You probably saw the story on CBS Sunday Morning (click here).
11,000 Club Members.
11,000 on the Waiting List.
The secret over the past two years seems to be an exclusive subscriber list that you treat better than your average customer / prospect.
Makes me think about my own business ... hmmmmmmm ... what ideas do you have for your business (or mine)??!!
If you are a restaurant in Los Angeles, you don't get a COVID-Bump. You get to be closed, with no assistance from anybody. Good luck!!
But if you are a direct-to-consumer e-commerce brand not selling apparel, you might still be benefiting from a massive COVID-Bump, fueled mostly by new customers. You are stunned by what has happened in 2020. What will likely be 400,000 deaths and millions of hospitalizations netted you +50% or +100% sales gains. As I was told earlier this fall ... "I'm torn between feeling awful for society and feeling blessed because my company is performing well and I have a job."
What is the question I'm asked to analyze most often this Fall?
If your Annual Repurchase Rate is greater than 50%, well, it's a whole different world. You get to enjoy the magic of Compound Interest for several years. God smiled upon your business model.
For any business, however, 2021 is a "setup year". It's like in baseball when you have a 4-2 lead in the 8th inning. You bring in your setup relief pitcher. It is his job to bridge the gap between the 7th inning and the 9th inning, when you bring your closer in to finish off the game. If you want 2022 to be as successful as possible, you need to set up 2021 to be as successful as possible.
Certainly you've heard the news by now ... maybe not from the trade industry, but if you are on Twitter the outpouring of support was unavoidable for the founder of Zappos (click here).
Mr. Hsieh was an early reader of this blog. When you are getting started in this business, it's helpful to have a somebody read what a nobody has to say.
Mr. Hsieh was one of four people (Don Libey, Ben Chestnut of MailChimp, Robert Kestnbaum are the other three) who thought differently in a way that shaped how I viewed things. Three of the four are gone now. Make sure you appreciate those you think highly of. Say something to them while they are still here.
Do you have examples of individuals in our industry that have shaped how you view the world? Share those individuals with our audience ... pass me a note and I'll publish credible responses.
P.S.: If you are a cataloger, read up on the stuff that Robert/Kate Kestnbaum wrote about in the 1990s. They used math 25-30 years ago that was smarter than the math you are using today. Hint - their math forms the basis of the catalog optimization work I perform today.
P.P.S.: If you love email marketing, read what Ben Chestnut has to say. Also notice that he didn't choose to dominate email marketing ... he helped small businesses be excellent at email marketing, and that difficult choice made all the difference.
P.P.P.S: Don Libey taught me how to run a consulting business as an independent consultant. He gave away his knowledge, for free. He's largely the reason that the work I perform is mostly shared ... for free ... via this blog.
Most of my project work shows two important facts (yes, there are exceptions):
It's a lot easier in Sports to see how strategy evolves over time than it is to see how strategy evolves in Business. Sports is measured in terms of wins, losses, and Championships. As a consequence, good strategies tend to be moved into the future, where they are evolved. In business, some of the best strategies I've seen are buried in small businesses that never evolve or change, and as a consequence those strategies never see the light of day.
This brings me to the story of Virgil Carter. Virgil was a Statistics Major at BYU, and he was a good college Quarterback. In the NFL, Mr. Carter had a weak arm, so the Cincinnati Bengals had to develop an offense that would suit what he did well (he released the ball quickly and was an accurate thrower). Who was his offensive coordinator? Well, it was none other than Bill Walsh, who won multiple Super Bowls with the San Francisco 49ers in the 1980s. Bill Walsh developed what became known as the "West Coast Offense" to suit Mr. Carter's skills, then evolved the offense to a comprehensive "system" for running a football organization. Heck, Mr. Walsh wrote a book with a limited number of copies on how to run a football organization. I bought one of the copies on eBay for $$$ ... if you carefully look at the bookshelf of any NFL coach, you might just see one of the copies.
