More On Abacus, Google, And Customer Biodiversity

Please click on the image to enlarge it.

One of the most popular pieces I've written this year was Tuesday's discussion about Abacus, Google, and Brand Implosion.

Almost nobody chose to leave a comment. But you're reading this article, you're forwarding this article to friends and co-worker. When you come to the site to read it, you're interacting with the site much more than usual.

Interest in the article made yesterday the busiest day on the blog in the past eight weeks.

Why is this article interesting to you, and why is the topic so divisive among the catalog marketing community?

Why is this topic of interest to me? To me, it all boils down to "customer biodiversity".

Online marketers excel at using customer biodiversity to their advantage. They drive traffic through a massive network of affiliates, often numbering in the thousands or more. Online marketers utilize portal advertising to reach larger audiences. Brilliant online marketers cultivate traffic through natural search, at close to no incremental cost. Most online marketers use paid search across hundreds, thousands or more keywords. All of this guarantees a diverse audience of potential and existing customers. Some strategies work, some fail. The marketer manages a complex ecosystem of marketing strategies and customers.

Retail marketing is all about a complex interaction between "who you hang out with" and "target customer demographics". Nothing happens when you put a physical presence in front of the wrong target demographic. The right demographics and the wrong shopping center or wrong set of competitors cause problems. Combine the right demographics, competitive biodiversity, and a modern shopping environment, and cash registers sing.

Catalog marketing, however, is being threatened by a lack of customer biodiversity. The entire left side of the diagram represents potential customer biodiversity for catalog marketers. In the past, the list broker was the gatekeeper of biodiversity. S/he managed hundreds of outside lists, s/he even fueled the growth of compiled lists because s/he wanted to do "what is right for the client". In the process of doing that, s/he ceded market share to the compiled lists. This hastened the decline of the list broker, and accelerated the rise of the compiled list vendor. In 1990, one list broker ensured customer biodiversity by simultaneously managing a hundred relationships with competitors. Today, the same service can be provided by one statistician creating a statistical model at a compiled list vendor.

There was a lot of discussion about postal rate increases at last week's catalog conference. Obviously, this is an important topic in the short term.

Long term, there must be a significantly increased focus on customer biodiversity. The success of a multichannel business is predicated on the ability of the retailer to align with the target customer across a wide variety of potential sources.

My experiences tell me I want to spread my marketing efforts across a thousand affiliates, several large portals, natural search, paid search focusing on several hundred or more keywords, e-mail marketing, RSS and applicable Web 2.0 marketing, several compiled lists, several dozen or more rented/exchanged catalog lists, catalog requests, and other prospect lists. This gives me a portfolio of opportunities to manage.

I do not want one statistician who knows nothing about my brand culling prospects out of a compiled list as my primary source of new customers. I'd love for this statistician to be a piece of the puzzle, not be the entire puzzle.

Your turn, what do you think?

A Forecasting Quiz

All right folks, here's your chance to shine!

Last year, you mailed a catalog to three of the five customer segments you manage. The results are listed in the table below:

Last Year's Catalog Performance
	Households	LY Catalog	LY Online	LY Totals
Customer Segment 1	50,000	$5.75	$4.25	$500,000
Customer Segment 2	60,000	$3.25	$3.75	$420,000
Customer Segment 3	75,000	$2.50	$3.25	$431,250
Customer Segment 4	110,000		$1.90	$209,000
Customer Segment 5	150,000		$1.65	$247,500
Mailed Totals	185,000	$3.62	$3.68	$1,351,250
Other Segments	260,000		$1.76	$456,500
Grand Totals	445,000			$1,807,750

In total, your customers spent $1.8 million dollars. As you can see, the fourth and fifth customer segments did not receive a catalog, and consequently, did not generate any telephone/catalog demand. Last year totals are calculated by multiplying households by the sum of catalog and online demand. For instance, in customer segment 1, total demand = 50,000 * ($5.75 + $4.25) = $500,000.

This year, you have a new forecast of households in each segment. In addition, your management team is allowing you to mail each of the five segments of customers.

The quiz: Tell our loyal readers how much demand, in total, you expect to occur by mailing all five customer segments. Explain your logic in the comments section of this post. Good luck!!

This Year's Projection
	Households	TY Catalog	TY Online	TY Totals
Customer Segment 1	62,000
Customer Segment 2	68,000
Customer Segment 3	79,000
Customer Segment 4	125,000
Customer Segment 5	195,000
Grand Totals	529,000

Abacus, Google, And Brand Implosion

Using Abacus for customer acquisition has always been a hotly debated topic in catalog marketing.

Many circulation experts have always enjoyed their relationship with their favorite list broker. It's fun to exchange 50,000 names with Talbots, to net out 24% and realize, by default, that you share the exact same customer as your competitor. It can be a rush to test a Crutchfield 0-3 month $100+ select, and see the list work. List rental, exchange and brokerage requires gut feel, instinct, business savvy, and negotiation skills.

Then along came Abacus. You dump your housefile into their database. You then have access to modeled prospect names for something like seven cents a name. You have no idea which names you're getting, you just know their model picked "good" names, names that have an "affinity" to your brand.

At first, big companies hated this idea --- why should a big company dump six million names into the compiled list, only to realize that sixty percent of the compiled list is your customer?

Once Abacus achieved scale, all contributors theoretically benefited. Another funny thing happened along the way. The performance of Abacus names rivaled that of rented/exchanged lists. Why go through the hassle of managing 73 different lists in a mailing, when Abacus can automate the process for you?

The evolution of catalog customer acquisition is driving companies toward Abacus, away from the good folks at Millard and Mokrynski.

Everything seems peachy.

Except for one person I recently spoke with. This person made an interesting observation. He told me that almost all of his customer acquisition is from Abacus. He told me that the performance of Abacus names continues to be good. But, his housefile names are not performing well anymore.

I asked this individual what his twelve month buyer annual repurchase rate was. The answer ... thirty percent.

Remember, this individual does almost all of his customer acquisition via Abacus.

So, two years ago, this individual had 100 buyers. 30% repurchase. This person has to recruit 70 new customers ... almost all from Abacus.

In year two, there are 30 existing buyers, and 70 from Abacus. 30% of each list repurchase. This leaves us with 9 existing buyers, 21 existing buyers from Abacus, and 70 new customers from Abacus.

Within two years, 91 of 100 customers are from Abacus. Obviously, some names come from other lists, or from lapsed buyers. So let's assume that just 75 are from Abacus, not 91.

Still, in just two years, 75% of the active housefile are Abacus-sourced buyers. And this individual points out that his housefile names aren't working well anymore.

If your annual repurchase rate is in "Acquisition Mode", under forty percent, and you do the vast majority of your customer acquisition work with Abacus, you've got an interesting dilemma. In just two years, the vast majority of your active housefile is sourced from Abacus.

Remember, this individual says his housefile names no longer work well. Hmmmmmmmm.

This isn't the fault of Abacus. They are simply providing a service that clients are willing to pay for.

No, this is the fault of circulation experts. It is our fault! We're doing this to ourselves. Not smart!

Our business models participate in a big ecosystem. Unwittingly, we are moving our ecosystem away from something we control, toward something we no longer control. In this example, Abacus now owns the brand I spoke of, with housefile productivity imploding as we speak. The success or failure of the brand is no longer in control of the merchants who pick great product. Instead, the brand depends upon the type of names that Abacus makes available for the client.


