Modern Channel Index (MCI)

When applied to merchandise, the Modern Channel Index (MCI) teaches us an awful lot about how customers interact with merchandise.

Here's some data ... the x-axis depicts how "old" the average customer buying an item is, in years (1.00 = all new customers, 2.20 = average customer is 2.20 years old).

The y-axis measures the "MCI" or "Modern Channel Index" for the top 500 items. A value of 1.00 represents highly modern channels (like mobile) ... a value of 0.40 represents old-school channels (like your call center).

Tell me what the relationship indicates?

We learn that "older customers" tend to lean toward "older channels".

We learn that "newer customers" tend to lean toward "modern channels".

You might say to yourself, "duh".

But here's why this matters ... you have been taught to leverage an "omnichannel" strategy, where every item is featured in every channel. And you wonder why the thesis behaves in such a tepid manner, right? Well, certain items align with modern channels, while legacy items tend to align with legacy channels.

It turns out that each channel serves a "purpose" ... and possesses merchandise that uniquely defines the channel.

More on this tomorrow.

Two Key Merchandising Attributes

In recent projects there are two key merchandising attributes I analyze. I'm encouraging you to do the same.

Attribute #1:  "Age" of the customer buying the item.

• Let's say you sell widgets. Two customers purchased a widget in the past year. The first customer is brand new. The second customer has been on the file for five years. "Age" of the customer buying the item = (1.00 + 5.00) / 2 = 3.00. The average customer buying the item is "three years old".

Attribute #2:  "Modern" channel index (MCI).

• Say you sell four widgets. The first widget is purchased at your call center. The second widget is purchased via your website. The third widget is purchased via email marketing. The fourth widget is purchased via mobile. Assign a value to each channel. Assume call center purchases are "old school" and get a value of 0.00. Assume e-commerce purchases are "average" and get a value of 0.50. Assume e-mail purchases are more "modern" and get a value of 0.75. Assume mobile purchases are very modern and get a value of 1.00.
• The "Modern Channel Index" (MCI) is calculated as follows:  (0.00 + 0.50 + 0.75 + 1.00) / 4 = 0.5625.

Why would I do this?

We'll discuss "why" tomorrow!!

The Recurring Challenge

Since 2014, there has been a recurring challenge in my project work. Here's how events transpire over time.

1. A business has a sales decline.
2. Discounts / Promotions are offered. Sales rebound.
3. Sales decline.
4. Free Shipping is offered. Sales rebound.
5. Profit suffers.
6. To fix the profit issue, new merchandise is offered at higher prices and/or at the same prices with lower quality.
7. Customers say "no" to the changes to new merchandise.
8. Sales decline.
9. Even more Discounts / Promotions are offered.

This is the time when new customers are needed the most ... new customers who do not have the baggage of 1/2/3/4/5/6/7/8/9 above.

Of course, Google + Facebook + (in catalog marketing, catalog co-ops) have locked-down new customer acquisition, making it terribly expensive to find new customers.

Since I've run across this problem 50ish times in the past four years, I'm familiar with what comes next.

• How do we get out of this mess?

I've only witnessed two strategies that work.

1. Innovative new merchandise that customers must have.
2. Innovative low-cost / no-cost customer acquisition programs that bypass Google / Facebook and other expensive sources.

And when (1) / (2) are offered to the Professional, there is a predictable response.

• There has to be another way. Isn't there a channel that delivers customers at low cost at "scale"?

If there were a channel that delivered customers at low cost at "scale" you'd be using it. And once you used it, everybody would use it. And once everybody used it, somebody would monetize the channel so that it wouldn't be a low cost channel anymore.

We're coming to a very unique inflection point in e-commerce. For more than twenty years, there was always hope in e-commerce ... sales grew and grew (usually cannibalized from other channels, but that's ok because lots of people made a career out of cannibalizing sales that would have already happened). The "hope" of e-commerce is ending. Amazon won. 

From here on out, it's hard work.

We've trained a generation of marketers to avoid hard work ... and yes, I realize that comment sounds "crabby" ... you have to work very hard to hustle Google and Facebook and retargeters and affiliates, no doubt about it. I'm talking about a different type of "hard work" ... the hard work traditionally performed by true marketers and gifted merchants.

