September 17, 2019

Not All Dollars Are Created Equally

It keeps coming up in project work, so something is going on.

It's common to see a merchandising team that is purposely trying to increase prices. When the merchandising team adds new items to the assortment, those items are added at price points that are a bit higher than the items that are being replaced.

Is that a good thing?

From a gross margin standpoint, it can be a good thing.

From a customer standpoint?

In the table above we have a regression equation. I'm measuring how much a customer will spend next year, based on how much a customer spend last year in various price point categories.
  • p010 = Items $0.01 to $9.99.
  • p020 = Items $10.00 to $19.99.
  • etc
The coefficients (under the column labeled "B") represent how much a customer will spend next year (in total) based on how much was spent last year within that price point band.

So when we see a value of 0.537 next to p010, we know that next year the customer will spend $53.70 for every $100 spent last year on items $0.01 to $9.99.

When we see a value of 0.273 next to p150, we know that next year the customer will spend $27.30 for every $100 spent last year on items $100 - $149.

Where are the larger values?
  • Larger values are associated with lower price points.
For the brand studied here (actual data), customers buying from lower price point items (all things being equal) become more loyal than customers buying from higher price point items.

Now, there's a caveat here. Let's look at three different customers.
  • Customer #1 Spent $100 last year on items priced $10.00 - $19.99.
  • Customer #2 Spent $150 last year on items priced $10.00 - $19.99.
  • Customer #3 Spent $150 last year on items priced $50.00 - $74.99.
Using the equation above (including the constant term), we obtain next year's customer value:

  • Customer #1 = $29.36.
  • Customer #2 = $59.91.
  • Customer #3 = $44.61.
Do you see the caveat?
  • If customers are more loyal because they buy from lower price point bands, and you cause customers to spend less in the lower price point bands, future value will be less.
In other words, it's good to get a customer to buy 5 $20 items instead of 1 $100 item. It's not good to shift the customer from 1 $100 item to 3 $20 items.

Not all dollars are created equal. You need balance in the merchandise assortment, skewing toward what the customer wants, offering breadth of assortment to capture gross margin dollars as well. But clearly, you need to skew the assortment toward what the customer is pre-disposed to purchase.


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