And all you online marketers, if you think you're immune to this, you're not. Where do you get all of your customers from? Google? Abacus is tiny. Google owns the world. Once we've saturated the online customer market, Google plays the role for online marketers that Abacus plays for catalog marketers today.

Multichannel CEOs and CMOs: If your annual repurchase rate is under forty percent, be wary of sourcing the majority of your new customers from one vendor. The dynamics of your housefile dictate that, within just two years, that vendor determines the fate of your brand, not the product/creative/service/brand strategies you initiate.

Give Me Someone To Believe In

Last week, Dell agreed to sell computers in Wal-Mart stores, even though management repeatedly assured us that they are a direct-to-consumer brand.

The punditocracy tells us we need to emulate Circuit City and their "Buy Online, Pickup In Store" multichannel program. Yet, Circuit City is fighting to stay in business, as sales sag. Weren't we told that multichannel customers were the best customers? If Circuit City provides a great multichannel experience, then why in the heck aren't they swimming in a pool of profit produced by a ton of multichannel customers, the most valuable of all customers?

Of course, Circuit City competes with the successful Best Buy chain of electronics stores. The punditocracy tells us we should emulate Best Buy's "Customer Centric" approach to store design. On the surface, that would seem like a good idea, because they're killing Circuit City. And yet, Best Buy is accused of allegedly implementing a "bait and switch" program, whereby customers saw one price online, then were shown a higher price in an in-store online version of the website. If this is true, how "Customer Centric" is that? And if the lawsuit is proven to not be valid, the small number of customers who received a higher price did not receive a "Customer Centric" experience, did they?

Dell, Circuit City and Best Buy are "brands" that have a veritable plethora of hard working, earnest employees, all trying to do what is best for their customers and shareholders.

Each week, the punditocracy tells us who we should emulate, and why. All too often, their logic is flawed. We shouldn't copy Dell and their direct-to-consumer model. We shouldn't copy Circuit City and their "Buy Online, Pickup In Stores" program. We shouldn't copy Best Buy and their "Customer Centric" approach.

Instead, believe in yourself, and do what is best for your "brand". Give me someone to believe in --- YOU!!!

How Much Do I Spend On Online/Catalog Advertising?

Lands' End was a fun place to work in the early 1990s. There were a lot of interesting minds, tossing around interesting ideas.

One of our debates was about the optimal level of advertising spend. One camp, led by our Circulation Director, believed that you circulate to an incremental 7% pre-tax level (prior to subtracting fixed costs). The theory was that the return on investment had to be sufficient to cover fixed costs ... that if you actually subtracted fixed costs from the equation, you were circulating to about break-even.

Another camp believed that you circulated to -5% pre-tax levels, because this way, you were capturing long-term profit that you were losing in the short term. At the end of five or ten years, your business was much bigger, because you acquired/reactivated a lot more customers than in the situation where you maximized short-term profit.

At Eddie Bauer, we circulated to break-even (prior to subtracting fixed costs), then shifted our strategy to invest to below break-even, in order to maximize the long term health of the business.

At Nordstrom, we tried our hardest to convince folks to invest in online marketing activities that maximized the long term health of the total business. We probably under-invested in the online channel, though we had the data to tell us what the 'right' thing was to do. The process of assigning a marketing budget did not provide us the flexibility to maximize the online channel (and ultimately, to grow store sales). This is a good lesson --- it doesn't matter what data you have, there are internal processes and existing cultures that simply cannot be changed.

In the past, we didn't have the right tools to understand the long-term impact of short-term advertising decisions. With Multichannel Forensics readily available these days, we can simulate different strategies, and identify the best long-term strategy.

I crafted an online/catalog business simulation, and ran three scenarios.

• Scenario #1 = Maximize profit each year.
• Scenario #2 = Maximize total profit over the course of five years.
• Scenario #3 = Maximize profit five years from now --- make that year as profitable as possible.

The table below show the results of the three simulations. All numbers are listed in millions:

Maximize Short-Term Profit
	Demand	Ad Spend	Profit
Year 1	$44.6	$5.6	$2.1
Year 2	$42.0	$5.2	$1.7
Year 3	$40.9	$5.1	$1.4
Year 4	$40.4	$5.0	$1.2
Year 5	$40.1	$4.8	$1.1
Totals	$208.0	$25.8	$7.4
Maximize Long-Term Profit
	Demand	Ad Spend	Profit
Year 1	$59.2	$9.9	$1.5
Year 2	$66.6	$11.0	$2.0
Year 3	$70.6	$11.6	$2.3
Year 4	$72.8	$12.0	$2.4
Year 5	$74.0	$12.2	$2.4
Totals	$343.2	$56.7	$10.6
Maximize Only 5th Year Profit
	Demand	Ad Spend	Profit
Year 1	$66.4	$12.5	$0.6
Year 2	$80.3	$14.9	$1.6
Year 3	$88.6	$16.3	$2.2
Year 4	$93.4	$17.1	$2.5
Year 5	$96.3	$17.6	$2.6
Totals	$425.0	$78.4	$9.5

Let's review each simulation.

In the first run, profit is maximized by year. Therefore, profit in the first year is $2.1 million. However, a much smaller business exists going into year two, with too few customers to generate large volumes of profit. Still, the management team tries to maximize profit in year two, then year three, year four, and year five. As a result, this business actually contracts. If we followed the rules of Wall St. (maximize short term profit), we may not protect the long term health of our business.

In the second case, online/catalog advertising spend is more than twice as much as in the first simulation. This means the business is more profitable in the long-term, and grows at a much faster rate.

In the third case, online/catalog advertising is fifty percent more than in the second case. This yields a marginally profitable business in year one, but in year five, the business is much larger, and more profitable.

For every online/catalog business, these scenarios can be easily created. The multichannel analyst provides management with three or more scenarios (as outlined above), and lets management determine the future trajectory of the business.

This is an important point --- abstract and geeky topics like lifetime value have little or no meaning to executives. Picking from one of three possible strategies is easy to do if you're an executive, and accomplishes the exact same thing as a geeky, technical lifetime value analysis.

Multichannel CEOs and CMOs: Simulations indicate that it is important to invest in unprofitable customer activities in the short term, in order to protect the long term health of your business. It is important not to focus on "this year". Where possible, invest in the short term, to protect the long term health of your business.

Marks And Spencer: Reviving A Brand

If there was ever a good time to spend six dollars on an article from Harvard Business Online, today is that day.

The article, "Back In Fashion, How We're Reviving A British Icon", is written by Stuart Rose, the CEO of Marks & Spencer, a gigantic British retailer.

He took over the reigns of the struggling retailer in 2004. He fired the consultants. He focused on what is important ... product, store experience, and customer service. He had to cut staff, and did so. He asked folks to stop hiding behind data, and to stop being paralyzed by what data suggested.

He outlines marketing and advertising activities that aligned with his vision of the business.

More than anything, he asks employees to focus on the basics, to believe their "gut" feelings about products, to take care of customers. This article is a great case study in doing small things that result in solid business performance.

If you're looking for the next "big idea", don't read this article. If you're looking to build your business by focusing on the basics, Mr. Rose leads you through a case study that outlines how this happens.

Friends Of MineThatData, May 27, 2007

Here are the top ten blogs in the Friends of MineThatData for May 2007. Please take a look at the content these authors are writing.

