Merchandise Lifetime Value - MLV - Depends On First-Year Performance

Let's say that a new item performs in the bottom 45% of the assortment.

• Five-Year Cumulative Demand = $348.

Let's say that a new item performs between the 46th percentile and the 70th percentile.

• Five-Year Cumulative Demand = $1,569.

Let's say that a new item performs between the 71th percentile and the 85th percentile.

• Five-Year Cumulative Demand = $4,328.

Let's say that a new item performs between the 86th percentile and the 95th percentile.

• Five-Year Cumulative Demand = $11,380.

Let's say that a new item performs between the 96th percentile and the 100th percentile.

• Five-Year Cumulative Demand = $35,714.

Yes, this is based on actual data I recently analyzed.

This is why it is SO IMPORTANT for the marketer to play a key role in promoting new merchandise to the customer base. Just migrating a lousy new item to the 46th - 75th percentiles results in a nearly 5x improvement in MLV.

Bumping the item up another level increases MLV by nearly 3x.

Bumping the item up another level increases MLV by nearly 2.5x.

Bumping the item up to peak winning status increases MLV by another 3x.

Now, are you ever going to get a crappy new item to become a peak winner? Absolutely not. But can you move an item up one segment, and achieve a 3x-ish MLV improvement for the item?? YES!!!! And if you do that consistently, you'll have great merchandise productivity, and that causes your marketing productivity to greatly improve - allowing you to spend more on marketing at a better ROI.

Are you against achieving better marketing ROI via giving new merchandise appropriate exposure?

Cumulative MLV

In our example, we have five years of data to analyze - and we can use that data to project MLV for a new item.

That's what I'm doing here with this graph.

After ten years, how much cumulative demand does an average new item generate?

About $2,500.

Armed with this knowledge, you can back into how many new items you need each year for your business to achieve corporate objectives.

More on the topic tomorrow.

MLV

Y'all have heard of Customer Lifetime Value (called CLV or LTV), right? Another 10% of you calculate the metric and know what the right level of customer acquisition spend truly is.

Of course, marketers focus on the metric from the perspective of the customer, and for good reason.

But what about merchandise? Is there a version of lifetime value associated with merchandise?

Of course there is!

Call it "MLV" or "Merchandise Lifetime Value". It's the amount of demand and/or gross margin dollars that can be generated by a new item over time.

It's a critically important metric, because by knowing the metric the marketer can do two things.

1. The marketer can tell the merchandising team how many new items have to be released annually to achieve important company goals.
2. The marketer can feature new items that are about to become winners, thereby increasing MLV ... and when MLV increases, all marketing performance increases, which means that the marketer can spend more on all of the tactics the marketer loves to execute.

Look at the image above - an average new item generates $273,000 in year one, then $511,000 in year two, then $415,000 in year three, then $342,000 in year four, and $283,000 in year five.

Of course, by year five, we don't have the same quantity of items that we started with. Items are discontinued, while a small fraction of items become winning items and those items generate a fortune.

The graph above demonstrates what a difficult year the first year is - this is when the marketer needs to step in and make sure that new items are given ample exposure so that the potential winners actually become potential winners. Too often marketers squelch new merchandise (I've done it) by not giving new merchandise enough exposure.

More on the topic tomorrow.

Speaking of Omnichannel Theory

Have you ever purchased something from Apple?

Apple are Visual Merchandising experts. You might buy a lightning cable and you instead get a Tiffany's style presentation of your overpriced cable. That's the power of Visual Merchandising.

I ordered a rug from Home Depot. They outsourced delivery to a third party ... and the third party appears to have outsourced delivery to another party - a dude driving a Penske Rental Truck. I was supposed to sign for the item ... nobody rang the doorbell, I didn't sign, and as a consequence I didn't see what arrived until I saw the Penske Rental Truck pulling away from my home.

I opened the front door - and I was greeted by the image featured here.

The rug might have been dragged down a freshly paved road.

You can have the best omnichannel strategy on the planet ... but if you fail in any of the three key areas, your omnichannel strategy is utterly feckless.

1. Merchandise. Yup, that's what customers actually purchase.
2. Visual Merchandising / Creative. Does the rug above pass the Visual Merchandising test?
3. Execution. Home Depot outsourced their execution to a third party that couldn't have cared less about executing properly. Which means that Home Depot isn't going to sell me any rugs in the future.

If you have great merchandise, and if you present the merchandise in a compelling manner, and if you execute well, you'll sell stuff. If you adhere to the omnichannel thesis and fail at merchandise / visual merchandising / execution, you have problems.

