Stuck In The Middle With You

To speak with Lois Gladstone (Chief Financial Officer, Gliebers Dresses), you'd think she was fighting a lonely battle.

• "Is it just me, or has every Marketer and Executive gone completely brain dead when it comes to evaluating whether various activities generate profit?"

A quick review of the five-year profit and loss statement suggests that Ms. Gladstone may be on to something. Take a look:

You've read a lot about how strong November/December was ... and we see here that sales grew by a whopping 3.1% in 2017 ... and with a reduction in fixed costs, the business generated nearly $2 million in profit, 3.8% of net sales.

Most catalog brands are "healthy" when they are producing at least 10% pre-tax profit. Gliebers Dresses is at 3.8%. This business is not healthy.

Look at net sales during the past five years. Net sales is stuck.

This business is stuck!

Why was 2017 profitable, compared to 2016?

• A modest increase in net sales.
• A modest improvement in gross margin dollars.
• A 2.6 point improvement in ad-to-sales ratio, which did meaningfully contribute to profit improvements.
• Pick/Pack/Shipping expenses are constantly increasing, hurting profit. Expenses have increased by nearly a million dollars over the past five years. Somebody is going to have to address this issue in 2018, correct?

Is the business shrinking? No!

But the business is stuck.

It's time for things to change.

This is when things get interesting ... when you tell somebody that it is time to change. This is where company culture takes over. Here's what I would hear from the Management Team.

• Meredith Thompson, Chief Merchandising Officer:  "2017 was the best year in the past five, and you want us to change? If anything, we need to do more of what we did during 2017, because what we did in 2017 worked!"
• Roger Morgan, Chief Operating Officer: "You're exactly right, we need to change. I've been saying this for a decade now, but nobody around here seems to care. If we just followed the Woodside Research playbook we'd be living the omnichannel dream!"
• Pepper Morgan-Pressley, Chief Marketing Officer: Is this going to cause my team to have to do a lot of extra work? Because honestly, I don't feel like having to implement the wild ideas of an outsider, or any idea Roger has, for that matter. Remember when Roger spent that year hosting Roger's Blog? A full year later he had 92 followers and  he had the temerity to blame me for not marketing his blog. Idiot.
• Lois Gladstone, Chief Financial Officer: Don't tell Roger we need to change. He'll tack five million dollars on to the expense structure of this business and nobody will want to do the work he wants done and then we're finished. It's not easy keeping the wheels on this bus.
• Glenn Glieber, CEO/Owner: For two years I've been asking our team to increase our main catalog mailings from 96 to 100 pages. Maybe your recommendation will be the impetus to get this change moving forward.

You laugh ... you think "nobody would say that stuff".

Some variant of this discussion comes up all the time.

But the most damaging comment comes from Meredith. She's the protector of "the culture". It is her job (though not written in her job description) to maintain unofficial control of "what has always been". And there's nothing like tepidly improved results to protect "what has always been".

This is how a catalog brand gets stuck. It's also how e-commerce brands got stuck and ended up becoming "a division of Wal-Mart".

If you want to move a company forward, you can't just educate employees why it is important to move forward. You're going to have to address the Culture. And you sure can't just use a "data-driven" approach to moving a company forward. If there is anything 2017 taught us, it's that facts have limited value. Convincing communication, now that has value.

Culture

We're bringing old friends back, starting today.

Back in 2009 I introduced readership to Gliebers Dresses ... mini-plays about a fictional catalog brand out of Nashua, NH. I can't speak at a conference without numerous attendees reminding me that Gliebers Dresses was their favorite thing about reading this blog.

At some point ... maybe in 2013 or 2014 ... the topic tired. Readership #engagement dipped considerably. Maybe the format (a mini-play) didn't work anymore, maybe the issues faced by a catalog brand being "peppered" by vendors didn't bring joy to catalogers or vendors.

But in recent months, I tested "Gliebers Dresses" content on Twitter ... and guess what? Folks enjoyed it!

For the next month, we're going to talk about how Culture inhibits change. There's no better way to do that than to focus on a fictional company that has considerable cultural challenges. A company where you already know "the players", the folks who have made up the Management Team since 2010.

