Kevin Hillstrom: MineThatData

Theorists

Sometimes you run into what I'd call a "Theorist".

Theorists hold companies back, in three ways.

They don't bridge the gap between theory and practice.
They alienate co-workers via hubris, thereby stopping any possible progress.
They don't understand "business".

Say you have a Marketing Director who "skews Theorist" and wants to leverage AI in email marketing to boost conversion rates. Seems like a good idea. She doesn't have any in-house capabilities. She likely has a Theorist in IT that talks a good game but knows little. She probably has to work with a vendor to accomplish her goals. This can be a bumpy process. The vendor could care less about "inventory position" in specific items ... thereby recommending an algorithm that personalizes the merchandise assortment for a group of customers. The assortment features popular selling items (in an effort to boost conversion rates) ... of course, those items sell out quickly and the algorithm doesn't recognize this fact so customers are inevitably disappointed and the inventory team loses faith in "AI". The inventory team and the merchants grumble about the Marketing Director, the CFO wants to know why the Marketing Team is spending $$$ and conversion rates are only up from 3.0% to 3.1%, questioning whether that would have happened without "AI" and the "AI" vendor doesn't recommend AI/No-AI testing so you can't answer the CFO's question and the wheels come off the bus.

That's what happens when Theorists run the show.

What happens the next time the Theorist wants to do something? It's the image above, that's what happens. In other words, nothing happens.

Many of you are going to go through a significant transition over the next five years. You will be well-served by not letting the Theorist get anywhere near your transition, even though the Theorist will be the first in line to encourage the transition.

2014 - 2018

When I look back on what my clients have endured over the past decade, I cannot help but reflect upon the era of 2014 - 2018.

In 2018 a Private Equity individual reached out. We had worked together for the past half-decade. His firm owned a brand, and he was looking to fill out the Board of Directors. I asked him what he wanted to accomplish. His response caught me off-guard.

"I want to collaborate with bright people and I want to have fun."

Since 2018, how many of you have genuinely had fun at work? Not an enjoyable day or two, but consistent, satisfying fun?

Can I use Macy's as a proxy for something?

Here is a fifteen-year net sales trend for Macy's.

There were a few positive comps before 2014, a handful through some of 2018. From there? No fun. By and large, the business began contracting in 2015. There is some evidence in the top portion of the chart that Management might be bringing this flight in for a safe landing.

Meanwhile, click here to look at Amazon's trajectory over time. From the link, here's the image that matters.

It's not hard to see that began, unabated, in the 2014 - 2018 timeframe.

Maybe more interesting is what began at Shopify in the 2014 - 2018 timeframe.

They went from $0 in the 2014ish timeframe to $12,400,000,000 in the most recent twelve months.

The 2014 - 2018 timeframe was one of massive transformation. Either we were paying attention, or we weren't paying attention. We're suffering today if we didn't pay attention back then.

Two distractions since 2018 ... COVID ... and now AI. Both distract us from actual changes in customer behavior and competitive balance.

Example: A few months ago, one of you emailed me, wondering why I don't require you to pay for a subscription to my blog? I responded that I can't ask you to pay for something I've given away for free for twenty years, and that if somebody wanted to compensate me for my content they could purchase a booklet. They professional then said "nah, at minimum you should at least have a Venmo-enabled tip jar on your blog, nobody wants to buy books but people do want to say thank you for your content". Over the weekend, I'm watching a storm chaser who was about to lose a $100 deposit on a hotel room and within seconds his 3,000 viewers donated $100 so he'd break even. He raises $500 a day from his viewers to pay for his gas. He raises $3,000 a month from his viewers to cover travel costs.

Not long ago, I took up the professional on his "tip jar" comment ... but in a different realm. I started a pickelball Substack. Dollars started flowing in.

Why bring up the "example" above?

There are subtle changes that happen, and if we don't pay attention we miss them even though they become standard across our industry. When the Private Equity individual wanted to "have fun" back in 2018 with a catalog brand, he kind of missed out on what that catalog brand needed to pay attention to. Today, I go back and look at Elite Program results from the 2014 - 2018 timeframe, and I'm struck by how so many companies missed out on how business was changing.

