December 30, 2019

So Long 2010s

You can make a reasonably strong argument that the past decade was a fusion of three key factors:
  • We pulled out of a near-depression.
  • Free and Open Communication with anybody.
  • Demographic change.

From a commerce standpoint, we have the implosion of malls coupled with the rise in dollar stores. That's not a coincidence, that's a consequence of a near-depression. And we accelerated the problem by telling our own customers to ignore stores and "buy now" online. 40% off is the outcome of failing to adjust to a changing world ... failing to account for deflation of the commodities we sell.

"Free and Open Communication" has consequences as well.
  • As messages increase, the value of each individual message decreases. When I started this blog in 2006 I could write something that would resonate across the industry. It was common for ten thousand people to read something I wrote and it was common for 50 or 75 people to comment and interact with what was said. In 2019, up to a thousand people might read something and virtually nobody will interact with the content.
  • The same thing happens in your business ... sum up your email campaigns, your tweets, your Instagram posts, and you'll realize that you sent thousands of messages that virtually nobody interacted with.
  • Meanwhile, your use of "free and open communication" means that third parties are spying on everything you say/do, repackaging it, segmenting it, and then plugging the information into algorithms that even the creators of the algorithms cannot fully understand. The algorithms make decisions. When a customer "engages" with you on social media, the "engagement" has plenty of unintended consequences (for the customer).
  • Finally, when there is no short-term cost for lying, people will lie. Hint - there are serious long-term consequences for lying. In retail, a decade of lies regarding omnichannel business strategy helped accelerate the implosion of mall-based retail. Lies are permeating our society. In business, lies are perpetrated by folks who need to monetize my client base. The result isn't positive for my client base.
Demographic change is plowing through old-school catalog marketing and retail.
  • Traditional catalog brands continue to fold ... and while you can criticize them for holding to a "catalog" business model, demographic changes and merchandising strategy are far more the issue. Baby Boomers are retiring, and the catalogers who followed them for the past thirty-five years have morphed their merchandise assortment so far away from a middle-aged customer that they cannot attract a middle-aged customer. It's a failure of merchandising strategy that is killing traditional catalog brands, and nobody wants to talk about this issue.
  • Traditional mall-based retail is a confection of the Baby Boomer generation. Now that Baby Boomers have largely left the mall, the mall is dying. Toss in financial considerations (customers shifting dollars out of malls and into dollar stores and low-cost brands), and you end up with what trade journalists call "the retail apocalypse".

Nobody can predict what the 2020s will bring us.

But we can spend the start of the decade figuring out our place in a changing world.
  • Most "consumers" have less money.
  • Free and open communication renders individual messages meaningless while tech folks monetize the aggregation of individual messages, which is quite meaningful (and quite negative for our customers). Toss lies into the mix, and you have a toxic slurry of issues to navigate.
  • Baby Boomers will be pulled from the commerce ecosystem over the next decade, requiring us to adapt, and adapt rather quickly.
So long 2010s ... you left us with a unique set of challenges ... as all decades do. We get paid to deal with the challenges. Let's start dealing with them.

December 29, 2019

My Favorite Metric of 2019

I call it "below average" ... you calculate the average price an item sold at over the lifetime of the product. If an item sold for $30 and then you offer the item at $20 then times when the item sold below the overall item average are considered "below average".

Why is this metric my favorite?

This business is struggling, and you can visibly see when Management pushed the "panic button".

Here are some of the findings I enjoyed this year when viewing this metric:
  • You get to see when management gets frustrated with business performance. 
  • Customers who buy items "below average" tend to like this fact, skewing away from full-priced items in the future.
  • Full-Priced item buyers can become "tainted" when they're offered items sold at prices below their historical average. They switch their loyalty toward future items that sell below the historical average for the item.
  • Email marketers are notorious "cheaters" ... in my work, they purposely select or promote items selling below their historical average in an effort to boost email performance metrics.
Calculate this metric and store it in your database. Segment customers based on this information. Understand the moment when your Management team lost faith in the business. The metric is so darn useful!!

December 25, 2019

New Items, Higher Prices

It's one of the common themes of 2019. The CFO is fed up with low margins and wants something to be done about it. So the merchants respond, new items will be more expensive.