1. Innovative new merchandise that customers must have.
2. Innovative low-cost / no-cost customer acquisition programs that bypass Google / Facebook and other expensive sources.

You are ready to deal with this challenge!

And if you aren't ready to deal with this challenge, it may be time to sell.

But I think you are ready to deal with this challenge!

Raise Prices on New Items

I spent the past three days explaining how marketers nuke businesses with discounts, promotions, and free shipping. As a marketer you likely disagree with me ... the merchants messed up or Amazon took your lunch money or whatever and you are simply responding to adjacent issues. You may be right. Of course, if the only tools in your toolbox are discounts, promotions, and free shipping ... well, then you are stuck. Brilliant marketers with low-cost / no-cost marketing programs have a lot more they can do to grow the business.

So the next thing that happens is that the CFO goes after the merchandising team to boost gross margins. You can't raise prices on existing items, so new merchandise takes the stage. Two things happen.

1. Prices increase. If a comparable new item used to sell for $35.00 with a $17.50 cost of goods, then the new item sells for $42.50 with a $17.50 cost of goods, boosting gross margins up to $25.00 instead of $17.50. Problem solved!
2. Quality decreases. On some widgets, the item is still $35.00 but the quality is worse, yielding a cost of goods of $15.00 and gross margins of $20.00 per item.

The strategy rolls out.

It takes a year to truly see what is happening ... but the early returns are not promising.

• Net items, which represent 25% of company volume, are selling 20% worse than prior year (due to higher price points).
• Total sales are down 5% as a consequence.
• The CFO is even more angry.
• The marketer responds by moving to 40% off (on all items, even the items that are still selling at an acceptable level), further nuking the brand in the process.

Tomorrow I'll discuss why I just spent four days on this topic, ok?

Free Shipping + 30% Off ... That's A Deal!!!

Here's our situation from yesterday.

• Three items at $35.00 = $105.00 demand.
• 30% off = $31.50 discount.
• Net Sales = $105.00 - $31.50 = $73.50.
• Cost of goods for three items at $17.50 = $52.50.
• Gross Margin Dollars = $73.50 - $52.50 = $21.00.
• Shipping Revenue = $10.00.
• Shipping Expense = $8.00.
• Net Shipping Revenue = $2.00.
• Total Profit from the Order = $21.00 + $2.00 = $23.00.
• Order Increase = 1.50.
• Total Profit = $23.00 * 1.50 = $34.50.
• Profit at Full Price = $54.50.

This is the point in the script where the CFO enters the picture ... she's not happy that profit never recovered. Sales aren't increasing enough, either. The Board (or the Owner) are upset.

What does the marketer recommend?

Free Shipping on Orders > $100!!!

So now we have 30% off plus free shipping. Somebody in marketing jumps up and down ... "we're competitive" ... they can't wait to measure conversion rates in real time. And conversion rates improve. 

Our situation changes ... we get a 20% bump in orders, so that's a good thing. But ...

• Three items at $35.00 = $105.00 demand.
• 30% off = $31.50 discount.
• Net Sales = $105.00 - $31.50 = $73.50.
• Cost of goods for three items at $17.50 = $52.50.
• Gross Margin Dollars = $73.50 - $52.50 = $21.00.
• Shipping Revenue = $10.00 (for half the orders, $0 for the rest) = $5.00
• Shipping Expense = $8.00.
• Net Shipping Revenue = -$3.00.
• Total Profit from the Order = $21.00 - $3.00 = $18.00.
• Order Increase = 1.50 * 1.20 = 1.80.
• Total Profit = $18.00 * 1.80 = $32.40.
• Profit at Full Price = $54.50.

We're losing more money now than before.

Order volume is up 80%.

Profit per order is down by 67%.

Total profit is down.

The customer has been trained to love discounts/promotions ... when you don't run discounts/promotions orders fall off of a cliff.

Now your CFO is really corked off.

To achieve more profit, the CFO asks the merchandising team to develop new items with better gross margins. We'll explore that issue tomorrow.

30% Off!!!

