Whipsawing Customer Development Issues

For many of my clients, 2020 was good for the p&l. Really good. With retail largely shelved for a few months, customers bought from e-commerce brands. A glut of new customers joined the customer file, and those customers (when developed properly, which didn't necessarily happen) rolled through the customer file through the middle of 2021, generating disproportionate profit.

During the second half of 2021, many of my clients faced inflationary pressures ... labor cost increases paired with cost of goods sold increases. Most of the clients impacted had no choice but to raise prices.

During 2022, the price increases are rolling through customer files. It's common to see reductions in rebuy rates offset by increases in spend per repurchaser. It's very common to see decreases in new customer counts as well. This is the troubling aspect of 2022. Artificial customer acquisition buyer increases in 2020 evened up a bit in 2021 and have been in decline during 2022. Now you add price increases and we're seeing a lot of new customer acquisition pressure. Pair that with rebuy rate declines and you've got a recipe for a Customer Development crisis.

A lot of old-school marketers are already committed for Christmas with product and "campaigns". These marketers have problems. I'm not very optimistic about what the second half of 2022 holds for these brands. Going into 2023, these brands won't have file power, and will likely struggle to compete. Weak companies (from a p&l standpoint) are in a lot of trouble.

Companies with strong Customer Development issues will build the customer file through early November, in an effort to capitalize on Christmas. They're going to use nearly-free tools like email and social to Develop existing customers while identifying likely prospects. They will leverage the items that still have "value" in the mind of the customer, presenting products that do not appear disproportionately expensive. They will fuse Customer Development and Merchandising Margins to grow "where possible". They will attract new customers with merchandise the customer can afford.

Blend your Customer Development strategies with Merchandise Margins, and generate as much profit as you can during our inflationary period. This is not the time to do "what we've always done" while you already increased prices and have product availability issues. That's a recipe for an awful 2022.

Do something different.

Collecting Broken Brands

Over the past fifteen years, catalog brands buckled under the stress of competition from pure e-commerce brands. You'd think the vaunted omnichannel thesis would have saved the catalog brands, because we were all told that omnichannel shoppers were worth 8x as much as single channel shoppers, but the thesis never verified. Broken catalog brands were collected, merged, with the customer who remained harvested for every last penny of profit. It's the way the world works.

In retail, the process continues. Broken retail brands are in the process of being collected (click here), with Kohl's as the latest example. Healthy retail brands do not sell themselves to mall operators. Mall operators don't purchase healthy retail brands, they cannot afford healthy retail brands, now can they?

In a perfect world, the resulting conglomeration of broken brands leads to all sorts of Customer Development opportunities. Catalogers learned this quickly, they cross-shopped customers from one brand to another, greatly reducing customer acquisition costs. Catalogers knew that if the customer bought from 2+ brands within the portfolio, profit increased significantly, helping grow the financial health of the overall portfolio. Long-term the strategy is not sustainable, of course, because you still need a constant supply of new customers entering the portfolio. But short-term, yeah, have at it.

So yes, you can buy Kohl's. But how exactly do you Develop the Kohl's customer to cross-shop JCP (and vice versa)? Trust your instincts if you don't feel comfortable with a mall operator having the myriad skills necessary to build the profitability of different customer audiences via Customer Development tactics.

It's one thing to collect broken brands and then merge operational divisions in a manner that reduces expenses.

It's another thing to properly Develop Customers. Very few people have the chops to do the proper work here, especially in an environment where unknowledgeable naysayers can block good ideas at the snap of a finger.

Question Week: Question #5

Our final question comes to us via Sherrie:  "Hi Kevin, what are the metrics you look at that tell you that your marketing is successful?"

A pretty good question to wrap up the week.

I have about 8,100 Twitter followers. Twitter does not generate business. Twitter is where you test ideas, concepts, comments, and see what the angry masses have to say. Nobody waiting to hire you is sitting there on Twitter waiting for you to say something brilliant.