• Glenn Glieber, Owner/CEO.
• Meredith Thompson, Chief Merchandising Officer.
• Lois Gladstone, Chief Financial Officer.
• Roger Morgan, Chief Operating Officer.
• Pepper Morgan-Pressley, Chief Marketing Officer.

What would you like to see addressed in this series? Send me an email message and let me know what you'd like to see discussed (kevinh@minethatdata.com).

Transition

Four years go, the Milwaukee Brewers spent much of the season in First Place in their division. An old and tired team fought for a hundred games, then began to fall apart, missing the playoffs and barely finishing above .500.

A 5-17 start to the 2015 season kicked off a "rebuilding project". Older players were traded for prospects. The General Manager "moved on" and was replaced by a 30ish year old GM. This individual brought a different focus to the team, having come from an organization that would two years later win the World Series.

2015 was a miserable year.

2016 was a bad year.

In 2017 enough pieces were in place that the Brewers would actually compete for a playoff spot, missing the playoffs by a single game.

And now, as we await the 2018 season, a talented farm system built over the past three years provided the pieces necessary to facilitate a trade for a genuinely talented player. Coupled with a free agent signing (because the team had such a low payroll, allowing the team to pay for existing talented players), hope has arrived in Milwaukee.

In sports, teams rise and fall. When they fall, they typically have to "start over" ... they "rebuild" with young talent (i.e. new merchandise) and then a handful of young players become all-stars (winners) and then the players get old and the process begins again.

In our world, we are rarely willing to do what sports teams do. To some extent, the "profit and loss statement" precludes us for doing what must be done ... we can't go bankrupt, so we hold on to the past (#omnichannel) in an effort to keep paying the bills.

In our world, a rebuild happens in three different ways.

1. We "remodel" ... happens all the time in retail.
2. We evolve the merchandising assortment. Risky, filled with failure. Just like in sports.
3. We create a new brand (we're loathe to do this, but we need to do this).

Having been in the industry for thirty years now, it's become obvious that this "transition" from what was to what will be is what we're afraid to talk about. A thousand business charlatans sell elixirs designed to offer "quick fixes" ... stuff like #personalization and #engagement and #social and #mobile and #relevancy and #omnichannel ... all nonsense ... all theoretical ... all designed to keep us spending money with vendors while acting like we're transitioning our businesses into the future.

Do we transition our staff into the future? We hire and fire people, but do we actually encourage our staff to transition into the future?

Or does our culture thwart our ability to Transition into the future?

Bose Headphones + iPhone

So I get a new iPhone. No headphone jack. This yields two possible solutions.

1. Simply connect the headphones to the phone via bluetooth by turning on the noise cancelling switch on the headphones.
2. Connect an audio cord to the Bose headphone. Then connect an audio adapter to the iPhone. Finally, we connect the audio cord from the Bose headphones to the iPhone audio adapter. Then I turn on the same switch that I use for the bluetooth connection on the headphones to enable noise cancellation.

(2) is what is called "omnichannel" in our industry. The future is "connected" to the past, and is done so in an allegedly "seamless" manner.

Which represents the future above ... (1) or (2)?

Our businesses struggle to move forward when we're constantly trying to convince a customer that (1) above is the "right" solution.

Why do we try to convince the customer that (1) is the "right" solution? And I'm not saying Bose is trying to do that, they aren't trying to do that. We try to do that with our businesses. We try to convince the customer that receiving a catalog on Monday followed by five email messages that support what is in the catalog followed by a website presentation that is aligned with the catalog coupled with an Instagram presence that aligns with the catalog is "right".

It's not "right". It's simply (1) above.

Now if your career depends upon (1) above ... well, you'll fight to defend it, won't you?

And that's the issue with our businesses. Our careers frequently depend upon protecting the past.

Tomorrow we'll begin to discuss this topic.

Personalized vs. Appropriate

My wife saw something on Pinterest about model trains ... I visited a model train show and performed a couple of Google searches and next thing you know the surveillance economy decided that my wife should see something about model trains.

There is a difference between something that is personalized and something that is appropriate.

Personalization is a #datadriven theology executed by algorithms seeking to maximize short-term ROI. We put "DEAR KEVIN" in an email message and then we tell the customer that the shopping cart has three items in it and then we offer a 20% off promo to sweeten the deal." Out of 100 conversions, 80 would have happened anyway ... but we take credit for all 100 and we celebrate!!!!

