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Lean Techniques Part 3: Marketing

Furniture World Magazine
Volume 145 NO.6 November/December


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To review, LEAN is the art and science of continuously examining and improving a business’s processes, people and products. LEAN can make the customer experience flourish, allowing a business to realize its potential.

LEAN is about developing an organization. It is NOT about making broad cuts in expenses or people. It is about making cuts in areas of organizational waste so that business productivity accelerates.

Lean Marketing Example
Two Stores: One Lean


To illustrate how one business can be viewed as being LEAN in marketing versus another, take 2 mid to upper price point operations that are 1000 miles apart geographically: ABC and XYZ. Their market demographics are similar in population, competition and average household income. They both have their stores located on the ring-road retail areas of their cities, have similar street exposure and drive-by traffic.

ABC and XYZ have identical monthly marketing and advertising budgets: $50,000 / month.

You would think these two businesses would be similar in other areas, especially their sales volumes. Well, logic does not always apply in the “real world”. Operation ABC produces average monthly sales of $625,000 while operation XYZ produces $1,000,000.

XYZ is LEAN compared to ABC, even though they spend the same amount of dollars on marketing. XYZ is more efficient with its use of dollars. Their respective marketing efficiencies can be seen in 2 ways:

1. ROI (return on investment) of marketing dollars with respect to gross profit produced:

ROI =(Benefit – Cost) / Cost
Store ABC =($625,000 @ 50% gross margin - $50,000) / $50,000 = $5.25
Store XYZ =($1,000,000 @ 50% gross margin - $50,000) / $50,000 = $9.00


Assuming both businesses produce a 50% gross margin, XYZ returns $3.75 more gross margin dollars per $1 invested in marketing. Expressed as a percentage XYZ produces a 900% return on marketing dollars while ABC produces a 525% return.
Of course there is always the issue of which portion of sales and margin was directly attributed to marketing activities. If you are able to get reliable information here, an even better ROI calculation would be: gross margin dollars produced due to marketing activities / cost of marketing. The ROI would be lower for both with this formula however XYZ would likely still be the leanest of the two.

2. Marketing expense as a percent of sales dollars:

Expense % of Sales =Expense / Sales
Store ABC =$50,000 / $625,000 = 8%
Store XYZ =$50,000 /$1,000,000 = 5%


Operation XYZ has a 3% lower marketing cost structure than ABC. This goes directly to the bottom line and to cash flow before tax. 3% does not sound like much, but when applied to the bottom line of a $10 Million dollar operation, this equates to $300,000 in additional profit dollars.

The burning question is, why is it that XYZ can produce this higher ROI on its marketing and be so much more efficient than ABC?

The answer is that they follow a LEAN strategy. I’ll explain this using my strategy for implanting LEAN:
  • Establish benchmarks based on performance metrics
  • Measure performance using 80/20 thinking
  • Find solutions
  • Execute to conclusion
  • Continue improving



Establish Benchmarks Based On Performance Metrics


The first step is setting the measures that will guide your organization to improve. Above I’ve mentioned two great macro performance metrics that you should definitely track monthly: ROI and % of sales. When it comes to becoming LEANER in marketing, get specific as well. Here are three performance metrics suggestions that you can use for either in-store or retail online components:

Traffic Related: Unique Customer Visits vs. Previous Customers (including be-backs). Here you split the total traffic your marketing produces, into two categories, first time and repeat. The number of unique visitors or first time customers are important because they show you how effective your campaigns are at generating new leads. Previous customer visits are important because it is a measurement of your level of customer relationship building. Together they represent total traffic mix produced by your advertising mix.

Engagement Related: Bounce Rate vs. Conversion Rate. Bounce rate is a measure of the customers who visit, then just leave without any meaningful interaction. Alternatively, conversion rate is a measure of the customers who visit and interact (either resulting in a sale or some sort of meaningful connection has been made with follow-up required). Tracking engagement can be an indicator of what type of customers are visiting, and how well you are connecting with them.

Media Related: Specific Source vs. Unknown. Understanding why a customer is visiting you, and if a specific ad campaign brought them in, is an age-old challenge for retailers. Often there are no clear cut answers since a mix of different media types, or other factors, can be responsible for bringing in a customer.