In this example, new items maintained synergy with existing items until the past year, when new items were introduced at a price point considerably higher than the overall average.

It might be necessary to do this ... but it is a dangerous strategy. See, when new items are fundamentally out of line with the rest of the brand, customers frequently skew to the less expensive existing items. This causes new items to not sell well, which causes marketers to offer blanket 40% off promotions which causes all items to artificially deflate in price. In other words, you destroy pricing integrity across the board.

Analyze your 2020 assortment ... what are your merchants doing that you need to pay attention to?

December 23, 2019

Merry Christmas!

For the fourteenth consecutive year I bring you this classic image.

Postings will be light over the next two weeks. Hopefully you don't have to work much until January 6.

Until then, look around ... there's a lot of good things happening all around you!!!!

December 22, 2019


If you don't like running through the history books, take today off ... heck, take the next two weeks off and come back in early January.

Now, if you noticed, I ended last week's discussion about catalog circulation with discussions about five-year ad-investment simulations. This would be the part of the program where my comments are met with groans. But progress happens. And there will be a time when you are running simulations of your business, so that you can make decisions based on the outcome of myriad simulation runs and not based on random strategy changes implemented in real time. It's unavoidable, progress is coming.

Progress doesn't always happen on the timeline we'd like it to. 

When I started working at The Garst Seed Company in 1988, I was introduced to the concepts of Experimental Design. Sure, I dabbled in it a bit in college, but in the real world we conducted a ton of experiments. We had a whole "tournament" set up each year ... various corn/sorghum hybrids were tested against our existing "winners". If a hybrid showed promise, it advanced to another round of experiments against existing "winners" and promising new hybrids. Eventually, a handful of hybrids achieved commercial status ... they passed the testing gauntlet and were commercially viable.

Our testing program was the end result of progress made in the 1930s and 1940s. We leveraged the work of Snedecor and Cochran ... I still own their Statistical Methods book from 1938 ... yes, 1938. Their ideas were made famous at Kansas State University and Iowa State University, and were fully embraced by the statisticians I worked with in 1988.

By December 1990 I was a newly minted Statistical Analyst at Lands' End. At first I created logistic regression models and ordinary least squares regression models ... borrowed from my predecessors, then fully implemented from my own work ... with techniques borrowed from Norm Draper. Folks leveraging "machine learning" today are just building upon stuff that Lands' End (and many others) did in the mid-1980s. Progress.

In 1991 we were wondering why we kept adding catalogs to the mail plan and sales didn't increase linearly as catalogs were added. This is where the work of Snedecor and Cochran was applied to catalog marketing. I'm sure we weren't the first to do this, but we took the concepts far, probably farther than most in the industry at that time. Over the next four years we learned a ton about the true (incremental) impact of catalog marketing by employing the testing tools that Snedecor and Cochran applied nearly sixty years earlier. Progress.

It was no different at Eddie Bauer. We used the techniques described by Snedecor and Cochran to test the effectiveness of email marketing, to test the effectiveness of discounts/promotions, to create matched market tests to measure television advertising effectiveness and to test the appropriate price for a pair of blue jeans. Progress.

It was no different at Nordstrom. We used testing methodologies to demonstrate that we could eliminate $36,000,000 in catalog ad cost and move into the future. I fielded the calls from trade journalists, they thought we were insane ... and they printed their critical thoughts. But we had testing data (they didn't). We ran simulations (yes) to demonstrate that the business would be healthy in the future. We knew more than trade journalists and industry experts knew. We had progress on our side.

And we were proven right. Online/Phone sales increased even though $36,000,000 of ad cost were removed from the ecosystem. Hint - that results in A LOT of profit!!

In the Spring of 2007 I spoke at the Spring NEMOA Conference in Boston. I was also asked to participate on a panel. I was asked about the future of catalog marketing, and in particular, how catalogs would be measured in the future. I shared the fact that catalog key-codes / source-codes were already irrelevant, and that the future was all about experimental designs ... stuff that had already been employed in other industries for 70 years ... and that the results of these tests would tell us whether catalogs possessed any meaning in a digital world. I told the audience that we executed these ideas at Nordstrom, grew online/phone sales, and greatly increased profitability.