Whether Personalization is Appropriate or not is a whole 'nuther deal.

Here's an add that is clearly Personalized and is Not Appropriate. I'm visiting a sprint car racing forum and I get this ad:

The ad fails the "right message at the right time to the right person" nonsense we keep hearing about.

I live in Arizona ... so this email probably isn't personalized and probably isn't appropriate! At press time, we hit a high of 77 degrees at my home.

Most of Personalization has gone the route of algorithms ... algorithms using bad data too late in the process (think #retargeting). When you go the route of algorithms, you lose the "soul" of the process.

Now think what somebody like Custora does for your business ... displaying a merchandise assortment to you that is tailored to prior buying activity and to a much lesser extent tailored to visitation data. That's "Appropriate". It's also personalized, but as the consumer of information you don't even know what you are seeing is different than what somebody else is seeing.

Personalization can reflect algorithmic brilliance and be utterly meaningless.

Appropriate Marketing is important and meaningful, and isn't practiced enough in our industry.

2018: Four Levers

Last week Twitter was peppered with tweets (often from influencers hired and/or reimbursed for attending and saying nice things) from the NRF conference.

The theme was "technology".

Why do you think the theme was "technology"?

1. Do vendors control the merchandise? No.
2. Do vendors control the customer experience? No.
3. Do vendors control awareness? No.
4. Do vendors offer technology? Yes!!
5. How does a conference make money? Vendors!

So the focus on technology is a bit skewed.

You read a lot about personalization. Personalization touches the Customer Experience and it leverages Technology ... so yeah, you're going to hear a lot about that. It's a key way vendors can make money. And a pundit will never be wrong talking about personalization ... so you'll hear a lot of chatter about it from that side of the dance floor.

Meanwhile, ask J. Crew what happens when you don't have cute merchandise?

When our industry swung too far toward "omnichannel" ... our industry suffered.

Our industry is swinging too far toward "technology" now.

When an industry swings in one direction, there are significant opportunities in other directions.

Did you hear anything about the following quadrants above last week?

1. Product.
2. Awareness.

You are going to hear a lot about Experience & Technology over the next two years.

Without Product & Awareness, Experience & Technology (especially the latter) are much less meaningful.

Getting Away From The Addiction

Heard numerous times in the past month:

• "With all of the consolidation happening in our industry, how the heck are we going to find new customers? A handful of holding companies own every customer age 55+ and catalog co-ops are imploding. And our core customer doesn't scale on Google and/or Facebook. What should we do next?"

Some who had vision and got the heck away from catalog co-ops, Google, and Facebook 3-5 years ago are thriving.

So you're going to not be left with a choice.

• You will have to get away from Catalog Co-Ops, Google, and Facebook.

And here's the typical response to that statement.

• "But what do we do next? How do we acquire customers without them?"

Have you seen ads for all of those dinner-in-a-box services? Have you used one? They didn't use catalog co-ops. Sure, they've used Google+Facebook, but that's not 80% of their new customer base, now is it?

So how did they do it?

How does anybody do it?

Folks are doing "different" things (click here for examples). Notice that product and experience are key differentiators ... not marketing channels. Notice that marketing evolved as well ... becoming a fusion of product and experience and technology and awareness.

So if I'm an old-school catalog brand likely in the SELL quadrant above, think about the four things I just mentioned.

• PRODUCT: Products that a Baby Boomer or Retiring individual prefers.
• EXPERIENCE: Reading.
• TECHNOLOGY: Printing.
• AWARENESS: Virtually none.

This is what drives the cataloger to the all-you-can-eat buffet of catalog co-ops, Google, and Facebook.

We're going to need to get away from the all-you-can-eat buffet, aren't we?

It's Time!! The Next Run of the MineThatData Elite Program

It's time for the next run of the MineThatData Elite Program!!!

In addition to the typical monthly tables, this run will include the all important "CYBER MONDAY" analysis. Yes, you will learn if all of that effort to "drive business" between Black Friday and Cyber Monday actually resulted in increased business.

First-Time members pay $1,800. If this is your second+ run, you pay $1,000.

