July 7, 2014, 3:27 PM

Why you should treat every SKU as its own line of business

Some items perform well in one marketing channel and not in another. Some bring in especially valuable customers. It’s only by analyzing data this way that a retailer can optimize online marketing, says the digital marketing manager at e-retailer PureFormulas.com.

There are two types of retailers, those that sell one product thousands of times, and those that sell thousands of products one time. In each case the goal is to have the right type of merchandising that fits your business concept.

The difference is how you choose to make your business work. If you are a retailer that specializes in a tight collection of hand-picked SKUs then your game plan is very precise online marketing campaigns. If you are a retailer that offers thousands of SKU’s you have a totally different game plan: your reach is broad and vast, spanning thousands upon thousands of keywords and pages. This type of retailer is utilizing comparison shopping engines’ a variety of marketplaces such as eBay and Amazon; Google Shopping campaigns; Google, Yahoo and Bing PPC campaigns; affiliate traffic; organic traffic and more to drive visitors to their site. This retailer has a difficult task at hand and must manage a huge inventory and a giant search marketing (SEM) campaign while staying profitable. In this article we will cover the second retailer and ways to optimize its spend, inventory catalog, and online marketing performance.

Most retailers that are profitable never dive deep inside their analytics. In fact, on the outside performance appears to be just fine. But what lies beneath the surface is a different story.  In most cases your retail business has partnered with an agency, and you are relying on outside sources to make sure performance is solid, trusting your experts provides you with a sense of relief and discouragement from looking beneath the surface.  You must take the wheel and become the driver of change in your optimization efforts.  Below is a simplified overview of types of improvements you can make to get more by using less.

Death by a thousand cuts

Death by a thousand cuts, you might have heard this phrase before.  The problem is that most of your products do not make your business money; they are slow and costly.  Most of the revenue comes from less than half of the total inventory.  These slow-moving SKUs need to be treated differently.  They may get 1-3 clicks per month and make a sale every 3-6 months.  They are mostly stumbled upon when purchased.  Most of these products don’t make money, so there is no need to be advertising them.  

The "shotgun SEM approach" is a good idea in the beginning when you are a young growing business, but at some point you need to identify poor-performing SKU's and throttling down spending on these bleeders.  You simply cannot afford to throw money at every product.  Most of the time these products move so slowly they pass under the radar, as most marketers optimize SKUs at certain threshold of clicks, for example over 40.  

Thousands of these bleeders are slowly draining your budget at a rate of 2 clicks per month, without coming close to breaking even.  In some cases 50% of an online marketing budget produces less than 1% of revenue.  The reality is that you can be even more efficient than you think, and there is a lot of room for improvement.  To solve this issue we need to look at the problem at hand, then apply multiple optimization layers to chip away at the problem from multiple angles.

Each SKU is a unique business

You don’t have to advertise your entire catalog.  You have to treat each individual SKU as a unique business. This way your view is not constricted to looking at the inventory as a huge pile of groups and brands.  

Not every business is profitable, and it makes sense to invest in a business that can give you a return.  A SKU can perform poorly on Bing, and be profitable on Google.  Sometimes it can be a loser in Google Shopping and be a winner in a comparison shopping engine.  You need to know how a single SKU is performing across channels, and which channels are working or not.  This will pave a way towards elimination of spend on poor performing products.  You can filter further to find out which SKU's are wasting your budget in which channels.  Most of the time the best approach is to bid these SKU's down to a a penny and let them ride, allowing them to still be searchable.  I found that by doing so we made unprofitable SKU's profitable over time.

Look at the real margin

Most retailers have a segmented way of looking at a value of a SKU.  Since retail is a two-sided business consisting of fulfillment and marketing, the margins are not married.  Fulfillment knows they can charge a certain amount for a product to get a decent margin; marketing knows how much they are willing to spend on a particular SKU to get a return.  The disconnect lies in the true margin, as the cost of advertising must be added to the margin of a product. This way you will know if the SKU is truly profitable as a business.  

If your business spends $1 to operate, $1 to market, and returns $1.50 in revenue you are out of business.  It may seem your marketing is profitable, but until you add the advertising cost to the margin you won’t know your real margin.  Once you have your actual margins side by side with your marketing costs you will know your true cost per click and attain full understanding of you spending ceiling and floor per SKU.

Focus on high-margin products

Once you know your real margin you have a completely different view on what’s working and what’s not.   Now you can focus spend on your high-margin products and increase value.  You know you can afford to pay more on marketing since you can make that money back pretty quickly.  

When you’re treating each SKU as a business you are setting up a unique cost threshold for each SKU.  Low-margin products have little wiggle room in spend, as they have to be profitable at lower cost.  Of course you have to take into account the true value of a SKU before you cut the spend.

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