Case Study: When The Crabby Merchant Is Right ... And Horribly Wrong At The Same Time

In the email dialogue shared yesterday, the Chief Merchandising Officer suggested that her customers had long repurchase cycles, therefore, it's not fair to measure future value across only twelve months.

For "Beans: The Internet's Only Variety Store", she is both correct and horribly wrong at the same time.

Her customers have long repurchase cycles. I use my Life Table Methodology to measure repurchase activity/cycles. Here is what the data looks like.

The green table shows incremental repurchase probabilities by month, as well as cumulative repurchase probabilities by month, for 1x buyers, 2x buyers, 3x buyers, and 4x buyers. The graph next to the green table maps out incremental repurchase probabilities for first time (1x) buyers. Look at that stupid-high spike at month = 12. What do you think that is?

• It is customers coming back and repurchasing at high rates exactly one year following a first purchase.

In other words, there are a metric ton of customers who buy in November/December, are responsive in Dec/Jan/Feb, then are inactive for most of the year ... then they magically reappear 11-12 months following a purchase to buy again. The customer then disappears for nearly a year before reappearing in months 23-24.

It's a hugely seasonal business ... the Chief Merchandising Officer is CORRECT in suggesting that her customers have a long purchase cycle and measuring things over time is more appropriate.

The Chief Merchandising Officer is also HORRIBLY WRONG at the same time. Her customers are simply not generating reasonable amounts of future demand no matter the timeframe looked at. Remember what I shared yesterday?

• New customers spend maybe $11 in year one, $7 in year two, and $4 in year three. In total, that's $22 of future demand ... it's nothing.

It is terribly difficult to run a business when customers have virtually no future value! The secret to a successful business is to manage acquisition costs while maximizing future profit yielding a wildly profitable relationship. If you cannot maximize future profit? No bueno.

The job of a great merchant is not to smoosh all sales into November/December. A great merchant creates reasons for customers to buy products all year long. The Nordstrom Anniversary Sale proves this is possible. Amazon Prime Days (where do you think they got that idea from) prove it is possible. The merchandising team at Beans should also know it is possible ... and chiding an analyst for not viewing customer response on an appropriate time horizon does not absolve the merchant for failing to create a thriving business in, say, June.

Does that make sense to you?