Trust

Back in the day I spoke at the NEMOA conference. A day later I'm listening to one of the best and brightest in the vendor industry (meant honestly here) finish his talk. The audience wobbled out of his session, seemingly confused. The speaker turned to me and said (paraphrased) "I think they're too stupid to understand what I'm saying to them."

That comment stuck with me for a long, long time. Even today.

I don't think the audience was too "stupid".

I think the audience simply trusted the speaker.

The speaker could have told the audience to throw nerf balls into a garbage can to generate a sales increase and the audience would have complied.

In the 16.5 years I've consulted, not a month goes by when a traditional catalog client is presented with one of my analyses ... and the analysis clearly shows that customers have changed behavior (i.e. they could mail a lot less and be more profitable). In recent years, the discussions happen via video conference. You can see the faces of the Executives I'm talking to. The Executives trust their vendor partners.

• "My printer says they are encouraged by what they are seeing!"

At another conference in 2019, a print person stopped me and said "if you think I'm going to let you tell my clients to stop putting catalogs in the mail resulting in me not being able to put food on the table for my family, you are sorely mistaken."

You can trust your vendor partners.

You can also trust your own customers.

Here's where trust comes into play. Look at this article title:

It was written last year by somebody the industry generally trusts (click here). Notice that the author doesn't have anything to say about the myriad ways to use digital marketing or offline marketing to grow your business ... just cut a few pages, or trim circulation a little bit, and integrate yourself deeper with a paper industry who is harming you.

Meanwhile, your test results tell you what your customers think. 

Do you trust your customers?

Many of you in the catalog industry are telling me your mail/holdout tests show increased organic percentages and decreased print effectiveness. Believing in test results suggests you trust your customers.

Do you trust your customers?

An Article

They found a way to make Cabelas, their own client, look utterly incompetent (click here).

I wrote a thousand words on this topic, and I finally quit. Read the article for what it is.

An Opportunity

Let's try something.

Because the theme of merchandise productivity keeps coming up in Marketing Budget Experiments, I'll add something for you.

For anybody purchasing an MBE (Marketing Budget Experiment) project through August 15, I will include "Class Of" Reporting (similar to the table below) at an overall level and at a category level, at no additional cost. We'll see if merchandise productivity is holding your marketing efforts back or not.

Click here for project pricing.

Consequences

The brand we are studying greatly reduced the number of new merchandise introductions in the year ending June 2021.

This actually caused at least a $3.0 million dollar demand hit in the year ending June 2021. The business should have been around $46.5 million. And I'm quite confident nobody cared. There were bigger problems and sales were up $4.4 million so the topic just didn't matter.

It mattered the next year.

In the year ending June 2022, demand fell by $6.1 million.

Look at new item introductions in the year ending June 2022. Just 1,729 new items, generating $5.7 million.

Look at the new item introductions from the year ending June 2021. These items generated just $6.2 million the following year (because there were so few of them) instead of the $8 million or $9 million or $10 million they might have otherwise generated.

Between the two years of meager merchandise introductions, the year ending June 2022 suffered by a likely $6 million to $7 million. Had new item introductions kept pace, the business likely generates $43 million or $44 million in the year ending June 2022.

In other words, there's no COVID-bump here, in reality. There's poor management of new item introductions.

By the year ending in June 2023, those two merchandise classes are costing the business maybe $5 million. The impact of older merchandise classes is starting to shrink.

Imagine being a marketer at this brand? You'd be badgered for two years about poor conversion rates and marketing inefficiencies. It would be your fault.

It is not your fault.

There are consequences for decisions made at a point in time. Often, those consequences are paid downstream from the decision. As a marketer, you'd likely want to know if your merchants have made your life more difficult with decisions they made 2-3 years ago. Maybe merchandise productivity is the reason your marketing dollars are "inefficient"?

One Little Detail In The Report

Here's our report from yesterday.

The business cratered in June 2022. Instinctively, we'd assume that unwinding of the COVID-bump is to blame.

But there's a tidbit here, in this report, that we cannot ignore.

How many new items were introduced in the year ending June 2021?

• 1,567 new items generating $6.9 million.

So in the year ending June 2021, the peak year of the COVID-bump, while generating $43.5 million in demand, this brand was already imperiled. You just couldn't see it because the overall business was SO GOOD.

This brand cut back on product introductions (and there may have been perfectly good reasons for this ... supply chain issues, work from home issues, cost of goods issues) that year, introducing 1,567 items that generated $6.9 million (instead of the $10.3 million generated the year prior from 3,741 new items).

