Forecasting

One of the least favorite parts of running old-school circulation functions 20-25 years ago was forecasting sales by hour the week a catalog was in-home.

What an awful, awful job.

Fool's gold.

A catalog would have an in-home window courtesy of the USPS (Monday - Wednesday). Your printer would deliver your catalogs deep into the USPS system, and then the USPS would deliver the catalog to the mailbox.

I had one analyst 100% dedicated to forecasting, and half of what this person did was create a forecast by hour for delivery measurement purposes (which to be fair fed our call center forecast, even though the call center had been gutted by the transition of customers to online purchases).

• 8:00am = $100,000 sales.
• 9:00am = $140,000 sales.
• 10:00am = $200,000 sales.
• 11:00am = $180,000 sales.

The forecast was created based on history. We knew what slow/average/fast delivery looked like, and we had a forecast for sales for the catalog.

So on Monday morning, there would be a phone call ... usually around 11:00am.

Ring ring.

Ring ring.

Ring ring.

Kevin:  "Hello".

Chief Merchandising Officer:  "Kevin, the catalog is off by 15%. Is this because delivery is slow, or is the forecast wrong?"

Kevin:  "Maybe customers don't like the merchandise?"

Chief Merchandising Officer:  "You make d&*$ sure your forecast is accurate."

It was never be possible that the catalog was awful. It was always the forecast.

For the next four days my analyst and I would get screamed at ... by merchants ... by inventory leaders ... by the CFO ... by the CEO ... by randos.

By the following week, one week later, it was clear that the catalog was awful. Sure, delivery might have been a bit slow, but the catalog was a clunker and the merchants were accountable and attention would shift from blaming the forecast to blaming delivery to blaming my team for "mailing the wrong customers". Just non-stop petulance from those accountable.

The secret to forecasting is to not micro-manage hourly forecasts. None of us are capable of accurately forecasting anything hourly.

All of us are capable of forecasting stuff at a high level. And honestly, this is all that matters (unless you are running a call center, of course). Forecasting high-level issues allows your brand to pre-emptively prevent bad outcomes. Micro-forecasts create myriad opportunities for somebody to criticize.

We Raised Prices. It Worked For A Year

Never trade a customer for a dollar.

Here's a common scenario.

• Prices were increased by 10% in 2022.
• Response decreased by 10%.
• Spend per Customer increased by 11.1%.

The outcome of this tradeoff is flat demand/sales. All is good.

Now it's 2023. And guess what? The relationship isn't working anymore.

You know why?

Because in 2022 when response decreased by 10%, you lost 10% of your housefile. Congrats! Those customers aren't there to buy from you anymore.

Want to see what that relationship looks like over five years?

Assuming prices remain at this level for the next five years, this business goes from $210 million on the top-line to $192 million because the business is starved of customers.

Never trade a customer for a dollar.

Profit suffers as well. In fact, in this Marketing Budget Experiment, gross margin percentages would have to increase by 1.4 points (from 50.1% to 51.5%) ... if you're passing cost of goods increases on to the customer, you might even have a gross margin percentage decrease.

I realize you likely have to pass cost increases on to the customer. But there is a price you pay ... and you can't see that price for 2-3 years AFTER you make the decision. By then it is too late.

I'm guessing you run some sort of long-term scenario that fuses price increases with customer response, customer spend, and customer segment migration patterns ... so you already know much of what I'm sharing here. Regardless, the facts need to be shared with all of you.

Fast vs. Long Payback Window

The table below features two different payback windows. Both windows pay you back the same amount of profit within five years. The top portion of the table pays you back quickly, the bottom portion of the table pays you back slowly.

Which business would you prefer to run? I'd prefer the top business. With rapid payback, you are profitable faster, meaning you can actually invest even more money today.

If you run this table for your business, you fully understand how your payback window looks by marketing channel, correct? If you don't run this table, give me a holler and we'll get you started with a Marketing Budget Experiment.

It Does Make A Difference

In yesterday's post (click here), far more of you clicked on the bait-centric link about the Top 20 Omnichannel Brands than clicked on the story about merchandise/presentation in a Macy's store.

