Impact On Future Value

I advocate measuring Merchandise Productivity, and for good reason.

Merchandise Productivity plays a major role in each quadrant, especially when it comes to incorporating lifetime value.

Here's an example. You are in the "Sell" quadrant. You want your business to be running on all cylinders so that it is an attractive target for those looking to acquire a healthy company. Your marketing team works terribly hard to get 12-month payback on marketing activities, based on feedback from the CFO.

On average across paid search, this is what happens:
  • Average Cost per Click = $0.50.
  • Conversion Rate = 2%.
  • AOV = $60.
  • Profit Factor = 40%.
  • Paid Search Return = 0.02*$60*0.40-$0.50 = ($0.02).
  • Profit/(Loss) per New Customer = ($0.02) / 0.02 = ($1.00).
  • 12-Month Payback = $20.00.
  • Profit/(Loss) = ($1.00) + $20.00 = $19.00.
Now let's assume that Merchandise Productivity declines by 10%. The story changes.

  • Average Cost per Click = $0.50.
  • Conversion Rate = 1.8%.
  • AOV = $60.
  • Profit Factor = 40%.
  • Paid Search Return = 0.02*$60*0.40-$0.50 = ($0.068).
  • Profit/(Loss) per New Customer = ($0.068) / 0.018 = ($3.77).
  • 12-Month Payback = $17.00.
  • Profit/(Loss) = ($3.77) + $17.00 = $13.23
A 10% Merchandise Productivity hit yields a 30% drop in Long-Term Value.

Minor changes in Merchandise Productivity yield Major changes in Long-Term Value.

So if you are in the SELL quadrant, you want to clean up your mess long before you get to a point where you want to act. Plug the leaky holes.