There's Nothing That Harms Merchandise Productivity More Than Being 55% More Expensive Than Amazon For The Same Item

I am standing in a Camping World store ... in need of a small, portable grill for an upcoming trip.

Oh look, this little beauty is normally $99.99 ... but in store, it is on sale for $84.99. Cool! It's on sale. What's not to like?

A quick check of the website shows me this ... an online sale for $80.15 (click here). Even better. Except for one thing. When I navigate the myriad offers and upsell opportunities offered by Camping World, I learn that shipping will be $14.00.

So the item is cheaper in store.

But before I check out, I thought it wise to check what the price might be on Amazon. I mean, with my Prime Membership, I won't have to pay shipping, will I?

Here's the link to the price ... go ahead ... click it ... I dare you! 

Ok, I'll tell you ... wait for it ... wait for it ... $54.99!

While standing next to the darn item in a Camping World store, I add the item to my Amazon cart, I check out, and that's that.

Explain for a moment how any semblance of omnichannel wizardry overcomes the pricing difference? Go ahead ... I'll sit here and wait for an explanation ... and wait ... and wait.

There's nothing that harms merchandise productivity more than being 55% more expensive than Amazon for the same item.

Can I say that again?

• "There's nothing that harms merchandise productivity more than being 55% more expensive than Amazon for the same item."

That's a good quote.

But in an ecosystem where a customer can showroom the darn item, an even worse dynamic arises.

Here's the dynamic.

• An 18-39 year old customer doesn't even bother to step into the store.
• A 40-59 year old customer uses a smart phone and buys online.
• A 60+ year old customer waltzes into the store and buys the item.
• The merchandising team sees that various items seem to sell well ... the items that 60+ year old customers love, and elects to further promote items that 60+ year old customers love, further bonding the brand with customers age 60+.
• Only the marketing tactics that appeal to a 60+ year old audience tend to work, in part because of the merchandising/pricing/demographic dynamic, further fueling the ecosystem.

Cataloger after cataloger tell me that they now cater to the aging Baby Boomer customer. And it sure is interesting to hear online brands talk about how mobile conversion rates "stink". Both happen, in part, as a consequence of the dynamic above.

Merchandise Forensics isn't just about identifying the items that "work". It's about aligning merchandise and marketing and demographics. When the alignment fails, an odd dynamic forms. In many ways, we're all dealing with a comparable dynamic to what is illustrated above.

Diminishing Returns

Back in the early 1990s, a large part of my job was dedicated to measuring the incremental value of additional advertising.

The relationship between advertising (x-axis) and demand generation (y-axis) looked very similar to the curve you see depicted in this image. You got a lot of benefit by contacting customers ... and then ... you got less incremental benefit ... and less ... and less. Eventually, you were advertising and were essentially generating almost no incremental value.

Many of you wonder why I demand that you focus, not on customer loyalty, but instead, on acquiring new customers at a low (no) cost. This graph is the reason.

Here's what happens ... you eventually reach a point where you do not generate a sufficient return on investment. As you approach that point (not go past it, mind you, but as you approach it), the incremental cost to convert the customer to another purchase is greater than the incremental cost required to acquire one additional buyer.

This is where it gets interesting ... because if you decide to shift your advertising dollars to customer acquisition, then you end up with more customers ... and that means you get to market to two good customers instead of one very good customer. Unless you are Nordstrom or Wal-Mart or Verizon or Amazon, you want two good customers more than you want one very good customer.

Modern attribution work makes it very difficult to see the law of diminishing returns in action. You can easily see it within paid search. You can easily see it within retargeting. You can easily see it within email marketing. It's terribly hard to see the law happening across an integration of all three disciplines.

Make sure your attribution vendor is illustrating the law of diminishing returns to you. The best attribution vendors will be able to recreate their version of the graph above - quite easily - within a few hours of your request.