Remember when I told you that Mr. Carter was a statistician? Well, it turns out that Mr. Carter also contributed to the future of football by analyzing the outcome of plays (click here). He learned how many expected points you would generate if you took over possession of the ball at your own 33 yard line, for instance.
So Virgil Carter played two key roles in the evolution of football.
Last week was fun ... I wrote about risk ... and close to 1% of subscribers opted-out, citing that "CONTENT IS NO LONGER RELEVANT".
I've always judged that when many people unsubscribe because CONTENT IS NO LONGER RELEVANT that I am headed down the right path. I lost a ton of subscribers back in 2013 when I started talking about the importance of merchandise performance ... then I generated more annual revenue over the next three years than during any other three year period ... because you (the loyal reader) hired me to analyze merchandise performance.
I've learned a lot about the audience over the past fourteen years. A key finding is that the audience tends to want very specific answers to very specific questions. If I write about general topics that relate to general questions, the audience rebels.
In recent years, a fraction of the audience has become more combative. These individuals want very specific answers to very specific questions ... and more important, they want to ARGUE about specific answers. The arguing is the end result that "some" readers seem to embrace ... sort of like in politics. The reader can "appear" smart by arguing a small fact in a large argument, without ever having to apply any smarts to a challenging business situation.
I had one subscriber who was with me for several years. This person held a C-Level position with a company that was headed toward bankruptcy. This person always argued ... he wasn't mean (he was very kind to be honest, I assume a very good person), but he was always nitpicking 5% of an argument in an effort to invalidate 100% of an argument. He was quite good at this. I can't imagine how frustrating it would have been to work for this individual. Worse, he had answers to every specific argument you could imagine ("here are four reasons why Amazon will not take over e-commerce") but didn't have a single argument for solving the problem at hand ... that being, of course, the fact that his own company was headed into bankruptcy.
His company went bankrupt.
You didn't opt out last week ... I know that because you are still reading today's post. That means you are at least somewhat open-minded to different concepts. Frequently I develop ideas as a stream-of-thought over several days/weeks, and those ideas infrequently become products that eventually help your business. That's how I use this blog. I use it to develop concepts. I'm not trying to provide a specific answer to a specific question. I'm trying to hover a level or two above specific answers to specific questions. If I do that successfully, your business performance can improve.
P.S.: Speaking of highly specific answers, here is an example of what I am talking about, one that everybody can form an opinion of (click here). This is what so many readers want ... a highly specific solution that everybody can "weigh in on".
I promised you I'd share how variable profit is under normal circumstances.
25% of the time profit will be below $2.3 million.
50% of the time profit will be around $2.8 million.
25% of the time profit will be above $3.2 million.
10% of the time profit will be above $3.6 million.
Our CFO ... she's not going to be pleased with profit numbers that could vary between $2.0 million and $3.6 million.
But this is what we're dealing with when we craft a plan. We do all of this work, hard work, to produce a certain outcome. But the outcome is not certain. The outcome is highly variable. I mean, half the time profit could be between $2.3 million and $3.2 million. And the other half of the time? It's an outcome more variable than that.
And that's under normal circumstances.
Every one of you is dealing with a business that has that kind of variability. Your estimates for what "will" happen next year are filled with risk, filled with variability.
Then you layer COVID on top of it.
It's going to be darn important to communicate risk to people. Unbelievers. Folks who think because a spreadsheet says you will generate $62,000,000 means you are promising to deliver $62,000,000. In a normal year you could not make that promise, though you've done so for a long time. In 2021? You are facing more risk than you've faced since 2020.
A flexible and adjustable plan, one where you clearly communicate a range of possible outcomes ... that's what is needed in 2021.
Yesterday I shared a high level sales plan, one where we figured out that our business would generate $28.2 million in sales and $2.6 million in profit.
Is the plan something we can take to the bank?
Well, you have the "bottom's up" crowd that estimates a business plan based on individual segment performance in marketing campaigns. It's a lot of work, and it isn't any more accurate than doing the simple calculation I performed yesterday. I know this because I spent a decade building plans at Eddie Bauer & Nordstrom and have the scars to prove my point.