I have about 1,380 blog email subscribers, with another 3,000 blog visitors per month. If I de-dupe some of overlap (not much), I likely have 29,000 "views" possible in any given month (website visits and 20 posts per month viewed potentially viewed by the audience of blog subscribers), yielding about 80 visits to the "Hire Kevin" page per month. Convert just 2-3 of those per month into a project and life is good! Visits to "Hire Kevin" are what I consider "success". Monthly blog subscribers (1,380) are a secondary measure of success.

I used to have a podcast with 3,000 subscribers. I recall one (1) paying project coming out of that endeavor ... a lot of work, not much return on that investment.

Books used to be a huge source of projects ... about 20% of my work used to come from people who read books/booklets and hired me. COVID changed that dynamic. Now, people substitute a book purchase for what used to be a paid project. Times change, we move on.

Undoubtedly, there are things I could do better. Much better! But the math outlined above yields a work-from-home model that persists ... for fifteen years now.

Question Week: Question #4

Today's question comes to us from Rhonda:  "Hi Kevin, is the COVID-bump still a real thing?"

Not really.

Here's the way to think about it. In 2020 many clients had 50% to 100% increases in Customer Acquisition, as customers marooned at home bought stuff they wouldn't normally purchase. Pretend that you normally acquire 100 customers. Now you acquire 175 customers. The difference ... 175 - 100 ... that is your COVID-bump. And I get it, existing customers likely spent more as well ... but most of your gains came via customer acquisition.

In 2021, you had 75 additional customers. Maybe their rebuy rate was normally 31%. That means that 75*0.31 = 23 customers purchased, with 52 customers lapsing. The COVID-bump of 75 customers has been mitigated by math.

In 2022, you have 23 valuable customers. Maybe their rebuy rate is 52%, yielding 12 customers with 11 lapsing. Meanwhile, you have 52 lapsed customers with a 10% rebuy rate, yielding 5 customers with 47 lapsing further. You have 17 customers purchasing.

See what is happening?

• 2020 = 75 incremental new customers.
• 2021 = 23 active customers.
• 2022 = 17 active customers.

Yup, your COVID-bump is eroding.

That's what we are experiencing, folks.

And worse, with inflation running rampant, we're raising prices which causes customers to become less responsive, so the number of active customers in 2022 from our 2020 efforts is lower than we'd expect.

By next year, the COVID-bump will be a distant memory, in commerce terms. 

Question Week: Question #3

Here we go:  "Kevin, on Twitter, you've talked about the importance of incrementality. I just don't understand what you are talking about. Can you share a couple of examples? Thanks, Paul."

Here are two examples.

First, let's assume you have two product categories, "Widgets" and "Bidgets". You decide to add a third category, "Ridgets". Below are sales totals by each category, in the year before and the year after "Ridgets" were introduced.

Year Before:  Widgets = $10 million. Bidgets = $6 million. Total = $16 million.

Year After:  Widgets = $8 million. Bidgets = $5 million. Ridgets = $4 million. Total = $17 million.

Now, there are a ton of reasons why the forthcoming analysis is flawed, but at a simple level, you generated an additional $1 million in sales. However, on paper, it looks like Ridgets generated $4 million in sales. From an "incremental" standpoint, 25% of Ridgets is incremental (1 million / 4 million). That's a bad thing. When < 70% of sales are incremental, profitability of the endeavor becomes suspect.

Here's another example. Let's assume you have a terrible SEO program, so you spend a ton of money on Google. Now you improve your SEO program. Sales for the year pre/post implementation look like this (again, there are a thousand reasons why this analysis is flawed, but I'm trying to illustrate something so you can understand the concept).

Year Before:  Organic Search = $2 million, Paid Search = $10 million. Total = $12 million.

Year After:  Organic Search = $8 million, Paid Search = $6 million. Total = $14 million.

Your incremental rate is ($14 million - $12 million) / ($8 million - $2 million) = 2/6 = 33%.

In other words, you generated very little in the way of incremental sales ... however, if you can spend less on paid search and have the dollars continue to spill over into organic search, you are much more profitable and your decision is/was a good one!!

