Top 10 Problems I Observe In My Projects: #8

Problem #10 = New Items Are Too Expensive
Problem #9 = Discounts Drive Down Price Of Existing Winners
Problem #8 = Relying On 1-2 Customer Acquisition Channels


This one comes up all the time as well.

1. Catalogers = Co-Ops.
2. E-Commerce = Google + Facebook.
3. Retail = Mall Foot Traffic.

The best-performing clients have a dozen (+/-) unique customer acquisition channels fueled by a low-cost / no-cost customer acquisition program. They use print and/or radio and/or television and/or Google and/or Facebook and/or pop-up stores and/or sponsorships and/or storytelling and/or a thousand other tactics.

The worst-performing clients do (1) (2) (3) above ... and they complain about (1) (2) (3) above not working. Or they ask what the "next big thing is that is going to scale"?

Diversify!!

Catalogers are struggling mightily because of an over-dependence upon the co-ops. Now that "co-ops don't work", I'm asked "what's next"?

E-commerce growth (outside of Amazon) is slowing ... not surprising that there are only two major customer acquisition channels to focus on either, right?

And we know what has happened to foot traffic in malls.

Diversify!!

Top 10 Problems I Observe In My Projects: #9

Problem #10 = New Items Are Too Expensive
Problem #9 = Discounts Drive Down Price Of Existing Winners

This problem comes up in nearly every single project.

Think about it this way. You have an item at $29.99, and that item is a winner. Then business is bad for any of a number of merchandising reasons. Some/Many items just aren't working. So Management instructs Marketing to take 30% off all orders.

What happens to the $29.99 item that would have sold at $29.99 (and generated $15 of gross margin)?

• The item now sells for an effective price of $20.99 (and generates $6 of gross margin).

What happens next year when the customer is presented with the $29.99 item?

• "I'm not buying it unless it is offered at 30% off."

We are nuking the good half of the merchandise assortment because the bad half of the assortment won't sell.

Don't do this!!

Offer 30% off on items that aren't selling ... maintain pricing integrity on your winning items.

I know, I know, your in-house systems won't allow you to do this.

Please find a way to do this.

Top 10 Problems I Observe In My Projects: #10

Problem #10 = New Items Are Too Expensive

In my projects, I continually observe pricing challenges - and for good reason - pricing is hard work!

Here's what happens ... the CFO demands that gross margin dollars increase, regardless of net sales increases/decreases. Existing merchandise sells at "x" ... and is often required to sell at "x" because Amazon sells a comparable item at "x - $1". Therefore, the CFO has two options.

1. Increase marketing dollars by 20% to increase gross margin dollars by 5% - 10% (hint - the p&l won't work).
2. Introduce new items at more expensive price points.

Companies with long-time loyal buyers struggle on this front ... customers typically revolt against the tactic, and do not buy the new items. This creates a challenge, because the company then fails to generate enough winning items, which hurts the business 2-5 years out.

I know, you're caught between a Rock and Amazon.

Please make sure you have enough new items at price points that customers appreciate.

Analyze the success of new items by price point band ... I do this work all the time and the results are illuminating. Define what a winning item "is", and then measure the rate that new items become winning items by price point band.

One last point ... this is the job of the MARKETING department. Your merchandising team should be doing this work, and probably is doing this work ... but the MARKETING department is responsible for managing customers. And if customers are being mismanaged by price point band, the MARKETING department must point this out. Period. In the past decade, marketers gave up their authority to measure merchandising challenges that cause marketing performance to weaken ... largely because of an obsession with digital conversions via software like Google Analytics & Adobe. It's time to change, to take back what we once analyzed on a weekly/monthly basis.

Thoughts?

Time For A Rant Defending Retailers & Catalogers

Alright my friends, I clicked through to this article because it had content regarding MailChimp and I like the work they do and I like their company culture ... so I read the article (click here to read the article).

And then I became angry.

Now, is the author necessarily wrong? No! 

But the advice does not help my client base. Not. One. Bit.

There's a common theme right now, and it goes like this.

• Retail and Catalog employees are stupid.
• Vendors and Thought Leaders and Researchers and Trade Journalists are smart.
• Vendors and Thought Leaders and Researchers and Trade Journalists have the answers.
• Vendors and Thought Leaders and Researchers and Trade Journalists can beat up Retailers and Catalogers because it earns them page views - page views that may lead to solutions that dumb Retail and Catalog employees will pay for.
• The solutions are to "be more digital" and "engage" customers ... and this is done by "tearing down silos" within companies enabling companies to be "agile" ... among other things.

The solutions are tactical.

The problems, of course, are structural.

Allow me to give you an example.

Let's pretend you are a mall-based retailer like Ann Taylor. Let's pretend that you do everything the author of the article demands of you. Let's pretend that you become as digital as you can be. Let's pretend that engage customers, and concoct great branding strategies. You work with approved agencies and you implement omnichannel strategies that the vendor community demands you implement. You spend tens of millions on all of this stuff.

Will it matter?

