Imagine What You Are Truly Capable Of ...

This was the largest Elite Program run of the past four years. The run required an open mind, something that sometimes eludes me.

What did I observe during all of these runs ... all of these companies ... all of these challenges?

It takes a lot of courage to face great uncertainty, and then have to make significant decisions that could well jeopardize your future. You ... yes, you reading this ... you made important decisions. You could have been wrong, so wrong. Some of you were wrong!! But you made your choices, and you lived with your choices. Nobody ... not a soul ... has the right to judge you for making difficult decisions under such challenging circumstances.

You might feel comforted to learn that (by and large) your decisions were right. If you cut back on your marketing budget and you observed that you made a mistake, you corrected your course. If you saw that business was +40%, you reacted and harvested as many new customers as possible. If you were spending $100,000 with Google and the data said you should spend $200,000, you spent $200,000 ... and you made the decision from home knowing you didn't have the inventory to support every customer and you were willing to disappoint some customers for the opportunity to please many, many more customers.

You closed distribution centers and offices. You opened Zoom and Skype. 

Some among you exceeded 2019 sales by between 50% and 120% during April and May. Yes, you were blessed, but you took the blessings given to you and you amplified your opportunity. You did that. Nobody else did. You did. You turned +35% into +85%.

If somebody told you on Thanksgiving Day 2019 that, from home, via video, you'd transform your business and grow sales by 50% in April/May and you'd be in quarantine ... you probably couldn't have imagined HOW that was possible. And yet, so many of you pulled your brands through this mess. Yes, you. You did it. 

Some of you faced demand catastrophes ... -30%. You also dealt with this from home, and you didn't get any of the benefits your peers enjoyed. They'll be paid bonuses for amplifying good luck, you'll take home a 20% pay cut for mitigating a disaster. Congrats! In many ways, your work was more important. You kept a brand alive when it flat-lined. That kind of effort doesn't get covered in trade journals, but it matters.

Whether you were -30% or +120%, you changed how business will operate ... forever. You had to change it.

I must say, I am so proud of all of you.

We focus on our differences. We lambast our peers because 3% of their belief system is in direct opposition to our belief system.

But since March 11 (what I call "Tom Hanks Day"), alone, we all worked together, each of us trying to solve a complex puzzle with highly incomplete information. Regardless of the "results", all earned an "A" for the processes put in place ... a process you couldn't have fathomed on Thanksgiving Day 2019.

Imagine what you are truly capable of ... given what you accomplished in the past 3-4 months?

Downstream Value

Take every customer you acquired between March 11 and the end of June, and measure their future spend in comparison to customers acquired over the same timeframe over the past 3-5 years.

What does the result tell you?

I'll leave the analysis hanging right there ... you need to go do your homework. Elite Program members already have a good idea if a COVID-bump helped their business this Spring, and they have a reasonable idea if the customers acquired during the pandemic are off to a good start or not.

The Great Experiment

I am on the verge of finishing all of the Elite Program runs. 

There were a lot of them this time around, and for good reason. This time, we had to ferret out the impact of the coronavirus on business.

It's not easy to ferret out the impact of the coronavirus on business.

Why?

Because of "The Great Experiment".

Some of you saw the quarantine coming and decided to stop spending money on housefile customers.

Some of you saw the quarantine coming and decided to stop spending money on acquisition-centric channels (Google, Facebook).

Some of you saw the quarantine coming and decided to wait ... you decided to read what was happening and then react to it. This turns out to have been the right decision for most of you ... so many were suddenly blessed with what I called a "COVID-bump" and responded by pouring gas on the marketing fire, creating a blaze of new customers that will pay back for quite some time.

Some of you did nothing.

Some of you exhausted your inventory levels trying to fill every possible order ... you maximized your opportunity.

In this run, I saw many strategies employed. Nobody was smart enough to know what would happen prior to March 11. Everybody, however, had the potential to adapt quickly once data rolled in ... 

... and that's the lesson of this run.

Don't let your heart become hardened by what you think you should do ... watch what happens, and react accordingly.

Patterns Repeat

That's why we refer to them as patterns.

Have you ever noticed how feckless most loyalty programs are?

It's not the fault of the loyalty program, that's for certain. Or the marketer. The marketer is paid to figure out a way to increase loyalty.

No, customers aren't loyal because the brand offers merchandise that is purchased at infrequent cycles.

