August 30, 2016

Healthy Business: Growth Metrics

Each company has a unique culture. Of course, you already knew that, but the culture frequently determines how healthy the business is.

When I worked at Lands' End, our Marketing Department was obsessed with 10% pre-tax profit, so much so that I am still obsessed with 10% pre-tax profit levels twenty-five years later. 

If you are Wal-Mart, then 10% pre-tax profit is not achievable (#grossmarginsaretoolow). But for most of us, 10% pre-tax profit is more than achievable. And at Lands' End, back in the day, there was always a vigorous back-and-forth about how to achieve 10% pre-tax profit. Acquire a lot of new customers? You protect the future, but you hurt your pre-tax profit rate today. Send the 51st catalog to a customer this year? You grow sales, but you make it close-to-impossible to achieve a high pre-tax profit rate.

Then I moved over to Eddie Bauer. The CEO, one of my favorite business people of all time, would announce that it was our job to "DRIVE SALES PROFITABLY". What the heck does that mean? It means you only had one choice ... you had to increase sales and you had to increase profit at the same time. You could not grow sales and hurt profit. You could not hurt sales and grow profit. That really boxed you into a corner. It shouldn't come as a surprise that sales/profit weren't healthy at Eddie Bauer, because the culture did not respect profit - how could it when profit could only improve if sales improved?

Nordstrom was a merchandise-centric organization. If you sold stuff the customer loved and did it at reasonable gross margins with good customer service and you minimized expenses and avoided overstocked items, the p&l worked. Oh, the p&l worked. We routinely generated 12% - 14% pre-tax profit and grew the top line at a healthy rate.

I've worked with 200+ brands since founding MineThatData. About 25% are able to increase the performance of metrics that align with a growing, healthy business.
  1. Increased Merchandise Productivity.
  2. Increased New Customers at an Acceptable Cost.
In the three examples above, only Nordstrom was able to do both. Nordstrom consistently grew Merchandise Productivity by finding merchandise customers loved. By doing this, Nordstrom could acquire new customers at an ever-cheaper cost, further growing the business.

Eddie Bauer had failing Merchandise Productivity. This put tremendous pressure on New Customer Acquisition - it became more and more expensive to find new customers, requiring the brand to discount more and more often, which grew sales but completely eroded profitability. The least healthy of the three businesses, Eddie Bauer had no positive metrics to speak of. You know what has happened in the 20 year since, don't you?

Lands' End had flat Merchandise Productivity. When Merchandise Productivity is flat, it becomes very hard to grow. Because the company had a policy of no discounting back in the day, the only way to grow was by spending more money on marketing to existing customers (i.e. Marketing Productivity) or by finding New Customers at an Acceptable Cost. Lands' End prospect catalogs from back in the day were a great example of Marketing Productivity - comparable new customer counts at a lower cost, driving up the number of new buyers, which grew sales and ultimately increased future (but not short-term) pre-tax profit.

This is why I harp on the two most important growth metrics.
  1. Increased Merchandise Productivity.
  2. Increased New Customers at an Acceptable Cost.
If you get this right, top-line sales grow, your ad-to-sales ratio looks great, and cash just drops to the bottom line. The healthiest businesses continually find merchandise that customers love, and the increased productivity makes it easier to find new customers at an acceptable cost.