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How Does A Shifting Customer File Impact The Future?

For the company we're studying, here we see what customers spent, on average, by price band over the past five years.

Notice that customers are leaking out of lower price point bands as the company expands volume among items >= $20.

On average, customers are spending at least $3 less this year than last year, and nearly $6 less than four years prior.

Does this mix impact future value? We can take our equations from yesterday and find out.

Using the 2019 equation, we score 2019 customers and 2018 customers to measure the impact of file mix ... take the 2019 column in the first table and multiply it by the 2019 column in the second table, and add the constant.

• 2019 Customers are worth $50.02 in 2020 based on 2019 file mix.
• The file mix for 2018 customers yielded $52.28 in 2020 value.

In other words, the current file mix delivers 4% less value next year. This brand shifted customers out of lower price point bands, and the activity is causing the file to be 4% weaker than it would have otherwise been.

You'd probably want to know this if you were planning what 2020 will look like, right?

Price Impact Over Time

So this is kind of fun!

If you can run a regression equation for one year, why not run one for each of the past four years? This allows us to compare how customer spend in one price band is impacted over time.

In this comparison, I evaluate a customer spending $200 last year on items only in the $0.01 to $9.99 price band. Over time, customers are becoming less valuable:

• 2016 Customers = $113.83 next year.
• 2017 Customers = $106.99 next year.
• 2018 Customers = $109.50 next year.
• 2019 Customers = $103.86 next year.

You're seeing the impact of merchandise productivity ... and it's not pretty, is it?

We can run a comparable table for other price points ... how about $50.00 to $74.99?

The relationship is different, isn't it? There are productivity gains in each of the past two years at this price point.

Granted, the customer is less valuable. But the customer is becoming more valuable.

So the key, I suppose, is this:

• Is the company shifting toward higher price points over time?
• If so, is the mix away from lower price point items into higher price point items good for customer loyalty?

We'll answer that question tomorrow.

Not All Dollars Are Created Equally

It keeps coming up in project work, so something is going on.

It's common to see a merchandising team that is purposely trying to increase prices. When the merchandising team adds new items to the assortment, those items are added at price points that are a bit higher than the items that are being replaced.

Is that a good thing?

From a gross margin standpoint, it can be a good thing.

From a customer standpoint?

In the table above we have a regression equation. I'm measuring how much a customer will spend next year, based on how much a customer spend last year in various price point categories.

• p010 = Items $0.01 to $9.99.
• p020 = Items $10.00 to $19.99.
• etc

The coefficients (under the column labeled "B") represent how much a customer will spend next year (in total) based on how much was spent last year within that price point band.

So when we see a value of 0.537 next to p010, we know that next year the customer will spend $53.70 for every $100 spent last year on items $0.01 to $9.99.

When we see a value of 0.273 next to p150, we know that next year the customer will spend $27.30 for every $100 spent last year on items $100 - $149.

Where are the larger values?

• Larger values are associated with lower price points.

For the brand studied here (actual data), customers buying from lower price point items (all things being equal) become more loyal than customers buying from higher price point items.

Now, there's a caveat here. Let's look at three different customers.

• Customer #1 Spent $100 last year on items priced $10.00 - $19.99.
• Customer #2 Spent $150 last year on items priced $10.00 - $19.99.
• Customer #3 Spent $150 last year on items priced $50.00 - $74.99.

Using the equation above (including the constant term), we obtain next year's customer value:

• Customer #1 = $29.36.
• Customer #2 = $59.91.
• Customer #3 = $44.61.

Do you see the caveat?

• If customers are more loyal because they buy from lower price point bands, and you cause customers to spend less in the lower price point bands, future value will be less.

In other words, it's good to get a customer to buy 5 $20 items instead of 1 $100 item. It's not good to shift the customer from 1 $100 item to 3 $20 items.

Not all dollars are created equal. You need balance in the merchandise assortment, skewing toward what the customer wants, offering breadth of assortment to capture gross margin dollars as well. But clearly, you need to skew the assortment toward what the customer is pre-disposed to purchase.

Who Is Most Valuable?

Remember our three tables ... for low price point band customers ...

... for average price point band customers ...

... and high price point band customers ...

Let's look at next year's total expectation by customer type.

• Last Year's Low Price Point Band Customers = $52.01 next year.
• Last Year's Average Price Point Band Customers = $45.71 next year.
• Last Year's High Price Point Band Customers = $33.91 next year.

Oh oh.

Remember, this company was consciously moving the merchandise assortment toward high price points. Unfortunately, the customer who buys from the high price point bands spends less in the future.

These are analytical tools that you use before your merchandising team wants to make changes, or before your CEO wants to make changes. You get an idea if the strategy will work before you ever implement the strategy. That's the power of this stuff, right?

The High Price Point Customer

For the company we're evaluating, high price point band customers tend to spend the majority of future dollars in high price point bands. Look at the results of our equation.

• $4.45 next year in low price point bands.
• $7.24 in average price point bands.
• $22.23 in high price point bands.

It's a good thing that the high price point band customer stays there ... this protects the integrity of items at those prices. It prevents you from having to discount those items, because you have a loyal customer base willing to buy those items.

Tomorrow, we'll explore who has the most value ... low price point band customers, average price point band customers, or high price point band customers.

Will The Average Customer Move Up Or Down??

Here's a customer who buys only from the average price point band ... now look at next year's spend levels.

Expect the customer to spend $12.55 in the low band.

Expect the customer to spend $22.14 in the average band.

Expect the customer to spend $11.03 in the high band.

The average band customer will move up or down ... and that's a good thing, because this customer can be pushed toward more expensive items.

Up next - we review customers who buy from high price point bands.