Speaking of Omnichannel Theory

Have you ever purchased something from Apple?

Apple are Visual Merchandising experts. You might buy a lightning cable and you instead get a Tiffany's style presentation of your overpriced cable. That's the power of Visual Merchandising.

I ordered a rug from Home Depot. They outsourced delivery to a third party ... and the third party appears to have outsourced delivery to another party - a dude driving a Penske Rental Truck. I was supposed to sign for the item ... nobody rang the doorbell, I didn't sign, and as a consequence I didn't see what arrived until I saw the Penske Rental Truck pulling away from my home.

I opened the front door - and I was greeted by the image featured here.

The rug might have been dragged down a freshly paved road.

You can have the best omnichannel strategy on the planet ... but if you fail in any of the three key areas, your omnichannel strategy is utterly feckless.

1. Merchandise. Yup, that's what customers actually purchase.
2. Visual Merchandising / Creative. Does the rug above pass the Visual Merchandising test?
3. Execution. Home Depot outsourced their execution to a third party that couldn't have cared less about executing properly. Which means that Home Depot isn't going to sell me any rugs in the future.

If you have great merchandise, and if you present the merchandise in a compelling manner, and if you execute well, you'll sell stuff. If you adhere to the omnichannel thesis and fail at merchandise / visual merchandising / execution, you have problems.

Focus on what matters for your business, ok?

Omnichannel Customers Are The Best Customers

Omnichannel customers may well be the best customers. But that doesn't mean that the omnichannel thesis caused customers to become best customers.

It can be hard to understand the concept of "incremental value". Simply put, incremental value is the additional value that you achieve, above and beyond what would normally have happened.

Let's say you have a customer who purchased online three times. This customer is about to purchase again, and wants to buy online. But the company invested money in a buy-online-pickup-in-store strategy (BOPIS as the pundits say), so the customer goes to the store and buys something. The customer is now an omnichannel buyer ... online and store.

Assume the customer would normally have migrated from 3x online / 0x retail status to 4x online / 0x retail status.

• Annual Value increases from $76.79 to $98.59 ... $21.80 annual sales gain.

But instead the customer migrates from 3x online / 0x retail to 3x online / 1x retail status.

• Annual Value increases from $76.79 to $114.81 ... $38.02 annual sales gain.

The incremental gain, of course, is the difference between what would have happened ($21.80) to what now happens ($38.02). The difference is $16.22 annual sales gain.

The $16.22 is the incremental annual sales gain caused by the omnichannel thesis. It is more than $0, so that tells us that the omnichannel thesis has some value. That's a good thing.

Then there's the bad thing.

First, we subtract cost of goods and we're left with maybe $6 of annual value. Then we subtract the incremental cost of transacting in a retail store ... that could (depending upon your CFO) include incremental retail employee costs, store rent, and potentially interest expense because the customer is now required to contribute to pay down the debt required to build the store. Worse, the customer has to pay for the incremental cost of the software required to make "BOPIS" possible in the first place. These costs are compared against online costs (pick/pack/ship) ... so you only assess the incremental above-and-beyond costs associated with moving the customer down this path.

This is where the "omnichannel posse" hops on Twitter and condemns the analysis. They'll say that there are customers who wouldn't buy, period, unless the BOPIS option was available. That's a hard one to prove ... but sure, go ahead and tell me how many customers fall into that category, and we'll give full incremental value to those customers and assign credit to the omnichannel thesis. This is a wild guess, of course, so we should discount the value of a guess, right?

From there, you run a profit-and-loss statement. Did the omnichannel thesis provide enough incremental profit to offset the costs associated with moving a customer into omnichannel status?

Show of hands ... how many profit-and-loss statements have you seen that factor in incremental value?

This is the style of analysis required to prove that the omnichannel thesis is appropriate. Go run it, ok?

Omnichannel Theory

Omnichannel Theory / Customer Experience Theory is predicated on the hypothesis that when a customer does "more" the customer becomes "more" valuable.

The data used to support the theory is highly fraudulent, to say the least. Typically, those promoting the theory average historical spend for all customers buying from one channel (i.e. $100) and compare it to average historical spend for all customers buying from multiple channels (i.e. $900). Those who promote the theory look at the ratio of spend (900 vs. 100) and say that the omnichannel buyer is worth 9x as much ... and then paint a picture where the "brand" is encouraged to convert as many customers as possible to as many channels as possible because the opportunity is a 9x increase in customer spend.

We know the measurement strategy is highly flawed ... just look at Macy's, who have suffered through a 10% sales drop in the past few years while touting their omnichannel strategy. If the strategy worked, sales would have increased dramatically.

Tomorrow I'll explain a few of the metrics in the attached table. I analyzed customers who purchased up-to-five times historically, with at least one purchase in the past year. The story told in the table directly contradicts what those who promote omnichannel theory want you to believe, but directly support the fact that omnichannel brands don't enjoy sales increases.

Last Chance For 2018 Pricing

I have room for one more project for the remainder of 2018 ... one more! However, if you get your project in before Thanksgiving, I will honor 2018 "Total Package" pricing. In 2019, there will be a new pricing structure, so get your project in now to get lower prices ... and if you are first, you get your project completed in December.

