Success in today’s market requires attention to balancing inventory levels,evaluating the effectiveness of marketing,adapting to fragmenting consumer tastes, identifying and communicating with current and potential customers and differentiating yourself from competitors

Jewelers across the country face a difficult environment not expected to change anytime soon. Here are some of the challenges and responses that small and moderate-sized retailers can cost-effectively implement:

• Wary consumers concerned about excessive spending. Jewelers must more closely match products and pricing to customer needs.

• Industry overcapacity (too many stores relative to the population) and competition from non-store retailers results in cutthroat price competition. Jewelers must improve margins by differentiating on other variables, especially if they aren’t the low-cost competitor.

• Time-starved customers who don’t have the time to or the interest in shopping. Retailers must communicate more often off-site with customers.

• Fewer exciting new products from vendors to stimulate customer demand. Jewelers must cut expenses and use assets wisely to improve profitability rather than rely on sales growth. They also must make an effort to find exciting new products.

• Fragmented customer lifestyles, interests and, therefore, purchasing patterns, result in the destruction of the mass market. Jewelers must cater to the varieties of taste of (sometimes) small subsegments of the customer base.

• Increasing consumer skepticism about advertising claims for product and pricing competitiveness. Jewelers must demonstrate credibility.

What’s a smaller jeweler to do? Mega-retailers can respond to pressures of the marketplace by opening superstores, pressuring suppliers for discounts or co-op dollars or installing capital-intensive logistical support systems. Smaller companies have opportunities too, including:

• Employ tried-and-true financial measurements to better balance inventory levels to meet customer preferences and profitability targets.

• Measure more carefully the productivity of their various marketing promotion efforts.

• Adapt to fragmenting consumer tastes by creating relationships with subgroups of customers.

• Become smarter at identifying the best prospects for their goods.

• Communicate more with customers and prospects away from the store.

• Credibly differentiate themselves from competitors.

Here’s a closer look at how to make the most of these opportunities to meet retail challenges.

Improving inventory balance: Many jewelry retailers evaluate the performance of categories based on sales or gross profit or perhaps gross margin percentage. That’s bad news because these don’t take into account the dollars required to generate the results. It’s like a stock broker boasting he made $100,000 of profit in the stock market last year. That’s nice, but how much did he invest? $100,000, $1 million, $10 million? Obviously, it makes a difference. So, too, inventory groups must be rated based on return on investment (ROI). Treat inventory as a portfolio of financial assets and rate them the same way. Say a retail jeweler puts $10,000 into 14k gold and diamond earring inventory. He should be able to compare the return he gets on that investment to the yield from investing a similar amount in IBM stock, municipal bonds or a Fidelity mutual fund.

Here is an illustration of the problem faced by jewelers who rate inventory on gross margin, or absolute sales or profit dollars generated, without considering inventory turnover. Suppose two inventory groups generate the same gross profit in one year — say $10,000. The retailer’s average daily inventory is $50,000 in Group One and $10,000 in Group Two. The gross profit ROI on inventory is 20% for Group One and 100% for Group Two. Clearly performance is unequal, despite the fact that each group generates exactly the same gross profit. By knowing these differences, the jeweler can more intelligently adjust his inventory levels.

Jewelers must monitor inventory ROI over time. Like financial assets, the performance of inventory groups will inevitably shift. Performance may change because consumer tastes change and/or because competitors introduce products that once were offered exclusively by one retailer.

The result is increased price competition, depressed ROI and reason to rethink commitment to that product line.

If a jewelry retailer finds that his ROI for 14k gold necklaces is very high, he may be tempted to add more to that inventory group. How does he know when to stop? By carefully monitoring the ROI of the group as he adds additional goods.

A more sophisticated approach to measuring inventory performance is to compute ROI after deducting allocations for non-cost-of-goods-sold expenses. This may be difficult to do exactly, but should be done at least on a rough basis.

Performance rankings of inventory groups may change after taking into account these expenses because some groups take up a disproportionate amount of selling and administrative expenses relative to their investment levels. Example: Assume your gross profit return on inventory investment is the same for two inventory groups — one with an average selling price of $5,000, the other with an average price of $50.