The plan, of course, is subject to a lot of variability.
For instance, over the past five years, annual rebuy rates have varied as follows for this brand:
You start with a high-level plan for the upcoming year, based on actual data from the year prior. This is a common-sense approach to planning, one that so darn many companies use.
12 Month Buyers:
Remember yesterday, when I shared that something you pencil out in a spreadsheet as a "good decision" is actually a decision that has risk? In my example, what appeared to be a profitable decision actually had a 23% chance of being unprofitable.
I worked for a person who took a few stat classes in college and therefore thought he was a brilliant statistician. When I communicated risk to him, he got uncomfortable, then he got angry, then he misinterpreted what he learned in his three stat courses, then he said things that were completely wrong but said them as if he were right so anybody in his orbit took his side, causing everybody in the room to be wrong.
What did he misunderstand about risk?
He believed that the "average" outcome was a "certain" outcome.
And if actual results came in "below average", well, that was your fault.
And if actual results came in "above average", well, that was because the merchant was brilliant.
I learned to NEVER communicate a probability to this person, because this person was incapable of understanding probabilities. He'd have been a terrible Texas Hold 'em player and a really sore loser if he had to deal with a "bad beat" on the river.
Instead, I sandbagged everything.
I never submitted a business plan assuming an "average" outcome. I'd calculate the probability of a less-than-optimal outcomes, then submit a less-than-optimal outcome. Business would then "hopefully" perform at an average level, in which case my plan would be exceeded, and everybody would be happy ... including my boss who didn't (couldn't) understand probability and risk.
It's awfully hard to properly communicate risk to individuals who struggle with assessing risk. Come up with a strategy that mitigates the downside while promoting an upside that makes people happy.
You have a paid search program, and you expect the program to deliver the following metrics this month:
Earlier in the week, I mentioned that I used to negotiate with the CEO of the Online Division at Nordstrom for my testing budget.
In other words, we had a discussion each year, and we pre-agreed upon the sales/profit impact of my tests.
I recall in 2003 that the budget was set at 3% of sales. For a $350,000,000 division, this was roughly $10,000,000 in sales and $3,000,000 profit. The CEO was willing to lose $3,000,000 profit because what was learned in executing the tests was worth $3,000,000 profit.
If you do your job as a Virtual Chief Performance Officer properly, you'll generate enough downstream profit to more than make up what you lose executing the tests.
Do you have a testing budget?
Odds are 90% of you don't have a testing budget, and that says something about your historical ability to prove that what you learn from testing has long-term value.
For instance, the testing budget at Nordstrom was what we used to determine that catalogs (via holdout tests) generated no incremental profit to the company ... which allowed us to allocate $36,000,000 of ad-cost to other activities ... half to paid search ... which generated a profit ... which caused our online sales to increase when we pulled all that paper out of the ecosystem. The testing budget (where we were willing to lose $3,000,000 profit per year to learn) allowed us to learn enough to make tens of millions of dollars of profit.
That's what you can accomplish as a Virtual Chief Performance Officer ... implementing a simple testing budget and a credible testing plan and a communication plan for the results of your tests.
It was 1991 at Lands' End. We were greatly ramping-up our testing work. And when we wanted to execute a test, we needed to understand how the results might "vary".
Back then, a test was sampled from the population who would receive a catalog. Maybe that audience was 4,000,000 customers. If the catalog was a productive catalog, it might generate $10.00 per catalog mailed. If the catalog wasn't productive, circulation would be reduced and the catalog might generate $4.00 per catalog mailed.
If you want to measure a 10% difference in sales for two groups performing around $4.00 per book, you need fewer customers than if you are trying to measure at 10% difference in sales for two groups performing around $10.00 per book. This is an issue called "heteroscedasticity".
So I built an equation that measured variability around different dollar-per-book estimates. The equation was a simple one:
This is the part of the discussion where the Virtual Chief Performance Officer hears the grumbles, from near and far.
