Posting Again

Last week I posted this topic about sales challenges coming in Fall/Winter (click here).

Among blog readers, it was a snoozer (blog readers tend to be a catalog-centric audience).

Among Twitter followers, it was very popular (that audience tends to be e-commerce-centric). Twitter / E-Commerce folks have been very responsive to this topic this Spring/Summer.

Strong hint ... this article is more important to the catalog audience than the e-commerce audience. So, I'm publishing the link again. Read it. Then work with your forecasting team to try to mitigate what is coming in a few months, ok? And if you don't have a forecasting team you can trust, contact me (kevinh@minethatdata.com) and we'll get busy.

Winning Items Among New Items

Back to the brand we're studying.

In each year we see sales distributed by A/B/C/D/F grades, allowing me to calculate a GPA for the first year (or for any year, really) of a new merchandise class.

• 2019 = 2.21
• 2020 = 1.93
• 2021 = 2.88
• 2022 = 2.50

2.00 is average, so we observe a change over time, don't we? 2019 wasn't bad ... 2020 was bad ... 2021 improved significantly, and 2022 was pretty good.

This tells me that somebody is trying ... hard ... to reverse the trend of new item performance.

However, this company solved the performance problem ... they haven't solved the core problem (declining sales of new items). Obviously, they aren't offering enough new items.

The Older Items Are Dying, However

At the bottom of our table we see the problem with those long-time items.

The "Class of 2018" in the table represents all of the long-term existing items ... the old stuff. Look at what happens to those items over time.

• 2018 = $1,441,582.
• 2019 =    $887,766.
• 2020 =    $604,527.
• 2021 =    $498,776.
• 2022 =    $357,782.

Yeah, they're dying.

This is why your new merchandise is so darn important. You can keep pushing existing items, but eventually your items will die off, and you will have no choice but to offset the existing items with new merchandise.

This happens in every class. Look at the class of 2019.

• 2019 = $581,765.
• 2020 = $438,380.
• 2021 = $469,514.
• 2022 = $273,966.

Within three years these items sell 1/2 as much as they sold in the year of introduction.

You see the same things in the classes of 2020 and 2021.

It's just a doomed situation ... being staved off by squeezing as much as this brand can from existing items (items which perform progressively worse over time). In the past year, the sales decline took off. It's gonna be hard to fix this problem in the short-term.

A Lot Going On Here

Speaking of reports your boutique agency won't create for you (because they think your problem is marketing - and hint, it probably is 65% merchandise, 20% marketing and 15% creative), we look here at Merchandise Category #5, measuring sales of new/existing items by merchandise grade (A/B/C/D/F).

Yeah, a lot going on here.

In this post, let's focus on the bottom of the table. Sales of new items look like this:

• 2019 = $581,765.
• 2020 = $347,852.
• 2021 = $290,224.
• 2022 = $293,816.

So that's bad news.

However, it's clear that somebody instructed the marketing team to feature existing merchandise ... everywhere.

• 2019 =    $887,766.
• 2020 = $1,042,907.
• 2021 = $1,281,862.
• 2022 = $1,157,969.

This is a classic scenario, we see it all the time. Somebody decides to "squeeze more juice out of the lemon". It's the kind of thing Sears/Kmart did ... it's the kind of thing very mature / late stage brands do, they ride their favorite items into the sunset. And in the short-term, yeah, good idea.

But eventually, the sales lost by not having enough good new items harm you over time. More on that topic tomorrow.

Late 2022 / Spring 2023: A Warning

Allow me to show you what is happening to too many of you. Let's pretend you run a really small business.

As of 2/28/2020, you might have possessed the following customer metrics.

• 100 12-Month Buyers The Year Prior.
• 30% Rebuy Rate and $200 Spend per Repurchaser.
• Year Prior = 60 New/Reactivated Buyers Spending $120 Each.
• 100 * 0.30 * $200 + 60 * $120 = $13,200 Net Sales, 90 Customers Total.