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You'll learn how your merchandise productivity is impacting your business. If you want my typical Merchandise Forensics framework (50 projects in the past three years), well, that's a separate project. This is more like your annual physical - you will know if your customers do not like your merchandise, and you will know how you stack up against other participants.

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Why is Merchandise Productivity important?

• 80% of my Merchandise Forensics projects strongly suggest that merchandise missteps, not channel strategy or marketing strategy, is the reason why a business is struggling.
• A 10% increase in Merchandise Productivity allows the marketer to invest more, typically leading to a 15% increase in reactivation rates, new buyers counts, and retained buyers. The marketer looks great when Merchandise Productivity looks great. The marketer gets fired when Merchandise Productivity is bad.
• Profit comes from Merchandise Productivity. Period. Ask Apple. When you understand Merchandise Productivity, you understand why you business isn't at 10% pre-tax profit, and you understand the productivity needed to get there.
• Merchandise Productivity can be changed. When the marketer figures out what is going on, the marketer can partner with the Merchant ... the marketer can feature new items that have potential, fueling those items to best seller status. When more new items become best sellers, the future of the business is assured.

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Channel Management - Makers & Takers

Have you read this one - from Buzzfeed of all places (click here)?

• 1,000,000 Nordstrom Rack customers upgraded to first purchases at a Full Line Store and/or Nordstrom.com.

I know, I know, I can hear the complaints now.

• "Kevin, you used to work at Nordstrom, so you are biased."

The omnichannel movement is all about getting the same customer to use every channel.

Why not get many customers to use many channels, independent of each other?

Nordstrom Rack merchandise is not integrated with the Full Line Stores, is it?

Nordstrom Rack pricing is vastly different than than pricing at a Full Line Store, isn't it?

Nordstrom Rack customers are younger, while Nordstrom Full Line Store customers continue to age ... it's essentially not the same customer, is it?

So if 10% to 20% of the customer files overlap, then everybody wins.

• Incremental purchases at an off-price channel.
• A fraction of the customers upgrade, and are fed into the Full Line Store channel at minimal customer acquisition cost to the Full Line Store channel.

Where would Nordstrom retail growth be without Rack?

In classic channel management, you have two dynamics.

• Makers - channels that create customers.
• Takers - channels that take customer created by other channels.

From 1995 - 2005, cataloging created customers, the online channel was the "taker". Then, the online channel took all the customers, rendering cataloging a niche marketing channel tailored to customers age 60-89.

From 2002 - 2012, the online channel created customers (after taking them from catalogers, no less), then the retail channel was the "taker". This led to the theory that channels had to integrate, so that the online researcher would purchase in a store.

From 2012 - 2015, the dynamic reversed - you've seen this, too, you measure this stuff, right? Right?! Once the online channel reached a sufficient level of maturity and service potential, the dynamic reversed - the retail channel created customers, the online channel reverted back to taking customers from retail. This dynamic is really, really bad for retail, because the dynamic doesn't allow for comp store sales growth as customers are slowly taken by the online channel, causing fixed costs to de-leverage (i.e. causing finance folks to need to close stores).

From 2012 - 2015, e-commerce was the maker, creating customers. Mobile was the taker, taking customers cultivated by e-commerce and converting them to the newer channel. Again, we're all going to misinterpret this - we'll say we must integrate the e-commerce and mobile experience. That's a mis-read of a classic channel shift dynamic that we've observed for twenty years (catalogs vs. e-commerce) and failed to understand. Remember when everybody grumbled that mobile conversion rates were horrible? That's a complete mis-read of a shift in channel dynamics ... same thing happened when e-commerce conversion rates were 2% and catalog response rates were 7% ... we were simply measuring everything wrong ... on a monthly basis, response was comparable. In mobile, the best customers, the obsessive browsers, converted quickly (low conversion rates), and were measured poorly.

Channel dynamics are not constant. They continually evolve. They must be measured. Must be. If we listen to pundits and don't perform our own due diligence, we'll simply be at the mercy of vendors selling solutions. Times are changing. We need to create businesses where channels feed each other, constantly supplying new customers into the ecosystem, new customers that are then migrated along or are kept within a portion of the ecosystem.

