Dear B2B Catalog CEOs: Payback Period

Dear B2B Catalog CEOs:

There's a significant difference between you and your B2C cousins.

In B2C marketing, you're acquiring a customer that has a 40% chance of buying again, and if the customer buys again, the customer might purchase 3 times at $100 each over the next three years. This nets the B2C marketer $120 demand over three years. After backing out expenses, you're lucky to take home $25 profit. This means that the B2C marketer cannot afford to lose a ton of money acquiring customers.

In B2B marketing, you're acquiring a customer that has a 30% chance of buying again, and if the customer buys again, the customer might purchase 3 times at $400 each over the next three years. This nets the B2B marketer $360 demand over three years. After backing out expenses, you're blessed to take home $70 profit.

If the B2C marketer is taking home $25 profit over three years, and the B2B marketer is taking home $70 profit over three years, then the B2B marketer has a major advantage - the advantage of a stronger/longer payback period.

The B2B marketer can invest - almost over-invest - in new customers.

Your mileage will vary, of course.

But it's worth pointing out that if your AOV is north of $300, you have an opportunity to greatly ramp up your customer acquisition activities - investing today to protect the future of your business.

When you work with the folks at Merit Direct or your preferred vendor - focus less on all the technical stuff - focus on how much you can truly invest. Or email me (kevinh@minethatdata.com) and we'll figure out just how deep you can invest.

Cyber Monday Tip #5: Profit

Well, you're gearing up for Cyber Monday, aren't you? It's fun - the press talks about your business, there's a buzz in the air, discounts and promotions are available everywhere you look.

Some will be declared "the winners of Cyber Monday", based on social buzz or biggest discounts.

Your CFO will declare you a Cyber Monday winner if you generate more profit, both short-term and long-term profit.

The profit and loss statement we see here is typical. The normal offer is "free shipping" during Christmas, so in this case, the business offers 20% off plus free shipping for Cyber Monday.

Hopefully, some testing is done - testing that allows you to see how the promotion performed against the normal offer. In our case, the promotion did outperform the normal offer.

The "Increment" column is important. With the normal offer, you generate $19,800 profit on $90,000 net sales, at a profit rate of 22%.  In the "Increment" column, you generate $1,800 profit on $90,000 net sales, at a profit rate of 2%.

I once had an EVP tell me that you don't take percentages to the bank - all that matters are dollars. This promotion generates more dollars, right?

Another expert recently told me that you offer the Cyber Monday promotion, because you are going to steal market share from the competition. This one is interesting - I want you to think about this, for a moment. If everybody runs Cyber Monday promotions, and everybody see sales double over a short period of time, but annual sales don't double, then how the heck did you actually steal market share?

It's impossible. You didn't steal market share. Everybody posted gains. And since annual sales increase at maybe 3% to 7%, this tells me no market share was stolen - rather, sales were shifted out of other time periods.

The tip?

Run a test - your best offer against your normal offer - then calculate the "Increment" column in the table above. If you are generating less than 5% pre-tax profit prior to accounting for fixed costs, then you're not accomplishing a whole lot.

How Many New Items Do I Need? Eighty Percent More? Wow!

How many new items do I need to kick-start my business?

This issue is easily addressed. Think back to the Multichannel Forensics days of 2007 ... we forecast sales five years into the future, didn't we? Well, we can do the same thing with merchandise. Each item has a probability of being carried over, and if it is carried over, has a probability of being a winner/loser.  Here's an example from the booklet (click here to order via Amazon).

This business is toast. The number of "A" items is forecast to drop from 35 last year and 32 today all the way down to 26 in five years. The business is forecast to implode ... from $22.8 million to $18.5 million in five years.

Geez.

Our instinct is to prop the business up via marketing ... spend a fortune on new customers, email marketing, search, affiliate, mobile, you name it ... we'll chase the business, seeking to find a mythical omnichannel customer. We'll spend money, lots and lots of money. And we'll toss in 30% off plus free shipping, why not?

We'll just ignore the core issue. It's marketing's fault. They aren't targeting the right customer.

Why the heck wouldn't we solve the core problem - merchandise?

Isn't merchandise what the customer actually purchases?

Look at this instance - we'll ramp up new item development by 80% - yes, 80%. Now take a look at what happens:

Oh, the business is growing again!

Notice that I'm not asking for a miracle - I just want 80% new item growth across the board - poorly performing new items, winning new items, it doesn't matter. Just get some growth going! Now, your merchandising team might balk at 80% more new items, per year, for five years - but you have data on your side.

Look in year five - we have 41 "A" existing items, compared to 26 existing "A" items in our base scenario.

Do you understand how important new items are? New items mean everything!

