B-to-B Cataloging An Introduction to Merchandise Analysis
By George Hague
Editor's note: This is the second of a two-part series on analytics and measurement. The first article appeared in Catalog Success, May 2006, pg. 91, and covered circulation essentials. Part II covers merchandise analytics.
Regardless of what you sell, your merchandise is the reason people purchase from your catalog. Appealing product can give your catalog a 20 percent to 30 percent lift in sales with no additional marketing expenses.
Since merchandise is the driving force behind your catalog's success, product development and selection should receive the most attention in terms of strategic planning and analysis.
The state-of-the-art tool for merchandise analysis for both business-to-business and consumer mailers remains the square inch (squinch) report. Few spreadsheet reports will return as many tangible, bottom-line driven results as your squinch analysis. Your investment in preparing one will be well rewarded.
If you create your squinch report as described below, you're among the few catalog merchants and marketers who have a real handle on their products' performance. According to the Direct Marketing Association's 2004 Statistical Fact Book, just 5 percent of the catalogers surveyed conduct a square inch analysis. That's an alarming statistic.
Without a squinch report to guide your decision-making process, you're relying on incomplete information for your most important decisions. On the other hand, with this report, you confidently can plan your merchandise selection beyond the immediate needs of your next catalog.
All raw data metrics represent a column heading from left to right on your spreadsheet. Each product will occupy one row of your sheet.
SKU number: The unique stock keeping unit (SKU) number represents each product in your catalog. If you use "lookup" formulae in Microsoft Excel, the SKU will drive those lookups and make updating your sheets with the latest sales information quick and easy.
Product name: Include the product name associated with each SKU.
Product description: If you offer the product in different colors or sizes, you may need to include that information as a separate field if it's not included in the product name. (Companies handle this information in a variety of ways. If you have difficultly separating out your sales by color and size, skip this piece of information for now and pull it in later.)
Category/subcategory: List the English word category grouping of the products. If you use numbers or codes to identify each category, take the time to include the English word description of the code. This will make using your report much easier.
For your category divisions, try to think in terms of how your customers shop. Once while attempting to purchase about 20,000 plastic binders from a manufacturer, the company sent me its catalog that categorized its products in terms of manufacturing processes: extruded and poured. The company's customers thought in terms of binders, paper clip holders and sheet protectors.
Price: The selling price of the product.
Vendor: Make it a habit to include the vendor of each product.
Page number: The page of the catalog on which the product appears.
Square inches: This measurement is the biggest hindrance to producing a squinch report. Use this opportunity to make a breakthrough for measuring your catalog!
Treat this metric as a rough measurement of how many square inches a product takes in promotional space. Your measurement should be close, but it doesn't have to be exact. However, you must be consistent in how you measure.
I like the measurements to be precise, and every page's measured square inches to equal the same total. But I've been forced to rethink my insistence on this level of precision.
Once due to a miscommunication — two people on my staff measured the same catalog in preparation for merchandise analysis. One did it with the precision; the other, in my opinion, was a bit sloppy. He rounded up or down to the nearest half inch for both the horizontal and vertical measurements.
Finally, I could prove that precision in measurement was the correct way! But I was in for a surprise. In this 64-page catalog with more than 500 products, the results of the two techniques did not change our decision on a single product. Yes, the final contribution numbers by product differed a bit, but the variances were not enough to change a single strategic or tactical decision.
Since providing information to make decisions is the purpose of a squinch report, I had to admit that it really didn't matter if a product produced $1,000 in profit or $1,025. The product was a winner either way, and it kept its place in the catalog. Nor did it really matter if a total product's profit and loss (P&L) broke even or lost $25. Unless it was an essential product needed to maintain credibility in a niche industry or was a loss leader of some sort, that product was going to be pulled either way.
For determining each product's promotional space and cost, here are the two keys for success:
- Apply the same measurement technique to each product.