What do you do when JCP nukes their business model and attempts an Apple-Lite strategy and 30% of foot traffic at JCP leaves - costing you foot traffic because JCP is an anchor store? No amount of engagement overcomes the traffic that left because JCP made what turned out to be terrible decisions, right? How is this Ann Taylor's fault?

What do you do when Macy's becomes intoxicated with the vendor / trade journalist / researcher / thought leader spell known as #omnichannel? What do you do when Macy's invests money on a theory that doesn't pan out ... resulting in Macy's closing stores and resulting in less foot traffic in Ann Taylor stores because Macy's is gone? No amount of engagement overcomes the traffic that left because Macy's followed a failed omnichannel thesis? How is this Ann Taylor's fault?

What does Ann Taylor do when the pundits tell Ann Taylor to be "digital or die" ... and so Ann Taylor employs digital strategies ... and those strategies cause the customer to shop Ann Taylor online and not go into a store ... causing average stores to perform below-average and causing below-average performing stores to become unprofitable? The very digital strategy Ann Taylor was told to follow (or die) results in sub-standard performance in stores ... which will result in the closing of stores. No amount of engagement overcomes the traffic that left because Ann Taylor did what they were supposed to do and became "more digital". How is this Ann Taylor's fault?

The solutions are tactical.

The problems are structural.

Few people have solutions to structural problems. If people had solutions, then Sears would be growing.

There are a few things that we can do to fight structural problems (but we aren't going to solve structural problems).

1. We can focus on our merchandise assortment. Think about how the fast fashion folks overcame structural problems by forcing customers into stores by turning the assortment over fifty or more times a year. The momentum of the merchandise assortment overrode declines from structural problems.
2. We can focus on finding new customers. This goes against everything you've been taught - you've been taught to encourage customer loyalty. But new customers are the lifeblood of our future - without new customers, we don't have a future.
3. You can employ vendor-centric tactics within your customer acquisition strategy. Be as digital as you like. Engage prospects. Employ branding strategies. Do everything the author of this article recommends (click here). But please understand that these are tactical methods that support your customer acquisition strategy - not groundbreaking strategies that transform your business.
4. You can forecast the impact of structural changes 1/2/3/4/5 years out.
5. You can position your company to be financially viable five years from now based on the results of your forecast.

This brings me to catalogers.

There isn't an industry that has a roadmap for structural change that retailers should pay more attention to than the catalog industry.

About a third of my readership works in the catalog industry. These folks have been through the wars, and they know what the outcome of structural change looks like. E-commerce routed catalog marketers. There are very few strategies that can offset structural change. Catalog marketers weren't stupid. They moved to e-commerce. But they also had to protect the core business (which at the time generated all of the profit) - and protecting the core business generally provides short-term benefits.

The result of structural change on catalogers?

1. Younger customers left catalogers to shop e-commerce (just like customers are leaving traditional retailers to either shop online or Amazon or newer retail brands).
2. With older customers left, the merchandise assortment evolved "old" very quickly.
3. A merchandise assortment that skews "old" dissuades younger customers from shopping, creating a feedback loop.
4. The feedback loop separated catalogers from the digital ecosystem, further accelerating the shift to older customers who appreciate offline marketing.
5. Catalogers clobbered the algorithmic source of new names (co-ops) ... deflating performance. At the same time, with few younger names added to co-ops, the co-ops became less effective, creating a new customer acquisition feedback loop of ever-declining performance.
6. Catalog consolidation happened (and is happening) - with a handful of companies gobbling up catalogers to generate a list of the "magic 8,000,000" catalog-centric households. I called this the "Abandoned Warehouse" (click here). Retail may well consolidate as well.
7. Cataloging became a niche industry catering to older offline customers in rural areas.

Now, catalog professionals aren't stupid. They largely employed the tactics that vendors / trade journalists / researchers / consultants / pundits told them to employ. It's just that the tactics cannot offset structural change.

We should defend retailers and catalogers because there are very few tactics that can offset structural change. These folks are pushing a boulder up-hill. It's easy to go work at an online e-commerce brand that is growing organically - you look good even though you didn't do anything special. It's hard to work in an industry dealing with structural change - your work may well be great and it won't matter one bit. It takes courage to go through this process.

It does not take courage to demand that employees in structural change industries focus on "engaging" customers.

Killing Off A Popular Item

In the past year, my projects illustrate a consistent theme.

1. Merchants kill off a popular item.
2. Merchants do not replace the popular item with an acceptable new item.
3. Demand declines.
4. Marketing gets yelled at.

Here's a good example. Take a look at this item - the graph depicts monthly demand for an item introduced back in 2013.

This is what the "life of an item" is all about. The item roared out of the gates, and became an instant winner.

Even winning items begin to "die". The graph depicts the slow death of the item. After about 18 months, the merchandising team inexplicably kills off the item, and monthly demand drops by about 60%.

Then, the merchandising team realizes that this item shouldn't have been killed off - they "reintroduce" the item for the start of 2016, and the item begins the normal process of "dying off" - with the merchandising team formally killing the item last summer.

