Here's A Huge Advantage

Your annual repurchase rate tells you an awful lot about File Power.

Say only 20% of last year's customer base will buy this year. Unless those customers are spending $3,000 a year, you are going to have a File Power problem, one that is unavoidable. Your entire business model surrounds finding new customers at low-cost or no-cost. I can't tell you how often it is that real Business Leaders with credible skills have no idea this is how their business operates.

Meanwhile if you retain 50% of last year's customer base, a different dynamic happens. You have File Power. In other words, a customer who buys today will generate enough incremental purchases in the future to cause you to be willing to invest in the customer today. You have a different dynamic, and it is your job to capitalize on that dynamic.

A 50% rebuy rate is a huge advantage over a 20% rebuy rate. Either business model can be very profitable, but the business model with a high rebuy rate acts like a 401k earning interest over time.

Real-Time File Power Decisions

Here's one for you ... the Oakland A's will not broadcast on terrestrial radio ... you can stream their radio-based games online from now on (click here).

Of course, this is the future.

And of course, if you are 71 year old driving across Central California, this is gonna stink (while the 31 year old will fire up TuneIn and ... no worries ... assuming that 31 year olds even care about listening to baseball anymore).

From a File Power standpoint?

• You are giving up on customers age 62+ who listen on radio. Do they have other options? Absolutely. But you'll lose File Power here.
• You are moving into the future. You'll gain File Power here.

This is the EXACT decision that would hold-up 90% of my readers ... "how can they give up on the 71 year old riding in a car???" Catalogers know this all-too-well ... they wouldn't give up on the 71 year old. And in the process, the cataloger misses the future.

What would you do?

Be honest.

It's really, really hard to truly move into the future, isn't it? Too often, we try to move into the future while protecting the past. That's a recipe for short-term File Power gains coupled with long-term File Power pain.

When Transactions Disappear

The 35% of my subscriber base that is catalog-centric is going through a ruthless transformation.

Fifteen years ago these subscribers made a major shift ... instead of leaving behind lists and embracing digital strategy, many (most) of the catalog professionals shifted to what are called "catalog co-ops". They gave their purchase transactions to the co-ops (for free) ... then paid money to pull unique non-duplicated names out of the co-ops for one-time mailing use.

The strategy "worked". From 2006-2010 the list industry died, and catalogers kicked the digital can further down the road while maintaining current-day catalog volume.

Here's a good way to think about what a catalog co-op meant to a cataloger. Let's pretend that there are five names available in the database, and the cataloger needs to mail three names.

1. Customer #1 = 8 catalogers bought from last month, $800.
2. Customer #2 = 5 catalogers bought from last month, $800.
3. Customer #3 = 3 catalogers bought from last month, $300.
4. Customer #4 = 2 catalogers bought from last month, $150.
5. Customer #5 = 1 cataloger bought from last month, $75.
6. Total File Power = 800 + 800 + 300 + 150 + 75 = $2,125.
7. Total File Power Selected = 800 + 800 + 300 = $1,900.

The co-op (obviously) selected Customer #1, Customer #2, and Customer #3. The cataloger mailed the customers. The cataloger acquired new customers. All was good.

As catalogers went out of business and as Amazon cannibalized transactions typically reserved for catalog brands, the co-op file weakened. There was less file power. The situation looked like this in 2015:

1. Customer #1 = 8 catalogers bought from last month, $800.
2. Customer #2 = 5 catalogers bought from last month, $800.
3. Customer #3 = 2 catalogers bought from last month, $200.
4. Customer #4 = 1 cataloger bought from last month, $75.
5. Customer #5 = No longer exists.
6. Total File Power = 800 + 800 + 200 + 75 + 0 = $1,875.
7. Total File Power Selected = 800 + 800 + 200 = $1,800.

Do you see the subtle difference?

• File Power from the 3 Names Selected was $1,900, now is $1,800.
• Total Co-Op File Power was $2,125, now is $1,875.