#sigh

Can I show you something? I ran a Marketing Budget Experiment for the brand below. In each year, I added 2.5% to merchandise productivity ... 1.25% to response, 1.25% to spend. Look at how the top-line and p&l changes over time.

I mean, you barely notice a difference after one year.

At year five, the business is almost 20% larger, with more than 33% more variable profit (likely leading to 50% more earnings before taxes).

The best companies I work with are relentlessly looking for 2.5% more merchandise productivity, annually. They never quit.

When I share this stuff on Twitter, that audience looks for "marketing hacks" ... ways to cheat by spending marketing dollars.

The easiest place to improve merchandise productivity is email marketing. Easiest. By far. Look at how you present merchandise via email marketing ... this can easily be improved via testing. Look at what you present ... this can easily be improved by analyzing what customers purchase via email marketing (hint, it's different than what customers purchase via other channels). Look at what you offer ... this can be improved dramatically by showing every customer a different subset of your assortment.

Come on, let's get busy ... you can do this ... you can grow your brand without blaming Google for changes in their PLAs ... you can grow without depending upon an unholy alliance between Facebook and Apple paired with fabricated reporting from your favorite social media source. You can do this!

For Your Reading Pleasure

20 Best Omnichannel Retailers ... #19 = Macy's (click here).

Then we have a merchandising/presentation issue (click here).

Repeatedly ... repeatedly ... merchandising/presentation issues are an overriding challenge in 2023. E-commerce or Retail, it does not matter. We're executing whatever the marketing gurus want executed. We aren't executing "what" we sell or "how" it is presented, and we aren't even bothering with human details.

If you are the customer, you are buying "what" we sell, and "how" we present it matters. I mean, you can spend tens of millions of dollars to facilitate "buy online, pickup in store" and then you go to store and it looks awful and is thoroughly understaffed ... you just blew the "how".

Here's a fun quote from the second article:

• "But when I went to the register, no one was there to help me check out. I waited for a few minutes, just long enough to change my mind and put the shirt back."

Omnichannel!!

I once consulted with a retail brand. I noticed that there were no employees (there weren't any customers, either). I waited a good ten minutes until an employee somehow appeared ... the employee looked at me and said "you aren't one of those spies from corporate, are you?" The store was sloppy, unappealing, lifeless. I did take pictures. I shared them with the Executive Team. Heads slumped. I never sensed they slumped enough to do anything about what they saw.

We're going through a process of stripping humans out of the retail and e-commerce experience. Something is gained and something is lost when progress happens. We're losing more than we're gaining in 2023.

A Telling Statement

I frequently referenced this website to find out how many people were watching Pickleball on ESPN or CBS ... a month ago they announced that they were finished (click here).
One of the statements is absolutely telling.

• "As everyone is aware, the bottom has dropped out of linear viewership, and the ratings have had increasingly less utility.  (Last Thursday’s cable ratings in the 18-49 demo included 25 shows clustered between 0.09-0.12, basically molecules of difference.)  The balance of home viewing, for better or worse, has swung toward streaming, and the proprietors of those companies have chosen to be opaque with their information, providing data that’s incomplete and unverified when it’s available at all.  That very lack of transparency is one of the key issues in the ongoing Writers Guild strike.  Meanwhile, scrutiny of linear numbers is becoming a preoccupation akin to documenting angels on the head of a pin."

For the first nine years of my consulting work, catalog brands represented more than half of my business. Now a quarter to half of those companies are no longer in business! As I shifted my content toward merchandise and forecasting/budgeting and customer development, I lost "some" readers from the catalog world ... "content no longer relevant" was the reason they gave.

Meanwhile, an industry leader penned a piece saying that even when the customer throws out a catalog there is value because the customer had to look at a catalog to throw it out. Sort of like there is value in a dollar because you have to look at the dollar as you light it on fire.

There are amazing competitive differences out there right now. There are brands I'm working with who have ten million dollars to spend and want to know how much money they lose paired with how many customers they generate so that the business looks ripe to an investor in a few years. This kind of stuff has always happened, but wowzer, what a difference from a catalog brand looking to cut back on catalog spend by 50% because they can't get paper and the paper they can get is terribly expensive and response is declining anyway and the customers buying are age 65+. I mean, it's two completely opposite worlds. It's like the two different worlds in the quote above.

