You Were Warned Back In Early Spring / Summer

I told you earlier this year that what is coming in 2023 isn't going to be pretty. I sure hope I am wrong. I maybe have a 35% chance of being wrong. It would be wonderful if I were wrong. Please let me be wrong!

But any analysis of customer data showing the end of the COVID bump paired with Customer Acquisition weakness points toward the information shared via this tweet (click here). Or this tweet (click here).

Use your imagination.

• Sales in decline post COVID-bump.
• Customer Acquisition efforts in decline.
• A year of higher prices deflated customer retention efforts.
• Over-correction of shipments (i.e. you are ordering less merchandise) from China.

Seriously. Use your imagination. What happens?

Get ahead of this. Have a plan.

Want vs. Need vs. Emotional Benefit

The Professional tweets and says "Kevin, Loyalty programs work! Just look at Starbucks for proof."

That's not proof.

Starbucks sells an addictive substance with emotional benefits.

You sell widgets.

Starbucks checks all three boxes. You want the item. The content of the item is addicting, so you need the item.  Then you get your Honey Almondmilk Flat White with a heart forged via magic marker.

You accomplish those three things, and you can create any number of games to encourage customers to visit more often.

But you sell widgets.

In some cases the customer needs the widget. The NewPig Pig Absorbent Mat Pad in Dispenser Box comes to mind. If most of what you sell is "needed", your rebuy rates are higher and you have a reasonable chance of implementing a Loyalty Program.

In most cases, we sell products that the customer might want. You don't need Griot's Garage Car Wash, do you? You have to want it. And there isn't really an emotional benefit tied to it. So if the brand sells a lot of this stuff, there isn't need and there isn't emotional benefit across the assortment. This is where Acquisition trumps Loyalty. Go find somebody who wants something like this product right now.

Emotional Benefits, if you get them right, lend themselves to fat gross margins and wonderful Loyalty Programs. A Man doesn't necessarily want or need BLEU DE CHANEL Eau de Parfum Spray from Ulta. But there are emotional benefits associated with the product. Yeah, Loyalty Programs work here.

Loyalty Programs work when rebuy rates are high and purchase frequency is high. Those situations are satisfied by selling something that a customer Needs, or by selling something that a customer receives an Emotional Benefit for.

You sell widgets. The customer likely wants the widget, but doesn't need the widget and doesn't obtain any emotional benefits for using the widget. These end up being low rebuy / low purchase frequency situations, requiring the marketer to focus on Acquisition.

Chipotle / Loyalty

On Twitter, I mentioned that Chipotle has come back from the dead and is hummin' these days. The brand grew by more than 45% in the past four years.

One of our loyal readers mentioned (and I'm paraphrasing here for effect) that "They rolled out a loyalty program, Kevin". The reader understands my distain for modern marketing theory.

If you go back to my now out-of-print Merchandise Forensics book from 2007, you'll see that I categorized brands into three bands back then.

• Acquisition Mode:  Rebuy Rates between 0% and 40%.
• Hybrid Mode:  Rebuy Rates between 40% and 60%.
• Loyalty Model:  Rebuy Rates between 60% and 100%.

If your annual rebuy rate is > 60%, your business operates in the realm of Loyalty. These brands frequently possess twelve-month buyers who have a 70% chance of buying again next year and possess customers who purchase 7 times a year, on average (your mileage will vary). If this brand starts a loyalty program and the program increases order frequency by 10%, you add 0.7 purchases per year. That's a big deal.

If your annual rebuy rate is < 40%, your business operates in the realm of Acquisition. These brands frequently possess twelve-month buyers who have a 30% chance of buying again next year and possess customers who purchase 1.5 times per year, on average (your mileage will vary). If this brand starts a loyalty program and the program increases order frequency by 10%, you add 0.15 purchases per year. That has no impact on your business.

You must know if your business is in Acquisition Mode, Hybrid Mode, or Loyalty Mode.

The mistake made by vendors in our industry is that they push Loyalty solutions on brands that operate in Acquisition Mode. It's profitable for the vendor. It's foolish for the brand to accept Loyalty solutions. Go find another new customer profitably.

Which Product Do You Feature?