From a co-op standpoint you can see the collapse happening in real time (-12%), with a 20% reduction in the overall file.

From a cataloger standpoint you don't notice the change happening as dramatically (-5%).

Fast forward to 2020.

1. Customer #1 = 8 catalogers bought from last month, $800.
2. Customer #2 =No longer exists.
3. Customer #3 = 2 catalogers bought from last month, $150.
4. Customer #4 = 1 cataloger bought from last month, $75.
5. Customer #5 = No longer exists.
6. Total File Power = 800 + 0 + 150 + 75 + 0 = $1,025.
7. Total File Power Selected = 800 + 150 + 75 = $1,025.

The File Power of the names you select in 2020 is about half of what it was in 2010. You're still getting three names, but you get one great customer, one tepid customer with lower File Power, and one customer that you never used to select but are required to select now because a good customer disappeared.

When we (Bill LaPierre and I) talk about the "Collapse of the Co-Ops", this is the dynamic we are describing.

This dynamic requires you to be oh-so-sophisticated at Digital Marketing to make up the difference. But because you've delayed being oh-so-sophisticated at Digital Marketing for the past fifteen years, you aged your existing customer base to a customer base that is not terribly responsive to Digital Marketing, rendering Digital Marketing less effective.

Oh oh.

This is what happens when co-op transactions disappear.

This is why understanding File Power is so darn important.

American Eagle

Read here.

Pay attention to the Macy's comment ... because Macy's will close stores, mall traffic will decline, and the decline is expected to hurt American Eagle.

If you were measuring File Power at American Eagle, you'd analyze data at a market level. You'd separate markets where Macy's closed stores historically from those where they are currently closing stores to those where Macy's has active stores.

• You'd measure downstream File Power from existing 12-month buyers in each segment.
• You'd measure new/reactivated customers in each segment.
• You'd quantify how future sales will be impacted as a consequence.
• Any sales downturn represents File Power lost due to Macy's closures.

You run analytics like these ... right?

File Power is a critically important aspect of modern marketing ... we need to understand what others are doing to us, we need to understand what we're doing to ourselves, and we need to understand what the future holds. All can be done within the File Power framework.

Walmart = Tepid Q4

Here you go (click here).

• US Retail Comps = +1.9%.
• E-Commerce = +35%.

We've all been there. When e-commerce thrives and retail comps struggle, we're dealing with a classic case of File Power.

Think of it this way. Results suggest that sales were $141.7 billion (yes ... billion) in Q4. We can reverse-engineer growth (yes - some new stores muck-up the math, but for illustrative efforts please play along here).

• Last Year Q4 Sales = $137.1 Billion.
• Assuming 4.5% of net sales via e-commerce, we get $130.9 billion at retail and $6.2 billion via e-commerce.
• Retail Growth = $130.9 billion * 1.019 = $133.4 billion ... growth = $2.5 billion.
• Online Growth = $6.2 billion * 1.350 = $8.3 billion ... growth = $2.1 billion.
• Total Growth = $4.6 billion ... of which 45.6% came from e-commerce.

We can rest assured that Walmart isn't acquiring a ton of new customers.

In other words, as e-commerce grows, those sales either have to be incremental/additive ... or those sales come at the expense of retail.

A significant fraction of those sales HAVE to be coming at the expense of retail ... no added File Power whatsoever.

We've all been there.

• Catalog marketing was destroyed as sales shifted online.
• Retail in-store sales are being mulched as sales shift online.

We all know what comes next, don't we?

Pier 1: Bankrupt

There you go (click here).

You can go back to 2014 and read the positive articles about integrating offline/online and improving the customer experience and providing omnichannel features (click here).

Integrating offline/online ... customer experience ... this stuff sounds seductive. But does it translate to improved File Power? 

Noooo.