Here's what a typical order looked like (from yesterday):

• Three items at $35.00 = $105.00 net sales.
• Cost of goods for three items at $17.50 = $52.50.
• Gross Margin Dollars = $105.00 - $52.50 = $52.50.
• Shipping Revenue = $10.00.
• Shipping Expense = $8.00.
• Net Shipping Revenue = $2.00.
• Total Profit from the Order = $52.50 + $2.00 = $54.50.

At some point the widget business becomes "competitive" or "Amazon enters the space" or the merchandising team messes up and it's harder to sell widgets. A valuable marketing team has several tricks up their sleeve ... a typical marketing team says "30% off"!!!

Are customers surprised and delighted? 

Well, you get more orders, that's for sure.

But the dynamics of your business have been changed.

• Three items at $35.00 = $105.00 demand.
• 30% off = $31.50 discount.
• Net Sales = $105.00 - $31.50 = $73.50.
• Cost of goods for three items at $17.50 = $52.50.
• Gross Margin Dollars = $73.50 - $52.50 = $21.00.
• Shipping Revenue = $10.00.
• Shipping Expense = $8.00.
• Net Shipping Revenue = $2.00.
• Total Profit from the Order = $21.00 + $2.00 = $23.00.

You used to generate $54.50 variable profit per order.

You now generate $23.00 variable profit per order.

But order volume increases by 50% ... customers love your (albeit highly discounted) brand once again. Isn't that all that matters?

Well, here's the situation:

• You used to generate 1.00 orders at $54.50 profit per order = $54.50.
• You now generate 1.50 orders at $23.00 profit per order = $34.50.

Worse, you've trained your customer to expect 30% off.

Tomorrow we take a look at free shipping ... another favorite in the marketer playbook.

Generating Profit

This week we are going to talk about some of the dynamics surrounding generating profit. I know, I know, this is going to bore the living daylights out of many of you ... for those who are likely to be bored silly, read this little ditty about an old-school gaming organization who needed 11 years before being willing to "change" (click here) and then ask yourself if your organization would take that long to change.

Ok, let's pretend you sell widgets. The average price of a widget is $35.00. The gross margin of that widget is $17.50 (about 50%), yielding a cost of goods of $17.50 each. That's the business you are in. When a customer orders, the customer typically purchases three widgets, for an AOV of $105.00.

When the customer purchases, the customer pays $10.00 for shipping and handling. The cost to ship the merchandise is $8.00.

Make sense?

So here are the dynamics of a typical order.

• Three items at $35.00 = $105.00 net sales.
• Cost of goods for three items at $17.50 = $52.50.
• Gross Margin Dollars = $105.00 - $52.50 = $52.50.
• Shipping Revenue = $10.00.
• Shipping Expense = $8.00.
• Net Shipping Revenue = $2.00.
• Total Profit from the Order = $52.50 + $2.00 = $54.50.

Tomorrow we'll take a look at what happens when the marketing team thinks 30% off is a good idea.

Tradition / Nostalgia

Take a look at this place in Nashua, NH.

It's cold, it's miserable, and I end up talking to a guy (age 65ish) who is waiting for his cheeseburger.

Guy:  Isn't it great that they're open?

Kevin:  Sure.

Guy:  You know, the big chains aren't open on a day like this.

Kevin:  Burger King isn't open right now?

Guy:  What I am saying is that this place is always open. You're probably too young to remember the blizzard of April 1978. This place was open during the blizzard of April 1978. That's what I love the place. They're always open, no matter what. 11-9. Every day. Even when it is pouring rain and 38 degrees like it is right now.

Kevin:  Alright.

The guy scooped up his cheeseburger and off he went.

I got my hot dog with cole slaw and cookies 'n cream ice cream and off I went. Notice that the hot dog is wrapped in thick slice of white bread.

This was 2:45pm in the afternoon. And after I snapped my photos and began eating my lunch in my rental car, another fifty people walked up and got their fix of less-than-healthy food.

Food that is just a bit different ... and TRADITION.

If you struggle with online marketing and you cater to a 65 year old customer, then capitalize on the one competitive advantage you have ... TRADITION! Play it up. Use it to your advantage.

Online Sales Tax

Over the past decade, Amazon made a transition. Early on, they did not have a physical presence in your state. So when you purchased something, you purchased it sans sales tax. Retail brands howled how unfair this was.

