Calculating Merchandise Residual Value

Let's work through a very simple example of Merchandise Residual Value.

Let's pretend you have five customers and three items that the customer can purchase.

13-24 months ago, here's how much each customer spent.

• Customer #1 = $100.
• Customer #2 = $200.
• Customer #3 = $100.
• Customer #4 = $300.
• Customer #5 = $500.

0-12 months ago, here's how much each customer spent.

• Customer #1 = $0.
• Customer #2 = $100.
• Customer #3 = $100.
• Customer #4 = $0.
• Customer #5 = $300.

There are three items that the brand offered (in this overly simplistic example). Here are the items purchased 13-24 months ago.

• Customer #1 = Item 1.
• Customer #2 = Item 1, Item 3.
• Customer #3 = Item 2.
• Customer #4 = Item 1, Item 2, Item 3.
• Customer #5 = Item 1, Item 2 (twice), Item 3 (twice).

Ok, we have everything we need to calculate Merchandise Residual Value.

The average 13-24 month value of customers buying each item was:

• Item 1 = $275:  (100+200+300+500)/4
• Item 2 = $350:  (100+300+500+500)/4
• Item 3 = $375:  (100+300+500+500)/4

The average future value (0-12 month) generated by customers buying each item was:

• Item 1 = $100:  (0+100+0+300)/4
• Item 2 = $175:  (100+0+300+300)/4
• Item 3 = $175:  (100+0+300+300)/4

We can now fit Merchandise Residual Value. We regress 0-12 month value against 13-24 month value.

The equation?

• -119.231 + 0.808*(13-24 Month Value).

We calculate the prediction and compare it to what we actually observed. The difference is the residual ... Merchandise Residual Value.

Item #1 caused customers to spend $2.97 less in the next year vs. normal.

Item #2 caused customers to spend $11.43 more in the next year vs. normal.

Item #3 caused customers to spend $8.77 less in the next year vs. normal.

If you had to protect an item, you'd protect Item #2 because it adds $11.43 of future spend (next twelve months) to each customer who bought it the year prior. Which of the three items would you feature in your next email marketing campaign?

This is how you calculate Merchandise Residual Value ... and it's a very important metric to know in a world where your cost of goods might (or might now) increase significantly in upcoming months. Make sure you know the specific items that cause customers to spend more next year, ok? And if you don't know this metric, contact me right now (kevinh@minethatdata.com) and let's get busy calculating it.

Merchandise Residual Value

Every item in your merchandise/product assortment has two key attributes.

1. It is purchased by newer customers, average customers, or loyal customers.
2. It either adds to the future value of customers, is neutral, or detracts from the future value of customers.

If you have to take a bath on an item because the cost of goods on the item skyrocket over the next few months (or it doesn't, who knows), take a bath on items that appeal to newer/loyal customers and/or items that add to the future value of customers.

Perform the analytics and know exactly who each item appeals to ... know if that item adds or detracts from future value.

A/B/C/D/F Channel Grade Opportunity

Let's try something low-cost to help you plan better for Q3/Q4.

• For $9,000 I will grade every customer in your database (A/B/C/D/F where "A" is best and "F" is non-responsive) for every large marketing channel you employ.
• You will receive a list of all 60-month buyers, all customers graded.
• I will update the list for you with data through August 1, and again with data through October 1 ... or alternatively, I'll update the list for you on September 1 ... whatever works best for you.
• This allows you to save $$$ by not mailing customers with D/F designations, especially among those with A/B/C email grades.

Those of you who leverage my catalog modeling efforts ($15,000 or $30,000) get a better and more actionable outcome paired with analysis of the importance of your print efforts ... hence, the higher cost. Your email grades are already built into how many catalogs to mail a customer on an annual basis. When I tell you to mail a customer "3" times, that is a highly actionable and prescriptive outcome, based on whether the customer is an email respondent or not, based on whether the customer buys from other digital channels or not.

This analysis ($9,000) is designed to get you an actionable and inexpensive outcome without compromising the integrity of the bigger projects I've performed over the past fifteen years. I want you to have an opportunity to "do something" to save you money during what could well be a spirited eight months to follow. I want to do something to help you. And it helps me, too!

You can click here for the file layout.

Does this seem reasonable?

Send me an email right now (kevinh@minethatdata.com) and we'll get started, ok?!

Making Good Decisions

Those of you deciding to save money in upcoming months ... especially those of you in the print world ... will need to make good decisions. Really good decisions. Like not killing customer acquisition efforts. Like finding ways to keep customers buying whatever is available without spending a lot of money telling customers to buy stuff.

A good decision? Not mailing email buyers. Not mailing digital buyers. Not mailing 25+ month buyers. I've been telling many of you this for nearly twenty years. A fair number of you listened, hiring me to cut back on wasteful variable marketing dollars.

