Gross Margins Matter

In a perfect world, the Categories possessing the largest share of annual sales would also be the Categories with the largest gross margin percentages ... that way, you maximize profitability.

Is that the case with this brand?

Remember, Category 11 is the Sun in the Category Solar System ... Categories 6/7 are Major Planets ... Category 10 seems to act like a large Comet.

What do gross margin percentages look like for each of the four Categories we've mentioned thus far?

• 51.7% for Category 6.
• 49.0% for Category 7.
• 19.4% for Category 10 (oh ... my ... goodness).
• 40.6% for Category 11.

#ohboy

This, ladies and gentlemen, is why we perform a Category Development project. 

Look at Category 10. Remember, this Category possesses 61.5% of sales of customers who buy from it. Those sales generate a 19.4% gross margin. That's not acceptable!! That's how we sub-optimize profit. In this case, this category represents "branded merchandise" ... this company buys products from vendors and resells them at a price largely determined by the vendor.

Category 11 is "the Sun" within the Category Solar System. But gross margins are just 40.6%, well below what we see in Category 6 (51.7%) and Category 7 (49.0%).

If you were running an email marketing program, which category "should" you feature in your campaigns? Yeah, tough question. Your response/conversion metrics will likely look good featuring Category 11. Profit will likely look good featuring Categories 6/7.

This stuff is SO MUCH FUN to dig into, don't you think?

More On Those Interesting Category Development Metrics

Here's our table from yesterday.

Let's look at the "Spent on Category" column. This metric represents the share of total spend last year spent within the category. If you look at Category 1, customers who bought from Category 1 spent just 4.5% of their total dollars in Category 1 ... meaning those customers spent 95.5% of their dollars on other categories. This Category is a "try and buy" category ... it does not own the customers it possesses.

Remember Categories 6/7/11? Those categories dominate this brand.

• Category 6 = 34.2% of dollars spent by Category 6 customers are within Category 6.
• Category 7 = 36.3% of dollars spent by Category 7 customers are within Category 7.
• Category 11 = 61.4% of dollars spent by Category 11 customers are within Category 11.

This tells me that even Category 6/7 customers aren't terribly loyal to those categories ... they're gonna spend their money elsewhere (hint - Category 11).

Do you see an outlier when evaluating this column/metric?

Look at Category 10.

Turns out this is the fourth largest Category (generating $8.2 million last year) ... and customers who buy from this Category spent 61.5% of their dollars last year in Category 10. This means that Category 10 buyers are reasonably loyal to Category 10.

It kind of seems like Category 10 is like a comet ... maybe it isn't part of the formal solar system with Category 11 as the Sun and Categories 6/7 as major planets. We'll see.

 

Interesting Category Metrics

Here's our Category lineup from yesterday.

Categories 6/7/11 dominate this brand, with Category 11 consuming more than half of all sales. This Category is the "Sun" in the Category Solar System, isn't it?

Among the "Big 3", only Category 11 grew in the past year ... both 6/7 contracted. That's not a good sign. In fact, nearly every category contracted in the past year.

Ok, let's look at a handful of interesting and unique metrics.

"Oth Mrch Gain" tells us how much customers who bought from the category also purchased across all other categories in the past year. We care deeply about categories 6/7/11.

• Category 6 contracted by 5.3%. However, customers buying from Category 6 spent 8.8% more last year on all other Categories. Customers were a success, the Category was not a success.
• Category 7 contracted by 9.9% last year. However, customers buying from Category 7 spent 9.6% more on all other categories last year. Customers were a success, the Category was not a success.
• Category 11 GREW by 11.9% last year. However, customers buying from Category 11 spent 4.5% LESS on all other categories last year.

This tells us that it is very likely that Category 11 cannibalized other categories, taking market share from other categories. 

We'll deal with the rest of the table tomorrow.

But for today, think about your business. Do you have any Categories that grew in the past year at the expense of other Categories? Is it a good thing if a Category grows at the expense of other Categories?

Category Development - One Category Growing Quickly

Ok, here's the first table I look at when evaluating categories and customers. This table is easy to produce, you probably already look at it, but it almost always tells a story. The table below shows five years of sales history by category, rank-ordered from the best-selling category to marginal categories. Ready?