Tomorrow we'll explore the consequences of that decision.

The Report

Yesterday I mentioned a report that I created back in 2013. Many of you have written me over the years to tell me you cloned this report, and it helped you find a way to communicate to your merchandising teams that there were problems they were not seeing clearly.

The report is a simple one ... it's called a "Class Of" Report.

Here's a business that rode the COVID-bump to riches, growing from $37.9 million to $43.5 million through June 2021.

Then reality hit in 2022 ... it was like a game of Chutes and Ladders. In June 2023 Management is frustrated that this business is worse-off than in June 2019, even though prices are higher and business costs are higher.

Look at June 2022 ... the business collapsed after the COVID-bump.

However, I have a homework assignment for you. What happened in the year ending June 2021 that set the stage for the June 2022 collapse?

The answer? Stayed tuned.

When You Cannot Make Marketing Dollars Work Anymore

One of our intrepid readers sent me an email from the paper industry. The content in the message suggested that changing the quality of the paper being used could impact the response/cost relationship.

Or not.

When I was given responsibility for Catalog Circulation at Eddie Bauer in 1998 (my goodness, that's forever ago), our marketing dollars no longer worked. It wouldn't have mattered that a paper rep had a "breakthrough" ... the breakthrough was meaningless. The brand had overspent on marketing for years. Each additional dollar spent was spent at a short-term loss. Each additional dollar spent did not generate enough long-term profit to overcome the short-term loss.

We couldn't make marketing dollars work anymore.

At this point, you have three options.

1. Keep doing the same thing the same way and cross your fingers, hoping for luck to smile upon you.
2. Cut back on marketing spend, take a top-line hit, but improve your profitability (hint - Business Leaders DO NOT LIKE DOING THIS).
3. Improve merchandise productivity by 10% to 20% so that your marketing dollars work again.

Have you ever criticized a merchant at your company?

You better have thick skin if you're going to do it. Criticism is necessary. Your merchants (or your product team) are responsible for 70% of the success of your business. If your marketing dollars no longer work, it suggests your merchandise productivity no longer works.

Back then I'd present multiple scenarios to Management.

1. Base-case, running the business as-is.
2. Increased marketing spend based on a 10% increase in merchandise productivity.

In (2) the top-line surged, marketing spend usually increased modestly, and the p&l looked a lot better. That's where everybody would begin grumbling.

• "How do you increase merchandise productivity by 10%?"
• "If we could increase merchandise productivity by 10%, don't you think we would have already done that, idiot?"

Tomorrow I'll share a report I created back in 2013 ... having come out of the Great Recession, there were a few good years for my clients, and then ... businesses struggled. One fact stood out, repeatedly ...

Profit Profiles

Marketing investment is directly related to the profit profile of the customers buying from the marketing channel.

For instance, say the customer pays you back as follows in years 2/3/4/5.

• $22.00.
• $17.00.
• $14.00.
• $11.00.

When that happens, you can lose A FORTUNE generating the order ... you get $64.00 of profit downstream and the profit is spread out over time, allowing healthy payback well into the future.

This profile is different.

• $33.00.
• $14.00.
• $11.00.
• $6.00.

Here, you also get $64 of profit. But the profit happens in year two. If you lose too much money right out of the gate, you don't get the long-term payback you need.

Then there are situations that look like this.

• $8.00.
• $5.00.
• $3.00.
• $2.00.

This is a profit profile that requires strict discipline. You don't have sufficient long-term customer value to be sloppy. You must be a precise, effective operator to have any chance of running a successful brand. These brands need spectacular customer acquisition programs that bring in organic traffic at virtually no cost. These brands have no choice.

Know what the profit profile of every marketing channel looks like. Then use the profile to your advantage in your Marketing Budget Experiments!

Reverting Back To The Trajectory Line

There's a lot of things that COVID messed-up.

One of the things it messed up (in a positive way) was the trajectory of a lot of businesses in the 2-3 years prior to COVID. There were a lot of warning signs that things weren't trending positively. Acquisition was hard. For some, sales growth was manufactured by trying to get best customers to spend more.

Then COVID changed all of that. All of a sudden there were free new customers everywhere. Profit. Sure society was collapsing, but your e-commerce business guaranteed you a healthy bonus at the end of 2020.

By Summer 2021, things were changing. The COVID-bump popped.

And in 2023, with the bump gone, many of us are reverting back to the trends from 2017-2019. Sales might look like this.