Your merchandising team comes to you asking you to feature two items in an upcoming email campaign. Because of the constraints of your email program, you can only feature one item.

Item #1:

• Current Price = $49.00.
• Cost of Goods Sold = $25.00.
• Expected Weekly Sales, All Channels = $5,000.

Item #2:

• Current Price = $29.00.
• Cost of Goods Sold = $10.00.
• Expected Weekly Sales, All Channels = $4,000.

Which item do you feature in your email campaign?

The answer, by the way, is not "it depends". Pick a side and defend your side.

A Little Productivity Goes A Long Way

Let's use the world of Google as our window into the magic of merchandise productivity.

Ok, you spend $15,000. You get 20,000 clicks. Congrats!  Of the 20,000 clicks, 400 customers convert and buy something, spending $100 each. Your profit factor (you know what your profit factor is, correct?) is 30%.

Net Sales = 400 * $100 = $40,000.

Variable Profit = $40,000 * 0.30 - $15,000 = $12,000 - $15,000 = ($3,000).

You lost $3,000. You got 400 customers to buy something.

Profit (Loss) per Order = ($3,000) / 400 = ($7.50).

You lost $7.50 per order.

Now, let's say that a year later your merchandising team increased productivity by 15%. That's a big deal! Does it matter when it comes to your marketing efforts?

Instead of 400 customers converting, you get 460 customers converting, spending $100 each.

Net Sales = 460 * $100 = $46,000.

Variable Profit = $46,000 * 0.30 - $15,000 = ($1,200).

You lost $1,200. You got 460 customers to buy something.

Profit (Loss) per Order = ($1,200) / 460 = ($2.61).

You went from losing $7.50 per order to losing $2.61 per order.

All because merchandise productivity increased by 15%.

Now imagine what happens if you were originally losing $2.61 per order? You'd be making money.

Marketers don't want to hear this fact ... but marketers are fully dependent upon their merchandising/product partners. When these people are successful, marketers are successful.

The smart marketer spends a lot of time figuring out which products work ... they spend more time on product than they spend on channels/keywords/conversions. By understanding the products that work, the smart marketer turns a loss into a profit. Everybody benefits. Because of a smart marketer.

It's Time ... Again!

It's time for another run of the MineThatData Elite Program!

For existing clients ($1,000) and new clients ($1,800) you'll receive my standard suite of program analytics (Rolling Twelve, Comp Segment, Repurchase Activity). We'll also answer the time-honored question ... "Do You Have Loyal Customers?" with a logistic regression model designed to identify the factors that contribute to customer loyalty. So many of you question the logic of customer acquisition with the "loyalty matters more" reply. I'll identify what your loyalty opportunity is, ok?

Contact me now to participate (kevinh@minethatdata.com).

• Participation Deadline = September 30.
• Five Years of Data From 10/1/2017 - 9/30/2022.
• Payment Due By October 15, 2022.
• Data Due By October 15, 2022.
• Analysis Delivered By October 31, 2022.

Not Understanding Merchandise Personalization

I've told this story before, but it comes up often enough that it bears repeating. I'm at a meeting at a "Portfolio of Brands" ... meaning that a holding company scooped up a bunch of brands and they're having a strategy session with the heads of each brand (and other assorted Executives).

One of the sessions includes a analyst sharing results of online personalization testing. This woman, probably 27-30 years old, was FABULOUS. Full of energy, passion, and she made her brand A FORTUNE. It's quite possible that 10% of net sales, on an annual basis, were because of her and her alone. This also likely means that about 30% of annual profit was because of her and her alone.

Think about that for a moment.

She finishes her presentation, and the room full of Executives all begin giggling and whispering ... they're having private conversations about how geeky her presentation was. In essence, they didn't listen to her words (because her words showed that they were going to get nice bonus checks ... because of her), they addressed her as an entity ... they perceived she was a nerd.

Maybe she was a nerd.

They didn't realize they needed a nerd.

Every analytics person reading this post knows exactly what it is like to be humiliated by a traditional business Leader for no good reason other than making the traditional business Leader look good. In the next ten years, we're going to see significant changes in Upper Management. Baby Boomers will continue to leave the workforce, replaced by a different mindset. Something will be lost, no doubt about it. But something will be gained ... like respecting the woman in this post.

