Simply put, the "Decay Rate" is the percentage of demand from an item sold in both 2012 and 2013 that still exists in 2013.
- 2012 Item Generated $50,000.
- Same Item In 2013 Generated $40,000.
- Decay Rate = 1 - (40,000 / 50,000) = 20%.
Decay Rates aren't good, and they aren't bad. Instead, Decay Rates simply tell the merchandising organization how to grow the business.
For instance, in my life at Nordstrom, it would be common to see an item with a 50% Decay Rate - especially fashion-centric items.
When you have a high Decay Rate, you have a different business model.
- You typically under-buy merchandise, because you cannot be left sitting on 1,500 units of an item that is going to sell less and less well over time.
- You must constantly find new items - and the new items, by default, have to perform well. This puts immense pressure on your merchandising team - companies with high Decay Rates have brilliant merchandisers - they have to have brilliant merchandisers!
- Your marketing team must have a tight relationship with the merchandising team. The marketing team must respond, in near real-time, to the merchandise that is working, and must feature that merchandise now!
Quantify your Decay Rate. If it is 5%, you run a very different business than if it is 50%.