But with higher prices for many of you reading this post, customers are on a worse trajectory.

Take those two years out (2020/2021), and you can see what the customer trend looks like, can't you?

The "hope" is that there is a bottom, and for many the bottom is being hit. For others, it's a trajectory issue (like the customer image above). The business was headed in a direction prior to COVID, COVID masked the trend, and now the trend is once again revealing itself.

It's the trend (in orange, with customers) that is why Marketing Budget Experiments become important. Now, you don't need to do it the way I do it ... you likely have resources to analyze the information yourself. Use your resources! Project the long-term value of customers purchasing from various channels, forecast sales as a result and apply customer segment mix/migration trends to your customer base.

You do this (obviously) because you want to see what 2024/2025 look like. Changes are coming. The tech folks saw this coming nearly a year ago and shed 300,000 jobs as a consequence. Was that necessary? Probably not. But that was their response. Your response doesn't have to be that draconian. 

However, a response is going to be necessary.

Channel Inflation

I talk about Merchandise Productivity all the time, and for good reason. You have no choice but to improve Merchandise Productivity to offset rising costs across the rest of your business.

Here's a p&l comparing normal conditions to one where Paid Search costs increase by 3% per year ... 3% next year, 6% the year after ... 15% after five years. If your goal is to keep conversions identical, your p&l suffers.

Over five years this brand gives up $4.3 million in profit to Google. Google will say they did nothing ... it's "competitive forces" that drove up the cost of the keywords. Google did cash the checks, by the way.

At some point, your CFO gets angry and asks you to "right size" your Paid Search program. She doesn't want Google making money. "Right Sizing" the program means you will experience a sales decline.

But a funny thing happens along the way.

To right-size year one, we have to cut spend by 9%.

In year two, it is -22%. In year three it is -46%. In year four it is -65% and in year five it is -65%.

But you cannot get the profit back ... eventually you lose enough customers and those customers are never there to generate the long-term profit you need to offset channel inflation. Eventually you are forced to spend much less, you make less profit, and your top-line eventually drops by 20%.

All because of a little bit of channel inflation.

Yeah, you'd want Marketing Budget Experiments at your disposal to understand these dynamics, right? Click here for pricing.

P.S.:  At the beginning of the article, I mentioned Merchandise Productivity. Merchandise Productivity covers up a bunch of vendor cost sins. The more things cost, the more you need merchandise productivity to offset increased costs.

A Philosophical Debate

Thirty years ago, during the roaring 90s at Lands' End, there was a philosophical debate about investing in catalog mailings to housefile customers.

One camp said you should mail to a 10% variable profit level, because after accounting for fixed costs, you were approximating a break-even approach to mailing. This meant that a housefile mailing might be sent to 4,500,000 housefile customers.

Another camp viewed the world differently. They said you mailed to a -10% variable profit level, because after you converted customers to a purchase, those customers had higher long-term value, and consequently you would make money on the transaction on an annual basis.

Neither side had an actual Marketing Budget Experiment to prove or disprove the other side. It was an argument that could never be won, and as we've learned from politics, those are the arguments that our modern world is optimized for.

Today we have Marketing Budget Experiments.

Here, we invest more in catalog housefile marketing and we lose money in the process. The top table shows what happens if we do it for just one year. The bottom table shows what happens if we do it every year for five years.

In the top table, we see that the investment makes sense. We lose money in year one, then we make money each year thereafter, causing us to make money overall.

In the bottom table, we see that if we employ this strategy as a "best practice" (doing it every year), we lose money for four consecutive years before finally turning a profit. Overall, the brand loses nearly $1.5 million over five years.

The endless argument continues ...

You get to decide which choice makes the most sense.

But you should make that decision with full knowledge of what your p&l looks like (on a Variable Profit Level) with/without the tactic, right?

Click here for project pricing.

Two Channels With Very Different Investment Profiles

The top portion of the table below represents an increase in marketing spend of 10% within Paid Search. Tell me what you observe.

The bottom portion of the table represents an increase in marketing spend of 10% within Email Marketing. Tell me what you observe.

In Paid Search, two-thirds of the customers purchasing are new customers. Finding new customers is expensive ... so you lose $34.50 profit per order this year ... then make $60.73 in years 2/3/4/5. In total, you generate $26.23 profit over five years.

In Email Marketing, nearly all of the customers purchasing are existing customers. You cause your existing customers to become better customers! You generate $71.94 profit per existing customer in year one, then you make $85.43 in years 2/3/4/5. In total, you generate $157.37 profit over five years.

