Sharper Image And File Momentum

Sharper Image continues to deal with business challenges, according to Internet Retailer.

Multichannel Forensics sometimes illustrate business oddities. In some instances, merchandise problems can be fixed, and yet, sales will decrease.

For example:

• Assume you start with 100,000 good customers.
• Assume 30% of them repurchase.
• Assume that each customer who repurchases spends $200.
• Assume that you only get 40,000 new customers.
• Assume that each new customer spends $100.
• Total volume = 100,000*0.30*$200 + 40,000*$100 = $10,000,000.
• Total customers = 70,000.

Assume you fix your merchandising woes. Next year looks like this:

• We start with 70,000 good customers.
• Assume 35% of them repurchase (an improvement over LY's 30% rate).
  
• Assume that each customer who repurchases spends $200.
• Assume that you get 45,000 new customers (an improvement over LY's 40,000).
  
• Assume that each new customer spends $100.
• Total volume = 70,000*0.35*$200 +50,000*$100 = $9,900,000.

In this example, you'd post a -1% comp store sales drop ... yet your internal customer metrics are all improved. Your repurchase rate increased from 30% to 35%. Your new customer acquisition counts improved from 40,000 to 45,000.

When businesses go bad, file momentum works against them. This example doesn't explain all the woes at Sharper Image. But the example demonstrates the critical importance of knowing all of your customer metrics. In particular, you need to know customer counts by segment, repurchase rates, spend per repurchaser, and similar metrics for new customer acquisition.

Your merchandising organization depends upon you to provide this service. On the surface, in this example, it looks like the merchants are failing again. In reality, file momentum is the issue --- merchandising of the store has improved.

B&H Catalog, Creating Demand

The perfect-bound, 420 page B&H Photo/Video catalog arrived in my mailbox this afternoon. You'd be set back about $2,000,000 if you purchased every item in this catalog.

This "resource" catalog, as it used to be known in the industry, is part of a dying breed. As recently as the 1970s, 500 page perfect-bound catalogs were mailed often, carrying a huge assortment of merchandise. I never knew that there were computerized chess games until Montgomery Wards and J.C. Penney told me so.

B&H uses this style of advertising to tell customers about merchandise that the customer never knew existed. I had no idea there was such a thing as a 5-channel portable field mixer. I had no idea these things could be a few thousand dollars.

Catalog marketing used to be great at "creating demand". Catalogs educated the customer, they taught the customer why she had to have a 5-channel portable field mixer.

But then catalogers figured out how to mail targeted 124 page catalogs, with a limited assortment, to an audience that liked only the targeted product in the catalog.

And then marketers figured out how to put all of this merchandise up on a website. They figured out how to send electronic mail messages to customers. So did deposed leaders in Africa.

And then Google turned everything upside down. For a fee, Google could intercept the customer at the very moment s/he was considering the purchase of a 5-channel portable field mixer. You'll notice B&H in the paid search results of this query.

All of this is wonderful for the customer. Absolutely wonderful.

Except for one little problem.

Over the next ten years, catalogs may become obsolete. It is very likely that the USPS will make it it impractical to send paper through the mail. Baby Boomers may focus less on consumption, may focus more on retirement. Boomer kids will have spent their formative years in a Web 2.0 or Web 3.0 or a Web 26.7 world that doesn't rely on paper.

When catalogs become obsolete, how will you ever learn that you want/need a 5-channel portable field mixer? Is Google going to be able to read your thoughts? How good a job does Amazon do at guessing what you might like?

Web Analysts need to start analyzing customer behavior over time. Online Merchants need to figure out how to make us aware of merchandise we never knew existed, but if we knew it existed, we'd want to purchase. When Online Merchants figure out how to do this, we can put catalog marketing to rest. Online Merchants will eventually figure out an effective way to do this. Today's method of "customers who like 'x' also liked these eight items" fails to capture the imagination of the consumer.