1 = Occam's Razor, 7.0
2 = Customers Rock!, 4.7
3 = Juice Analytics, 3.8
4 = Rimm-Kaufman Group, 3.2
5 = Marketing ROI, 2.9
6 = Sports Marketing 2.0, 2.7
7 = Marketing Productivity Blog, 2.6
8 = Luna Metrics, 2.5 (was 4.8 prior to new URL).
9 = Profitable Marketing, 1.8
10 = Data Mining Research, 1.6
10 = Digital Solid 1.6

Would You Buy This Multichannel Solution?

What has happened to the writing style used by folks in the multichannel marketing world?

At the end of my time at Nordstrom, I nagged my staff all the time about saying things that "Oprah and her television audience could understand". The data were seldom as important as the message used by the communicator.

Tell me what the following writing sample communicates to you. Pretend that "movie voice", the guy who does the previews in the movie theater, is saying this. Is this an effective form of communication? If it is effective, what is it about the copy that makes it effective? If it is not effective, how should it be written to become effective?


Article: Our Changing Landscape

By: Eldon Rothschild, President, Acme Multichannel Solutions

In today's fiercely competitive retail landscape, the need to squeeze value out of every customer transaction has never been greater. There has never been a time in history when placing the right message to the right customer at the right time has been more important.

And yet, customer loyalty has never been more fragile. A recent Forrester Research study indicates that eight-six percent of customers are frustrated with their overall shopping experience. We all know that it costs fourteen times more to acquire a new customer than to retain an existing customer. And yet, the "C-Level Suite" seems to be focused on other initiatives. Could anything be more important than customer loyalty? Maybe that explains why the average Chief Marketing Officer survives for only twenty-three months.

These days, multichannel retailers won't survive if they cannot provide solutions that exceed the needs of savvy online shoppers who switch loyalty at the click of a mouse.

What is the "C-Level Executive" to do? Here are three suggestions that any CEO can implement immediately to significantly grow top-line sales.

First = Apply Modern Targeting Strategies. Are you tired of receiving an endless array of useless catalogs in the mail? I am. Today's busy consumer doesn't have time to thumb through 124 pages of products she doesn't want. E-mail provides a viable, cost-effective, relevant, targeted alternative to destroying our planet by harvesting trees for the purpose of commerce.

Second = Become "Customer Centric". The days of managing brands by product lines or silos are over. Executives who manage the business on the basis of products or silos are destined to follow the path of the dodo bird ... extinction. This requires discipline, and a tops-down management initiative that communicates to employees that they need to focus on customers, not products, to survive in a chaotic marketing environment. By aligning incentives around key initiatives, the "C-Level Suite" properly focuses activities around the appropriate drivers of future business success.

Third = Implement "Multichannel Solutions" That Drive Customer Loyalty . According to Forrester Research, multichannel customers are worth six times as much as single channel customers. And yet, retailers continue to ignore systems implementations that bond customers to the brand forever. Studies indicate that multichannel organizations generate earnings that are 1.6 times as great as single channel brands. There's never been a better time to implement a systems solution that increases ROI (Return on Investment) while delivering upon the brand promise.

Today's complex marketing environment may provide endless challenges to today's time-pressed executives. Fortunately, multichannel solutions exist in the marketplace for managing these challenges. By implementing a multichannel solution that is supported by e-mail, the executive is able to retain and nurture loyal customers, ultimately driving a dramatic increase in ROMS (return on multichannel solution). There has never been a better time to implement a multichannel solution.

Eldon Rothschild is President of Acme Multichannel Solutions, a leading provider of e-mail and multichannel solutions for Fortune 1500 brands. Eldon can be reached at eldon.rothschild@zzz.com.

Memorial Day Weekend

The Friday before Memorial Day weekend is one of those magical times at work.

Many of your co-workers are enjoying vacation today. There are not a lot of meetings.

Following this weekend are fourteen wonderful summer weeks, just a small sliver of the year.

Take advantage of this day before the big weekend. Be creative. Create something. Tackle a problem outside your area of responsibility. Leave work a little early, and spend time with your family. Explore my blog.

Honor our troops, especially those who gave their lives so that we can achieve our potential.

Matchback Analysis Challenge

Catalogers --- here's what I'd like for you to do on your next catalog.

Step 1: Randomly select 10,000 customers from your mailing.

Step 2: Divide these customers into two groups.

Step 3: In the first group, code these customers as "mailed". Send these customers a catalog.

Step 4: In the second group, code them in your promotional history as "not mailed". Do not send these customers a catalog.

Step 5: After these catalogs have been mailed and results have been measured, send each group of customers to your favorite matchback vendor, be it Experian or Abacus or anyone else.

Step 6: DO NOT TELL EXPERIAN OR ABACUS THE DIFFERENCE BETWEEN THE TWO GROUPS. Simply perform the matchback analysis on each group.

Step 7: Carefully analyze the results in each group. Remember, the second group DID NOT RECEIVE A CATALOG. Therefore, every order that Experian or Abacus attributes to a catalog in this group represents an "overstatement", a "matchback bias" in web orders that are attributed to catalog mailings. Remember, these customers DID NOT GET A CATALOG, you're just communicating to your matchback vendor that they got a catalog, so that you can measure the "matchback bias" that exists in all of these analyses.

After you've done this little experiment, share the results with my audience. I'll be happy to publish what you've found, regarding "matchback bias". I think you'll be surprised by what you learn from this experiment. I think you'll see that you are over-stating the importance of catalog mailings at driving web sales.

Dell And Discovery Channel

The fact that Dell may be moving deeper into the retail space, while the Discovery Channel announces they are exiting the retail space must be flummoxing to the multichannel punditocracy.

Weren't we told that "clicks and bricks" would trump online-only pureplays? And didn't Dell tell us they thoroughly believed in their direct-to-consumer strategy?

Focus on what your customer wants you to do, not what the punditocracy wants you to do.

Marketers Gone Wild

The Wall St. Journal reports that there will be a concert series called "Social" this summer, in East Hampton, NY. For $15,000 a person, you will get to experience an intimate venue featuring Prince, Billy Joel, Dave Matthews, Tom Petty and James Taylor.

For $15,000, you could feed an impoverished African family of four for fifteen years.

Those of us who do direct marketing, catalog marketing, and online marketing need to pay attention to the socio-economic changes bubbling all around us.

The highly affluent are racing off into another strata. The middle class are being clobbered by the flattening of the world. And woe be to the working poor, earning $14 and hour without ever being able to achieve the dream of a middle-classed, median-priced $400,000 home with a white picket fence in a nice neighborhood.

It's easy for marketers to go wild, to chase the money, to "target" a $150,000 a year household.

Now flip the tables. What could you do that would make the working poor, a person earning $14 an hour making Spam (yes, the meat-related product) in Austin, MN, feel great? You probably don't have to put Tom Petty in front of them.

If we want to increase website conversion rates from 3.04% to 3.12%, if we want more than one in five people to even bother to open an e-mail campaign, if we want people to actually be excited to receive a catalog in their mailbox, we should ask ourselves "Does this marketing campaign make a customer feel great?"

I earned $14 an hour, I know what it is like to have $15 to spend on food and entertainment for an entire week. There were a lot of ways to make me feel great.

Direct Marketing Association, Dues, And ROI

An open-ended question for you.