Completely Misinterpreting Success

The CEO is frustrated.

• "Online, as a percentage of sales, is just 12%. We are a complete failure."

The Marketing Executive is frustrated.

• "Online is failing because we haven't created a seamless, frictionless omnichannel experience. Let's whiteboard some ideas!"

The consultant (that's me) is thrilled.

• "You have the highest sales per square foot I've ever seen. The reason your customers aren't shopping online at high rates is because they WANT to be in your stores."

Needless to say, the CEO and the Marketing Executive severed ties with me after that comment. They found the usual array of pundits, consultants, vendors, researchers, and trade journalists who agreed with them that their HIGHLY PROFITABLE business was a failure because their online penetration was below the industry average.

I was in a mall last week ... according to the CEO above, this is what success should look like ... a completely empty store with customers buying online instead.

Yeah, there it is ... success!

Or maybe this style of visual merchandising is considered success. I mean, my goodness.

I mean seriously, what in the name of Montgomery Wards is going on here?

Also notice there's not a soul in the store ... but there are balloons and whatever the heck that is that is greeting absolutely nobody at the entryway to the store.

Here's a hint for those of you out there in the studio audience ... if you are a terrible in-store merchant, your online sales penetration will increase. If you are a brilliant in-store merchant and customers WANT to be in your store, guess what? Your online sales penetration will go down.

You don't understand how business works if your sales per square foot are industry-leading and you are complaining about it.

Speaking of Not Understanding How Business Works

Having worked at Nordstrom for more than six years, I'm confident there is a team of "Brand Strategists" who work at Saks and are painstakingly critical of any activity that does not "protect the brand". If you are a middle manager who wants to have some sort of field event in a parking lot there will be a Brand Strategist who tells you that you do not understand the brand and that you need to go back into a conference room and sit there until somebody delivers a box lunch to you for sustanance.

And yet ... the Brand Strategist lets this pass. Follow the orange arrow.

Tell me how either the Digital Marketer or the Brand Strategist know anything about how business works? How is this "protecting the brand"? Is this how you want your brand portrayed, with a horribly flimsy digital ad that is 40% cut off by some redonkulous video that nobody will ever watch?

The Digital Marketer knows how ad delivery works, so that individual knows something.

The Brand Strategist knows ... what? I don't know. But the Brand Strategist should never allow this to happen, correct? 

Here's a peach for ya ... as I performed a screen dump Norton informed me that it blocked a malicious attack from this page. What does the Saks Brand Strategy team think of that? How does that "help the brand"?

I know, I know, here comes the hate mail ... "Kevin, you don't understand how digital marketing works". Yeah, I understand how digital marketing works, you have no idea where your display ads end up and nearly half of the money is skimmed off the top by shady third parties. That's how it works.

"Protect the Brand". I've been in a thousand meetings and Zooms where somebody who doesn't understand how business works utters this phrase to say "no" to something while allowing this nonsense to happen, happily saying "yes" by turning a blind eye to an entire advertising discipline.

Here comes more hate mail ... "But Kevin, you don't understand how digital marketing works, you just don't have control over where your ads end up." Maybe that's the point. Maybe you shouldn't engage in a discipline where you no control over anything. Your Brand Strategist would tell you that in five seconds, right?

30,000 Feet

Have you ever sat in seat 17F on a United flight into Chicago?

You look outside and you see thunderheads. Big storms. You are flying the Friendly Skies, the sun is out, and your six ounce diet soft drink rests comfortably on your tray. At 30,000 feet, things look a certain way.

Directly below you, however, the thunderstorm has just moved through. Flash flooding is happening. A tornado ripped through a residential community. At 0 feet, it is a very different story.

If you want to meet somebody who does not understand business, sit down with a Strategist for a half-hour. We've all been there. The Strategist sits comfortably, and asks a lot of "what if" questions, with thumb and index finger on chin.

I met one of these people at a conference in the "before days". His business was in free-fall, and had been for several years. He reached out every few months with a strategic question.

• "I want to hear your opinion. If Amazon Web Services can fund their e-commerce losses, do you think Amazon can obtain 50% or greater e-commerce market share, and if they do achieve 50% or greater e-commerce market share, what does that mean for small and medium businesses?"

