September 14, 2015

Merchandise Productivity

Remember - my system begins with measurement of annual repurchase rates. In most cases, we work for companies that have annual repurchase rates (among twelve-month buyers) of under 40%. Sometimes the percentage creeps up to 45%. Seldom do we work for companies like Nordstrom (75% when I was there) or Wal-Mart or Starbucks that have crazy-high repurchase rates.

A low annual repurchase rate forces us to spend disproportionate time finding new customers. Most of us do not spend disproportionate time finding new customers. Most of us want to believe we can, as one CEO told me, "squeeze more juice out of a lemon". Always remember that each lemon has a finite amount of juice in it ... and once you've squeezed all the juice out of the lemon, the lemon doesn't look much like a lemon anymore, now does it?

If we want more juice, we need to find more lemons.

A former VP of mine, Bill Michel, was being pummeled in a meeting at Eddie Bauer back in the late 1990s. The merchants and creative folks were suggesting that -20% sales hits were his fault - that he was doing a poor job of marketing their products and their lifestyle spreads. He waltzed up to the greaseboard, and jotted down, with a black marker, the following percentages.
  • 70%.
  • 20%.
  • 10%.
He told the audience that 70% of the reason why business works is because of merchandise. He said that if the company offered what the customer wanted to buy, everything else would take care of itself.

He then turned to the creative team. He said that 20% of the reason why business works is because of how the merchandise is presented to the customer.

Finally, he informed the room that 10% of the reason why business works is because of how marketing optimizes the 70% / 20% merchandising / creative mix.

Then, he sat down. That's when the gnashing of teeth began. "You idiot" ... "that's crazy" ... "blah blah blah" ... the merchants and creative folks immediately began informing the marketing VP of what a moron he was. It was at that moment, where the marketing exec received a cold, unfeeling tongue-lashing from defensive merchants and creatives, that I realized that merchandise productivity meant everything.

After that meeting, the marketing exec told merchandising and creative that he owned "prospect catalogs". In other words, he said that if he was going to be accountable for new customers, then he wanted to be accountable for the vehicle that generated new customers. He made a deal with the merchandising and creative team - they could own the monthly catalog stream, while he would own the prospect catalog stream. They could do whatever they wanted with housefile customers ... he would do whatever he wanted to find new customers.

Merchandising and Creative accepted the deal.

That's when things got interesting.

The marketing exec picked only winning items, and he picked only winning creative, when assembling the prospect catalogs. The core monthly catalogs had lifestyle spreads featuring products that did not always appeal to the core audience.

The results?
  • Prospect catalogs were anywhere between -5% and +10% to plan.
  • Monthly housefile catalogs were anywhere between -20% and -10% to plan.
This taught me that I had no choice but to measure merchandise productivity. Within the same company, two different approaches led to two completely different outcomes - same merchandise - different methods of presenting the merchandise - led to completely different outcomes.

Within six months, the cries from the merchandising / creative teams grew louder. "Those prospect catalogs are not accurately reflecting 'the brand'". Well, maybe. See, there were two different takes on what 'the brand' meant to the customer. The marketing take on 'the brand' worked at least 10% better than the creative take on 'the brand'.

I was the circulation guy ... so I decided to "optimize" the strategies. In the past, 3,000,000 people would receive a monthly housefile catalog and 1,000,000 would receive a prospect version of the catalog. Going forward, I measured profitability, and swapped the mix ... 800,000 would receive the monthly housefile catalog and 3,200,000 would receive the prospect version. You should have heard the howls from the executive team, from the catalog business team, from the merchants, and from the creative folks. Of course, I argued that the merchandise productivity was not sufficient to mail the large version ... I argued that when the large version of the catalog achieved sufficient merchandise productivity, I would swap the mix back to the large version of the catalog.

In 1999, we had the most profitable year in the history of the catalog/online channel.

Merchandise productivity means everything. Without it, nothing a marketer does matters. It is terribly hard to market your way out of a merchandising and/or creative mess.

Ok, we have two pieces to "my system":
  1. Annual Repurchase Rates dictate the strategy a marketer needs to employ - and in most cases, that strategy is to find a ton of new customers.
  2. If we have to find a ton of new customers, and most of us have to find a ton of new customers, we need healthy levels of merchandise productivity to get the job done.

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