Suppose you find the average showcase space, amount of selling time and amount of data processing time required to generate the same amount of sales (say $5,000) from both groups is significantly different. In all likelihood, these expenses will be greater for the less expensive goods. If that’s the case, then the net profit ROI for the less costly items will be lower than that for the expensive ones. The implication is that jewelers should add more inventory to the latter than the former.

An even more sophisticated approach is to measure ROI not only by product group but also by age of inventory. This tells you how the value of inventory changes as it ages. Do this by product line because some age less gracefully than others. You may be shocked at how the value of some categories of inventory declines as they age. We have found this exercise to be of great value among retailers selling fashion-oriented as well as relatively classic merchandise.

Armed with aged ROI data you can make a more informed judgment regarding:

1. When and how to liquidate slow sellers.

2. Which inventory groups to build up.

Suppose your jewelry store has an average inventory of $100,000 (at cost) of 18k gold and diamond pins. Assume the gross profit generated by this inventory during the past 12 months was $50,000 — a gross margin ROI on inventory of 50%. Assume your accountant figured out you need to generate a gross profit ROI of 75% to cover these non-cost-of-goods-sold expenses. Next, suppose you sort your inventory and gross profit in this group by age (that is, the date the goods were received into inventory).

The data look as follows:

	Received Inventory	Gross Inventory	ROI
Under 12 Months	$20,000	$35,000	175%
12-24 months	$10,000	$10,000	100%
25-36 months	$40,000	$5,000	13%
over 36 months	$30,000	0	0%
Total	$100,000	$50,000	50%

One more point. Remember the $50,000 above represents gross profit, not net profit. You still have to deduct a charge for selling and administrative expenses. Calculate your firm’s true break-even ROI by deducting these expenses to determine how much inventory/age groups are really contributing to the bottom line.

For this particular inventory group, these findings suggest that you might want to liquidate or otherwise dispose of goods over two years old and reinvest at least some of the proceeds in new merchandise in the same group.

Obviously, the numbers in the example above are only an illustration. Similar calculations for your business may show a very different pattern, and the pattern will surely vary widely among inventory groups. The point is that without knowing the pattern for your specific merchandise in your marketplace, you cannot make empirically based decisions regarding how and when to dispose of “excess” goods.

Beware of the buyer who wants to add inventory to a category with low ROI on recently acquired goods and who claims that this SKU is going to do well, despite past results. He’s betting against the marketplace. Agree only if the new design is a stroke of genius; otherwise refrain. And make sure the likely rewards are commensurate with the risk involved.

How do you decide whether to introduce radically new products? Suppose you are thinking of differentiating yourself from competitors by offering an upscale designer line that represents a distinct departure from your traditional inventory mix. You cannot estimate the probability of success by looking at the performance of your current product lines. And it’s not always productive to ask customers whether they want you to carry the new product line. Although they may say they like it, their buying pattern may be quite different once they are asked to pay for it.

Customers may not like a new product idea when it’s described in the abstract or shown in a photograph, but may react quite differently when they see it in person. There is no substitute for empowering the customer to experience the product in order to assess true demand. That’s why it’s so important to allow a customer to wear a new purchase for a time, with the understanding he or she may return it if the experience is unsatisfying.

Retailing can never be run just by the numbers. You have to rely on the creative genius of the buyer to recommend new lines. And limit your risk by limiting new lines to a predetermined percentage of your total inventory.

Allocating money: To know how much money to allocate to alternative methods of communicating with customers and prospects, you need to track how much revenue and profit each method brings in. How?

The most comprehensive way is to keep a database of customers and all their transactions. First, assign each new customer in your database a source code that indicates what brought that customer into the store. The code may indicate a specific issue of a magazine ad, a direct mail promotion, a referral from another customer, or simply a walk-in. That source code stays with the customer forever. Keep a record of all customer purchases (and returns) so you can summarize sales and profit by source code.

Suppose you put an ad in The Boston Globe. All new accounts who identified themselves as coming in because of the ad should receive a distinct source code that identifies the particular issue in which the ad appeared. New customers who came in because of a direct mail campaign should receive a source code that uniquely identifies that effort. You may find The Globe ad generates more immediate gross profit per dollar of marketing expense than the direct mail effort.

Does that mean ads in The Globe are the best use of your money? Not necessarily. Track the repeat purchases of both groups of buyers over some reasonable time period, say two years. You may find the rate and amount of repeat purchases from the direct mail group far exceeds that of The Globe ad-generated group.