Now the rest of you are going to be forced down this path. Or not. Who knows?

But if you are forced down this path, score every darn customer in your database for propensity to purchase from different marketing channels.

Example:

• Print Customers ... top 5% = "A", 6% - 15% = "B", 16% - 35% = "C", 36% - 60% = "D", 61% to bottom of file = "F".
  
• Apply Same Modeling Logic to "Omnichannel" Customers (respond to print online), Website Customers, Email Customers, "Digital Marketing" Customers, and Social Customers.

You likely mail a TON of "D" and "F" customers. Don't do that!

Here's a great example of an individual customer from a large dataset:

• "F" for Print.
• "D" for Omnichannel (Print via the Website).
• "C" for Website.
• "B" for Email.
• "B" for Digital Marketing.

Catalog brands likely mail this customer 2-8 times per year. Stop it! The customer is in the top 15% for email marketing. You're already speaking to this customer 7-21 times per week.

If you want to conserve marketing dollars without putting the top-line at risk, here's the place where you can make a good decision ... so do it!

More News

An FYI.

Solving Two Problems At Once

I get two types of feedback these days.

• We need tariffs to even the playing field and not be taken advantage of anymore.
• My business is about to be clobbered for no good reason, my own Government is killing us.

Somewhere between those two comments ... surely ... must exist a reasonable solution. Right?

I mean, I've been to Tucumcari, New Mexico. Have you? Any reasonable solution must solve the "Tucumcari Problem".

This city is equidistant between Albuquerque and Amarillo ... cities north of 500,000 people and 200,000 people, respectively. Two hours east and two hours west, that's where the jobs are.

As you can see in the image/map above, the town is bypassed by I-40. If you're whistling by with a half-tank of gas, you don't need to stop at the "interchange commerce" resources (gas stations, hotels, fast food) at each exit.

Any reasonable solution should allow the residents of Tucumcari to earn an honorable wage, making a living doing something the residents want to do. Residents shouldn't have to move to Amarillo or Albuquerque because that's where the money is.

Of course, plenty of people do move, they do what they have to do ... which is why the population of Tucumcari is in decline.

I don't expect you to come up with a solution.

I do expect you to have some compassion for a town that was largely abandoned by the modern world the minute Route 66 was replaced by I-40. Somewhere between what we've done the past "x" years and the path we're taking is a reasonable solution.

P.S.:  If you want an example of how one town can be impacted by leadership and industry, allow me to present you with Green Bay, Wisconsin. Green Bay is hosting the NFL draft this weekend. Green Bay is a city of 107,000 people. That's it. The financial impact of having an NFL team in such a small town is felt region-wide. I grew up in Manitowoc ... any town from Sturgeon Bay to Manitowoc to Sheboygan to Fond du Lac to Oshkosh to Appleton to Shawano to Marinette/Menomonee ... any town in that region is impacted. Dollars come "in" to that region. In Tucumcari? Outside of interchange commerce, dollars go "out" of that community. We need to solve the problem of money leaving communities. Ok. I'm done now.

A Couple of Scenarios - Stop Wasting Marketing Variable Costs

When customers become less productive (as happened in April), decisions need to be made. Especially among lapsed buyers. These customers are, by definition ... lapsed ... and therefore are not terribly responsive.

When a customer is not terribly responsive, the last thing you want to do is spend a ton of money on the customer. It's just dumb. You can spend the money elsewhere ... find a new customer, make the best video about widgets ever.

Here's an example.

You could send a direct mail piece to the customer (assuming the customer is 60+ years old). Or, you could send an email campaign to the customer. One tool creates a good amount of lift, one tool creates very little lift. Take a look.

It's common for outsiders to look at the lift observed in print and say "Look at that, you moved the needle!" And you did ... the customer (in the example above) would have averaged $1.60 in the two weeks after the piece was mailed ... but instead spends $2.40. You did move the needle ... a lot.

Outsiders will look at the $0.23 profit generated by the audience mailed and say, "see, that's a lot of profit". And they are right. But they are measuring things wrong. Compare the mailed group to the holdout group ... $0.23 (mailed) vs. $0.69 (not mailed). Which strategy yields more profit? NOT MAILING THE CUSTOMER!!

Now look at email marketing ... it barely moves the needle ($1.70 vs. $1.60). But ... but ... the end result is MORE PROFIT.

In 2025, it is FOOLISH to waste marketing dollars on customers not likely to respond. Go ahead and spend $$$ on customers who are responsive ... if the lapsed customer just visited your website, have at it, because the customer is temporarily responsive.

In 2025, you don't spend marketing dollars ... you spend marketing effort. Sure, pay for that silly click because the customer is responsive. Otherwise, leverage your YouTube presence, your social media presence, and your email marketing program to teach customers why they should buy from you at minimal/no variable cost.

We're not wasting variable costs anymore, got it?