Three Ways To Grow

Rank-ordered by what you read about from the experts.

1. Get more sales from loyal buyers.
2. Acquire new customers.
3. Manage your merchandise assortment properly.

Rank-ordered by what my project work suggests is most important?

1. Manage your merchandise assortment properly.
2. Acquire new customers.
3. Get more sales from loyal buyers.

How Many New Items?

FYI - when you sign up for a Category Development project, you receive the "Class Of" analysis we're discussing in this series (click here).

Ok, here's our table.

There is a relationship hidden in the table.

• 594 items = $8.0 million in new item sales.
• 235 items = $3.9 million in new item sales.
• 579 items = $9.5 million in new item sales.
• 603 items = $8.7 million in new item sales.

Graphically, the relationship looks like this:

Here we have our friendly law of diminishing returns ... it appears practically everywhere once you know how to look for it.

The first 100 new items generate about $2.0 million in sales.

The next 100 new items generate about $1.5 million in sales.

The next 100 new items generate about $1.4 million in sales.

The relationship progresses from there. The first three hundred new items get you just shy of $5.0 million ... while the next three hundred new items add about $3.8 million.

If you needed to get ten million in sales from new items next year, you'd need 700 new items next year.

So yeah, this stuff is really useful!

What Harms You Today Harms You Tomorrow

We learned yesterday that the Class Of 3/10/2021 was too small, and didn't generate enough sales, costing this business five million dollars in the year ending 3/10/2021.

Did you notice that the business never recovers from this problem?

New items recover quickly. Somebody noticed that the merchants nuked the business, and as a consequence new items perform at $9.5 million the following year ... recovering by about $5.5 million dollars. However, the total business does not recover ... sales increase by a paltry $0.4 million.

How can that be?

Two things are happening here.

First ... new items today become existing items tomorrow. Read across the year ending 3/10/2021 row. $3.9 million in year one becomes just $2.6 million in year two. In the class of 3/10/2020, $8.0 million in year one becomes $5.7 million in year two. In other words, this brand loses $5.7 million - $2.6 million = $3.1 million in sales in the second year because the merchants failed the year prior.

Each merchandise class has a "life" ... and if you don't have enough new items one year you won't have enough existing items the following year.

That's the first issue.

The second issue? This is a completely different issue. Look at the top row. These are older items, items that have been around for more than four years. Look at how sales drop off year-over-year. These items gave up $6.6 million in the year ending 3/10/2020, they gave up $6.8 million in the year ending 3/10/2021, they gave up $5.6 million in the year ending 3/10/2022, and they gave up $3.0 million in the year ending 3/10/2023.

In other words, items at this company have a moderate life cycle (in terms of length), and each year you need to come up with enough new items to cover the losses you experience from long-term existing items. If you don't generate enough new items, you hurt your new item performance AND you fail to compensate for items that are aging.

You can use this analysis technique to measure how many new items you "might" need next year to protect the future of your business. When you know the decay rate of existing items you can back into how many new items you likely need to keep your business moving forward.

Problem Spotted!

Back to our table:

Look at the row titled "New Through Year Ending 3/10/2021". 

That "class" had just 235 new items, compared to 594/579 in the years before/after it.

This merchandise class was small, and it did not generate sufficient sales. In the first year, this "class" generated $3.9 million in sales, a lot less than the years before/after it ($8.0 million, $9.5 million).

Look at total sales for the year ending 3/10/2021 ... there is a five million dollar top-line hit compared to the year prior.

This business was nuked by a merchandising team that failed to give proper importance to finding new items that work. Some might say "well, we had supply chain issues" and sure, that's a problem. But it doesn't solve the problem of the business being harmed.

Notice that this business doesn't recover, with sales down for each of the two subsequent years. More on this topic tomorrow.

Can You Spot The Problem?

Though this seldom happen in actual project work with actual clients, there are times when I receive emails or tweets that share this theme:

• "You seem to oversimplify everything. Business really doesn't come down to new customers and new merchandise."

Well, yeah, it does come down to that.

Marketing experts generally accept that customers have long-term value. If you acquire a customer today, the customer will buy stuff tomorrow ... at ever-decreasing rates of return of course, but future purchases will happen. Future purchases pay for today's acquisition costs.

Very few marketers understand that their marketing performance is directly influenced by the outstanding or unacceptable merchandise performance they have no control over. Maybe your online conversion rates average around 3% and over the past six months they've slumped to 2.7%. Who gets blamed? The marketer! It must be the traffic. The marketer made a mistake.

Often, it's the merchant who messed up - but nobody can see the truth because nobody reports on new merchandise performance. Just as often, the issue is easy to identify and not hard to fix.

Here's our table from yesterday.

Each year there is a new merchandise class. Those items sell for several years before being discontinued and/or sales decline.

Look at each merchandise class.

Can you spot the problem?

The "Class Of" Report

Over the past two weeks I mentioned that I was going to bring back a table from Merchandise Forensics work I performed a decade ago. This table became really important (again) in 2021 when supply chain issues impacted our businesses.

The table is called a "Class Of" table. In it, we review new items introduced by year ... each year is a "Class", and we follow the "Class" into the future to see how sales change/evolve.

Here is an example ... review it today, we'll discuss it tomorrow.

Silicon Valley Bank

I don't have any insider information, sorry. Here's an article to help you learn a bit more.

Business Professionals struggle with feedback loops. Feedback loops are cousins of interactions. Here is an example of an interaction. This is a 2x2 factorial test on conversion rates.

Here we see that the interaction of B/C produces the best result. A test of this nature identifies the interaction we should pay attention to.

Now, what would happen "A" was your control and you tested A vs. B? The results would be identical, and you'd conclude to keep doing "A" and you'd never realize that A with B works best.

In our world of A/B testing, we miss interactions all the time. Interactions lead to unique outcomes, and unique outcomes can lead to feedback loops that can either accelerate results or harm our businesses.

I wrote this more than eight years ago for catalog readers (click here). Here we are in 2023 with constant grumbling about how hard it is to find new customers in large enough quantities. With an inability to measure and understand interactions between Amazon and online brands and catalog brands (all of which could have been disclosed by the co-ops but they'd have seen that as bad for their clients), my catalog clients suffered mightily, and continue to suffer.

In the case of Silicon Valley Bank, you saw what the interaction of risk (which likely wasn't as huge as it was on many/most bank failures) did when multiplied by insider Silicon Valley folks pulling money early multiplied by commoners pulling money late leading to the failure of the bank.

Where possible, develop your skills at identifying interactions. It's a critically important business skill to acquire.