October 31, 2011

The Life Spiral: New Items

By now, you feel depressed.

You spent a full month reading about all of the ways that your business may be in decline.  Heck, you probably asked somebody to run a few queries for you, and you realized that your business has a few attributes associated with the death spiral.

So this week, we're going to talk about some of the things that successful businesses do.  Do some of these things, and you may be climbing the "Life Spiral" in no time.

Topic = New Items

New items are the life blood of any company.

Successful companies view new items like a baseball team views a farm system.  In baseball, you have maybe two hundred players performing at different levels in a farm system.  The players who exhibit the best performance move up, from Rookie Ball to Class A to AA to AAA.  Eventually, if the player is really, really talented, the player makes it to the Major League team.

New items act in a similar manner.  I frequently do work where a business will introduce 200 new items ... and five years later, only 10 of the items are what I would call "Grade A" items, items that are responsible for a disproportionate share of total company net sales.

If you want to put your company on a path toward the "Life Spiral" (i.e. unfettered sales and profit success), focus on measuring the success of new items.  Are new customers using search to find these items?  Do certain new products outperform best products in email campaigns?

Companies experiencing success have new items that follow one of two trajectories.

  1. The business experiences new product success at greater rates over time (hard to do).
  2. The business generated new products at a faster rate, allowing more new items to become best sellers.
You can look back to 2008, and see how businesses responded to new merchandise initiatives.  Many companies cut back on customer acquisition when the economy collapsed.  Many companies also cut back on product development.

Products developed in 2008 - 2009 are the ones that are paying the bills today.

And products developed in 2011 - 2012 will be the ones that pay the bills in 2014 - 2015.

A laser-like focus on new products is critical to the long-term success of a business.  If you are a CEO, create an initiative to increase new item development by 15% in 2012.  If you are a marketer, find every example in your catalog marketing efforts, email marketing, search marketing, retargeting, mobile, social and e-commerce activities where new items are successful.  There is a formula for success, here, waiting to be discovered.  If you are an analyst, generate reporting that helps every employee in your company understand the critical importance of new items in the long-term health of your business.

New items are as important as new customers in the "Life Spiral" ... invest time and energy today, and your business may well ascend the "Life Spiral" in a few years!

October 30, 2011

Dear Catalog CEOs: Trick or Treat?

Dear Catalog CEOs:

Tonight, you and your husband will hear the doorbell ring.  You open the door, and there, in front of you, are a pair of young children, dressed up like a pair of M&Ms or a vampire/wolf combo from Forks.  You'll hear the phrase "TRICK OR TREAT!!!!!"  And you'll drop a Snickers Bar or Twix Bar in their little bags.

You'll repeat this until you've exhausted your supply of treats, or until you've run out of children in your neighborhood.

How often will you trick a child?  How often will you provide a treat for a child?

As a catalog marketer, how many of you receive tricks, and how many of you receive treats?

We can look back, now, and realize that we've been tricked.

Last week, I read a few articles, articles with headlines that told a story we've all heard before.

  1. Mobile customers are 24% more valuable than average.
  2. The socially engaged customer drives a Net Promoter Score that is 88% higher than average.
Sound familiar?  Back in 2002-2003, we were inundated with this message ... "Multichannel Customers are worth 37% more than single-channel customers."

This is a trick, a trick perpetrated by folks looking to sell products, services, or page views.

How is this a trick?

You can replicate this situation within your own database.  Take a look at this simplistic example:

Here's the problem.  "Best" customers tend to do everything.  Therefore, when you run a simple query, a query not controlling for all effects, you find that presence of just about any indicator yields a more valuable customer than not having presence of the indicator.

Go have your database analyst or web analyst run this query for you, against any attribute you have in your database.  Any attribute.  Any.  You will come to the same realization in nine of ten instances.

Once you realize this, you realize that almost everything you've been taught about modern marketing is fundamentally wrong.  You've been "tricked".