Question Week: Question #2

Here we go:  "Kevin, how should I evaluate the productivity of an item we sell? All of our reporting is channel-centric. How do I obtain a complete view of the performance of an item? Thanks, Sherri."

Good question, Sherri!

I'll share an answer with you. Not one soul is going to agree with me. Not one. Everybody will have their own ideas. Few are implementing their ideas. So let's at least get some thoughts going.

My recommendation is to evaluate item-level performance on a monthly basis. The image below is for twelve months. One can compare the current twelve-month period to a prior twelve-month period ... I'm not going to go into that level of detail here, as the concepts matter more than the comparisons.

Here's a potential template - click on it as the text is tiny, peeps.

Ok, let's explore sections of the analysis.

The top set of rows illustrate where sales come from, be it a physical channel like a call center, catalog orders matched back to the online channel, online sales by online marketing tactic, all of it rolls up to what I call Gross Demand. This is what the customer "wanted".

Then our leaky bucket subtracts some of what the customer wanted. Items that were not fulfilled and items that were returned are subtracted from Gross Demand, leaving us with Net Sales. We have units sold, and a simple division yields price per item purchased, an important metric.

The next section deviates from sales for a moment. Here we analyze how many visits the item attracted online, how many orders were generated for the item based on who viewed the item, and the conversion rate for customers viewing the item.

Here's the part you won't like. It's hard to generate this information at an item level, but it is absolutely necessary. On a monthly basis, you sum ad costs by marketing channel ... at an item level. Yup, not easy, and you'll come up with a thousand reasons why you shouldn't do this (but the real reason is because it is hard to do it). If you have a catalog, allocate square inches against your life-of-catalog curves (i.e. 40% of sales happen in week one, 30% in week two, 20% in week three, 10% in week four), yielding an ad cost for that specific item.

Digitally, this becomes interesting as well. If a customer visited from search and looked at three items, the cost of that click is allocated to the three items the customer looked at. If a customer visited your home page and bounced, you allocate that visit across all items equally (I know, that can be punitive, but you'll view your assortment differently after doing this). Sum up all ad costs, and you've got the amount of marketing dollars spent against that item for that month.

That's a big deal, folks!

Sum up your pick/pack/ship expenses for that item next. This gets you to what I call "Variable Profit" ... it's the amount of profit the item generates prior to fixed costs. Fixed costs don't change as sales change, so you don't evaluate fixed costs in this framework.

Again, this style of analysis requires hard work and discipline, so most readers aren't going to pursue this path.

If you want to know how profitable each item is, pursue this path, ok?

The next three rows evaluate gross margin dollars and rates. Obviously this is a big deal.

Question Week: Question #1

Here's a question:  "Hi Kevin, listen, I just don't understand your obsession with margin and profit. Who cares? Let the CFO figure out if our efforts matter, and if they don't matter let the CFO bring the hammer down. I just want to do my job. Thanks, Henry."

Henry, what is wrong with you?

I've worked with more than 250 companies. Maybe 20 of those companies thoroughly understood margin and profit. Those companies, not surprisingly, were "high performers" ... their rate of generating profit was high, their ability to generate profit was high, and the bonus levels of the employees was "high".

I've spent the better part of 2022 talking about margin/profit. The feedback I've received has been fascinating. One individual on Twitter told me that his company didn't know what their products cost. Come on! And when I explained how one might arrive at an estimate, he threw up roadblock after roadblock. In other words, he didn't want to know how much his products cost, because if he knew he'd have to make different decisions.

Another individual argued with me, suggesting that Return on Ad Spend (total sales divided by total ad spend) is the metric that matters most. Come on! ROAS is essentially profit if you just take the calculation a few additional steps. Why not do the work? Why be lazy?

I repeatedly hear the phrase "I just want to do my job". Lazy. That means you want to do your job with imperfect information and you don't care if you are sub-optimizing your business.

What if the CFO decided that your salary would be variable, and based entirely on the gross margin dollars you generate? What would you do in that situation? We both know the answer, don't we?

Just because Google Analytics waters down your analytics to the point of "scalable homogenization" doesn't mean you should play along with Google.

Do the work!