Progressive

As best I can tell, Progressive (yes, the company that has all of those commercials with "Flo") generates $25 billion in annual revenue and spends a bit more than $500 million on marketing.

That's a 2% ad-to-sales ratio.

And they apparently pay "Flo" $500,000 a year ... 1% of their marketing budget.  All stats can be identified via Google searches.

There are ways to not spend 25% - 30% of net sales on paper.

Renting

Advertising is largely a rental platform ... you rent space or paper or a click, and it's your job to demonstrate that you made a good investment.

The smartest companies tend to have low ad-to-sales ratios. In other words, the smartest companies do not need to rent attention, they generate their own attention.

Facebook ad-to-sales ratio in 2017? 11.6%.

Alphabet/Google ad-to-sales ratio in 2017? 11.6%.

Well isn't that interesting?

Apple last disclosed marketing spend in 2015. Their ad-to-sales ratio that year? 3.5%.

Amazon's ad-to-sales ratio in 2017:  5.6%.

Wayfair ad-to-sales ratio in 2017:  10.3%.

A typical cataloger somehow possesses a 22% - 33% ad-to-sales ratio. Yeah, how the heck is that possible in a modern world?

And retail isn't much different ... instead of renting clicks or paper or 30-second slots you are renting real estate

If you have to rent more than 15% of your sales (effectively passing pure profit to third parties), you've got problems.

If a competitor spends 10% less on marketing than you spend, then the competitor has 10% of sales to spend on everything else to out-compete you.

And if your response to this is "yeah, but if we don't spend the money we don't get the sales", then you have absolutely messed up your business and need to start a new marketing plan, don't you?

In 2018, there's too many initiatives that require money. Marketing cannot consume 25% or 30% of annual sales.

Channels Influence What Sells

I know, I know, you are supposed to offer the same merchandise in every channel and create a frictionless omnichannel customer experience ... because that's what the customer wants, or so we are told. Then the customer goes and buys from Amazon anyway.

There are channels that customers prefer specific merchandise. Twenty years ago at Eddie Bauer, 40% of what we sold online was extended sizes ... yup, the customer didn't want to buy the XXL Tall shirt in a store, so he bought it online. 

It's no different today. Each channel possesses strengths, and each channel possesses weaknesses. You'll understand this when you evaluate future merchandise preference by historical channel preference.

Here's an example from a recent project.

• Historical Preference - Catalogs = 37% buy from Merchandise Category 14 in the future.
• Historical Preference - Online = 27% buy from Merchandise Category 14 in the future.
• Historical Preference - Email = 29% buy from Merchandise Category 14 in the future.
• Historical Preference - Search = 25% buy from Merchandise Category 14 in the future.
• Historical Preference - Customer Assistance = 24% buy from Merchandise Category 14 in the future.

We learn that there's an interaction between customers who historically loved catalogs and customers who buy from Merchandise Category 14 in the future.

This is a big deal. Why?

• Companies that try to evolve their catalog toward an "omnichannel merchandise assortment" are companies that have problems with catalog productivity.

In other words, the catalog can be really hard to change, because there's a predisposition for some customers to align with certain merchandise categories. When you homogenize the whole experience to please the omnichannel customer experience thesis, you erode profitability.

Let each channel cater to the customers who love the merchandise in that channel. You can offer the same stuff across channels, but you don't have to FEATURE the same stuff across channels, ok?

Email Marketing and Discounts

It comes up over and over again.

The email marketing team wants to maximize open rates (not profit, mind you, open rates). How does one do that? Great merchandise? Well, sometimes. More often, of course, is that the marketing team will apply discounts / promotions - or will be directed by Management / Merchandising to apply discounts / promotions.

Soon thereafter, the process is institutionalized - an in-house best practice. Worse, customers learn that the process is institutionalized.

Here are some results from a recent project, featuring the preferred historical channel used by customers - measuring how much demand will be tied to a discount in the next year:

• 23% = Print / Catalogs.
• 30% = Online / All Other.
• 46% = Email Marketing.
• 26% = Search.
• 33% = Online Customer Assistance.

Look at customers who spend the majority of their money via email marketing ... their rate of discounting next year is at 46% - compare that to print . catalogs, which are at 23%.

Say your average discount is 30%. Say your cost of goods is 40%.

Gross Margin Dollars via Print / Catalogs per $100:

• Full Price = $100 - $100*0.40 = $60.00.
• Discounting at 30% off = $70 - $100*0.40 = $30.00.
• Weighted Average = 0.77*$60 + 0.23*$30 = $53.10.

Gross Margin Dollars via Email per $100.