The audience laughed.

They heartily laughed.

If you've spoken in front of an audience, you know when the audience thinks you are a moron. You see the condescending looks, the glares, the dismissals. At that moment, the full menu of industry derision was on display. It's always amazing to gain hard-earned knowledge and have folks who haven't earned the knowledge laugh at you and criticize you. Ha!

Progress doesn't happen on your timeline.

You may not like the fact that your future is a fusion of Experimental Design (i.e. tests) and Simulations. I've been running simulations (not complex ones, but simulations nonetheless) since the mid-late 1990s at Eddie Bauer. The insights offered by simulations enable the Business Leader to side-step years of trial-and-error in the real world.

I mean, if you simply A/B test your catalogs, A/B test your email campaigns, test any spend with Google, and test any spend with Facebook (and if you are a cataloger you A/B test your co-op investments as well ... right ... RIGHT??) ... if you do that and then build a simulation tool around your investment levels, well, you're going to know EXACTLY what you need to do in the future to make sure your business achieves the potential your Ownership Team or Shareholders or CEO or Executive Team (or you) believe it should have. You'll know exactly how much you have to spend, and you'll know exactly where to spend it, to achieve your potential.

I know, I know, you are going to ask around ... "is anybody else doing this???" ... and you'll feel reassured when you learn almost nobody else is combining Experimental Design with Simulations. You'll say, "see, I'm not crazy, that silly blogger, he's the crazy one."

This is how progress works.

Remember the NEMOA reference? Source-Codes / Key-Codes are meaningless as we move into 2020. Mailing decisions via the "organic percentage" and mail/holdout tests are common now. 

Progress happened.

You are going to leverage a combination of Experimental Design (testing) and Simulations to figure out what direction to take your business in. It's coming. This is how progress works. 

Heck, just A/B test your way into understanding your organic percentage ... do the tests we executed at Lands' End ... in 1991. The outcome of the tests is more valuable today than it was back then. Go learn something!!! Have fun!!! Make progress.

December 19, 2019

So What Does It Mean?

This week we ran through a series of simulations that demonstrated something very interesting.

  • If you are a struggling catalog brand and 75%ish of your sales are catalog driven, you've got problems. Cutting back on circulation hurts top-line volume and doesn't generate enough incremental profit to effectively boost the bottom line. Yes, you can save a lot of ad cost that can be invested elsewhere, but that doesn't solve your merchandising problems.
The story is different if you've done the hard work of attracting a "more modern" housefile.
  • If you are a struggling catalog brand and 50%ish of your sales are catalog driven, you can cut back (dramatically) while significantly boosting profit. Your ad-cost savings (which will be significant) can be spent elsewhere, or pocketed, your choice.
In other words ... the cataloger who got away from the co-ops and rented lists is able to manage the future far more effectively than the cataloger who stayed "loyal" to the industry.

The fraction of audience that works in the catalog industry would probably want to know what a five year circulation simulation says about the future of their business, correct? Contact me ( / 206-853-8278) and we'll talk about data requirements, ok??

December 18, 2019

What Happens When The Organic Percentage Increases??

In our simulation yesterday, we learned that when the organic percentage is low, there's virtually no reason to cut back on catalog mailings ... simply because most of what you are mailing (under low merchandise productivity conditions) produces tepid results that don't move the profit needle. This is the problem with struggling low-organic-percentage catalog brands ... you don't solve the problem by saving ad-cost expenses. You need merchandise productivity and new customers (at a low cost) to get out of the mess.

What happens when the organic percentage is considerably higher ... representative of a modern catalog brand? Well, the story changes.

Here is the base case.

And here is the "optimal" solution for a brand with the same exact dynamics and a 48% organic percentage.

Well, that's a spicy outcome, don't you think?

The optimal solution happens when you cut back by 70% ... that's a whopper of a figure!

Here's five-year housefile demand, ad-cost, and profit by level of ad-cost expense.

You lose a third of housefile demand over five years, but profit increases by $1.5 million dollars ...a meaningful amount.