Rise of Social Media as "dark matter" in creating awareness (even though it has been doing that for two decades). It's not a source that an attribution model appreciates, nor should it be ... it serves a completely different purpose. It's "dark matter".
Rise of Amazon at taking away your ability to grow your own brand.
Rise of Shopify at birthing new companies who take away your ability to grow your own brand.
Post-COVID, rise of video and trust in causing customers to stick with you when they aren't buying merchandise. If a customer buys from you twice a year, you need to have something to keep them interested the other 363 days of the year.
Post-COVID, the rise of "alternate revenue streams" ... the Orvis-Endorsed Adventure model, for instance, or the role of a Gorsuch cafe in then month of December.
For my catalog audience, the "land grab" transfer of wealth from brand p&l to paper / printing / postage net sales ... maybe necessary from a capitalism standpoint to keep the paper / printing world in business, but completely devastating to my client base to see their trusted partners turn on them.

What do you think we'll look back on in 2034 and say "we missed that in 2026"?

World Series of Poker

You know I enjoy Weather, and Pickleball, and Ryan Hall Y'all (which is weather again), and Headphones.

I also thoroughly enjoy YouTube coverage of the World Series of Poker each June.

Why?

These folks are doing the exact same thing you're asked to do ... except they have to do it every ninety seconds.

You have a report where the ROAS of a Facebook campaign is measured. You know what the campaign costs, you know the sales you generate, and you had better darn well know how much the customer pays you downstream to know if your investment was a good decision or not. You know what your customers pay you downstream, right? Right?

It's not different here. You have two cards that nobody can see. Your opponents have two cards you can't see. Based on your two cards and your guess of somebody else's cards, you calculate your probability of winning the hand. Maybe your probability of winning the hand is 48%. Your opponent bets $1,000,000. You have $5,000,000 left, and there are $3,000,000 in the pot. Do you call? I mean, you'll be paid 3x as much as your bet for an approximate 50/50 chance of winning ... what do you do? What happens if the hand continues and you are forced to go all-in (which will undoubtedly happen)?

You make decisions every ninety seconds.

One of the things I've witnessed in my consulting career is the behavior of professionals who don't have to make decisions once every ninety seconds. The less often the professional has to make hard decisions with incomplete information, the more the professional stalls and refuses to make any decisions until the professional has complete information.

Attribution vendors prey on these people. Every single attribution solution is horribly wrong, but they are sold as "truth". Because it is sold as "truth", the professional is willing to make decisions ... often bad decisions, believing what s/he is doing is "right".

I spoke at a conference in 2016 ... that's a lifetime ago! The presenter (who worked for an attribution vendor) shared five (5) different attribution solutions produced by her agency ... and she (and her agency) had the courage to say that every single solution offered a different view of campaign results. The audience simply groaned. They didn't want five possible / different outcomes. They wanted "truth". They groaned because the vendor had integrity.

If you want to be a great decision maker, learn to play poker. Poker teaches you how to guess properly, poker teaches you to "pretend" (bluff), poker teaches you to calculate short-term and long-term value. Poker teaches you that you can lose even if you do everything right. Poker teaches you that you can win even if you do everything wrong (this happens in business every day).

And you don't have to play against the "unsavories" (i.e. personalities you'd rather never have to meet in person). Play against a computer. You'll learn everything you need to learn to become a better Marketing Professional.

By the way, AI has no idea how to create a reasonable poker cartoon.

How Much Does Productivity Need To Increase To Cover Cost Increases?

You're told that if you are more strategic, if you execute better, you will increase productivity and cover the paper / printing / postage costs that come at you unabated.

Here is the optimized solution with a 12.5% ($0.10 per book) ad cost increase.

Optimal strategy drops from $9.18 profit at 12 catalogs to $8.17 profit at 9 catalogs.

We need to add merchandise productivity to offset the increase in ad cost if we want to get our profit back. We can do that in theory - let's do that in theory here. How much merchandise productivity do we need to get back to an equal amount of optimized profit?