You'll never find a more cost effective analysis anywhere.

Contact me (kevinh@minethatdata.com) for details.

Key Dates:

• 5 Years of Data Through January 31, 2018 is due on February 15, 2018.
• Payment is due on February 15, 2018.
• Analysis delivered by February 28, 2018.

Annual Bonus

Give this a read (click here).

I worked at Avenue A - one of the companies that took retargeting from theory to practice. I was underpaid relative to the market and was given significant equity. Six months into my employment, my equity was worthless and I was underpaid relative to the market. Three months after that, I moved on to Nordstrom.

You've got four levers you can pull.

1. Salary.
2. Benefits.
3. Equity.
4. Bonus.

If you are looking at where you on relative to the quadrants below, it's important to know which lever helps you achieve your goals.

Salaries are highly homogenized these days ... for the past twenty years, a handful of "compensation" organizations standardized pay to the point that jobs pay "x" and that doesn't vary by more than +/- 20%. So salary is, to some extent, irrelevant (I know, it isn't, but it isn't something that changes the story).

Benefits are going in the other direction ... some are improving, but across the board employees are generally getting less and less each year. You can compete here by offering better benefits, but employees aren't dumb ... they sum salary and benefits in their brain and they know what "true compensation" ultimately is. Benefits, by the way, are in the realm of companies that are in the SCALE quadrant ... if this is you, this is a place where benefits matter more than average.

Equity is in the realm of SCALE and UNIQUE. This is "selling the dream". You can become an Executive at a SCALE company and equity is going to be great. You can be a startup in the UNIQUE cell and offer the dream of getting rich someday. If you are in the BUY or SELL quadrants, equity is generally not something that makes a difference because it isn't offered.

Which brings us to the Bonus.

If you are in the BUY or SELL quadrants, the annual bonus is a huge motivator.

If you are in the SELL quadrant, you likely have a difficult time recruiting talent. The bonus becomes your point of difference. Bonus structure might look like this:

• Analyst = 15%.
• Manager = 25%.
• Director = 40%.
• Vice President = 75%.
• C-Level Executive = 100%.

Bonuses should stretch employees yet still be achievable. Bonuses should be linked to key metrics. If you are in the SELL quadrant, bonuses should be based on annual Earnings Before Taxes, on Sales Growth, and on Personal Objectives.

Think of it this way. You have annual salaries by position.

• Analyst = $60,000.
• Manager = $100,000.
• Director = $140,000.
• Vice President = $200,000.
• C-Level Executive = $300,000.

Now look at the salaries when max bonuses are paid out.

• Analyst = $69,000.
• Manager = $125,000.
• Director = $196,000.
• Vice President = $350,000.
• C-Level Executive = $600,000.

Which company would you prefer to work at?

When the company exceeds expectations, employees share in the riches.

When the company fails, employees don't get paid.

If you are in the SELL quadrant, the annual bonus is the path to attracting and motivating talent. Yes, it requires the Owner / Shareholder to not get paid as much during a great year, but tough ... you are in the SELL quadrant and you'll get paid when you SELL, #amirite? So  you want your employees aligned with your incentives ... if they do well, they get paid today, which allows you to get paid well tomorrow.

If you are in the BUY segment, bonuses matter as well. You want to motivate employees at the recently acquired brand (or in-house startup) to do well ... and they deserve to share in the gains, right?

If you don't like the fact that it is hard to recruit people to your company, pay 'em. Pay 'em on a variable basis. There's no downside. So please discuss today what stops you from paying people to do great work, ok?

80/50 Rule and Purchase Memory

Ok, here's one of the regression models I built to rank twelve-month buyers so that I could determine if the 80/50 rule holds or not:

• Future 12-Month Spend = -3.25 + 0.55*(12 Month Spend) + 0.15*(13-24 Month Spend) + 0.09*(25-36 Month Spend) + 0.07*(37-48 Month Spend).

I compare the coefficient for 0-12 month spend to the coefficient for 13-24 month demand.

• 0.55 for 0-12 month.
• 0.15 for 13-24 month.

What is the ratio?

• 0.15 / 0.55 = 27%.

I call this "Purchase Memory".

Purchase Memory is important if you are a "CRM" fan ... if you love loyalty programs and reactivating customers, you'll have success if "Purchase Memory" is above 40% in my experience.