Six years ago you had two identical customers ... both loved shopping in stores. One shopped online instead, one kept buying in a store. The analytics demonstrated that File Power did not improve (maybe a few percentage points, a largely useless outcome), but the customer who shopped online now had an incentive to not shop in a store.

• Fewer store visits = reduced store sales.
• Reduced store sales = more discounting to get you in the store.
• More discounting = must discount online as well to be an integrated brand.
• Integrated brand = close stores.
• Closing stores = less retail traffic in general.
• Less retail traffic in general = more store closures.
• Bankrupt.

It's more important than ever to understand File Power, before we do more damage to the brands we manage.

Fake File Power

Here's a case where a $20 purchase leads to a potentially unethical $50 charge (click here).

I had a call a few years ago with the CEO of a company. This person said something interesting ... and I paraphrase below:

• "I can sell anything. I just sweeten up the offer and the text until the customer can't help but buy whatever I choose to sell. Merchandise is unimportant. I just manipulate the customer as I see fit."

We've all been taken advantage of by a "brand" at one point or another. When you are taken advantage of, there is a rapid transfer of wealth. You are misled into giving money today that you may have given to the brand long-term. The customer frequently terminates the relationship as a consequence.

Deception = Fake File Power.

Side Hustle

Before I started my own business, I created my own "side hustle". I wrote books, I developed an audience of a thousand +/- readers on my blog, and I made a small amount of money in the process.

We all know people who have side hustles ... they write fiction, or make quilts that they sell, the referee high school basketball games.

Side hustles work until they don't work. Once they interfere with your main job, you have a choice to make ... keep the main job or figure out how to make the side hustle work as a full time endeavor.

The image here is of a local UPS store ... the pile of "stufff" is their "side hustle" ... better known as Amazon returns.

For +/- $2.00 an item, UPS takes care of the return on behalf of Amazon.

On this late Thursday visit, the line of customers was out the door. Based on my best guess, of the eight customers in line, seven were returning merchandise from Amazon.

In other words, the side hustle was swamping the core business.

If you were a core customer looking to ship an item via UPS, your wait in line for core services probably offended you.

Over time, the brand sees a reduction in File Power from the core customer, further pushing the brand in favor of the side hustle.

This is how businesses are transformed.

Classic catalog brands didn't go down the path of the "side hustle", did they?

Omnichannel retail brands didn't go down the path of the side hustle, did they?

J. Crew did go down the path of the side hustle (Madewell). Turns out that was a good decision.

Integrated Marketing

From a professional and business-smarts standpoint, you'll no doubt benefit from attending key industry conferences. No doubt. You'll acquire skills very important to your professional development.

From a File Power standpoint (however) Integrated Marketing (featured in one way or another at most industry conferences) has been a colossal failure. It's has been (however) a boon for vendors. This is a key distinction worthy of your consideration.

At the conference outlined above, the two featured speakers at the top of the list are from Google and Facebook. Anytime we learn about Integrated Marketing, those two characters seem to be in the mix. If you want to integrate across channels, you need a strong search strategy (i.e. Pay Google) and you need a strong paid social strategy (i.e. Pay Facebook). You spend money with Google/Facebook. You spend money with 3rd party vendors to work with Google/Facebook. And you always need to pay the paper people. Google/Facebook/3rd-Parties/Paper-Folks get paid, so Integrated Marketing is good for them.

What do you get for your investment?

You don't get File Power, and File Power is what you need to be successful.

If Integrated Marketing mattered, wouldn't catalog marketers have been the most successful direct marketers of all time? Shouldn't a catalog coupled with Google coupled with Facebook outperform everybody else who simply leverages Google/Facebook (or worse, those who don't leverage either properly)???

If Integrated Marketing mattered, wouldn't mall-based retailers have thrived with all of these channels and all of these 3rd parties working with Google/Facebook to drive mall-based traffic? Why are malls dying if Google/Facebook are so essential to driving mall-based traffic?

