New Items and Demand Elasticity

Remember our table from yesterday?

I want to show you something ... look at projected four-year value of new items based on how many new items are introduced during a quarter:

What does the graph tell you?

Well, if you offer a small number of new items, you get a lot of demand per item.

If you offer a large number of new items, you get a small amount of demand per item.

There's a relationship here ... and tomorrow, we'll see how much long-term demand you get based on how many new items you offer per quarter.

So Much Juicy Data!!

The New Marketing Leader has a ton of challenges (and fun) awaiting ... but maybe the most important challenge awaits in understand what role the merchandising team played in the demise of the prior marketing leader.

In that process, the New Marketing Leader learns a ton about how merchandise strategy evolved.

Look at this example ... look down the "Quarter" column ... we can see how many new items were introduced in each quarter behaved (or are predicted to behave) over time.

Your merchandising team executed a highly inconsistent strategy, didn't they?

We'll be able to digest information from this table all week, but let's begin by looking at new items. Read down the "Items" column. Tell me what you see??

• By quarter, there were between 129 new items per quarter and 377 new items per quarter through 25-27 months ago.
• Then, somebody in the merchandising division decided that newness was a bad idea ... new items dropped from 273 to 106 to 52 to 45 to 25 in the quarter ending 13-15 months ago.
• Then, somebody in the merchandising division decided that newness was a GOOD idea ... new items increased from 25 to 149 to 631 7-9 months ago.

This type of wild behavior happens all the time ... and IS NOT THE FAULT OF THE MARKETER!!!!

Yes, marketers lose their job because of these issues all the time. But the marketer doesn't have to lose their job all the time ... or ever.

Spend some time analyzing merchandising issues.

Tomorrow, we'll dig more into this table, because there's so much juicy data there!!!

Must Read

A story about Gymboree (click here).

Just soak it in, ok?

First Client To Say Yes Gets It

Last week I talked about measuring the downstream value of new items.

Let's try something ... instead of folding this into the typical Total Package framework in the short-term, I'll offer the following:

• First client to say YES gets a "Downstream Analysis" by Merchandise Category for the low price of $3,000.
• Each additional client to say YES this week gets a "Downstream Analysis" by Merchandise Category for $5,000.

Going forward, this analysis will be folded into my Total Package framework and cost structure (click here). So take advantage of this one-time opportunity!!!

Downstream Value Varies by Season

Look at four-year value for new items by season. Quarters 5/9/13/17 represent the first quarter ... 6/10/14/18 represent the second quarter, and so on.

Four-Year Downstream Value by Quarter Introduced:

• 1st Quarter = $2,521.
• 2nd Quarter = $2,533.
• 3rd Quarter = $2,674.
• 4th Quarter = $2,894.

In our example, new items introduced in the 4th quarter are worth about 7% to 10% more than new items introduced earlier in the year.

You'll work with your merchandising team to make sure that you give new items more exposure all year round (especially in free channels like email and Instagram), and you'll be willing to expose less-productive new items in Q4 simply because their potential value is better than any other quarter.

Now We Have Downstream Value

We take our annual totals, and then we (via the red numbers in this table) fill in estimates to get all new items to represent a four-year downstream value metric.

The bottom row represents four-year value, by year, for a typical new item.

• Year 1 = $1,210 per item.
• Year 2 = $1,850 per item.
• Year 3 = $2,296 per item.
• Year 4 = $2,656 per item.

Those are cumulative figures. Incrementally, we observe the following:

• Year 1 = $1,210 per item.
• Year 2 =    $640 per item.
• Year 3 =    $446 per item.
• Year 4 =    $360 per item.

Over four years, new items quickly lose steam, don't they?

At an approximate 9,000 new items per year, the brand will generate ...

• Year 1 = $10.9 million.
• Year 2 =   $5.8 million.
• Year 3 =   $4.0 million.
• Year 4 =   $3.2 million.

Let's say that your brand generates $20.0 million from existing merchandise ... and your CFO says you need to hit $35.0 million in total annual demand. You have evidence that the best you can hope for is $20.0 + $10.9 = $30.9 million in annual demand. You're not going to hit your goals. And not hitting your goals is going to become your fault!!! That's how business works.

From here, you can calculate how many new customers you need to make up the difference ... and/or you can calculate how many new items you need to make up the difference.

You do this stuff, right?

Right???

Converting The Table

Once we know how much downstream demand (on average) a new item generates over time, we convert the table into a new table ... in this case, a table that illustrates quarterly demand based on quarters since the item was introduced.

Look at the red numbers ... those are estimates ... estimates that allow us to project how much downstream demand a new item generates on an annual basis.

Tomorrow, we'll convert this table into something usable.