Kevin Hillstrom: MineThatData

Share of Demand by Advertising Channel Detective

This one came up in the past year. I noticed a problem with a business.

Regardless of the attribution method (they're all wrong and yet they're called "truth" by so many in the industry), it's pretty easy to play detective and identify a business that is not healthy.

Healthy Business:

40% of Sales Happen Organically, Without Aid of Advertising.
20% of Sales Happen Via Email Marketing.
20% of Sales Happen Via Search Marketing.
10% of Sales Happen Via Social Media (Paid + Organic).
10% of Sales Happen Via Other Marketing Channels.

Unhealthy Business #1

10% of Sales Happen Organically, Without Aid of Advertising.
15% of Sales Happen Via Email Marketing.
35% of Sales Happen Via Search Marketing.
15% of Sales Happen Via Social Media (Paid + Organic).
25% of Sales Happen Via Other Marketing Channels.

Unhealthy Business #2

5% of Sales Happen Organically, Without Aid of Advertising.
65% of Sales Happen Via Catalog Marketing.
12% of Sales Happen Via Email Marketing.
15% of Sales Happen Via Search Marketing.
1% of Sales Happen Via Social Media (Paid + Organic).
2% of Sales Happen Via Other Marketing Channels.

Whether you are trying to rebuild your business or are looking to buy/sell a business, this is a good guideline for you to reference. Unhealthy businesses generate very little demand/sales organically (without the aid of marketing). Healthy businesses did the marketing years ago, earned trust via the merchandise they sell and consistently good customer service, resulting in ongoing sales that do not require marketing.

Unhealthy businesses possess two key attributes.

Marketing is required to generate sales. Less marketing, less sales.
One marketing channel is responsible for more than half of annual demand.

Again, most of you are not looking to buy/sell a brand (if you are, I'm the person to evaluate the health of the business ... kevinh@minethatdata.com). Most of you are looking to rebuild your business or maintain it. Use what you've read this week to rebuild/build your business.

"Cheating" Detective

In the 2016-2018 timeframe Private Equity folks asked me to evaluate a business that they felt was "cheating".

What does "cheating" mean?

It means the brand was somehow boosting net sales in a manner that wasn't ideal for the future of the business.

When I reviewed ad spend, I didn't see anything unusual.

8,500 lines of code later, my detective work paid off.

13-24 Months Ago = 15% (numbers disguised here) of sales from discounted/promo items.
Past Year = 55% (percentage disguised here) of sales from discounted/promo items.

In other words, Management decided to make it look like the business was surging, when in reality Management was cheating.

At this time, Management had not provided Private Equity with their p&l ... you can't hide from the p&l of course ... discounting leads to lower gross margins, which would have set off alarm bells.

If you are selling your business or rebuilding your business, best not to cheat. Do the hard work.

Playing Merchandising Detective

In the 2016-2018 timeframe, I was asked to evaluate a business that was simply bumbling along. I was told to figure out how a company with a reasonable annual repurchase rate (35%ish) could struggle to grow, even though customer acquisition efforts were being managed properly.

This is when you have to become a Merchandising Detective.

Very few clients manage merchandise consistently over time.

It's easy to see when the CFO demands higher gross margins. I'll see an immediate price per item purchased increase that is immediately paired with a customer response decrease and/or conversion rate decrease.

It's easy to see when a merchant quits or is fired. The new merchant comes in, has disdain for what the predecessor did while disrespecting what previously worked (see Lands' End 2014-2015ish for examples), leading to a new vision that is "trend right". Sales plummet and it takes 2-5 years to dig out of the mess. Nobody wants to hear that message, but that's frequently the message you deliver when playing merchandising detective.

It's easy to see when the paper / printing folks interact with unsuspecting catalog merchants. Costs increase by 20% or 25%, the unsuspecting catalog merchant cuts pages, the pages that are cut are not supported via digital marketing, and sales decrease ... then the paper / printing folks belittle the merchants for "being stupid". It's a common story post-COVID.

