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Put the Odds In Your Favor-Optimize your Gross Margin

 

The blog posting below from our good friend, Bill LaPierre, is great advice for every business- especially e-commerce and catalog retailers in today’s super-competitive environment.

 

Time for me to be crass and talk about profits, those things that you take to the bank.

I saw a t-shirt this past Christmas season in a catalog that said “I would have had a really great job right now, but instead I chose to be ____ major.”  Apparently, you fill in the blank with the liberal arts major of your choice. My son is 13, and will be entering high school next year. My wife and I are providing parental guidance by telling him that he can be anything he wants, and should study whatever he wants in high school and college. But secretly, I remember that T-shirt, and remember that I was a dual major in American History and Historical Geography. Both subjects enriched me culturally, but I can’t say that a career in either one would have been as financially rewarding as where I am today. I have my father to thank for talking me into getting an MBA.

Sure, if I had become a “professional historian”, maybe I’d be a famous author like David McCullough. But that would have been a long shot. Instead, I increased my chances of professional success (spelled m-o-n-e-y) and growth by getting an MBA. And I do have a great job now, even with a BA in History.

What does this have to do with catalogs? One of things that constantly amazes me are the decisions often made early in a business’ life that set the course of fate for that company. This applies especially to the merchandise mix of a company.

During the analytics for marketers seminar that Datamann hosted two weeks ago, one of the areas I discussed was “profits”.  It’s interesting how little “profits” are discussed in most seminars, not because they are a “dirty” word, but because they’re “assumed”.  I find that people automatically assume that if they follow all the prescribed “best practices” when it comes to the co-ops, branding, social engagement, and email deployment, that the profits will automatically be there. We all know that’s not so, but no one ever acknowledges it.

The problem manifests itself most in merchandise, and mostly with regards to cost of goods.

About 15 years ago, I was consulting with a public electric utility planning a consumer goods catalog, as a means of diversification. They were nice people, but incredibly naïve. Their business plan called for inching their gross margin percent from 45% (at the launch) to 60% in five years. This was the main “line item” in their P&L that made them profitable – at least they understood the importance of a strong gross margin. But, when I asked how they intended to accomplish this Herculean feat, they simply responded with “we’re just going to make it happen”. For a variety of unrelated reasons, the book never mailed.

But that experience reinforced in me how little thought most entrepreneurs give their cost of goods and the reciprocal gross margin. If you’ve ever bought a used car, you know how a “fresh coat of paint can hide a multitude of sins”. Well in catalogs, a strong gross margin can compensate for many other short comings. Maybe not for long, but it helps.

Over the years, the clients with whom I’ve work that have remained healthy are the ones with strong gross margins. Size obviously plays a role in that larger companies can negotiate better terms on costs than smaller mailers. But a few of my clients were astute enough in the beginning to find product niches where they could maintain a strong margin from the start, simply because of the products they chose to sell. They consciously stacked the odds in their favor on margin, a largely overlooked catalog survival strategy.

Unfortunately, a strong gross margin cuts both ways. I’ve worked with many catalogs that manufacture their own goods, and therefore have exceptionally high margins. The danger comes when they fall in love with that margin, and refuse to introduce products that are not theirs, that have lower margins, but that would round-out their assortment and improve their response rates. A corollary to this tale are the catalogs that buy huge quantities of goods to get “container” pricing, but end up marking the price down so much to rid themselves of excess inventory that they end up with worse margins than if they had not committed to the quantity discounts in the first place.

The most sage advice I can impart to my clients is to closely study their pricing. Most mailers are not charging enough for goods. Obviously, the more you charge the more margin you make, but your response will typically go down. Although pricing tests are not as much fun as cover tests or building a fan base on Facebook, they will lead to more direct profits than anything else you can do.  You should be testing pricing strategies all the time, both raising and lowering prices. With consumers able to search your products across infinite sources, there is no excuse to not be testing pricing.

But here is a warning – as with everything else, don’t let margin dominate your merchandising decisions. I got an MBA to augment my studies in History and Geography. You need to keep a balance of products in your catalog that drive response and sales which may not necessarily have the greatest margins, but which will round out your assortment.

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by Bill LaPierre

VP – Business Intelligence and Analytics

Datamann – 800-451-4263 x235

blapierre@datamann.com

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