For Best Customers, The Merch Curse Is "Worse"

We talked earlier about The Curse of Great Merchandise.

Frequently, the curse is even worse among the best customers you have.

In this query, I grade each customer, just like in school, based on life-to-date purchases. Look at the results:

By Customer Grade	Classic Products	Newer Products
Customer Grade = A	65.0%	35.0%
Customer Grade = B	48.0%	52.0%
Customer Grade = C	42.0%	58.0%
Customer Grade = D	39.0%	61.0%
Customer Grade = F	31.0%	69.0%
First Time Purchasers	37.0%	63.0%
Totals	53.5%	46.5%

The percentages skew even worse among the very best customers. The very best lifetime customers are most likely to keep purchasing the same merchandise you've always offered.

So think about this problem, multichannel CEOs. When you want to move your brand in a different direction, your very best customers are going to be the ones that are most likely to resist your direction.

What to do?

If your business is failing, and you want to try a different merchandise assortment, create two versions of a catalog. For your very best customers, send them what you've always sent them, protect your sales. For your "Bs", "Cs", "Ds" and "Fs", you test your new strategy --- these customers are the ones most likely to embrace newer merchandise. New customers might accept new product, I'd test them in either version.

For your website, if you have the ability to create two versions of landing pages or home pages, merchandise them differently based on the customer who visits.

For e-mail, you have huge testing opportunities among your "Bs", "Cs", "Ds" and "Fs". Try anything/everything here ... your risk is so minimal, given that probably 1 in 1,500 of these folks even bother to purchase from an e-mail.

Business leaders --- keep the merchandise curse top-of-mind, when thinking of taking your brand in a new direction.

The Curse Of Great Merchandise

E-commerce, catalog, retail and multichannel merchants focus more energy on merchandise than on customers. As disappointing as this may be to customer advocates, vendors and research organizations, it is probably a necessity.

Many find the customer/merchandise relationship akin to the chicken/egg relationship.

In reality, there are few brands that start with a throng of customers, then question what they should sell to the throng. Brands start with a merchandise offering, then build a community of customers who purchase the merchandise/experience offered by the brand.

Some brands are wildly successful. They offer merchandise that customers love. This audience becomes the "core customer audience". Customer advocates suggest you don't anger the core customer.

And yet, merchandise has a life expectancy. Merchandise eventually becomes unpopular, or no longer has utility.

This is the curse of great merchandise. Your best customers want you to keep offering the merchandise your best customers fell in love with. Take the latte away from the Starbucks customer, and you'll have a mutiny.

When you have a moment, have your business intelligence team run this query for you. This is a very common relationship among e-commerce, catalog, retail and multichannel brands.

Percentages By Customer Acquisition Year
		Year Merchandise Was Introduced
When Acquired	Old Products	Recent Products	New Products	Grand Totals
Long-Time Customers	64.0%	28.0%	8.0%	100.0%
Recently Acquired	46.0%	38.0%	16.0%	100.0%
Newly Acquired	37.0%	40.0%	23.0%	100.0%
Grand Totals	53.5%	33.3%	13.2%	100.0%

In this example, the most loyal customers, those with the brand the longest, spent sixty-four percent of their 2007 sales on old products, products introduced to customers more than four years ago. They only spent eight percent of their sales on products introduced during 2007.

Recently acquired customers, those acquired two to four years ago, strike a balance across product offerings.

New customers, those acquired in 2007, are much more willing to purchase new merchandise, merchandise offered for the first time in 2007.

This is a huge challenge for the direct-to-consumer CEO, especially if the brand is struggling.

If the CEO elects to offer a lot of new product, the core customer group will be offended, lowering annual sales, response rates, and conversion rates.

If the CEO focuses on best merchandise, the core customer group is pleased, but new customer acquisition struggles, hurting the long-term potential of the brand.

Each week/month, the e-commerce, catalog, retail or multichannel CEO should receive a report that illustrates the customer segments who purchased each item offered to consumers. By scrutinizing the customers who prefer each item, the CEO knows just how far s/he can push new merchandise to customers. By understanding how best customers interact with new merchandise, the CEO can hopefully avoid the curse of great merchandise.

