January 11, 2015

Hippoman's Big And Tall: Turning The Dial Up To Eleven

Ok, here's what we know.

  1. Sales are down, considerably.
  2. Profit (albeit marginal) has turned into a loss.
  3. New products were scaled way, way, way back, or performed horrifically bad, or both.
  4. Management appeared to invest in new customers for a brief period of time, propping up the business.
  5. When new customers were scaled back (hypothesis to be proved later), and when new items were scaled back, the business imploded.
  6. Repurchase rates cratered in 2014 (maybe because of new item issues), but repurchase rates are very low to begin with, causing the business to be highly dependent upon new customers for survival.
Let's look at trends in customer purchases over the past few years. Here's a view of annual purchase frequency.

Poor Mr. Hippoman. In four years, the average customer is purchasing 0.1 times less per year, down from about 1.375 to less than 1.275 orders per year. Now, that's not the end of the world, as long as other metrics change in a positive manner.

Here's items per order.


When items per order is in decline (especially this much), I often find that price per item purchased is increasing.

There it is!

Notice that items per order improved late in 2014, at the exact time that price per item purchased leveled off. These two metrics frequently move in inverse proportion to each other. It's almost like the customer has $100 to spend, and if you raise prices, the customer purchases fewer items.

Items per order and price per item purchased yield average order value.

Remember, annual purchase frequency was in decline - but average order value is, on average, increasing. The multiplication of the two metrics give us annual customer spend.

This happens ALL THE TIME, folks. Everybody is trying to manage different metrics, in an attempt to grow the business. A merchant raises prices, causing the customer to purchase less often and to buy fewer items. The marketer responds by offering promotions to increase the probability of purchasing, but then the customer becomes hooked on promotions, causing the merchant to raise prices to improve profit margins, lowering purchase frequency and items per order even more. Everybody is turning dials on the stereo receiver to 11, only to get the graph above - essentially a flat-line. In four years, inflation would be enough to cause customers to spend an additional $10 per year (in this case) - but we don't see that happening, do we?

Again - everybody is turning stereo dials at the same time, up to eleven, but nothing is happening. It's like moving each band on the equalizer to maximum, causing the same tone you'd get if everything was at zero.

Mr. Hippoman seems to be leading a business in a chaotic manner, don't you think? Everybody is trying "something", but nothing positive is happening.

Profit per New Customer

It's common for folks to measure cost per new customer. Total Marketing Cost = $10,000. Total New Customers = 130. Cost per New C...