Purchase Memory is an indirect indicator of "want" vs. "need". When the customer wants merchandise, the item is purchased and then the transaction is "forgotten".

When the customer needs the merchandise, there is "memory" and that is reflected in the coefficients in the regression model.

What Does An 80/50 Table Look Like?

It looks like this!

In this example, 50% of the twelve-month buyer file yields 78.4% of future demand from the twelve-month buyer file. This is a mostly reasonable distribution. And even though it is reasonable, look at the top 7.5% of the file ... yielding 28.7% of future demand. The distribution is reasonable and the top 7.5% of the file are zealots.

Look at the values down the "Next 12 Months" column. You get below Rank = 16 +/- and you can see that customers just don't deliver a lot of future volume, do they? A large fraction of the twelve-month buyer file is not expected to deliver much value. Zealots, however, they deliver a ton of value.

Why Do I Care About The 80 / 50 Rule?

Lifetime Value is a function of customer diversity.

When a customer buys via email and search, the customer is typically worth an additional 10% vs. a customer who buys via just search.

When a customer buys two $50 items the customer is typically worth more than the customer who buys one $100 item.

When a customer buys from multiple product categories the customer is typically worth more than the customer who buys multiple items from one product category.

When a customer buys in Spring and Christmas, the customer is typically worth more than a customer who buys twice at Christmas.

Companies that are UNIQUE or who are ultimately looking to SELL are companies that do all of these little things well. And as a consequence, they have a "beefier" customer base - a customer base willing to spend more in the future.

That's where the 80 / 50 rule comes into play. All companies have zealots. Not all companies harvest adequate profit from the middle of the 12-month buyer file. If you generate more than 80% of demand from 50% of the twelve-month buyer file, you're not harvesting adequate profit from the middle of the 12-month buyer file and consequently you are not generating sufficient lifetime value (meaning that it is harder to acquire new customers due to ROI constraints).

Make sense?

80 / 50 Rule

Here's something that has changed a bit over time.

Step 1: Build a model ... independent variables = 0-12 month demand, 13-24 month demand, 25-36 month demand, 37-48 month demand, 49-60 month demand, 61+ month demand. Those variables are created as of a year ago. Then select only 12-month buyers. The dependent variable is demand spent in the past year. Create a simple regression equation.

Step 2: Score the file using the equation.

Step 3: Rank scores into 1%-tiles or 2%-tiles or 5%-tiles ... your preference.

Step 4: Sum cumulative annual demand across %-tiles. Document the point at which 50% of annual demand is accumulated.

If you learn that 80% of annual demand happens at the 50% mark or later, you generally have a productive customer file.

If you learn that 80% of annual demand from the 12-month buyer file comes from fewer than 50% of your customer file, then the profit generated by your business comes from a disproportionately small portion of your buyer file.

I just ran this analysis on an e-commerce business ... 80% of demand came from 40% of 12-month buyers ... and 33% of demand came from 4% of 12-month buyers. At this point, you have zealots and a bunch of customers producing minimal value.

Over the past decade, our businesses shifted ... aligning more with zealots. The meaty "middle" of the customer file was ceded to Amazon. Expect more of this going forward.

Impact On Future Value

I advocate measuring Merchandise Productivity, and for good reason.

Merchandise Productivity plays a major role in each quadrant, especially when it comes to incorporating lifetime value.

Here's an example. You are in the "Sell" quadrant. You want your business to be running on all cylinders so that it is an attractive target for those looking to acquire a healthy company. Your marketing team works terribly hard to get 12-month payback on marketing activities, based on feedback from the CFO.

On average across paid search, this is what happens:

• Average Cost per Click = $0.50.
• Conversion Rate = 2%.
• AOV = $60.
• Profit Factor = 40%.
• Paid Search Return = 0.02*$60*0.40-$0.50 = ($0.02).
• Profit/(Loss) per New Customer = ($0.02) / 0.02 = ($1.00).
• 12-Month Payback = $20.00.
• Profit/(Loss) = ($1.00) + $20.00 = $19.00.

Now let's assume that Merchandise Productivity declines by 10%. The story changes.