If everything we read about being "multichannel" was accurate and data driven, wouldn't your business have grown at a breathtaking rate as you added new marketing channels? By 20% a year?  40% a year?  75% a year?

If everything we've read about social media was accurate and data driven, wouldn't 30% or 40% of our sales now be sourced from Facebook and Twitter?  And wouldn't you be having daily conversations with customers, who, following the conversation, immediately purchased products because "markets are conversations"?

Here's what happened.  In the past fifteen years, customer behavior, measured by repurchase rates, orders per buyer per year, and items per order, barely changed.  Go look at your own metrics!!  We added unimaginable ways to communicate with the customer ... the net sum of this, on a company-by-company basis, is something close to zero, in terms of sales.

We've been tricked.  

Are there any treats out there for us?  Certainly!

  1. The most successful clients I work with have found ways to increase customer loyalty (measured by annual repurchase rates) by up to 10%.  This is terribly hard work, and is most likely influenced by the second treat below.
  2. The most successful clients I work with increase customer loyalty, not by marketing, but rather, via merchandise productivity.  In other words, they work tirelessly to find merchandise that customers love, and then they feature more of that merchandise in their marketing activities, which drives up the productivity of marketing activities, which allows the business to reach more customers and grow faster.
  3. The most successful clients I work with tirelessly try to find low-cost ways to increase new customer acquisition.  In fact, when I look at the 10 year history of successful and unsuccessful clients, I almost always observe annual repurchase rates that move by +/- 10% vs. the ten year average for both successful and unsuccessful clients ... and I almost always observe that the successful companies acquire more customers today than ten years ago, and the cost per new customer is cheaper today than ten years ago.
I realize these treats aren't terribly tasty ... they're more like getting an apple for Halloween than a Twix Bar, but the apple provides better long-term health than the Twix Bar.  You, of course, thrive when you achieve long-term health ... right?

October 27, 2011

Death Spiral: Channel Shift

There are two situations where channel shift leads to big problems.
  1. Customers shift from an old technology (newspapers) to an newer technology (online), and in the process, trade customer dollars spent on old technology for dimes spent in the newer technology.
  2. Rate of Adoption.  When customers, after controlling for age, are slow to shift to new technology (say mobile), pay close attention to customer counts.  When this happens, it can become ever more difficult to acquire customers.  As new channels emerge, customers tend to shift behavior, adopting the new channel over the old channel, making it harder and harder to acquire customers via the old channel.
Set up your dashboards to understand this phenomenon.

October 26, 2011

Death Spiral: New Customers vs. Loyalty

Here's an easy one.  Businesses locked in a Death Spiral are, for a myriad of reasons, unable to acquire enough newbies to offset the customers being lost.
  • Example:  100,000 twelve-month buyers, 45% repurchase = 45,000 customers ... 25,000 reactivated customers ... 15,000 new buyers ... total buyer file next year = 85,000 customers.
This isn't a challenging query to run.  Just run it, monthly!!

Management is going to have a natural reaction ... they're going to suggest that if customers were just more "loyal" or more "engaged", you wouldn't have a problem.  Unfortunately, that's not true.  Repurchase Rates vary by +/- 10%, on average ... so if you did everything right on repurchase rate, you'd have the following situation.
  • Example:  100,000 twelve-month buyers, 50% repurchase rate = 50,000 customers ... 25,000 reactivated customers ... 15,000 new buyers ... total buyer file next year = 90,000 customers.
In other words, new customers are a bigger indicator of a business in a Death Spiral than changes in customer loyalty is.

Run this query on a monthly basis, and communicate your findings to Management.  If you are in Management, demand that somebody run this query for you, you need to understand this relationship!

October 25, 2011

Death Spiral: Customer Age

Pay really close attention to the average age of your customer.

I mean this!

By and large, most businesses have a customer base that ages as time passes, it's just the way life works.  In other words, if you had a 45 year old customer in 2001, you probably have a 48 year old customer in 2011.

