What Is Happening To Brands With A 29% Repurchase/Rebuy Rate?

We don't talk about it often because it isn't a lot of fun to talk about. But the business models we built in the first twenty years of e-commerce are crumbling.

It's not that anybody is failing, per se. It's that the business models were built on an assumption that customer acquisition would be cheap and easy.

Let's assume your customer base has a 29% repurchase rate (29% of 2021 buyers purchased again in 2022). If those customers purchase, they spend $200. Meanwhile, new/reactivated buyers spend $130 each.

Pretend your business has 100 customers at the start of the year. Pretend your business will acquire 71 new customers. Pretend you spend $3,000 a year on advertising. Pretend that 40% of sales flow-through to profit. Pretend that you have $1,500 a year in fixed costs. 

• 100 Customers * 29% Rebuy Rate * $200 + 71 New/Reactivated * $130 = $15,030 sales.
• $15,030 sales * 0.40 - $3,000 ad cost - $1,500 fixed costs = $1,512 EBT, 100 customers.

That's a nice business ... 10% pre-tax profit.

Then your friends at Facebook stop delivering for you. Oh sure, you'll blame Apple, it's their fault they shut down a portion of the surveillance economy that helped you earn a bonus check. But we all know the truth. We know we should never, never, never have depended upon third parties for bulk new customers at a low cost. Never. Ever.

So you lose 30% of your new customers. You cut your ad budget by 10%, trying to optimize the situation. Here's your new p&l.

• 100 Customers * 29% Rebuy Rate * $200 + 50 New/Reactivated * $130 = $12,300 sales.
• $12,300 sales * 0.40 - $2,700 ad cost - $1,500 fixed costs = $720 EBT, 79 customers.

Now you have a 6% pre-tax profit.

Worse, you only have 79 customers instead of 100. Let's run the situation forward another year.

• 79 Customers * 29% Rebuy Rate * $200 + 50 New/Reactivated * $130 = $11,082 sales.
• $11,082 sales * 0.40 - $2,700 ad cost - $1,500 fixed costs = $233 EBT, 73 customers.

You're down to 2% pre-tax profit. And just 73 customers.

See what's happening?

Now, if you don't have a viable customer acquisition plan that doesn't cost and arm and a leg, you are heading down a path that isn't ... viable.

All because customer acquisition became harder.

This is what is happening to brands with a 29% rebuy rate.

You fix the p&l several ways.

1. You come up with an alternate customer acquisition program (I've been barking about this for seven years).
2. You change your merchandise assortment to encourage frequent repurchase or you find a way to generate recurring income (i.e. subscriptions).
3. You find a way to minimize variable costs (gonna be hard).
4. You find a way to trim fixed costs (works for awhile).

Obviously you cannot go down the (3) (4) path for long. And you don't want to go down the path of (1) because if you did you would have made changes back in 2015-2016.

So (2) becomes your future.

This is what is happening to brands with a 29% rebuy rate.

P.S.:  This is where some of you tell me that you'll just increase your loyalty efforts, that you'll turn a 29% rebuy rate into a 39% rebuy rate or 49% rebuy rate. If that were true, what exactly stopped you from already doing that over the past twenty years? It's darn near impossible to move rebuy rates. How many of you had a captive customer audience who couldn't visit stores in 2020 and what happened to your rebuy rates during that time? That's a best case scenario (for e-commerce).

Which brings us back to (1)

Great Moments in Omnichannel History

More store closures from Macy's, who branded themselves nearly a decade ago as "America's Omnichannel Store" (click here). It's another Great Moment in Omnichannel History.

Retail goes through non-stop evolution. Small urban stores to large urban stores to suburban malls to big boxes to Target/Walmart to Dollar Stores, it always changes.

Over the next ten years, retail brands cannot have the enormous fixed costs of a store weighting them down. Cannot do it. Time tells us that we are going through an evolution ...

• Past:  Fixed costs covered by purchases at good gross margins.
• Recent Past:  Fixed costs covered by many purchases at low gross margins.
• Future? Minimized variable costs, minimal fixed costs, recurring income.