This Strategist was the Chief Marketing Officer. It was his job to fix his business, not opine on Amazon Web Services. And yet, he emailed me these questions on a periodic basis, and when I elected to answer his questions he came back at me with ... wait for it ... more questions!

• "But we need to take a 30,000 foot view here, don't you think? If Amazon Web Services ends up being 80% of Amazon's annual profit, then they can fund e-commerce with another business unit, further lowering prices and subsequently driving all of us out of business. That's the view we need to be taking here, don't you think?"

There it is.

The Strategist is looking for somebody to blame when he cannot come up with the 39,443 new customers he needs for his brand to meet sales goals for the year. It's not my fault, it's AWS that is killing my business.

Eventually this CMO lost his job because his business floundered. He understood how AWS might impact an ecosystem, but he didn't understand business. All he had to do was spend time finding an additional 8,000 new/reactivated customers. That's it. Just find a tactic that opened the door to just 8,000 new/reactivated customers, and he and his business would still be here.

The 30,000 foot view, the "Above The Clouds" view of business, it's dangerous. It's fine if you understand how business works and have a tactical approach to delivering sales/profit for your business. It's not fine if that is where you spend all of your time.

The Wrong Metric

You've probably been in this situation as well.

The Marketing Executive is struggling with a mostly unprofitable business. He sends me his customer data, I perform an analysis, and I show him that he is spending a fortune acquiring customers and then is generating very little future profit. He's losing $25 of profit acquiring a customer, and then over two years he makes maybe $30. That's a net of $5 variable profit. You cannot survive when your customer base delivers $5 of variable profit - there's not enough profit to cover fixed costs.

The Marketing Executive gets a terse look on his face, and he says the following.

• "Profit is an outdated metric. We look at ROAS."

You couldn't possibly say something that communicates the fact that you do not understand your business more clearly than by saying you analyze customer acquisition via ROAS. He's clearly using the wrong metric. And he doesn't like it that I'm pointing this out to him.

• "ROAS as a metric is a best practice. All the smart digital folks use it. Profit is a relic of a time gone by."

ROAS, as you know, is not a best practice, and not all of the smart digital folks use it. ROAS is simply the ad-to-sales ratio, inverted. Maybe you spent $100 on a paid search campaign and got $250 of sales as a result.

• ROAS = $250 / $100 = 2.5.
• Ad-To-Sales-Ratio = $100 / $250 = 0.40.

Both metrics are identical. One was used in the 1980s. One is a best practice used by all of the smart digital people.

Neither metric matters.

What matters is this:

• Did you generate enough profit on this transaction to align with future profit, allowing your business to thrive?

Let's assume that your "Profit Factor" (you know what that is, right?) is 40%. How much profit did the $100 of marketing expense generate?

• Profit = (Sales) * (Profit Factor) - (Ad Cost).
• Profit = $250 * 0.40 - $100 = $0.

In the example above, your marketing efforts broke even. You're fine.

What happens if your profit factor is 35%?

• Profit = $250 * 0.35 - $100 = ($12.50).

You lost $12.50.

Now you count how many customers ordered (pretend it is 2), and you divide your loss by the number of customers ... ($12.50) / 2 = ($6.25). You lost $6.25 per customer.

If the customers you acquired generate $30 of future value, you are fine. You net out at $23.75 of total profit over time.

If the customers you acquired generate $5 of future value, you are not fine.

ROAS doesn't tell you any of that, does it?

The more "canned" our analysis software has become ... the more reporting we accept from vendors as truth ... the less sophisticated and nuanced our work becomes. We're looking at the wrong metric(s) ... all the time. It's clear when we're looking at the wrong metric that we do not understand the business we are managing. When we look at profit, we understand the business we are managing.

We Can Fix That Rebuy Rate

This happened seven or eight years ago. You've likely been in the same situation. I'm sitting in the Executive Conference room at a nine-figure brand. Everybody enjoyed (to some extent) their box lunch. After a morning of presentations, it was time to get down to business.

This brand had customers who repurchased at a 34% rate (in other words, of all customers who bought during 2015 just 34% bought again in 2016). And the rate had gotten worse and worse over the past five years.

