The New Math - Total Retail

By Ray Goodman

4 Integration Planning Tips

1. Communicate. Inside your organization, ensure that marketing and merchandising teams are working in concert. Work to align your merchandise planning process with marketing planning and campaigns. Include merchandise planning for print offers, features on your website’s home- page and email campaigns. The more you align these internal functions, the greater chance you’ll have to maximize demand and fulfillment by delivering the best product at the best price.

2. What does the customer see? Customers don’t make a distinction between sales and distribution channels. Avoid the tendency to compartmentalize by channel when merchandise planning between catalog and the web. Continue to evaluate product profitability by marketing offer and channel, but consolidate the analysis across channels to identify profitability of individual products. In the final analysis, you’re really seeking the most profitable products for the  overall business.

3. Garbage in, garbage out! Make sure you capture and report accurate information. You can’t make quality business and merchandising decisions or product profitability analysis without accurate sales reporting attributed to marketing events, accounting for advertising, overhead and resource allocations.

4. Know your channels. All sales and distribution channels have distinct characteristics. Understanding the various profit and cost characteristics of your sales channels allows you to build better reporting, conduct better analysis, and generate higher sales and profits.

In the traditional catalog arena,  profitability analysis is pretty straightforward: Merchandising contribution margin is composed of demand, returns, net sales, cost of goods sold and advertising expense. In e-commerce, merchants have a different kind of profit analysis and planning process, due to the dynamic nature of the web. E-commerce profit planning focuses on sales and gross margin, while advertising expense is rarely attributed to product-level marketing. Many online merchants maximize use of drop-ship SKUs, which require different profit performance standards.

Catalog and e-commerce profit planning processes aren't interchangeable, but they're evolving into a hybrid process. Catalog merchants are marketing more actively on the web and increasing investments in pay-per-click campaigns, online advertising and search engine optimization (SEO). E-commerce merchants increasingly recognize print's value in driving web traffic and purchasing decisions. As the models converge, product profit analysis is becoming more complex.

Beyond Squinch
Traditional catalog merchants continue to rely on square-inch (squinch) reporting to allocate advertising expense to products within a catalog. With the emergence of e-commerce, however, a portion of demand is driven from the catalog but recorded as online sales. This impacts the accuracy and reliability of  squinch reporting.

When merchants rely on squinch alone, products in the catalog are allocated 100 percent of catalog advertising expense while reflecting only those sales directly attributed to the catalog. Unless sales from other channels are taken into account, a merchant could decide to drop a product that appears to be unprofitable in the catalog, only to see its sales plummet in other channels.

Squinch reporting remains a valuable tool, but it's necessary to make some adjustments in today's marketplace. One solution would be to attribute and allocate web sales to the catalog to appropriately offset catalog expense. Alternately, adjust analysis to look at profit across both catalog and web channels individually and on a consolidated basis.

Punishing Stars
On the other hand, catalog merchants increasingly are reducing catalog page counts by cutting the quantity of products displayed. The products remaining in the catalog are usually those most important to the business, and their contributions to the business should be fully understood. At the same time, a much larger number of products is made available on the website.

With this practice in place, the products in print bear the full burden of advertising expense, even though all products benefit from the traffic they drive to the website. Ensuring that profit analysis recognizes this benefit allows merchants to avoid penalizing the catalog products and overstating the profit of the products marketed only on the website.

When e-commerce merchants spend advertising dollars, they're usually not directly attributable to individual products. Yet dollars are being spent on resources, including staff for website management and/or third-party providers for web development, SEO management, pay-per-click campaigns, affiliate marketing and other unmeasured resources. For a business to be sustainably profitable, the individual products must generate enough gross margin to pay their shares of the advertising expense.

Business decisions at the product level rely upon achieving and delivering an accurate view of the product's true performance. The profit analysis decision should factor in an allocation of advertising expense to determine the viability of the product.

Drop-ship products are attractive to both catalog and e-commerce merchants, as they can be sold with lower operating expense and are free of the challenges associated with physical inventory like back orders, overstocks and inventory turnover. The costs associated with those challenges already are reflected in the cost of goods paid to the drop-ship vendor.

Resources still are required to source drop-ship products, publish them to the e-commerce site, maintain the integrity of product data and forecast demand to manage vendor expectations, however. While it's complex to assign a specific number to these costs, merchants should make their best efforts to assign value to them to improve the quality of individual product profit analysis.

As the catalog and e-commerce channels continue to converge, make product decisions based on the overall profitability of each product. Decisions within each channel should be made based on how a product must be presented to meet the organization's goals.

Bottom line: The methods used by merchants to determine the viability and profitability of products must continue to evolve.

Ray Goodman is senior vice president of multichannel  systems provider Direct Tech (rgoodman@direct-tech.com).

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Ray Goodman Author's page Ray has been a consultant to various direct marketing companies across the country. His goal is to streamline the merchandising and marketing planning processes inherent in multichannel marketing. He works closely with clients and industry experts to develop new methodologies and tools for merchandising and inventory control. He says, "It's exciting to work with our staff customers to help evolve our applications. I'm proud of the way our staff works together to bring our visions from concept to product." Ray has been with Direct Tech since 1994. His primary responsibility is directing the development of Direct Tech products. He's been a featured speaker on inventory forecasting and management at various industry conferences.

Inventory Management: The New Math