Whether it’s a $20,000 fur scarf, a high-end gaming PC, a superbly crafted tool, or an Oxford cloth shirt, the key to success in performance marketing is offering the right products to your customers.

While it is the role of your marketing staff to establish a customer profile, it is the function of the merchandiser to translate that profile into a customer lifestyle and to select merchandise that fills the needs of that lifestyle.

To assure appeal to your customer base and the profitability of your ecommerce, it is essential to establish a comprehensive merchandise strategy and an organized buying plan. This article will detail a procedure for developing such an ecommerce merchandise strategy. It also will review several key decisions confronting the merchandiser in selecting items to sell online.

Planning the Best Products to Sell

The key objective of strategic planning for a performance marketing vehicle is to establish a productive product mix.

Your offer must be consistent with the strategy of your company (especially if you have retail stores or the ecommerce site is only a part of it) and still accomplish the objectives of a performance marketing-based ecommerce site.

It must have the potential to appeal to a sizable portion of nationally or internationally established target audience and to generate enough sales to make your online store profitable.

When you follow these three steps in the development of a strategic merchandise plan you will get a strategic list of products to sell online.

Step One: Gross Margin Review

The first step is to measure the past performance of your merchandise categories for a given medium. Your first criterion for the review would be the gross demand in dollars generated by a category of merchandise. Table below illustrates a gross demand analysis.

Product Category	# of Clicks	% of Clicks	Total $	% of $	Productivity Factor
A	90,000	26%	$228,352	32%	1.23
B	52,500	15%	$149,825	21%	1.40
C	65,000	18%	$136,665	19%	1.06
D	52,500	15%	$110,497	16%	1.07
E	20,000	6%	$18,062	3%	0.50
F	60,000	17%	$46,844	7%	0.41
G	10,000	3%	$14,130	2%	0.67
	350,000	100%	$704,375	100%

The key indicator in this analysis is the productivity factor – a ratio of the total clicks to the total dollars generated by a category of merchandise. For instance, if the percentage of traffic used up by a merchandise classification is equal to the percentage of dollars generated by that classification, the productivity factor is 1.00.

This is a basis upon which to initiate the plan for your coming planning period. Although it is only an indicator, a traffic-to-dollars analysis will help you pinpoint obvious problem areas and prompts an in-depth study of individual categories with respect to actual results.

Using the analysis, you must review the following areas closely for their impact on gross demand.

Average Price Point Offered / Sold

In reviewing a product category, it is important that you compare the average price point that was offered within the classification to the average basket actually purchased by the customer. If the average basket sold is lower than offered, it indicates the price points for the category were too high.

This is particularly true if your productivity factor fell below 1.00. Should the average basket sold be the same or higher than offered, the range of price points should be reviewed for possible expansion of the merchandise mix.

You should review inflation and current market trends prior to planning both average price point and price point ranges for your future offerings. You should incorporate any changes you anticipated into the planned gross sales dollars for the coming planning period (e.g., a season).

Density Factor

The density factor, or number of items offered per each promotional medium (e.g., your email newsletters, Facebook special promos, recommendations on-site, home page space, etc.), has far-reaching repercussions on all aspects of your performance marketing effort.

It is critical that your merchandising department be aware of the density assumptions made by your marketing staff when planning the gross demand dollars for planned campaigns. Some merchandisers wrongly assume the amount of space given to an item is directly related to the potential sales volume of that item. However, if the density factor is substantially reduced, it is likely that the online store’s total gross sales will be reduced accordingly.

The density factor affects inventory strategies. Increasing or decreasing the density factor directly affects the total gross dollars invested in the initial inventory commitment.

The density of items within a merchandise category is also a factor to be considered in the development of a strategic merchandise plan. The coverage of a particular classification within your merchandise mix must offer the customer a reasonable selection of styles and price points while not reaching the point of diminishing returns.

If you offer too many items in a category, your item productivity is likely to drop. In contrast, there are times when an increase in the density of a category is indicated (unless you can sustain long-tail strategy including SEO and price comparison website-based tactics). If the productivity factor of the category was substantially above 1.00, an expansion of the category should be considered. Increasing the number of items in each category can reflect current trends in the market and can help you to create a fashion statement of your ecommerce site.

Step Two: Profit and Loss Statement

Having reviewed the gross demand for each category, it is essential that you study the profitability of the individual classifications. A profit and loss statement should be done for each classification using actual results from the prior planning period or “season”. Table below is a sample statement.

Gross Sale Dollars Return / Cancellation Dollars	$500,000	$ (75,000)
Net Sale Dollars Net Cost of Goods	$125,000	$ (200,000)
Gross Margin Dollars Operating Expense (incl. back order and cancellation expense) Creative Expense General Expense	$225,000	$ (110,000) $ (50,000) $ (25,000)
	$40,000

Several key factors in the profit and loss statement should be reviewed for each category of merchandise.