Today, Amazon has a physical presence in many states. Much of what you buy from Amazon is subject to sales tax. Retail brands still howl about how unfair it is that Amazon (and you) do not have to collect sales tax.

Have you ever noticed that Amazon grows, virtually unfettered, regardless whether they collect sales tax or not?

Sales tax is one of those topics designed to generate page views. It's virtually irrelevant to your business. If you sell something that the customer wants, sales tax is a minor inconvenience.

The problem happens when we are selling stuff that the customer doesn't care about ... at that point, discounts / promotions / sales tax become important.

So maybe instead of focusing on sales tax we focus on what matters ... and what matters is what we sell.

More Cheese On The Nachos

Have you ever noticed that no matter how much cheese they put on your nachos, they still call 'em nachos?

Now, you're allowed to personalize your nachos ... more peppers, more cheese ... but they're still called nachos.

What is your strategy regarding new merchandise?

Adding a button to a dress shirt still leaves you with a dress shirt ... to the customer, the item isn't fundamentally different, is it?

It's not easy to identify new merchandise, is it? It's hard work. And too often we're just making modest changes to existing merchandise. When we have success, we truly invent new items. We don't simply put more cheese on our nachos.

Write A Bonus Plan That Actually Leads To Growing The Business

Assume you had a $50,000,000 company like Gliebers Dresses. You write two bonus objectives that look something like this:

Now assume that your team EXCEEDS each objective. Now you have to pay people.

You probably run forecasting simulations that tell you what your business looks like at the end of the year if you grow new customers and increase annual demand, right? Right? Your Finance Team added up the sum of all cash bonuses and realized that the total cash to be paid out was $1,300,000.

In the case of Gliebers Dresses, assume that we have an $8,000,000 increase in demand and the increase leads to a $2,500,000 increase in profit. In essence, the profit is being shared ... half goes to the employees that caused the profit increase, half goes to the brand.

If you write your bonuses in a smart manner, you essentially create a profit sharing plan ... a REAL profit sharing plan.

How is that a bad thing?

Discuss.

Show of hands ... how many of you work for a retail brand or e-commerce brand or catalog brand that pays healthy bonuses?

Pay 'em!

I finished presenting slides, including a series of slides outlining shared bonuses. Bonuses that are written identically for all salaried employees.

A woman stops to see me, and offers a phrase I've heard often.

• "I love the idea of bonuses, but I'm never going to pay them to my staff. My team needs to be self-motivated."

In other words, she didn't love the idea of bonuses. She loved the idea of people working together for the good of the organization, regardless of reward structure (or absent of rewards, to be more honest ... the employees should do 'what is right' while Executives and Vendors get paid).

I worked with a company that had a good year, a really good year. Going into the next year, employees enjoyed paltry 2% "cost-of-living" increases. Vendors however, well, those folks got paid. The marketing budget grew by 15%, which meant that marketing vendors were getting 15% more pay. Paper / Printing / Postage / Email / Search / Social all "reaped the rewards" of company success. The person who managed those vendors earned 2% more pay.

What in the name of Don Libey are we doing?

In the past ten years, we decided to treat our own employees worse than the vendors that our employees hire.

Please pay your employees. I simply don't understand why your vendors deserve to share in your success but your employees don't get to? Why do you prioritize your vendors over your co-workers? Seriously? I'd like to you to "join the conversation" and explain why employees are treated so poorly but vendors get to rake in coin?

Discuss.

The Importance of Merchandise Productivity

Remember our ninety-panel outcome?

In this outcome, six (6) catalogs is optimal.

What happens when Merchandise Productivity increases by 15%?

Just like that eight (8) catalogs is optimal. Wow!

And what happens when Merchandise Productivity decreases by 15%?

Now four (4) catalogs is optimal.

One of the great weaknesses of matchback analytics is the outcome of overmailing when merchandise productivity declines. For many catalogers, merchandise productivity has been in decline in the past decade - but that problem has been masked by matchback analytics. When you apply test panel results ... extrapolated to many different possibilities, you get to see just how important merchandise productivity is to your business.

Are you executing tests of this nature?

Are you analyzing different scenarios to better understand the "optimal" strategy to maximize profit?

You've got the skills and resources to do this.  Go do it!!!!

Customers At Marginal Value

In our test results, we can estimate what might happen when customers of marginal value are contacted differently.