There's the common-sense portion of Integrated Marketing that is reasonable ... but do not expect to generate any File Power from the effort.

File Power, as you know, is the interest rate based on today's purchases. Integrated Marketing too often results in cannibalization (at a cost, no less) instead of incremental value. You simply pay third parties to facilitate an order that would have happened anyway. Others get paid, you end up with a minimal increase in sales coupled with a bloated expense structure.

Kohl's ... Weak File Power

Industry pundits lauded Kohl's for accepting returns from Amazon.

From a data standpoint, it's fun to collect data on a competitor. When your customer enters your store, you record the fact that the customer is returning something from a competitor. This causes the customer to be "different" ... the customer moves into a very different segment in your File Power structure.

But it doesn't mean that the customer is more valuable. 

It does mean that the customer will behave differently in the future.

The theory is that you get the customer into the store for an incremental visit, and that incremental visit results in an incremental purchase.

The reality is that you are processing a return. The reality is that the visit and any potential purchases are not 100% incremental. They might only be 20% incremental. That's good for the p&l, but it is a classic case of adding a weak amount of File Power to your business. 

We're in an odd state right now ... e-commerce is fully mature ... mobile is essentially mature ... and File Power is hard to come by. It's like the early 90s all over again. 25-30 years ago, pre-internet, merchandise was critically important. We're headed in that direction once again.

Wayfair File Power

Layoffs ... they happen to many companies (click here). Sometimes they happen because the business is struggling. Sometimes they happen because the bottom portion of the employee base (i.e. the least valuable ones or the least productive employees) needs to be trimmed. You never truly know why layoffs are happening. I was once asked to downsize my team and was then paid an unexpected "retention bonus" weeks later.

Here's what we do know:

• Through nine fiscal months, gross margin was 23.8% vs. 23.1% the year prior.
• Through nine fiscal months, advertising was 11.9% of sales vs. 11.4% the year prior.
• Through nine fiscal months, selling/general/administrative expense was 17.5% vs. 15.1% the year prior
• Through nine fiscal months, loss before taxes was -9.9% vs. -7.5% the year prior.
• Through nine fiscal months, Wayfair lost $652,860,000 on sales of $6,593,967,000.
• In the past year, Wayfair stock is down 50%, shaving off about seven billion in shareholder value at a time when the stock market has gone bonkers.

Do you understand how woefully awful that level of performance is? It takes a special amount of "something" to lose that kind of money.

It wasn't long ago when the catalog industry praised Wayfair for adding catalogs to the marketing mix ... suggesting this was a company that "gets it". Catalog industry conferences invited Wayfair to speak about catalogs. Over a glass of wine, catalog professionals winked at each other ... knowing about the power of catalog marketing.

What nobody seems to understand is that File Power is far, FAR more important!!

When you acquire 100 customers, you have to generate sufficient downstream value to offset what you lose when you acquire a customer. If gross margins are low, you need even more file power to make up for low gross margins. If advertising expenses are high, you need even more file power to make up for low gross margins. If SG&A are high, you need even more file power to make up for low gross margins.

Can this story be changed?

Absolutely!

Will this story change?

The numbers don't look good.

When your paper rep or industry vendor tells you that Wayfair is smart to add catalogs to an integrated marketing approach, share the p&l figures above, and ask the pundit to defend the company as a whole. It's clear that, at this time, Wayfair does not generate enough file power from downstream customer response to make the p&l work. That's a shame, because it is obvious that customers like the brand, or the brand wouldn't generate nearly ten billion a year in annual net sales.

A Classic File Power Catastrophe

Macy's, known in 2014 as "America's Omnichannel Store" by a Management Team no longer associated with the brand, represents a Classic File Power Catastrophe.

Think about it this way ... it's likely you run some sort of analysis that corroborates what I've analyzed. You have a customer, a pure retail shopper. This customer is expected to spend $400 in the next year. Then, you demand that the customer interact digitally with your brand. And the customer listens to you! She purchases online.