Think about recurring income ... in e-commerce you have subscription brands who accomplish the goal of keeping dollars flowing every month. Amazon keeps dollars flowing every month via Prime ... you pay annually and then by golly you better use Amazon to get your money's worth, right?

Fixed costs are going away. This trend has been happening for 25 years.

Variable costs covered by recurring income is the future. It's gonna be darn hard for anybody to survive long-term, retailer or e-commerce brand, with 29% annual rebuy rates and 1.5 purchases per year.

Maybe the fundamental change that happened in 2022 wasn't that it became very hard to acquire new customers. Maybe the fundamental change that carries into 2023 is the end of a fixed cost model paired with marginal rebuy rates (i.e. < 40%) requiring inexpensive customer acquisition.

Yeah, Open Some Stores!!

That's what you are reading these days ... the pundits enjoy lauding "digitally native" brands for opening stores. "It's proof positive that retail matters and that an omnichannel approach is a smart bet in a confusing customer landscape".

Alright.

If you've ever worked in retail, you know that when you open a store a cascading series of events happens, resulting in the store not performing at the level your reporting tells you it performs at.

Here's what happens, especially when you already have a store in a market.

Let's evaluate what happened.

1. When a new store was opened, the existing store suffered. Some customers from the existing store (actually, many customers) switched store preference, causing the existing store to perform considerably worse.
2. When a new store was opened, online sales declined. This is a common outcome in year one of a store opening. Customers who used to shop online find the new store convenient, and they switch allegiance. Again, this is a year one phenomenon. After year one, the store begins sending customers online at rates that cause online sales to increase. Your mileage will vary.

Before the store opening, the original store did $1.6 million in sales.

After the store opens, the original store now does $1.15 million in sales.

Oops.

Before the store opening, online sales were $493,000.

After the store opening, online sales were $343,000.

The new store does $1,500,000 in sales ... it looks like a huge success, now outperforming the original sale. Somebody will say that a renovated store, with modern/clean presentation outperforms the tired old store. That somebody "might" be right. That somebody "likely" is wrong.

Look at incremental sales ... instead of generating $1,500,000, the new store truly added $900,000 in sales to the market. Not $1,500,000. The store is 60% incremental, with 40% being cannibalized from other stores/online.

Your job is to run a p&l on the $900,000 total, not the $1,500,000 that is reported on your company dashboards. Hint - that's not going to be a pleasant exercise.

Pundits love it when you open stores.

Run a p&l on incremental sales to see if the pundits are right.

Barnes & Noble

Here's an article about improvements at Barnes & Noble.

The article talks about the use of co-op dollars ... situations where your product supplier pays you a fee in exchange for favorable placement of their product in your stores, online, or in print.

I had first-hand experience with co-op dollars at Nordstrom. We nuked our catalog program in 2005, replacing it with a print program that focused on store merchandise that was funded with co-op dollars. I recall that we set the price at $29,000 a spread (two pages) ... enough to offset printing/paper/postage costs.

This decision caused a whole series of interesting outcomes.

Creative (look and feel of a spread) was controlled by the vendor/supplier. Making these things look cohesive was a mess. The vendor/supplier had ideas on "branding", resulting in one product on a page (instead of the 5-6 that optimized sales/profit). What one vendor/supplier thought was "brand appropriate" was completely different than what another vendor/supplier thought was "brand appropriate". As a result, the catalogs looked like garbage ... now, having said that, the marketing/creative folks thought the catalogs looked "great" compared to the high-density catalogs we previously sent with merchandise optimized for catalog performance.

Taking all of these co-op dollars resulted in catalogs that performed 60% to 80% worse (yeah, worse) on a sales-per-square-inch basis. Woo-boy. If you want to watch catalog professionals melt-down in real time, imagine them trying to convince anybody that this was a bad thing ... because outside of about eleven catalog professionals, everybody was happy with all of those co-op dollars funding everything. "We saved $1.4 million, look at how that helps us exceed our budget goals" was something I heard weekly.

The analytically-minded professional might interject at this point and ask somebody to run a profit-and-loss statement. Good idea!

In this example, the normal catalog strategy generated $100,000 more profit. There were plenty of cases where the opposite happened. Each strategy yielded the same amount of profit over time.