So here's the magic solution for a struggling catalog brand.
  • A low organic percentage brand cannot solve profit problems by cutting ad cost. Solutions require immediate improvements in merchandise productivity coupled with increased new customer counts at a low cost. That's unlikely to happen.
  • An average organic percentage brand can make meaningful changes by dramatically cutting back on ad cost, simply because so much demand will happen regardless of catalog mailings. This brand "buys time", often a year or two, so that merchandise productivity and customer acquisition issues can be "solved".
In other words, if a catalog brand does a great job of "modernizing" the customer, the catalog brand has more options to improve profitability when merchandise productivity suffers.

Does that make sense to you??

December 17, 2019

Cutting Back 40% ... Close To Optimal!

Here's our base case.

Across numerous simulations, the "optimal" solution occurred when we cut back by 40% across the board. What does the business look like over time when we do this?

When we cut back ... WAY BACK ... we arrive at an optimal solution. But how "optimal" is the solution? It's not very optimal.
  • Over five years, you give up $7,000,000 in top-line volume.
  • You save $3,500,000 in ad cost ... that's not a trivial amount.
  • Total five year profit only increases by about $250,000.
This is one of the dirty little secrets of struggling catalog brands. Nearly half of the ad-cost spent yields nothing ... NOTHING! You just grow sales somewhat, creating a stronger housefile, but a housefile that is fundamentally unproductive.

I harp on merchandise productivity and customer acquisition for a reason. Both merchandise productivity and customer acquisition MOVE THE NEEDLE ... they improve the trajectory of a brand.

As is almost always the case, the issue isn't catalog productivity ... catalog productivity is largely meaningless. The issue is what you sell coupled with how many new customers you can find at an acceptable cost.

Now, what happens if the organic percentage isn't a paltry 24%, but instead is a robust 48%? We'll find out tomorrow.

December 16, 2019

Cut Back 10%, Make More Profit

So your traditional catalog brand that has been around since 1978, a brand that survived the dot-com crash and anthrax in the mailbox and a Great Recession is finally taking on water. Executives blame Amazon. A thirty-four year old named Hailey has a lot of answers and nobody will listen to her. Somebody on an "advisory board" (nobody will pay anybody to be on a real board) thinks catalogs are making a comeback and has a 42 page study from a paper brand proving that the future is bright.

You perceive that you are the only person possessing "common sense" in your brand. So you run a simulation. You measure the five year trajectory of your brand as-is, and you measure it if you cut back on housefile mailings by 10%, straight across the board. Granted, you'd never execute this way, but you need to paint a picture to Management regarding what the business "could" look like.

Here's your base case.

And here's a five-year simulation of what your business looks like if you cut back by a straight 10% across the board, across the 0-48 month file.

Over five years you give up just $1.8 million in housefile demand (and this is for a business with a 24% organic percentage ... your organic percentage is likely to be considerably higher). You save $900,000 in ad cost. You increase profit by $110,000 in total.

If you share this with somebody ... heck, just about anybody ... you'll learn that NOBODY CARES. The difference isn't enough to motivate anybody to change.

Tomorrow we'll discuss the "optimal" housefile solution.

December 15, 2019

Optimizing A Catalog Brand

As catalog brands die right and left, one wonders why those businesses were so reluctant to "optimize themselves" before misery and closure set in?

It happens all the time. Those who hold the keys to "the brand" are not willing to cut back and save expense, they feel they need to "protect the brand", and to them the essence of the brand is "the catalog". 

Eventually somebody cuts back on housefile mailings ... ever-so-marginally ... from 14 mailings per year to 13, and nothing improves. Then customer acquisition is hacked back too far (we'll win by keeping our "loyal" customers), and the wheels come off the bus.

Here's a business that is heavily catalog-centric ... a paltry 24% organic percentage and heavy ad-cost investment across the 0-48 month file.

Tomorrow, I'm going to demonstrate to you what a Housefile Print Ad Cost Simulation can show you about your business. Learn how profitable your business could be (albeit smaller). Consider it your Christmas Gift, ok?

December 12, 2019

The Vice President

My first job out of college was at a seed company in Central Iowa (Garst Seed Company). I had a poster hung on the interior of my cubicle. The poster outlined income levels ... if I remember correctly the average (or median, I don't recall) salary in the United States in the mid 80s was something like $30,000. My salary wasn't at that level. So I'd stare at that graph, wondering how in the world I'd ever earn a credible salary when my income grew by 4% per year. It would take me thirty years before I'd get close to $100,000 a year, based on my calculations. I figured I'd be dead by then.