A Stunning Quote About Macy's

Have you read this wonderful piece about Macy's and their Real Estate portfolio (click here)?

Here's the stunning quote that you need to pay attention to:

• Starboard chief Jeff Smith estimated the value of Macy's real estate at $21 billion last month -- and that's almost exactly what the entire company's market cap is today.

Do you understand what that means?

• Their brand is worth $21,000,000,000.
• The buildings they own are worth $21,000,000,000.
• The merchandise they sell and their omnichannel strategy and their creative/marketing strategy and their customer service strategy is worth $0.

#Omnichannel!!!!!!

For the past five years, research brands, trade journalists, consultants, and vendors demanded that you adopt an omnichannel strategy or your business would be "dead". Repeatedly, they use Macy's as the poster child for success ... so much so that Macy's, in their SEC filings, proclaim that they are "America's Omnichannel Store".

Meanwhile, sales (which had been flat or largely tepid for years) are now in decline. Sales are declining. Declining. The value of everything they do is $0. The value of their real estate holdings represents 100% of the value of the company.

Now, can they reverse this trend? Absolutely! But look where the strategy led them. Are you following the omnichannel playbook? Where is it leading you?

Focus on merchandise excellence.

Focus on telling a spectacular story that customers want to learn more about.

Focus on entertaining your customer base. It's not good to bore customers.

Focus on aligning pricing tactics with your core audience.

Focus on finding new customers - never take your foot off of the new customer acquisition gas pedal.

Focus less on omnichannel strategies that benefit research brands, trade journalists, consultants and vendors.

Do what is right for your business.

Retail And Experiences

One of our loyal Twitter followers forwarded this gem about retail, and Macy's in particular (click here).

Let's briefly move to the world of sports - because in sports, we can draw parallels that make sense. We'll focus on the Seattle Mariners - a baseball team out here in the Pacific Northwest that has had three winning seasons in twelve years and zero playoff appearances in fourteen years ... FOURTEEN YEARS! None!

The team is perennially awful. The team, can we all agree, represents the merchandise. In St. Louis, the team is really, really good - as a result, they average over 43,000 fans per game, and at rather beefy ticket prices. No need to do much discounting when fans want to be in the stadium to see a winning team. But in Seattle, where the team is bad, attendance averages just a bit over 29,000 per game. 

Can we agree that the stadium (along with promotions like bobble-head days and fireworks after the game) represents the experience? In other words, a team can win, and winning is really important - but the stadium also makes a difference. The experience you have makes attending the game fun. Boston has a bad team but a great experience, hence, they have good attendance. Seattle has a bad team and a good experience, hence, they have below-average attendance. Tampa has an average team and a lousy stadium / experience, hence they have horrific attendance.

Does that make sense to you?

Look at the attendance list (click here). Eight of the top ten teams are winning a lot this year ... the other two teams have won a ton in recent years. So clearly, winning matters, a lot.

Now, if you aren't winning, you better darn well have a great customer experience. Look at the teams 11-20. Look at Milwaukee - a terrible team with a great in-game in-stadium experience. They've built a tradition and a tailgate experience that makes going to a game fun, win or lose. Sausage races? They have 'em (hint - cheer for the Chorizo). Their attendance, after controlling for the quality of the team (Merchandise), is really good.

Have a bad team and a bad experience? That doesn't work (look at Oakland).

Can we agree on the framework?

1. Winning (Merchandise) matters most.
2. Experience (Stadium) matters a lot.
3. It's tough to make things work if you lack Winning and you lack a good Experience.

Ok, now let's move back to our world.

1. Winning (Merchandise) matters most (ask JCP - click here - they add Sephora to stores & it comprises 12% of sales and helps generate a 4% comp increase).
2. Experience (Fun, Entertainment) matters a lot.
3. It's tough to make things work if you lack Merchandise and Fun.