If you are planning on selling your business (catalog brands) or rebuilding your business (many ecommerce brands are in the rebuilding stage right now), you'll need a stable merchandising base. Take two years and build your merchandising foundation. This isn't the time to hire a "maverick" who takes risks. You need the smartest people possible to put together a multi-year plan to put your business on stable ground.

Playing Detective

This is way back in 2016. The Private Equity firm wanted to buy a catalog brand. Their initial review of the data showed that the brand "bumbled" along for several years ... and then eighteen months ago the business surged. "Tell us the scheme this brand employed" was the mission.

What "scheme" did the brand employ? What is your guess?

Did you make a guess?

It took me all of four minutes running this business through 8,500 lines of code to reveal the reason. They juiced up their customer acquisition efforts for about a year, then let all those new customers pay off handsomely via well-analyzed customer lifetime value metrics while throttling back customer acquisition, thereby making the p&l look utterly robust.

This is the kind of stunt you can pull off when you mismanage your business for a considerable period of time and then the owner wants to buy a yacht at the same time that a smart marketer/analyst figures out the secret to success. When executed properly, Private Equity pays a higher multiple for the business.

Of course, it begs the question ... why wasn't the brand smart enough to do this in the decade prior? If it was smart enough, the business would have sold for 2x - 3x what it sold for.

The best time to properly manage the inflow/outflow of customers was ten years ago.

The second-best time to properly manage the inflow/outflow of customers is tomorrow morning.

A Healthy Business Metric

If I asked you the following question, would you be able to answer it?

For every twelve-month buyer you earned through the end of 2025, how many marketing dollars will you spend speaking to the customer in 2026?

I'm willing to bet the following:

Fewer than 1 in 2 readers could come up with a credible estimate. And a credible estimate is a good thing ... it will immediately tell you if you have a marketing problem.
Fewer than 1 in 40 readers have actually measured the metric (email me kevinh@minethatdata.com) if you have actually measured the metric ... we'll determine if my estimate is correct.

Why is this metric important?

The metric is a measure of business health.

The best businesses generate "some" volume from marketing, especially via their customer acquisition efforts. These businesses frequently have a 10% ad-to-sales ratio. The brand might spend $5.00 per year marketing to the twelve-month buyer ... with most marketing dollars spent acquiring customers AND the merchandise is so compelling that the customer willingly purchases on her own with minimal prompting (AND the prompting is email / organic social which costs next to nothing).

Many profitable ecommerce businesses generate considerable volume from marketing. These businesses frequently have a 20% ad-to-sales ratio. The brand might spend $12.00 per year marketing to twelve-month buyers. They spend a lot of search and paid social, and unfortunately those dollars reach indecisive twelve-month buyers considering shopping from the competition ... the marketing dollars are a tax the brand pays because their merchandise isn't compelling enough. Vendors and Agencies will tell you that the marketing expenditures lead to increased profit. They tell you this for a good reason ... "they" increase their own profit. The higher level of ad-spend most likely leads to more profit dollars for you, sure, but it is at a sub-optimal rate, a tax you pay for not having compelling merchandise.

Then we have those catalog marketers with ad-to-sales ratios between 25% and 30%. They're disconnected from modern ecommerce. The acquire half or more of their customers via traditional lists and co-ops. They send 20 catalogs a year to their twelve-month buyer file. Their email marketing metrics look awful (and worse, an agency convinced the brand to attribute email orders to catalogs). They cut-and-paste catalog creative on Instagram then say that Instagram "doesn't work". Paid Social is considered a "waste". Paid Search orders are attributed to Catalogs. These brands spend $20 per year marketing to their twelve-month buyer file, making it very difficult to achieve a robust business that yields a 10% pre-tax EBITDA.

If you are trying to sell this business ... good luck. Few people want to purchase advertising-dependent businesses. Even fewer want to buy advertising-dependent businesses catering to 72 year old customers via paper.

Are you spending $5.00 per year per twelve month buyer?

Are you spending $12.00 per year per twelve month buyer?