- Apply the entire catalog's promotional expenses to your total number of measured product inches.
If you follow these two steps, the end results will tend to balance out.
Units sold per product: Your total number of units sold for each product. Ideally you're capturing your gross demand, and you're then able to back out your returns from this number.
Gross sales per product: This number should represent your total sales per product. Once again, in an ideal situation, this number represents your gross demand sales, and you can then subtract your returns.
Returns: A catalog order tracking system should track returns by units and sales per product. It's possible, however, that you may have less than an ideal tracking tool. If you can't easily track returns, don't let this weakness in your system prevent you from creating your squinch report. In the future, try to get a handle on the returns of each product.
Cost of goods sold per product: This number represents the cost of goods for each product. Often, catalogers don't have this figure tied into their order tracking system. If so, pull this information separately. Worst case, you'll need to work with averages by vendor or category.
When you look over this list of metrics, you'll find that many of them can be pulled together during the catalog's production process. In fact, one of the most effective techniques for future catalog preparation is to create your pagination in Microsoft Excel. Now you've actually improved your efficiency: You've prepared your pagination and basic squinch template for that catalog's response at the same time!
The calculated metrics are developed and calculated based on the above-mentioned raw data.
Promotion cost: Determine your entire promotion cost, including printing, postage, mailing, rented lists, data processing and creative. Take this number and divide it by the total number of inches you've measured. This is your cost per square inch. Now multiply this number by the number of square inches for each product. That number is your promotional cost for each product. To cross check, add up your promotional expense for each product. It should total your entire promotion expense.
Don't fall into the trap of trying to subtract non-selling space from your costs. A square inch of non-selling space costs just as much as a square inch of selling space. It's a real cost that needs to be included in your calculations. By taking the entire promotional cost of the catalog and dividing it by the number of selling square inches, you can accrue your promotional expense — selling and non-selling — in an effective way.
Net contribution: Start with your gross sales of the product. Subtract your cost of goods and your promotion cost. This is your net contribution number.
Contribution to overhead: From your net contribution number, subtract your average cost of fulfillment. For most companies, this number runs from 10 percent to 12 percent of gross sales. Use an average in this range if you're not sure of your company's number.
Profit and loss (P&L): From your contribution to overhead number, subtract your average overhead expense. Your overhead expense usually will range from 8 percent to 15 percent of gross sales. (Be sure not to double count your creative expense if you've already included it in promotion.) Your P&L number tells you how much profit you made on each product.
Based on your P&L, you'll have an excellent handle on how each category, product and ultimately the entire catalog performs.
With Excel, you can run many versions of the same squinch report. Using the sort feature, you easily can group your categories and sort the product within those categories based on their profit. This type of category sort is one of the most effective uses of a squinch report.
As for sorting by vendor, if you've never done this before, you could be in for several surprises. It's not uncommon for several vendors to produce no positive contribution! If this is the case, run some what-if scenarios to determine what margin you need on those vendors' products.
Knowing exactly what margin you need is a powerful negotiating tool with vendors. In a situation like this, you have little to lose. The products already are losing money, so they would have to be cut.
On the other hand, which vendors are producing the most contribution? It's likely you're spending a lot of money with those vendors on your product purchases. Can you use that volume of business to negotiate better prices?
For a quick price-point analysis, calculate each category's average price sold for products, and compare it to the category's average price offered. Are customers comfortable buying higher or lower priced merchandise than what you are offering? Use that information to guide future product development and selection.
Once you start using a squinch report, you won't know how you ever performed your job without it.
Based on knowing exactly how each category in your catalog performs, you can set goals for future product trade shows. You plan your trip knowing exactly for which types of products to search. Your meetings with your vendors become more effective. You're now planning strategically for your company's continued success.
George Hague is senior marketing strategist at J. Schmid & Assoc., a catalog consulting firm in Mission, Kan. Reach him at email@example.com or (913) 236-8988.