Then the COVID-bump happens. Things go bonkers.

• 90 12-Month Buyers.
• 33% Rebuy Rate and $200 Spend per Repurchaser.
• 90 New/Reactivated Buyers Spending $120 Each.
• 90 * 0.33 * $200 + 90 * $120 = $16,740 Net Sales, 120 Customers Total.

We think life is good ... other than the dying part and the illness part and the pointless hatred for each other because of political beliefs. Otherwise, life is/was good. Until life wasn't good. Until prices started to increase in late 2021. Until new/reactivated buyer counts began to fade. As of today, our data looks like this.

• 120 12-Month Buyers.
• 26% Rebuy Rate and $220 Spend per Repurchaser.
• 55 New/Reactivated Buyers Spending $130 Each.
• 120 * 0.26 * $220 + 55 * $130 = $14,014 Net Sales, 86 Customers Total.

Our little business, which had $13,200 in sales two years ago and $16,740 a year ago now has $14,014 in sales. Better than two years ago, but oh oh. And our little business had 100 buyers, then 90 buyers, then we improved to 120 buyers, and now we have 86 buyers. We've lost all of our file power, haven't we? File power is important, because next year's sales are connected to how many customers we have at the end of this year.

Worse, our rebuy rates are impacted by rising prices ... down to 24%. New/Reactivated buyer counts were at 60 two years ago, then 90 COVID-infused newbies a year ago, then just 55 due to the price increase.

Now we have to forecast what happens in the next year. Well, prices are much higher, so we'll forecast a 24% rebuy rate, $230 spend per repurchaser, just 45 new/reactivated buyers, and $140 sales per new/reactivated buyer. Fewer customers, but more spend per customer.

What does the next year look like?

• 86 12-Month Buyers.
• 24% Rebuy Rate and $230 Spend per Repurchaser.
• 45 New/Reactivated Buyers Spending $140 Each.
• 86 * 0.24 * $230 + 45 * $140 = $11,047 Net Sales, 66 Customers Total.

This is what the end of the COVID-bump combined with an increase in prices means.

Sales by year:

• $11,047 forecasted for the next twelve months.
• $14,014 for the year ending June 23, 2022.
• $16,740 for the year ending June 23, 2021.
• $13,200 for the year ending June 23, 2020.

Tell me what happens when we get to October and the forecast becomes reality?

Many e-commerce brands will be able to outrun this forecast ... they'll find ways to generate new customers, as they have for the past twenty years.

Many traditional catalog brands will not be able to outrun this forecast. By not developing sufficient online marketing capabilities, the contraction currently being observed will be amplified by a lack of paper. The very vendors demanding that catalogers mail paper instead of embracing online marketing will hasten this dynamic.

This blog post is a warning. There is time to do something about what is coming. Expense increases paired with sales declines = trouble.

Trouble.

I've spent much of the past eight years advocating for strong customer acquisition programs. Fall/Winter 2022 will belong to those who have a strong customer acquisition program.

You are a Leader. You have time to address this challenge. Be a Leader.

P.S.:  If you need forecasting help, let me know (kevinh@minethatdata.com).

A Struggling Category

Here is the GPA for each of the past five years for a category that is struggling.

• 2018 = 1.77.
• 2019 = 1.48.
• 2020 = 1.37.
• 2021 = 1.27.
• 2022 = 1.19.

Yup - that's a category that is dying. An average GPA is 2.00, so this category has been below-average for five years and performance is getting progressively worse.

If you are a marketer, you need to know this is happening, so that when you are asked to feature this category you adjust your sales plan accordingly, right?

The Marketer Influences The Customer

For one company, I looked at the GPA of the merchandise purchased by customer based on customer life stage ... for all new customers acquired in the past two years. Ready?

Look at the "Below Average" column ... on a first order, 25.9% of the merchandise is priced below the historical average for the item. For loyal customers? 82.3%. This brand is discounting the living daylights out of the stuff they sell to the most loyal buyers.