Improve The Product

Yesterday, I asked for suggestions to grow a hypothetical business by ten percent.

The options I provided were channel-based tactics, things you can do in the short-term, to grow top-line sales.

One should ask the obvious question, "why don't you just improve the product, why don't you create something remarkable that the customer craves?"

I take you to a board room I was in, many, many years ago. Customers did not want to buy our merchandise, they were voting "no" with their wallet ... for at least a year.

Most of the merchandise we sold was private label. This means we created, designed and sourced our own merchandise. If we wanted to improve the product, we had a nine to twelve month process ahead of us. You don't simply go out and find new, better product. You improve product today --- but the product isn't available to the customer for almost a year. Your job is to increase sales today.

So we're meeting in this board room. It is November, and we are talking about our sales plan for the next fiscal year, which begins in February. Remember, new product takes nine to twelve months to develop and make available to the customer.

Our sales plan, based on what has happened over the past year, did not meet the expectations of our President or our CFO. I was responsible for creating the sales plan.

After taking a half-hour of heat from the executives, I became defensive. I simply turned to our Chief Merchandise Officer, and said "If we could just improve our merchandise productivity, we wouldn't be in this situation."

Once words leave your mouth, you cannot take them back. As the light-hearted smile that previously adorned the face of the merchant turned into a rage-based, crimson-colored scowl, I realized my choice of words, while honest and accurate, were not going to produce the result I desired.

Eight executives watched as the merchandise executive shared thoughts, opinions, and assorted non-positive commentary with me.

Our President and CFO turned their attention back to me, and asked "What are YOU going to do to improve sales next year?"

When faced with constraints, you go back to the tactics that you are accountable for. You try to add catalogs, add pages, remail old catalogs to your best customers. You look to add a second or third e-mail contact each week. You try to add affiliates who could refer sales to your website. You look at marketing strategies surrounding your best customers, your most productive customers, because you simply cannot afford to send crappy merchandise to customers who are unlikely to buy anything --- that's a recipe for financial disaster.

Of course, the strategy of adding remailed catalogs, adding additional catalog contacts, adding pages, adding e-mail contacts, adding affiliates, increasing online marketing spend, you name it, is a long-term recipe for financial disaster. We add these tactics to grow sales. Then the merchandising team does a good job, and these tactics become profitable. Inevitably, however, customers don't want to buy your product, or become frustrated by being spammed by your marketing activities.

In many cases, you cannot "retreat". Your shareholders won't tolerate a "rightsizing" of the marketing plan, in order to profitably drive sales. In other words, you couldn't reduce your bloated catalog or online marketing budget by forty percent, because it would come with a twenty percent reduction in sales --- a result that is not acceptable to your executive team or shareholders.

In a perfect world, you create great product that customers crave. In our world, not everybody creates great product that customers crave. Regardless, we have to find ways to grow sales without the benefit of great product. That's the job of a Database Marketer.

Multichannel Catalog Merchandising Strategy

The art of cataloging changed during the past ten years.

We used to market our catalogs to a target audience. We put the best merchandise in our catalogs. We sent the catalogs to our target audience. We measured results. We carried the best merchandise forward. We carried the best new merchandise forward. We capitalized on runners, we killed dogs.

Multichannel cataloging is different. Though we merchandise and market to our target audience, we have no control over which channel the target audience chooses to respond in.

Multichannel retailers run demographic profiles of the customers who respond to various products. For instance, assume we manage circulation at J. Crew. We advertise this Montauk Tote in our catalog.

In the telephone channel, we observe a DMPC (Demand per Thousand Pages Circulated) of $50.00. We're happy with this, because the outcome exceeds our profitability expectations.

Online, we notice that this item has a below-average conversion rate, a below-average "demand per visitor" metric.

Given the combination of the metrics, we elect to carry this item forward next season.

Still, something nags us about the performance of the item. So, we decide to look at the demographics of the customers who purchased the item, by channel.

