November 19, 2015

The Optimized Business: Merchandise Productivity

You optimized the business (click here for the spreadsheet) by entering the following parameters.
  • D6 = 0.700.
  • D7 = 0.250.
  • D8 = 0.100.
  • D9 = 0.100.
  • D10 = 0.100.
  • D11 = 0.450.
  • D12 = 0.300.
  • D13 = 0.300.
  • D14 = 0.200.
  • D15 = 0.100.
  • D17 = 2.000.
Then we added 10% merchandise productivity. Here's what we learned:

Optimized Case (Year 10) = $124,495 demand (in thousands) ... $22,708 marketing spend ... $27,090 variable operating profit.

10% Merch Productivity Gain (Year 10) = $156,466 demand ... $25,805 marketing spend ... $36,782 variable operating profit.

But with a 10% gain in merchandise productivity, you are able to spend more marketing dollars, in an effort to optimize the business. Now, the business is optimized at the following levels:
  • D6 = 1.000.
  • D7 = 0.300.
  • D8 = 0.150.
  • D9 = 0.100.
  • D10 = 0.050.
  • D11 = 0.650.
  • D12 = 0.450.
  • D13 = 0.350.
  • D14 = 0.250.
  • D15 = 0.150.
  • D17 = 2.300.
Our three comparisons now look like this:

Optimized Case (Year 10) = $124,495 demand (in thousands) ... $22,708 marketing spend ... $27,090 variable operating profit.

10% Merch Productivity Gain (Year 10) = $156,466 demand ... $25,805 marketing spend ... $36,782 variable operating profit.

10% Merch + Marketing Optimization = $182,744 demand ... $35,778 marketing spend ... $37,320 variable operating profit.

Do you see what is happening here?

This example is a generalization, of course, but it does help explain the story of the past ten years. And the story is a whopper.
  • Merchandise Productivity Is Dying.
  • Marketers Spend More Trying To Prop Up The Top Line.
  • Profit Slumps.
  • The Business Is Terribly Sub-Optimized.
  • To Optimize The Business, Housefile Spend Is Cut, And Top-Line Demand Drops.
  • Executives Hate Top-Line Demand Drops.
  • Customer Acquisition Spend Is Frequently Sub-Optimized.
The narrative can be changed. Go do something!!
  • Optimize Housefile and Acquisition Spend. You'll Save $$ On Housefile Buyers.
  • Take Housefile Savings, Invest In Free Shipping, Invest In Customer Acquisition. Business Improves!
  • Work With Your Merchandising Team - Work Hard To Get A 10% Merch Productivity Gain. 
  • Feature Winning Items In Digital Initiatives - Home Page, Landing Pages, Email.
  • Feature Up-And-Coming New Items Digitally - Home Page, Landing Pages, Email. Tell A Story.
  • 10% Merch Productivity Gains Are Multiplicative Over Time.
  • 10% Merch Productivity Gain Allows The Marketer To Spend More, Across The Board.
  • Increased Marketing Spend Grows Top-Line Significantly, While Growing The Bottom Line Marginally.
  • The End Result = A Healthy Business Where Sales Grow, Profit Grows, And Marketers Get To Spend A Fortune!
This is what I've been harping on for the nearly nine years I've been writing this blog, for the nearly eight years I've been running my consultancy.

I have a simulation tool that helps me test hypotheses. The path to a successful future is apparent.

If you disagree with me, that's fine. But make darn sure you have the simulation tool or appropriate mathematics to back up your hypothesis.

Do you have a simulation tool that helps you see the future?

Do you need a simulation tool that helps you see the future?

Contact me (kevinh@minethatdata.com) for assistance.