When I got to Lands' End, a co-worker told me that I should read the 10-K and specifically the DEF14 statements the company put out, because those statements publicly communicated the salaries and bonuses of the top five employees at Lands' End. Those documents made something clear to me ... you could make a pretty darn good living as a Vice President at a retail brand.

So that became a goal ... I wanted to be a Vice President.

From learning what a 10-K and DEF14 statement were to becoming a Vice President took nine years ... Analyst to Manager to Director to VP.

Along the way you see every possible flavor of Vice President. There are gifted rocket ships destined to run companies in the future ... they're just passing through on their way to a better place. There's the overmatched family member who gets put into an important Leadership position and promptly "breaks things". You'll run across the 62 year old who is just (as precisely one of these individuals once told me) trying to keep the wheels on the bus until he can retire. Everybody's worked for or with the Bureaucrat ... a person who seems to have one precise skill ... getting things done by triangulating complex issues across warring factions.

There are the "power hungry" ... Leaders who crave power and once they get it they dispense a particularly unpleasant array of behaviors requiring HR intervention.

I polled my Twitter followers what their opinion of a Vice President at a Retail brand is ... polished professional or three dismissive choices. Only 38% viewed a Vice President at a Retail brand as a polished professional.

28% thought of the title favorably. About 1 in 4. Think about that for a moment.

I spoke at an industry conference several years ago ... a Vendor Vice President (hint - Abacus) went off on a tirade about how stupid Vice Presidents at catalog brands were. So you'll also get to enjoy VP on VP violence in this industry. As a consultant, I've found Vendor Leaders to be particularly dismissive of the very people who decide whether to pay the Vendor or not.

Heck, you could argue that I'm no better ... I spent the better part of a decade writing Gliebers Dresses stories for this blog. There aren't a lot of glowing platitudes for Roger Morgan, are there?

So it's easy to bash the Vice President. They get paid a healthy amount of cheddar and most readers aren't paid as much so they are in line for criticisms that may or may not be warranted.

But if you find a Leader who has ethics, who wants to do the right thing, who brings new ideas to the table, who cares about staff development ... why wouldn't you support this person? Just because you run across a litany of people you don't think highly of doesn't mean you should bring your condescending attitude to those who are truly trying to do good work.


Maybe it's time to recognize that there are fabulous people working hard to grow businesses and grow people. Don't let the imbeciles taint the good work done by many other professionals. According to my followers, 28% of the leaders are good ... help them do good and who knows what might happen in your career?

December 11, 2019

Optimal Assortment Size??

At your company, let's assume you sell 100 Womens items and you generate $1,000,000 a year. 

Let's also say you sell 35 Mens items and you generate $550,000 a year from those items.

Let's say your CEO wants you to add 10 items to the assortment.

Should you add the 10 items to the Womens assortment, or to the Mens assortment?

This is a classic example where a regression-based power function can be used. You can look, year-over-year, at the increase in styles/skus, and you can compare it to the year-over-year increase in sales. This is done by merchandise division, at which time you fit an equation and then you answer the question.

We'll use a simplified version of the equations I use. The end result?  Adding items to the Mens assortment is likely to yield a better sales increase.
  • 10 Additional Womens Items = (110/100)^0.5 * 1,000,000 - 1,000,000 = $48,809.
  • 10 Additional Mens Items = (45/35)^0.5 * 550,000 - 550,000 = $73,641.
When you fit your year-over-year relationship, you'll come up with coefficients that are different than what I use above (0.5) ... but the concept holds. It's a reasonably straightforward exercise to determine where you might be over-assorted or under-assorted.

December 10, 2019

Marrying Acquisition Investment With Long-Term Value

Your annual repurchase rate dictates everything about your investment strategy, doesn't it?

When you retain 20% of last year's buyers, your newly acquired buyers have minimal long-term value, requiring you to make money on the acquisition transition.