During my time at Nordstrom, I paid the Direct Marketing Association more than $200,000 in annual membership dues from my operating budget. That's money that I could have spent doing things that benefited Nordstrom, or more importantly, benefited my staff. Think about this ... we had to generate between $600,000 and $1,200,000 in sales to cover the profit lost by paying these dues. We had to sell an additional 6,000 to 12,000 pairs of shoes to cover the profit lost by this expense!

If you belong to an association, what do you believe is a valid return on investment for your annual dues? Whether you belong to a stamp club that charges $10 annual dues, or you are an $8 billion dollar business paying a huge organization $200,000+ over five years, what is an acceptable ROI? How would you measure ROI?

Seattle DMA Event: Conference Slides

Thanks very much to those of you who joined me for my talk today at the Seattle DMA event, "Market To The Max". A great crowd, and great questions! Follow this link to download slides from the presentation.

Lifetime Value And Return On Investment (LTV, ROI)

Multichannel CEOs and CMOs: How do you make decisions that shape the future of your business?

Recently, the best and brightest analytical minds (David, Jim, Ron) lamented the fact that Lifetime Value is not a widely accepted business concept. The concept was re-branded as "Return On Customer", with (at best) marginal corporate acceptance.

Loosely defined, lifetime value is the present value of future profits. Lifetime value frequently appears in two different ways. First, analytical folks focus on an analytical and financial approach to managing the business. Second, brand marketers focus on advocacy of customer rights as a way of increasing long-term shareholder value. If we could only get these two audiences to work together (analytics/finance and brand marketers), we might have something!

In many cases, Lifetime Value is discussed from an "outside-in" perspective. In other words, somebody outside a company (vendor, consultant) is trying to persuade somebody within an organization to purchase services, without knowledge of the real needs of the person "inside" a business. This can give LTV a bad name.

From an "inside-out" standpoint, many companies indirectly measure Lifetime Value.

• Catalogers are particularly good at measuring LTV, they manage list rental activities on the basis of LTV.
• In many cases, the Web Analytics folks don't have the software tools to do LTV measurement. Yet, they indirectly know this is important, because they like to measure the behavior of "new verses existing" visitors.
  
• Retailers often think of LTV in terms of "market share" or "most admired brand". Regardless whether this is flawed thinking or not, increased market share or being an admired brand deliver some of the benefits of a business with a customer base delivering outstanding LTV.

At some level, all companies and executives think about LTV. They just think about it differently than analytical folks, different than how the customer evangelist folks think about the problem.

Even better, let's get all the LTV evangelists together in a room, and let's see if they do things that are in the best interest of their own personal long-term health and financial benefit?

• We smoke, or drink alcohol, or overeat, all things that reduce our lifespan.
• We don't spend money in the best way. We purchase a Lexus or BMW or Mercedes that will depreciate from $60,000 to $0, when we could buy a Toyota Corolla. How does this decision help our own financial LTV?
• We pay via credit card, then pay interest. How does that help our financial LTV?
  
• We ignore health issues until they present dire consequences.

How can we expect "brands" to adopt LTV concepts when we don't take care of the LTV of our own financial or health concerns?

Like anything else in life, we know that LTV is good for us. All too often, we fail to follow through on what we know is good for us.

Based on my experiences working with business leaders, most would like to implement some version of LTV (they don't even know it is called LTV --- they just want a healthy long-term outlook that also generates lots of short-term profit). However, most Executives don't want the database marketing analyst hounding them about their thoughts and decisions.

• LTV is risk-averse. LTV might suggest that Apple focus on their core competency of making computers & software, might suggest they not invest in an unproven MP3 player that requires a significant capital investment.
  
• LTV tells you to invest in things that "work". Want to add new products to a catalog mailed to prospects? You can't, because new products probably don't have as good a LTV as existing products.
• Want to invest in a new creative representation of your "brand". You can't. LTV tells you that the existing creative is what is liked most by customers.
• Want to add a new catalog to your contact strategy? You can't, because LTV is telling you that you are over-saturating the mailing of your customers, lowering overall profitability.
• Want to add a third e-mail to the weekly contact strategy? You can't, because LTV tells you that too many customers opt-out after receiving more than two e-mail campaigns a week.
• Is your business in trouble, do you need to liquidate merchandise to open up your "open to buy"? Don't add a clearance catalog, because you'll lower the LTV of your full-price customers by converting them to full price + sale customers.

From time to time, LTV proponents struggle to see the business the way the Executive sees the business. Similarly, Executives make short-term decisions that mortgage or sub-optimize the long-term value of the business. Somewhere in-between these viewpoints represents the appropriate way to implement ROI-based decision-making within a business. That in-between place requires a culture that is willing to accept this thought process. Those cultures are hard to find.

Advice For The College Graduate

Drew McLellan of Drew's Marketing Minute had a good idea --- ask a bunch of bloggers to offer advice for recent college graduates as they enter the business world. The result is an e-book --- download the text-only version here, or the full document with pictures here.

Lots of good articles from good writers, including Aaron Potts, Andy Brudtkuhl, Andy Nulman, Andy Wibbels, Ann Handley, Ann Michael, Anne Simons, Becky Carroll, Bob Glaza, C.B. Whittemore, Carolyn Manning, Cris Cree, Christine Brown, CK, Darren Barefoot, David Reich, Delaney Kirk, Derek Tutschulte, Designer Mike, Doug Karr, Douglas Mitchell, Drew McLellan, Joan Schramm, Kevin Hillstrom, Lewis Green, Liz Strauss, Mario Sundar, Mark Goren, Mark True, Mary Schmidt, Nick Rice, Patrick Schaber, Paul McEnany, Phil Gerbyshak, Roberta Rosenberg, Roger von Oech, Rosa Say, Seth Godin, Sharon Sarmiento, Stephanie Weaver, Steve Miller, Steve Sisler, Terry Starbucker, Toby Bloomberg, Tony D. Clark, Valeria Maltoni

Microsoft Buys aQuantive

When folks say that "it couldn't have happened to a nicer guy", they should be talking about Mike Galgon, one of the founders of Avenue A, the banner advertising company that became aQuantive. The online advertising agency was purchased by Microsoft for $66.50 a share, a considerable premium over the current price of about $35 a share.

At a time when folks created flimsy business models, hoping to cash out via the drama of an IPO, aQuantive did things the right way. The CEO is the same CEO from 2000. Mr. Galgon, one of the founders, is still actively involved in the business.

aQuantive is one of a very small number of success stories from the internet bubble era. I'm very happy for those folks!!

P.S. Had I stayed for seven and a half years, I, too, would have been worth millions!!

Missing Plan

If you really want to test your professional character, see what happens when your business starts missing plan ... by 45%.

Back in 2001, I was part of a new management team recruited by the esteemed Michael Smith (of Lands' End, Classmates.com and Bag, Borrow Or Steal fame). Our job was to fix Nordstrom.com, a division of Nordstrom that was posting hideous double-digit negative EBIT, year-after-year.

In our first four months, we experienced something that tests professionals who think they're brilliant. A business that was failing mightily began to miss expectations by more than twenty percent. In fact, one series of catalogs missed plan by forty-five percent. That means customers liked the catalog so little that they spent almost half of what they spent in a comparable catalog the year prior --- a year where double-digit negative EBIT occurred.