Return Percentages

Some categories within the product mix historically run high return percentages, and it is important to plan your inventory accordingly. Particularly within the apparel categories there are wide variations in return percentages.

For example, more moderately priced blouses, sweaters, and knits average 13% to 15%, whereas for suits and dresses a 30% to 35% return rate is not unusual. The handling and processing of these returns have a direct impact on operating expenses incurred; the effect on the net sales demand is obvious.

Generally, the percentage of return will be directly affected by price point range. Within a category of merchandise, your items at the upper end of the price point spectrum will run a higher return rate. (This should be taken into account if a price point expansion within a merchandise classification is being planned for the coming season.)

Cancellation Percentages

When planning the product mix, or the list of your best products to sell, you have to review the historic cancellation percentage for a given category of merchandise and the ramifications for the bottom line.

The potential cancellation percentage can be affected by the following:

• Uniqueness and exclusivity of the merchandise you offer.
• Resource structure of your merchandise mix.
• Timing of the campaign offering.

Initial Margin

When you weigh the mix of product classifications in the merchandise mix, it is important that you review the anticipated initial margin and the subsequent effect on the gross margin. Particularly in categories such as home furnishings and cosmetics, the margin can be several percentage points below clothes.

You should complete a comparative study of the profit and loss statement and the gross demand results prior to the development of your strategic ecommerce merchandise plan. It is possible that a classification that has strong gross demand results is a potentially poor profit contributor.

Step Three: Develop a Plan for a Profitable Ecommerce Product Mix

The final step is to develop a strategic ecommerce merchandise outline that will become a guide for the selection of individual items in the market.

It is your ability to interpret previous experiences into current market trends that is most crucial to the formulation of an effective buying strategy. However, to be too much influenced by the trends and results of last year can be dangerous. You must act upon current developments in the market, anticipating what is right for your customer now rather than reacting to results of last year.

Deciding What Products to Buy: Hard Choices in the Marketplace

Your merchandiser makes several major choices in structuring the ecommerce merchandise mix. Again, the established target audience and the customer’s motivation for purchasing must be the foremost considerations when reviewing merchandise options in the market.

Selling Branded Merchandise Online – Advantages

There are certain distinct advantages to the purchase of branded merchandise for resale through ecommerce and performance marketing efforts.

1. The brand helps customers identify with the quality of a garment and, perhaps even more important for ecommerce customers, it helps them identify with the sizing. Size identification in name brands can result in substantially reduced return percentages.
2. Most branded lines offer a fairly extensive product selection each season with considerable depth of color, style, and fabrics. This allows you to review the fashion statement being made by the resource. By the purchase of select items, you can edit the line for a specific customer group.
3. Often a resource’s interpretation of fashion trends or the “look” of a resource can reflect the lifestyle of the target audience. The brand then develops as a tremendous selling feature, and consideration can be given to expansion of the line in other media.
4. There is a continuity of goods purchased from a branded manufacturer. Usually, a line will open for the season and will be shipped during a two- to four-month period, allowing for possible reorders after your marketing efforts start. This not only results in better fulfillment percentages and customer service, but also permits a smaller initial inventory commitment.
5. One of the biggest advantages to be considered when purchasing branded merchandise is the potential to take advantage of vendor cooperative advertising. This is a payment made by the vendor in return for promoting his name in your marketing copy. The cooperative advertising fee is determined in several ways.

Cooperative Advertising in Ecommerce

• A set percentage, generally 2% to 5% of all net purchases made by a company from a particular season to service the needs of your promotional efforts. No commitment is made by the merchant to the resource for an allotted percentage of email campaigns, etc. Payment is made by either deducting the percentage from each invoice or as a lump sum payment at the end of a season. This is probably the most common method and perhaps the fairest method of cooperative advertising.
• The vendor contributes a flat fee to participate in the ecommerce promotions. The amount of the fee is usually several thousand dollars, and no commitment is made by the merchandiser for allotted clicks, views, or space in email newsletters.
• The third method is to charge the resource the actual cost, or a percentage of the actual cost, of each promotion in paid and owned media, including creative and production costs. This is like the procedure in retail advertising, and the resource is guaranteed an allotted percentage of emails, Facebook ad exposure, web pushes, package inserts, etc. As this is the most expensive form of cooperative advertising, the resource will often request a particular placement within the online store or its email newsletters, such as the opening slider on the home page, email topics, or upper-most position in the newsletter. In some instances, a designer resource may request creative approval of the photo and copy to be used.

For the ecommerce company the positive financial effect of cooperative advertising is obvious, but there are advantages for the partnering company as well. The vendor gains exposure of his merchandise to a large customer audience.

More important, the merchandiser will have selected that part of the line which best suits the target audience, and that merchandise will be accessorized and photographed in such a way as to be most appealing to that audience.