Businesses locked in a Death Spiral often have a rapidly aging customer base.  The 45 year old customer in 2001 becomes a 53 year old customer in 2011, and will become a 61 year old customer in 2021.

This is a simple metric that everybody can track, with a simple demographic overlay.  Spend a few pennies, and see if your customer base is aging at a disproportionate rate.  If it is, you know you may have a business that has future potential to be locked into a Death Spiral.

October 24, 2011

$12,000,000 Profit on Catalog PhD Projects This Year? $22,000,000 Total?

It is an understatement to say that there are profit opportunities for catalog marketers these days.

In fact, in the past twenty months, I've uncovered $22,000,000 of annual profit opportunity for clients, using the Catalog PhD framework.

How is this possible?

Well, the secret is that "matchback analytics" employed by most catalog brands are fundamentally flawed.  After analyzing several hundred catalog and email mail/holdout tests, it is clear that demand happens organically ... in other words, if you don't mail catalogs or send emails to customers, customers spend money anyway.  Matchback/Allocation algorithms determine that organic demand, demand that would be generated because of brand loyalty, is caused by catalog/email marketing, severely overstating the importance of marketing at catalog brands, limiting the amount of profit you generate (though it generates significant profit for the entire catalog marketing vendor ecosystem).

Here's the fundamental flaw:  Take your average catalog brand, using an average matchback algorithm.  Most online transactions are allocated back to the catalog, with few transactions left for email or search or whatever channels remain.  In the following example, the brand mails 15 catalogs a year to the average customer.  Here's the profit and loss statement, by catalog count.

Catalog Organic Total Total Total
Catalogs Demand Demand Demand Ad Cost Profit
0 $0.00 $7.60 $7.60 $0.00 $3.04
1 $7.48 $7.60 $15.08 $0.65 $5.38
2 $11.34 $7.60 $18.94 $1.30 $6.28
3 $14.47 $7.60 $22.07 $1.95 $6.88
4 $17.19 $7.60 $24.79 $2.60 $7.32
5 $19.66 $7.60 $27.26 $3.25 $7.65
6 $21.93 $7.60 $29.53 $3.90 $7.91
7 $24.05 $7.60 $31.65 $4.55 $8.11
8 $26.06 $7.60 $33.66 $5.20 $8.26
9 $27.97 $7.60 $35.57 $5.85 $8.38
10 $29.79 $7.60 $37.39 $6.50 $8.46
11 $31.55 $7.60 $39.15 $7.15 $8.51
12 $33.24 $7.60 $40.84 $7.80 $8.54
13 $34.87 $7.60 $42.47 $8.45 $8.54
14 $36.46 $7.60 $44.06 $9.10 $8.52
15 $38.00 $7.60 $45.60 $9.75 $8.49
16 $39.50 $7.60 $47.10 $10.40 $8.44
17 $40.96 $7.60 $48.56 $11.05 $8.38
18 $42.39 $7.60 $49.99 $11.70 $8.30
19 $43.79 $7.60 $51.39 $12.35 $8.21
20 $45.16 $7.60 $52.76 $13.00 $8.10

This brand mails 15 catalogs per year, and as you can see, somewhere between 11 and 15 catalog mailings per year is optimal.  Based on matchback analytics, this business is doing a good job.

Reality, verified by mail/holdout tests, tells us something different.  Often, mail/holdout tests tell us that 50% of demand is generated organically, without need for marketing.  When that happens, the profit and loss statement looks a lot different:

