We Can Fix That Rebuy Rate

This happened seven or eight years ago. You've likely been in the same situation. I'm sitting in the Executive Conference room at a nine-figure brand. Everybody enjoyed (to some extent) their box lunch. After a morning of presentations, it was time to get down to business.

This brand had customers who repurchased at a 34% rate (in other words, of all customers who bought during 2015 just 34% bought again in 2016). And the rate had gotten worse and worse over the past five years.

How does Management fix this business?

Well, the CEO had ideas. He starts yelling "WE SIMPLY HAVE TO FIGURE OUT HOW TO GET CUSTOMERS TO BE MORE LOYAL, THAT SOVLES EVERYTHING".

The CEO looks to me, knowing what I'm going to say.

• "What do you think?"

I'll tell ya what I think.

• "Stop cutting back marketing spend on customer acquisition and start focusing on what your business is, not what you want it to be. You are in the business of finding new customers on a continual basis."

That was not what the CEO wanted to hear. Knowing I would say that, he slams his fist on the table (I sense this wasn't the first time he's done this to intimidate a consultant or a staff member). "I WON'T ACCEPT THAT ANSWER. I SIMPLY WON'T ACCEPT IT. WE HAVE TO CRACK THE CODE. WE HAVE TO CRACK THE CODE. THAT'S THE WRONG ANSWER. THE ANSWER IS SITTING RIGHT HERE IN THIS ROOM. NOW TELL ME WHAT WE'RE GOING TO DO TO FIX OUR REBUY RATE?"

These are always fun moments as a consultant. The CEO fundamentally does not understand his own business. He is making the wrong decision, and desperately wants to be right by making the wrong decision. Have you ever known an Executive who desperately wants to be right by making the wrong decision?

The entire room turns to look at me ... they're clearly happy the CEO is screaming at me and not them.

This is where there are advantages to being a consultant.

I take a breath.

And then I respond.

• "You have been CEO for six years. You have tried everything you and your team can possibly think of to increase repurchase rates. If the answer was sitting in this room, wouldn't the answer have appeared before today? You already know the answer to your question."

There are moments when you expect security to usher you out of the building. This was one of those moments. There are twelve executives in the room and one CEO, and not one of them is looking at me or anybody else. Every head is pointed down at the table. Including the head on the neck of the CEO.

Not one of the highly paid people in that room understood their business ... or were too frightened to communicate that they understood their business. Either way, the end result was the same.

You cannot fix your rebuy rate. The merchandise you sell determines the range your rebuy rate will reside in. If your rebuy rate is 34%, it could be 28%, it could be 40%. It cannot be 64%.

And if your rebuy rate is under 40%, your number one job as a Leader is to constantly find new customers at a low cost. You have no choice. The products you sell dictate a low purchase frequency, and given that you are not shifting to a different product assortment, you have no choice but to acquire new customers at "scale" as the kids say, and at a low-cost or at no cost.

Close to a decade later, this business is in the same place, marooned by Leadership that fundamentally does not understand how their own business (products and customers) operates.

You cannot fix your rebuy rate if you maintain the product assortment you've always sold to customers. You can improve it. You cannot fix it.

This is the point in the blog post where the experts send me email messages telling me why they are right and I am wrong. Happens every week. When you do that, please send me the receipts ... cases where you took a 28% rebuy rate and made it a 65% rebuy rate by selling the same merchandise assortment.

Completely Misunderstanding Your Merchandise Assortment

Many of us have been there.

Your business is failing, so the Board or Ownership clean house. They hire a new CEO, the new CEO brings in Executives she can work with. It's a new team, and the team is going to make changes. Everybody who came before them are idiots. Everybody who doesn't "onboard" is an idiot.

This team HATES the merchandise being sold. They know that what is being sold wasn't embraced by the customer, so it is time to make guesses as to what the customer "wants".

Existing items are discontinued.

New items are introduced.

Business absolutely tanks.

Eighteen months later, the CEO is fired (she wants to spend more time with family, or so we are told). Executives scatter into the wilderness. Another rebuild begins ... this time going back to the formula that originally failed.

Some of you in the marketing community, some of you who are Executives, you don't understand how a merchandise assortment works. If you sell items that have a long life (i.e. you've sold them for eight years and they continue to sell well), you can't simply discontinue the items and replace them with something unproven. You have to develop new items carefully. Conversely, if you work in fashion, you can discontinue just about anything and you'll be fine ... the life of an item might only be three months. 