2018 "Total Package" Pricing:

• Annual Sales $1 to $9,999,999 = $9,000.
• Annual Sales $10,000,000 to $29,999,999 = $15,000.
• Annual Sales $30,000,000 to $59,999,999 = $20,000.
• Annual Sales $60,000,000 to $99,999,999 = $28,000.
• Annual Sales $100,000,000 to $999,999,999 = $35,000.
• Annual Sales $1,000,000,000 and Greater = $40,000.

If You Thought 20% Off Was Bad ...

Remember our example from last week?

We were talking about 20% off, and we were discussing how you had to sell 83% more units to increase demand by about 46% to generate equal levels of profitability compared to selling at full price.

Of course, there aren't many of us who are out there selling at a paltry 20% off. And with Cyber Monday just around the corner and trade journalists screaming about discounts leading to "another record" event (which allows them to get clicks and to get paid by the vendors who support your CRM efforts to promote Cyber Monday discounts ... interesting, don't you think?) ... you're more likely to be closer to 40% off than 20% off.

In our example above, how many units do we need to sell if we bump things up to 40% off?

Hint - it's a lot of units.

We need to sell 11 times as many units, generating more than 6x as much demand, to achieve the same level of profitability.

In other words, one of three things (or all three things) are happening when you see a brand offering 40% off.

1. The business is dying and nobody is buying the merchandise, leaving the company with no choice whatsoever but to discount heavily to move through inventory.
2. The business has gross margins that are north of 70%, allowing for a cycle of fake markups and brisk discounts.
3. The business employs professionals who do not understand math.

Keep 1/2/3 in mind when you look at discounts on Cyber Monday in a few weeks, ok?

Your job is to do what is right for your business, not what is right for other people.

Generate profit.


P.S.:  If you are frustrated with discounts about discussions (and my unsubs suggest you don't like it when I point out the math behind discounts), then read this from Stitch Fix ... about personalized communications (click here). There are so many ways to be successful ... ways that have nothing to do with discounting merchandise because customers aren't as responsive as you forecasted them to be. 

You Need To Move A Lot Of Units To Make The Math Work

"The Industry", largely comprised of your vendor partners, wants you to use discounts / promotions to tickle the buying bone of today's price sensitive customer ... or so they tell you. Just look at the lather they get themselves into talking about Cyber Monday, for instance.

But is discounting right for your business?

You need to move a lot of units to make the math work.

Here's our example from yesterday, taken one step further down to contribution. Look at how many additional units you have to sell at a 50% gross margin and 20% off in order to make the numbers work.

At just 20% off with a 50% gross margin and a $3 cost per item for pick/pack/ship, you need an 83.3% increase in units (which nets out to a 46% increase in demand) just to make the math work.

Just let that sink in for a moment.

In fact, let that sink in for the weekend.

I'll come back to the topic next week, ok?

Discounts

Let's evaluate discounts / promotions within the context of the "Great Eight".

There's no greater temptation than to offer 20% off (or more) when business is not accelerating.

Your vendor partners love it when you discount, because you use their tools to sell more units in the process. Your merchandising team "might" appreciate the discounts as long as they move enough units to open up their buy for more new merchandise in the future. Your CFO likely doesn't enjoy discounting for obvious reasons.

Within the Great Eight, here's where discounting plays a role.

AUDIENCE:  Discounting fundamentally changes the audience. Ask Apple / Google if you want to understand the dynamic ... Apple owns affluent customers and most of the profit ... Google/Android owns a large swath of customers and the scraps of profit associated with a lower-priced category. Discounting pushes you into the "scraps of profit" audience. Full priced selling is MUCH harder and MUCH more profitable.

AWARENESS:  How are you going to communicate to those who don't buy from your brand that you are discounting?

ACQUISITION:  Google/Facebook want you to discount because that drives more traffic their way, which fattens their bottom line. The less profit you make, the more profit they make. Fun business, huh?

WELCOME PROGRAM:  Here's where your existing vendors love you ... now you leverage their tools (databases, campaign management systems, social, print, television, radio, billboards, retargeting) to communicate your wonderful 20% off opportunity.

ANNIVERSARY PROGRAM:  Again, your existing vendors love you ... you leverage their tools to communicate your version of Amazon Prime Day, and you give discounts to customers who haven't purchased in a year.

OPTIMIZATION PROGRAM:  Again, your existing vendors love you ... you might optimize your discounts using their tools, you might optimize customer long-term value, you might optimize the number of annual print pieces to send to a customer, you might optimize the number of email campaigns per week featuring discounts. In most cases, you'll be using vendor-based tools to get to a theoretical "optimal" outcome.

NEW MERCHANDISE:  Discounts can be used to move merchandise that isn't working, though there are many other ways to achieve a more optimal outcome (smarter inventory buys, using marketing spend to move units instead of discounts).

EXISTING MERCHANDISE:  See "new merchandise".

As you can see, discounts touch most areas of the "Great Eight" ... and are of particular value to the vendors selling solutions to you ... because smart discounting either requires you to use their tools or drives more units which results in their tools being more profitable to them. Vendors win when you discount. That's why you read so much about discounting and (in particular) loyalty programs.

Tomorrow, will talk about the other side of discounting ... profitability.