Catalog Organic Total Total Total
Catalogs Demand Demand Demand Ad Cost Profit
0 $0.00 $22.80 $22.80 $0.00 $9.12
1 $4.49 $22.80 $27.29 $0.65 $10.27
2 $6.81 $22.80 $29.61 $1.30 $10.54
3 $8.68 $22.80 $31.48 $1.95 $10.64
4 $10.32 $22.80 $33.12 $2.60 $10.65
5 $11.79 $22.80 $34.59 $3.25 $10.59
6 $13.16 $22.80 $35.96 $3.90 $10.48
7 $14.43 $22.80 $37.23 $4.55 $10.34
8 $15.64 $22.80 $38.44 $5.20 $10.17
9 $16.78 $22.80 $39.58 $5.85 $9.98
10 $17.88 $22.80 $40.68 $6.50 $9.77
11 $18.93 $22.80 $41.73 $7.15 $9.54
12 $19.94 $22.80 $42.74 $7.80 $9.30
13 $20.92 $22.80 $43.72 $8.45 $9.04
14 $21.88 $22.80 $44.68 $9.10 $8.77
15 $22.80 $22.80 $45.60 $9.75 $8.49
16 $23.70 $22.80 $46.50 $10.40 $8.20
17 $24.58 $22.80 $47.38 $11.05 $7.90
18 $25.44 $22.80 $48.24 $11.70 $7.59
19 $26.27 $22.80 $49.07 $12.35 $7.28
20 $27.10 $22.80 $49.90 $13.00 $6.96

Oh boy.  OH BOY!

In reality, just FOUR catalog mailings per year yields an optimal outcome.  FOUR!

Now, yes, you're going to generate less demand.

And yes, this means that your housefile is going to shrink a bit ... unless you reallocate some of your ad cost savings back to customer acquisition activities or to marketing in other channels.

Look at the profitability of a customer, folks.  Using matchbacks/allocation algorithms, you generate $8.49 profit per customer at 15 catalog mailings per year.  Using HIllstrom's Catalog Marketing PhD, you generate $10.65 profit per customer at 4 catalog mailings per year.

This is how I have been able to help folks generate $12,000,000 of profit opportunity this year alone, and $22,000,000 in the past twenty months, using this methodology.  The matchback/allocation routines employed by the catalog vendor community fail to account for mail/holdout results, and fail to account for cannibalization between catalogs.  Hillstrom's Catalog PhD accounts for these factors.

The methodology is reasonably straightforward and simple.
  1. Predict the likelihood of a customer purchasing in the next year (40%).
  2. Predict how much a customer will spend if the customer purchases, annually ($100).
  3. Predict the percentage of demand that will be organic, annually, at a customer level (50%).
  4. Multiply the predictions (40% * $100 * (1 - 50%)) = $20.00.
  5. Run a profit and loss statement, using cannibalization assumptions, to identify the optimal number of catalogs to mail.
I've just given you the keys to the kingdom.  I literally told you how to do this.  Show me a vendor that will give this type of information away???

So, what is stopping you from using this methodology?

You have a few options.
  1. You can continue to use flawed matchback analytics, analytics you pay the vendor community to use.
  2. You can implement the methodology I outlined here.
  3. You can read the print version of the book for more details, click here now!
  4. You can read the Kindle version of the book for more details, click here.
  5. You can hire me to execute a project for you ... contact me now!
Here's a little bit of inside information ... I am raising prices on Catalog PhD projects, starting January 1, 2012.  By responding to this blog post (click here for this opportunity), you lock in 2011 pricing, saving you $$$$.

So take advantage, folks, what's not to like about generating more profit or saving a serious chunk of ad cost?  What would stop you from using this methodology?

Death Spiral: Expenses

Pay close attention to the signals you receive from Management.

You're blessed when your Management team wants you to grow the business, and gives you marketing dollars to do just that.

It's a bit more stressful when somebody asks you to start minimizing expenses.

Businesses in a Death Spiral are constantly focusing on expense reduction.

