Optimal Assortment Size??

At your company, let's assume you sell 100 Womens items and you generate $1,000,000 a year. 

Let's also say you sell 35 Mens items and you generate $550,000 a year from those items.

Let's say your CEO wants you to add 10 items to the assortment.

Should you add the 10 items to the Womens assortment, or to the Mens assortment?

This is a classic example where a regression-based power function can be used. You can look, year-over-year, at the increase in styles/skus, and you can compare it to the year-over-year increase in sales. This is done by merchandise division, at which time you fit an equation and then you answer the question.

We'll use a simplified version of the equations I use. The end result?  Adding items to the Mens assortment is likely to yield a better sales increase.

• 10 Additional Womens Items = (110/100)^0.5 * 1,000,000 - 1,000,000 = $48,809.
• 10 Additional Mens Items = (45/35)^0.5 * 550,000 - 550,000 = $73,641.

When you fit your year-over-year relationship, you'll come up with coefficients that are different than what I use above (0.5) ... but the concept holds. It's a reasonably straightforward exercise to determine where you might be over-assorted or under-assorted.

Marrying Acquisition Investment With Long-Term Value

Your annual repurchase rate dictates everything about your investment strategy, doesn't it?

When you retain 20% of last year's buyers, your newly acquired buyers have minimal long-term value, requiring you to make money on the acquisition transition.

When you retain 50% of last year's buyers, your newbies generate a healthy amount of long-term profit. You get to make an important decision:

• Do I want to generate a TON of short-term profit and sacrifice long-term growth?
• Do I want to "scale" my business and lose money for several years but then have a much larger business that generates a ton of future profit?

Most of the businesses I've worked with that retain 50% of last year's buyers choose short-term profit. It's a choice, and there isn't a right/wrong one. But you can have a huge brand that is wildly profitable if you execute the latter strategy.

When you retain 80% of last year's buyers, you can lose a FORTUNE acquiring the customer because the customer will pay you back for years. Years!!!

Marry your acquisition strategy to downstream customer dynamics. You almost have to make money on the initial transaction if you manage a business with a low annual repurchase rate.

Visual Merchandising

Twitter user @travelintweeter sends us this image from inside a major retail brand. The image was take late last week.

If you read retail pundits on Twitter, you'll come to the conclusion that the customer wants two things.

1. An seamless, frictionless omnichannel shopping experience.
2. A fabulous customer experience, fueled by technology.

How about not stuffing a handful of disorganized Hersheys bars in a bin?

How about making sure all the bottles on top of the counter are vertical?

How about processing that red whatever-it-is next to the bottles?

During major events at Nordstrom, I had to work in the stores. Trust me, you don't want Kevin working in one of your stores. Since my skillz (yes, with a "z") were limited, my job was to clean up messes like what you see in the image above. In other words, I'd run that red top back and hang it for returns processing. I'd make sure the presentation of everything in my department was perfect (and this isn't easy work because customers are savages and they'll nuke every perfectly featured display if given the chance).

We've done a good job (as an industry) of paying vendors tens of millions of dollars to execute strategies that aren't moving the needle.

We could spend next-to-nothing to hire a person responsible for making sure that, visually, our merchandise looks spectacular.

Vendor Mistake

Here's a problem, quite possibly caused by the vendor responsible for email marketing at Final Draft ... maybe not, but quite possibly yes.

I once had a boss who told me that I was free to pick and choose vendors and when my vendor messed up badly I'd lose my job as a consequence. Is that a fun work environment? Nah. Is that the way the world works? Oftentimes yes.

We all make mistakes.

The outsourcing of all marketing activities to the vendor community (yes, I'm exaggerating for effect) means that we become more accountable than ever before, while at the same time being an arms-length away from those who should theoretically be accountable with us.

Two $25 Items or One $50 Item??

Both tactics lead to $50 in your pocket.

In most projects, however, the customer who buys two $25 items has better future value than the customer buying one $50 item.

Run the analysis for yourself and you'll come to a comparable conclusion.

Every price point has a purpose.

Quantity of items purchased has a purpose.

From a marketing perspective, you have a responsibility to share all price point options with the customer. You want to encourage customers to buy multiple items where possible ... the downstream profit you generate helps pay your bonus in future years!

Gifts

Certain items are sold with the purpose of being offered as gifts. In your database, you can easily discern this fact by looking at the winning items during 11/15 - 12/15 ... items that then quickly die off.

If you want to see how effective those items are at creating loyal customers, measure the 12-month repurchase rate of customers who bought gift-centric items. Say a customer bought the item on November 20. Measure the probability of the customer buying that item again from November 21 to the following November 20. Repeat this process for every customer who bought that item, and you have an "item-rebuy" metric for each item.

The metric is useful because it helps you understand which items generate loyal buyers, and helps you figure out which items generate short-term profit (both of which are important).

Every item in your assortment has a purpose.

Every price point in your assortment has a purpose.

Your merchandising team has a purpose for each item.

Your customers have a purpose for buying each item.

Your job is to understand the real purpose of each item.

But They're Easy To Acquire!

Look, I get it. You've got a budget you have to hit so acquiring a new customer between 11/15 and 12/15 at 50% off makes a lot of sense, right?

Do you measure the downstream value of customers acquired between 11/15 and 12/15?

Often, the results look like this:

• Acquired Rest of Year = $24.00 Profit.
• Acquired 11/15 to 12/15 = $12.00 Profit.

Print-based marketers are particularly guilty of fueling this dynamic ... mailing way too many catalogs to customers acquired 11/15 to 12/15, driving down long-term value in the process. It's bad enough customers acquired 11/15 to 12/15 have lower annual rebuy rates to begin with, don't amplify the process by harming long-term value by over-marketing to customers.

So don't do that. If you have to acquire Christmas customers in large quantities, at least manage lifetime value properly, ok?