How does Management fix this business?

Well, the CEO had ideas. He starts yelling "WE SIMPLY HAVE TO FIGURE OUT HOW TO GET CUSTOMERS TO BE MORE LOYAL, THAT SOVLES EVERYTHING".

The CEO looks to me, knowing what I'm going to say.

• "What do you think?"

I'll tell ya what I think.

• "Stop cutting back marketing spend on customer acquisition and start focusing on what your business is, not what you want it to be. You are in the business of finding new customers on a continual basis."

That was not what the CEO wanted to hear. Knowing I would say that, he slams his fist on the table (I sense this wasn't the first time he's done this to intimidate a consultant or a staff member). "I WON'T ACCEPT THAT ANSWER. I SIMPLY WON'T ACCEPT IT. WE HAVE TO CRACK THE CODE. WE HAVE TO CRACK THE CODE. THAT'S THE WRONG ANSWER. THE ANSWER IS SITTING RIGHT HERE IN THIS ROOM. NOW TELL ME WHAT WE'RE GOING TO DO TO FIX OUR REBUY RATE?"

These are always fun moments as a consultant. The CEO fundamentally does not understand his own business. He is making the wrong decision, and desperately wants to be right by making the wrong decision. Have you ever known an Executive who desperately wants to be right by making the wrong decision?

The entire room turns to look at me ... they're clearly happy the CEO is screaming at me and not them.

This is where there are advantages to being a consultant.

I take a breath.

And then I respond.

• "You have been CEO for six years. You have tried everything you and your team can possibly think of to increase repurchase rates. If the answer was sitting in this room, wouldn't the answer have appeared before today? You already know the answer to your question."

There are moments when you expect security to usher you out of the building. This was one of those moments. There are twelve executives in the room and one CEO, and not one of them is looking at me or anybody else. Every head is pointed down at the table. Including the head on the neck of the CEO.

Not one of the highly paid people in that room understood their business ... or were too frightened to communicate that they understood their business. Either way, the end result was the same.

You cannot fix your rebuy rate. The merchandise you sell determines the range your rebuy rate will reside in. If your rebuy rate is 34%, it could be 28%, it could be 40%. It cannot be 64%.

And if your rebuy rate is under 40%, your number one job as a Leader is to constantly find new customers at a low cost. You have no choice. The products you sell dictate a low purchase frequency, and given that you are not shifting to a different product assortment, you have no choice but to acquire new customers at "scale" as the kids say, and at a low-cost or at no cost.

Close to a decade later, this business is in the same place, marooned by Leadership that fundamentally does not understand how their own business (products and customers) operates.

You cannot fix your rebuy rate if you maintain the product assortment you've always sold to customers. You can improve it. You cannot fix it.

This is the point in the blog post where the experts send me email messages telling me why they are right and I am wrong. Happens every week. When you do that, please send me the receipts ... cases where you took a 28% rebuy rate and made it a 65% rebuy rate by selling the same merchandise assortment.

Completely Misunderstanding Your Merchandise Assortment

Many of us have been there.

Your business is failing, so the Board or Ownership clean house. They hire a new CEO, the new CEO brings in Executives she can work with. It's a new team, and the team is going to make changes. Everybody who came before them are idiots. Everybody who doesn't "onboard" is an idiot.

This team HATES the merchandise being sold. They know that what is being sold wasn't embraced by the customer, so it is time to make guesses as to what the customer "wants".

Existing items are discontinued.

New items are introduced.

Business absolutely tanks.

Eighteen months later, the CEO is fired (she wants to spend more time with family, or so we are told). Executives scatter into the wilderness. Another rebuild begins ... this time going back to the formula that originally failed.

Some of you in the marketing community, some of you who are Executives, you don't understand how a merchandise assortment works. If you sell items that have a long life (i.e. you've sold them for eight years and they continue to sell well), you can't simply discontinue the items and replace them with something unproven. You have to develop new items carefully. Conversely, if you work in fashion, you can discontinue just about anything and you'll be fine ... the life of an item might only be three months. 

If you don't understand business, you'll misinterpret a "winners" business for a "fashion" business and that's a recipe for disaster.

