Understanding Your Demand Winners
Almost every company that we work with can easily rattle off and name the top 10-20 products with the highest gross sales, or demand winners. But often times these same companies couldn’t tell us which of those items are profit winners. The first guess is usually those core items that they never want to be out of stock on because maybe they are private label or unique products but usually have a nice price point and good margin. But in any case, companies should be able to point out the top demand winners but then also be able to point out the most profitable items as well, or those that contribute the highest net contribution to profit.
What do we mean by net contribution to profit? Net contribution is derived from taking an item’s (or category etc) gross demand dollars and subtracting out the cancel and return dollars. This leaves you with net sales dollars – or most importantly what you put in the bank. Now take the net sales dollars and subtract out that item’s allocated marketing, operational (call center and fulfillment) and lastly its general and administrative (G&A) dollars. This leaves with the true profit or loss earned by that item.
Here is a perfect example of understanding demand winners but not evaluating profit winners. Just the other day we were analyzing a clients merchandising results for spring and early summer 2009. We reviewed the top 25 demand winners with them and then allocated the additional expenses form marketing operations and G&A. The results were very interesting.
Nothing too out of the ordinary in the top 5 or so items – they were the top demand winners and for the most part were all in the top 5 from a net contribution to profit perspective.
But the 9th highest demand winner happened to be ranked 621 in terms of profitability out of 1630 products.
The 12th highest demand winner was ranked number 1,630 – making it the least profitable item offer in the spring and summer campaigns.
Numbers 17 and 18 of the top 20 were ranked in the bottom 20 of the all time least profitable products.
In this case these products fell into two categories. The first category was the low retail price and high margin percent. But the problem is that these products were under $10 with a 48% gross margin percent. After allocating marketing, operational and G&A expenses these items lost a tremendous amount of money – especially considering the sheer number that were sold.
The second group were those items that were technical in nature and required a lot of question and answer in the call center but were also fragile. So their allocation of costs were much higher than most other items. Longer to answer customers questions and much more care and packaging in the fulfillment center. This ate up margin dollars, of which the margin was relatively low compared to other items.
It’s important to understand how items are performing, which ones are your “bread and butter” and those that add to the bottom line instead of chewing up the bottom line. When was the last time you did a thorough merchandise analysis and revealed what the numbers are really telling you? How many of your top 20-30 demand winners are also your profit winners? If you can’t answer these questions then maybe it’s time that we talked about assisting you with an in-depth merchandising analysis. Call or email us and see how we can assist you with this process today.
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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