Now, Macy's largely sells what everybody else sells, right? Heck, they sell just about everything available in apparel. So the merchandise may or may not be the issue - because Kohl's sells a lot of the same stuff and their results are tepid while Nordstrom sells a lot of the same stuff and full-price business isn't horrible at Nordstrom. If everybody is selling the same merchandise, then the experience is heightened, exaggerated, and disproportionately important.

Let's move to the experience. Is it fun to shop in a big old box-formatted store like Macy's? If you had three hours of free time, would you spend it having fun at Macy's, or would you invest your time in a more enjoyable experience elsewhere?

Be honest.

Now, the omnichannel thesis can work. Sure it can!

But sit back for a moment, and think about whether our application of the omnichannel thesis answers the right question. Which of the two questions below is the omnichannel thesis designed to answer?

1. Are customers not shopping because channels are not aligned and because it is hard to do research in a mobile environment that leads to an in-store purchase?
2. Are customers not shopping because retail is boring?

If the answer is (1), then the omnichannel thesis is the appropriate answer.

If the answer is (2), then omnichannel is feckless.

I am not confident that we are addressing the right question.

Your thoughts?

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Frequently Asked Questions:

Question: Why can't I get more for $1,000 than this? Where is the detail?

• Think of this as being your annual physical. Your annual physical is inexpensive, you get checked over, and if there are any problems, you go see a specialist and the meter really begins to run. That's what I am doing here. I am measuring the overall health of your merchandise assortment. If I find that there are problems, then I recommend that you hire your favorite vendor, preferably me, to dig into the issues via a Merchandise Forensics project.

Question: Why does the cost double after an arbitrary date?

• As you know from following me for nearly a decade, I offer the best prices on new products to my long-term client base and long-term subscriber base. Then, prices increase, and when a product is fully fleshed out, the price is increased again. Those who partner with me at the beginning of a process are rewarded.

Question: Are you planning on using straight averages or weighted averages for the competitive portion of the analysis?

• I might do both. In the early stages, we might have a large business and nine small businesses, so the overall average will be misleading and the weighted average will be misleading. Once I have the initial roster for the first run in October, I may do both and share both with you.

Question: Can I see the competitive results and not pay and not send you data? I'd love to see the overall results, as would anybody.

• No. That's called "getting something for free" or "taking advantage of others who are paying for a solution". Go talk to Woodside Research, let them set you up with a solution.

Question: Why use 2x buyers last year for your comp segment analysis? I think your definition is biased.

• More than 50 Merchandise Forensics projects illustrate that the 2x-last-year definition is most effective at identifying merchandise trends. 1x buyers are infrequent and are influenced by new buyers. Loyal buyers are too highly influenced by discounts, promotions, and loyalty programs. A proper comp segment analysis needs to illustrate the impact of merchandise on your business. You are always free to run a comp segment analysis yourself, using your own data.

Question: Can you run a customized segment analysis just for my business? I'd prefer to see 5x buyers!

• Probably not. You are welcome to speak to your in-house analyst and have your in-house analyst perform the work. Or, work with me on a Merchandise Forensics project. Now, having said that, the structure of the product may change over time, and may include more detail. I reserve the right to provide more insight over time, and will quite likely do so. If you get in on the introductory rate, you get to play a role in the evolution of the product, and you lock in on low pricing.

Question: Can I join your pilot group after August 20 and still get the low introductory rate?

• No. How is that fair to the companies that followed the rules and jumped-in early?

Question: Let's say your analysis shows that I have a 5% drop in merchandise productivity on November 1. What do I do with that? How do I make the analysis actionable?

• Use the analysis to prevent a 5% drop in merchandise productivity in November 2016. Where did the problem happen? On your best items? Specific merchandise categories? Within various price points? New items? Defective items? Items with high return rates? Items that are sold on Amazon? Proprietary items? Dig into your data, and figure out what you did wrong on or around November 1, and make sure it doesn't happen again. Or hire me for a Merchandise Forensics project, and I'll dig into your data for you.