## February 14, 2024

### MRV: Merchandise Residual Value

"MRV" is what I call "Merchandise Residual Value". It's the amount of incremental value the item generates on an annual basis, per customer purchasing the item, above-and-beyond expectations.

We control for the LIFESTAGE of the customer buying the item. Here's a sample dataset of six items. For each item, I calculated the LIFESTAGE of the customers buying the item, and I calculated the FUTURE spend customers who purchased the item in 2022 spent in 2023.

• Winner #1:  Lifestage = 3.00.  Future = \$200.00.
• Winner #2:  Lifestage = 3.50.  Future = \$235.00.
• Winner #3:  Lifestage = 4.00.  Future = \$180.00.
• Winner #4:  Lifestage = 4.50.  Future = \$305.00.
• Winner #5:  Lifestage = 5.00.  Future = \$285.00.
• Winner #6.  Lifestage = 7.00.  Future = \$400.00.
Let's graph the relationship.

There's a clear relationship - if items are purchased by customers later in the LIFECYCLE, those items produce better Merchandise Value.

That's not what we are looking for.

We went Merchandise Residual Value (MRV) ... the difference between the points on the graph and the orange line.

The equation is a straight linear Ordinary Least Squares Regression equation.
• \$34.63 + \$51.75*(LIFESTAGE).

For each item, we know the FUTURE spend of customers buying the item, we know the predicted amount of future spend, so the residual is FUTURE - PREDICTION.

• Winner #1:  Lifestage = 3.00.  Future = \$200.00. Pred = \$189.99. MRV =  \$10.12.
• Winner #2:  Lifestage = 3.50.  Future = \$235.00. Pred = \$215.76. MRV =  \$19.25.
• Winner #3:  Lifestage = 4.00.  Future = \$180.00. Pred = \$241.63. MRV = (\$61.63).
• Winner #4:  Lifestage = 4.50.  Future = \$305.00. Pred = \$267.51. MRV =  \$37.50.
• Winner #5:  Lifestage = 5.00.  Future = \$285.00. Pred = \$293.38. MRV =  (\$8.38).
• Winner #6.  Lifestage = 7.00.  Future = \$400.00. Pred = \$396.88. MRV =   \$3.12.

Which item has a poor MRV?  Winner #3 does. At an average LIFESTAGE of 4.00 orders, the item should produce customers worth \$241.63 ... instead it produced customers worth \$180.00. MRV is negative ... -\$61.63.

This is so ... darn ... neat!!

So ... darn ... neat!!

If you are going to feature merchandise in social or email or print, you might de-emphasize Winner #3 because it produces customers who spend less in the future, with an MRV of (\$61.63).

Think about all the ways you'll use MRV in your business?

Now get busy using MRV!!