When you retain 50% of last year's buyers, your newbies generate a healthy amount of long-term profit. You get to make an important decision:
  • Do I want to generate a TON of short-term profit and sacrifice long-term growth?
  • Do I want to "scale" my business and lose money for several years but then have a much larger business that generates a ton of future profit?
Most of the businesses I've worked with that retain 50% of last year's buyers choose short-term profit. It's a choice, and there isn't a right/wrong one. But you can have a huge brand that is wildly profitable if you execute the latter strategy.

When you retain 80% of last year's buyers, you can lose a FORTUNE acquiring the customer because the customer will pay you back for years. Years!!!

Marry your acquisition strategy to downstream customer dynamics. You almost have to make money on the initial transaction if you manage a business with a low annual repurchase rate.

December 09, 2019

Visual Merchandising

Twitter user @travelintweeter sends us this image from inside a major retail brand. The image was take late last week.

If you read retail pundits on Twitter, you'll come to the conclusion that the customer wants two things.
  1. An seamless, frictionless omnichannel shopping experience.
  2. A fabulous customer experience, fueled by technology.
How about not stuffing a handful of disorganized Hersheys bars in a bin?

How about making sure all the bottles on top of the counter are vertical?

How about processing that red whatever-it-is next to the bottles?

During major events at Nordstrom, I had to work in the stores. Trust me, you don't want Kevin working in one of your stores. Since my skillz (yes, with a "z") were limited, my job was to clean up messes like what you see in the image above. In other words, I'd run that red top back and hang it for returns processing. I'd make sure the presentation of everything in my department was perfect (and this isn't easy work because customers are savages and they'll nuke every perfectly featured display if given the chance).

We've done a good job (as an industry) of paying vendors tens of millions of dollars to execute strategies that aren't moving the needle.

We could spend next-to-nothing to hire a person responsible for making sure that, visually, our merchandise looks spectacular.

December 08, 2019

Vendor Mistake

Here's a problem, quite possibly caused by the vendor responsible for email marketing at Final Draft ... maybe not, but quite possibly yes.

I once had a boss who told me that I was free to pick and choose vendors and when my vendor messed up badly I'd lose my job as a consequence. Is that a fun work environment? Nah. Is that the way the world works? Oftentimes yes.

We all make mistakes.

The outsourcing of all marketing activities to the vendor community (yes, I'm exaggerating for effect) means that we become more accountable than ever before, while at the same time being an arms-length away from those who should theoretically be accountable with us.

December 05, 2019

Two $25 Items or One $50 Item??

Both tactics lead to $50 in your pocket.

In most projects, however, the customer who buys two $25 items has better future value than the customer buying one $50 item.

Run the analysis for yourself and you'll come to a comparable conclusion.

Every price point has a purpose.

Quantity of items purchased has a purpose.

From a marketing perspective, you have a responsibility to share all price point options with the customer. You want to encourage customers to buy multiple items where possible ... the downstream profit you generate helps pay your bonus in future years!

December 04, 2019


Certain items are sold with the purpose of being offered as gifts. In your database, you can easily discern this fact by looking at the winning items during 11/15 - 12/15 ... items that then quickly die off.

If you want to see how effective those items are at creating loyal customers, measure the 12-month repurchase rate of customers who bought gift-centric items. Say a customer bought the item on November 20. Measure the probability of the customer buying that item again from November 21 to the following November 20. Repeat this process for every customer who bought that item, and you have an "item-rebuy" metric for each item.

The metric is useful because it helps you understand which items generate loyal buyers, and helps you figure out which items generate short-term profit (both of which are important).

Every item in your assortment has a purpose.

Every price point in your assortment has a purpose.

Your merchandising team has a purpose for each item.

Your customers have a purpose for buying each item.

Your job is to understand the real purpose of each item.

December 03, 2019

But They're Easy To Acquire!

Look, I get it. You've got a budget you have to hit so acquiring a new customer between 11/15 and 12/15 at 50% off makes a lot of sense, right?

Do you measure the downstream value of customers acquired between 11/15 and 12/15?

