Most digital marketing channels and tactics are commoditized. But only you possess the unique relationship between your customers and your products.
This content was published in the No Best Practices newsletter on 9.26.2021.
You’re probably overlooking a powerful “marketing hack”, and you don’t even know it. What am I talking about? Your own product assortment, of course.
Most digital marketing channels and tactics are commoditized. Anyone can open a Klaviyo account or run Facebook ads. And anyone can set up an abandoned cart series or run dynamic targeting for broad audiences. But only you sell your products. And only you possess the unique relationship between your customers and your products.
But before you can unlock the power of merchandising to improve the effectiveness of your marketing, you have to learn the basics. For many marketers, merchandising is foreign territory. So I’m going to make the basics easy to digest (and fun!) with a coffee shop story.
Setting The Stage
Imagine you are the owner of a successful New York City coffee shop called Mack’s Coffee. Despite the homely name, your shop has all the hallmarks of the trendy NYC coffee shop: Scandinavian-inspired interior, a long menu of beverage options and $5 cold brew.
You’re located in the middle of a moderately busy street in midtown, surrounded by a mix of apartments and office buildings. We’ll pretend that this story takes place before Covid, when those office buildings were full during the week.
Here are some common merchandising scenarios you’ll encounter as the owner of Mack’s:
Product And Retention
The best-selling products in Mack’s Coffee Shop all contain…coffee. It’s even in the name of the store. If the owner decided to pull all caffeine from the menu one day, do you think most of the customers would come back? Especially because there are five other coffee shops in a three-block radius?
Your repeat customers return for a reason, no matter what it is that you’re selling. You need to determine what that reason is, and then not mess with it. The real reason often differs from your assumptions. But any major change to the essence of your product offering always poses a risk of alienating loyal customers.
Price And Retention
The prices at Mack’s are average for a New York City coffee shop. $3 for a basic hot coffee and $5 for a cold brew. In the summer months business slows down a bit because some of the regular customers are away on vacation. The owners decide they can make up for the lower foot traffic by raising prices by 25% across the board. A basic hot coffee is now $3.75, and a cold brew is now $6.25.
On the first day of the price change many regular customers balk but order anyway. By the next week, foot traffic has declined even more, and sales of add-on items like pastries are down.
A customer’s first order contains vital information: what they like, and what they’re willing to pay for it. You may think that raising prices by a few dollars or a few percentage points will go unnoticed. But you would be wrong.
Most customers do the majority of their spending within their preferred price and category. If that price/category combo disappears, so will many of the customers who once shopped it. “Brand loyalty” can’t overcome hard economics–most peoples’ choices are constrained by their disposable income.
The Hot Item Problem
Mack’s releases a new product: the bro-nut. It’s a cross between a brioche and a donut. The Bro-nut is hyped up by key Instagram foodie accounts and the local press. Soon, people are traveling from all over the city and waiting in line to buy one. About 25% of bro-nut customers also buy coffee.
Within a year, the hype dies down and sales regress to their prior trend, with a slight boost from locals who became aware of Mack’s via the bro-nut. If Mack’s created an expansion plan that assumed the bro-nut hype was sustainable, they would be in big financial trouble.
A “hot item”, or a product that goes viral, is a blessing and a curse. These hot items typically drive hockey-stick growth. But it eventually fades away because the surge in interest is driven by short-lived trends or freak PR wins (like getting your book in Oprah’s book club back in the day).
You can’t treat the hot item growth trend as if it will last forever. In fact, many people who buy into the hot item won’t buy anything else from you, or even return for a second purchase. The viral growth is a financial boon, but you shouldn’t automatically invest that money in more inventory. Think of other ways it could aid the long term growth of your business.
Secret Acquisition Drivers
Mack’s is the only coffee shop in the neighborhood offering llama milk, the hot new cow’s milk alternative. Llama milk brings in the neighborhood’s bougie alternative health crowd (they read Goop religiously). These are relatively big spenders who come in 1-2x daily and purchase additional health-conscious items each time.
After a few months Mack’s management runs the numbers and determines that llama milk is cutting into the profitability of selling coffee. They stop offering it as an option and the bougie Goopers soon go elsewhere.
The more complex a brand’s assortment becomes, the more likely it is that there is a secret product or category bringing in the big spenders. This category may not be a volume driver, but without it you’d lose some of your best customers. Hint: it’s usually correlated to things that rich people buy. If you can find it, you can use it as a lever to bring in more rich people, who have strong LTV potential.
The Clearance Customer
Mack’s decides to drum up sales by running a promotion on KrazyCoupons.com, a well-known local deals site. The offer is buy one small coffee, get one free. Mack’s sees a surge in foot traffic and offer redemption while the promotion is running. But once the promo is over sales fall back to prior levels and very few of the offer redeemers come back.
The clearance customer is a unique animal. When I say “clearance”, I’m referring to discounts of 70% off or more. These customers have different motivations than your average shopper. They’re not loyal to the brand, they’re loyal to the thrill of the deal. So don’t expect them to buy from you outside of clearance periods at scale.
This is the reason that “online sample sales” and other clearance tactics are never a valid customer acquisition strategy. You’re filling up the customer file with people who will only purchase at a steep discount.
This only scratches the surface of the merchandising discipline, but these are the key concepts marketers need to know. In a future newsletter I will cover how to put these ideas to work to improve marketing efficiency and customer LTV.