The top 5 metrics for your business

May 15, 2005 9:30 PM  By

How is your catalog doing for the first half of the year? What does that mean for the rest of 2005? While you may need to crunch some numbers to determine actual results and to make accurate predictions, you should be able to pull the data together fairly quickly if you’re minding the right metrics.

Each functional area of your company should have a set of key measurements that you can review frequently to take the pulse of the business and assess for early signs of trouble or opportunity. If you don’t already monitor key metrics on a regular basis, you can start now. No matter your department — marketing, merchandising, Internet, or operations — develop your own top five metrics specific to your department and relevant to the objectives of the organization. And keep in mind that data should help you determine a course of action, because you and your colleagues each have a piece of the performance puzzle.

Suppose one top manager noticed that first-quarter revenue was running 3.5% below last year’s and suggested limiting expenses until further notice. But the manager didn’t consider that the catalog and e-mail campaign dates had changed to take advantage of data gleaned last year to increase productivity. The cataloger’s revenue shortfall was most certainly nothing more than a timing issue.

This sort of situation is not uncommon. Business would be more efficient if the functional areas of a company regularly submitted their top five metrics to help to shape the business decisions.

What are the top five metrics for catalog and Internet marketers? Each functional area of the business will have its favorites to help uncover opportunities as well as identify problem areas prior to a crisis. Overall you should focus on the top-line variables that greatly influence the bottom line: response rate, average order value, gross margin, returns, and advertising expense. These five factors directly affect the health of the business. Lower the return rate by 1%, and you will see an immediate increase to the bottom line. Increase gross margin by 1%, and you will see an immediate increase to the bottom line. You get the idea.

  1. RESPONSE RATE

    Driving response rates up and motivating catalog recipients to purchase must be the focus and responsibility of the marketing, merchandising, and creative departments. This task applies to both the customer file and prospects. Declining response rates hurt the overall business in several ways. The customer file erodes and begins to implode; the advertising ratio becomes too high, requiring cost realignments; and inventory collects dust in the warehouse.

    Response rates — how the customer reacts to the campaign — are predicated on the right merchandise, motivated by the right message and offer and creatively designed to sell off the page. Frequently monitor response rates by customer segment so that you can react early to keep your customer file healthy.

    Warning: When your response rates decrease and your average order increases, you are appealing to a smaller group of customers. Your goal should be to increase response rates and hold steady or increase average order value.

    Strategies: Review the purchasing behavior of first-time buyers from the catalog and from the Internet. Determine which price points are most appealing and which merchandise categories or products are most popular. Build strategies — catalog cover versions, items on the home page, promotional offers — that take advantage of historical data to increase response rates and hold steady the average order value.

  2. AVERAGE ORDER VALUE (AOV)

    This metric provides insight to how much money customers typically spend. Since buying behavior changes throughout the year due to the seasonality of merchandise, price points offered, and purchasing channel (catalog, Internet, retail), make sure you are monitoring AOV accordingly.

    You can set AOV goals by season, by channel, and by customer group. Review historical data and set benchmarks. Ensure that your merchants are taking advantage of measurements such as square-inch analysis to evaluate price point offered vs. price point sold. Customers are good about communicating their sensitivity to price points within merchandise categories. If you can increase the average order value without reducing response rates, you’ll see a boost to the bottom line because more revenue is associated with each order to cover operational costs.

    Warning: Don’t increase prices to artificially increase average order value.

    Strategies: Identify opportunities for upsells to increase the number of items per order. Proven techniques, such as add-on accessories; warranty agreements; upgrades on paint, finish, or materials; and bundling (“buy both and save”) and cross-sell suggestions on the Internet, can help drive the average order value higher.

  3. GROSS MARGIN

    Margin means money for your company and is a critical component to the health of the business. Each merchandise category must have margin goals, and together all categories must roll up to meet the margin goal of the organization. For instance, it is not unusual for electronics to carry low margins — consumer electronics margins typically average 15%-20%, compared with 25%-30% in other categories. At the same time, electronics have strong appeal on the Internet and tend to be seasonally strong in the fourth quarter. This situation reveals three dynamic variables to gross margin with the understanding that electronics may represent 10% of overall company revenue. Regularly reporting margin goals by category and channel guides the forecast of money for your company.

    Margin monitoring triggers early warning signs to remerchandise the catalog with higher-margin products such as private-label goods, or to place strong margin-dollar products in hero spots in the catalog such as near the outside of the page and to feature those items more prominently on the Internet. Also, reviewing margin reports by vendor will help provide insight when renegotiating costs in order to improve margin.

    Warning: Low margins are not necessarily bad — provided there is a strategic objective identified (loss leaders, competitive category) and overall margins are in line with your company goals.

    Strategies: Use the square-inch analysis to analyze gross margins by item within each merchandise category. Identify any outliers (high or low), and modify the assortment or renegotiate the margin (either cost dollar or retail price).

  4. RETURNS

    An ideal return-rate goal would be zero…customers kept every product shipped to them. But that’s not possible in the real world — customers will always need to return some item for some reason. So your goal should be to keep return rates as low as possible.

    Low return rates signify satisfaction and keep the business financially healthy; high returns are costly to your company in many ways. First, inventory is deducted and not available for other customers. Second, if returns identify a more significant and long-term problem such as merchandise fit issues or quality of goods, the loss of customer confidence plus the elongated time line to correct the problem is a huge disadvantage.

    And finally, the expense to the organization is nearly doubled when you have returns. That’s thanks to customer complaints; paying workers to pick, pack, and ship the replacement orders; restocking the warehouse; return- to-vendor expenses; and the costs associated with processing a credit to customers, while any profits within order fulfillment are depleted.

    Warning sign: Don’t ignore early indications of increased returns percentages by merchandise category, as well as return percentages by vendor or by channel. Never assume returns percentages will decrease without a purposeful change by the organization.

    Strategies: Identify the reasons for the returns and help correct the problem with better copy and creative that accurately reflect the merchandise as well as its uses. Also, train call center reps (and use text boxes on the Internet) to accurately guide the customer.

  5. ADVERTISING COST

    Expense control is a delicate topic. You have to spend money to make money…but how much is too much? Calculate the advertising cost to gross sales (measures appeal) or to net sales (measures productivity) to identify a profitable investment for your company. It is not unusual for apparel catalogers, for instance, to carry a higher ratio than hard goods companies, but the bottom line works for both situations.

Some catalog advertising costs (such as increased postage or printing and paper expenses) you can’t do anything about, but you may have some leeway in the cost of creating the promotion. For instance, as one way to reduce catalog costs, determine if rather than using location photo shoots you can use studio photography and digitally insert a background.

Warning sign: Assuming only on-location photography or on-figure (use of models) photography is the only way to successfully sell your merchandise.

Strategies: Identify how much money will be allocated for advertising costs and determine which products sell best on models and on location. If you’re apprehensive, chose several catalog spreads to test, and test photos via the Internet.

Going forward into the second half of 2005, think about how your organization makes decisions. Use empirical data that can uncover opportunities as well as identify problem areas prior to a crisis. Spotting trends early provides ample time to evaluate inventory commitments, marketing plans, and merchandise margins.

You should also be considering your company metrics for 2006. Knowing this information sooner rather than later can mean the difference between black ink or red.


Gina Valentino is vice president/general manager of J. Schmid & Associates, a Mission, KS-based catalog consultancy.