If you don't understand business, you'll misinterpret a "winners" business for a "fashion" business and that's a recipe for disaster.

Loyal Customers

It's easy to get caught in this trap. You visit Starbucks every day, so you know what a "loyal" customer looks like (she looks like you).

Businesses that have loyal customers have an advantage. Not every business can have loyal buyers (I realize this goes against everything you've been taught). Brands that have loyal buyers tend to have three advantages.

• Customers "need" what you sell (i.e. a Pharmacy, Target).
• Customers "want" what you sell (i.e. Starbucks).
• The "need" or "want" must be replaced, often.

If you sell something that is purchased at Christmas, as a gift, you're gonna have trouble generating loyal buyers. The customer only "needs" or "wants" what you sell once a year.

People who don't understand how business works try to advocate that they have a "loyal" customer base when the products/merchandise they sell do not lend themselves to loyal customers. Vendors love preying on these individuals - if you only emailed your customers more often or gave them bigger discounts or hounded them all across the internet via display ads you'd have a loyal customer base.

Nonsense.

Try selling something that the customer wants or needs on a frequent basis, and you'll have a loyal customer base.

What you sell dictates whether you operate a business that is funded by loyal buyers. It starts with what you sell, not with your customers.

How Business Works

A Twitter user forwarded me an interesting article from more than a decade ago (click here).

There's a quote in the article, in the footnotes, that resonates:

• "That gravels me. I cannot think of another industry in which the uttermost basics of how the product works are a mystery to the people in that industry. There is nothing, to any with IQs much over their hat size, mysterious or controversial about analysis: it's just the way things work, and that's that. Yet a coach on the major-league level (coaching on a team last in all the majors in OPS) can to this hour be found publicly remarking, "You want to see a walk? Go watch a mailman." How is that possible? How can businesses with annual payrolls approaching a tenth of a billion dollars not have any least idea how their business works?"

The quote doesn't just apply to baseball.

One of the most frustrating experiences of my consulting work was a pairing of analyst and executive. These two understood every aspect of Google Analytics. They could tell you how much traffic they had, they could tell you where it came from, they could tell you how it converted. They knew nothing about their business. When conversion rates dropped by 10%, they panicked. They didn't even bother to look at new merchandise (which was a problem). They just started blaming vendors and co-workers for random issues.

This week, we'll talk about How Business Works. There is a natural cycle in your business. If you understand the cycle, you can do something that gives you a competitive advantage over the pair of guys I described above.

Acquired via Discount

Here’s what I see in a typical project:

Customer acquired via discount/promo = more likely to purchase in the future, much more likely to buy via discounts in the future, less profitable in the future unless the response increase is greater than 30%ish.

Customer acquired via full price tends to be less responsive and more profitable in the future.

You get to pick the business model you want and the customers you want. You get to decide how profitable you want to be in the future. The choices you make today dictate how you’ll behave next year and beyond.

Peak Acquisition Time

We’ve talked about this many times. The easiest time to acquire a customer is before Christmas. But those customers tend to have the lowest future value.

The best time to acquire a customer? Just before a peak season. Why is that?

Well, if you acquire a customer in September or October, the customer is very recent (responsive) at the very time (Nov/Dec) when customers are most likely to buy something. You get to double dip on response.

The best marketers (that’s you) already know this and take advantage of this dynamic.

And yes, when I discuss this topic I get complaint emails. I have the receipts. Doesn’t matter. It’s an uphill battle to counter best practices with actual customer data. But the battle is worth it.

Gross Margins and Marketing Investment

Duluth Trading Company generates 55%ish gross margins. For every $100 they sell they produce $55 cash. Then you back out pick/pack/ship expense and it is reasonable to guess they generate $40 cash per $100 sold. This means there is a lot of cash available for marketing purposes.

Best Buy generates 22%ish gross margins. Back out pick/pack/ship expenses and they likely generate $10 cash per $100 sold.

Which company can afford to generate new customers via paid marketing channels?

Which company must be a lot more clever?

Some of the biggest marketing blunders I’ve been associated with over 3.5 decades doing this work involve new marketing teams trying to rebuild brands without an understanding of how gross margins dictate marketing investment. It is frustrating to see the channel-centric investment approach leveraged when gross margins don’t let you lose much money acquiring a customer.