May 10, 2007

Sharper Image And File Momentum

Sharper Image continues to deal with business challenges, according to Internet Retailer.

Multichannel Forensics sometimes illustrate business oddities. In some instances, merchandise problems can be fixed, and yet, sales will decrease.

For example:

  • Assume you start with 100,000 good customers.
  • Assume 30% of them repurchase.
  • Assume that each customer who repurchases spends $200.
  • Assume that you only get 40,000 new customers.
  • Assume that each new customer spends $100.
  • Total volume = 100,000*0.30*$200 + 40,000*$100 = $10,000,000.
  • Total customers = 70,000.
Assume you fix your merchandising woes. Next year looks like this:
  • We start with 70,000 good customers.
  • Assume 35% of them repurchase (an improvement over LY's 30% rate).
  • Assume that each customer who repurchases spends $200.
  • Assume that you get 45,000 new customers (an improvement over LY's 40,000).
  • Assume that each new customer spends $100.
  • Total volume = 70,000*0.35*$200 +50,000*$100 = $9,900,000.
In this example, you'd post a -1% comp store sales drop ... yet your internal customer metrics are all improved. Your repurchase rate increased from 30% to 35%. Your new customer acquisition counts improved from 40,000 to 45,000.

When businesses go bad, file momentum works against them. This example doesn't explain all the woes at Sharper Image. But the example demonstrates the critical importance of knowing all of your customer metrics. In particular, you need to know customer counts by segment, repurchase rates, spend per repurchaser, and similar metrics for new customer acquisition.

Your merchandising organization depends upon you to provide this service. On the surface, in this example, it looks like the merchants are failing again. In reality, file momentum is the issue --- merchandising of the store has improved.

2 comments:

  1. Adelino de Almeida5:39 PM

    This is a great example of going profitably out of business, and one of the greatest pitfalls of poorly employed ROI principles. Beyond a discussion of whether retention is more important than acquisition or vice versa, the aspect to bear in mind is that the profitability of the business is more important than the profitability of each campaign.

    ReplyDelete
  2. Thanks for the comment!

    If you were CEO, what would you do to turn around their fortunes, and how would you try to generate profit during tough times, to keep shareholders off your back?

    ReplyDelete

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