Here is what the results looked like, with numbers altered to protect the innocent:

Analysis Of Catalog Results
	Rates	Plan	Actual
Circulation		4,000,000	4,000,000
Demand		$35,000,000	$19,250,000
Net Sales	71.0%	$24,850,000	$13,667,500
Gross Margin	52.0%	$12,922,000	$7,107,100
Less Book Cost		$5,000,000	$5,000,000
Less Var. Op Expense	11.0%	$2,733,500	$1,503,425
Var. Op. Profit		$5,188,500	$603,675

When your catalog misses expectations by nearly five million dollars profit (remember, numbers have been doctored a bit, to protect the innocent), folks begin pointing fingers at each other ... quickly! Your new merchandising expert blames the old administration. The old administration blames the new team. Your President suggests you don't know a thing about circulating catalogs.

After the finger pointing subsides, you have to get down to the hard work of planning next year's catalog. You use the catalog that completely failed as your planning base. Your circulation plan for the next year might look as follows:

Next Year's Plan
	Rates	This Year	Next Year
Circulation		4,000,000	1,600,000
Demand		$19,250,000	$10,900,000
Net Sales	71.0%	$13,667,500	$7,739,000
Gross Margin	52.0%	$7,107,100	$4,024,280
Less Book Cost		$5,000,000	$2,479,000
Less Var. Op Expense	11.0%	$1,503,425	$851,290
Var. Op. Profit		$603,675	$693,990

This is called "thinking inside the box". And it is damaging. You end up trimming circulation by more than half, to get rid of unprofitable names. By doing so, you only increase profit by about a hundred thousand dollars. And, you've made the business much, much smaller.

Actually, your customers are making your business much, much smaller, because they're voting with their pocketbook that they don't like you.

But this is where you get yourself in trouble, if you continue to "follow the rules". In other words, if you continue to circulate to a certain cutoff level, you are "certain" to run yourself out of business. You cut marginal names, the very names that will pay the freight in a year or two.

Missing plan by 45% requires you to re-think your business model.

In our case, many more members of the management team "left to pursue other interests, we wish them the best in their future endeavors".

A stable team of leaders "gelled". We "rightsized" the catalog business (fewer titles, fewer pages, fewer in-home dates, capitalize on e-mail and online marketing) A hideous profit and loss statement became one that any leader could be proud of.

You don't learn a lot when your channel is constantly growing by twenty percent, or thirty percent. You learn a lot about business, and about people, when your channel fails to meet plan by forty-five percent.

It will be very interesting to see what happens to today's online business leaders when the online channel begins to decline, an inevitability in the evolution of business channels.

Personas and Pressure

Personas are becoming a popular way to bring data to life, to make data actionable.

In the late 1990s, we were looking for ways to reinvigorate the Eddie Bauer "brand". One way management chose to do this was to hire a team of brand marketing experts. There's no better way to generate new ideas than to hire a dozen brand marketing experts.

This team created personas of the Eddie Bauer customer --- Ken and Karen, if I remember correctly. These folks were mid 40s but felt like they were in their mid 30s, $75,000+ annual household salary, sitting in the ski lodge next to a fire watching folks ski, after arriving in an Eddie Bauer Ford Explorer.

Because these folks felt like they were younger than their mid 40s age, the brand marketing team felt our creative should skew younger, to reflect how these personas felt about themselves.

Within a few months, a new creative approach appeared in our catalogs. The 46 year old graying male wearing jeans while walking along a raging river in Alberta was replaced with a 31 year old, muscle-bound set of men carrying a canoe over their heads.

Instantly, mens pages in catalogs that were missing expectations by 10% became mens pages in catalogs that were missing expectations by 20%.

In other words, the new way of presenting men in the catalog, based on the personas created by our brand marketing team, caused a ten percent reduction in demand of mens merchandise.

There's nothing that strikes terror in the hearts of an Executive team than a ten percent decrease in sales volume, a decrease that is quite possibly self-inflicted.

The brand marketing folks fought back, suggesting that it would take Eddie Bauer customers six months, a year, or two years to get used to the new creative. They were probably correct in their assessment of the situation.

Meanwhile, inventory managers were frustrated, because they had to liquidate merchandise that used to sell better. Merchants were frustrated, because merchandise they believed in was not selling as well due to the implementation of a vision endorsed by the brand marketing experts.

I recall sitting in a conference room on a Friday afternoon, watching this brand marketing team get chewed out like you wouldn't believe. Folks left the room crying. Within a year, most of the brand marketing team either lost their jobs, or chose to leave the company. The brand marketing experiment of 1998-1999 was over.

Pressure causes leaders to make decisions that may not be in the best interest of the long-term health of the business. It is entirely possible that the brand marketing folks were doing the exact right thing for the "brand". It is also possible they unintentionally damaged the "brand".

We still have to meet short-term sales expectations, regardless of the long-term vision of brand marketing experts. This conflict causes pressure.

Personas may be the right thing for your business. It is how personas are implemented within your culture, how that implementation impacts short-term sales, and how short-term expectations are communicated to all employees, that determines how successful the business strategy will be.

Listen To Tuesday's Webinar!

The good folks at Intelligent Results recorded today's webinar on Multichannel Forensics. The event was well attended. Thanks to everybody who joined me, I appreciate that you spent time listening to this topic.

Please click here to listen to today's presentation. You'll be able to follow along with the slides as you listen to the audio portion of the presentation.

Up next is the Seattle DMA's "Market To The Max" event on Monday, May 21. If you're in Seattle, stop by after the presentation for a chat! You'll also have a chance to hear uber-bloggers Robert Scoble and Ben McConnell, as well as Friend of MineThatData Chris Baggott at this conference.

Tell Me About Your Vision For "CRM"

I recall reporting to an Executive who called CRM a "four letter word". This person felt burned by the failed promises of a movement that may have been ahead of its time (or maybe way behind the times) in the late 1990s.

Maybe things would have been different if CRM were shepherded by marketing folks. Often, CRM was driven by the Information Technology folks, in partnership with vendors selling solutions. All too often, the focus was on "Management", not on the "Customer Relationship".

These days, it gets harder and harder to define "CRM". I believe that's a good thing. Here are examples of "CRM" in the year 2007.

• The President of Whole Foods talks directly to his customers via a blog, allowing customers to respond to him.
• Nielsen and Experian enter an alliance to provide "CRM for CPG Companies", promoting use of a series of traditional direct-marketing techniques to traditional brand-marketing organizations.
• Tamara Gielen writes a great blog about using E-Mail to build relationships with customers.
• The American Catalog Mailers Association is formed to protect the craft known as cataloging.
• Google might say they own relationships with customers, by matching customer needs with vendors willing to pay Google the most to meet the needs of a customer.
  
• Salesforce.com might argue that they provide software that allows folks to manage relationships with clients.

My questions for you, the loyal reader, are these:

• Do you believe that a "brand" can manage customer relationships? In other words, is the term "CRM" antiquated, given today's marketing environment?
• If you were building a "brand" from scratch, which elements of "CRM" would you use to build your business? E-Mail? Catalogs? RSS? Blogs? Paid Search? What else?

Trust

I frequently read articles that use a formula to engage the reader.

• The article starts with an obvious statement that cannot be disagreed with, like "multichannel customers are the most valuable customers".
  
• Next, the author creates a sense of fear, as in "today's time-pressured customer won't stay loyal to a business using antiquated systems".
• Finally, the author offers a solution to the perceived threat, often structured as something like "'x' steps to an improved multichannel experience". The steps are either so elementary as to be virtually useless, or the steps include products or services offered by the author or the organization employing the author.
  