Look at the "New Items" column. 13.5% of what first-time buyers purchase are new items (new in the past year). 4.5% of what loyal buyers purchase are new items.

Now look at "A" items ... 13.1% of what new buyers purchase are the very best-selling items. However, 77.6% of what the most loyal buyers purchase are the very best-selling items.

Look at the "GPA" column ... the GPA goes from 1.81 to 1.94 to 2.13 to 2.39 to 2.66 to 3.13 to 3.39.

In other words, the customer (as the customer matures) clearly increasing buys the best items. However, the marketer is pushing this customer to purchase the best items at discounted prices. The marketer is driving the behavior.

It would take a LOT of discounted purchasing to overcome the damage this marketer is doing to this business.

Yes, the marketer influences the customer.

Evolution of New Items - The GPA

Allow me to introduce a new metric for you ... the GPA or "Grade Point Average".

This metric is just like the old-school GPA you enjoyed in school. If an item (on a monthly basis) is in the top 20% of total sales (rank-ordered from highest selling item to lowest selling item), the item is an "A" ... next 20% of sales is a "B" ... next 20% of sales is a "C" ... next 20% of sales is a "D" ... and the bottom 20% of sales is an "F". This isn't an even distribution of items, because it could be that one item accounts for 20% of sales and the bottom 60% of items account for 20% of sales.

Then, we compute a GPA or "Grade Point Average" ... "A" sales are multiplied by 4, "B" sales are multiplied by 3, "C" sales are multiplied by 2, "D" sales are multiplied by 1, and "F" sales are multiplied by 0. Divide that total by total sales and you have a GPA, or Grade Point Average between 0 and 4, with 2 being "average".

Why go through this nonsense?

The GPA allows us to see how items evolve over time. If items are performing better, the GPA will increase. If items are performing poorly, the GPA will decrease. If sales decrease but the GPA increases, then the merchandising team is culling out the losers and focusing on the winning items.

Let's look at items introduced in February 2019. Sales in each subsequent month are outlined in the table, as well as the GPA for items in that month.

Notice the seasonality in sales ... March/April/May are peak sales months for these items. The items build into healthy sales status through the remainder of 2019. Then in 2020 the items begin to slump, and the slump significant in 2021 with the notable exception of the March/April/May timeframe where the GPA's increase.

Let's look at March/April/May performance.

Two years after the items were introduced sales are cut in half, but the GPA is noticeably higher.

In other words, the merchandising team (predictably) culled out the losing items, focusing only on the items that have success.

This is standard behavior ... of course.

But it brings up an interesting thought. If sales continue to decline from items from the Class of February 2019, you need new items to replace the sales being lost, correct?

The best companies I work with are gifted at constantly introducing new items that sell well enough to replace the items that are always dying off.

Asleep At The Wheel

Sometimes our teams are directed to perform at a sub-optimal level. Sometimes our teams don't have the reporting to help them understand what they "should" have done.

Here's the four-year trend for new item introductions for a brand. The arrow tells you where the problem resides.

In 2018 the brand introduced new items at a thrilling clip ... now, that isn't always right either, especially if none of the items become winners. However, what happens in 2019 borders on being grounds for dismissal with cause. Average monthly new items per year look like this:

• 2018 = 28.6
• 2019 =   6.8
• 2020 = 13.1
• 2021 = 10.5

We don't need a lot of reporting to help us. We just need the "right" reporting. And if your merchandising/product team won't produce the reporting, well, then it is your job to produce the reports.

When you have a year where your merchandising/product team is asleep at the wheel, you have subsequent years where the marketing team suffers because the failure to develop new items ripples through the future, causing customers to spend less. That's not the fault of the marketing team.

They Don't Work In Lock-Step

Alright, it's becoming clear I have to focus more on merchandise tactics and analysis, because those are the questions that are coming into the Global Headquarters at MineThatData.