Second, tie in a conversion code that identifies what caused each purchase. Though the source code remains constant with the customer forever, the conversion code varies with each purchase. It may be an ad, a letter announcing the arrival of a new collection, a telemarketing effort or simply an unsolicited walk-in visit.

By summarizing sales and profit by conversion code, you can judge the effectiveness of individual marketing methods at getting repeat purchases. Knowing this, you can more intelligently decide how much to spend on alternative methods.

Adapting to fragmentation: Some marketing promotions may be more profitable when directed at subgroups rather than the total customer base. It may pay to send a product postcard only to customers who have purchased similar goods in the past or, perhaps, those in a particular geographic area. By carefully tracking what promotions and what merchandise have attracted which customers, you are better able to deal with the subgroups’ preferences.

What about demand among some subgroups for SKUs unpopular with most of the customer base? If you want to serve these customers, you can keep the ROI on these SKUs sufficiently high by limiting the dollars tied up in them. If that level of inventory is insufficient to generate significant sales and achieve a high ROI, you probably shouldn’t be serving those customers with that merchandise. For example, we worked with a jeweler who tried offering a radical designer collection. Alas, the line was a flop. Most of her customers considered it too avant-garde. A very small subsegment found the pieces attractive, but their purchases could not support an inventory of more than two or three pieces. When she pared down to this level, the merchandise was lost in the showcase. Customers originally interested in the line were disappointed by the lack of depth, further depressing sales.

Identifying the best prospects: Focus your research to identify those characteristics that differentiate heavy buyers from light or non-buyers. Why not just look at the characteristics of heavy buyers? Suppose 75% of the customers in your top quartile (in terms of sales) live in a specific three-digit ZIP code area, but about the same percentage of the bottom quartile live in the same area. This implies that geographic location is not an important factor. On the other hand, suppose that 70% of the top spenders are men, while only 25% of the bottom group are men. This suggests your marketing efforts should be geared to men rather than women.

How do you identify these differentiating variables? Sort your customers according to cumulative sales and gross profit over time. Segregate the top quartile from the bottom quartile. Look for differences in the two groups based on all data you have on file, such as geography, gender, type of credit card used, source code, etc.

You also can append demographic and psychographic information to customer records to identify additional differences between heavy and light buyers. How can you get that information? Try these methods:

1. Survey your customer base, perhaps through mail questionnaires. Ask for data on hobbies, preferred magazines, newspapers, number and age of children, etc. Questions should be relevant to helping you distinguish the variables that identify other folks who look like your better accounts. If you learn that your heavy buyers tend, disproportionately, to be readers of travel magazines, you might advertise in these or rent their subscription lists for a direct mail campaign.

2. You can overlay data from outside databases onto your customer files. There are list compilers who collect information ranging from estimated household income and value of home to the number and age of children and automobile data for millions of individuals. You send the list compilers a tape of your customers and they match those names against their database files. When they find a match, they append data to your files. Match rates vary, so you can never get information on 100% of your accounts. However, 50% or 60% is a good starting point for prospecting purposes.

Focus your marketing to reach prospects who look most like your best accounts. If lists are available that can be sorted on your desired criteria, you can take a very targeted approach, as with a direct mail campaign. Sometimes relevant lists are not available or they are too small to meet your growth goals. For example, you identify your best prospects as Jewish female bowlers with a keen fashion sense who wear petite sizes. It may be difficult to find prospects lists that yield customers with these traits. In such cases, you may want to advertise in media that tend to be read by your target audience. Prospects may then identify themselves.

Communication through catalogs: The bad news is that catalog start-ups generally lose money until they build up a critical mass of buyers. The good news is that jewelry retailers who decide to use them as an additional tactical weapon have an advantage in that they already have an established customer base. Offering these customers a catalog may stimulate incremental purchases. Many will continue to buy in-store rather than by mail or by phone. But because they received the catalog, they are presold and thus require less salesperson’s time to complete the transaction.

Depending on the size and responsiveness of your house file (that is, existing customers), you may find you can more than cover the fixed costs of creating a catalog. Then you can do prospecting for new accounts and your incremental cost is only the marginal printing and postage expense (see tables below).