• Old Trajectory = $370 in-store, $30 online.
• New Trajectory = $270 in-store, $170 online.

For this customer, you just lost $100 of in-store File Power. Meanwhile, your brand gained $140 of online File Power. The brand benefits by $40, but the in-store retail channel suffers.

Now imagine what happens when Macy's does this "at scale".

• Stores lose a third of their traffic.
• Between 2016 - 2020 (projected), Macy's will have closed 30% of their stores. Thirty percent!!!

Guess what happens when you close a store?

• Old Trajectory = $270 in-store, $170 online.
• New Trajectory = $50 in-store (at other stores), $200 online.

You take a customer with $440 of File Power and convert the customer to one with $250 of File Power when you close a store.

I've been analyzing store / online dynamics since early 1996. This pattern repeats, over and over and over again.

The same pattern happens in catalog marketing when you convert the customer from old-school channels to online marketing channels.

It repeats.

Over and over and over again.

And we keep repeating the same mistakes, over and over and over again.

You measure File Power, and you forecast what is likely to happen in the future, right?

If you don't measure this stuff, you become Macy's.

If you measure this stuff and have great merchandise, you become Sephora, opening 100 stores in the next year.

A Classic Case Of Applying File Power Incorrectly

Alright peeps, here's what happened.

Over the past three years, this brand made a choice to maximize the short-term while squelching the long-term.

The segments that are growing have solid File Power ... but are segments associated with old-school business models (call center, print).

The segments that are shrinking have poor File Power ... but are segments associated with modern e-commerce (online marketing, paid search, natural search).

This is a classic mistake.

And it is a mistake that sooooooooooooo many companies make. The company has their back against the wall, and has to make numbers in the short-term in order for the p&l to work. So the company doubles down ... the company markets to existing buyers with predictable behavior via old-school channels.

This strategy almost always works in the short-term. There's proof that the strategy worked, too ... the customer file barely grew but File Power improved, yielding a stronger customer file.

This strategy almost always fails in the long-term.

How are you going to modernize your business if you are constantly trying to squeeze every last penny out of old-school buyers?

And I get it ... this company realizes that the "modern" buyer doesn't have great File Power. This company "runs the numbers" and decides to stay away from low-value customers. Then marketers wonder why it has become so disconnected from modern business? 

Many old-school brands go through a painful transition.

1. They trade old-school valuable customers for modern less-valuable customers.
2. They evolve to generate 1.5x - 2.0x as many modern less-valuable customers in an effort to maintain profit.
3. They move into the future.

Old-school brands that do not go through this transition face a more painful future. So many catalog brands (for instance) ended in 2019 because they assessed File Power incorrectly.

There's a reason I've been discussing File Power for the past six weeks.

File Power is the story of 2020.

If you aren't actively measuring File Power in 2020, you may well be treating your business like it was 2002 instead. That's a problem.

Measure File Power. It's terribly important to the future health of your brand.

File Power Is Weaker In Various Segments

On a percentage basis, there are four segments that have shrunk by at least 29% over the past three years:

Segment 11.

Segment 12.

Segment 22.

Segment 23.

There are other segments that are shrinking as well, but these four segments represent the "epicenter" of File Power declines.

What are the attributes of customers in segments 11 / 12 / 21 / 23?

Segment 11 = $58 in the past year, mostly new buyers, existing merchandise, online marketing and search, merchandise categories 4/10/15/16/20.

Segment 12 = $68 in the past year, mostly new buyers, existing merchandise, discounted merchandise, online marketing and search, merchandise categories 4/10/15/16.

Segment 22 = $109 in the past year, some activity 13-24 months ago, online marketing and search, merchandise categories 2/4/7/20.

Segment 23 = $135 in the past year, some activity 13-24 months ago, new + existing merchandise, online marketing and search, no specific merchandise preference.