There's a misconception out there ... when business is bad, some business leaders believe there is a smoking gun that can be readily fixed ... if some math person would just write some code and identify the problem. It's always fun to have an EVP making $475,000 a year with a $400,000 annual bonus not know why business is failing but expect a 24 year old to write sixty lines of code and solve the problem.

Sometimes there are feedback loops. Sometimes it isn't easy to identify the problem. Sometimes you have to realize that there is some cause-and-effect going on.

Case in point. This brand is failing. In the graph below, I plot year-over-year change in sales for new merchandise, and I plot year-over-year change in new/reactivated customers. These are two metrics that do a good job of deciphering what is going on, and are "predictive" in that problems in these metrics today yield problems in the business tomorrow. Here's the graph.

Each month is coded in the database, with "60" being recent and "36" being two years ago. That's your x-axis.

Let's look at change in sales of New Merchandise first (the orange line). Two years ago sales, year-over-year, were positive. Customers liked what was being offered. And then, somebody on the merchandising team decided to muck everything up. At month=43 sales of new items crashed, and they have not recovered in the seventeen months since. This often happens when new merchandising/product leadership take over, but in this case, I know that the brand made a conscious choice to focus heavily on the long-term best selling items. It's a conscious choice that also turned out to be a bad choice, because when you don't develop new items today your sales decline tomorrow.

Meanwhile, the blue line is the year-over-year change in new/reactivated customers. At about month=42 the trend turned positive. New/Reactivated customers thrived for about nine months, before turning negative and thus creating a problem for this brand.

Two leading indicators of future sales success ... new items ... new/reactivated customers ... both trending negative.

Now, in this case, the brand had six months of lousy merchandise performance (due to new item failures), so the CFO decided to tell the marketing department to cut back on marketing spend ... and guess what? That was also a bad decision!

The metrics don't move in lock-step ... but there is cause and effect. Management decided to focus on long-term winning items while de-emphasizing new items, causing the business to struggle, causing the CFO to tell marketing to spend less, causing fewer new/reactivated customers, setting up a horrible second half of 2022.

Yup - humans caused the problem. The people running the business caused the problem. If they want the business fixed, they need to look in the mirror.

Forecasting Offer

Incoming messages from Professionals on Twitter are centered around interrelated issues (and it is interesting that this is happening on Twitter - it means this is something younger professionals in e-commerce are running into):

• We have too much inventory.
• We may have forecasted sales improperly.
• We increased prices, significantly, and customer response is declining.
• New customer counts are in free-fall, is this due to the COVID bump or inflation or something else?
• What does Christmas look like, as a consequence?

So, let's create a mini-project, as we've done so often in the past. Send me five years of purchase transactions and for $7,000 I'll forecast the rest of the year and next year as well. We'll see where you are headed and see what kind of "downside" there is if things get worse.

Contact me now (kevinh@minethatdata.com) ... I'll take four (4) projects at this price. Get in line now. Project work will begin on July 1.

Where Do You Fit?

Increasingly, it is obvious that we all fit into one quadrant here:

If we're good at New Customer Acquisition (and awareness programs) and we're good at New Products/Merchandise, our business thrives.

If we're good at New Customer Acquisition but fail at generating New Products/Merchandise, business will slow down and accountability for sluggish business sits at the feet of the Merchant.

If we're good at New Products/Merchandise but fail at New Customer Acquisition, business will slow down and accountability for sluggish business sits at the feet of the Marketer.

Mess up both? That's the fault of the CEO and the Executive Team she hired/inherited.

We simply cannot mess up both aspects of business. Can. Not.

Get 'em both right and we manage a thriving business.

Where does your company fit, which quadrant does your business occupy?

We Will Just Improve Marketing And Reduce The Organic Percentage, That Solves The Problem, Right?

I received an email from a non-client ... this individual was grumbling about his organic percentage.

• "It's only 20%. That's awful. That means we don't know how to generate sales from print. Can't we improve the percentage? We have to improve the percentage. We need to change how we creatively present merchandise, that'll fix our problem, right?"

It's a good question, obviously.