• Catalog Customers Who Responded Via Telephone: Age = 53, Income = $63,000.
• Catalog Customers Who Responded Online: Age = 49, Income = $70,000.
• Online Responders Who Did Not Receive A Catalog: Age = 46, Income = $66,000.

Can you see the challenge we face?

This item worked in the telephone channel. Our online-based analysis says this item performed below average. Our demographic profile suggests different audiences are responding, by channel.

Our challenge is to decide the role of catalog advertising.

If we want a profitable telephone channel, we run this item next year.

If we want to drive online sales, we don't run this item next year.

If we want to maximize multichannel sales, we run this item next year, but we may need to reduce circulation, or mail the catalog to a different audience. Eventually, we will mail catalogs only to customers who shop via telephone and web --- a limited audience.

Darwinian-style evolution of catalog advertising suggests that catalogs will either be constructed to maximize telephone sales, or will be mailed only to a limited audience that shops via both the telephone and online channels (or shops both direct and retail channels for companies who sell via retail). We're already heading in one of those two directions, most of us just don't know it, yet.

We're not going to get thought leadership from a Management Consulting firm on this topic. The answer does not appear in a $279 report from Forrester Research. The answer is not evident in a statistic that says "multichannel customers are worth 'x' times as much as single channel customers".

Multichannel CEOs and CMOs: I don't think there's a right or wrong answer, here. We simply have to decide what we want our multichannel catalog advertising to accomplish, and accept the consequences of our decision.

What Is Wrong With E-Commerce?

We are more than a decade into the e-commerce experiment, and it feels to me like we've completely stagnated. Something is amiss with e-commerce.

Take a look at several leading websites:

• Electronics: Best Buy, Circuit City, Buy.com
• Apparel: J. Crew, Talbots, Coldwater Creek
• Home/Office: Staples, Office Depot, Office Max
• Housewares: Williams Sonoma, Restoration Hardware, Crate and Barrel
• Food: Omaha Steaks, Safeway.com, iGourmet.com

Within each category, I see similar presentation styles, similar merchandise, similar prices, similar promotions.

There is a human element of e-commerce that, to me, is simply missing. Retail merchandising is all about being human. People exhibit artistry and creativity in presenting and selling merchandise in a retail setting. People serve customers, solve problems, help select merchandise, help make the consumer feel good about her purchase. Humans fail, and we love to talk about all of the failures. But humans succeed far more often than not.

The catalog channel, to a lesser extent, has elements of human interaction. The catalog can be merchandised in a way that communicates a story to the customer. Imagery and copywriting communicates a story that engages the customer. The customer picks up the phone, and calls a person working in a call center. The human interaction between the person working in a call center is an important part of the historical success of cataloging.

I feel like the online channel is missing warmth, missing a certain element of humanity. All of the websites mentioned earlier do a nice job of presenting merchandise on their homepage. But in all cases, you are dealing with a machine. A machine (one usually programmed by humans) determines what recommendations it has for you. Navigation of the website is largely done in a drill-down manner, one built in the style of databases developed by information technology experts. You can use search and various hyperlinks to jump around a website. But for the most part, you are drilling down, then backing up to a landing page, then drilling down again.

This is not the human method of shopping used by customers in stores, or the random thumbing through pages of a catalog. It isn't natural. This drill-down and back-up style of navigation causes the merchant to not be able to tell a compelling story. Catalogers use copy to create emotion and inspire purchasing. The online merchant cannot do this, because the online merchant simply cannot know where every customer is going to navigate at any given time.

In the past two or three years, the pace of e-commerce innovation has slowed. E-Commerce continues to grow, in large part because customers are migrating from the catalog channel to the online channel, and because of the increase in access to broadband internet access. Once the transition from catalog to online wraps-up, and once the majority of consumers have broadband access, something will need to change in the online shopping experience.

I don't believe our industry's zealous focus on multichannel integration is the answer. Somehow, we marketers need to humanize the online experience. We need to move away from the "information technology" based design of websites, and somehow allow our customers to have meaningful experiences when visiting our sites. Until this happens, we simply compete on the basis of lowest price and best promotional tactics.