Don’t Be Fooled by the 80/20 Rule
by Curt Matthews
Hard-headed business people love to talk about the 80/20 rule: 80 percent of your sales usually come from 20 percent of your customers, or 20 percent of your products. It follows from this insight that serious players pay much more attention (mathematically, it should be four times as much attention) to the customers or products that produce the most sales. The real hard guys dump the low performers altogether.
Here at IPG/Trafalgar Square, we are pursuing a contrarian approach. It’s clear that we do a highly competent job with our high-profile products and customers. They, of course, command a great deal of our attention and effort and will continue to do so. But how well do we do with the low-profile products and customers? Such sales are costly to make. Wouldn’t both IPG and its distributed publishers be better off if we concentrated on the high-volume sales?
This approach might be right for widgets, but it is wrong for books, for two reasons.
The financial health of publishers depends heavily on selling out print runs. Titles must, if possible, be kept alive until the last copies go out the door. While an unsold copy might be a dead loss of its $2 production cost, that same copy sold might bring $8 back to its publisher—a swing of $10. Converting dead books into live ones can have a greater effect on a publisher’s bottom line than the continued sale of a strong title.
From the point of view of a distributor’s health, offering a title for sale is an expensive proposition. Books must be received into the warehouse, cataloged, and entered into many databases, and the sales and marketing staffs have to learn the title’s strengths and potential markets. If the costs of these activities cannot be spread over many units sold, any chance of profitability for the title is gone. For a distributor, as well as a publisher, converting dead stock into sold copies has a big effect on profitability.
The 1,2,3 Strategy
All this is fine in theory, but what can be done in practice? For IPG/Trafalgar, the answer is a three-step process.
The first step is to instill in the staff a certain attitude about what the business is really all about. Unit sales of trade books have apparently been essentially flat for a decade now. But niche publishing, and IPG along with it, has grown at a rate of about 25 percent a year. Small is beautiful if you really pay attention.
The next step is to have enough appropriate titles for many niche markets. IPG’s acquisition of Trafalgar Square has meant that there are now very few book customers so small or specialized that they are not worth a call from the IPG special-sales staff. We have many thousands of titles that have run their course in the bookstores but are alive and selling well in special markets.
The final step is the fierce application of technology. Marginal titles and customers really are more expensive and time consuming to handle than high-volume ones; but these costs can be radically reduced by applying the right software. Here are some of the techniques we are now using:
Producing instant catalogs. The IPG sales staff can filter the title database by subject to find an appropriate list of titles for any customer and produce a sophisticated four-color catalog with images, text, and reviews of those titles in about five minutes. We can efficiently produce only one copy of this catalog for a particular customer, or hundreds in the case of multiple customers working the same niche.
Gauging the need for reordering. IPG has a database that collects data on books actually sold to customers and books on hand from Barnes & Noble, Borders, Books-A-Million, Amazon, Baker & Taylor, and Ingram. A quite subtle algorithm searches this database to find titles whose sales performance indicates that an out-of-stock situation will occur in about two months, and also calculates the number of copies that should be restocked. It may be that only a handful of copies will be needed, but nonetheless IPG will order them, and sell them too.
Mining data. Here is the sort of query that can now be directed to the IPG database: Give me a list of titles first shipped more than three months ago that were bought by Barnes & Noble and have achieved a ratio of weekly sales to stock on hand grater than N but that are not stocked by Borders or if stocked have sales less than 50 percent of those enjoyed by Barnes & Noble. The list generated by this query can be used to remind the Borders buyers that they are missing sales on certain titles. (I don’t mean to pick on Borders here; every customer misses the boat on some titles.) Such queries are quick, highly efficient, and fine enough to capture the information needed to keep even low-profile titles selling.
More Pixels, More Profits
The apotheosis of the contrarian approach I have described occurred a couple of months ago. Amazon’s position now in regard to titles distributed by IPG or Trafalgar Square is that it wants to stock at least one copy of everything we have. Recently, we shipped Amazon about 22,000 single copies to top it up. What this means is that the Amazon Web site shows 24-hour order fulfillment times for all these titles, rather than the two- or three-week turn times indicated for nonstocked titles. The sale of these single-copy titles may average only 20 copies a year per title, but that amounts to a total of about $4 million a year of additional income for their publishers. A few titles, instead of selling 20 copies a year, have become quite strong backlist: they have been brought back from the dead.
The metaphor I like the best from the IT world is resolution: dots or lines or pixels per inch. If you can steadily crank up the resolution in your business—your ability to see in ever more fine-grained ways—surprising new patterns and opportunities come into focus.
Curt Matthews is the founder and CEO of Chicago Review Press, Incorporated, which is the parent company of Chicago Review Press and of Independent Publishers Group, the first and now the third-largest independent press distributor. He has served on the PMA board and also as the association’s president.