This Happens in Your Business, Too

A month ago I started a relationship with HeadAmp. I was looking to purchase the Meze 109 Pro headphones, but I didn't want to pay $799. Fortunately, HeadAmp had an open box unit for $649, and a first-time buyer incentive for $20, so I paid $629.

From a Merchandise Dynamics standpoint, there are several things we want to record here.

• Kevin purchased via a discount ($20).
• Kevin didn't pay $799 for the item, bought an open-box version cheaper than the average historical price point for this item.
• Kevin bought one (1) item, not a multi-line order, not a multi-category order.
• Even at $629, this is a high-price-point headphone. I will behave differently than a person purchasing a $49 in-ear monitor.
• Kevin is a new customer ... need to convert Kevin quickly to a second purchase.

Next, HeadAmp promises me $50 if I write a review of the item. Ok. I already planned to purchase an dac/amp. Done. I write the review. The promo is sent to me via email.

Ok, the dac/amp. It's normally $89, but they have an open-box version for $84, and I have $50 off, so I'm paying $34 for an $89 item. 

• Kevin purchased via a discount ($50).
• Kevin didn't pay $89 for the item, instead buying an open-box version cheaper than the average historical price point for the item.
• Kevin bought one (1) item, not a multi-line order, not a multi-category order.
• Kevin has now purchased from a low-middle price point band and a high price point band.
• Kevin is an existing customer.

We already know a lot about Kevin. He doesn't pay full price, he only purchases when something is discounted, he only buys one item, he buys from multiple categories but not in the same order, he purchases high-price-point items and medium-price-point items, he purchased items about 30 days apart (i.e. high velocity ... you measure purchase velocity, right?).

These are the attributes I look at when measuring future value for somebody like Kevin.

I also apply these attributes to each item, and measure "who" buys the item and I measure something called "Merchandise Residual Value". You've heard me talk about it previously, haven't you? The concept here is simple ... if a customer buys an item that causes the customer to buy more merchandise in the future, then the item has positive MRV. If the customer buys an item that causes the customer to stop spending in the future, then the item has negative MRV.

Every one of us manages a business that sells items that have negative MRV. My business operates this way. Clients who craft ad-hoc projects outside of my product offering tend to not come back very often ... the ad-hoc project has negative MRV ... my Elite Program projects have high positive MRV because they bring in brands who then upgrade to more expensive projects. Maybe you are a gift brand ... you sell a gift to a customer in the 2nd week of December at 40% off and free express shipping and the customer never comes back ... that gift has negative MRV.

In my example above, two things happen.

• The Headphones have positive MRV - I purchased an amp a few weeks later.
• The Amp has negative MRV - I'm done buying from HeadAmp for the forseable future.

An item with negative MRV is an acceptable item. But it is important to understand the role that item plays in your assortment. In the case of HeadAmp, they're more than familiar with the Headphone/Amp/Dormant cycle.

Next step for HeadAmp? Since (if they perform Merchandise Dynamics analysis) they know that I'm headed for a dormant period, it's important to not spend valuable marketing dollars on me, but instead use free channels like email and videos to encourage me to do one of three things.

1. Upgrade to more expensive headphones (which people do all the time).
2. Cross-Shop into a different branded headphone with a different sound signature. This is where marketing matters ... it takes marketing chops to convince me to buy something I don't need. Marketing isn't setting up a retargeting program, marketing is convincing me to do something I don't need to do.
3. Migrate me into iems (in-ear monitors), which are a different category and are considerably cheaper, a category where I could easily purchase six or seven iems that cost the same (in total) as my $629 headphone.

Please tell me you think this way with your products/merchandise.

That's how you use Merchandise Dynamics findings and Merchandise Residual Value at your brand. You have countless examples of items with positive and negative MRV. How often are you using MRV to make better marketing decisions?

If the answer is "we're not using it", contact me right now and we'll get busy (kevinh@minethatdata.com).

P.S.:  If you are a traditional catalog brand reading this stuff, this is your future. As your catalog discipline becomes too expensive to execute, you'll have to apply these concepts in a digital realm to maintain relationships with customers.