Now, I harp on new customer acquisition all the time, and for good reason.

But come on! If you can make 6x as much profit over five years by figuring out how to improve email marketing productivity by 5% (based on a 10% gain in spend), wouldn't you want to do that?

This is the kind of stuff that your garden-variety Marketing Budget Experiment unearths for you.

An Example

Yesterday we talked about a different method for financial brands to fund growth ... here is an example of what we were talking about (click here). 

These concepts require significant long-term value from acquired customers.

A common e-commerce brand with a 28% annual rebuy rate "might" be a candidate for this style of financial assistance, especially with 70% gross margins. This combination leads to healthy long-term customer value.

There's a reason so many of you took advantage of my Marketing Budget Experiments pilot program (actual program cost is outlined here) ... the most successful product launch I've ever had. Money is no longer cheap, artificial growth via the COVID-bump is long gone, and we really need to take an honest look at 2024 and beyond.

I'm not saying you should avoid self-funding your brand ... I'm saying you should have long-term goals and have access to whatever you need to achieve your long-term goals. That may or may not require outside assistance.

A Different Investment Method

Are you aware of what General Catalyst is doing? No? Click here to learn how they are funding your marketing efforts, then taking downstream orders/sales from the customers they help you acquire (HT to https://twitter.com/d_mccar).

Think about it this way. Here's our Marketing Budget Experiment, and in this case our brand is going to spend 25% more on Paid Social for one year. Here's the projected outcome of the Experiment.

In this example, you spend $1,773,219 of marketing expense (you spend money acquiring the customer, then in the first year you have marketing expenses associated with the newly acquired customer, resulting in a lot more total first-year marketing spend). You lose $785,458 in the first year. Yikes! You generate 14,614 customers ... meaning you lose $53.75 converting these customers. Once you lose that money, the customers begin paying you back.

• $15.48 in year two.
• $16.47 in year three.
• $14.83 in year four.
• $13.80 in year five.
• (presumably more in years six, seven, eight, etc.)
• You generate $60.59 profit in years two, three, four, and five.

Would you give up all profit on this customer for years 2/3/4/5 in order for a third party to allow you to acquire a customer you would not otherwise acquire? Or under different terms, would you give up two-thirds of your incremental sales gain in year one to pay for the incremental ad cost provided to you from a third party (plus interest)?

If the answer is "yes", how would this change how you approach growing your top-line?

Something to think about. You may adore this style of "investment", you may abhor this style of "investment". But you should think about it at minimum, right?

Ever Have This Happen?

Have you ever worked at a company? Yes! Ok.

Have you ever worked at a company where you had a really good department head? This woman knew her stuff inside-and-out, her employees respected her, her co-workers got along with her, and she got stuff done. She protected you from the lunatics you are frequently subjected to.

And then ... something happened. Some cauliflower head is given her job. This guy knows nothing. He adheres to industry phrases like "move fast and break things".

He breaks things.

He cannot get along with people.

He seems to take pleasure when demeaning other people.

He might be corrupt ... it's hard to tell because you have incomplete information, but it seems like he might make more money than just his salary.

He might have inappropriate relationships with other individuals.

HR has a file on him that they'd love to share but can't share.

We've all been through it.

The person doesn't last terribly long - maybe a few years (years that seem like a decade).

Then it takes a half-decade to fix everything broken by the menace ... if the business doesn't go bankrupt.

Our modern world seems more likely to embrace this scenario than "back in the day". Profit was too darn important back in the day.

Even when somebody burns everything down, somebody always comes in and fixes things. It might not be at the same company (it might happen at a competitor), but things do get fixed. There's a time and season for everything, and sometimes the end of something aligns with the appointment of a cauliflower head.

Your Advertising Budget

It's common to think of channels like paid search and paid social as ad channels. You spend money, you get customers, everybody claps their hands and moves on.

Have you looked at your ad budget for email marketing? It's comparatively tiny, and sales are disproportionately huge. It is common in my projects to see e-commerce brands generate 30% of annual variable profit solely from email marketing.

Have you ever taken your discounts/promotions, and allocated them as an "ad cost"? In other words, if you take 40% off of everything, do you have a line-item in your p&l for dollars "given away"? I assure you that if you've ever gone through this exercise you've been gobsmacked by what you learn.

For many of you reading this missive, the biggest line item expense in your p&l is all of the margin dollars you give away begging customers to purchase at 30% off or 40% off or 50% off. You'd think you'd spend more time on this topic if it was your biggest expense, amirite?