Learn how one retail consultant's failure illuminated "The Golden Rule" that now drives Nate's key decision-making.
“Hanging monkeys!”, exclaimed the consultant.
He was a well-dressed man in his mid-50s representing a Big 5 Consulting firm. He probably had been a former executive at Linens & Things or some struggling retailer along those lines.
This particular consultant was brought in to help save the brand I worked for at the time, FAO Schwarz. The entire FAO corporate team, which consisted of less than 20 employees, stood in a semicircle on the lower level of the FAO Schwarz 5th Avenue store, eyes fixed on the consultant who held court.
“Hanging Monkeys is how we’ll help fix this business!"
My immediate reaction was that, while the consultant probably made 10x my annual salary in a week, this was the dumbest idea my ears had ever heard.
“You see,” he went on to say. “There are only three things you can do to grow the revenue of a retail business: increase traffic, increase conversion, and increase average basket size. I call this The Golden Rule of Retail. FAO Schwarz does not have a foot traffic problem. In fact, it is the most visited toy store in the world. It does not have a conversion problem. Most customers come through the doors with the intent to purchase. FAO Schwarz has an AOV problem.”
He continued to explain that in reviewing FAO Sales reporting, he had found that many of the top SKUs were candy. FAO at the time had a 'shop-in-shop' called Its Sugar, which later went on to become a well-known chain of candy stores.
He noted that customers were coming in and purchasing candy as a souvenir from FAO, and that the average ticket price for candy was less than $5. To the consultant, this was like giving money away. FAO was wasting the hoards of high-intent customers by trading them into a low-value product.
Also in his analysis, he uncovered the SKUs that had the highest velocity-to-price ratio. They happened to be hanging monkey stuffed animals from a brand called Wild Republic. His working theory was that by moving the hanging monkey display to the ‘runway of the store’ (the center aisle through the main doors), we’d likely trade a large number of customers up from candy into hanging monkeys, thereby increasing the value of those customers to FAO and ultimately increasing revenue.
The FAO corporate team nodded in agreement to this idea and hustled to move the fixture to the front of the store. We placed an additional order for thousands of hanging monkeys like giddy school children. A week went by, and then two weeks. The hanging monkey strategy didn’t make a dent in sales. Not even a plume of smoke signaled a broader shift that we could copy-paste across other parts of the store.
A month after the ganging monkey theory fell off the tree, FAO was teetering on the edge of bankruptcy, later scooped up by Toys R Us for pennies on the dollar. The consultant's idea had been far too small to save FAO from this fate, and in the end, was akin to rearranging the deck chairs on the Titanic.
While picking up the fragmented pieces of my now shattered career, I reflected on what the consultant had said about the Golden Rule of Retail. His hanging monkey theory was shortsighted, but the basis for it was sound. His articulation of how to narrow the focus to the only metrics that can produce revenue growth was enlightening, and in some ways freeing.
The Golden Rule of Retail has stuck with me ever since and I have sung its praises from the highest peaks I can find in the retail and eCommerce worlds.
The beauty of this framework is its simplicity. Every member of an organization that is responsible for driving revenue can understand and enroll in it. In a modern eCommerce sense, the Golden Rule breaks out like this:
The product of multiplying all of these KPIs together is Gross Revenue. The formula looks like this:
AUR $ x UPT x Traffic x CVR% = Gross Revenue $
All revenue goals and the related strategies for accomplishing revenue goals for a retail or eCommerce business can be distilled to this formula. Businesses that understand this well will take a step forward, and ensure that their goals and the activities that support these goals are targeted directly toward impacting one or more of the component parts of the Golden Rule. The best of the best organizations will have specific strategies and tactics that attack ALL parts of the Golden Rule.
Let’s peel back the onion and walk through some of the ways in which eCommerce and Retail Brands can address and improve these specific KPI:
I often posit that the distance between a Brands AIR (Average Initial Retail; also referred to as ‘In the Door’) and Average Unit Retail (also referred to as ‘Out the Door’) is the measure of how much a customer respects your brand.
There are a number of different strategies to grow AUR, but having a strong brand and maintaining the price/value of your product is paramount. This can be accomplished through:
Additionally, on a blended basis, AUR can be increased by offering net new products or categories that carry a higher price point. Running a successful apparel company and introducing handbags and jewelry as new categories with price points that sit higher than the mainline apparel is an example of this practice.
Competition is often the enemy of AUR. When brands compete for a customer with a similar product, the equity of the brand may be the deciding factor. In cases where both brands lack enough brand equity to sway the customer's favor, promotions and discounts come into play. In a vacuum, lower Average Unit Retail through discounting is not a problem, unless the decrease in AUR is not offset by an equal or greater increase in UPT, otherwise, AOV will fall.
The partner of Average Unit Retail within the Average Order Value calculus is Units Per Transaction. Strategies to drive up UPT include but are not limited to:
Ideally, the gamification of UPT is a limited practice and focuses only on net positive value creation for the customer along their journey.
Announcing that more traffic is needed is the best way to set off an argument within DTC marketing circles, spawning any number of “Yes, but…” responses. Traffic is a lightning rod because it can often be the most nebulous metric. Where does our traffic come from? Why did they visit the site? Did they visit on their own accord (organically) or through some form of marketing outreach? What is the quality of our Traffic?
There are no easy answers to these questions. My general bias is that no traffic is bad traffic, and that more is always better. That aside, there is some degree of granular work that can be done to understand the quality of traffic by source, and to decide where efforts and resources should be spent to not only grow the aggregate of traffic to the website but also the quality of the traffic (as defined by the propensity to convert to a customer at some point).
A non-exhaustive list of strategies and tactics to increase traffic:
Conversion rate is another ‘duck and cover’ conversation amongst DTC Operators. The hottest of hot-button discussions is: "What should our conversion rate be? 2%? 5%? 7%?"
Conversion Rate is a function of many things, but the governing factors for any given brand’s conversion rate are as follows:
A Word About Benchmarking
In my opinion, industry benchmarking data or comparisons to competition are generally not useful in crafting internal strategies or objectives. It’s also not particularly useful for defining what the Golden Rule metric targets should be for your brand. In fact, more often than not, this practice can be damaging or limiting to progress on the improvement fronts and the advancement of your revenue growth goals.
The goal of any brand is to create unique value for the end consumer. Modeling yourself against others even in terms of operating benchmarks / KPIs will move your brand closer to the competition and not further away. It will foster copycat behavior and regress your business to the mean.
Did the hanging monkey theory save FAO Schwarz? No…not even close.
Was it a sound idea in accordance with The Golden Rule? Yes, 100%.
What’s right about it is that FAO did indeed have an AOV problem, and improving this metric was the biggest lever that FAO had at its disposal in increasing revenue.
Your hanging monkeys could be any number of things, but what is important is that you identify the biggest headwinds to each of the KPI within the Golden Rule, that you isolate the issues that limit performance, and that you line up your strategy, tactics, and resources in a way that overcomes those headwinds and limitations.
Find and identify enough Hanging Monkeys and you are well on your way to revenue growth.
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