This one is easy, isn't it?

This brand decided to de-emphasize online marketing.

Tomorrow I'll discuss the meaning of the changes in File Power associated with this brand.

Change Is Happening

Here's the business we've been evaluating.

This time, we analyze the change in the twelve-month buyer file by each of the twenty-five customer performance segments.

This analysis is important, because we want to understand how our business is evolving, and we want to understand if this is good/bad for the future of the brand.

Today we analyze the segments that are growing.

The segments that are growing are 31 / 41 / 51 / 52 / 53. In other words, the upper right hand corner of our customer grid is growing.

Who are those customers? I ran an analysis to measure the average customer attributes of these buyers.

• 31 = Newer buyers, full price existing merchandise, search-centric buyers, $108 last year. Merch Categories 12/13.
• 41 = Average buyers, full price existing merchandise, search and online buyers (i.e. online marketing driven), $151 last year. Merch Categories 12/13.
• 51 = Good buyers, full price existing merchandise, call center and online buyers (i.e. print driven), $223 last year and $171 the year prior. Merch Category 13.
• 52 = Good buyers, full price existing merchandise, call center buyers (highly print driven), $301 last year, $236 spent the year prior. Merch Categories 8/12/14.
• 53 = Very good buyers, full price existing merchandise, call center buyers (highly print driven), $451 last year, $361 spent the year prior. Merch Categories 12/14/21.

The answer becomes really clear.

• This brand pushed existing items from categories 8/12/13/14/21 mostly via print, causing the customer file to grow, ultimately increasing File Power.

Of course, there are negative file counts in the table. Tomorrow we'll explore the negatives, so that we have a complete picture of how this brand is changing.

This Brand Is Making Progress!

Three years ago, this brand had 1,127,132 twelve-month buyers.

Today this brand has 1,149,212 buyers.

In other words, the customer file isn't growing ... 2% growth over three years isn't growth, it's a rounding error!

I can multiply the number of customers from three years ago by the File Power associated with each segment. I can multiply the number of customers today by the File Power associated with each segment. By doing this, I can compare File Power three years ago to File Power today.

• Average File Power Today = $177.32 per 12-Month Buyer.
• Average File Power 3 Years Ago = $168.21 per 12-Month Buyer.

Ok, now we're getting somewhere!

The average 12-month buyer is stronger today than three years ago.

This analysis leads to the following conclusions:

• The 12-Month File is 2% Bigger.
• The Average 12-Month Buyer Has 5% More File Power Than 3 Years Ago.
• In Total, The Brand Has 7.5% More File Power (2% Bigger File, 5% More Value).

That's good news!!!

Tomorrow we'll explore how the customer file changed, ok?

25 Segments In Action!

I took two-dozen-ish customer attributes and leveraged a Factor Analysis to create two factors ... the two factors were divided into quintiles ... and then customers were placed into each quintile by factor, giving us 5x5 = 25 File Power segments.

There - we got the geeky math out of the way!!

I then measured how much customers spent in the next year by segment, giving me a solid estimate of File Power.

We easily see that customers falling into segment 55 have the most File Power ... they are worth $864.43 in the next year.

In a separate analysis I evaluated who the customers are that reside in segment 55:

• Average Spend 0-12 Months Ago = $1,158.
• Average Spend 13-24 Months Ago = $1,101.
• Purchases Full Price Items.
• Skews to Email Marketing, Doesn't Buy via Search.
• Tends to Purchase via E-Commerce, Minority of Dollars in Stores.

In other words, high-value "omnichannel" customers.

Now look at the middle/bottom portion of the table.

• Customers in Segment 55 3 Years Ago = 53,971.
• Customers in Segment 55 As of Today = 62,515.

This brand is growing the number of customers in the highest value segment ... good work!!! This is good news for File Power.

Is the brand growing customers across all segments? More on that topic next.