A secondary advantage for the partner is the exposure to other merchandisers who often investigate promotional pieces of other ecoms to look for new resources.

Selling Branded Merchandise Online – Disadvantages

Although the use of branded merchandise can offer the merchandiser many advantages, you must consider some disadvantages.

• The single biggest disadvantage in extensive use of branded merchandise is that you cannot offer a unique product to your customer. Competition is likely to be strong, not only from other ecommerce offerings, but also from retail stores. It is also likely that, in most instances, the offering of a brand name by an online store will be narrower than the selection offered in a retail store or super large ecommerce marketplaces such as Amazon.
• In recent years there has been a tremendous move toward the discounting of name brands, and a change is apparent in customers’ attitudes toward discount purchasing. It has become fashionable to “bargain hunt.” This presents all performance marketers, such as yourself, who have no flexibility to adjust price once a campaign has dropped, with a potential disadvantage.

Selling Private Label Merchandise Online

Few large ecommerce companies have not dabbled in producing private label merchandise in recent years. The anticipated advantages seem on the surface to outweigh the disadvantages, but private label merchandising should be handled with care.

You should examine the following elements before committing to a private label program:

1. Your Customer. As always, the question, “Who are your customers and what motivates them to purchase?” is critical to the decision to establish a private label program. The most important question to ask is, “Will my name as a private label mean something to my customer?”
2. Inventory Management. Is there enough volume potential in individual styles to support the larger quantities (often 600-1,200 pieces) needed to establish a private label item? Even more important, can these items in your merchandise mix be identified?
3. Inventory Commitment. Is there enough flexibility in the open-to-buy to accommodate bringing substantial quantities of goods in at one time, as opposed to spreading the commitment into one initial purchase and one or two reorders?
4. Merchandise Mix. How would private label items fit into the current merchandise mix, and what percentage would they be in the total mix? What effect would the program have on the current average basket price? For example: Is your motivation for development of a private label program the desire for a better quality product at the same price, or is it to maintain the quality of an item at a lower price? These factors have direct effects on the gross demand figure projected for a given category of merchandise. The loss of dollars resulting from lower unit prices is not always balanced by increased units sold at the lower price.
5. Profit. Although your initial margin usually is higher for a private label purchase than for branded merchandise, the effect on the gross margin can have the opposite result. Why? First, it is important to consider that private label merchandise is often purchased net, and the standard term discounts cannot be taken. Second, no advertising dollars are contributed by the vendor. Particularly in the case of a brick-and-mortar retailer in the ecommerce business, the cost of promoting the item online is often loaded against the department’s gross margin.

Selling Exclusive Items Online – Advantages

Exclusivity is probably the most sought after, and at the same time the most misused, term in ecommerce. It is obviously a tremendous advantage to be able to offer your customers unique products. Exclusivity also provides these benefits:

• It eliminates any split in customer demand due to multiple offerings in several ecommerce sites. This is a particular advantage today, given the proliferation of online stores and the Facebook- and Google-based, auto-targeted ad campaigns dedicated to ecommerce items within distinct categories.
• The lack of possible price competition often allows the merchandiser to add a percentage point or two onto the initial margin, making the item potentially more profitable.
• Should the demand be excessive and result in a higher-than-normal backorder file, the risk of resulting cancellations is somewhat reduced as the customer has no opportunity to purchase the product elsewhere.

There are, however, substantial risks to be considered and weighed against the advantages of exclusivity.

Selling Exclusive Items Online – Disadvantages

The single biggest danger is poor customer service due to a lack of item continuity. Continuity is defined as the ability to acquire additional goods in the market should customer demand exceed initial expectations. Exclusive items are not supported by a resource’s open stock. The resulting inability to reorder merchandise leads to a poor fulfillment percentage and disappointed customers.

It is also important to consider the definition of exclusivity. Often the desire of both the merchandiser and the resource to call an item exclusive has led to abuse of the term. Changing a pocket detail or a sleeve treatment is not a legitimate reason for calling an item exclusive.

An item is not truly exclusive if it is not in another ecommerce site but is available through retail stores, or if it is distributed by a business in a confined geographic location.

Exclusivity is not always synonymous with a company’s private label. Certain basic styles of Oxford cloth shirts and Shetland sweaters are not exclusive simply because they have not been purchased from a branded resource.

Summary

1. The development of a productive product mix for an ecommerce offering requires a complex merchandise strategy.
2. The selection of products to generate the required response from the target customer group is only the final step in achieving the merchandise objectives of a performance marketing organization. The item for your customer must be purchased from the right company, at the right price, at the right time and in the correct quantity.
3. It is important to remember that the selection of merchandise requires the spontaneity and flexibility to incorporate current market trends successfully into the product mix.
4. The past product sales experience of the organization and its strategic goals to achieve a target gross demand figure profitably must all be calculated in formulating the master merchandise strategy that the buyer will use as a guide in the selection of individual items in the marketplace.