As a consultant, you see this pattern repeat constantly. You measure annual repurchase rates, and they're about 22%. Only 11 in 50 customers who bought in 2019 will buy again in 2020. That's not a high rate. The rate is usually a "merchandise-driven" rate. Maybe you sell gifts. How often does the customer need a Christmas gift? Once a year? Yeah, well, that right there precludes loyalty. The customer isn't going to buy in August.

These same patterns repeat in the majority of my project work. The brand I'm analyzing offers merchandise that is only "needed" once or maybe twice a year. The customer won't ever become loyal because the brand doesn't sell "repeatables" ... merchandise that the customer must buy over and over and over again.

If we want to increase customer loyalty, maybe we bypass the traditional loyalty program and instead focus on what we sell? I mean, these patterns just keep repeating ... over and over again, right?

Speaking of Patterns

Here's what a typical day looks like ....

1. I write some code.
2. I run the code
3. It might take 5-10 minutes for the code to run.
4. I look at a curated list of "pundits" on Twitter, searching for themes among their missives.
5. 8 minutes go by and my program finishes running.
6. I analyze data.

It's in the eight minutes that a program runs that I look for patterns. I look to see what the pundits are saying. Are there themes in their comments? Is there news that they're responding to? Where are the pundits being led astray?

Pundits are always being led astray. The "news of the day" constantly pushes and pulls pundits in odd directions.

CNBC will report that Neiman Marcus is going bankrupt ... and the pundits respond with a "THIS IS WHAT IT MEANS" publication. It's almost never "what it really means", but it fills the void and allows the masses to feel like they're being strategic.

You've always got to look a few levels past what the pundits are saying. When a retailer goes bankrupt, you want to think ahead 3-5 years. Will the retailer still be in business? If the retailer is still in business, has anything fundamentally changed? Will the customer base change? Will the merchandise change? Will the expense structure change? Will the management team change? Is the fundamental flaw in the business model being addressed? What happens if the fundamental flaw in the business model is addressed but the competition fails, causing less traffic overall? These are questions you ask yourself ... you don't wait for a pundit to publish a "THIS IS WHAT IT MEANS" article!

Once you answer the question for yourself, once you develop your own thesis, you'll notice that there are patterns that are lying there, ready to be discovered.

You'll notice that A-level malls are likely to thrive ... while marginal malls are finished.

You'll notice that there are affluent customers who will keep affluent brands afloat.

You'll notice that there are lower income rural customers spending $250 a square foot at a Dollar Store ... and that pattern will reappear over and over and over again ... and you'll start asking yourself what that means ... not to Macy's or JCP ... but what that means to Target and Walmart? And you'll quickly realize that the darlings of 2020 ... Target & Walmart ... have issues in 3-5 years. You'll investigate 10K statements and figure out that Dollar Tree / Family Dollar do nearly $24,000,000,000 a year in net sales, and produce gross profits that are equal to or better than Target / Walmart, and that will cause you to really start thinking, because the pundits told you to focus on Amazon when you should be been focusing your thoughts elsewhere. The Amazon thought will lead you to the truth that these dollar stores didn't embrace e-commerce and therefore force the customer to shop the store and you'll immediately understand the feckless nonsense of the omnichannel thesis. Hmmmmmm.

You'll realize that these stores are being opened in areas where there isn't necessarily a nearby Walmart or Target to compete against a dollar store. You'll see inventory turns of 4x/year and then you'll think even more about the fact that you can't move your own merchandise that fast.

You'll realize that in an 83 page annual statement (click here) they mention the word Marketing one (1) time. Once. Won't that disappoint all of the digital marketing pundits out there?

You'll realize that the world changed and that the pundits almost never talk about dollar stores and you'll realize that the pundits are missing the story and you'll figure out the pundits don't really know what they're talking about.

That level of pattern detection will cause you to become a detective.

And by being a detective, your co-workers will perceive you as being "strategic".

Once you're perceived as being "strategic", doors will open.  

All because you are detecting patterns.

Pattern Detection

Back in the day my team supported an EVP of a business unit. This person had virtually no interest in us whatsoever. Oh, he enjoyed putting us through our paces ... the re-work ... the claiming that we never produced documents for him.

Once was what it was. The second time it happened you wondered what was going on? The third time? This was a pattern. And once you establish a pattern, it's up to you to figure out what to do about the pattern.

My team cleared our plans with the SVP of Marketing and the CEO. We didn't even share the plans with the EVP in charge of his own business until "his boss" approved the plan we authored.

Now this didn't go over well with the EVP of the business unit.

But it saved my team a lot of re-work.

And the performance of his business improved. Ultimately nobody cared that we cut the actual owner of the business unit out of the plans for his business, as long as we delivered acceptable business results.