And yet, we try to find some magical omnichannel answer.

Focus your efforts on merchandise, and truly make a difference within your company.

Contact me (kevinh@minethatdata.com) for your own, customized Merchandise Forensics project.

Cascading Problems

I talk about this in the booklet - that one set of problems cascades, yielding other problems (click here to purchase the booklet).

Maybe this sounds familiar to you?

Here's what I typically find:

1. In 2010-2011, coming out of the recession/depression (are we out yet?), there was pressure on the profit and loss statement. Everybody had to be on top of their game. As a result, merchants were under pressure to maximize performance.
2. Merchants, seeking to maximize performance, stayed away from new, risky products, squeezing every last ounce out on proven winners.
3. In 2012, two years of reduced new product introductions tricked into a problem with existing items. A 20% reduction in new products yielded an eventual 10% reduction in winning items in 2012.
4. With fewer high-productivity existing items, fewer new customers were acquired.
5. With fewer new customers being acquired, the marketing team gets yelled at.
6. When the marketing team gets yelled at, you can rest assured that discounts and promotions are not far behind. This propped-up 2012 demand, temporarily.
7. With demand propped up, profit suffered, causing Management to trim expenses.
8. In 2013, there are even fewer winning existing items, following three years of new item problems.
9. With even fewer winning existing items, marketing runs out of additional discounts/promotions, causing demand to once again sink.
10. This results in fewer new customers and lowered customer retention.
11. With fewer customers and lowered retention, there are fewer items that become "winners".
12. And with fewer items becoming "winners", there are fewer customers, and as a result, we're running a business without profit.

That's when the private equity folks are called in.

Cascading problems.

All caused by a failure to properly monitor what customers spend on new items, and on existing items.

And it's so easy to measure this, folks, just do it! What do comp customers spend on new items, and on existing items? The answer falls right into your lap. You'll immediately see if there is a new item or existing item problem. Then dig into your merchandising data, and figure out what is going on.

You're not failing because of "omnichannel issues".

You're not failing because your business "isn't agile, or isn't social".

You're failing because of merchandising issues.

Go solve the problem! Email me if you need help (kevinh@minethatdata.com).

Dear B2B Catalog CEOs: The Importance Of Human Beings

Dear B2B Catalog CEOs:

You have a major advantage over your B2C counterparts.

You employ human beings in a more central role in your marketing strategy.

In a recent project, I ran a query - I controlled for prior purchase history, equalizing customers. Among a segment of equal customers (as of September 2012), I measured next twelve month spend. Here's what I learned.

• Customers Assigned A Sales Rep = $800 future spend.
• Customers Not Assigned A Sales Rep = $600 future spend.

Remember, I equalized customers. This means that, with equal customers, the only fundamental difference in future value was that one set of customers were assigned a sales rep.

Better yet, within those assigned a sales rep, there were differences.

• Sales Rep = John:  $1,100 future value.
• Sales Rep = Jerry:  $825 future value.
• Sales Rep = Bill:  $775 future value.
• Sales Rep = Perry:  $520 future value.

In other words, it's really important to measure "who" works for you. My equalization methodology can ferret out the sales reps who truly provide incremental value to your business, and better yet, can put a dollar amount on how much value the individual creates.

For instance - if John is accountable for 1,000 customers ... and he generates $500 of true incremental value ($1,100 - $600 = $500) per customer, then John is accountable for $500,000 of incremental demand - likely $250,000ish of incremental profit.

It might be time to recognize John, don't you think?

Contact me (kevinh@minethatdata.com) for your own, customized B2B "human equalization analysis"!

Gliebers Dresses - Distribution Center Shutdown

If you like the drama surrounding the Government shutdown ... and you like catalog marketing ... and you like the Gliebers Dresses saga ... then you'll want to read what happens when Roger Morgan shuts down the Distribution Center.

Click here for the latest episode of Gliebers Dresses:

Mobile: A Developing Problem

We'll address the graph in a moment.

A key tenant of the Merchandise Forensics framework is that item reductions, especially via new items, leads to an erosion in customer productivity. And an erosion in customer productivity leads to fewer new customers, and fewer retained customers. This leaves us with a weaker customer file for next year, which drives down the volume per item/sku next year, which causes the merchant to "hunker down" and offer fewer items/skus - which causes fewer customers to purchase. The death spiral is underway!

I observed this in 16 of 20 recent Merchandise Forensics projects, FYI. This is a problem. It is especially a problem with catalogers trying to conserve cash - investing cash in paper instead of investing cash in the stuff customers purchase - merchandise.

But I digress.

So far, I don't like what I'm seeing, when it comes to Mobile. Love Mobile, don't love what it forces us to do, from a merchandising standpoint.

