Kevin Hillstrom: MineThatData

Oh Come On!

I receive my daily dose of propaganda from industry sources. Digging through twelve glowing articles about Macy's because they posted their first positive comp store sales metric in (checks notes) four years is tiring enough.

The paper / printing / postage folks and their associated partners have made a habit in recent years of blaming you ... their customer ... for not being smart enough. It's YOUR fault that what used to be known as the catalog industry is crumbling.

Link from Midland Paper (click here).

The actual article from Printing Impressions (click here).

Oh come on. "Poor strategy costs more than postage ever will." You're blaming my clients for asking the wrong questions because the paper / printing / postage folks keep increasing costs?

Unacceptable.

There is virtually nobody left in what used to be the "catalog industry" who speaks up. Don Libey would have spoken up. I need to speak up. The cost of paper / printing / postage is too onerous now, and it isn't your fault that it is onerous. You're still practicing the craft.

For most of what remains of the "catalog industry" (and as one of my readers tells me, there is no such thing as a catalog industry anymore), the cost of paper / printing / postage for a comparable catalog increased by between 50% and 100% in the past decade, with increases of 20% over the past three years very common. Who is responsible for that?

It sure as heck isn't my client base.

One of my favorite emails of all time came in several years ago. The source was Midland Paper. Somebody mistakenly sent something to Kevin Hillstrom instead of the Kevin intended to email. The email contained an attachment ... the document in the attachment outlined how catalog pages circulated had declined dramatically in fifteen years (at least 40% and up to 80% based on what I could decipher in the document). Midland Paper outlined how they'd constrain supply (i.e. close down mills) going forward, and with supply constrained they'd be able to charge my clients more for paper.

Is that outcome the fault of my clients leveraging "poor strategy"?

I recall another client calling me in 2022. Their printer (a major one in the Midwest) told them they were being fired after a multi-decade relationship. This brand had to find a broker to help them complete print runs ... naturally their printing costs went up.

Is that outcome the fault of my clients leveraging "poor strategy"?

On LinkedIn, an industry expert posted pictures of a wine-and-dine event in Washington, DC, trying to communicate for the 22,549th time to Congress the importance of a viable USPS. This poor guy keeps fighting for my catalog clients - even though he doesn't get paid to do that. He keeps losing. He keeps showing up.

Is that outcome the fault of my clients leveraging "poor strategy"?

I'm so frustrated by the behavior of a community that increased your costs by 50% to 100% and then possesses the temerity to suggest you are asking the wrong questions.

Increased costs transfer wealth from your brand to support agencies.

You are less profitable because you send your profit to support agencies. You lose out on equity or bonuses.
They generate an increase in net sales.

Do you understand that? Your hard-earned profit dollars are reduced while at the same time their net sales / top-line growth improves.

Here's what the value transfer looks like for a typical catalog brand with $60,000,000 of annual attributed catalog demand / net sales.

This would be a company that mails twelve times a year, about 1,000,000 per drop. Since 2023, paper / printing / postage costs increased by 25%. Instead of making $12,000,000 of contribution / variable profit before factoring in fixed costs (likely $6,000,000 or more), the company makes $9,000,000. Three million dollars evaporate off the bottom line, transferred from client profit to agency/vendor/supplier net sales.

Are my clients wrong to do anything but cut back on print expense and instead focus on accelerating their twenty-five year transition to digital marketing?

The author of the article doesn't go after ORVIS ... they cut it all! They got out. Did Orvis ask the wrong questions?

No, Orvis did just fine. The article author and Midland Paper (who published this sample of the article) goes after you ... the very brand still doing what they want you to do. You're paying their bills (Orvis no longer is), and they suggest you are asking the wrong questions.

You are not asking the wrong questions.

Standing up for you will cost me business. Doesn't matter.

You simply cannot accept the ad cost increases via paper / printing / postage that are causing p&l challenges.

I'm not done. More tomorrow.

At 10,000 Feet?

We established that there are four categories that the Merchandising Team believes in ... and seven categories that are being purposely contracted.

Does a contracted category impact customer response?

Yes.

Let's look at how many customers bought from the four primary categories and all other categories (both) in the past four years.

3 Years Ago: 180,286.
2 Years Ago: 171,306.
1 Year Ago: 169,072.
Today: 110,850.

Yeah, that's a problem.

How many customers purchased just from the four primary categories?

3 Years Ago: 168,952.
2 Years Ago: 156,288.
1 Year Ago: 174,994.
Today: 184,286.

Counts are holding mostly steady.

How many customers purchased just from the other seven categories?

3 Years Ago: 217,656.
2 Years Ago: 243,028.
1 Year Ago: 218,436.
Today: 130,866.

Yeah, counts are crumbling.