Loyal Customers

It's easy to get caught in this trap. You visit Starbucks every day, so you know what a "loyal" customer looks like (she looks like you).

Businesses that have loyal customers have an advantage. Not every business can have loyal buyers (I realize this goes against everything you've been taught). Brands that have loyal buyers tend to have three advantages.

• Customers "need" what you sell (i.e. a Pharmacy, Target).
• Customers "want" what you sell (i.e. Starbucks).
• The "need" or "want" must be replaced, often.

If you sell something that is purchased at Christmas, as a gift, you're gonna have trouble generating loyal buyers. The customer only "needs" or "wants" what you sell once a year.

People who don't understand how business works try to advocate that they have a "loyal" customer base when the products/merchandise they sell do not lend themselves to loyal customers. Vendors love preying on these individuals - if you only emailed your customers more often or gave them bigger discounts or hounded them all across the internet via display ads you'd have a loyal customer base.

Nonsense.

Try selling something that the customer wants or needs on a frequent basis, and you'll have a loyal customer base.

What you sell dictates whether you operate a business that is funded by loyal buyers. It starts with what you sell, not with your customers.

How Business Works

A Twitter user forwarded me an interesting article from more than a decade ago (click here).

There's a quote in the article, in the footnotes, that resonates:

• "That gravels me. I cannot think of another industry in which the uttermost basics of how the product works are a mystery to the people in that industry. There is nothing, to any with IQs much over their hat size, mysterious or controversial about analysis: it's just the way things work, and that's that. Yet a coach on the major-league level (coaching on a team last in all the majors in OPS) can to this hour be found publicly remarking, "You want to see a walk? Go watch a mailman." How is that possible? How can businesses with annual payrolls approaching a tenth of a billion dollars not have any least idea how their business works?"

The quote doesn't just apply to baseball.

One of the most frustrating experiences of my consulting work was a pairing of analyst and executive. These two understood every aspect of Google Analytics. They could tell you how much traffic they had, they could tell you where it came from, they could tell you how it converted. They knew nothing about their business. When conversion rates dropped by 10%, they panicked. They didn't even bother to look at new merchandise (which was a problem). They just started blaming vendors and co-workers for random issues.

This week, we'll talk about How Business Works. There is a natural cycle in your business. If you understand the cycle, you can do something that gives you a competitive advantage over the pair of guys I described above.

Acquired via Discount

Here’s what I see in a typical project:

Customer acquired via discount/promo = more likely to purchase in the future, much more likely to buy via discounts in the future, less profitable in the future unless the response increase is greater than 30%ish.

Customer acquired via full price tends to be less responsive and more profitable in the future.

You get to pick the business model you want and the customers you want. You get to decide how profitable you want to be in the future. The choices you make today dictate how you’ll behave next year and beyond.

Peak Acquisition Time

We’ve talked about this many times. The easiest time to acquire a customer is before Christmas. But those customers tend to have the lowest future value.

The best time to acquire a customer? Just before a peak season. Why is that?

Well, if you acquire a customer in September or October, the customer is very recent (responsive) at the very time (Nov/Dec) when customers are most likely to buy something. You get to double dip on response.

The best marketers (that’s you) already know this and take advantage of this dynamic.

And yes, when I discuss this topic I get complaint emails. I have the receipts. Doesn’t matter. It’s an uphill battle to counter best practices with actual customer data. But the battle is worth it.

Gross Margins and Marketing Investment

Duluth Trading Company generates 55%ish gross margins. For every $100 they sell they produce $55 cash. Then you back out pick/pack/ship expense and it is reasonable to guess they generate $40 cash per $100 sold. This means there is a lot of cash available for marketing purposes.

Best Buy generates 22%ish gross margins. Back out pick/pack/ship expenses and they likely generate $10 cash per $100 sold.

Which company can afford to generate new customers via paid marketing channels?

Which company must be a lot more clever?

Some of the biggest marketing blunders I’ve been associated with over 3.5 decades doing this work involve new marketing teams trying to rebuild brands without an understanding of how gross margins dictate marketing investment. It is frustrating to see the channel-centric investment approach leveraged when gross margins don’t let you lose much money acquiring a customer.