Toss in subscription-based business models (it's a key way to overcome the tepid 25% annual rebuy rate e-commerce businesses suffer with), and we realize just how much the word changed. Yeah. Completely different than a decade ago. I mean, last weekend CBS showed Pickleball at a time when an affiliate might have broadcast a scripted show a decade ago. A completely different world.

It's time for you, a Leader in my industry, to respond to this different world. You've got this! You have so many choices, so many ways to be successful.

Yeah, Merchandise!

Seven years ago, I'd wake up on a summer morning, drive down to the port, walk down to the fish shop, and select from whatever was caught in Puget Sound the night before or whatever was flown in from Alaska from 24 hours ago. Let me tell you, this stuff tasted infinitely better than what you'd find at your local Kroger-based store. It cost more, as well.

When you move to the desert, fresh seafood is not something easy to find.

And then, I stumbled across Nelson's Meat and Fish (click here).

Here's the Insta post that got me ... King Salmon (click here). 

It's a half-hour drive from my house to the store. The store is all of 350 square feet ... all fresh fish. It's more expensive than buying frozen fish sticks, I'll tell ya that much. But the taste? Ohhhhhh.

When I showed up on Saturday, the line at the counter was ten-deep ... every person in there spending $100. Do the math. Their costs must be stupid high ... their revenue also stupid high.

Now, their Instagram page seems reasonable. Their emails, which I subscribe to, violate just about every single best practice your favorite thought leader can dream up.

"THIS IS THE BEST PIECE OF FISH I'VE EATEN THIS YEAR"--NELLIE.  WILD STRIPED SEA BASS MA. 1ST OF THE SEASON.  WHATEVER THEY ARE FEEDING ON THIS YEAR (MOST LIKELY SQUID + EEL) HAS CREATED AN ICREDIBLY MOIST, FATTY, SWEET, DELICATE FLAKEY FLESH...NOT TO BE MISSED IF YOU LOVE GREAT SEAFOOD!

All caps text screaming out their passion. It's five pages of this stuff! All good enough to get me in my car on a 116 degree day to drive thirty minutes to a 350 square foot store with a line ten-deep bending around the counter purchasing seafood at $42.50 a pound, in $100 quantities.

If you are the only place in Phoenix flying in fresh Faroe Island Salmon on a daily basis, you can charge $34 a pound, and without any competition to speak of, you can maintain price integrity.

Yeah, merchandise! What we sell matters. If we choose to sell stuff everybody else sells, it's hard to sell stuff, isn't it?

One of the brands many of my readers love sent me three emails on Sunday offering more than 50% off. Three! Seriously, do you even care about the merchandise you sell if you have to send me three emails on a Sunday begging me to pay half? "You'll love our Chinos!" You don't even love your own Chinos! If you loved them you wouldn't price them at $59.99 and then offer them at half-off and then offer an additional 30% off on top of the half-off because it's "Christmas in July". You are selling the Chinos for $21.00, which means the gross margin is probably $14.00. It's contempt for the product, and it's contempt for the customer.

I worked with a company that had Seth Godin visit and speak to the employees. Yeah, that's old-school. He was the pundit of the day. This company sold stuff you can purchase just about anywhere. This brand spent about 25% of their net sales on marketing, a whopping percentage. Mr. Godin alluded (gently) to the fact that if you have to spend 25% of net sales on marketing you don't have a compelling story. Shoulders slumped. Mr. Godin got paid. Nothing changed.

Your merchandise should easily translate to a compelling story. 

And if your merchandise does not easily translate into a compelling story, you have to create a story tangential to your merchandise. How the heck does Crutchfield stay in business when Amazon or Best Buy copied their assortment? How the heck does Orvis still do $300,000,000 in annual net sales?

Sell something unique and charge whatever you want - the merchandise becomes your story.

Sell something anybody can get anywhere and you better have a compelling story tangential to what you are selling.

These themes keep coming up in my Marketing Budget Experiments work (click here). Merchandise productivity is simply not sufficient to fuel brand health. Merchandise productivity is a fusion of what you sell and the story you tell when selling it.