If you can get your hands on a profit and loss statement, take a look at several expense lines, especially over the past three to four years.
  • Marketing Dollars as a percentage of Net Sales.  If sales are decreasing while expenses are increasing, then Management is trying to spend their way out of a Death Spiral.
  • Pick/Pack/Ship and Contact Center Expense as a percentage of Net Sales.  If sales are decreasing, and this expense line is the same percentage of Net Sales, then Management is actively trying to fly the plane out of a Death Spiral.  If sales are in decline, and this expense line is increasing as a percentage of Net Sales, you might want to question the Management Team about what they are thinking!
  • Promotional Dollars as a percentage of Net Sales.  If this number is rocketing skyward, then your Management Team is trying to use promotions to fly the plane out of a Death Spiral.
  • Gross Margin Percentage:  When this line is decreasing (was 62%, then 59%, then 54%, then 52% by year), it tells you that the business is spiraling out of control, that Management is actively trying to lower prices to move merchandise.
  • Liquidations/Clearance:  You only sell a lot on clearance when your inventory team buys too much, or the customer buys too little merchandise.  Pay close attention to the this.
Carefully analyze your profit and loss statement, and look for these tell-tale signs of a Death Spiral.

October 23, 2011

Dear Catalog CEOs: What Did We Learn In 2011?

Dear Catalog CEOs:

What did we learn in 2011?

Learning #1 = Frustration With Co-Ops:  Not because of service or problems, but because of the change co-ops have helped accelerate.  Run a demographic report on co-op sourced names vs. names you acquire via Google ... your co-op sourced names are generally 55+ and rural, the result of years of "optimization".  Our dependence upon co-ops accelerates the aging of our customer file.

Learning #2 = Multi-Channel Didn't Matter:  I've analyzed more than 300 business-years of data since starting MineThatData in 2007.  Many of my clients send me ten or fifteen or twenty years of purchase data.  Guess what?  Annual Repurchase Rates, Orders per Buyer per Year, and New Customer Counts have, by and large, not changed over the past decade.  Just let those facts sink in for a moment.  In 1995, we mailed a dozen catalogs a year to our best customers.  In 2011, we mail fifteen catalogs a year, one-hundred email campaigns per year, we offer incentives via Facebook, via Twitter, via our Mobile website, via Search, via Affiliates .... on and on and on I could go.  And yet, there is no fundamental change in annual customer behavior.  Customers still repurchase at the same rate.  Customer still order the same number of items per order.  Customers still place the same number of orders per year.

Learning #3 = Core Skills Are Missing:  This one comes up repeatedly, as well.  People can tell me that the big blue button outperforms the small green button by 27.44393928%.  Nobody can tell me if merchandise productivity is increasing or decreasing.  People can tell me that free shipping with a $125 hurdle increases orders by 11%.  Nobody can tell me how important new products are to a business.  People can tell me that 29% of recipients open email campaigns. Nobody can tell me the percentage of the email file that orders at least once a year from an email campaign.  Everything we know about our business surrounds the performance of a campaign.  We've lost the ability to understand how customers behave, annually, and we've lost the ability to act upon that behavior.

Learning #4 = Email Is The "Hub".  Almost every project I work on suggests that best customers actually purchase at least once a year from email campaigns.  Email marketing actually connects brand messaging to best customers ... I can't even believe I just said that!  Earlier this year, one of you lamented to me that "email generates 25% of our profit but we only allocate 0.1% of our staffing to email".  Well, folks, you can fix that!  Some combination of email, mobile, and social is going to account for an ever-increasing percentage of our future profit.  It is time to figure this combination of channels out before the competition figures it out.

Learning #5 = Talent Dearth:  When I worked at Lands' End in the early 1990s, our marketing department was LOADED with talent.  LOADED.  In fact, the folks I worked with have gone on start their own catalog companies, to be VPs and Directors and to generally excel in ways that were entirely predictable in the early 1990s.  Can you predict that the same thing will happen in 15-20 years with the team assembled in your marketing department today?  Talent is not being funneled into catalog brands, talent is going to Mobile and Social.  Somehow, we have to change this.  You keep telling me that you can't find talent.  It might be time for all of us to start developing talent.

