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Healthy Business: Sweating The Details

I know, I know - you read social media, and you hear that the Finance Folks ... the Beancounters ... they're always messing with what you want to do ... they're questioning why your ad-to-sales ratio is two points higher than two years ago ... they're wondering why return rates crept up marginally.

There's a reason they do this. They sweat the details so that your business is healthy.

Look at these two companies ... one healthy, one unhealthy.

Both businesses generate $100,000,000 demand ... in other words, in both businesses, customers wanted to purchase $100,000,000 last year.

Now look at the subtle differences.

• The healthy business fills 97% of items / the unhealthy business fills 96%.
• The healthy business has a 23% return rate / the unhealthy business = 25%.
• The healthy business has a 41.5% gross margin / vs. 39.5% at the unhealthy business.
• The healthy business has a 32% ad-to-sales ratio / the unhealthy business = 34%.
• Warehouse costs are 10% for the healthy business / 11% for the unhealthy one.
• Fixed costs are 10% for the healthy business / 11% for the unhealthy business.

Those aren't big differences, are they?

But when evaluated across the profit and loss statement, the result is dramatic.

• The healthy business generates $6,139,518 Earnings Before Taxes.
• The unhealthy business generates $2,930,400 Earnings Before Taxes.

Every step in the profit and loss statement leaks one point or two points. And that modest level of leakage results in an unhealthy business - one earning less than half the profit of the healthy business.

Think about this, my friends.

Each business is equally successful at getting customers to buy stuff ... and that's the hardest thing to accomplish. This isn't the fault of the marketer, and it isn't the fault of the merchant. It's caused by all parties being sloppy.

The merchant doesn't forecast sales accurately or doesn't hustle when stuff sells out.

Instead of pleasing the customer the first time around (all aspects of the business), the unhealthy brand allows a return rate two points higher.

Incorrect forecasting leads to worse gross margins due to increased liquidations.

The marketing team are lazy and don't measure lifetime value properly and as a result bid too high for various keywords.

One warehouse uses people, the other robotics, resulting in a one point change in pick/pack/ship expense.

One business makes bad capital decisions, the other is careful, resulting in a one point change in fixed costs.

There are simple fixes to all of these issues ... the unhealthy business chooses not to implement the fixes ... they fire the Marketing leader and hire a new one ... every two years (it's her fault).

No, it's the fault of the culture at the unhealthy business - a business that does not sweat the details.

This is why you Finance Team behaves the way they behave.

Healthy Business: Teammates

Two years ago, I consulted with the healthiest business I've ever worked with. 

The most amazing thing about this business? The employees genuinely cared about each other. If you had six people in the room, you essentially earned the productivity of eight or nine people, because folks worked so well together.

Do you and your co-workers support each other? Marketing / Merchandising / Creative, all trying to help each other?

You can spot an unhealthy business a mile away ... people don't work well together, people don't like each other, and you have to push a boulder up a hill to get a decision made. Heck, I once worked in a department where the department head threatened physical violence if his wishes were not met. This led to three separate teams all trying to work on the same project, all competing against each other. That didn't turn out well. In another case, the Executive led terrifying meetings that caused people to walk out of the meetings ... weeping. Needless to say, the health of the business in this environment was ... sub-optimal!

Healthy businesses have employees who support each other ... the employees are not best friends, but they genuinely care about each other. And employees are allowed to make their own decisions ... with mistakes not being held against employees.

You (yes ... you, the reader) can change the culture of your business ... and in doing so, you may improve business performance, pushing your business closer to a Healthy Business.

Healthy Business: Testing

I fielded a call from an Executive. This individual wanted to understand the impact of a marketing tactic. The conversation went something like this:

Kevin: Did you test the idea?

Professional: Did I what?

Kevin: Before rolling out the tactic, did you test it, so that you knew the impact it would have on sales?

Professional: Heavens no. We were being strategic.

Kevin: What does that mean?

Professional: We workshopped a bunch of ideas on a white board, held a strategic session including all members of the Executive Team, and then picked the strategies we wanted to act upon.

Kevin: How is that being strategic?

Professional: Are you kidding? That's the essence of being strategic. A room full of Leaders making decisions.

Kevin: But now you are asking me what the impact of your decisions are, and you could easily have known the impact if you had the patience to execute a small test.

Professional: Just use some of your geeky math and answer my question, alright?

A healthy business wants accurate answers to questions.

Unhealthy businesses want somebody to "hack" the answer.

A healthy business possesses employees who want to learn, who want to understand how everything fits together. A healthy business then acts upon what was learned, and does not waste time retesting.

Unhealthy businesses want to be strategic, but their actions are not strategic.

A healthy business does this:

• Test.
• Learn.
• Act.

An unhealthy business does this:

• Theorize.
• Strategize.
• Lionize.

Yup ... since the unhealthy business doesn't want to learn, the unhealthy business creates theories. The theories are converted to strategies, and when the strategies don't work, the one who theorizes is lionized. This is one of the reasons why Marketing Executives are fired every two years.

If you want to improve business performance, try the Test / Learn / Act approach.

Healthy Business: Newness

I was in a meeting back in 2002 - the Chief Merchandising Officer of the online division was being beaten silly for not having enough new merchandise. At the time, I was a huge proponent of running winning items out there over and over and over and over and over and over and over and over again until they were dead tired. This thought process was drilled into my skull at Lands' End ... turtlenecks and mock turtlenecks in the first twenty pages of the catalog, no excuses ... same stuff, year after year after year.

Then I got to see what a "newness agenda" looked like at Nordstrom. Wow. I guess new merchandise works! Four straight years of healthy bonus payments will cause anybody to acquire an appreciation for new merchandise.