• Average Cost per Click = $0.50.
• Conversion Rate = 1.8%.
• AOV = $60.
• Profit Factor = 40%.
• Paid Search Return = 0.02*$60*0.40-$0.50 = ($0.068).
• Profit/(Loss) per New Customer = ($0.068) / 0.018 = ($3.77).
• 12-Month Payback = $17.00.
• Profit/(Loss) = ($3.77) + $17.00 = $13.23

A 10% Merchandise Productivity hit yields a 30% drop in Long-Term Value.

Minor changes in Merchandise Productivity yield Major changes in Long-Term Value.

So if you are in the SELL quadrant, you want to clean up your mess long before you get to a point where you want to act. Plug the leaky holes.

How Does Lifetime Value Fit Into The Picture?

There are four ways you are going to impact Lifetime Value.

First = Average Order Value. Companies with 35% rebuy rates and $150 AOVs tend to yield better LTV than companies with 35% rebuy rates and $80 AOVs. If your AOV is < $100, life is hard.

Second = Rebuy Rate. This one is pretty much fixed in concrete. If you have a 35% rebuy rate, it's going to change by +/- 5 points, tops. Your business model determines your LTV, not the other way around. If your rebuy rates are > 50%, LTV begins to accelerate.

Third = Operational Excellence. I know, I know, you HATE thinking about this. But when you stop the leaks and improve gross margin and reduce return rates and STOP DISCOUNTING you find that previously unprofitable customer acquisition activities become profitable. Hint - if you are in the SELL quadrant, private equity folks will pay more for companies that have operational excellence. Discounting, FYI, is fatal to LTV. If a customer is expected to spend $200 next year at 40% off and a 60% gross margin, you make $40 gross margin. If your customer is expected to spend $200 next year at 20% off and a 60% gross margin, you make $80 gross margin. Discounting destroys customer acquisition activities because you cannot afford to acquire as many customers because of your cost-per-new-customer metrics.

Fourth = Multiples. Buying from multiple channels increases LTV by +/- 10%. Buying from multiple product categories increases LTV by more. Buying from multiple seasons ... multiple tender types ... once you control for customer spend, all of these factors increase LTV. The best companies maximize all of these "variables" and squeeze more LTV out of customers, which allows them to spend more to acquire more new customers (who also have increased LTV). 

If you end up in the SELL column, LTV becomes critically important. Your potential buyer wants to know several things.

1. They want to know that you know LTV down to the penny.
2. They want to know that you know whether a 0, 1, 2, 3, 4, or 5 year payback period is right for your business.
3. They want leaky holes plugged in your p&l, and if they aren't, they'll pay you less and they'll make you plug the holes THEIR WAY and you won't enjoy that experience a whole lot. So "Fix It" before they force you to fix it THEIR WAY.
4. They want to know that you can acquire HALF OR MORE of your new customers without any assistance from Google, from Facebook, from Amazon, from Catalog Co-Ops. Why? Because this leads to future growth and it leads to healthy LTV because you don't have to spend money to acquire the customer.

Lifetime Value (LTV) is critical to the success of your business. Measure it ... or hire me and I'll measure it for you! Half of my Q4-2017 and Q1-2018 projects focused on LTV.

Knowing The Business You Operate

If you want to know what quadrant your business belongs in, it's a good idea to know what type of business you operate.

More than a decade ago, I wrote a book called "Multichannel Forensics". In that book, I described three types of repurchase modes that define a typical e-commerce and/or retail and/or catalog business.

Here are the three repurchase modes described in that book (click here for a summary).

• Acquisition Mode: When 40% or fewer of past twelve-month buyers repurchase again in the next year.
• Hybrid Mode: When 40% - 60% of past twelve-month buyers repurchase again in the next year.
• Retention Mode: When 60%+ of past twelve-month buyers repurchase again in the next year.

Most of us operate like all of our customers are in "Retention Mode". We think we can force a customer to be loyal. We offer points and we send 250 emails offering 40% off plus free shipping and we go out of our way to encourage a customer to keep buying. Most of it doesn't work.

What is the average annual repurchase rate across my client base?

• 37%.

That being the case, what is the average "mode" that my average client belongs in?

• Acquisition Mode.

If you are in Acquisition Mode, what is the most important thing that business can do to grow and thrive?

