Category Development and Gross Margin Dollars

Here's one that comes up all the time.

A brand has a category with an average price point of $30 and an average cost of goods sold of $14. Gross Margin = (30-14)/30 = 53%. Gross Margin per Unit = $16.

Meanwhile, another category has an average price point of $40 and an average cost of goods sold of $22. Gross Margin = (40-22)/40 = 45%. Gross Margin per Unit = $18.

Which item should be sold if you can only sell one item?

There isn't a good answer to this question. One item has a high margin but a lower price point. The other item has a lower margin but a higher price point, yielding more gross margin dollars.

Do the work here.

Does one category feed the other? In other words, does the high margin category push customers to the low margin category? That could be ok if AOVs are similar. If AOVs are lower in the low margin category, then you are creating problems.

Anytime you switch a customer from a high margin category to a low margin category, you have to increase the amount of spend to compensate for the switch. Analyze the heck out of these dynamics, then push customers to high margin / high spend categories (or items) where possible.

Next week, we'll begin to explore Category Dynamics in even more detail, reviewing the reports I look at. We're going to see that some categories are "feeder" categories, while other categories are the center of your solar system. Once we learn how all of your categories work together, we can come up with a coherent marketing plan to support increased profitability.

Different Channels, Different Selling Styles

Take your Top-100 best sellers from last week, and then measure where each item ranks among your most important marketing channels. This analysis tells you what the future holds ... items selling well at your Call Center are gonna have problems in the future, for instance.

Here were results from one company, for one good-selling item.

• Item = 12th best selling for the week 10/9 - 10/15.
• Call Center = 12th best selling item.
• Online = 23rd best selling item.
• Email = 567th best selling item.
• Search = 20th best selling item.
• PLA = 658th best selling item.

Meanwhile, here's the results for another good-selling item.

• Item = 13th best selling item for the week 10/9 - 10/15.
• Call Center = 40th best selling item.
• Online = 8th best selling item.
• Email = 83rd best selling item.
• Search = 18th best selling item.
• PLA = 33rd best selling item.

One final good-selling item.

• Item = 84th best selling item for the week 10/0 - 10/15.
• Call Center = 915th best selling item.
• Online = 121st best selling item.
• Email = 5th best selling item.
• Search = 149th best selling item.
• PLA = 110th best selling item.

The first item is a good seller across all channels, but is ignored by the email marketing team. Work with your email marketing team to see if the item can be featured more often, given how well the item sells.

The second item skews online, but isn't as good a seller via the Call Center. This item represents more of the future of the brand, given the Call Center vs. Online mix with this item.

The third item is being almost entirely driven by email. In my projects, it is common for items to sell well in email marketing but not as well elsewhere, frequently due to pricing promotions. However, there is an old adage that "you sell what you feature" ... and items featured in email are likely to sell better.

The future of your brand (i.e. the types of products you are going to sell in the future) is told via this analysis. Perform the analysis and see what it tells you.

Remember Last Week?

Last week I shared information about a larger-sized brand that many of you shop from, illustrating the subject lines used in their email marketing campaigns over a multi-week period (click here).

In my Category Development projects (click here for pricing), I run models based on the percentage of sales generated by a customer on items selling below their historical average price point. The equation might look something like this:

• Future Gross Margin Dollars = $10.00 + 0.25*(Dollars Spent on Items At/Above Their Historical Average Price Point) + 0.20*(Dollars Spent on Items Below Their Historical Average Price Point).

Pretend you have a customer who spent $100 last year on items at/above their historical average price point:  Future Gross Margin Dollars = $10.00 + 0.25*(100) = $35.

Pretend you have a customer who spent $100 last year on items below their historical average price point:  Future Gross Margin Dollars = $10.00 + 0.20*($100) = $30.

Discount a lot this year, cost yourself $5 profit next year.

This is the reason why I used the "above" / "below" designation. Some brands discount everything. Well, this still means that a $49.99 item which usually sells at 30% off ($34.99) can be sold at 60% off ($19.99) meaning the $19.99 item is sold below the historical average price point.

I realize there are business situations that require significant discounting. I'm trying to help you avoid problems where customers become trained to expect the discount, costing you profit. I want you to be more profitable.

Walmart

So yeah, Walmart is printing high margin money by asking "brands" to hawk Walmart customers through Walmart stores or all across the internet. It's a modern twist on the old-school catalog method of generating list revenue in the 80s and 90s by renting the twelve-month buyer file to competitors or frienemies.

Walmart's advertising solutions page is a marketing word salad designed to inspire middle managers to embrace the customer journey, paying $$$ in the process to get the customer to "BUY SUPPLEMENTS" (click here).

Can I tell you a story?

I was at Walmart tonight, picking up prescriptions. As I sat on an unsteady plastic chair awaiting my fate, a gentleman somewhere around 70 years old waltzes over to me, smiling.

CUSTOMER:  Have you ever bought milk here?

KEVIN: No.

CUSTOMER:  Do you want to know a secret?

KEVIN: Ok.

CUSTOMER: This store sells milk for $1.48 a gallon. I've shopped other Walmart stores in the West Valley. Milk is anywhere between $3.48 and $3.98 a gallon elsewhere. But here it is $1.48. Why do you think that is? It's always the case. It cannot be a mistake. Somebody somewhere thinks this is the right thing to do.

KEVIN: Wow.

CUSTOMER: I drive fifteen miles just to come to this store to buy milk.

KEVIN: You what?

CUSTOMER: Yeah, fifteen miles. I have to. It's $1.48 a gallon.

