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Catalog Churn: Replenish Unproductive SKUs & Hit GMV Targets

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In my conversations with C-suite retail executives, I’m often asked:

How do I build a believable business case for dropship?

Most retailers measure the health of their assortment with SKU productivity. However, we think that measuring SKU productivity alone only gets you so far. After all, a planned SKU productivity target often doesn’t align with reality.

In this article, I’ll share a concept that we’ve devised to help retailers achieve more accuracy in their assortment performance. We call it catalog churn.

Catalog churn measures the replenishment velocity of unproductive SKUs in a retailer’s dropship or curated marketplace assortment.

Catalog churn is the path to the promised land: GMV. 

Why SKU productivity isn’t enough 

To explain catalog churn, you need to understand the components of a typical board-level business case for starting a new dropship program or investing in a curated marketplace platform. There’s just two components to the business case. Your calculation can get fancy, but your math will ultimately boil down to the following:

SKU Productivity ($) x SKU Count Target = GMV ($)

SKU Productivity: The minimum amount of GMV needed per SKU that you merchandise online. Varies by category and subcategory.

SKU Count Target: The maximum number of SKUs you’ll curate and merchandise into your virtual shelf space in a given category.  

Let’s say you want to launch a kids and baby category. At maturity, your GMV target might be based on the following: 

$2500/SKU/month x 1,000 SKUs = $2.5M/month

$2.5M/month x 12 months = $30M/year

Repeat this formula for each category and sum up the GMV totals. Every retailer and marketplace will have a master spreadsheet that looks exactly like this one, filled with assumptions about what’s possible.

Easy, right?

Not exactly.

The hard truth about SKU productivity is that it’s merely a guess that you are ultimately accountable for. But without a target, you won’t make progress. So, how do you aim at something worthwhile and factor in the inevitability that only some of your virtual SKUs will cross the SKU productivity threshold?

Your alternatives are:

  • Do nothing.
  • Lower your standards for SKU productivity.
  • Implement Catalog Churn.

Do nothing means not hitting targets. You’ll be stuck with inventory that won’t sell.

Lowering your standards means failing to meet your potential.

Enter Catalog Churn.

How catalog churn complements SKU productivity

When SKUs get merchandised that don’t meet the productivity threshold, cycle them out and merchandise new ones. Do not lower your productivity threshold. That’s admitting defeat. Instead, remove the unproductive SKU and replace it (quickly) with a new SKU.

Catalog churn is the time it takes for you to replace your unproductive SKU with a new SKU.

A retailer’s ability to conduct Catalog Churn rapidly will determine whether they hit their plan or not. Monthly cycles are rare. You should aspire to weekly churn cycles, creating a machine that cycles out unproductive SKUs and cycles in new ones.

Catalog Churn is self-imposed entropy. You are creating room on your virtual shelf for a SKU that will hopefully ultimately perform at the level you expect. Nobody has a crystal ball, so the only way to assess productivity is to test and learn new SKUs and let customers vote with their wallets.

Catalog churn is the time it takes for you to replace your unproductive SKU with a new SKU.

The hard truth retailers must accept is that not all SKUs will be productive. Some will fail. Customers won’t buy it. You’ll lose money on ad spend. Expect this to happen. The most important factor to iterating your way to GMV growth is how quickly you can turnover unproductive SKUs. 

How to implement catalog churn

When your board asks you to defend your model, you can explain the term Catalog Churn and articulate a process for implementing it.

Here are the steps:

#1. People

Ensure that measuring SKU productivity and catalog churn are written into the job description of your vendor manager, category merchants, or ecommerce manager. Reinforce the idea that low performing SKUs are a fact of life. Do not waiver on your SKU productivity target; instead, reinforce speed of SKU replenishment.

Set milestones for replenishment, and document every step and bottleneck in the process of onboarding a new vendor and SKU quickly. Merchandisers who have existed in a wholesale/in-line business model will struggle to implement this idea, because items purchase in bulk often take time to turnover, so there’s less urgency to replenish new SKUs.

Catalog churn is to dropship what inventory turnover is to wholesale.

In wholesale, the most valuable retailers by market capitalization also turn inventory at the most frequent rate. Costco famously turns inventory 12.1 times per year (slightly better than monthly).

Source

In dropship, the most valuable retailers by market capitalization churn their catalog more frequently, often daily (e.g. Shein, Chewy, Amazon). The good news is that once your team is thinking in these terms, you can anchor them in service of the next incremental milestone (monthly, then weekly, and so on).

Catalog churn is to dropship what inventory turnover is to wholesale.

#2. Process

There are a few components to measure.

Vendor Pipeline: Build a growing pipeline of new vendors whose catalogs can be staged into your PIM or ecommerce platform seamlessly. Get vendors through your sourcing process quickly, require standard category-specific margins, and simplify your dropship legal agreement. The legal agreement is critical. We have taken legal agreements down from 140 pages or to 5 pages. A vendor shouldn’t require a law degree to onboard with you. 

Time to Onboard: Measure the time it takes to onboard a new vendor. This is usually the bottleneck in launching and scaling a dropship or curated marketplace program. Without the right platform (see below), there will be many steps in a vendor’s onboarding process that require manual intervention. Minimize the number of interventions needed by making vendor onboarding completely self-serve.

Time to First Order: Measure the time it takes to receive the first order once a new SKU is lit up online. This will tell you roughly how long it will take for marketing to produce GMV from the fresh SKU. You can then account for any time delays in your monthly or weekly catalog churn exercise.

Next, set up internal reporting for SKU productivity and assess them with your team. You’ll begin to see certain SKUs vastly outpacing others. At a certain point of maturity, you’ll notice unproductive SKUs before the monthly or weekly mark. Catalog churn those duds and replenish with winners. 

#3: Platform

This is the multiplier.

If you pick the wrong platform, you are most likely doomed on your board-level plan.

Pick the right platform and you can then implement the people and process tactics mentioned above.

Ask the dropship platforms or curated marketplace platforms that you are meeting with to walk you through the process of onboarding a vendor and getting product information validated into your taxonomy. If in your qualification you don’t see a path to replenishing SKUs in less than a month, move on to a more modern platform that’s built to onboard vendors quickly.

With Convictional, we’re replenishing SKUs from new vendors in under 5 days. 5 days from the initial handshake with a new vendor, signed legal agreement, onboarding, integration, merchandised SKU, and first order. 

Features like our New Products Notifications enable you to replenish SKUs from your vendors faster.

Execute your catalog churn plan with Convictional

Catalog churn is the only way to meeting your GMV goals for your dropship program. SKUs will naturally entropy — some faster than others. Run towards this inevitability and be the hero to your board 12 months after you’ve launched your brand new dropship program.

At Convictional, we have sophisticated ways of estimating SKU productivity and backing out the catalog churn plan. If you’d like to walk through it, send me an email: chris@convictional.com

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