Category 11 is the category to look at, isn't it? Sales have grown from $39.5 million four years ago to $59.6 million in the past year. This category grew by 12% in the past year, by 28% vs. the average of the four years prior.

Category 11 is a monster of a category, and it is clear that Management is allocating resources to that category. Or, the customer is choosing that category, right? It's hard to de-tangle the situation.

Regardless, Category 11 is going to be a key focus of our analysis. Of the remaining 11 categories, just one (1) showed sales growth (Category 2). Every other category posted a sales decline in the past year.

This stuff is so much fun to dig into!

P.S.: Interest in Category Development projects is on the rise - get in now before I get too busy (click here).

Propose to Your Future Spouse at Cracker Barrel

Seven years ago I presented a series of Powerpoint Slides about marketing ideas ... and my goodness, were those slides HATED by the audience! Hated! "We're never going to drive a Wiener Mobile across America, Kevin. Never. Bad idea. What else do you have?" 

Those audiences would really hate this idea (click here).

P.S.: I realize that, as marketers that you hate this stuff ... you'd prefer to create a square digital ad with imagery representative of your brand and text that says "Great Offers, Save Now!" You think this idea is stupid. Ok. Then conceive what a "smart" version of this would look like.

Category Development and Gross Margin Dollars

Here's one that comes up all the time.

A brand has a category with an average price point of $30 and an average cost of goods sold of $14. Gross Margin = (30-14)/30 = 53%. Gross Margin per Unit = $16.

Meanwhile, another category has an average price point of $40 and an average cost of goods sold of $22. Gross Margin = (40-22)/40 = 45%. Gross Margin per Unit = $18.

Which item should be sold if you can only sell one item?

There isn't a good answer to this question. One item has a high margin but a lower price point. The other item has a lower margin but a higher price point, yielding more gross margin dollars.

Do the work here.

Does one category feed the other? In other words, does the high margin category push customers to the low margin category? That could be ok if AOVs are similar. If AOVs are lower in the low margin category, then you are creating problems.

Anytime you switch a customer from a high margin category to a low margin category, you have to increase the amount of spend to compensate for the switch. Analyze the heck out of these dynamics, then push customers to high margin / high spend categories (or items) where possible.

Next week, we'll begin to explore Category Dynamics in even more detail, reviewing the reports I look at. We're going to see that some categories are "feeder" categories, while other categories are the center of your solar system. Once we learn how all of your categories work together, we can come up with a coherent marketing plan to support increased profitability.

Different Channels, Different Selling Styles

Take your Top-100 best sellers from last week, and then measure where each item ranks among your most important marketing channels. This analysis tells you what the future holds ... items selling well at your Call Center are gonna have problems in the future, for instance.

Here were results from one company, for one good-selling item.

• Item = 12th best selling for the week 10/9 - 10/15.
• Call Center = 12th best selling item.
• Online = 23rd best selling item.
• Email = 567th best selling item.
• Search = 20th best selling item.
• PLA = 658th best selling item.

Meanwhile, here's the results for another good-selling item.

• Item = 13th best selling item for the week 10/9 - 10/15.
• Call Center = 40th best selling item.
• Online = 8th best selling item.
• Email = 83rd best selling item.
• Search = 18th best selling item.
• PLA = 33rd best selling item.

One final good-selling item.

• Item = 84th best selling item for the week 10/0 - 10/15.
• Call Center = 915th best selling item.
• Online = 121st best selling item.
• Email = 5th best selling item.
• Search = 149th best selling item.
• PLA = 110th best selling item.

The first item is a good seller across all channels, but is ignored by the email marketing team. Work with your email marketing team to see if the item can be featured more often, given how well the item sells.

The second item skews online, but isn't as good a seller via the Call Center. This item represents more of the future of the brand, given the Call Center vs. Online mix with this item.

The third item is being almost entirely driven by email. In my projects, it is common for items to sell well in email marketing but not as well elsewhere, frequently due to pricing promotions. However, there is an old adage that "you sell what you feature" ... and items featured in email are likely to sell better.

The future of your brand (i.e. the types of products you are going to sell in the future) is told via this analysis. Perform the analysis and see what it tells you.