May 11, 2022

I Brought This Up A Few Weeks Ago, But The Topic Keeps Popping Up Regardless

Let's look at a couple of merchandise categories.

Category A

• Last Year's Buyers Have a 20% Chance of Buying From The Category Next Year.
• If They Buy, They Will Spend \$200.00.
• The Gross Margin Of The Items Purchased Next Year = 60%.
• Future Margin Value = 0.20 * \$200.00 * 0.60 = \$24.00.
Now let's look at Category B

• Last Year's Buyers Have a 23% Chance of Buying From The Category Next Year.
• If They Buy, They Will Spend \$187.00.
• The Gross Margin Of The Items Purchased Next Year = 45%.
• Future Margin Value = 0.23 * \$187.00 * 0.45 = \$19.35
Which category, as a marketer, do you want to develop customers within? And I get it, some of you are going to say "both" just to be combative.

The answer, of course, is Category A. From a sales standpoint, the Category B customer is worth a bit more. But any gain is quickly offset by the difference in gross margin percentage (60% vs. 45%).

For every one of your categories, make sure you know the following:
• The fraction of last year's buyers who will purchase again next year within the category.
• How much the customer will spend within the category if the customer repurchases.
• Expected gross margin percentage next year.
Then rank-order your categories from highest Future Margin Value (FMV) to lowest.

Then prioritize your marketing efforts around these differences.

Stop wasting marketing dollars on categories that do not deliver sufficient Future Margin Value.