On Peas and Print Music Part 2

by Tim Cose, Hal Leoanrd CorporationTim Cose

The 70/30 Caveat

All that talk of Power Law, ratios, and consumer preference was a long way back to the most important thing to understand about the sales ratios represented in publisher’s sales graph (and many other nearly identical graphs not shown). At this leading songbook publisher, whose name we won’t mention, a relatively small number of causes (skus) account for a disproportionately large amount of the effects (sales). But, and this is a BIG but, that assumes they’re in stock.

Consider for a moment a situation with only 10 products. The top 3 products make up 70 percent of the sales for all 10. If we have an ideal supply of these products, 7 out of 10 sales in any given amount of time will be from the top 3. In the same amount of time, we will sell 3 of the other 7. Over the time it takes to sell the slowest item at least once, your sales might look something like this:

 

Sales Rank 1 2 3 4 5 6 7 8 9 10
Quantity Sold 159 86 70 58 33 19 11 8 5 1

 

That’s 450 units sold, as long as you have them in stock (unlimited/ideal supply). Here’s the exact same hypothetical products over the exact same period of time if you buy one of each:

 

Sales Rank 1 2 3 4 5 6 7 8 9 10
Quantity Sold 1 1 1 1 1 1 1 1 1 1

 

Clearly, a reordering strategy cannot be overlooked if your goal is to maximize your sales. Now the easiest answer is, of course, to reorder turning items in small quantities as frequently as is feasible. This does carry with it a certain amount of shipping and labor expenses, of course, but offers a tradeoff in less risk of large quantities or missed opportunities. For retailers that can strike a balance with the associated costs of shipping and receiving, this is a good way to build print sales without overmuch guesswork.

Please note: the graphs that follow are based on a cross-section of actual data from our mystery publisher and should be taken as representative of industry leading retailers who fit certain criteria as explained below. You’ll find strikingly similar results from each group surveyed, despite very different reordering strategies, customer bases, and even products.

Please further note: reading beyond this point may result in minds blown; continue at your own risk.

Disclaimer out of the way, here are sales ratios representative of a Small Brick and Mortar retailer who has found a good balance between frequency of ordering and the associated costs:

Peas and Print 3

The above strategy is as simple as placing frequent orders to fill special requests and replenish stock. The important, but not immediately obvious, concept here is the high opportunity cost associated with delaying an order in hope of a discount special or larger order down the road. In the meantime, you’re out of stock of your fastest selling items and missing your biggest revenue opportunities. The simple answer is of course to reorder what sells as often as is feasible, and it works pretty well for many retailers up to a certain scale.

A second rule of thumb strategy for reordering has been suggested by Alan Friedman at recent RPMDA conventions. Alan’s predictive approach requires more familiarity with one’s business and customers than simply reordering when a product is sold, but does pay dividends in potentially reducing costs and missed opportunities:

for x = days to turn and M = gross margin expressed as decimal (eg 40% = .4)

x = 360 days * M

For example, if we use a 40% margin in the equation above, we get x = 144 days (or just under 5 months). How many copies of book Y can you sell in 144 days? That’s how many you can safely order. The actual numerical answer for this snippet of algebra lies in your sales history and your familiarity with your customer demographics. Predict too high and you may feel an inventory crunch, predict too low and you’ll have to reorder; but when you predict just right, you optimize your shipping and processing costs and don’t miss sales due to lack of stock.

Implementing this type of reordering strategy requires good knowledge of your customer base and historical sales trends and it does imply a certain amount of risk, but the payoff is minimized overhead (and maximized profits). If you have on staff someone that can dedicate themselves to focusing on print music, 4 out of 5 CPAs agree that it’s a sound way to tackle reorders.

Here are sales ratios representative of this second type of reorderer:

Peas and Print 4

Although a retailer who fits the profile above orders very frequently, the product on these orders differs. This is due, in part, to special orders and, in part, to the vast number of skus for sale. The most popular products are ordered seldomly and in large quantities, but orders are still placed frequently in order to keep up with the Long Tail product selection that is so central to an identity as THE sheet music destination in a market.

Finally, I think it’s instructive to look at the sales ratios typical of online retail, not only because it provides such an insight into consumer demand (through virtually unlimited product selection), but also because the reordering strategy is often very different than that of a brick and mortar store:

Peas and Print 5

You’ll notice that even with an unlimited selection of products, universal reach via the internet, and everything in stock (at least from the consumer’s perspective), even an online retailer sees a sales ratio extremely similar to that of a brick and mortar store with good reordering habits. What’s more is that retailers from this particular cross-section follow a ‘just in time’ inventory model for a large portion of their products. That is, they do not order from the publisher until they receive an order from the consumer. This gives us an excellent indication of true consumer demand, as opposed to demand constrained by availability. Turns out, it’s a 70/30 relationship.

Aside from the varying strategies employed in the above examples, it should also be noted that the products themselves making up each of the profiles differ a great deal (as do the customers purchasing them). If you’re looking for a perfect silver bullet product, ‘Let It Go’ (see what I did there?). In print music, even moreso than many other parts of the music industry, what works for one retailer in terms of the product itself is not guaranteed to work for another. What does seem to remain consistent is a hierarchal ratio of quickly turning products as they relate to overall sales and the importance reordering plays in the process of maximizing their effect on your revenue.

In Conclusion: Three Thirds

One third of your inventory should account for two thirds of your sales. If a portion of your print music seems to be lagging behind the rest, don’t lose too much sleep over it. That’s how peas, and books, work. Put your focus into the portion of your inventory that is selling. What trends can you find? Which customers are buying it? Which customers are not buying it? Identifying your customers’ preferences is absolutely essential in deciding what new products are likely to become the next top third to make up two thirds of your sales.

Reinvent your inventory every three months (at least). The ‘next big thing’ is a moving target and, whether you realise it or not, your inventory screams how ‘with it’ your store is. Now more than ever, trends and perceptions are spread by advertising and shared by consumers at what seems like reckless speeds. Staying in touch with and reacting to these perceptions not only allows you to hone your product selection, it also improves the overall image of your store. Reinventing does not need to mean starting from scratch, but it should mean a concerted effort to liquidate the worst performers and replace them with products that reflect cultural and sales trends. The future ‘next big thing’ is somewhere out there.

Taking into account reasonable shipping costs, you can safely order a third of a year’s supply. Using Alan Friedman’s equation provided earlier, and what you know your typical print music margin to be, I’m sure you can see that a 120 days supply is a fairly safe reorder for print music. Planning your reordering in this way minimizes associated costs and protects you from running dry of the top third of skus that should be making up two thirds of sales. This does not mean ordering only once every 120 days; it means filling out weekly special orders to optimize shipping, constant communication with your publishers, and continued analysis of your inventory and reordering habits.

In conclusion, and in contradiction of much of what you just read, print music is not a numbers game. There are some fascinating mathematical gymnastics we can perform, but they amount to not much more than what may already be common sense. Nevertheless, just as finding the used and abused 80/20 rule of business to be rooted in real statistics may surprise you, so might the realization of the validity of doctrines like ‘make customers, not sales’ or ‘you can’t sell from an empty wagon’. Know your customers through your print sales, reflect their preferences in your print purchases, and don’t focus on how inventory moves into or out of the store, focus on how inventory moves through it.

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