Time for your thoughts, especially those of you who are Online Merchants. How will you create demand for items that the customer will purchase, but doesn't even know exist in your merchandise assortment?

Around The Horn

Random thoughts:

• The Web Analytics folks are missing a major opportunity to understand customer behavior across visits, over time. I completed a Multichannel Forensics project for a website with numerous merchandise divisions. The visual representation of customer behavior was breathtaking ... this website is literally a visual representation of our Solar System. One merchandise line was like the sun --- it represented the gravity that kept the whole customer system in place. At least two other merchandise lines were like planets, with their own moons rotating around them. A few of the merchandise lines were not part of the gravitational pull of the whole system(website). When communicated properly, an Executive team can finally understand how customers interact with a website, over time. Web analysts and clickstream vendors have a huge opportunity to grow, to change, to understand customer behavior over time. Conversely, you SAS and SPSS folks who have always analyzed catalog and retail customer behavior --- this is your brief moment in time to make a difference. Do something with your data now, before the web analytics folks figure this out.
  

• Corporate America has an opportunity to allow employees to do more work from home. We really struggled with this during my time at Nordstrom. My employees could honestly do 60% or more of their work from home. Broadband internet access changes everything. Of course, you worry about people not doing their job while working at home. A manager could measure employees on productivity, and if the employee were productive, who cares where the employee produces work? I woke up at 6:00am today, was working at 6:45am, and wrapped things up by 2:45pm. This allowed me to re-wire a pond pump and lighting system, visit a hardware store, pick up prescriptions, clean outdoor furniture, pull weeds, all before 5:00pm. I did all of this with the cell phone right next to me, just in case somebody needed something. I didn't spend two hours in a car, traveling to work at 14mph, listening to the "morning zoo" on the radio. How much more productive would our employees be if we gave them a little bit of work/life flexibility? How much happier would employees be? I'll tell you, I was one happy worker today, with 72 degree temperatures and blue skies amplifying my experience.

• Multichannel Forensics in action in the music industry: Consumers have changed their behavior in a post-iPod world --- this music industry insider believes marketers and musicians/artists must change as well. Catalog industry executives need to monitor what is happening in other industries that are being flattened by the internet. Music is one of those industries.

Do You Use Algebra In Your Everyday Life? How About Multichannel Forensics?

You probably recall your teacher telling you that you'd use algebra in your everyday life. That seemed like a stretch, especially when trying to solve the equation 4x - 3 = 13.

Kids and adults may feel the same way when taught Multichannel Forensics. Yet, there are all of these interesting things happening in our everyday lives that are well explained by this framework.

Circuit City: You're responsible for selling compact disks. Not many people buy these things anymore. Are customers transferring sales to other departments in your store? Do they still purchase other products in your store? When is the transfer so great that sales per square foot drop below acceptable levels? The same theory can be applied to non-HD 27" tube-based televisions.

Toyota: Are Corolla customers in equilibrium with Hybrid cars? And if so, is the rate increasing to the point where customers will transfer out of one category, into Hybrids? Is there a price point ($5.00 gas) that accelerates transfer?

Safeway: When a customer purchases organic merchandise, how does behavior change? Does that customer exist in equilibrium with traditional brands, or does the customer isolate herself in organic foods? And if the customer isolates herself in organic foods, what does that mean for the products she used to purchase, especially if more customers transfer out of traditional brands?

Comcast: Within the course of ten years, many Americans chose to trust Comcast with HD, Digital and Basic Cable, a DVR, their Telephone Service, and Broadband Internet. Can Comcast forecast a five year sales trajectory by product line, and are there enough new customers available to sustain long-term growth?

New Jos. A. Bank President

This article in DMNews hit it right on the head --- merchandisers own whatever we define "multichannel" to be.

From a career advancement standpoint, most of us really butchered the "multichannel thing".