Focus on what matters for your business, ok?

Omnichannel Customers Are The Best Customers

Omnichannel customers may well be the best customers. But that doesn't mean that the omnichannel thesis caused customers to become best customers.

It can be hard to understand the concept of "incremental value". Simply put, incremental value is the additional value that you achieve, above and beyond what would normally have happened.

Let's say you have a customer who purchased online three times. This customer is about to purchase again, and wants to buy online. But the company invested money in a buy-online-pickup-in-store strategy (BOPIS as the pundits say), so the customer goes to the store and buys something. The customer is now an omnichannel buyer ... online and store.

Assume the customer would normally have migrated from 3x online / 0x retail status to 4x online / 0x retail status.

• Annual Value increases from $76.79 to $98.59 ... $21.80 annual sales gain.

But instead the customer migrates from 3x online / 0x retail to 3x online / 1x retail status.

• Annual Value increases from $76.79 to $114.81 ... $38.02 annual sales gain.

The incremental gain, of course, is the difference between what would have happened ($21.80) to what now happens ($38.02). The difference is $16.22 annual sales gain.

The $16.22 is the incremental annual sales gain caused by the omnichannel thesis. It is more than $0, so that tells us that the omnichannel thesis has some value. That's a good thing.

Then there's the bad thing.

First, we subtract cost of goods and we're left with maybe $6 of annual value. Then we subtract the incremental cost of transacting in a retail store ... that could (depending upon your CFO) include incremental retail employee costs, store rent, and potentially interest expense because the customer is now required to contribute to pay down the debt required to build the store. Worse, the customer has to pay for the incremental cost of the software required to make "BOPIS" possible in the first place. These costs are compared against online costs (pick/pack/ship) ... so you only assess the incremental above-and-beyond costs associated with moving the customer down this path.

This is where the "omnichannel posse" hops on Twitter and condemns the analysis. They'll say that there are customers who wouldn't buy, period, unless the BOPIS option was available. That's a hard one to prove ... but sure, go ahead and tell me how many customers fall into that category, and we'll give full incremental value to those customers and assign credit to the omnichannel thesis. This is a wild guess, of course, so we should discount the value of a guess, right?

From there, you run a profit-and-loss statement. Did the omnichannel thesis provide enough incremental profit to offset the costs associated with moving a customer into omnichannel status?

Show of hands ... how many profit-and-loss statements have you seen that factor in incremental value?

This is the style of analysis required to prove that the omnichannel thesis is appropriate. Go run it, ok?

Omnichannel Theory

Omnichannel Theory / Customer Experience Theory is predicated on the hypothesis that when a customer does "more" the customer becomes "more" valuable.

The data used to support the theory is highly fraudulent, to say the least. Typically, those promoting the theory average historical spend for all customers buying from one channel (i.e. $100) and compare it to average historical spend for all customers buying from multiple channels (i.e. $900). Those who promote the theory look at the ratio of spend (900 vs. 100) and say that the omnichannel buyer is worth 9x as much ... and then paint a picture where the "brand" is encouraged to convert as many customers as possible to as many channels as possible because the opportunity is a 9x increase in customer spend.

We know the measurement strategy is highly flawed ... just look at Macy's, who have suffered through a 10% sales drop in the past few years while touting their omnichannel strategy. If the strategy worked, sales would have increased dramatically.

Tomorrow I'll explain a few of the metrics in the attached table. I analyzed customers who purchased up-to-five times historically, with at least one purchase in the past year. The story told in the table directly contradicts what those who promote omnichannel theory want you to believe, but directly support the fact that omnichannel brands don't enjoy sales increases.

Last Chance For 2018 Pricing

I have room for one more project for the remainder of 2018 ... one more! However, if you get your project in before Thanksgiving, I will honor 2018 "Total Package" pricing. In 2019, there will be a new pricing structure, so get your project in now to get lower prices ... and if you are first, you get your project completed in December.

2018 "Total Package" Pricing:

• Annual Sales $1 to $9,999,999 = $9,000.
• Annual Sales $10,000,000 to $29,999,999 = $15,000.
• Annual Sales $30,000,000 to $59,999,999 = $20,000.
• Annual Sales $60,000,000 to $99,999,999 = $28,000.
• Annual Sales $100,000,000 to $999,999,999 = $35,000.
• Annual Sales $1,000,000,000 and Greater = $40,000.