If you want to be a Leader in business, you'll have to become good at detecting patterns. Customer patterns, website usage patterns, Executive Management patterns, they all become important as your career progresses. Start practicing this skill right now.

Pickleball Injuries

So our pickleball community opened up about six weeks ago. After being locked in a house for several months, people lost their minds. They played, and played, and played multiple times a day. They played ten (10) times a week, in temperatures over a hundred degrees.

For 3-4 weeks, that worked out really well.

Then the injuries started to pile up.

Calves.

Groins.

Knees.

Abdomens.

Back injuries.

Plantar fasciitis.

This happens in marketing all the time.

Does your average customer (notice I said "average") really need 18-24 catalog mailings per year? Not even close. But we overdo it, don't we?

Does your average email subscriber (notice I said "average) really need 250-300 pushed email campaigns per year? Not even close. But we overdo it, don't we?

My first job out of college was at the Garst Seed Company. My job was to analyze numerous experiments ... one of my favorite experiments was one where we "overdid it". We'd plant corn hybrid plants increasingly closer and closer to each other until they were so close together that they crowded each other out and generated no incremental yield. The plant breeder PhD's would take me out into the field to show how puny the crowded corn hybrids were vs. those spaced out properly. That lesson stuck with me ... to this day.

You cannot "overdo" it ... in anything.

When A Consultant Tells You What You Should Do

Arizona - my State ... is now one of the hottest Coronavirus regions in the world, in terms of cases (which I get is tied to testing and hospitalization isn't at levels like in other hot spots and deaths are FAR below other hot spots and blah blah blah blah I get it). But we're starting to cook here, regardless. 

You wouldn't know it by visiting the grocery store. Aisles are clearly marked ... you can walk in only one direction. The 15% of shoppers wearing masks adhere to the directive ... 85% of shoppers are not wearing masks and they're doing what they want. If they want to cut in front of you and touch all of the Brussels Sprouts, they'll do it. You're not going to impede upon their freedom.

Arizona had a short quarantine period, and was quick to open for business. From late March to late April, you simply never ran across somebody who had the virus. You'd think the virus was a hoax, because you didn't know anybody who had it.

In mid-May I ordered a carry-out pizza from a restaurant. When I arrived, there were 70ish people in the restaurant ... two or maybe three tables open with every other table filled with up to ten people who were all actively playing a trivia game. No masks ... not from the staff, not from the patrons, certainly not from the trivia host who belted out instructions into a microphone.

Like anywhere else, this wasn't happening for a lack of education. Everybody was told to wear a mask. Everybody was told to social distance. Everybody was told to stay home ... all the freeway signs told you to stay home.

And yet ... well ... here we are.

If you've ever been a consultant, you thoroughly understand this behavior.

Allow me to give you an example.

I launched this blog in 2006. During that time I've written ... hundreds of times ... of the importance of mail/holdout tests in print and email marketing. In my project work, it is common to generate a million dollars of easy profit for every $100,000,000 in annual sales a brand generates annually. Execute mail/holdout tests, apply the results on an annual basis, and become much more profitable. It's not hard.

I'd speak at a conference ... somebody would introduce themselves to me. The individual had been a long-time blog reader ... since 2010, for instance!! We'd talk about random stuff, but eventually land upon mail/holdout tests. I'd ask what their tests told them. 9 times out of 10, here's the response I'd get:

• "Oh, we don't execute mail/holdout tests. And we aren't going to. What other ideas do you have to help us become more profitable?"

That response ... "what other ideas do you have to help us become more profitable" is just plain offensive. I gave you the idea ... FOR FREE ... hundreds of times ... and you chose to ignore the advice ... over and over and over again. Why?

Why?

If you are a mask-wearing advocate and you are fed up with people who won't wear a mask and won't take steps to keep everybody safe ... ask yourself if you implement the concepts you've been given for free on this blog 200+ times a year for fourteen years for free? If you haven't done that, well, hmmmm, interesting, right?

I know I've been guilty of this style of hubris over my career. I can't tell you how many consultants waltzed into Eddie Bauer and Nordstrom during my tenure and told me what to do and as they walked out of the building I'd begin immediately doing whatever the heck it was that I wanted to do.

It's human nature, folks. We do what we want to do. All of us. Maybe we're strict advocates of doing the right thing in one area but then we'll eat Cheetos every night in spite of knowing it's the last thing we should eat.

When a consultant tells you what you should do, vet the consultant. Maybe the person is a fraud. Maybe the person is an expert. If the person is an expert, keep your mind open to what the person is saying.