But in the process, a year of normal progression was "lost" because the item was killed off.

These are the mistakes that I keep seeing in my project work.

Why do I keep seeing these mistakes?

I'm not sure.

But I think modern analytics has something to do with it. Show me how you would identify this problem in Google Analytics? Or Adobe, for that matter? Is IBM's Watson calibrated to identify these problems for you? Is your Merkle-hosted customer data warehouse set up to deliver a real-time warning when the merchants kill off a winning item?

Here's another interesting quirk about this item. The purple color in the bars represent "telephone" demand ... i.e. demand directly caused by catalog marketing. By the time we get to Spring 2016, almost no demand is from the phone ... meaning that this item was utterly de-emphasized from an offline marketing standpoint. Not sure who owns the "catalog" in this case, but Marketing needs to stand up and defend winning items so that catalogs and email campaigns perform well. I don't see a lot of Marketing Leadership these days - the voices that used to stand up for merchandise seem to be gone, or seem to have reallocated their voices to defending the performance of digital campaigns. And that leads to a question - of what good are digital campaigns if the items that perform well in digital campaigns are de-emphasized or are killed-off?

Just Get Customers To Be More Loyal!!!

It comes up all the time ... I share the importance of finding new customers, and somebody in the room says something like this:

• "I just want to play Devil's Advocate for a moment."

First of all, few Professionals play Devil's Advocate for the sole purpose of playing Devil's Advocate. The Professional knows that s/he holds an opposite point of view and doesn't want to be called out if s/he is wrong, so the qualifier is added. Then ...

• "We just haven't figured out how to get customers to be more loyal. Starbucks figured it out. Facebook figured it out. If we just add more components to our loyalty program and we send more catalogs and we add email campaigns and we give a larger percentage off then our customers will be more loyal and we'll reap the rewards of our strategy and we won't have a loyalty problem. Why can't we just solve the loyalty problem? I mean, I've read that it costs nine times more to acquire a customer than to keep a customer. Why don't we spend five times as much keeping the customer and we'll come out ahead? #amirte?"

No. You won't come out ahead.

Remember our image from yesterday - this is a business that is slowly dying.

This business has an approximate 35% annual repurchase rate - a rate very similar to my average client. Not the 90% that Starbucks has (I'm guessing, don't quote me), is it?

Ok, let's pretend you find some magic elixir (remember, you've been trying to increase loyalty for your entire tenure at the company and haven't moved the needle much) and you increase repurchase rates from 35% to 40%. This is almost impossible to do, by the way, but let's ignore that fact. What does the forecast look like?

For a year, you've fixed the business (though profit might tumble, but let's ignore that for now). Kudos!

Then what happens in year two?

The business begins to contract again, albeit from a higher base.

See, you haven't fixed the core issues with the business ... you just covered up problems with rewards points and %-off deals and free shipping and gifts with purchase and whatever else you can conceive. It's a temporary fix - one that might leave you less profitable.

This is why I harp on the core issue (merchandise). That's what matters most. Without a merchandise assortment that encourages repeat purchase activity monthly, it's nearly impossible to meaningfully move customer loyalty - not impossible - but my goodness it is hard!

Fixing File Momentum

Here's a common outcome across my current projects.

1. Merchandising missteps have hurt the business.
2. Marketing cut back on new customer acquisition to "align expenses with demand".
3. The customer file shrinks due to the interaction between (1) and (2).
4. Merchandising fixes problems, and merchandise productivity actually increases.
5. But the business shrinks.
6. Executives get angry.

This is an example of what I am talking about.

A year ago there were 61,521 twelve-month buyers - today there are 59,765 twelve-month buyers - and as we forecast into the future the quantities continue to decrease. If the business is optimized per current merchandise productivity levels, then the business will continue to shrink. That's what data-driven optimization does to a business.

The best marketers leverage forecasting algorithms that incorporate channel dynamics, merchandising dynamics, pricing dynamics, and discounting dynamics. All are blended together using some sort of "algorithm" - I personally like to use Principal Components Analysis combined with probability of segment movement, your mileage will vary. Given the dynamics of your business, you get an overall forecast (illustrated above) and you get forecasts by marketing channel and you get forecasts my merchandise category.

Best of all, the marketer figures out what kind of marketing investment is required to grow the business again. Look at this example.

We need 7% increases in retention and new buyer productivity to grow the business by 5% this year ... and then to maintain 5% growth, we need increases of 12.5% / 16.8% / 20.6% / 24.0% (vs. this year) to keep growing by 5% per year.

The best marketers use forecasting methodology to communicate to Sr. Management what is needed to grow the business. A 7% increase in retention + newbies is then compared to the organic percentage. If a business generates 50% of volume organically / without marketing, then the marketer knows that there will need to be a 20% investment in marketing spend to generate the 10% increase in demand required among the half of the business that is fueled by marketing. The 10% increase among marketing-centric customers and 0% increase among all other customers yields the 5% increase our situation requires.

Make sense?

Contact me (kevinh@minethatdata.com) for your own Forecasting Worksheet.