End of DMNews / DMN

I'm at Lands' End, way back in 1992, and we were in the process of bringing in a new set of Marketing Managers. My boss was named one of the new Managers ... and our PR team made sure that a blurb was put in DMNews. There it was ... the new copy of DMNews was delivered via the mail, you opened up to page 8 and the announcement was there for the entire industry to read about. You'd hear the phones ringing across the office (#landlines), people actually read the content and called our Managers to congratulate them.

In 1992, DMNews was a print publication that you couldn't wait to receive, simply because there was so little news publicly available.

DMNews had a front-row seat for the dramatic evolution and ultimate contraction of the catalog industry, reporting pundit thoughts ... frequently off-base pundit thoughts (search their site for thoughts about Amazon from 2001-2002), but interesting stuff nonetheless.

The very forces that DMNews reported on were the forces that tore apart their own industry.

And with the death of what ultimately transitioned into DMN, we've witnessed the full evolution and contraction of the catalog industry ... an industry that peaked with the J. Peterman character on Seinfeld twenty-five years ago ... an industry that has witnessed the withering of key conferences and key publications and key brands and the utter collapse of the catalog co-op ecosystem. All of which, of course, have been replaced by entities that are much stronger and newer, covering e-commerce and mobile and the current implosion of retail. 

Those entities will, one day, be replaced as well. That's how this works.

90% of my readers will see this and start snoring ... this will have no meaning, because what was relevant in 1992 has no direct application to what matters in 2020. And that's ok. But think carefully about where you get your information today ... maybe you love attending Shoptalk for free ... there will be a day when that entity is gone as well. That's how this stuff works. 

Enjoy and appreciate what you have today.

Work hard to create something that will be viable tomorrow.

So Many Factors Go Into File Power ... How Do I Combine Them All?

About ten years ago I introduced a concept called "Digital Profiles" ... I used a Factor Analysis to reduce a whole bunch of customer attributes into just two dimensions ... and then segmented customers based on the values of two dimensions.

I've been using the methodology ever since. You might not see it directly referenced in the projects I work on with you, but it's there, lurking behind the scenes. It's one of the primary ways I figure out why your business is changing.

Well, if it is one of the primary ways to figure out why a business is changing, then it should be a good way to figure out how File Power is changing over time, right?

In the geeky plot above, I enter two dozen merchandising (MR variables) and marketing channel (CH variables) variables into a Factor Analysis. Points that are far away and in any of the outside edges of the four quadrants represent customer attributes that are driving customer behavior.

• Root12 and Root24 represent the square root of 12-month and 13-24 month spend. Turns out that customers who spend more behave differently than everybody else. Who knew?
• MR15 / MR19 / New / Bel represent customers who buy new merchandise from merchandise categories 15/19 at prices below the historical average for the item. In other words, these categories release new items that are either included in promotions/discounts or are quickly liquidated.
• MR13 ... customers who buy from merchandise category 13 behave different than other customers.
• CH09 / CH11 ... customers who buy from these two marketing channels (which were Paid Search and Natural Search, FYI) behave different than everybody else.

Now that I know this, I score the customer file every three months going back three years, and I look to see how customer behavior has changed. 

In addition, I score the file a year ago, segmenting customers into 25 unique segments based on the factors above. This allows me to measure future value (next 12 months) by segment. Guess what? I now have a measure of File Power that I can consistently evaluate over the past three years.

Now I have something!!

More on that topic tomorrow.

Ruining File Power

Here's how you do it. Your File Power is great, but your ability to generate orders without advertising is not great. As a result, you leak out all of your File Power to third parties.

This is what happens to File Power when you manage the business appropriately ... generating orders without the need for advertising.

That's a huge difference.

In fact, you need around 7 times the File Power to make up for the fact that you cannot manage your business without advertising, discounts, and promotions.

Late-stage brand health looks like the first graph, at the top of this post.