I believe that an excellent piece of information to determine is how many of your customers went to the internet first (google, web-site, Facebook, Houzz, etc.), versus those who saw a recent off-line campaign such as a TV ad, direct mailer, catalogue, radio spot, or billboard.

Many retailers ask, “How can I get this information?” The simple answer is: CUSTOMER ENGAGEMENT. As you improve the engagement selling processes, and LEAN selling techniques (discussed in the last article), you will gather information that can be used to measure your marketing efforts. Those operations that connect meaningfully with customers generally get better information. Use the good data you collect, and disregard unknown sources to make your media judgments.

80/20 Thinking


Measure performance using 80/20 thinking. 80/20 thinking focuses on identifying the minority of inputs that are producing the majority of outputs. Applying the ROI formula to media related sources collected from customers, you can use the 80/20 rule to better understand and improve your marketing mix. The following five steps will help you to do this:

  1. Record the sources of all traffic over the period of one month.
  2. Calculate the proportion of each source to the total traffic.

  3. Figure the total advertising dollars spent on each media.

  4. Identify the proportion of sales and margin that where unknown or not attributed to any one media. 
  5. Using the known dollars produced from marketing, you can now figure the ROI produced for each media spend. 

This will be a work in progress, and the quality of the information you collect will get better over time as your systems improve. The only alternative to tracking is guessing. Once you start to get more usable information, you will see certain media that are simply not producing acceptable standards of return. Others may surprise you by showing sizable returns. Focus on the minority of marketing that produce the majority of trackable results. This will give you some support when making decisions for future advertising investments.

Find solutions


Now that you have decided on your metrics, and have systems producing usable data, it is time to improve. Improvement involves making educated incremental changes in your business. I’ve seen so many businesses that do the same things over and over again and expect different results. Those that never modify their customer marketing strategy eventually spiral downwards. So, doing nothing is not an option.

Here is a short list of common actions / solutions that various clients have taken recently (which may or may not be right for you):

  • Commit a greater proportion of the traditional media budget to select morning TV spots.
  • Commit a greater proportion of the total marketing budget to digital media.
  • Outsource AdWords to an expert agent in the industry.
  • Build seasonal catalogs (magalogues). Print and digital.
  • Pay for Houzz to increase special order and interior design business. 
  • Outsource the entire marketing program to an industry agent.
  • Buy Facebook Ads.
  • Join a performance group and share marketing best practices. 
  • Use more segmented email campaigns vs “blasts”.
  • Blog. Publish content online. 
  • Move away from price marketing and toward branding. 
  • Increase targeting segments of the internal customer database.
     
  • When there is a Very Good reason, outsource a high-impact event sale to an industry expert.
  • Focus on improving Customer Relation Management (CRM), sales systems and procedures to decrease your necessary marketing spend.
  • Hire an internal digital media specialist.
  • Establish a customer loyalty program that links offline and digital worlds.
  • Recognize the move in this industry to Omni-Channel retailing. (The consumer’s use of a variety of offline and online channels in their shopping experience and the merging of the various channels). 

Remember, the best way forward will depend on your unique situation.

Execute to conclusion


After you put your LEAN strategy into motion, keep moving! Don’t drop the ball. Follow through as a business manager. For example, if you decide to move your Radio budget into TV spots, track the results of that decision closely for at least three months to get an idea of whether the move was good for the business or whether the strategy needs to be tweaked. The last thing you want to do is just make a decision to change and sign the checks for the next year. Just switching from one media to another may not be the answer. It may be your message that needs improving rather than the media choices. Or, it may be both. Execute, track, recalibrate.

Continue improving


Congratulations! You are on your journey to becoming a LEANER marketing organization. This means that you will produce better results. Maybe your total spend actually went up, and you are producing greater sales and gross margins; maybe spend went down and sales remained unchanged Both instances move toward LEAN.

Consistency in improvement-minded actions get results. Subscribing to the notion of LEAN is just the beginning. It is a road without an end. When you think you got it all solved, look again.

David McMahon is a Certified Management Accountant and Consultant with PROFITconsulting, a Division of PROFITsystems. Questions about this article, or to request a similar analysis on your financial statements contact him at Davidm@furninfo.com or call 8oo-888-5565.

Read other articles by David McMahon