Let me tell ya, this was INFURIATING!!

Catalog professionals love analyzing and optimizing - the co-op strategy eliminated all of that. The catalogs were equally profitable, we were forced to mail 2,000,000 names to please vendors/suppliers, and vendors/suppliers paid for the ad-cost, eliminating all analysis. There were two things we could still do.

• Rank-Order customers from best to worst ... a task completed by our model/algorithm.
• Set up the A/B Test to measure incremental results (#boring). Our holdout group was 200,000 customers, which allowed us to analyze performance at levels below a typical customer segment. Rich analysis ... but we were analyzing garbage because productivity was down by 63%.

But again, why did anything matter when vendor/supplier co-op dollars funded the ad-cost, causing profit to be about equal?

My catalog circulation analysts and professionals quickly became disenchanted ... they left the company or moved to different departments to do anything that wasn't traditional catalog-analysis related. Our inventory people quit ... their square inch analyses were pointless given they weren't helping decide what went into the catalog and frequently weren't told what went into the catalog until it was too late to do anything about it. Some of our merchants left the company ... their jobs were essentially outsourced to vendors/suppliers and were largely assumed by retail merchants (and that was an acceptable outcome from an integration standpoint - if you believe in the failed omnichannel thesis, it was "proof" you were right).

And without all of the work required to truly analyze and optimize a catalog program, my job became irrelevant. I'd be ousted from my job within eighteen months ... and I can assure you that Nordstrom did just fine without me in the mix.

So the Barnes & Noble analysis above takes us full-circle ... we hear a story about treating the store like it is your store, maximizing productivity even if it means that each store is individualized and personalized as a consequence (i.e. deviating from the failed omnichannel thesis of same everything at every store and online), and not being beholden to your suppliers.

My opinion only - there are a lot of optimization experts in retail and e-commerce ... and these experts are dying for an opportunity to run their business independent of Digital Omnichannelism. All it takes is a good crisis to provide that opportunity.

Hillstrom's Startup Project

I've never published the fact that I perform work for startups. That probably wasn't the smartest thing I've done.

If you are a startup with < 5 years of customer transactions and < $20,000,000 in annual sales, you qualify for a Hillstrom's Startup analysis! I will run a simplified Customer Dynamics / Category Dynamics project, focusing on where your rebuy rates will likely land, focusing on how much customers will ultimately spend, measuring if there are product categories that cause customers to have enhanced customer value. I will forecast where your business is headed, and give you insights into customer behavior that you won't find in any off-the-shelf analytics package or management consultant review of your business.

This project, for Startups only, is offered at the insanely low cost of just $5,000. It's virtually free. What would stop you from contacting me right now? (kevinh@minethatdata.com).

Project Menu for 2023

Here is the current project menu to begin Calendar 2023 (click here).

Last month I offered existing clients and blog readers an opportunity to test out the code for my new Category Development project work ... looking at the intersection of price increases, customer response, customer interaction with categories, impact of new merchandise on best customers, product preferences of new customers. Several clients took advantage of this offer.

I'll give you one more chance, albeit at a higher price (now that I've tested out the code and have a really good idea where this is headed). If you respond by Friday, January 6, I will execute the code against your customer base for just $19,000. The price from January 7 forward will be $29,000.

Also - look ahead to the future ... if you elect to have me run a Customer Development project and a Category Development project I will save you $15,000. How about that?!

Contact me now (kevinh@minethatdata.com) to get your spot reserved immediately!!

Digital Omnichannelism

If this term becomes something, you'll refer back to this post.

Two articles got me thinking about my industry (here, and here).

Why does everything look sterile and ugly? Why does music not sound as lifelike as it used to sound?

Do the same concepts apply to retail? Let's look at a handful of home pages from Friday night. Tell me what you see.

