You Were Warned Back In Early Spring / Summer

I told you earlier this year that what is coming in 2023 isn't going to be pretty. I sure hope I am wrong. I maybe have a 35% chance of being wrong. It would be wonderful if I were wrong. Please let me be wrong!

But any analysis of customer data showing the end of the COVID bump paired with Customer Acquisition weakness points toward the information shared via this tweet (click here). Or this tweet (click here).

Use your imagination.

• Sales in decline post COVID-bump.
• Customer Acquisition efforts in decline.
• A year of higher prices deflated customer retention efforts.
• Over-correction of shipments (i.e. you are ordering less merchandise) from China.

Seriously. Use your imagination. What happens?

Get ahead of this. Have a plan.

Want vs. Need vs. Emotional Benefit

The Professional tweets and says "Kevin, Loyalty programs work! Just look at Starbucks for proof."

That's not proof.

Starbucks sells an addictive substance with emotional benefits.

You sell widgets.

Starbucks checks all three boxes. You want the item. The content of the item is addicting, so you need the item.  Then you get your Honey Almondmilk Flat White with a heart forged via magic marker.

You accomplish those three things, and you can create any number of games to encourage customers to visit more often.

But you sell widgets.

In some cases the customer needs the widget. The NewPig Pig Absorbent Mat Pad in Dispenser Box comes to mind. If most of what you sell is "needed", your rebuy rates are higher and you have a reasonable chance of implementing a Loyalty Program.

In most cases, we sell products that the customer might want. You don't need Griot's Garage Car Wash, do you? You have to want it. And there isn't really an emotional benefit tied to it. So if the brand sells a lot of this stuff, there isn't need and there isn't emotional benefit across the assortment. This is where Acquisition trumps Loyalty. Go find somebody who wants something like this product right now.

Emotional Benefits, if you get them right, lend themselves to fat gross margins and wonderful Loyalty Programs. A Man doesn't necessarily want or need BLEU DE CHANEL Eau de Parfum Spray from Ulta. But there are emotional benefits associated with the product. Yeah, Loyalty Programs work here.

Loyalty Programs work when rebuy rates are high and purchase frequency is high. Those situations are satisfied by selling something that a customer Needs, or by selling something that a customer receives an Emotional Benefit for.

You sell widgets. The customer likely wants the widget, but doesn't need the widget and doesn't obtain any emotional benefits for using the widget. These end up being low rebuy / low purchase frequency situations, requiring the marketer to focus on Acquisition.

Chipotle / Loyalty

On Twitter, I mentioned that Chipotle has come back from the dead and is hummin' these days. The brand grew by more than 45% in the past four years.

One of our loyal readers mentioned (and I'm paraphrasing here for effect) that "They rolled out a loyalty program, Kevin". The reader understands my distain for modern marketing theory.

If you go back to my now out-of-print Merchandise Forensics book from 2007, you'll see that I categorized brands into three bands back then.

• Acquisition Mode:  Rebuy Rates between 0% and 40%.
• Hybrid Mode:  Rebuy Rates between 40% and 60%.
• Loyalty Model:  Rebuy Rates between 60% and 100%.

If your annual rebuy rate is > 60%, your business operates in the realm of Loyalty. These brands frequently possess twelve-month buyers who have a 70% chance of buying again next year and possess customers who purchase 7 times a year, on average (your mileage will vary). If this brand starts a loyalty program and the program increases order frequency by 10%, you add 0.7 purchases per year. That's a big deal.

If your annual rebuy rate is < 40%, your business operates in the realm of Acquisition. These brands frequently possess twelve-month buyers who have a 30% chance of buying again next year and possess customers who purchase 1.5 times per year, on average (your mileage will vary). If this brand starts a loyalty program and the program increases order frequency by 10%, you add 0.15 purchases per year. That has no impact on your business.

You must know if your business is in Acquisition Mode, Hybrid Mode, or Loyalty Mode.

The mistake made by vendors in our industry is that they push Loyalty solutions on brands that operate in Acquisition Mode. It's profitable for the vendor. It's foolish for the brand to accept Loyalty solutions. Go find another new customer profitably.

Which Product Do You Feature?