Learning #6 = New Customers Matter:  I can't tell you how often this grates business leaders, but it is true.  Unless you are Wal-Mart or another ten billion plus business, you desperately need new customers.  The marketing press, however, tells you all about "Eight Easy Ways To Grow Customer Engagement".  We've learned that there is almost nothing more important than growing our business via low-cost customer acquisition.  In fact, in the next 1-3 years, this will be a trend ... how do we find new customers at a low cost?

Learning #7 = Merchandise Matters:  I received an email from one of you a few months ago.  This business leader lamented the fact that she only sold "branded" electronics, that the only thing that differentiated her from her competition was "price".  Amen.  Ask Best Buy how it feels to have a customer shop an expensive big box store only to buy the item at a cheaper price at Amazon?  Catalog success depends upon unique, differentiated product.

Learning #8 = A Replacement For The USPS:  No matter how hard you fight, no matter how hard you lobby, the USPS is headed in a direction that is not congruent with the desires of the catalog community.  Find a replacement, now.  Hint, e-commerce seems to work, but requires a different "customer relationship" than catalog marketing requires.

Learning #9 = How We Buy Paper Needs To Change:  So many of you voice your frustration with me about the need to "buy paper" three to five months in advance, to get great pricing.  You tell me that you can't implement new and innovative strategies because you're "committed to paper".  We learned that this must change.  Our vendors must do what's best for us, not what's best for vendors.  You need flexibility. You can change this, only if you mobilize as a unified front.

Learning #10 = Free Shipping Will Be Mandatory:  And the only way you'll deal with this is to mail fewer catalogs to online/mobile/social-centric customers, regardless what the industry tells you.  I found new clients over $12,000,000 profit this year by mailing fewer catalogs to online-centric buyers ... and that's just little 'ole me, imagine what the real opportunity actually is!  We'll have no choice but to compete with free shipping by offering free shipping ourselves.  We'll pay for this via housefile catalog circulation reductions.

Learning #11 = They're Lying To Us:  Well, they're not lying intentionally.  Here's a heading I read this week ... "Triple Website Visits by Adding a Facebook Like Button".  Really?  That's how we triple website visits?  We have to really, really filter through content to find nuggets of gold.  And it is getting harder and harder each day, isn't it?

Learning #12 = The Industry Isn't Always On Our Side:  This year in particular, we learned that trade journals host blogs, and those blogs are designed to mock us when we make mistakes.  Worse, the vendors we pay money to pay to advertise on said blogs, taking our money and using it to help mock us.  Even worse, industry consultants openly point out our faults on their own blogs. Why? This isn't acceptable, and needs to change.

Learning #13 = Sell Something:  If I looked across the 65-70 clients I've worked with since early 2007, there's one thing in common with those who are wildly successful ... they work their tails off trying to sell something.  They don't care about channels, they care about selling merchandise.  They don't care about engagement, they care about selling merchandise.  They don't care about what mobile can do for them, they care about selling merchandise.  They don't care about eight best practices for selling on Twitter, they care about selling merchandise.  They don't care about the long-tail of search, they care about selling merchandise.  We have everything backwards.  We think if we utilize channels, we'll sell merchandise.  Instead, the opposite is true ... if we do a great job of selling merchandise, channels will perform well, allowing us to expand into new channels.

Learning #14 = Best Practices Stink:  Oh, I'll catch garbage on Twitter for saying this, but it is true.  Since when do we trust a vendor to tell us what the "best practices" are?  When you have a "trade secret", do you tell everybody what it is so that your competitors can copy it?  I mean, I do that, but you certainly don't do that, nor should you!  These days, "best practices" are something that a vendor tries to sell to you in order to benefit the vendor.  They're sometimes shallow and empty.  But they are seldom practices that will grow your business by 10%.  Nope, those practices are your responsibility.