Often, the results look like this:
  • Acquired Rest of Year = $24.00 Profit.
  • Acquired 11/15 to 12/15 = $12.00 Profit.
Print-based marketers are particularly guilty of fueling this dynamic ... mailing way too many catalogs to customers acquired 11/15 to 12/15, driving down long-term value in the process. It's bad enough customers acquired 11/15 to 12/15 have lower annual rebuy rates to begin with, don't amplify the process by harming long-term value by over-marketing to customers.

So don't do that. If you have to acquire Christmas customers in large quantities, at least manage lifetime value properly, ok?

December 02, 2019

Prices Up, Customers Down

Recall our paid search scenario from yesterday.
  • Spend = $100,000.
  • Clicks = 200,000.
  • Cost per Click = $0.50.
  • Conversion Rate = 1.8%.
  • Orders = 3,600.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Profit = (3,600*100)*0.30 - $100,000 = $8,000.
  • Profit per Order = (8,000 / 3,600) = $2.22.
The following year your merchandising team increases prices via introducing new items at higher price points. As a consequence, average order values increase 10% but conversion rates decrease 10%. On the surface, this dynamic should result in flat sales, right?

But something else interesting happens. Take a look.
  • Spend = $100,000.
  • Clicks = 200,000.
  • Cost per Click = $0.50.
  • Conversion Rate = 1.8%*0.909=1.64%.
  • Orders = 3,280.
  • Average Order Value = $110.
  • Profit Factor = 30%.
  • Profit = (3,280*110)*0.30 - $100,000 = $8,240.
  • Profit per Order = (8,240 / 3,280) = $2.51.
Did you see what happened?
  • Customers/Orders = Down 9%.
  • Profit per Order = Up 13%.
Price increases typically result in fewer customers, but the transactions you generate are more profitable (per customer), meaning you can actually increase marketing spend to find a few additional customers. And you'll want to do that, because if you don't do that you'll eventually grind your customer file down by 5% or 10% and then you'll have growth issues in the future.

December 01, 2019

Not Your Fault

This just keeps coming up, so let's explore the dynamic a bit.

You have a paid search program. Last year in November you spent $100,000, and you obtained the following outcome:
  • Spend = $100,000.
  • Clicks = 200,000.
  • Cost per Click = $0.50.
  • Conversion Rate = 1.8%.
  • Orders = 3,600.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Profit = (3,600*100)*0.30 - $100,000 = $8,000.
  • Profit per Order = (8,000 / 3,600) = $2.22.
This year, however, your merchandise productivity is -10%. Your metrics, as a consequence, look different.

  • Spend = $100,000.
  • Clicks = 200,000.
  • Cost per Click = $0.50.
  • Conversion Rate = (1.8%*0.90) = 1.62%.
  • Orders = 3,240.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Profit = (3,240*100)*0.30 - $100,000 = ($2,800).
  • Profit per Order = (-2,800 / 3,240) = ($0.86).
Because of a merchandise productivity issue, marketing metrics look worse ... you generated $2.22 of profit per order last year, you generate a loss of $0.86 per order this year.

As a marketer, you're likely to "optimize" performance. You'll cut back on marketing spend, and your metrics change as a result.
  • Spend = $80,000.
  • Clicks = 179,000.
  • Cost per Click = $0.45.
  • Conversion Rate = (1.8%*0.90) = 1.62%.
  • Orders = 2,900.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Profit = (2,900*100)*0.30 - $100,000 = $7,000.
  • Profit per Order = (7,000 / 2,900) = $2.41.
The marketer "optimized" performance. But there is a two-stage outcome that must be understood, an outcome caused by a 10% drop in merchandise productivity.
  • Orders dropped from 3,600 to 3,240 because of merchandise productivity declines.
  • Orders then drop from 3,240 to 2,900 because of how marketing responded to merchandise productivity declines.
In other words, a 10% drop in merchandise productivity results in a 19% drop in orders because marketing optimizes performance.

Now you likely have a new customer issue.

It's important to work carefully with your Chief Financial Officer on these issues. It may be more profitable long-term to lose money today and acquire enough new customers to protect the future of your business. Just be sure to do the math and figure out what makes the most sense for your business, ok?

Alex Morgan (Yes, This Will Be About Merchandise)

When the USWNT Olympics Team was announced, all-time great Alex Morgan wasn't on the team. Nor was she on the four player alternate list...