But it's not a problem that is solved by changing how you present merchandise. It's a problem created by demographics and digital tactics. Having a low organic percentage is generally a blessing, because it means you are doing something else right. Either your merchandise appeals to a younger audience, or your audience is responsive to your digital marketing tactics. 

Or, your customers love your merchandise and they don't need you to market to them to buy it ... this is the biggest blessing you can have and almost nobody likes it when I mention this fact. The best businesses don't have to ask the customer to buy something ... customers buy something because they want to buy something independent of marketing tactics.

Can you improve the productivity of a specific marketing tactic? Oftentimes the answer is yes. Email is a classic example. Just dipping your toes in personalization tactics improves the productivity of email marketing by +/- 20%. However ... and this is a big "however" ... if you cannibalize sales from other marketing efforts or from sales generated organically ... then you haven't accomplished anything.

What's the point of this argument?

The point is that it is hard to just "change the organic percentage". It's a game of whack-a-mole. Your efforts may fail, your efforts may succeed but sales won't increase, your efforts may succeed but the organic percentage stays the same and sales increase (because you generate more buyers who then behave organically in the future), you may end up cannibalizing other marketing activities. You may not change anything because your organic percentage is demographically driven. You may not change anything because your organic percentage is fueled by brilliant digital marketing tactics.

Does that make sense?

Correction - Organic Percentage Trends

The amazing thing was how few of you noticed the mistake(s). Of course, I didn't notice it and I proofed the darn thing.

Here's the update:

There are all sorts of trends and developments regarding the organic percentage and incremental rate. Let's discuss them a bit.

There are boutique agencies who gush about how "Millennials" love print. There are A/B tests that are broken down by age ... those tests tell us something different.

A customer 65 years old and older loves print. Still does. It's not uncommon to see organic percentages around 35%, with incremental rates around 65%.

A customer 45-64 years old is in a transition stage. Organic percentages might be 50% to 70%, with incremental rates under fifty percent depending upon the vendor performing matchback analytics.

A customer < 45 years old has moved beyond print. Organic percentages range from 70% to 95%, with incremental rates usually < 20%.

In a retail environment, print is largely ineffective. Oh, the boutique agencies are going to come after me about this - they'll swear they are seeing "breakthrough results" via matchback analytics. Execute A/B tests and you will likely see organic percentages even among 65+ year old customers above 80% with very, very low incremental rates.

Over time, organic percentages continue to increase ... what used to be a 40% rate in 2008 became a 55% rate in 2015 and is now a 70% rate in 2022. Digital marketing will do this to the incumbent channel. It's the way the world works ... no different than the 124 page catalogs that ran 600 page "big books" out of business 30 years ago.

It would be a lot better for my career if these trends were not happening.

The trends are happening.

So we adjust and change in response, same as it always has been.

Organic Percentage and Incremental Rate Trends

There are all sorts of trends and developments regarding the organic percentage and incremental rate. Let's discuss them a bit.

There are boutique agencies who gush about how "Millennials" love print. There are A/B tests that are broken down by age ... those tests tell us something different.

A customer 65 years old and older loves print. Still does. It's not uncommon to see organic percentages around 65%, with incremental rates that are comparable.

A customer 45-64 years old is in a transition stage. Organic percentages might be 25% to 50%, with incremental rates comparable depending upon the vendor performing matchback analytics.

A customer < 45 years old has moved beyond print. Organic percentages range from 5% to 30%, with incremental rates usually < 20%.

In a retail environment, print is largely ineffective. Oh, the boutique agencies are going to come after me about this - they'll swear they are seeing "breakthrough results" via matchback analytics. Execute A/B tests and you will likely see organic percentages even among 65+ year old customers under 20% with very, very low incremental rates.

Over time, organic percentages continue to increase ... what used to be a 40% rate in 2008 became a 55% rate in 2015 and is now a 70% rate in 2022. Digital marketing will do this to the incumbent channel. It's the way the world works ... no different than the 124 page catalogs that ran 600 page "big books" out of business 30 years ago.

