The DTC Index - And Giving Away Free Information

You read this and subscribe to this newsletter, correct (click here)?

Pay attention to what the author says about Marginal aMER. In my simulation / forecasting work, the relationship described comes through when measuring profit per new customer (though the relationship isn't identical to what is illustrated here).

P.S.:  A reader recently responded that he wanted "more free stuff". If you are that reader, click on the link and subscribe to their free stuff.

P.P.S.:  This is interesting. There is a clear relationship between giving away free insights and me staying in business. The relationship looks something like this ... the X-Axis represents the percentage of my blog posts where I give away my methodology for free ... the Y-Axis represents the percentage of annual income I generate as a result.

In other words, if I give away my methodology in 20% to 40% of my posts, I maximize my annual income. Give away everything in every post? I lose about half of my annual income. If I give you more free information, I eventually make less income and I'm out of business. Such is the relationship between a business and customers. Always remember that not all customers are customers ... some are consumers ... and there is a big difference. You make your profit off of customers, you generate improved vanity metrics from consumers.

An Interconnected Business

We've talked about your Category Development situation as being similar to a solar system ... you have a Star, you have Planets that rotate around the Star, you have Moons that rotate around Planets, you have Asteroid Belts (broken categories), and you have Comets that infrequently interact with your solar system (i.e. Gifts at Christmas).

In other words, your business is interconnected.

And when you fail in one category, you impact other categories.

If your Star category struggles, the struggles spill over into all other categories.

If a Planet category struggles, the Moons will struggle.

If a Comet category struggles? Meh.

But make no mistake. Your business is interconnected, and you are doing things that greatly help or hurt other categories.

Price / Customer Tradeoff

When you are developing categories, you likely look at your cost of goods and determine a price that (theoretically) delivers enough profit to fuel your business into the future.

On average (your mileage will vary), when prices increase, customers decrease. The goal (on the surface) is to increase sales as prices increase ... you trade off a few customers but the math all works out.

Here's what you are hoping to accomplish.

• Last Year = 1,000 customers buying 1.4 units per customer at $50 each = $70,000.
• Next Year =    800 customers buying 1.3 units per customer at $70 each = $72,800.
• Sales Increase = 4%.

That's what you are hoping to accomplish.

But there is a downside.

With 200 fewer customers, you have 200 fewer customers who will buy other merchandise from other categories. This creates a feedback loop - with fewer customers available to buy from other categories, those categories struggle, you end up with too much merchandise in those categories, you have to liquidate that stuff at lower prices (which increases customer counts but at a purchasing disincentive which hurts you long-term), and profit is hurt.

In other words - be careful! As prices increase, customers decrease, leaving you with fewer customers to buy from other categories.

Three Ways To Grow

Rank-ordered by what you read about from the experts.

1. Get more sales from loyal buyers.
2. Acquire new customers.
3. Manage your merchandise assortment properly.

Rank-ordered by what my project work suggests is most important?

1. Manage your merchandise assortment properly.
2. Acquire new customers.
3. Get more sales from loyal buyers.

How Many New Items?

FYI - when you sign up for a Category Development project, you receive the "Class Of" analysis we're discussing in this series (click here).

Ok, here's our table.

There is a relationship hidden in the table.

• 594 items = $8.0 million in new item sales.
• 235 items = $3.9 million in new item sales.
• 579 items = $9.5 million in new item sales.
• 603 items = $8.7 million in new item sales.

Graphically, the relationship looks like this:

Here we have our friendly law of diminishing returns ... it appears practically everywhere once you know how to look for it.

The first 100 new items generate about $2.0 million in sales.

The next 100 new items generate about $1.5 million in sales.

The next 100 new items generate about $1.4 million in sales.

The relationship progresses from there. The first three hundred new items get you just shy of $5.0 million ... while the next three hundred new items add about $3.8 million.

If you needed to get ten million in sales from new items next year, you'd need 700 new items next year.

So yeah, this stuff is really useful!

What Harms You Today Harms You Tomorrow

We learned yesterday that the Class Of 3/10/2021 was too small, and didn't generate enough sales, costing this business five million dollars in the year ending 3/10/2021.

Did you notice that the business never recovers from this problem?

New items recover quickly. Somebody noticed that the merchants nuked the business, and as a consequence new items perform at $9.5 million the following year ... recovering by about $5.5 million dollars. However, the total business does not recover ... sales increase by a paltry $0.4 million.

How can that be?

Two things are happening here.

First ... new items today become existing items tomorrow. Read across the year ending 3/10/2021 row. $3.9 million in year one becomes just $2.6 million in year two. In the class of 3/10/2020, $8.0 million in year one becomes $5.7 million in year two. In other words, this brand loses $5.7 million - $2.6 million = $3.1 million in sales in the second year because the merchants failed the year prior.

Each merchandise class has a "life" ... and if you don't have enough new items one year you won't have enough existing items the following year.

That's the first issue.

The second issue? This is a completely different issue. Look at the top row. These are older items, items that have been around for more than four years. Look at how sales drop off year-over-year. These items gave up $6.6 million in the year ending 3/10/2020, they gave up $6.8 million in the year ending 3/10/2021, they gave up $5.6 million in the year ending 3/10/2022, and they gave up $3.0 million in the year ending 3/10/2023.

In other words, items at this company have a moderate life cycle (in terms of length), and each year you need to come up with enough new items to cover the losses you experience from long-term existing items. If you don't generate enough new items, you hurt your new item performance AND you fail to compensate for items that are aging.

You can use this analysis technique to measure how many new items you "might" need next year to protect the future of your business. When you know the decay rate of existing items you can back into how many new items you likely need to keep your business moving forward.

Problem Spotted!

Back to our table:

Look at the row titled "New Through Year Ending 3/10/2021". 

That "class" had just 235 new items, compared to 594/579 in the years before/after it.

This merchandise class was small, and it did not generate sufficient sales. In the first year, this "class" generated $3.9 million in sales, a lot less than the years before/after it ($8.0 million, $9.5 million).

Look at total sales for the year ending 3/10/2021 ... there is a five million dollar top-line hit compared to the year prior.

This business was nuked by a merchandising team that failed to give proper importance to finding new items that work. Some might say "well, we had supply chain issues" and sure, that's a problem. But it doesn't solve the problem of the business being harmed.

Notice that this business doesn't recover, with sales down for each of the two subsequent years. More on this topic tomorrow.