Articles
Picking The Repeats
Ask most catalog merchants and CEOs how they select repeat products and you'll hear two things; square-inch analysis and profit contribution. In truth, though, it's more like three words -- gross dollar demand. Most merchants want to know what's selling three weeks after the catalog drops, before they rush off to another show. For them, gut feeling and gross sales point to next year's repeat products.
What's missing is a disciplined middle ground, a process that combines the intuitive and analytical. Let's take apart intuition and analyze what goes into making a good repeat product -- particularly with respect to profit contribution.
Cleaning Up the Data
Before you begin, make sure your catalog data is correct and usable. Here's how:
Grouping SKUs
Most catalogers capture unit demand, dollar demand and product cost at the SKU level, separating SKUs by sizes, colors, parts of sets or companion items. My advice: Combine SKUs into groups that make up a presentation unit. In other words, if you've got a seven-SKU bathroom accessory set, group it as one product. After all, you're deciding whether to repeat the set, not the SKU.
Adjusting Product Cost
Adjust your product cost to reflect the future. For instance, the cost of that alarm clock in your current catalog may reflect a small volume purchase or high shipping cost. In the next catalog, you might import an entire container. Remember, what you will pay is more relevant than what you previously paid.
Incorporate all costs in your product decisions, including first cost, duty, royalties and in-bound shipping.
Add or subtract from your product cost any exceptional shipping or packaging expense or savings that will not be passed on to the customer.
Adjusting Demand
Subtract any returns intrinsic to your product's sales that will continue in the future. Don't subtract returns due to problems that have been remedied.
Figure in "phantom demand" for certain products that might have been on back-order. If a silk blouse sold well the month before your shipment ran out, for instance, you can project those sales across the entire life of the catalog.
Creating Rankings and Indicies
Once your numbers are clean, sort your products top to bottom by four separate rankings: unit volume, gross demand, gross profit and profit contribution. My rule for picking repeat products: Consider the best from all four rankings.
Unit Volume
High unit volume products appeal to a broad spectrum of customers. They create goodwill, build the number of orders and add new customers to your house file.
True, such products are usually lower-priced, and may bring down the average order size. But even if these products rank low in other categories, high unit volume products have value. Remember, many sales are better than a few, even when their dollar value is equal. Look hard before you discard.
Gross Dollar Demand
High gross demand products drive the business and your response rate. Don't casually drop a product your customers think is great. If a great-selling product does not rank high in profit contribution, try either to improve the product's margin or reduce its space. A great-selling, low-margin product is better than a slow-selling, high-margin product. Winners, after all, are hard to find.
Gross Profit
Gross profit ranking combines customer interest with product margin. More than sales, gross profit accounts for your financial success. More importantly, it also allows you to look at profit contribution before figuring the cost of space.
My belief is that great product sells regardless of the amount of space allocation. Too often, great products end up low in a contribution ranking simply because their "hero" status allowed too much space relative to potential sales. Conversely, poor products given a small space end up looking like winners in square-inch contribution. It's easy to turn a "dog" into a winner, and vice versa, simply by reallocating space. But you can't easily turn a margin mutt into a profit prize winner.
My advice: Rarely walk away from a gross profit winner. If a gross profit winner is low in contribution, either live with it in the interest of creative presentation or reduce the space commitment in the next catalog.
Profit Contribution
Subtract advertising cost (space allocation) from gross profit and you have profit contribution, the true, bottom-line indication of a product's value. Remember, though, that this ranking remains valid only if a product's space allocation remains similar from catalog to catalog. Change the allocation, and you change the contribution.
Always ask, "Was it your customer or creative director who determined the product's contribution?" Space allocation may influence a purchase, but so does position, copy and photography. Those elements can easily change from catalog to catalog.
Indexing
After you rank your product line, create an index number for each product. I always assign the average product in each ranking the value of "one." So, for instance, if a leather tote sells 50% better than the average product, it would rank a 1.5 in the "gross demand" ranking.
Indexing allows you to create a history of a product's performance from catalog to catalog -- regardless of the number of products in each catalog or the catalog's circulation. You can easily trace these performance trends when deciding whether to repeat a product.
Bringing It All Together
If you've got a team of individuals working on product, make sure you bring them in to sort through the rankings. Each can contribute his or her own unique "take" on the process. For instance:
- Buyers are
aware of book themes or new products that may replace continuation
product.
- Purchasing
can discuss vendor performance, delivery issues and inventory
commitment.
- Customer
service can speak to customer product complaints.
- Quality assurance
can address product problems and reasons for returns.
- The analyst can share data-crunching insights, such as how a hot seller bombed in the Midwest.
It's the catalog merchant, of course, who must weigh all the information -- intuitive and statistical -- and decide what stays or goes. In most cases, it's clear; the products that rank high on all four indicies. But when products appear in the middle ground, analysis makes a difference. Analysis can even result in other actions, such as finding lower cost vendors or providing new creative treatment.
No
doubt, you'll need to revisit your continuation product decisions
several
times
as you develop your new merchandise plans and as new products compete
for space. Each time you go back, you'll find analysis will add
immensely to your "gut instincts."
THE
PERFECT PRODUCT |
||||
Average |
Brass
cat |
Wine
cart |
Dish
cover |
|
Catalog
price |
$48.88 |
$117.46 |
$11.33 |
|
Unit
cost |
$12.42 |
$63.27 |
$4.23 |
|
Unit
volume |
220 |
272 |
27 |
589 |
Gross
dollar demand |
$8,580 |
$13,295 |
$3,171 |
$6,673 |
Total
cost |
$3,378 |
$1,708 |
$2,491 |
|
Gross
profit |
$4,620 |
$9,917 |
$1,463 |
$4,182 |
Space
(sq. in.) |
21.00 |
33.50 |
18.00 |
|
Space
expense* |
$2,604 |
$4,154 |
$2,232 |
|
Profit
contribution |
$2,043 |
$7,313 |
$(2,691) |
$1,950 |
Contribution
ranking |
94/188 |
176/188 |
15/188 |
90/188 |
Unit
Index |
1 |
1.24 |
0.12 |
2.68 |
Demand
Index |
1 |
1.55 |
0.37 |
0.78 |
Gross
Profit Index |
1 |
2.15 |
0.32 |
0.91 |
Contribution
Index** |
1 |
1.87 |
0.16 |
0.95 |
* Space cost:
$124 per square inch
** Based on rank above or below median presentation unit
