July 19, 2020

Master Equation

So I run through all of the Elite Program data ... a Chief Marketing Officer didn't like how the writeup reflected his business. He says to me:
  • "Instead of comp segment performance, which I don't like because it is biased, is there a Master Equation that combines all elements of important variables to communicate why the business is succeeding or failing?"
Since introducing Comp Segment as my preferred metric to determine if merchandise performance is healthy or not (way back in 2012-2013, no less), this has been a common comment.

Remember:
  • Comp Segment = Take all customers who purchased 2x in the past year. Then measure how much these customers spend in the next calendar month. Then compare this year's spend in the next calendar month to last year's spend in the next calendar month. The percentage difference is your "Comp Segment" performance.
Two Key Findings Over The Years:
  1. Comp Segment Performance is most indicative of what is happening today.
  2. Comp New + Reactivated buyer performance is most indicative of what will happen in the future.
To answer the CMO's question, I performed a Principle Components Analysis of the variables this individual thought would be important.
  • Demand Change ... he wanted this to be "predicted", if you will.
  • Comp Segment (CompSeg)
  • Comp New + Reactivated buyer counts (NewRct)
  • Above = TY/LY spend on items priced above their historical average.
  • Below = TY/LY spend on items priced below their historical average.
  • NewMerch = TY/LY spend on new items.
  • ExiMerch = TY/LY spend on new items.
  • OrdBuyer = TY/LY change in annual orders per buyer.
  • ItemOrder = TY/LY change in annual items per order.
  • PriceItem = TY/LY change in annual price per item purchased.
In a Principle Components analysis, the data point closes to "Demand Change" is the variable that most closely aligns to demand changes.

What does the image below show you?


Comp Segment performance and change in Existing Item sales are most closely aligned with Demand changes, year-over-year.

Now imagine what a Comp Segment analysis of Existing Item sales will tell you?

You don't need a Master Equation of key variables. You need to analyze Comp Segment performance, and parse it between New Merchandise and Existing Merchandise if you want to learn why your business is / is not meeting expectations!



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