Back in 2013, I performed a Merchandise Forensics analysis for a company that was struggling financially. I noticed that this company had very few new items, and when they launched new items, the items typically failed.

Then you run fifty Merchandise Forensics projects, and the story repeats.

1. Healthy Businesses have a committed investment in new merchandise.
2. Healthy Businesses identify winning new items at rates far better than competing brands.

Businesses that fail to find successful new merchandise have to "cheat". There are many ways to cheat.

• Discounts / Promotions.
• Fake new items. For instance, moving a button around on a shirt does not make the shirt new - but the company will call this a new item and promote it as such to the customer.
• Arbitrary focus on "winning" products as a way to mask new item issues ... "it's what our customers demand of us."
• Blame ... "marketing can't find the right customers for where we want to take the brand."

The healthiest businesses increase the number of new/winning items, year-over-year.

The healthiest businesses increase the rate of new/winning items to new/average items.

The healthiest businesses have a marketing process in place to expose new items to large audiences at minimal cost.

Unhealthy businesses resort to discounts/promotions to sell stuff customers don't want. Yes, this includes free shipping promotions. Free shipping 24/7/365 does not fall into this category.

Surgically Cutting Catalog Circulation - Williams Sonoma

Give this one a read, friends (click here).

• "... has led the company to surgically cut our catalog circulation to rebalance and optimize our investments into digital channels."

Been saying this for a decade ... not fun for some to hear ... so if it comes from Williams Sonoma, maybe the impact will be greater.

There are a ton of catalogers who cater to aging Baby Boomers ... these folks will all go down the "surgically cut" path. It's a certainty, it cannot be avoided anymore, at least if a typical cataloger wants to be profitable.

In time, the old-school merge/purge process will go away as well ... and I know almost nobody in the catalog industry wants to hear that, because catalogers love old-school merge/purge processes.

Here's what is coming for traditional catalogers ... your vendors are likely to disagree with this, and that's fine. We all have different opinions.

• Merge/Purge processes disappear, replaced by hotline triggers that are integrated with vendor "hot lists". What does this mean? Think of it this way. If you are a New England based cataloger, your might work with a company like Datamann or another agency - there are several. A company like this will maintain a "hot list" of de-duped names fed from all co-ops and other "big data" providers. The "hot list" includes model scores from each co-op, updated hourly (and other data). So when a customer purchases from Williams Sonoma, that transaction is fed to the co-ops, the co-ops rescore the customer based on potential to buy from your brand, the new score is fed to Datamann or any other comparable agency, and your hotline process scours the "hot list" and sends a catalog to that customer on-demand. You'll pay $0.09 per name for the "hot list", with revenue shared by your favorite agency and the co-ops, and your performance will be better because the name is "hyper hot" ... the customer just purchased from Williams Sonoma, right? For those of you who believe in NaviStone ... that's the exact direction their future competition will take to compete with their product.
• Customer visits your website and is not mobile/social oriented, you'll trigger them a catalog. If so - you won't send a catalog, why would you ever send a catalog to somebody who is a generation or two removed from the art of cataloging?
• Lapsed customers will fall into digital triggers - catalogs will simply become way too expensive for these folks over time - there will be small 32 page catalogs to send to lapsed customers on a quarterly basis, or triggered when the lapsed customer buys complimentary product from other brands.
• Catalogs will generally carry winning items in the future ... real estate is too expensive for new items. New items will be advertised digitally (think email in the short-term), and the home page / key landing pages will be the domain of new merchandise.
• "Hot lists" will dynamically suppress customers who have no interest in catalog marketing (and this list will increasingly swamp the size of the list of customers who have interest in catalog marketing). When a customer buys from a Williams Sonoma store, that transaction will have a negative impact in the co-op models, and you'll save $$$ by not mailing that name.  But this process will be managed by an intermediary ... an agency like Belardi Ostroy or NaviStone or the competitors who are coming ... they will merge data from other sources and create the appropriate suppressions that are frequently missed by the co-ops. And they'll charge you accordingly. A Merkle or Clario have the talent to already be twenty miles down this path!
• Eventually, leading catalogers optimize themselves out of many of the traditional aspects of cataloging ... monthly catalogs & remails and all that stuff that employees love to assemble but customers increasingly ignore. The catalog evolves - to serve the needs of the "hot list" or to reactivate lapsed buyers as efficiently as possible. E-commerce does the rest.

That's about 5% of my thoughts on the topic - I could go on for days on this topic and field plenty of disagreements in the process ... why not send me a message (kevinh@minethatdata.com) and tell me your thoughts?

Healthy Business: Word of Mouth

The healthiest businesses I work with do an outstanding job of generating new customers via word-of-mouth.

Think about Betabrand ... they have a customer acquisition program designed to amplify word of mouth.

Of course, they're using discounts/promos to offer an incentive for you to refer a friend. But they also have those goofy glasses that provide word of mouth, they allow you to upload a photo while wearing the glasses to create word of mouth (and you earn a discount in the process).

Zara calls advertising a "pointless distraction" - they have more than ten million Instagram followers, and the imagery creates word-of-mouth that results in new customers at minimal cost. Not the quantity of new customers a catalog generates via a co-op, but that's not the point, because the cost is essentially zero.

Nordstrom has the legend of the person returning a tire to a store, earning a refund in the process. Word-of-mouth.

Every successful company I work with has some form of a word-of-mouth program.

I work with catalogers that have a 40% ad-to-sales ratio. Needless to say, they have no choice but to invest advertising dollars, because nobody is spreading the word on their behalf.

The healthiest companies have an enormous glut of new customers that they cannot possibly attribute back to paid marketing programs.

The least healthy companies obsess about attributing a meager number of new customers to expensive paid marketing programs.