November 24, 2022

Which Customer/Product Combination Yields The Best Gross Margin Percentage?

Back to our table format studied this week. This time, each product / customer combination measures gross margin percentage.

The green cells represent the highest gross margin percentages.

Do the best selling items have the highest gross margin percentages?

No.

Do the best customers have the highest gross margin percentages?

No.

If you think your best customers and your best products should yield the highest gross margin percentages, trust your instincts.

This business isn't being optimized properly.

Have you run this table for your brand?

No?

The contact me (kevinh@minethatdata.com) and let's get busy.




November 22, 2022

New Items Are Not Best Items

Back to the table framework we've been studying this week, take a look at share of sales from new items by product decile and customer decile.

Two things are worth pointing out in this table. First, new items are seldom best-sellers. New items require patience ... they need to be developed (just like customers need to be developed). Second, there are interesting trends in the table. The best customers are less likely to buy new items than are other customers. We teach our best customers what they should purchase, and guess what? They purchase what we tell them to purchase!

The second point is an important one. If our merchandising/product teams want to sell something different, our best customers frequently say "no" ... the best customers hold back brands looking to change. This is why, so often, it is best to launch a whole new brand than it is to try to transform a brand from within. Best customers simply don't want to change.




November 21, 2022

This Happens A Lot!

I see this one a lot ... look at the New/Reactivated row, and compare the price these customers pay for merchandise compared to the best customers.

Among the best selling items (the 5% column), best customers paid an average of $62.43 per item, whereas new/reactivated customers spent $71.96. This difference isn't as extreme through the remainder of columns, but the difference exists.

This happens A LOT in my project work. Either best customers are being given deals/discounts (whereas new/reactivated buyers are frequently given free shipping), or the merchandise preference is slightly different. Given that I'm controlling for the sales potential of the items in this table, it's a discounting issue. 

Sometimes my clients wonder why it is so hard to acquire customers? Sometimes it's hard because you're asking new/reactivated buyers to pay 10% more per item than your loyal customer base is asked to pay. 


November 20, 2022

Project Opportunity

I am in the process of finalizing a project package around discounts/promotions/pricing.

As is usually the case, I offer a significantly discounted project opportunity for loyal blog readers as I finalize the project code and test usability of the concept.

For you, that means I am offering two (2) readers the opportunity to purchase the discount/promo product (you've been reading about elements of what this project will become) for just $12,000 (it will be a $24,900 project when it is officially released).

Contact me immediately (kevinh@minethatdata.com), because both spots will be gone shortly.

November 17, 2022

Where Are The Discounts Being Applied?

Sometimes discounts/promotions are applied to items via liquidation efforts. This is one of those cases.

In this table, each row represents a group of customers. Best customers are at the top of the table (5% = best decile of customers, 15% = next best decile of customers). New/Reactivated buyers are at the bottom of the table. Meanwhile, item sales are rank-ordered across the top of the table. The best items are in the 5% column, the worst-selling items are in the 95% column.

Which cells (red) represent customers buying discounted products? The columns at the far right side of the table tell the story ... the worst-selling items are selling at/above their historical average price point about 70% to 75% of the time. The best-selling items sell at/above their historical average about 85% of the time.

So we have two dimensions at play ... marketers are offering discounts/promotions, no doubt about it. But at the same time, the merchants are liquidating lousy products. Both parties contribute to the challenge ... as is generally the case.



November 16, 2022

Optimal Price / Discounting Ratio

Ok, this isn't optimal because I'm not looking at gross margin dollars (that's reserved for clients), but you'll get the idea here about what I'm looking to accomplish.

I created regression models that predict the impact of prices on rebuy rates, and another model that predicts the impact of discounting on rebuy rates (again, gross margin work is done for clients).


The average price point for this category was $50.00, and the average percentage of items sold at/above the historical average price point was 75%. This yielded a 51.6% rebuy rate.

What happens if prices increase to $55.00 and discounting remains constant?  Rebuy rates decrease to 49.7%.

What happens if prices increase to $55.00 and discounting increases so that just 56.3% of the items are selling at/above their historical average price point?  Rebuy rates maintain at 51.5%.

This dynamic is coming to an omnichannel brand near you (your mileage will vary). Prices increased a year ago and continue to increase, customers balk at higher prices and purchase less often, leading "brands" to discount more to maintain response (which means that gross margin dollars decrease and the brand is less profitable).

It's hard to fight the customer. The customer is telling us how much s/he is willing to spend, and the customer does not care one bit, one bit, about how our cost-of-goods increased. Many of us are going to give up profitability, either by increasing prices / decreasing response, or by increasing prices / discounting (which decreases gross margin dollars).



November 15, 2022

Sometimes Discounting Leads To Positive Results

The secret to discounting is to generate more gross margin dollars and build a stronger customer file (for some, it is to liquidate merchandise, but that is a topic for another day). The goal should never be to steal market share, because honestly you'd have to be a ten billion dollar brand (or larger) for that to even make the slightest difference.

So, if you choose to sell a $50 item with a $20 cost of goods for $35 via your promotional/discounting program, you must sell twice as many units to equalize gross margin erosion.

I worked with a smart brand who knew what this relationship looked like, and they discounted only enough to make the math work (or, in this case, come very close to working). In their case, I created regression models that predicted how much customers would spend next year on items selling at/above their historical average price point, how much customers would spend next year on items selling below their historical average price point, and how much gross margin dollars customers would generate next year.

For customers who spent $100 on items at/above their historical average price point and spent $0 on items below their historical average price point ...

  • $64.41 spent next year on items at/above the historical average price point.
  • $8.44 spent next year on items selling below their historical average price point.
  • $73.05 spent next year, total.
  • $45.37 gross margin dollars generated next year.
  • 62.1% future gross margin.

For customers who spent $0 on items at/above their historical average price point and spent $100 on items below their historical average price point (discount-centric customers):

  • $56.51 spent next year on items at/above the historical average price point.
  • $28.74 spent next year on items selling below their historical average price point.
  • $85.25 spent next year, total.
  • $44.27 gross margin dollars generated next year.
  • 51.9% future gross margin.

This company comes really, really close to getting the math right. Full price customers generate $73.05 next year while discount-centric customers generate $85.25 next year. Discounting led to customers who spent 16.7% more in the next twelve months. However, full-price customers generate a 62% gross margin next year while discount-centric customers generate a 52% gross margin next year. Full-price customers generate one extra dollar of gross margin in the next year.


This is one way to make discounting work. As long as gross margin dollars are equal/greater and as long as the customer file is stronger, the math "can" work. I have a responsibility to share this fact with you.


But you have to do the math, perform the analysis, and understand the tradeoffs. At minimum you have to take the math down to future gross margin dollars. In a smarter world, you'd include pick/pack/ship information as well, and take into account any additional p&l metrics that matter.

Which Customer/Product Combination Yields The Best Gross Margin Percentage?

Back to our table format studied this week. This time, each product / customer combination measures gross margin percentage. The green cells...