........... twelve minutes later, I'm still sitting on a wobbly plastic chair, and the customer walks up with one (1) gallon of milk:

CUSTOMER: What did I tell you?

KEVIN: It's $1.48?

CUSTOMER: Exactly! And I don't get it.

........... five minutes later, I'm standing in line to buy my prescriptions ... here comes the milk man.

CUSTOMER (twirling the lone gallon of milk in his hand via the handle): A buck-forty-eight.

KEVIN (offers customer a thumbs-up).

Do you understand the moral of the story?

This guy, call him "milk man", drives 30 miles round trip to purchase one (1) gallon of milk. He spends $4 in gas to save $2.50 on milk. And he's happy about it.

Meanwhile, some marketing professional misinterprets this behavior as a sign of a seamless, frictionless omnichannel experience and sells the behavior to a middle manager who then targets string cheese to the customer. The customer gets meaningless ads, the middle manager feels strategic, and Walmart counts money.

So much of this omnichannel nonsense is actually price-fueled merchandise experiences. The behavior has nothing to do with channels, and has very little to do with marketing (unless you view pricing strategy as part of marketing ... or in this case, maybe a computer mistake).

But by using a language that marketers understand, Walmart aligns these "experiences" with the desires of a marketer desperate to sell string cheese "at scale", and prints money in the process.

The "milk man" doesn't care. He found milk fifteen miles from his home Walmart for just $1.48 a gallon.

Bed Bath & Beyond

Read this jargon-infused love-letter about Bed Bath & Beyond from two years ago (click here).

Did any of this ... any of this ... make a difference? The brand defaulted on January 13 (click here) and is cruising toward bankruptcy.

My goodness.

It does not matter if you reduce friction by cutting down the number of purchase steps from seven to three if the customer doesn't want to buy what you are selling.

It does not matter that you can buy online and pickup in a store if the customer does not want to buy the item in the first place.

It does not matter if you are digital-first if the customer does not want to buy the merchandise you offer.

It does not matter if you self-proclaim that you "established a digital-first, agile, creative customer experience organization" if the customer does not want to buy the merchandise you offer. What does the sentence fragment even mean? Be honest.

I've been harping on this for a decade, and some of you are likely tired of hearing me say it ... and the rest of you simply disagree with me ... but you HAVE to sell something that the customer wants to buy, or must buy to survive. Notice that the article doesn't say anything about what they sell ... the trade journalist and the PR person from Bed Bath & Beyond who got the article printed are assuming that the hurdle separating profitability and the customer was ... wait for it ... "omnichannel".

Wrong.

P.S.:  This is where I receive emails from omnichannel advocates. They'll say "A shift to omnichannel strategy happened too late. Had they done this a decade ago, who knows where they would be?" Yeah, who knows? Would they be limping to the finish line like Macy's? Would they be out of business like Circuit City, who pioneered "buy online and pickup in store"? I understand it is fun to sell eight-figure operational systems designed to allow the customer to bathe in an omnichannel bath of delight. But that's not why the customer purchases from you. Spend your time and energy selling something the customer wants to buy. And if you are in marketing, get to know every darn item your brand sells and how well every darn item performs ... then feature those winners in your marketing efforts (with nudges to try new products as well).

Judy / Jennifer / Jasmine

Eleven years ago I spoke at NEMOA about the importance of Judy / Jennifer / Jasmine as key shoppers within a traditional catalog brand (hint ... Judy was a Baby Boomer, Jennifer was Gen-X, and Jasmine was a Millenial).

The audience, evenly split between catalogers and vendors, absolutely groaned when I discussed Jennifer. They HATED her. Hated her. I recall one attendee telling me afterwards "I don't like anything about her. Shopping via email or social. Always online with a phone in her hand. She's not my customer."

She is now.

A reader sent me this PR-inspired link from CNN about Lands' End catering to Gen-X (i.e. Jennifer) ... click here.

If you built your business from the 80s through the early 00s via Baby Boomers, your next logical pivot is to a generation you simply do not like. Analyze your assortment, and identify the products that Gen-X buys vs. the products that Baby Boomers buy. I've done this, and there is a difference.

Build your assortment around these items ... you'll see stylistic differences. You might not like the differences, but the differences represent your future.

In the next seven years Baby Boomers will completely leave the workforce. Their need for your products will not exist. If a Baby Boomer is your core customer, you will have no choice but to pivot.

P.S.: I get it - you're about to email me telling me why you hate this. You've been filling my email box for a decade-and-a-half telling me you hate this. Your dislike for changing demographics (and we're not even talking about addressing Millennials or Gen-Z) cannot be stopped. Demographics are going to change. Are you willing to change?

Kevin, You Don't Get It

We'll see the body of an email that looks like this ...

... and I get grumpy. Fed up. Tired of the non-stop discounting.

That's when you, the avid reader, elect to send me a message.

• "Kevin, you don't get it. This brand never intended to sell that item for $100. Cost of goods are just $30, so it is their intention to sell the item for anywhere between $50 and $70 and they're still making between $20 and $40 of profit. They're the smart ones, Kevin. You just don't get it."

Do you honestly think "I don't get it?"

Oh, I get it.

There are many different ways to sell something.

In this case, there are two really clear choices.

1. Convince the customer that what you sell is better than anything else so that the customer is willing to pay a premium, allowing you to maximize profit.
2. Gamify the system because you now that what you sell is average or lousy. Create a game. Attract customers who love games.

In (1) you end up with customers who are passionate about the products your brand sells.

In (2) you end up with customers who are passionate about games.

Which customer would you prefer?

I'll take customer (1) every day of the week.

I get it.