Learning #15 = Incremental Sales Are Hard To Come By:  My projects continually indicate that the vast majority of sales are not "incremental".  This creates division within our industry ... we want to attribute every sale to a marketing activity, when the reality is that customers simply buy from us for reasons other than the advertising we just executed.  Think about the problem this way ... you need toilet paper, so you go to Wal-Mart to buy it.  Does a Wal-Mart television commercial that you viewed yesterday deserve credit for your toilet paper purchase?  No, this is not an "incremental" purchase caused by marketing.  The same situation happens in your business every day.  Only ego prevents us from understanding this.  Once we understand that customers place orders because they love us, not because they love our advertising, new opportunities immediately present themselves to us.

Learning #16 = We Have A Chance To Be Wildly Successful:  Yes, we have a chance to be wildly successful!  The choice, is ours, however.  We get to decide if we're going to be successful  Deep down, we know what we need to do to be successful.  We're going to be successful by offering superior merchandise, great service, fair pricing.  We're going to be successful by choosing valued business partners.  We're going to be successful by developing talent.  We're going to be successful by taking risks, by being willing to be wrong.

Death Spiral: Product Death

Pay close attention to how fast merchandise "dies".

Now, in some businesses (i.e. Fashion), merchandise turns over quickly, that's the nature of the beast.

In many other businesses, a product should "live" for a reasonable amount of time, two or three or four years, and should generate a significant amount of sales as well.

This is an example of a business with a quick "product death".  Here, we look at 1,000 new products.

Merchandise Productivity Forecast

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
New F 0 200 0 0 0 0
New D 0 200 0 0 0 0
New C 0 200 0 0 0 0
New B 0 200 0 0 0 0
New A 0 200 0 0 0 0
LY F 0 0 200 0 0 0
LY D 0 0 200 0 0 0
LY C 0 0 200 0 0 0
LY B 0 0 200 0 0 0
LY A 0 0 200 0 0 0
Existing F 0 0 0 236 110 28
Existing D 0 0 0 208 21 4
Existing C 0 0 0 212 29 6
Existing B 0 0 0 158 36 9
Existing A 0 0 0 23 19 12
Items 0 1,000 1,000 837 215 60
Demand $0 $18,458,695 $6,675,725 $3,634,327 $2,237,493 $1,289,102
$18,459 $6,676 $4,341 $10,400 $21,610
Item Chg.

0.0% -16.3% -74.3% -72.3%
Demand Chg.

-63.8% -45.6% -38.4% -42.4%
$/Item Chg.

-63.8% -35.0% 139.6% 107.8%

This is a problem.  New items generate the majority of sales in year one, then rapidly decline over the next four years, to the point where barely any sales are left by year five.

In cases where a business is in a Death Spiral, products have an unusually rapid rate of decay, with few items generating high sales volumes.  Each business needs a healthy number of items generating large sales volumes.  Think about The Sharper Image several years ago, they had that ionizer problem, and because that item carried a disproportionate level of total net sales, the business was in big trouble.

When you introduce a thousand items, you need a reasonable number of items to achieve success within 1-2 years.  If this doesn't happen, then existing products are required to carry a disproportionate load, and that is a recipe for a true Death Spiral.

October 19, 2011

Death Spiral: New Products

If you read Twitter or Trade Journals or Leading Bloggers, you read a lot of content about how to engage customers, how to use technology to grow sales (mobile, social, ecommerce), you know, all of the stuff that you've all tried over the past fifteen years.  Hopefully, sales increased at a rate faster than inflation.

Now, this may come as a surprise to some of you.  I hope you are sitting, because I am about to share something interesting with you.

When a customer buys from your business, what is the customer buying?
  • Answer:  Merchandise (for some, Services)!
That's right, the customer is buying merchandise.

So wouldn't it make sense if we take a little of the time we spend analyzing customers, and reallocate it, focusing instead on merchandise?

It turns out that new products are critically, critically important to most of our businesses.

Businesses in a Death Spiral sometimes fail to invest in new products.