Which customer do you want? Here is the amount of spend each customer segment generated in the past year based on how the customer was segmented a year prior.

Both Groups = $11.46.
Primary Categories Only = $6.44.
Secondary Categories Only = $4.60.

In other words, when you lose customers from Secondary Categories, you aren't losing highly productive customers. When you lose customers from Secondary Categories who also buy from the four Primary Categories, you lose $11.46 per customer, which is too much.

Worse, when a Primary+Secondary customer becomes a Primary-Only customer, value drops from $11.46 to $6.44. That's a stunning drop.

As the Merchandising Team at "Beans: The Internet's Only Variety Store" contracts the majority of categories, the Merchandising Team weakens the customer file - shifting customers from high-value segments to low-value segments. No Bueno! They are weakening the customer file, which lowers demand in all categories next year, which requires more of a marketing investment in new customers, which harms the p&l (in the short term).

So yes, before you start messing around with your merchandise assortment, think about what you are messing with! If you are lowering the value of customers for no good reason, well, that means you are harming the business.

The 15,000 Foot View

Yesterday we took a step back, looking at the business from a 30,000 foot view. We clearly observed that there was a new merchandise problem over the past two years.

I drilled down one level ... there are four categories that the Merchandising Team appear to have faith in.

Apparel Tops / Apparel Bottoms / Outside / Decorations were less than half the business three years ago ... today they're more than 60% of the business. Demand isn't necessarily stable, but it isn't bad. Existing items are stable, new items are down about $900,000 from two years ago.

Everything else?

Wow.

New items are down 45% from just two years ago. New item demand is down a whopping 70% from two years ago!!!!! In the past year, existing item demand is down a million dollars.

Tomorrow we'll apply this 15,000 foot level view of the business to customer response. It's obvious the Merchandising Team is doing something on purpose ... are customers impacted (hint - yes, they're impacted).

Click here for more information and file layouts.

The 30,000 Foot Level

It's common to run across a Marketing Team that is persecuted. "They don't know what they're doing!!" And yes, there are a ton of marketing teams that have absolutely no clue what they're doing ... that's life.

But there are marketing teams that are being persecuted ... they're blamed for problems that they have nothing to do with. Maybe the website has a 2.8% conversion rate and it was 3.3% last year ... "the marketing team is sending us terrible traffic". The Marketing Team blames Google & Facebook. Everybody is pointing at somebody.

Somebody should be pointing at the data. Here's the high level view of Beans ... at 30,000 feet, it is easy to see this isn't a marketing problem.

The business was at $27.4 million two years ago ... it is at $20.8 million today. Yes, there is a problem.

A simple cut of the data by new item sales vs. existing item sales shows us there is a merchandising problem.

New Items: Decreased by $6.5 million.
Existing Items: Decreased by $0.1 million.

Marketing problems result in equal declines.

Merchandising problems result in uneven and chaotic outcomes.

Here's a worse problem ... if you have a new merchandise problem today, you'll have an existing merchandise problem tomorrow. New items become existing items, and if you are down 40% in new items demand you'll be down a bunch in existing item demand in a year or two.

One simple table ... the one illustrated above ... it's not hard to run. If you are in marketing you need to know what the table illustrates. You need to know "what" specific problem you are solving, and it's frequently not the problem others in your company think you need to solve.

P.S.: Click here for information about your own "Categories" analysis.

Another Way To Depict The Challenge

If a business discontinues too many existing items (or fails to introduce sufficient quantities of new items), we should be able to see the problem manifest via sales declines. Right?

Here is a scatter plot of number of items sold each year (>= $1,000) on the x-axis ... the y-axis shows us annual sales per item.

The three outliers on the bottom left of the chart? Those represent the past three months when this brand also decided to not spend money acquiring new customers, compounding their own challenges.

Otherwise, there's a clear relationship. Every additional item offered yields an ever-decreasing rate of demand/sales.

Is this good or bad? It almost looks bad.

Let's perform a multiplication.

"Beans" generates $9,800 per item when it sells 2,700 items = $26.5 million.
"Beans" generates $12,750 per item when it sells 1,900 items = $24.2 million.

In other words, fewer items = less demand/sales.

Pair it with a customer acquisition catastrophe in the past three months (largely caused by reductions in the marketing budget) and "Beans" has problems.

A group of Professionals appear to have harmed the business, all independently, on their own.

It will take a team of Professionals, working together, to rebuild "Beans".

Ready for your own customized "Categories" project? Contact me now (kevinh@minethatdata.com) ... click here for additional information.

Kevin Hillstrom: MineThatData

Oh Come On!

At 10,000 Feet?

The 15,000 Foot View

The 30,000 Foot Level

Another Way To Depict The Challenge

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