• Creatively, we were told to "integrate" our marketing. Show me the instances where "integrated marketing" drove consistent, dramatic increases in sales, beyond an individual campaign? I'm not talking about improving the open rate of an e-mail campaign by 11%, I'm talking about what it is that has been done that increased total sales by 11% on a sustained basis.
  

• From an IT standpoint, we learned that "multichannel" is "expensive". We're busy securing capital. At some point in 2010 or 2015, we'll have the systems infrastructure to deal with the realities of the business world of 2007. Then what?

• From a marketing standpoint, we've failed in at least three ways. Many catalogers failed to embrace online marketing. Most online marketers failed to embrace print marketing. Many Chief Marketing Officers have not invested the time to understand how marketing has fundamentally changed in just the past two years.
  

• From an HR standpoint, we failed to build organizational structures that cross-pollinate skills across employees. The reality is that catalog marketing, online marketing, and retail marketing require VERY DIFFERENT SKILLS. We haven't cross-pollinated enough talent to have truly brilliant marketers, creative employees, copywriters, etc.
  

• From a Finance standpoint, our leaders usually fail to understand how to properly measure ROI, and consequently, can't provide a vision for how to move the business forward.

• From a Database Marketing standpoint, we are too technical, too geeky. We don't tell a "multichannel story". This holds us back. Tell me the last time your Database Marketer clearly explained (using ordinary English language) how customers utilize the website to make a purchase over the phone, online, or in a store?
  

• From a Web Analytics standpoint, we fail to ever measure anything more than the outcome of one visit. This has to stop. This isn't how customers behave. Web Analytics practitioners and Web Analytics vendors must analyze customer behavior across time, across channels --- not just in isolation within one visit.

• Pundits have failed us. There is little insight and vision into the future. There is a lot of talk about systems integration, or that "multichannel customers are the best customers", or that "customers demand a flawless multichannel experience". Duh. Worse, we pay for this type of insight. We need an ROI-matchback solution that's not so heavily skewed toward favoring catalog mailings.
  

Merchants have been able to avoid most of these problems. They simply are required to sell merchandise wherever the customer wants to buy it. If the merchant fails, s/he is fired. Merchants have largely succeeded, given the ordinary systems they've always had, by having a gut feel about multichannel customer behavior. Merchants are taking ownership of the top leadership positions in our businesses.

Annual Report Update: Overstock.com

In addition to EBT being -12% of net sales, the following quote by management clearly directs blame --- and management doesn't believe blame rests with the merchandising organization:

"Our fourth quarter revenue declined 7%, the same percentage decline we experienced in Q3, and our annual revenue was down 1%. We believe that these decreases were primarily the result of our infrastructure upgrades in the last half of 2005, which resulted in an unsatisfactory shopping experience for many of our customers and affected both repeat and new customer revenue in 2006. We believe that a key to future revenue growth is to increase our Website conversion rate-defined as the percentage of visitors to the website who make a purchase. The areas of our business that most directly affect conversion rate, including personalization of the website, customer retention, e-mail marketing, and site design and layout, are the responsibility of our internal marketing department."

Those comments may be true. Still, making money in a direct-to-consumer business that has 12-14% gross margins is VERY DIFFICULT. Repeat, VERY DIFFICULT.

Annual Report Update: PC Connection

A few tidbits from the PC Connection Annual Report:

• 89% of sales come from existing customers. This is a stunning amount, obviously helped by large business accounts.

• 54% of sales come from small businesses of 200 to 1,000 employees, down from 59% two years ago. Large accounts now comprise 30% of sales. 16% of sales come from the public sector.

• Notebook and PDA sales dropped from 21% of total two years ago to 17% today.

• EBT was just 1.4% of net sales, though this is easily the best performance of the past five years. Gross margin was just 12.2% ... this is a tough business model to make money on a consistent basis.

• Catalog circulation is just half of what it was two years ago --- and yet sales continue to increase. Catalogers --- make sure you pay close attention to this trend --- there are often serious flaws in matchback analyses that overstate catalog performance.