Inventory Management : The New Math

Catalog/e-commerce profit planning becoming a complex, hybrid process

In the traditional catalog arena, 
profitability analysis is pretty straightforward: Merchandising contribution margin is composed of demand, returns, net sales, cost of goods sold and advertising expense. In e-commerce, merchants have a different kind of profit analysis and planning process, due to the dynamic nature of the web. E-commerce profit planning focuses on sales and gross margin, while advertising expense is rarely attributed to product-level marketing. Many online merchants maximize use of drop-ship SKUs, which require different profit performance standards.

Catalog and e-commerce profit planning processes aren't interchangeable, but they're evolving into a hybrid process. Catalog merchants are marketing more actively on the web and increasing investments in pay-per-click campaigns, online advertising and search engine optimization (SEO). E-commerce merchants increasingly recognize print's value in driving web traffic and purchasing decisions. As the models converge, product profit analysis is becoming more complex.

Beyond Squinch
Traditional catalog merchants continue to rely on square-inch (squinch) reporting to allocate advertising expense to products within a catalog. With the emergence of e-commerce, however, a portion of demand is driven from the catalog but recorded as online sales. This impacts the accuracy and reliability of 
squinch reporting.

When merchants rely on squinch alone, products in the catalog are allocated 100 percent of catalog advertising expense while reflecting only those sales directly attributed to the catalog. Unless sales from other channels are taken into account, a merchant could decide to drop a product that appears to be unprofitable in the catalog, only to see its sales plummet in other channels.

Squinch reporting remains a valuable tool, but it's necessary to make some adjustments in today's marketplace. One solution would be to attribute and allocate web sales to the catalog to appropriately offset catalog expense. Alternately, adjust analysis to look at profit across both catalog and web channels individually and on a consolidated basis.

Punishing Stars
On the other hand, catalog merchants increasingly are reducing catalog page counts by cutting the quantity of products displayed. The products remaining in the catalog are usually those most important to the business, and their contributions to the business should be fully understood. At the same time, a much larger number of products is made available on the website.

With this practice in place, the products in print bear the full burden of advertising expense, even though all products benefit from the traffic they drive to the website. Ensuring that profit analysis recognizes this benefit allows merchants to avoid penalizing the catalog products and overstating the profit of the products marketed only on the website.

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