In our case, I estimated what might happen if customers were at 50% the quality of the average customer in the test.

What do you observe?

Profit is maximized at two (2) catalogs, not six (6).

Also notice that you can open the floodgates on email campaigns, can't you? Customers are very tolerant of a hundred messages over six months.

Using a simple nine-panel test, we can easily estimate the results of a ninety-panel test. Then we can repeat the process for differing levels of customer quality - for customers with marginal value (or great value).

You execute tests like this one, all the time, right? You kinda have to if you want to know what the right "strategy" is for your business.

Optimal Profitability

A simple test with nine panels yields a ton of insight, doesn't it?

You execute tests like this all the time, right?

If you have the nine test panels, you can "estimate" what might have happened had you executed more test panels. In our case, I estimated what might have happened had we executed ninety (90) test panels.

That's a lot of test panels!

And we quickly learn that, on average, the most profitable strategy is to mail customers six catalogs within a six month period of time. The test showed a tie ... both four (4) and eight (8) catalogs yielded the optimal outcome. When we expand the test results, we see that six (6) catalogs is most profitable.

Tomorrow, we expand the test results to differing levels of customer quality.

Profit Outcome

Here's our test from yesterday. Three email contact strategies, three catalog contact strategies, executed for six consecutive months.

You execute tests like this all the time, don't you?

You are about to see why the tests are so darn important!

In our example, we take demand, subtract marketing cost (notice that customers with 0 catalogs and 0 emails still cost $2.00 each ... they incur costs via paid search and Facebook and affiliates, etc), and multiply demand by the profit factor. The net result is total profit (on a variable basis, before fixed costs).

At this time, somebody will point out that the maximum number of catalogs and maximum number of emails is "most profitable". They'll wash their hands of the issue and move on, confident that they've "optimized" the business, end of story!

They would be wrong!!

Tomorrow, we'll take our exercise a step further.

Test Results

Surely you execute test designs similar to what is observed here, right?

This test was run over a six month period of time.

Customers were randomly selected, and then placed into one of nine test panes.

Test Panel 1 = 0 Emails, 0 Catalogs (for the next six months).

Test Panel 2 = 0 Emails, 4 Catalogs.

Test Panel 3 = 0 Emails, 8 Catalogs.

Test Panel 4 = 50 Emails, 0 Catalogs (for the next six months).

Test Panel 5 = 50 Emails, 4 Catalogs.

Test Panel 6 = 50 Emails, 8 Catalogs.

Test Panel 7 = 100 Emails, 0 Catalogs (for the next six months).

Test Panel 8 = 100 Emails, 4 Catalogs.

Test Panel 9 = 100 Emails, 8 Catalogs.

At the end of six months, total demand amounts are listed above.

Again, you execute tests like this, don't you? How else would you know the "optimal" combination of email campaigns and print campaigns to send to a customer?

Tomorrow, we evaluate profitability.

Merchandising Imbalance

Look at the items from classes prior to 2014 ... those items generated $13.5 million in 2017.

Meanwhile, items from the classes of 2016/2017 only generated $12.7 million in 2017.

In most of my projects, there is what I call a "Merchandising Imbalance". There is a class of historical items that generate a ton of demand ... and new items generate a ton of demand ... with items from recent years being "killed off" too soon.

This creates all sorts of productivity problems that marketers get blamed for. When you don't have enough good items from 2014 - 2016, the "brand" appears to bifurcate ... it looks both old and chaotic at the same time. Existing customers are bored with seeing the same thing month after month for a decade while seeing a bunch of new merchandise that will quickly be discontinued. Boredom and chaos lead to lower conversion rates, and lower conversion rates yield blame ... for the marketer.

You MUST measure this stuff ... you don't want to get blamed for merchandising sins from 2-4 years ago, do you?

P.S.:  If you are bored by this stuff, read about Under Armour getting hacked (click here). I'm increasingly confident all of this digital stuff is going to turn out just fine ...

New Merchandise

Look at the Class of 2016 at Gliebers Dresses ... fewer new items than surrounding years and poor productivity of those items.

You know who gets blamed?

Sometimes marketers get blamed ... conversion rates fall because new items perform about $2.0 million worse than they should and it becomes a marketing issue.