• Full Price = $100 - $100*0.40 = $60.00.
• Discounting at 30% off = $70 - $100*0.40 = $30.00.
• Weighted Average = 0.54*$60 + 0.46*$30 = $46.20.

Gross Margin Dollars via All Other Online Activity per $100.

• Full Price = $100 - $100*0.40 = $60.00.
• Discounting at 30% off = $70 - $100*0.40 = $30.00.
• Weighted Average = 0.70*$60 + 0.30*$30 = $51.00.

In this case, you lose $6.90 for every $100 in email demand (vs. print/catalog demand). You lose $4.80 for every $100 in all other online activities.

If you give the email subscriber your best discounts/promotions, don't be surprised if the customer becomes trained to use email marketing ... not because it is a good channel ... but because that's where the discounts / promotions are found. Now you've got to work 7% harder just to get back to break-even.


P.S.:  Here's an example of a marketing team running a promotion and causing problems (click here). I've made huge mistakes in my career, so everybody is going to have problems from time to time. One of the challenges I'm seeing in 2018 is the inability of a generation of Digital Leaders to think three steps ahead in the offline world. It'll get fixed, often via bad experiences.

MLV: Where You Feature Items Matters

In a recent project, I attached customer repurchase activity next year to the items a customer purchased last year. Then, I build a regression equation to determine if various merchandise categories and/or marketing channels and/or other factors play a role in helping an item launch customers to loyal status.

Here's what I learned (after controlling for customer quality).

• Items featured in catalogs caused customers to become "more loyal" in the future.
• Items featured in email campaigns caused customers to become "more loyal" in the future.
• Items that skewed to search (paid or natural) caused customers to become "less loyal" in the future.
• Items that were more likely to be tied to discounts/promotions were items that caused customers to become "less loyal" in the future.

Remember - we're analyzing customers who bought an item last year and determining the repurchase rate of those customers in the future - appending future repurchase back to the items customers bought last year. There's some chicken/egg stuff going on, of course (putting best items in catalogs, for instance).

Pay attention to the search finding ... Google plays a key role in influencing the future trajectory of your business. If Google brings customers who are less likely to buy in the future, and the items those customers buy become winners, then Google has mucked-up your brand ... they drive low-rebuy customers to you who like specific items that cause your merchants to offer more of those items (thereby attracting more low-rebuy customers).

Think about that for a moment - my project work shows that this dynamic is happening.

P.S.:  Facebook + Google get 75% of all digital ad dollars (click here). Your future requires you to find new customers outside of Facebook / Google / (and for catalogers, catalog co-ops).

MLV: Gift Cards

One of the offshoots of Merchandise Lifetime Value is measuring annual repurchase rates of customers who bought specific products/merchandise.

Why do we do this?

We want to understand the products/merchandise that cause customers to purchase again in the future, after controlling for historical spend at a customer level.

It turns out that there are many items that are so good and so appreciated that they cause customers to be more likely to buy in the future.

One of those items are gift cards.

Customers who are willing to spend their own money to give to another individual to buy from your brand are customers worth paying attention to.

Segment your customer file by gift card buyers (yes/no), and then measure what gift card buyers do in the future.


P.S.:  I'm old enough to remember when "Interactive Mailpiece Engagement" was simply known as "reading" (click here).

MLV: Merchandise Profile

Every item you sell has a profile.

For a company I recently analyzed, here's a sample of profile attributes for Item #1:

• Customers who bought the item last year have a 70% chance of buying again next year.
• 46% of the customers who bought the item last year spent at least $500 last year.
• 41% of the customers who bought the item last year bought it via a discount/promotion.
• 11% of the customers who bought the item last year purchased it via the call center.
• 31% of the customers who bought the item last year purchased it online, no marketing channel attributed to the order.
• 12% of the customers who bought the item last year purchased it via email marketing.
• 28% of the customers who bought the item last year purchased it via search.

Here's a sample of profile attributes for Item #2:

• Customers who bought the item last year have a 38% chance of buying again next year.
• 13% of the customers who bought the item last year spent at least $500 last year.
• 86% of the customers who bought the item last year bought it via a discount/promotion.
• 9% of the customers who bought the item last year purchased it via the call center.
• 42% of the customers who bought the item last year purchased it online, no marketing channel attributed to the order.
• 4% of the customers who bought the item last year purchased it via email marketing.
• 29% of the customers who bought the item last year purchased it via search.

The goal of every item we sell is to cause customers to become more loyal, and therefore, cause customers to come back and buy again.

Item #1 above does a great job of this.

Item #2 above doesn't do as good of a job as Item #1, does it?

It you have two items, and one item does a great job of fostering customer loyalty while another item harvests short-term margin dollars but does not foster customer loyalty, which item would you prefer to feature?