From time to time, I'm probably guilty of this style of writing. Interestingly I don't think I ever contacted a vendor or consultant on the basis of this style of writing.

I noticed that almost nobody visits my blog when I write articles for various publications. Maybe readers perceive I'm being a 'pundit'.

Conversely, I noticed that this blog receives a significant spike in traffic when I speak at conferences.

Lastly, I've had more than a thousand downloads of my white paper on Multichannel Forensics, a free paper that has only been publicized on this blog, a paper than can only be downloaded by my loyal readers, or via word of mouth.

My question for you, the loyal reader of this blog, is this ... when looking to purchase services, what/who are you most likely to trust?

• Folks you've worked with in the past.
• Companies with a proven track record in your profession.
• Companies offering innovative solutions.
• Companies offering inexpensive solutions.
• Consultants with a proven track record of success.
• Consultants with large 'name brand' consulting firms.
• Individuals who write blogs.
  
• Folks who write articles in trade journals.
• Folks who speak at conferences.
• Folks who offer white papers for free.
• Folks who offer discounts and promotions.

Your thoughts?

Return On Investment When Business Is Good

If you're one of the lucky folks managing online or catalog marketing at a company that is "winning", you have an interesting opportunity.

Let's say that this profit and loss statement represented what you expected to happen in April.

Demand	$100,000
Net Sales	$85,000
Gross Margin	$42,500
Less Marketing Cost	$25,000
Less Fulfillment Expense	$10,200
Operating Profit	$7,300
% of Net Sales	8.6%
Ad to Sales Ratio	29.4%
Average Order Size	$85.00
Number of Purchasers	1,176
Cost Per Purchaser	$21.25
Profit Per Purchaser	$6.21

You expected to generate $7,300 profit, and 1,176 new customers.

You execute this marketing plan, and observe these actual results for the month of April:

Demand	$115,000
Net Sales	$97,750
Gross Margin	$48,875
Less Marketing Cost	$25,000
Less Fulfillment Expense	$11,730
Operating Profit	$12,145
% of Net Sales	12.4%
Ad to Sales Ratio	25.6%
Average Order Size	$85.00
Number of Purchasers	1,353
Cost Per Purchaser	$18.48
Profit Per Purchaser	$8.98

Courtesy of the magic of your merchandising team, customers loved what you offered them, spending 15% more than expected.

Here's the challenge. If you believe that during the month of May you will see similar results, you can pocket a similar level of sales and profit.

Or, you can increase your advertising, and acquire more names, while still generating the same level of profit you promised to your CFO. This example shows what could happen, if you boosted your advertising spend:

Demand	$143,635
Net Sales	$122,090
Gross Margin	$61,045
Less Marketing Cost	$39,000
Less Fulfillment Expense	$14,651
Operating Profit	$7,394
% of Net Sales	6.1%
Ad to Sales Ratio	31.9%
Average Order Size	$85.00
Number of Purchasers	1,690
Cost Per Purchaser	$23.08
Profit Per Purchaser	$4.38

This is one of those unique mysteries that complicate the lives of those of us who manage profit and loss statements for online or catalog channels.

Choice number one allows us to pocket an additional five thousand dollars of profit.

Choice number two allows us to achieve our budgeted profit, but grows the top-line by an additional $28,000, and adds an additional 337 customers that contribute to future sales and profit.

I've always advocated spending more money when times are good, and spending more money when times are bad (to liquidate merchandise, but not at liquidation prices) --- holding to the marketing budget when business is close to plan.

What would you do? Would you pocket the profit today, or, would you spend more to acquire more customers, customers that deliver future sales and profit? Your thoughts?

Sharper Image And File Momentum

Sharper Image continues to deal with business challenges, according to Internet Retailer.

Multichannel Forensics sometimes illustrate business oddities. In some instances, merchandise problems can be fixed, and yet, sales will decrease.

For example:

• Assume you start with 100,000 good customers.
• Assume 30% of them repurchase.
• Assume that each customer who repurchases spends $200.
• Assume that you only get 40,000 new customers.
• Assume that each new customer spends $100.
• Total volume = 100,000*0.30*$200 + 40,000*$100 = $10,000,000.
• Total customers = 70,000.

Assume you fix your merchandising woes. Next year looks like this:

• We start with 70,000 good customers.
• Assume 35% of them repurchase (an improvement over LY's 30% rate).
  
• Assume that each customer who repurchases spends $200.
• Assume that you get 45,000 new customers (an improvement over LY's 40,000).
  
• Assume that each new customer spends $100.
• Total volume = 70,000*0.35*$200 +50,000*$100 = $9,900,000.

In this example, you'd post a -1% comp store sales drop ... yet your internal customer metrics are all improved. Your repurchase rate increased from 30% to 35%. Your new customer acquisition counts improved from 40,000 to 45,000.

When businesses go bad, file momentum works against them. This example doesn't explain all the woes at Sharper Image. But the example demonstrates the critical importance of knowing all of your customer metrics. In particular, you need to know customer counts by segment, repurchase rates, spend per repurchaser, and similar metrics for new customer acquisition.

Your merchandising organization depends upon you to provide this service. On the surface, in this example, it looks like the merchants are failing again. In reality, file momentum is the issue --- merchandising of the store has improved.

B&H Catalog, Creating Demand

The perfect-bound, 420 page B&H Photo/Video catalog arrived in my mailbox this afternoon. You'd be set back about $2,000,000 if you purchased every item in this catalog.

This "resource" catalog, as it used to be known in the industry, is part of a dying breed. As recently as the 1970s, 500 page perfect-bound catalogs were mailed often, carrying a huge assortment of merchandise. I never knew that there were computerized chess games until Montgomery Wards and J.C. Penney told me so.

B&H uses this style of advertising to tell customers about merchandise that the customer never knew existed. I had no idea there was such a thing as a 5-channel portable field mixer. I had no idea these things could be a few thousand dollars.

Catalog marketing used to be great at "creating demand". Catalogs educated the customer, they taught the customer why she had to have a 5-channel portable field mixer.

But then catalogers figured out how to mail targeted 124 page catalogs, with a limited assortment, to an audience that liked only the targeted product in the catalog.

And then marketers figured out how to put all of this merchandise up on a website. They figured out how to send electronic mail messages to customers. So did deposed leaders in Africa.

And then Google turned everything upside down. For a fee, Google could intercept the customer at the very moment s/he was considering the purchase of a 5-channel portable field mixer. You'll notice B&H in the paid search results of this query.

All of this is wonderful for the customer. Absolutely wonderful.

Except for one little problem.

Over the next ten years, catalogs may become obsolete. It is very likely that the USPS will make it it impractical to send paper through the mail. Baby Boomers may focus less on consumption, may focus more on retirement. Boomer kids will have spent their formative years in a Web 2.0 or Web 3.0 or a Web 26.7 world that doesn't rely on paper.

When catalogs become obsolete, how will you ever learn that you want/need a 5-channel portable field mixer? Is Google going to be able to read your thoughts? How good a job does Amazon do at guessing what you might like?

Web Analysts need to start analyzing customer behavior over time. Online Merchants need to figure out how to make us aware of merchandise we never knew existed, but if we knew it existed, we'd want to purchase. When Online Merchants figure out how to do this, we can put catalog marketing to rest. Online Merchants will eventually figure out an effective way to do this. Today's method of "customers who like 'x' also liked these eight items" fails to capture the imagination of the consumer.