Yesterday I showed you what happens when you sample 25% of customers from a full population with a known outcome ($14.42 per customer, average) ... you end up with noise.
What happens when you deal with an even smaller fraction of the original population? Look at the x-axis and compare the values in the histogram to the image above.
Notice that the overall average is "similar" ($14.32 sampling 5% of customers vs. $14.39 sampling 25% of customers vs. sampling 100% of customers and getting $14.42).
But the spread is huge!
Huge!
Some of the outcomes are around $13.75 ... and you CANNOT know if that outcome is the real outcome or a blip due to sampling variability. One of the outcomes was > $15.50 and you cannot know if that outcome is the real outcome or a blip due to sampling variability.
Look at the standard deviation metric ... 0.412 ... so much higher than the 0.113 we saw when sampling 25% of the original population. It means that your results will vary by +/- $0.82 instead of +/- $0.23.
The Virtual Chief Performance Officer has a job ... and that job is to STEER YOU AWAY from situations where you are measuring something with +/- $0.82 of variability ... steering you toward outcomes that are within +/- $0.23 of expectations.
Here's the problem we all face. We're told we're supposed to TEST outcomes, aren't we? You are supposed to be "data-driven".
But if you are "data-driven" and you make one little mistake ... testing without enough cases to test properly, well, you provide your company with GARBAGE, don't you?
This sin happens repeatedly in business. Smart data-centric folks making bad choices, not understanding variability, creating chaos in a company and then defending the chaos.
The Virtual Chief Performance Officer steps the company away from these situations. We'll talk more about these situations tomorrow.
One of the jobs of a Virtual Chief Performance Officer is to teach the concept of "variability" to employees ... and especially Executives.
In business, things don't happen on a predictable basis. There is always noise. ALWAYS! The real world is noisy too ... look at polling errors (again) associated with the Election.
Allow me to show you an example. Here is performance for twelve-month buyers in the next month. On average, customers spent $14.42 in the next month.
Is this what your COVID-bump looks like, when measured via a Comp Segment analysis?
For the third of the audience who reads my content and tends to be catalog-centric, you have two delivery-centric vendors who will need to re-establish trust with you going forward.
This fact keeps popping up, folks.
If you have a COVID-bump ...
Like existing merchandise. A lot of the customers driven by the COVID-bump are coming from search. Within search, Google sure seems to like pushing prospects toward existing items, long-term winners that Google has a significant history "analyzing". When I look at what COVID-bump customers are buying, it's the stuff that has always worked. And why not? New customers don't know that existing merchandise is the stuff that has always worked. So if it has always worked, the numbers "optimize" and you end up preserving your assortment one cycle longer than you expected to preserve it.
Be careful analyzing new merchandise during the COVID-era. What works in October / November 2020 "could" work next year ... but we don't really know that, do we? Your experience, knowledge, and imagination are going to go a long way toward projecting a future assortment.
And for some of you, the fact that new customers don't know that old merchandise is old merchandise is an important finding that has practical (and profitable) ramifications for your future.
We know what a COVID-bump looks like, via Comp Segment analytics.
Here was a trend for one company:
This is what a SMART MARKETING DEPARTMENT looks like.
Why would I say that?
Well, it is obvious that the marketers figured out in April/May that "something" was going on. They read the Comp Segment tea leaves properly, and they put their foot on the marketing gas pedal, spending money to amplify a highly positive trend.
You leverage your business experience to understand what is happening behind the scenes. Behind the scenes at this company, somebody was trying very hard to amplify a positive trend. These are the kind of clients (or companies) you want to work with. They're trying hard to make things better.
It's not hard to see it ... this is what it looks like across my client work, using my Comp Segment framework (you know how to calculate Comp Segment performance, right?):
Of course, if the maskless Midwest continues to burn down, then there may be additional restrictions, and those restrictions might inspire another COVID-bump. So we don't know what is going to happen. We do know we can use our Comp Segment framework to measure what is happening, and act accordingly.