A healthy brand looks like the second graph, at the bottom of this post.

Look at your profit-and-loss statement. What does the statement tell you about your ability to manage File Power appropriately?

Best Image of 2020

Here's the image (below), and here's the source (click here).

Look at the "Sales and Marketing" portion of the equation. That's what a 35% ad-to-sales ratio does in combination with a 56% cost of goods sold.

Future purchases are greatly influenced by past purchases.

• Customers who bought organically without the need for advertising in the past tend to not need advertising in the future. Hint - these customers are VERY PROFITABLE.
• Customers who purchased because of print, television, radio, Google, Facebook etc. in the past tend to purchase because of advertising in the future. Hint - these customers ARE NOT VERY PROFITABLE ... requiring you to get more customers to achieve profit totals (while constantly deflating EBITDA as a percentage of net sales).

Catalogers (in particular) are wholly guilty of this dynamic. They pay co-ops for new customers (at ever-decreasing response rates). They pay Google for new customers. They pay Facebook for new customers. And then they pay printers and paper reps to keep the paper flowing every three weeks.

You can increase File Power by advertising, no doubt about it.

But you can also decrease/destroy profitability while greatly aiding third parties in the process.

Buying File Power via Advertising

There are a lot of unique ways to increase file power. Some of the ideas you absolutely hate ... McDonald's releases their McRib sandwich infrequently (#chomp), and when they do customers place an incremental order they otherwise wouldn't place. File Power increases ... you take a customer who would buy 17 times a year at $15 a transaction and you convert the customer into a customer buying 19 times a year at $15 a transaction ... you just added $30 of file power. Subtract cost of goods and all of a sudden you have margin dollars.

Of course, McDonald's has to purchase File Power ... how are you going to find out that they're offering McRib? They have to advertise McRib. It typically costs money to advertise. The secret, as you know, is to spend less on advertising than the margin you generate from the file power you obtain.

In e-commerce, two brands obtain File Power at your expense.

1. Google.
2. Facebook.

When word of mouth isn't sufficient to generate sales increases, companies leverage advertising. They purchase file power. Meanwhile, Google and Facebook thrive when companies purchase file power.

Think about the dynamic this way.

• You spend $50 to generate 100 clicks with Google.
• 100 clicks yield 2 orders at $100 each.
• Cost of goods is 60%.
• Transactional Profit = 2*$100*(1-0.60) - $50 = $30.

In the short-term, you give Google $50 so that you earn $30.

What would have happened if you could have generated the order organically?

• 2 orders at $100 each.
• Cost of goods is 60%.
• Transactional Profit = 2*$100*(1-0.60) = $80.

When your brand is "remarkable" you generate $80 of margin.

When your brand is average, you generate $30 of margin and Google generates $50 of revenue.

This is where the CRM guru talks about File Power ... you now have a recent buyer, and recent buyers have more file power than inactive buyers. True!

The problem, of course, is that once a customer buys via an advertising channel, future file power is compromised by the fact that the customer frequently needs advertising to buy in the future.

Now that the customer purchased, the customer might have the following file power.

• 50% chance of buying again next year.
• 2 expected orders at $100 each.
• File Power = 0.50*2*100 = $100.
• Gross Margin = 40%.
• Margin = 100*0.40 = $40.

The customer who buys organically might be expected to generate a 5% ad-to-sales ratio in the future. This means the customer will generate $40 - $100*0.05 = $35 of future contribution.

The customer who buys because of advertising might be expected to generate a 20% ad-to-sales ratio in the future. This means the customer will generate $40 - $100*0.20 = $20 of future contribution.

Is it any wonder that Google/Facebook want you to keep on advertising?

When you buy file power, you alter the future amount of profit you generate. You play a fundamentally different game, one that becomes harder to win ... one that facilitates the transfer of wealth from you to your advertising partners. 

No wonder your advertising partners love you!