How to Develop a Profitable Merchandise Mix

By Gina Valentino

Answers to five FAQs.

Maintaining a sound balance between assortment, price points and gross margin is a difficult task for any cataloger to master.

Add to the job the "clanging" of other variables — such as the mix between new and repeat products, imports vs. domestically sourced items, branded vs. private-label merchandise, and durables vs. disposables — and you see how harmony quickly can turn to cacophony.

It's not unusual, therefore, for business-to-business (b-to-b) catalogers to merchandise a catalog with every product and part number found in the warehouse. A decision to increase catalog page count often is then a function of SKU count. And the pricing strategy is a symbolic gesture to discount the manufacturer's suggested retail price.

But developing the skill set to orchestrate a profitable product mix often is found in the answers to the five most commonly asked merchandising questions.

1} How can I tell if I have the right assortment?

To answer this, look at a few key metrics, such as your inventory status, price-point analysis, square-inch analysis, category analysis and gross-margin percentage.

Each metric provides insight to the answer, as well as having customer information provided by marketing (data such as items per order, response rates, response to offers, etc.).

Focusing on one particular metric, the square-inch analysis (the so-called SQUINCH) can offer the greatest variety of answers to the question. SQUINCH is the most granular view of the merchandise offering.

To develop it, use your printed catalog as a guide and spreadsheet-based software to tally the information. Look at each page in your catalog, and identify every product on that page, the price points offered, the square inches used to sell the products and the product categories.

After you've compiled this basic framework, add columns of information to further segment the products. For example, differentiate new products from existing, imports vs. domestics, and brand name or vendor. (Note: Use categories meaningful to your particular organization.)

Next, take the results of the catalog mailing, and for each product, indicate the following: gross demand items, orders and sales; gross margin; returns; and the advertising cost per square inch.

Add a column to calculate contribution by subtracting cost per square inch from gross margin per square inch. Sort the spreadsheet to rank products by contribution, price point, category, gross margin and catalog page.

These metrics will help you determine which categories, price points and items are most appealing to your particular customers. Now you have some hard facts to help you modify your product assortment accordingly.

2} Should I add more pages to the catalog?

Look to the SQUINCH for help here as well. Sorting the spreadsheet by page contribution can give you an immediate answer.

If 70 percent of a category is profitable, then growing that category and its space allocation is, of course, a good idea and more pages may be warranted.

Two other metrics to study include the overall sales per page and contribution per page. If your P/L shows that advertising expenses represent 20 percent of sales, use this figure to calculate the required page revenue.

For example, a 120-page catalog costs $2 to print and mail. Using a mail quantity of 100,000, multiply $2 x 100,000 for a total cost of $200,000.

Divide the $200,000 by 20 percent to determine what the catalog needs to generate — $1 million.

Divide $1 million by 118 pages (not counting the front cover or inside front cover due to editorial space and other non-product information), and you have your results: Each page must generate $8,475. This number can serve as a benchmark for your merchandisers.

3} Do prospects buy different items than current customers?

In the short term, yes; but in the long term, no, they don't.

The purpose of prospecting is to find more customers who will become loyal to your catalog. To help achieve this, review which products your loyal current customers purchased on their first orders.

If you notice a pattern, your decision is straightforward. It's relatively common for the first-purchase items to be bestsellers as well as in your best-selling price points. However, first-timers typically will buy fewer items per order, and they'll yield a lower average order value than your older customers.

Once prospects make their first purchases and eventually their second purchases, their buying behaviors will evolve to a similar pattern as your older customers.

4} Isn't it just our marketing department that's supposed to be suggesting special offers?

Not always. Your merchandising personnel often have a better perspective on which products are complementary, and more importantly which items have price breaks or can be pre-packaged as a bundle.

For example, a common mistake for a b-to-b cataloger is to line-list each product part but forget to offer an assortment bundle. With an eye on inventory issues, however, merchants can suggest promotional offers, such as buy one get one for half price, or buy a full case of widgets and get the widget cleaner for $1.

Or your merchants may suggest, for example, that when your product mix needs to change, promote the private-label items (higher margin dollars) or feature the best of the "good-better-best" selection in each product category. Such merchant-driven strategies can help you influence buyer behavior, change the mix of products sold, and boost your catalog's average order values.

Marketing and creative can, of course, help support such efforts. Customer contact strategies and relevant creative treatments will emphasize the offer and help achieve the desired impact.

5} How should I define the word "profitable" for my catalog?

Again, look to your SQUINCH to help show which products are contributing to gross margin, as well as reveal if the page space allocated for the item is profitable for your company.

While the metrics are meaningful, products that have a mediocre profit contribution, but notably are bestsellers driving customer response, still are key items in your merchandise mix. Items that are brand-enhancing or that round out your product line are valuable to the mix.

Each organization emphasizes a prerequisite for success. So it's important to set benchmarks for individual items and product categories so you can uniformly evaluate performance.

Conclusion

Developing a profitable merchandise mix is an evolving process. Using standard metrics and benchmarks allows for a consistent review of products and categories. Reviewing historical performance, setting objectives and then comparing the actual performance will expose data that are actionable.

Enlist the assistance of your marketing and creative teams to support the merchandise-mix objectives. Together, a profitable strategy can be orchestrated from the same sheet of music.

Gina Valentino is vice president/general manager at J. Schmid & Assoc., a catalog consulting firm based in Shawnee Mission, KS. She built her experience in marketing, promotions, e-commerce, circulation and catalog production. You can reach her at (913) 236-8988, or via e-mail at ginav@jschmid.com.