• Acquire Customers.

What is the typical response I get when I share this information with you?

• It's 8 times more costly to acquire customers than retain customers, so let's focus on retaining customers.

That's a strategy that never works. Look at the graph below ... this graph depicts how many times a year a "repurchaser" purchases based on annual repurchase rate.

As long as the annual repurchase rate is under sixty percent, the typical repurchaser is going to buy two or fewer times per year. Your mileage will vary ... but it's going to vary by +/- 25% of what I'm showing here. In other words, you simply aren't going to force a customer to become loyal. You might force 5% of your customers to become loyal (and you'll generate a ton of profit doing that) ... but by and large, you're done. The customer is pre-disposed to not buy more than two times per year. Get as much profit as you can ... but you're not going to have a loyal customer base.

Look at what happens when the annual repurchase rate goes beyond 70% ... orders per repurchaser begin to surge. The relationship looks like this:

As an industry, we think our customers have 90% annual repurchase rates and if the customer repurchases the customer buys 9 times a year. This is the customer we constantly hear about when we read "success stories" and "best practices".

By knowing the business we operate, we can do a better job of deciding what quadrant we belong to (Buy / Sell / Scale / Unique).

• Buy: If we are in Acquisition Mode and are flush with cash, we can buy other brands or build additional brands and then cross-shop customers across brands, thereby increasing customer acquisition counts.
• Sell: If we are in Acquisition Mode, then we know we have to fix customer acquisition practices in order to appeal to a buyer.
• Scale: Unless our Annual Repurchase Rate is > 60%, we are probably not going to scale. Home businesses (i.e. Wayfair) have a chance to scale because future purchases "can" happen on two or three year intervals. But for most of us, we're not going to scale.
• Unique:  Unique brands are ideally suited for Acquisition Mode. Word-of-mouth generates low-cost / no-cost new customers, allowing the brand to grow without giving all cash to Google or Facebook or Catalog Co-Ops (or even Amazon).

Study this stuff ... learn it inside-out, ok?

Getting In Trouble

We get in trouble when we try to fill multiple cells in the table.

For instance, we try to optimize profit and then we run discounts and promotions and try to compete with Amazon while at the same time trying to sell on Amazon. That doesn't work!

Our obsession with Amazon ... one we should have had back in 2005 ... the obsession blinds us to actual strategies. We start thinking about SCALE, and the minute we do that we make compromises that make it harder for us to get a fair price if we want to SELL ... or we become less UNIQUE ... or we don't consider creating new brands or acquiring distressed brands. 

Pick a cell.

If you don't have a creative bone in your body, avoid "UNIQUE". But then I'd avoid SCALE as well, because without a creative bone in your body you aren't going to compete with Amazon. Either clean up your business and optimize it for a potential "SELL" ... or create brands or buy brands ... but if you don't have a creative bone in your body you won't create new brands, so you know what you have to do ... and if you don't have cash or access to credit, you won't be buying anything. So you already know what cell you need to be in ... right? Go reside in that cell and clean up your p&l and optimize everything.

Pick a cell.

Be the best you can be within that cell.

Unique

I know, I know, you HATE this quadrant. HATE. IT!!!

Can I show you something that Amazon cannot compete against ... something that makes a business Unique?

First of all, watch the video (click here).

Second, read the press release (click here).

This is part of being Unique. Ups and Downs. 

Amazon cannot ever hope to compete against what I just shared with you. They're feckless against it. Feckless. If you've ever owned a pet, this resonates, doesn't it?

It's this kind of stuff that, if we choose to be Unique we have to do. There is a version of this that applies to your business. Heck, there might be ten different versions of this that apply to your business. Pursue 'em. Pursue 'em consistently. With passion!! Try it for four consecutive years. Do it at the same time that you clean up everything that you need to clean up to potentially SELL and you may find that you instead move into the UNIQUE quadrant and have no reason to SELL whatsoever.

That's how this stuff works.

Sell!!

If I asked a hundred readers if you belonged in this quadrant, maybe five would say "yes".

If I looked at a hundred independent catalog brands, I'd argue that 70 are already in this quadrant, they just don't know it yet.

There's nothing wrong with being in this cell. This is the cell where you optimize your business - you're already doing this on a daily basis.