Your merchandising team comes to you asking you to feature two items in an upcoming email campaign. Because of the constraints of your email program, you can only feature one item.

Item #1:

• Current Price = $49.00.
• Cost of Goods Sold = $25.00.
• Expected Weekly Sales, All Channels = $5,000.

Item #2:

• Current Price = $29.00.
• Cost of Goods Sold = $10.00.
• Expected Weekly Sales, All Channels = $4,000.

Which item do you feature in your email campaign?

The answer, by the way, is not "it depends". Pick a side and defend your side.

A Little Productivity Goes A Long Way

Let's use the world of Google as our window into the magic of merchandise productivity.

Ok, you spend $15,000. You get 20,000 clicks. Congrats!  Of the 20,000 clicks, 400 customers convert and buy something, spending $100 each. Your profit factor (you know what your profit factor is, correct?) is 30%.

Net Sales = 400 * $100 = $40,000.

Variable Profit = $40,000 * 0.30 - $15,000 = $12,000 - $15,000 = ($3,000).

You lost $3,000. You got 400 customers to buy something.

Profit (Loss) per Order = ($3,000) / 400 = ($7.50).

You lost $7.50 per order.

Now, let's say that a year later your merchandising team increased productivity by 15%. That's a big deal! Does it matter when it comes to your marketing efforts?

Instead of 400 customers converting, you get 460 customers converting, spending $100 each.

Net Sales = 460 * $100 = $46,000.

Variable Profit = $46,000 * 0.30 - $15,000 = ($1,200).

You lost $1,200. You got 460 customers to buy something.

Profit (Loss) per Order = ($1,200) / 460 = ($2.61).

You went from losing $7.50 per order to losing $2.61 per order.

All because merchandise productivity increased by 15%.

Now imagine what happens if you were originally losing $2.61 per order? You'd be making money.

Marketers don't want to hear this fact ... but marketers are fully dependent upon their merchandising/product partners. When these people are successful, marketers are successful.

The smart marketer spends a lot of time figuring out which products work ... they spend more time on product than they spend on channels/keywords/conversions. By understanding the products that work, the smart marketer turns a loss into a profit. Everybody benefits. Because of a smart marketer.

It's Time ... Again!

It's time for another run of the MineThatData Elite Program!

For existing clients ($1,000) and new clients ($1,800) you'll receive my standard suite of program analytics (Rolling Twelve, Comp Segment, Repurchase Activity). We'll also answer the time-honored question ... "Do You Have Loyal Customers?" with a logistic regression model designed to identify the factors that contribute to customer loyalty. So many of you question the logic of customer acquisition with the "loyalty matters more" reply. I'll identify what your loyalty opportunity is, ok?

Contact me now to participate (kevinh@minethatdata.com).

• Participation Deadline = September 30.
• Five Years of Data From 10/1/2017 - 9/30/2022.
• Payment Due By October 15, 2022.
• Data Due By October 15, 2022.
• Analysis Delivered By October 31, 2022.

Not Understanding Merchandise Personalization

I've told this story before, but it comes up often enough that it bears repeating. I'm at a meeting at a "Portfolio of Brands" ... meaning that a holding company scooped up a bunch of brands and they're having a strategy session with the heads of each brand (and other assorted Executives).

One of the sessions includes a analyst sharing results of online personalization testing. This woman, probably 27-30 years old, was FABULOUS. Full of energy, passion, and she made her brand A FORTUNE. It's quite possible that 10% of net sales, on an annual basis, were because of her and her alone. This also likely means that about 30% of annual profit was because of her and her alone.

Think about that for a moment.

She finishes her presentation, and the room full of Executives all begin giggling and whispering ... they're having private conversations about how geeky her presentation was. In essence, they didn't listen to her words (because her words showed that they were going to get nice bonus checks ... because of her), they addressed her as an entity ... they perceived she was a nerd.

Maybe she was a nerd.

They didn't realize they needed a nerd.

Every analytics person reading this post knows exactly what it is like to be humiliated by a traditional business Leader for no good reason other than making the traditional business Leader look good. In the next ten years, we're going to see significant changes in Upper Management. Baby Boomers will continue to leave the workforce, replaced by a different mindset. Something will be lost, no doubt about it. But something will be gained ... like respecting the woman in this post.