Really, Really Bad Models

Two things about models, for those of you considering a QuickScores project.

First, industry vendors attack me (I know this because you tell me they do this when you meet with them) by saying that my models are too simple ... there are only a handful of variables and the techniques (logistic regression, ordinary least squares regression) are "old school". They attack, of course, because they're trying to sell something complicated. When they attack me, ask the attacker what s/he thinks about the term "parsimony", because if the person is a credible stat expert they know about the importance of building a model with as few variables as possible. If they understand the term and the meaning of parsimony, ask them why they are trying to sell you something that is more complex than necessary?

Second, just because a person is building you a model doesn't mean that the person has any clue whatsoever what they are doing. I don't care that they've been employed by "Vendor X" for the past four years and have worked with all of the "Leading Brands". Why suggest this? I've told you the story ... sitting in the Executive Conference Room at a "major brand". On one side of the table was the vendor, saying that their model and 1,033 variables (it was more than a thousand, yes ... more than a thousand) was the best option for the brand. On the other side of the table was a PhD researcher hired by the "brand" to "in-house" math-related stuff. His model was reasonable ... maybe 10-15 independent variables ... but his dependent variable was complete nonsense. He was predicting who was going to buy from the brand, not who was going to buy from the catalog. I asked the researcher why he didn't calibrate the model toward A/B style mail/holdout tests, tests that clearly showed that retail buyers had NO INTEREST in catalogs whatsoever and therefore shouldn't be included in any circulation plan? The conversation went something like this:

• Researcher:  Are you actually questioning me?
• Kevin: What?
• Researcher:  What gives you the right to even question me or my credentials?
• Kevin:  Because you don't know what you are doing. You have mail/holdout tests that clearly tell you that 80% of your customer base could care less about catalogs and shouldn't be mailed. Why are you building models that will prioritize those customers?
• Researcher:  You clearly know nothing about building a brand.
• Kevin: What you are doing will cause you to generate less profit, thereby harming your brand.
• Researcher:  I'm mailing who I want to mail, and those will be customers who are loyal to the brand.
• Kevin:  Do you agree that if a customer won't spend incremental dollars because of catalogs that the customer shouldn't receive a catalog?
• Researcher:  No.
• Kevin:  Why not?
• Researcher:  Just because I don't. This conversation is over. I swear, you don't know anything about math, and "Vendor X" really doesn't know anything about math.

When the CFO asked me who to believe, I told the CFO to believe me.

The CFO again asked me which party (vendor or in-house employee) to believe? I said "neither".

I was not asked back for a few years.

Here's the problem ... if you aren't trained in statistics ... and you don't need a ton of training ... you don't know ... you COULDN'T know ... that you are being bamboozled by an "expert". There are times the expert doesn't know that the expert is clueless.

Our industry uses a lot of really, really bad models. The bad models cost us sales, and cost us profit.

Give a QuickScore a try. And if that's not the direction you want to go in, no worries. But then please figure out how the heck you are going to vet the experts when you don't have the skills to vet the experts.

We've Used The Same Model For 12 Years. It Still Works!!

This topic comes up in many "QuickScore" project proposals.

You hear the comments ... "We built our matchback algorithm in 2007 and we're happy with it and we aren't going to do any print mail/holdout testing because if we did that we'd lose sales and who wants sales to decrease? We are using an RFM+C segmentation strategy for print, and we established that back in 2008. It still works!! Everything is great. So we don't think that spending $8,000 on QuickScores is a smart idea, but we wanted to hear about your methods just in case we wanted to change something internally, thanks."

Mind you, a company like this spends $750,000 a year with catalog co-ops and grumbles all the way to oblivion wondering why those names perform at 40% of the level they performed at 10 years ago, but whatever, $8,000 is just too much to spend to modernize.

I'm no different. My car is nearly 13 years old. It still works!!

Well, there is a big difference. I've driven a lot of rental cars, and there are very few that drive as well as the 13 year old car I own. And I've only had to spend $1,800 fixing the car in the past decade. 

Meanwhile, you with the "same model you've used for twelve years" ... have you had a chance to see what other models look like when applied to your business? How do you know that what you are doing "still works"?

How do you know that what you are doing "still works"??

Last Chance for This Run of the MineThatData Elite Program

In this run, we're going to look at the impact of COVID on your business. This high-level analysis focuses on the style of metrics I use in more-detailed analytics projects.

Cost = $1,800 for the first run, $1,000 in each subsequent run, future participation is fully voluntary.