Let's go old-school ... back to catalogs. Go talk to an Inventory Manager, and you will hear a common lament:

• "If we don't feature the item in a catalog, the item does not sell well online."

In other words, the shift from catalogs to e-commerce caused a shift in the distribution of item selling characteristics.

In old-school cataloging, you saw something like this:

• 50 Great Items.
• 100 Good Items.
• 200 Low Performing Items.

Catalog marketing thrived on having a large number of good performing items - these items filled the catalog, making paper reps happy, making printers happy, driving down cost per thousand pages circulated, increasing new customer acquisition circulation (making co-ops and list folks happy).

Everybody wins when there's a bounty of good performing items.

E-commerce changed the dynamics of item performance. If you don't have a catalog to support advertising for good performing items, you end up with a different distribution:

• 60 Great Items.
• 65 Good Items.
• 225 Low Performing Items.

Google changed the equation - moving focus to the items that Google's algorithm favored (search). Google essentially "hid" the good performing items (page 6 of results). Email changed the equation - moving customer focus to the items that were given the biggest discounts and promotions. E-commerce eroded the number of "good" items, but rewarded "brands" with an increase in great items.

Mobile has many advantages over e-commerce, and myriad advantages over cataloging.

But mobile has one, enormous, whopping drawback.

In Mobile (as it exists today), you can only feature so many items. Given the display size, you are really, really stuck with what you can and cannot display.

Oh, I know, the pundits will argue against this (in catalog, they'll point to Catalog Spree - but if that was so great, why do so few people use it and why did they have to partner with Google), but be honest. On a 4" screen, there's only so much you can feature. The message, the story, it all must be simple. You can feature 100 product hyperlinks on a home page or landing page. You can feature 700 products in a 124 page catalog. You cannot do either (well) in Mobile (and maybe you shouldn't do this in e-commerce, either).

When what you feature is limited, then what the customer purchases is limited as well.

Based on the data I'm analyzing (highly preliminary), the distribution of items is going to continue to change. Here's what Mobile promises us:

• 80 Great Items
• 20 Good Items.
• 250 Low Performing Items.

In other words, we're seeing a "hollowing out" of the meaty middle, where old-school catalogers generated a ton of profit (allowing tens of thousands to catalogers to be profitable). Instead, we're moving to a world with a handful of best sellers, and a whole bunch of low-performing items. If we have limited space to display our merchandise (Mobile screen), we'll optimize that space with best sellers - it's a Darwinian process. This means we'll erode the "good" items - they either graduate up, or they drop down.

This brings me to the image at the top of the blog post.

When we measure the relationship between skus and $/visit (multiply conversion rate by AOV to yield $/visit), we see a clear, linear relationship. If all things are equal:

• Offer 100,000 skus, yield $6.50 per visit.
• Offer 200,000 skus, yield $8.00 per visit.

Now, the cost of having the 100,000 additional skus required to bump $/visit from $6.50 to $8.00 might be prohibitive. But if you figure out how to deal with the inventory (i.e. you don't own it), then the relationship is highly profitable.

But this is e-commerce, where a hundred thousand skus can be viewed via a series of drill-downs and landing pages and links, via considerable home page and landing page real estate.

How does this change in a Mobile environment?

Well, it changes everything, as the pundits say.

You're only going to feature a limited number of items. It's all you can do.

Mobile will likely limit what the customer can see. Look at your own phone - how many apps do you honestly use on a continuous basis? 15? 3?

As a consequence, Mobile will drive an effective reduction of skus - you'll still offer 100,000 skus, but your customer will perceive your brand as having 3,000 skus, or 300 skus, or more realistically just 30 skus.

Sku reductions lead to lower customer productivity, and fewer new customers.

In order to make Mobile work, we'll have no choice but to increase traffic.

Not everybody can increase traffic.

So in an arms race to capture a finite amount of Mobile traffic, we'll discount and promote ourselves into oblivion.

This leaves us with a handful of winning brands with enormous traffic (just like Amazon in e-commerce, but think something even bigger than Amazon in the future, or think Amazon becoming 40% of e-commerce instead of 20% - 25% today), with everybody else fighting for table scraps.

The handful of winning brands will be able to personalize, using sophisticated and expensive technology, to show off numerous skus - each customer will see a different assortment. This has been promised for two decades - but the technology is getting closer each day (experts will tell you it is already there, and it probably is), and Mobile will demand use of the technology to drive up conversion rates.

Remember, I write this stuff because I want you to think. 

Don't dismiss this argument with nonsense like "we're different, customers love our brand". Think about the argument. Think about the ramifications of the argument. Think about merchandise. I'm telling you what I'm observing, across a diverse set of clients.

Think.

Discuss.