So, if you suspect that your business is not investing in new products, run a little five year simulation, analyzing how products evolve and change over time.  Here's an example:

Merchandise Productivity Forecast

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
New F 261 261 261 261 261 261
New D 810 810 810 810 810 810
New C 1,371 1,371 1,371 1,371 1,371 1,371
New B 1,248 1,248 1,248 1,248 1,248 1,248
New A 174 174 174 174 174 174
LY F 795 261 261 261 261 261
LY D 873 810 810 810 810 810
LY C 1,161 1,371 1,371 1,371 1,371 1,371
LY B 1,257 1,248 1,248 1,248 1,248 1,248
LY A 168 174 174 174 174 174
Existing F 999 1,626 1,697 1,626 1,604 1,596
Existing D 555 939 851 836 833 832
Existing C 789 936 730 705 700 698
Existing B 909 819 690 660 653 650
Existing A 354 312 282 262 250 243
Items 11,724 12,360 11,979 11,818 11,767 11,746
Demand $107,436,827 $99,760,685 $95,912,962 $93,673,513 $92,400,613 $91,694,053
$/Item $9,164 $8,071 $8,007 $7,926 $7,853 $7,806
Item Chg.
5.4% -3.1% -1.3% -0.4% -0.2%
Demand Chg.
-7.1% -3.9% -2.3% -1.4% -0.8%
$/Item Chg.
-11.9% -0.8% -1.0% -0.9% -0.6%

I like to look at brand new products, products introduced last year, and products introduced prior to last year.  Then I grade each product ... A/B/C/D/F ... just like when you were in school, based on sales levels (high sales per item to low sales per item).

Many companies have a challenging sales hurdle for new items to overcome ... the new item has to achieve a certain level of sales, or it will be discontinued.  As a result, if a company develops 100 new items per year, only a handful will achieve high sales potential.

Now, if you kill new product development, then you're stuck in a situation where you'll kill the number of successful products in future years.

In the above example, sales are forecast to decrease, all things being equal, because there aren't enough new products in the product pipeline.

Here's a scenario where new product development is increased by 20%.

Merchandise Productivity Forecast

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
New F 261 313 313 313 313 313
New D 810 972 972 972 972 972
New C 1,371 1,645 1,645 1,645 1,645 1,645
New B 1,248 1,498 1,498 1,498 1,498 1,498
New A 174 209 209 209 209 209
LY F 795 261 313 313 313 313
LY D 873 810 972 972 972 972
LY C 1,161 1,371 1,645 1,645 1,645 1,645
LY B 1,257 1,248 1,498 1,498 1,498 1,498
LY A 168 174 209 209 209 209
Existing F 999 1,626 1,697 1,843 1,894 1,904
Existing D 555 939 851 985 995 996
Existing C 789 936 730 821 833 835
Existing B 909 819 690 758 773 776
Existing A 354 312 282 277 278 279
Items 11,724 13,133 13,524 13,958 14,046 14,064
Demand $107,436,827 $108,098,217 $108,277,042 $108,442,216 $108,657,216 $108,805,629
$/Item $9,164 $8,231 $8,006 $7,769 $7,736 $7,737
Item Chg.
12.0% 3.0% 3.2% 0.6% 0.1%
Demand Chg.
0.6% 0.2% 0.2% 0.2% 0.1%
$/Item Chg.
-10.2% -2.7% -3.0% -0.4% 0.0%

Interesting, isn't it?

If this company increases new product development by 20%, then the business is able to stabilize at about $108 million per year.  This business has to add 700 new products per year, every year, for the next five years, in order to stabilize.

Also notice that in year five, there are 279 outstanding existing items in the new scenario, vs. 243 outstanding existing items in the current forecast.  In other words, we add 700 new items per year, every year, and after five years, only 36 items qualify for elite status.

Merchandise success is a lot like the NFL, where you draft seven players and you sign twenty free agents, and you end up with one Pro Bowl player among the twenty-seven candidates.

Businesses stuck in a Death Spiral frequently fail to invest in new products, causing long-term health problems that take even longer to overcome.

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