But They Need To See New Merchandise

One of the first things I look at in a File Power analysis is new merchandise.

• Do the best customers prefer new merchandise?
• Do new/marginal customers purchase new merchandise?
• Does the brand push existing merchandise at new/infrequent customers?

Here's the format of the grid system I produce within a File Power analysis.

The best customers (Grade = "A") reside in segment X=5, Y=5. Those customers generate 48% of their sales via New Merchandise.

Marginal customers (Grade = "F") reside on the left side of the table ... typically at X=1 or X=2. They generate between 15% of their sales and 30% of their sales via New Merchandise.

It's common for old-school catalogers to stuff the catalog full of best sellers to maximize prospect performance. In other words, catalogers frequently "cause" this dynamic to happen.

For e-commerce brands, the dynamic still frequently happens. Best customers are bored by the same-old-same-old ... best customers seek out new merchandise.

The e-commerce brand can personalize the experience to serve multiple audiences.

• Feature newness to best customers, maximizing response/conversion.
• Feature best-selling winners to prospects and infrequent buyers, maximizing response/conversion.

Do something different for each audience, and you'll find you have more File Power ... resulting in better short-term sales and better long-term potential.

Personalization = File Power

I've told this story before, but the story is so juicy that one can't help but tell it again.

Years ago, I'm sitting in an Executive Meeting. An analyst ... a little 'ole analyst ... is presenting findings from her personalization work. She's probably making $60,000 a year and yet she personalized emails and the home page and landing pages with the merchandise a customer wants to purchase. Her work "works" ... not like the nonsense pundits tell you to do ... her stuff actually causes customers to respond almost 50% better.

Because of personalization.

She figures that she's impacting 20% of e-commerce transactions by almost 50% ... in other words, she and she alone is causing e-commerce sales to increase by 10%.

Think about her work this way.

• Base Case = $50,000,000 net sales at a 35% profit factor, $7.5 million ad cost, $8,000,000 fixed costs ... Profit = $50,000,000*0.35 - $7,500,000 - $8,000,000 = $2,000,000.
• Personalization = $60,000,000 net sales at a 35% profit factor, $7.5 million ad cost, $500,000 personalization software cost, $8,000,000  fixed costs ... Profit = $60,000,000*0.35 - $7,500,000 - $500,000 - $8,000,000 = $5,000,000.

Without personalization = $2,000,000 profit.

With personalization = $5,000,000 profit.

This analyst, at $60,000 per year, is generating $3,000,000 of annual profit ... profit that the Executive Team is going to get to share via bonus payouts of close $200,000 each.

How do you think the Executive Team responded to this finding?

After her presentation, they mocked the analyst.

"She doesn't get it."

"When she personalizes what a customer sees, she destroys the essence of 'the brand'".

"How will the customer see new merchandise if all she ever does is present best sellers to customers to boost conversion rates?"

Even the analyst missed a key point.

• Her work caused an additional $10,000,000 in sales, which resulted in 75,000 additional customers. Those customers would generate $5,000,000 in additional sales / File Power next year, causing another $1,200,000 profit after factoring in incremental ad costs.

This happens EVERY DAY, folks.

Executives babbling about nonsense.

Analysts missing key benefits of their work.

You've got to study File Power if you want to understand how your business truly behaves. If you aren't studying File Power, you are harming your business.

It Is Possible To Create File Power Via Discounts / Promotions - Be Smart

Macy's is always 40% off and is always on sale and as a result they don't stand for anything. They don't generate any File Power from their promotions because EVERYBODY gets a deal. They're just operating a tired business model, one that brought customers into a mall so that all mall tenants could benefit from the traffic.

Your business is more special than that, right?

So here's an example of how you could generate File Power while still executing the discounts and promotions that you love to execute ... getting mileage out of your CRM efforts so that your CFO feels like your investment in "data" was worthwhile.

Here a company called Last Bottle (click here). When somebody is down to a handful of bottles, they can clear 'em through Last Bottle. On Leap Day (several days ago), they had a promotion ...

You've all seen the "Receive $30" promotion ... though it always amazes me that old-school companies reject this effort while embracing paying intermediaries to do the hard work.

But look at the promotion on top.

Tell me how you couldn't make this work for your liquidations efforts? You don't give the promotion to everybody, you only give the promo to the customer taking the LAST item.

And I know, I get it, your systems "can't handle" that kind of promotion.

Doesn't that mean that "your systems" are antiquated and you need to change?

Do things that increase File Power.

It's March, and Those Christmas Buyers are Dormant

I spoke at a conference. One of my slides on File Power criticized customers acquired at Christmas. I made it very clear that when you acquire a customer at Christmas, you make a File Power tradeoff.

• You earn top-line Christmas sales.
• You might earn bottom-line benefit before the end of your year.
• You lose long-term File Power.
• Without long-term File Power you become a transactional brand who is weakened all year and then pays Google/Facebook $$$ to save the year.

If you've ever had a chance to speak in front of an audience, you know as well as I do that somebody in the audience is going to be offended by what you say, and wants to make sure they "correct the speaker". The conversation goes something like this:

Expert:  Do you really believe that Holiday buyers are worth less?

Kevin:  I've analyzed billions of transactions. I have proof.

Expert:  I must say, I don't believe you.

Kevin:  Why?