These aren't marketing issues ... these are merchandising issues that marketers get blamed for.

As a marketer, you MUST measure this stuff. You have no choice, your job depends upon it. If you don't measure it, somebody will eventually blame you for having miserable conversion rates ... it'll be your fault.

P.S.:  If you don't like this stuff, then read how 28% of traffic is not human ... I'm increasingly confident that all of this digital stuff is going to turn out just fine.

Killing Items

Your job is to ferret-out information that "really" describes why your business is struggling.

Here's one of the ways you do that. You listen to co-workers. For instance, a merchant might say something like this:

• "We've got a lot of new product and we need the company to get behind us and support what we're doing."

#OhBoy

There's nothing wrong with new merchandise.

But you have to analyze what happens to the merchandise you used to sell.

Merchandise has a natural "decay" ... the older merchandise gets, the less of it you sell, until one day you discontinue selling VCRs and Palm Pilots and you move on.

When your merchandising team purposely kills off existing items "too soon", well, that's when you have problems.

Here's an example. This is the typical "decay" relationship for items introduced five years ago.

• Year 1 = $30,000,000.
• Year 2 = $18,000,000.
• Year 3 = $12,000,000.
• Year 4 =   $7,000,000.
• Year 5 =   $4,000,000.

The problem happens when a new merchandising regime decides that the prior merchandising regime was "stupid". They'll kill off items in Year 2, and that creates a whole set of issues.

• Year 1 = $30,000,000.
• Year 2 = $11,000,000.

You just lost $7,000,000 because the new merchandising team hated what the old merchandising team introduced a year prior. How are you going to make that demand up?

Most of the time, new merchandise doesn't make up for this problem ... you're always introducing new merchandise. So the merchandising team just cost you $7,000,000. Congrats!!

But it gets worse.

What do you think happens in Year 3, Year 4, and Year 5? We can project the shortfall.

• Year 1 = $30,000,000.
• Year 2 = $11,000,000.
• Year 3 =   $7,000,000.
• Year 4 =   $4,300,000.
• Year 5 =   $2.400,000.

Yup - you lost $7,000,000 in Year 2, but you also lose $5,000,000 in Year 3 and $2,700,000 in Year 4 and $1,600,000 in Year 5.

If your merchandising team does this two years in a row, well, you know what happens, don't you?

Marketers get blamed for this nonsense. When this happens, online conversion rates fall, and when online conversion rates fall marketers take the blame. It's wrong, of course, but it is the way that business works.

As a marketer, you MUST measure the living daylights out of this stuff. Stop getting blamed for the sins of your merchandising team. And when your merchandising team succeeds, GIVE THEM CREDIT, PUBLICLY. Shout it out!

P.S.: If you're really bored by this stuff, then read about how Slack enables your boss to read your DMs (click here). I'm increasingly confident that all of this digital stuff is going to turn out just fine.

Blaming Marketers

Yup - it happens all the time. It's the reason for many of my consulting projects ... business is off and nobody knows why so somebody asks me to look at all of the ways that marketing is making mistakes.

And marketers make a ton of mistakes - so it is easy to point the finger at the stupid marketer and then see that conversion rates are down 10% and therefore the marketer messed up and we go fire the marketer and we start over with a new marketer.

The marketer in commerce is not unlike the head coach in sports ... if the General Manager fails to acquire talent, the GM should be fired, right? Too often, the head coach takes the blame.

For the rest of the week, I'll share examples of ways that marketers get blamed for merchandise challenges.

In 2018, the marketer MUST analyze merchandise productivity ... it's a requirement of job security (and brand health).

P.S.: If you are bored by that, learn how voice will be used to monitor your home ... sure, put a device in your home, what's the worst thing that could possibly happen?

Final Slides for VT/NH Event on April 5

Here you go, folks ... the final set of slides for my presentation on Thursday.

Vermont / New Hampshire Presentation: April 5, 2018 from MineThatData

If you cannot download the presentation or see it via your email client, click here for access.

Honestly, if you are Professional in New England, what is stopping you from attending? An omnichannel task force meeting where you'll discuss how many pages need to be in the October catalog in order to drive response via affiliate marketing? Get in your car and join us (click here to attend).