Time for your thoughts, especially those of you who are Online Merchants. How will you create demand for items that the customer will purchase, but doesn't even know exist in your merchandise assortment?

Around The Horn

Random thoughts:

• The Web Analytics folks are missing a major opportunity to understand customer behavior across visits, over time. I completed a Multichannel Forensics project for a website with numerous merchandise divisions. The visual representation of customer behavior was breathtaking ... this website is literally a visual representation of our Solar System. One merchandise line was like the sun --- it represented the gravity that kept the whole customer system in place. At least two other merchandise lines were like planets, with their own moons rotating around them. A few of the merchandise lines were not part of the gravitational pull of the whole system(website). When communicated properly, an Executive team can finally understand how customers interact with a website, over time. Web analysts and clickstream vendors have a huge opportunity to grow, to change, to understand customer behavior over time. Conversely, you SAS and SPSS folks who have always analyzed catalog and retail customer behavior --- this is your brief moment in time to make a difference. Do something with your data now, before the web analytics folks figure this out.
  

• Corporate America has an opportunity to allow employees to do more work from home. We really struggled with this during my time at Nordstrom. My employees could honestly do 60% or more of their work from home. Broadband internet access changes everything. Of course, you worry about people not doing their job while working at home. A manager could measure employees on productivity, and if the employee were productive, who cares where the employee produces work? I woke up at 6:00am today, was working at 6:45am, and wrapped things up by 2:45pm. This allowed me to re-wire a pond pump and lighting system, visit a hardware store, pick up prescriptions, clean outdoor furniture, pull weeds, all before 5:00pm. I did all of this with the cell phone right next to me, just in case somebody needed something. I didn't spend two hours in a car, traveling to work at 14mph, listening to the "morning zoo" on the radio. How much more productive would our employees be if we gave them a little bit of work/life flexibility? How much happier would employees be? I'll tell you, I was one happy worker today, with 72 degree temperatures and blue skies amplifying my experience.

• Multichannel Forensics in action in the music industry: Consumers have changed their behavior in a post-iPod world --- this music industry insider believes marketers and musicians/artists must change as well. Catalog industry executives need to monitor what is happening in other industries that are being flattened by the internet. Music is one of those industries.

Do You Use Algebra In Your Everyday Life? How About Multichannel Forensics?

You probably recall your teacher telling you that you'd use algebra in your everyday life. That seemed like a stretch, especially when trying to solve the equation 4x - 3 = 13.

Kids and adults may feel the same way when taught Multichannel Forensics. Yet, there are all of these interesting things happening in our everyday lives that are well explained by this framework.

Circuit City: You're responsible for selling compact disks. Not many people buy these things anymore. Are customers transferring sales to other departments in your store? Do they still purchase other products in your store? When is the transfer so great that sales per square foot drop below acceptable levels? The same theory can be applied to non-HD 27" tube-based televisions.

Toyota: Are Corolla customers in equilibrium with Hybrid cars? And if so, is the rate increasing to the point where customers will transfer out of one category, into Hybrids? Is there a price point ($5.00 gas) that accelerates transfer?

Safeway: When a customer purchases organic merchandise, how does behavior change? Does that customer exist in equilibrium with traditional brands, or does the customer isolate herself in organic foods? And if the customer isolates herself in organic foods, what does that mean for the products she used to purchase, especially if more customers transfer out of traditional brands?

Comcast: Within the course of ten years, many Americans chose to trust Comcast with HD, Digital and Basic Cable, a DVR, their Telephone Service, and Broadband Internet. Can Comcast forecast a five year sales trajectory by product line, and are there enough new customers available to sustain long-term growth?

New Jos. A. Bank President

This article in DMNews hit it right on the head --- merchandisers own whatever we define "multichannel" to be.

From a career advancement standpoint, most of us really butchered the "multichannel thing".

• Creatively, we were told to "integrate" our marketing. Show me the instances where "integrated marketing" drove consistent, dramatic increases in sales, beyond an individual campaign? I'm not talking about improving the open rate of an e-mail campaign by 11%, I'm talking about what it is that has been done that increased total sales by 11% on a sustained basis.
  

• From an IT standpoint, we learned that "multichannel" is "expensive". We're busy securing capital. At some point in 2010 or 2015, we'll have the systems infrastructure to deal with the realities of the business world of 2007. Then what?

• From a marketing standpoint, we've failed in at least three ways. Many catalogers failed to embrace online marketing. Most online marketers failed to embrace print marketing. Many Chief Marketing Officers have not invested the time to understand how marketing has fundamentally changed in just the past two years.
  

• From an HR standpoint, we failed to build organizational structures that cross-pollinate skills across employees. The reality is that catalog marketing, online marketing, and retail marketing require VERY DIFFERENT SKILLS. We haven't cross-pollinated enough talent to have truly brilliant marketers, creative employees, copywriters, etc.
  

• From a Finance standpoint, our leaders usually fail to understand how to properly measure ROI, and consequently, can't provide a vision for how to move the business forward.

• From a Database Marketing standpoint, we are too technical, too geeky. We don't tell a "multichannel story". This holds us back. Tell me the last time your Database Marketer clearly explained (using ordinary English language) how customers utilize the website to make a purchase over the phone, online, or in a store?
  

• From a Web Analytics standpoint, we fail to ever measure anything more than the outcome of one visit. This has to stop. This isn't how customers behave. Web Analytics practitioners and Web Analytics vendors must analyze customer behavior across time, across channels --- not just in isolation within one visit.

• Pundits have failed us. There is little insight and vision into the future. There is a lot of talk about systems integration, or that "multichannel customers are the best customers", or that "customers demand a flawless multichannel experience". Duh. Worse, we pay for this type of insight. We need an ROI-matchback solution that's not so heavily skewed toward favoring catalog mailings.
  

Merchants have been able to avoid most of these problems. They simply are required to sell merchandise wherever the customer wants to buy it. If the merchant fails, s/he is fired. Merchants have largely succeeded, given the ordinary systems they've always had, by having a gut feel about multichannel customer behavior. Merchants are taking ownership of the top leadership positions in our businesses.

Annual Report Update: Overstock.com

In addition to EBT being -12% of net sales, the following quote by management clearly directs blame --- and management doesn't believe blame rests with the merchandising organization:

"Our fourth quarter revenue declined 7%, the same percentage decline we experienced in Q3, and our annual revenue was down 1%. We believe that these decreases were primarily the result of our infrastructure upgrades in the last half of 2005, which resulted in an unsatisfactory shopping experience for many of our customers and affected both repeat and new customer revenue in 2006. We believe that a key to future revenue growth is to increase our Website conversion rate-defined as the percentage of visitors to the website who make a purchase. The areas of our business that most directly affect conversion rate, including personalization of the website, customer retention, e-mail marketing, and site design and layout, are the responsibility of our internal marketing department."

Those comments may be true. Still, making money in a direct-to-consumer business that has 12-14% gross margins is VERY DIFFICULT. Repeat, VERY DIFFICULT.

Annual Report Update: PC Connection

A few tidbits from the PC Connection Annual Report:

• 89% of sales come from existing customers. This is a stunning amount, obviously helped by large business accounts.