We need average $/book to go from $3.50 to $3.71 (+6%). If that happens, we get back to $9.18 profit ... but something else happens ... optimal catalogs are at 10 instead of 12, meaning we generate $45.44 demand per customer for the year in this segment instead of $46.96 ... we give up a bit of top-line to get a bit of bottom-line.

In other words, a 6% merchandise productivity gain offsets the 12.5% ad cost increase, but results in two fewer catalogs being mailed (10 vs. 12) which leads to less top-line demand.

Paper / Printing / Postage increases set off a chain reaction of events, none of which will be positive for anybody.

1 - The optimal profit strategy for my clients is to reduce annual contacts and/or reduce pages per contact.

2 - The optimal profit strategy for my clients is to shift dollars out of print into digital, accelerating a twenty-five year transition. Many companies have completed the transition (hint - Orvis). Other clients are well into a major shift in strategy.

3 - All of this ultimately ends badly for advocates of Paper / Printing / Postage.

4 - Blaming my clients for not being strategic, for executing poorly, represents an amazing level of hubris - given the ones doing the blaming are the ones forcing this accelerated transition upon my clients.

If you need me to score your entire file for the optimal number of catalogs each customer should receive, annually, click here and then contact me (kevinh@minethatdata.com) and I'll create personalized scores / optimal catalog assignments for each individual customer, leveraging my proprietary organic percentage centric models.

The Optimization Story

Your paper / printing / postage partners want you to execute SMARTER, they want you to be more STRATEGIC. The way they figure, if you just improved everything you did, your performance would increase by 20% and that would cover the 20% increase in paper / printing / postage you've experienced the past few years. You'd be fine if you were just smarter.

They'd also still get the $3,000,000 of value transfer I explained yesterday. You'd be back to $0 value, they'd still transfer $3,000,000 of your profit to their net sales line.

That's what they're asking you to do.

You don't operate in their world.

Here is my Catalog Optimization Worksheet. Email me (kevinh@minethatdata.com) and I'll send you this worksheet at no cost, whether you work for a vendor or one of my clients. In this example, the brand mails this catalog segment 15 times per year ... the segment averages $3.50 per book ... 40% of demand flows-through to profit ... the organic percentage via tests is 50% (you measure this, right) ... and 40% of sales flow-through to profit. Here is how optimal profit is calculated based on the number of annual contacts mailed to a customer.

The brand is generating $52.50 demand per 15 catalogs, yielding $9.00 profit.

The brand should generate $46.96 demand per 12 catalogs, yielding $9.18 profit.

When the optimal strategy isn't much different than the current strategy, we leave things alone.

Let's assume your mailing costs in 2027 will increase from $0.80/book to $0.90/book. What does that do to an optimal solution?

The brand would generate $52.50 demand per 15 catalogs, yielding $7.50 profit (not $9.00 prior to ad cost increases).

The brand should optimally generate $40.67 demand per just 9 catalogs, yielding $8.17 profit.

Do you see what is happening?

The direct transfer of funds from your bottom-line to their top-line results in several problems.

If you want to keep mailing the same number of times per year, you must transfer $1.50 per customer in this segment from your bottom-line to their top-line ... you are less profitable, their revenue increases. See how that works?
The optimal number of catalogs decreases from 12 per year for this segment to 9 per year. This means if you want to manage your business properly to account for increased costs, you have to mail 9 times per year instead of 12 (or 15) if you want an optimal strategy.
To achieve an optimal strategy, you lower annual demand from this segment from $46.96 to $40.67.
To achieve an optimal strategy, you lower ad cost as well ... meaning the support community gets paid less. This is why they're clamoring for you to be more "strategic" and not cut back.
Of course, you will be more "strategic". You will accelerate your twenty-five year transition to digital marketing, out of necessity.

Seriously, if you want the spreadsheet, email me (kevinh@minethatdata.com) ... I'll give it to you for free.

I'll wrap up this diversion in my next post, then it's back to solving actual business problems via merchandising analytics.