Margin tells you what a product earns alone. Its role in repeat baskets tells you what it earns for the rest of the store.
The usual range review sorts products by margin or by sales and draws a line near the bottom. The products under the line go. Some of them deserve to. Others are the reason a group of customers keeps ordering, and their low margin is paid back many times in the rest of the basket.
Before a product is scored, name its role. Four numbers from Appendix A are enough: its repeat share, its reorder rate (the share of its buyers who buy it again), its dependents, and the contribution of the other items in its orders.
| Role | Looks like | Default decision |
|---|---|---|
| Anchor | High reorder rate, many dependents, big baskets around it | Keep, even at low margin; fix its cost |
| Entry | Mostly in first orders; its buyers go on to buy other things | Keep if its buyers come back; judge on what they buy next |
| Attachment | Rides along in baskets anchored by something else | Keep if it earns its own margin; bundle it if not |
| Duplicate | Its buyers also buy a near-identical sibling | Merge into the sibling, with notice to its few dependents |
| Dead weight | Few buyers, little repeat, nothing in its baskets | Cut, with a short version of the playbook |
The scorer adds a product’s basket role to its margin. It compares what the product earns on its own with what the store would lose without it: the other items in orders that wouldn’t happen, and the dependents who’d leave.
With the defaults, the product earns −$1,500 a year on its own margin after its carrying cost, and a margin-only review would cut it. But it sits in 1,500 orders a year whose other items bring $25 each; if a fifth of those orders wouldn’t happen without it, that’s $7,500. Its 150 dependents spend $60 a year on other products, and half would leave: $4,500. Counted properly, the store is $10,500 a year better off with it Derived.
The best-known range cut in consumer products came at Apple after Steve Jobs returned. Apple’s annual report for fiscal 1998 says the company simplified its line during the year, moving “from approximately 15 separate individual products to three main product families,” and discontinued its MessagePad and eMate lines. The company went from a net loss of $1,045 million in fiscal 1997 to net income of $309 million in fiscal 1998 Filed.
Don’t read too much into the second sentence: the turnaround had many causes, and a computer maker is not a replenishment brand. The lesson is in the first. Apple didn’t cut from the bottom of a margin ranking; it cut to a few products with distinct roles, so each customer could see which one was theirs. And the cut had casualties: the MessagePad, better known as the Newton, had devoted users. Every simplification creates dependents somewhere. The question is whether you know who they are.
Apple Computer, Inc., Form 10-K for the fiscal year ended September 25, 1998, filed with the SEC on December 23, 1998.
This is one chapter of The Catalog, which is free and readable in full on a single page with no form in front of it.