Merchandising and cost of backorders
The other day we worked with a mid-sized gift marketer to have them analyze their Spring book and web campaigns from a price range perspective. They had never done this and were surprised to find that 39% of their SKU’s were $25 and under – the average price point in this group was actually $11.15. This group of SKU’s represented 32% of the gross sales but only had a 44% gross margin which meant that on average they were only earning $4.91 per SKU. After allocating marketing expenses, operational costs and general and administrative costs – each of these SKU’s lost over $10.00 each time they were ordered. What made the situation worse is that this price point also represented around 59% of the total backorders. With their cost of processing a backordered unit being around $12 this made the loss even greater – more like $22.
This company is now working to develop a strategic merchandise plan to improve the average price points over time. Something that cannot be done overnight or you will alienate the existing customer base. In addition they have opted to avoid taking backorders on low dollar and low margin products to avoid the additional costs. You could also decide if the items are essential to customer service to order larger quantities.
It is extremely important for companies to analyze merchandising results, taking in to account not only whether or not an item covered the marketing expense, but also the cost to take and process orders and the general and administrative expenses. By doing this you essentially create a P&L at the item level as well as the sub-category and category level. This allows you to truly understand what your best sellers are and whether or not they are delivering positive dollars to the bottom line. Use this same model of analyzing profitability and sort the products by price ranges and I am sure you will find some interesting trends. Review this on a regular basis and make changes accordingly.
Need help reviewing your inventory strategy, if so we offer inventory assessments for typically $6,500 – designed to be performed quickly with a high ROI and actionable recommendations – click here to learn more.
Brian Barry is a Senior Consultant with F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking; Learn more online at: http://www.fcbco.com.
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