• Use tactics to grow your annual repurchase rate.
• Improve your efforts with Google / Facebook / Catalog Co-Ops.
• Test optimal email strategies.
• Develop the best catalog contact strategy.
• Improve online conversion rates and mitigate conversion losses via mobile.
• Front-load each catalog with winning items and winning creative.
• Measure and then improve lifetime value, allowing you increase customer acquisition activities.
• Reduce return rates.
• Increase response/conversion.
• Improve gross margins.
• Increase merchandise productivity.

All of the tactical stuff helps improve the health of your business ... so when the day finally comes when ownership wants to sell, the company will appear healthy and will be on stable footing.

As mentioned above, 70 out of 100 catalogers are currently in this quadrant. They're never going to "Scale", they don't want to be "Unique", and they don't have the resources to acquire other companies. There's absolutely nothing wrong with being in this quadrant - there's a fortune to be made here ... go do something positive!!

Scale

This is the second choice, and it is the choice we're all failing at.

We're witnessing the end of a thirty year run known as e-commerce. From 1995 - 2002, it was all about startups ... we marveled at companies as they sprung up out of nowhere and produced television commercials featuring sock puppets.

From 2002 - 2009 it was all about existing companies building out their e-commerce infrastructure.

From 2009 - 2016 it was all about "omnichannel" and "social" and "mobile". This was a period of transformation, as the existing e-commerce business model changes (social / mobile for younger companies ... omnichannel for existing companies). We learned that neither direction worked terribly well for most ... and during this time of investment and transformation Amazon took over and dominated.

From 2016 - 2023 it's a period of "Scale". In old-school terms, the word is "Consolidation". The race is heading toward a handful of huge winners and everybody else loses. This has been the 25 year pattern of the internet ... a handful of winners and a mass of companies losing steam coupled with a ton of tiny winners in a niche. The mass of companies losing steam will pick up - you know this is happening by watching all of the acquisition among e-commerce brands ... easy customer acquisition has ended and the founders are looking for their final payday.

If you want to fight in this quadrant, be prepared to sell your soul.

• Lowest prices. 
• Partnering with Amazon.
• Biggest discounts (40% or 50% off all the time).
• Operational perfection.
• 1-2 day delivery at the slow end of the spectrum.
• Paying Google + Facebook all of your hard-earned cash, and then following their rules.

This is going to be the quadrant most of us chose to battle in. It's the quadrant that will push us toward the quadrant we'll talk about next ... "Sell!!".

Buy!!

There are several trends in the "Buy!!" quadrant.

The first trend is the obvious one ... catalog holding companies purchasing distressed catalog brands. There are a handful of catalog holding companies, and there are a handful of private equity folks who are active in this quadrant.

The second trend is less obvious, but equally important. It's an old-school trend ... the creation of separate brands. Think of it this way. There is a probability of your business having a bad year ... your merchants aren't perfect and your marketers aren't perfect ... so when both have a bad year, you put your business at risk. Your odds of staying in business decline. The single-brand deals with these problems all the time. Eventually, you go bankrupt. But if you have four brands and one has significant problems, you have three brands that might be succeeding and that reduces your risk. And you might have one brand that is utterly thriving, allowing the other brands to learn and change.

The third trend isn't happening yet, but it may become a necessity. If you aren't going to buy companies and diversify your portfolio, you can create a "Portfolio of the Willing" ... a family of non-competitive brands that share their practices in an effort to help each other grow. Look at the list of catalogers below ... this would be a "Portfolio of the Willing".

• Vermont Teddy Bear.
• Garrett Wade.
• Lake Champlain Chocolates.
• Littleton Coin Company.
• Really Good Stuff.
• SmartPak

These companies would meet monthly - sharing merchandising strategy, online marketing tactics, creative winners/losers, inventory management tips, results of pricing tests and free shipping tests and discounting tests ... helping each other develop customer acquisition strategies. One company might have a great modeling professional who builds models for the other companies ... one company might have implemented an ERP system and can help the other companies do the same ... you get the idea.

You can "simulate" being part of a portfolio of brands if you don't have the money to acquire distressed brands.

There are a lot of ways to participate in the "Buy!!" quadrant. Go make something happen ... do something!!