It would be a lot better for my career if these trends were not happening.

The trends are happening.

So we adjust and change in response, same as it always has been.

What Is My Catalog Organic Percentage and Incremental Rate?

In catalog marketing, the industry best practice (promoted by paper folks, boutique agencies, and vendors/consultants who make money if you mail catalogs) for measuring catalog success is the "matchback". You mail a catalog, you match back all orders generated by the customer in 30 days (or whatever), and the catalog gets credit ... for everything. Yup, everything. It's lunacy. And it is an industry best practice. If you are still doing this in 2022, well, ponder the next few paragraphs.

A business executes a matchback on a segment of customers, and finds that the segment spent $4.50 per catalog mailed based on matchback results. The catalog costs $1.00, and 40% of sales flow-through to profit.

• Profit = $4.50*0.40 - $1.00 = $0.80.

The catalog is a moneymaker and the industry clinks champagne glasses once again, sneering at the digital folks who don't understand how to have a relationship with the customer.

Is the industry right?

Execute an A/B test.

After thirty days, your A/B test shows you the following.

• Mailed Segment (A) = $5.00.
• Holdout Segment (B) = $3.00.

We now have enough data to calculate your "organic percentage" and your "incremental rate".

• Organic Percentage = 3.00/5.00 = 60%.
• Incremental Rate = ($5.00 - $3.00) / ($4.50) = 44%.

Ok, if you don't mail a catalog, the customer still spends 60% of what they would have spent otherwise. That's a big number, but that is also a number that defends catalog marketing as a generator of top-line sales. You can't really walk away from something that is responsible for 40% of what a customer spends.

Let's focus on profit next. Was the mailing of the catalog profitable to this segment?

• Profit = ($5.00 - $3.00)*0.40 - $1.00 = ($0.20).

In this example, you lost money.

And this is the point of all of this nonsense. Did you make money doing something, or did you lose money. In this case, you lost money.

The great paper shortage of 2021-2022 sent the smart catalogers who remain down one path ... these folks executed mail/holdout tests, they measured their organic percentage and their incremental rates, they completely recalibrated their marketing plans, and they emerged with more profit than prior to the great paper shortage.

Then there are the folks who do not know their organic percentage and do not know their incremental rate. These folks are at the mercy of matchback vendors, paper reps, printers, boutique agencies, consultants, and catalog pundits. Yeah, they're in trouble.

Yeah. 

They're in trouble.

Contact me (kevinh@minethatdata.com) if you don't want to be in trouble - I'll get you heading down a reasonable path.

Show Me: An A/B Test and the Organic Percentage

Some of the email I receive outlines concerns about the Organic Percentage. The emails look like this:

• "We just executed a month-long email A/B test. 50,000 customers received the normal stream of email campaigns (5 per week), the other 50,000 customers received no email campaigns. We did this for a month. At the end of the month the group receiving campaigns spent $10.00 per average. The group not receiving email campaigns spent $8.50 per average. Our email service provider says we generated $0.12 per campaign during this time, netting $0.12*20 = $2.40. What is our organic percentage?

Technically you have two different "organic percentages" to think about. The first one is the $8.50 / $10.00 = 85% metric. If you don't send email marketing campaigns, the customer will spend 85% of what they'd normally spend.

Then you have your "incremental rate" ... not a true organic percentage but it is a cousin of the organic percentage. Your email service provider says you generated $2.40 from email marketing. Your A/B test shows that you generated $10.00 - $8.50 = $1.50 from email marketing. Your "incremental rate" is $1.50 / $2.40 = 62.5%. For every dollar your email service provider says you are generating from email marketing, you are actually generating $0.625 of true incremental value with $0.375 being cannibalized from other activities.

In other words, you have to measure two different things to get a picture of what is happening. Measure your organic percentage to understand how much the customer spends independent of a marketing channel. Measure your incremental rate to understand how much your marketing vendor is overstating your results.