Hot Items are products that “go viral” in some way and drive a dramatic increase in sales. But if you’re not careful, you’ll become a victim of your own success.
This content was originally published in the No Best Practices newsletter on 3.27.2022.
Note: the “customer file” refers to all of the customers you have acquired, who you can market to. The most relevant slice of the customer file are buyers who shopped within the last 12 months.
This is part two of the “How To Destroy Your eCom Business” series, aka what not to do to build a healthy customer file. This series covers common business decisions with unintended consequences. These decisions appear to pay off in the short term, but they make it harder for your business to succeed in the future.
Why dedicate so much virtual ink to failure? First: businesses still regularly make the moves I’m describing here, so you want to understand them and avoid them. Second: by developing an understanding of how customers, marketing channels and merchandise interact we’ll be able to build the definition of a healthy customer file.
Reminder: a healthy customer file enables a business to succeed today, but it also sets a business up for success in the future.
This time around we’re covering hot items and viral traffic. These are hot topics in the post-traffic era of retail. The recent growth of TikTok makes it more likely than ever that your brand will go viral in one way or another. Here’s how to handle it.
What Are Hot Items?
A Hot Item is an old school retail term for a single product that “goes viral” in some way and drives a dramatic increase in sales. The virality can come from several sources. An influencer might discover the product organically and post about it. The product might line up perfectly with a cultural moment and generate a lot of organic PR. Or it might literally go viral–remember the Ocean Spray Tiktok?
How much revenue must a product generate to qualify as a hot item? That depends on the size of the brand. A good rule of thumb: does the SKU drive at least 60-70% of total daily sales in the initial days of the viral event? If so: Hot Item.
The Hot Item will generate a ton of revenue at a lower cost than the brand has ever seen before. The average cost to acquire a customer may be cut in half at the peak of the item’s popularity. This is because the item will increase brand awareness organically and, due to its trend-driven nature, buyers will have fewer hesitations about purchasing the item.
In the short term, this is great (as long as the unit economics of the business are sound)! The brand is making more money and spending less on marketing to do it. This is where management might start envisioning a future with more resources. You’ll be tempted to start mentally spending next year’s budget, and the year after that.
This is where brands get in trouble, because the surge in sales from the Hot Item typically doesn’t last forever. And the customers you do acquire via the item rarely come back and purchase again. So if brands purchase inventory and make other investments assuming the growth will last forever they often wind up in a worse position than before.
Even if the Hot Item remains “hot” for years, you can still mess up if you don’t reinvest the proceeds in the right way. If you’re interested in learning more, I wrote this case study on handbag brand Mansur Gavriel a few years ago. The brand went from overnight success to distressed PE case in five years due to a poor capital allocation strategy.
A brand with a hot item on its hands is faced with a pretty heavy decision: what do we do next? How much should we reorder, and how should we think about inventory overall in the next six to 12 months? Let’s zoom in on what a hot item does to the customer file to better understand how to answer this question.
Hot Items And The Customer File
Your sales can only come from one of two sources: new customers or returning customers. A Hot Item drives massive revenue growth because it drives massive customer acquisition. The trend-driven nature of the item lowers buyers’ inhibitions. The item becomes an impulse purchase and your current addressable market broadens exponentially.
The item is introducing a ton of new customers to the brand, but under what conditions? These new buyers primarily identify with the item, not with your overall brand narrative. In this way, these customers may behave like other customers from low-value acquisition channels. They’ll purchase once and forget about you. At least it was full price!
I’m not saying that every customer who is introduced to a brand via a Hot Item is a lost cause. There are certain factors that make a Hot Item customer more likely to convert to a second purchase:
- The brand has a broad assortment (at least 10 SKUs, ideally more). This is simple math: more items = more chances to drive a repeat purchase.
- The product is consumable (ex. makeup, food, drinks)
- The hot item is offered in multiple SKUs from the start (colors, flavors, etc).
- The price of the hot item sits in the middle of the price range of the entire assortment. If the item is at the lowest end, your new customers are less likely to be able to afford anything else you’re selling.
- The source of the viral awareness ties into a broader cultural trend. This means that journalists have a broader coverage angle so they’re more likely to keep talking about it. The Hill House Home Nap Dress is a great example of this.
What does this mean for planning next year’s budget? The two faulty assumptions behind comping hot item growth are:
- Your newly acquired customers will return to make a second purchase at the same rate as your average customer up until this point.
- The viral momentum behind your hot item will remain as-is or accelerate.
So your job is to make a realistic estimate of how long the Hot Item will stay hot. You are also going to find yourself with more cash on your hands, because you’ve made more sales than anticipated on your existing expense base. You’ll need to decide how to invest that cash in the way that yields the most benefit.
You essentially have three choices:
- Try to maintain your new growth momentum. If the Hot Item resulted in a 2x sales increase, you would shoot for another 1.5-2x increase the following year. This is the hardest path, and the most likely choice for VC-backed brands.
- Try to maintain your old growth rate at your new baseline. If the Hot Item increased your average YoY growth from 15% to 100%, you would aim for 15% next year at your new, higher revenue baseline. This is the path chosen by almost everyone else.
- Plan down for next year, almost as if the Hot Item never happened. You would plan for 20-30% YoY growth based on your old baseline.
No one wants to pick option #3, because it feels like taking an L. So they’ll pick one of the first two options, but fail to implement any strategies to maintain awareness.
Remember: you can’t count on your Hot Item customers returning to purchase again. The Hot Item was essentially a low cost customer acquisition vehicle. So you need to line up additional low cost acquisition events to maintain your growth momentum.
If the Hot Item happened by chance, that’s going to be hard. Your team will need to develop a new core competency to make that happen consistently. Most brands are better off going with option #3 and investing their Hot Item proceeds in projects that will improve operating margin more sustainably.
Analyzing Your Hot Item Customers
So, is your Hot Item a Nap Dress (long trend cycle) or a Clubhouse (remember that?). Here are some analyses you can perform to inform your inventory and marketing planning processes for the period after massive growth driven by a single item:
What percentage of new customers who purchased the hot item include other products or categories in their initial order? Larger baskets are a good indicator of future purchasing potential and broader interest in your brand.
What percentage of hot item customers return to purchase within 30 days, compared with all other new customers? If the repeat purchase rate for your hot item customers is dramatically lower than average, these customers are less likely to return and shop again.
What was the AUR of the hot item compared to the average new customer AUR for the prior 12 months? If your hot item was priced lower than your assortment’s average, the customers you acquired will be less likely to afford another purchase from your brand.
What percent of this year’s new customer revenue came from the hot item? The greater the hot item’s contribution, the riskier it will be to plan up revenue in the future without changing other aspects of your marketing and merchandising strategy.
What was your overall media efficiency during the peak of hot item selling vs a comparable period or vs LY? A hit product can drive organic awareness that improves overall media efficiency. But when the trend dies down, so does some of this benefit.
And here are a few questions you can ask yourself to get a sense of the longevity of your Hot Item:
- Have press outlets picked up on your item organically?
- Have any press outlets reached out to interview the founder?
- Does the product tie in to a broader macro trend? Can your PR team frame it this way?
- When your PR team reaches out to secure more coverage for the item, do you get enthusiastic pickup?
- Do you receive comments are direct outreach from customers via email and social media, asking when the item will be back in stock?
- Are you able to successfully build a waitlist for the item? You can use waitlist demand to estimate actual demand for the product.