Expert:  Well, our brand is kind of unique and special. Our value proposition enables us to harvest Holiday demand efficiently.

Kevin:  You don't even know what you just said, do you?

Expert:  I'm just saying we acquire Holiday buyers at or below break-even, and we can convert them efficiently.

Kevin:  What is the rebuy rate of Christmas buyers in the first half of the year?

Expert:  We don't look at data that way.

Kevin:  Do you look at the data at all?

Expert:  I just think it is short-sighted to criticize brands who harvest Holiday buyers at the time of the year when the fish are most likely to bite.

If you measure File Power, you know the Expert is just plain wrong. The time to acquire a customer is in the 1-3 months prior to a "peak season". If you have a Spring Peak in April, you acquire customers in February / March so that they have a chance to buy again in April. Now you have two purchases from the customer, and guess what? You have File Power! You have a customer who is much more valuable than the customer who buys when the "fish are biting".

You're likely experiencing File Power problems here, in early March. You acquired all of those Chirstmas customers and those customers are just sitting there waiting for 40% off and free shipping. You can't budge 'em. And if you think you can budge 'em, perform your File Power analysis and see if what I'm talking about makes sense to you or not.

You Don't Integrate Email Marketing, So Why Integrate Other Channels?

Don't believe me?

Run this analysis for me tomorrow.

1. Sum all sales attributed to all channels for the past year.
2. Sum gross margin dollars attributed to all channels for the past year, subtracting all promos and discounts.
3. Divide gross margin dollars by sales ... for each channel.
4. Look at the results for the email marketing channel.

Since I first analyzed this back at Eddie Bauer more than twenty years ago, the results are consistent.

• In email marketing, you are likely to find the worst gross margin percentage, or close to the worst gross margin percentage.

In other words, our industry spent more than twenty years making sure that the best deals are always available via email marketing.

Why do we allow this?

In an industry with unfettered zeal toward making sure that everything is integrated and aligned and synergized ... we allow the best promotions and the lowest prices in email marketing.

You already treat email marketing fundamentally different than all other channels.

Might it be time to treat all channels differently in an effort to drive true File Power and profitability?


P.S.: This is where I get feedback ... folks reach out and say they disagree with me, they'll say that email is fully integrated with the rest of the business. And I'll ask them if they have run my analysis yet and they'll say "NOOOOO". This is the problem we're dealing with. We don't actually analyze issues. We just believe stuff. I'm asking you to analyze stuff.

Adjusting Ad Spend / File Power

Folks are in a froth about the potential for a global pandemic ... both from a health standpoint and from a business standpoint.

We do not know whether "nothing" will happen, or "something" will happen, or "something awful" will happen.

We do know that people will react, regardless.

Pay close attention to your daily sales totals, and compare them to your forecast. In the next few weeks, you might see a downturn in sales.

When a downturn in sales happens, it is common for there to be consequences.

1. Sales disappear, and the do not return.
2. Sales are suppressed for a week/month, and then sales reappear so that in total there is minimal impact on the business.

This issue is directly tied to File Power. If sales reappear, you do not lose File Power. If sales disappear, there is a chain of events that transpire that further impact File Power.

1. Marketers will cut back on marketing budgets to align the expense structure with the downturn in sales. This hurts File Power, making it difficult to grow the business later this year.
2. Marketers incorrectly cut back on marketing spend with new/reactivated buyers, making it difficult to grow the business in subsequent years.

Catalog brands (about 35% of my audience) have a unique advantage ... they can cut back on marketing spend and have minimal impact on top-line volume ... consequently, minimal impact on File Power.

• If your in-house staff can accurately measure your Organic Percentage and then cut back appropriately on catalog ad cost, have them prepare the methodology RIGHT NOW so that you can act when the time is appropriate.
• If your in-house staff cannot accurately measure your Organic Percentage, have me measure it RIGHT NOW (at an individual customer level) so that in a month or three months you can act in a way that doesn't hurt your top-line but aligns business expenses with a potential downturn in sales.

The key, of course, is to act RIGHT NOW so that you are ready to pull the trigger if sales should decline. Make sure you protect future File Power ... you don't want to pile problems on top of each other.

A Quick Investment Quiz

You have a customer segment. If you choose to mail old-school catalogs to this segment for a year, you will gain the following sales outcome.

• Sales Increase This Year by $3.0 million.
• Sales Increase Next Year by $1.8 million.
• Sales Increase in Year 3 by $1.0 million.
• Sales Increase in Year 4 by $0.6 million.
• Sales Increase in Year 5 by $0.4 million.
• Five Year Sales Gain = $6.8 million.

You also gain the following five year profit outcome.

• Profit Decrease This Year is $0.3 million.
• Profit Increase Next Year by $0.3 million.
• Profit Increase in Year 3 by $0.2 million.
• Profit Increase in Year 4 by $0.2 million.
• Profit Increase in Year 5 by $0.1 million.
• Five Year Profit Gain = $0.5 million.

In other words, the act of mailing catalogs results in a nice sales gain, a loss this year, and then downstream profit because customers were reactivated / retained. In total, you lose $300,000 this year but make $800,000 in the future, for a net gain of $500,000 profit.

Do you lose money today to make money long term?

Do you make money today and post better results this year?

Select one outcome or the other, and then discuss why you made the choice you made.

Thanks,

Kevin