Here are a set of assumptions for producing a catalog just for your house file:

Number of customers on your house file	70,000
Marketing cost for 70,000 catalogs (including creative, production, mailing)	$150,000
Average cost per catalog	$2.14
Gross Margin	50%
Break-even to cover catalog marketing expenses	$300,000
Average catalog order from house file	$250
Number of catalog orders required to break-even ($300,000/$250)	1200
Break-even response rate (1,200/70,000)	1.7%

Now let’s look at the incremental cost to produce an additional 100,000 catalogs for prospecting purposes:

Incremental marketing cost of 100,000 more catalogs	100,000
Incremental cost per catalog	$1.00
Break-even to cover marketing costs on prospection ($100,000/.50)	$200,000
Average catalog order from new accounts	$175
Catalog orders required to break-even on prospecting ($200,000/$175)	1,143
Break-even response rate (1,143/100,000)	1.1%

Of course, the marketing expenses of producing a catalog for your business will depend on:

• Number of pages.

• Quality of paper stock.

• Expenses for photography.

• Expenses for copywriting.

• Number of books printed.

• Postal discounts applicable.

Furthermore, you will need to factor in your fulfillment costs, such as:

• Additional staff required.

• Additional space required.

• Data processing expenses.

• Telephone expenses.

Your payoff will depend on the appeal of the catalog, the attractiveness of the merchandise and, most critically, your ability to find lists of customers and prospects amenable to your offer.

Prospecting is generally not very profitable if you evaluate it only on initial profitability from the first mailing. It looks much better if you factor in the likely stream of profits from repeat purchases by these new buyers. A rational decision regarding how much to spend on catalog marketing requires you to take into account future purchases from newly acquired accounts as well as their initial responses.

Communications credibility: Consider offering and promoting a money-back guarantee as part of your promotional mix. The more generous and the fewer strings attached the better. Before you offer a generous guarantee, however, you need to work through some financial scenarios that assume different return rates.

Why does this work?It’s not because customers really like the idea of using your merchandise and then returning it. It’s because the guarantee adds credibility to your sale announcement. Customers figure that if you’re willing to provide such a generous guarantee, your prices and quality must really be very competitive.

Choose allies wisely: One of the fashionable concepts among business strategy theorists these days is the notion of forming alliances with partner firms that will help themselves by helping your firm to grow. Often this translates into dealing with fewer vendors of products and services, thus giving each one a greater stake in your business’ success. Accepting the suggestions in this article will lead you to develop working relationships with three types of vendors that retail jewelers may not have cultivated in the past. They are:

1. Innovative product manufacturers. Those who continuously come up with new designs and/or new manufacturing methods to improve quality or lower cost provide a method of differentiating your store from competitors’.

2. Software vendors who have developed database programs that allow the jeweler to capture some of the data needed to implement the ideas described above. Some programs are quite good at organizing inventory-related data, but most need extra custom programming to capture and manipulate important marketing data (e.g., source and conversion codes). Before you select a software vendor, you need to understand thoroughly what managerial purposes it will serve. If you want to implement some of the ideas described in this article, make sure the software you are considering can store the necessary data and that it allows you to create needed management reports. Remember that these programs help you to collect and organize your data — they do not tell you what to do with it. If you don’t know what to do with the information, all the fancy hardware and software won’t do you a bit of good.

3. Liquidators can act as the buyer of last resort when you have allowed merchandise to sit too long. You may be better off unloading old goods through a liquidator rather than waiting for a retail customer to take the goods off your hands at a higher price. How do you know when to sell through a liquidator? The trick is developing management systems that let you estimate the likelihood of selling the piece through other means. Liquidators could increase their market (and image) by sponsoring seminars to help retailers figure out how the value of their inventory diminishes as it ages. The point is to help retailers understand when much more money could be made by quickly taking their lumps on old goods and reinvesting the proceeds in new merchandise.

Closing: Personal computer technology has put the smaller jewelry retailer in a good position to use database software to better balance the inventory the customer wants with the profitability the retailer requires and to track the effectiveness of each element in the marketing mix.

Consider this article impetus for trying out some things, maybe on a limited basis, until you find out what works for you. Between these tactics and an old-fashioned approach to service, you can bring your business to a new level.