Product Selection and Merchandising: The Blackjack Analogy

I guess this is a little incestuous, but the idea for this column came from reading Sharon Harrison’s “Ten Shops, One Question” in the June issue of this prestigious rag. The question was “What type of bearings are skaters in your shop buying?”

What struck me was how each retailer had similar, but different answers. It made me think about how they selected and presented skate products in their shops. If you read between the lines of that article, there were, I thought, some lessons and ideas that could be generalized for decks, shoes, wheels, trucks and clothing as well as bearings.
What They Said
“It’s the brand.” It’s the price” (low or high). “It’s the packaging.” “It’s the ABEC rating.” “It’s our service and reputation.”
Obviously, there are some customers who want the lowest price. Period. Some just want the cool package. For quite a few, it’s the brand that dominates the purchase decision. 
But there’s a lot of ambiguity, and purchasers often fall within those extremes. They’d like a certain brand, as long as it’s not too expensive. They want to keep the package, so they’ll pay a bit more. They got to have what their friends’ have- unless you’re out of that in which case you can probably transition them to another product.
About a hundred years ago, in the first marketing book I ever read, a guy named Kotler introduced me to the concept of the four Ps in marketing; product, price, place, promotion. In traditional marketing at least, they are the cornerstone of how you sell any product. And you’ll notice they correspond pretty well to what retailers said motivates buyers of skateboard bearings.
I never miss an opportunity to remind us all, including me, that we may all love skateboarding, but from a business perspective it’s, well, just business. At its core, the process of choosing, pricing, merchandising and selling the product is the same as in every other business. Enthusiasm and commitment is part of business success, but so is realism and objectivity. We can’t just believe what we would like to be true.
But I digress. I know (hope?) there was a point I was trying to make. Maybe if I keep writing it will come back to me.
Ambiguity- How To Utilize and Minimize It
There’s good news and there’s bad news. There always is. On the one hand, you know your customers’ basic motivations. You understand in a general sense why they buy what they buy. On the other hand, for the individual customer, those motivations are often pliable depending on the choices presented to them at a given moment. If you understand your customer you can help them make good choices. I almost used the word “manipulate,” but that has a nasty connotation to it. I’m suggesting you can support the customer in making decisions that are good for him and for you. That’s not a bad definition of successful retailing.
Casinos love people who play blackjack but know nothing about the odds. They make a whole lot of money from that kind of person. That’s why they give you free drinks. They also like, though not as well, the person who is sophisticated enough to more or less play the so-called “neutral strategy.” The casino will consistently win around one and a half percent from that person.
They hate the card counter. She will minimize her risk and make big bets at the right time and, over the long run, take money from the casino. She won’t win all the time. She may not even win half of the time. But when she does win, it will tend to be big, and that can make up for a lot of small losses. She doesn’t have perfect information. But she has the best information she can get and uses it to control how she plays. That’s not a bad strategy in the stock market either.
I want to suggest you can use a similar strategy in skate retailing.
The ambiguity of customer motivations isn’t a hell of a lot different from the ambiguity of how the cards will come out in blackjack- even when you’re counting. A single blackjack hand is a statistical, probabilistic result. A single customer’s decision is not. But a lot of customer decisions, taken as a group, are.
What’s the goal of blackjack? Easy- to make money. Right? I can’t argue with that, but I’d point out that setting a goal of making money doesn’t tell you what to do or how to go about it. If you set a goal of making your bets according to the count of the cards, you will make money in blackjack.
In retailing, the goal of making money suffers from the same shortcoming- it doesn’t tell you what to do. Every time I look at a retail situation, I end up suggesting a focus on the same two goals:
1.    Get the customer to come back.
2.    Maximize your gross profit dollars.
By doing these two things, you maximize your chance of making money.   
Gross Profit Dollars
Where do your earn the most gross profit dollars by percentage and total dollars by product category and by brand? Do you communicate that to everybody who works in your shop? Do you make your purchasing decisions with that information in your hand?
Yeah, yeah, I know- “Well, we make most of our money on shoes and clothing.” That is not an acceptable answer. Neither is:
  • “Hey, I’ve been in this business a long time and have a good gut for it.”
  • “We just buy what the customer wants.”
  • “We don’t have the system to track that.”
  • Etc., etc., etc.
That’s all a bunch of fatuous blather and if you’re taking anything other than a quantitatively rigorous approach to figuring out where you make your gross margin dollars, you’re no different from the guy who sits down at the blackjack table in Vegas with no knowledge of the odds, has five drinks and bets in the dark. You may have fun, but it’s not likely to last for long.
Getting Customers Back
I don’t get into enough shops, but I have never gone into one and gotten a good answer to, “What factors are most important to your customers in making their buying decisions?” Everybody names all the same factors, but nobody can rank or quantify them in a valid way. What I’m always hoping for is “Well, we don’t talk to every customer, of course, but the data base of responses we’ve kept tells us that 32% come in here because they know us and we’re conveniently located. 27% know us as a shop that has the brands they want and the rest are guys trying to pick up the cute girl we’ve got on the floor.”
Why haven’t I ever gotten an answer like that? Because nobody asks their customers in a systematic way and tracks the answers. The more customers you ask the more valid the responses become. To go back to the blackjack analogy one more time, it’s a lot like a card counter that doesn’t keep track of how many ten value cards are left in the deck. He has no idea how big a bet to place or when to place it.
Now we’re getting somewhere. It’s always nice when I’m writing one of these and that finally starts to happen. There you are sitting with concise information about where you get your gross margin dollars, and some solid insights into your customer’s motivations. What might you do with that information?
First, recognize that there’s some inevitable conflict between giving your customers what they want and maximizing your gross profit dollars, especially where there’s a lot of price sensitivity. Welcome to specialty retail, where your success as a shop will depend on your ability to position yourself and the brands you carry so that customers don’t just focus on price. 
Perhaps you’ll move some product around to highlight high margin, fast moving products. Are there brands being asked for you aren’t carrying? When you’ve been out of, say, a specific deck, has the customer bought something another one and does that tell you anything about how many brands you really need to carry? If you do a lose some sales because you don’t carry as many brands, but sell some higher margin stuff instead, are you better or worse off? Maybe you should forget all this and just hire more cute sales girls.
Let me share a little secret with you. What I’ve been trying to do with recent article is to help shop owners prepare themselves for a recession if it happens. Last issue, I think, I suggested a few steps you might take to prepare yourself for a slowdown that made good business sense even if one doesn’t happen. This article has a couple of more. As I write this, the Federal Reserve has come out with its “beige book-“ a regional anecdotal survey of economic conditions. Manufacturing is still suffering, but the gloom is spreading to other sectors. Consumer spending is looking like it might falter and the stock market shows no signs of reviving.
Nothing I’m suggesting is a bad idea even if skateboarding continues to boom. Try it- you’ll like it.