Five years of data, one row per item purchased.

Data is due by June 15.

Payment is due by June 15.

Analysis will be completed by June 30.

Training The Customer

We use price and promotion to train the customer how to behave.

It's hard to analyze a first purchase or a second purchase and learn anything about customer pricing preferences. But by the time the customer purchases for the third time, behaviors become solidified.

For many of us, it takes 6-18 months for a customer to get to a third purchase. During that time the customer will see 300 email marketing messages. The customer will know our promotional cadence. The customer will not believe that 20% off is relevant, because the customer has 60 examples of cases where you lied about 20% off and then offered 40% off. The customer will wait until you buckle.

I've mentioned this test numerous times ... in 1998 at Eddie Bauer we promoted all customers who had not purchased in three months. They all got 20% off ... or more. Then we noticed that purchase response had unnatural "bumps" at three months. So my team executed a test. We did not promote customers for six months, period. What happened?

1. Customer response dropped dramatically for customers with recency = 1 month / 2 months / 3 months.
2. Customer response increased significantly for customers with recency > 3 months.
3. After six months, there was no difference in response or spend. There was, however, a huge increase in profit among customers who were not promoted.

We train the customer to behave the way we want the customer to behave. There are external factors (i.e. lower relative income) that we have to react to, of course, but we play a role in training the customer.

So let's train the customer appropriately, ok?

Deflationary Trends

When you read that Nordstrom generated 60% of sales in the prior fiscal year (pre-COVID) from ONLINE and RACK, you realize that something very different is happening among their customer base (click here).

Think about it this way.

• In 2000, the customer would have spent 85%ish of sales in Full-Line Stores, 10% in Off-Price Rack Stores, and 5% via Online/Catalog.
• In 2019, the customer spent 40% of sales in Full-Line Stores, maybe 35% in Off-Price Rack Stores, and maybe 25% Online.

So you've got a fundamentally different dynamic that you are managing, right? While this isn't mathematically fair to say, it's like there has been an implosion of the Full-Line Store concept resulting in a third +/- of all traffic to disappear. It's not a third, that's not how the math works, but for illustrative purposes it should cause you to think, and that's what I'm asking of you, right?

A company like Nordstrom builds two separate business units ... growing one while the other sets up for contraction.

Dollar stores are different ... they sprouted up and continue to expand as the middle class is whittled away. They built a customer base because their customers didn't have a choice ... less relative income, a lack of quick access to a Walmart. Dollar stores go up, mall-based stores die.

Now we turn to your brand.

The most common deflationary trend surrounds margin manipulation.

• 2000 = Buy an item for $19.99 ... cost of goods is $9.00, gross margin = $10.99.
• 2020 = Buy a comparable item for $24.99 ... at 30% off ... cost of goods is $6.50, gross margin = $10.99.

See what happened with margin manipulation?

• The customer paid $17.49 ... not the $19.99 the customer paid in 2000. If you adjust for inflation, well, the customer really paid $11.77 in 2000 dollars. Similarly, you made less money after adjusting for inflation ... but on the surface, you made comparable gross margin dollars.
• Your suppliers got squeezed. In return, your suppliers had to squeeze somebody, which leads to an awful lot of shoddy quality and lowly-paid employees outside of the United States.

Think about whether this dynamic happens at your brand or not.

The Deflationary Customer

During the past two months, we've talked about customers who warrant QuickScores.

• Print-Centric customers who can warrant MORE mailings ... compared to the vast majority of your customer base who don't need any print whatsoever.
• Email Clickers ... you have customers who click and don't purchase (bad), you have customers who click and buy stuff (the best), and you have the 90% of your email file who does nothing and needs to be experimented on.
• High Returners ... DO NOT MARKET TO THESE CUSTOMERS ANYMORE, OK??? It's horrible for your p&l ... do not send Email Campaigns and/or Print Campaigns to these customers.

There's a fourth customer type we're going to spend the next few weeks talking about.

That customer?

The "deflationary customer".

In a perfect business, you want an "inflationary customer". You know ... the kind that Apple possesses. The Apple customer will spend $1,000 on a phone ... while the "deflationary customer" will buy a $199 Android phone. Which customer delivers more gross margin dollars to your p&l?

So we'll spend a few weeks talking about deflationary customers.

Summer Schedule

Most summers I scale back publication from 5 days per week to 3(ish) ... so that you get a letter from me on Monday morning, Tuesday morning, and Thursday morning.

My regular schedule reboots after Labor Day.

By the way, not all retailers are in a death spiral (click here).