It looks like three things are happening:

1. There is an industry-wide calendar that demands that every company promote clearance and sale items as we approach January 1.
2. There is a website commerce template that nearly everybody is using ... the same template. It's like somebody created a template in 2003 and the entire industry said "GOOD ENOUGH". I mean, is there a fundamental difference between North Face, REI, and Eddie Bauer? Did they share imagery at the same photo shoot to reduce costs? Of course that didn't happen. But you couldn't tell it from looking at their websites. All feature mountains over merchandise.
3. Merchandise ... the very thing the customer is purchasing ... is irrelevant. Yes, irrelevant. The discount is what matters. At least Saks cares about handbags. Patagonia is selling a story as their primary target of interest (and yes, I get it, that's what they do ... but it still means that merchandise is irrelevant). Where is the product at Nordstrom? J. Crew? Macy's?

Yeah, it looks like my industry suffers from the same issues as the authors in the two articles at the start of this post reference ... this is a boring, cold, templated, lifeless digital presentation. No creativity.

I know, you're about to yell at me that it is clearance/discount season, retail brands are "supposed" to do this.

No, they are not. They are under no obligation whatsoever to all do the same thing at the same time and look the same way. No.

If you believe they are "supposed" to do this, then you adhere to the concept of Digital Omnichannelism.

What the heck is "Digital Omnichannelism"?

Let's define the concept.

"Digital Omnichannelism" represents passion for a selling process that prioritizes digital strategy, digital analytics, price manipulation, same merchandise across all channels, social/surveillance, engagement, mobile, and seamless/frictionless integration of online/offline channels at the expense of merchandising excellence and creative brilliance.

Scrape the J. Crew site ... you'll see analytics from TikTok and Google and Facebook. That's Digital Omnichannelism. Somebody cares more about tracking the customer all across the infinite nature of the online experience than selling a Smocked Puff-Sleeve Cotton Poplin Top in Stewart Tartan. And if somebody does care about selling that item, they're selling it normally for $79.99 but this week it is $69.99 with $34.50 off with discount code NEWYEAR. The goal is to track the customer journey, not to sell the item, and you get to track more journey if you offer the item at a lower price. 

Yes, I'm exaggerating for effect.

Scape the Nordstrom website, and you'll see analytics from TikTok and Google and Yahoo (really?) and Snapchat and Pinterest and Facebook.

Scrape the Eddie Bauer website, and you'll see analytics from TikTok and Pinterest and Facebook and Snapchat.

Get the picture?

It's all the same.

Everything looks the same.

Everything is executed the same - with a skew to digital engagement via mobile and social surveillance.

Everybody is executing the same promotion with comparable discounts at the exact same time.

Digital Omnichannelism.

Pick your favorite retail and/or e-commerce brand ... it doesn't matter. 65% to 70% of their presentations look identical, the analytics tools surveilling the customer are nearly identical, the promotional calendars they adhere to are nearly identical. They're all employing Digital Omnichannelism.

Think I'm wrong? Here's Jared, a jeweler. Same.

Scrape their site and you'll see Google Analytics and Facebook there, among other vendors.

In fact, you'll just keep seeing the same (digital) vendors over and over again across every brand. You exist to benefit them.

Digital Omnichannelism.

I can't tell you how many times somebody told me in 2022 how upset they were that Apple destroyed their customer acquisition program. When Apple decided to cripple Facebook's surveillance program, the emails poured in. "Apple cost us 25% of our new customers, they're awful." Well, they are awful if you adhere to Digital Omnichannelism. Your customer doesn't think Apple is awful. Those who embrace Digital Omnichannelism feel betrayed when the ecosystem they built a business around betrays them.

On the right side of the spectrum, we have Digital Omnichannelism. "Right" in this context means "correct" ... if you ask trade journalists, vendors, conference organizers, industry consultants, research brands, and professionals with "portable" skills across retail and e-commerce.

On the opposite side of the spectrum, we have merchants and creative professionals. They have a passion for what they are selling. They want the liberty to present the merchandise the way they see fit. Digital Omnichannelism has no patience for this audience. Better to measure a 27 step journey that leads to a 3% conversion rate than to have a 4% conversion rate via one visit where the customer interacts with your brand, unprompted.

If you care about this industry, poke holes in my argument. Tell me why I am wrong. Here's my email address (kevinh@minethatdata.com). Find me on Twitter @minethatdata. Tell me why I am wrong. I'll publish well articulated arguments based on actual customer data.