• 54% of sales come from small businesses of 200 to 1,000 employees, down from 59% two years ago. Large accounts now comprise 30% of sales. 16% of sales come from the public sector.

• Notebook and PDA sales dropped from 21% of total two years ago to 17% today.

• EBT was just 1.4% of net sales, though this is easily the best performance of the past five years. Gross margin was just 12.2% ... this is a tough business model to make money on a consistent basis.

• Catalog circulation is just half of what it was two years ago --- and yet sales continue to increase. Catalogers --- make sure you pay close attention to this trend --- there are often serious flaws in matchback analyses that overstate catalog performance.

Annual Report Update: Coldwater Creek

A few tidbits from Coldwater Creek's Annual Report:

• Continuing recognition that retail is where the growth is, Coldwater Creek plans on nearly doubling the number of retail stores over the next five years. Wow.

• The e-mail database grew from 2.9 million addresses in 2005 to 3.1 million in 2006.

• Circulation increased from 113 million in 2005 to 119 million in 2006 to nearly 130 million in 2007. Increases are in a newer title that serves a primary purpose of driving customers into stores.

• Total net sales increased from $473 million in 2002 to almost $1.1 billion in 2006, mostly due to dramatic retail expansion. This doubling in sales resulted in a 6x increase in net income. Sounds like somebody is figuring out the right multichannel equation here.

• Total direct sales have barely grown over the past four years. What a great lab for Multichannel Forensics, huh? Telephone sales have decreased from $200 million to $127 million over four years. Online sales have increased from $145 million to $264 million over four years. Management believes a large portion of the huge increase in online sales in the past year ($264 million vs. $198 million in 2005) is due to enhancements in the e-mail program (increased frequency & bigger list helped drive increases).
  

Annual Report Update: Eddie Bauer

A few tidbits from Eddie Bauer's Annual Report:

• Management believes that recent changes in merchandising strategy are responsible for Q4 comp store sales increases of 4.6%, Q1 comp store sales increases of 9.5%, and Q1 direct sales increases of 12.9%. We learn over and over again the importance of merchandising and merchandise presentation, not marketing, in driving customer response.

• Target customer = 30-54 years old women and men, income of $75,000 per year.

• Comp store sales have decreased in 23 of 28 quarters since 2000.

• Following a "relaunch of the brand" in Fall 2005 (which came after hiring new management in merchandising, creative and marketing), with new merchandise and creative presentation, comps by quarter were -4.3%, -7.1%, -10.0%, -5.0% and -1.9%.

• In the tradition of Otto Versand (former parent company of Spiegel, which was the former parent of Eddie Bauer), Bauer leverages preview catalogs to determine sales potential of items at the start of a season, and then adjusts inventory buys as a result of what is learned in the preview catalogs. Preview catalogs are mailed nearly three months prior to the start of a season. 70% to 75% of the buy is placed, then adjusted following performance of the preview catalog.
  

• 3.1 million twelve-month buyers, 1.8 million e-mail addresses.

• 28 catalog editions with total circulation of 80.8 million.

It will be fun to see if the turnaround can continue for this beleaguered brand.

Annual Report Update: J. Crew

A few tidbits from the J. Crew annual report:

• Since 2002, catalog sales dropped from $108.5 million to $90.0 million in 2006. Since 2006, online sales increased from $139.5 million in 2002 to $218.7 million in 2006.

• Catalog circulation is making the slow descent that is common with other brands. In 2002, 66,000,000 catalogs were circulated. In 2006, 50,000,000 catalogs were circulated.
  

• Multichannel Information: "As of February 3, 2007, our customer database contained approximately 22.8 million individual customer names, of which 2.5 million were households that had placed a catalog or Internet order with us or made a store purchase from us within the previous twelve months, and 3.0 million email addresses of customers who had agreed to receive promotional emails from us."

• Targeted E-Mails are sent to Mens, Womens, Kids and Sale customers.

• 30% of online customers report receiving a catalog prior to their online purchase. To me, this seems like a reasonable rate for a business with a retail channel, though industry experts might feel that this percentage is way too low.

• There are no more liquidation catalogs --- liquidation is done online. Interesting!

• 22 in-home dates, a total circulation of 50 million, 5.4 billion pages circulated.

• 71 million website visits in 2006, verses 64 million website visits in 2005.

• 80% of merchandise is sourced in Asia.

• Comp store sales have increased by at least 13% for each of the past three seasons. Folks who think marketing drives a business need to look at these figures --- the merchandise assortment is driving this business. Customers buy merchandise they like.

Annual Report Update: Talbots

A few comments from their Annual Report:

• New Stores: "The customer database compiled through the Company's catalog operations provides important demographic information and serves as an integral part of the Company's expansion strategy by helping to identify markets with the potential to support a new store. Although the addition of stores in areas where the catalog has been successful has resulted in slightly lower catalog sales in these areas, the lower catalog sales have been more than offset by the significantly higher sales generated in these areas by the opening of new stores".

• 78% of Talbots merchandise and 88% of J. Jill merchandise is sourced via offshore vendors. 33% of Talbots merchandise is sourced in Hong Kong.

• 2006 Talbots circulation = 25 in-home dates, 48 million catalogs circulated.

• Direct-to-Consumer sales across brands represented 17% of total Company sales --- the online channel comprised 49% of Direct-to-Consumer sales, 47% at Talbots (42% LY), 54% at J. Jill since the acquisition date.
  

• Talbots comps increased just 1.3%, J. Jill comps decreased 4.4% since the date of acquisition by Talbots.
  

Annual Report Update: Williams Sonoma

A few findings from Williams Sonoma's annual report:

• Retail = 58%, Direct-to-Consumer = 42% of the business.

• New products: "... we believe that the mail order catalogs and the Internet act as a cost-efficient means of testing market acceptance of new products and new brands."
  

• Internet sales: "... we estimate that approximately 45% of our company-wide non-gift registry Internet revenues are incremental to the direct-to-customer channel and approximately 55% are driven by customers who recently received a catalog".

• Direct Channel Challenges: Sales growth (telephone + web). was just 4.5%, on a 3.2% increase in catalog pages circulated, and a 1.6% reduction catalogs mailed. Oh oh. Pay attention folks, this is a harbinger of the future for all of us.

• Online sales grew 21% to $927.6 million. In 2007, "... plan to intensify the marketing support behind our fastest growing shopping channel, e-commerce".

• Telephone sales were 58% of direct-to-consumer sales in 2004, and are 42% of direct-to-consumer sales in 2006.
  

It will be interesting to watch how Williams Sonoma evolves their catalog marketing over the next three years. They are publicly saying they plan on growing their marketing efforts online. What will happen to catalog marketing at Williams Sonoma? In addition, direct channel growth is slowing (although a title was killed). All of us need to pay close attention to this trend.

Business 141 And The ACMA

I grew up in Manitowoc, Wisconsin. This picturesque town of 33,000 folks rests on the west side of Lake Michigan, about forty minutes southeast of Green Bay.

In the first half of the 1900s, Manitowoc was served by US-141, a two-lane highway that ran from Milwaukee, through Green Bay, to the Upper Peninsula of Michigan (a place that we called the "U.P."). US-141 cut right through Manitowoc, down Calumet Avenue, eastbound on Washington St., across the Manitowoc River on 8th Street, then westbound on Waldo Boulevard, exiting on the northwest side of town. At least that is how it is pictured on my 1953 map of the State of Wisconsin.

Somewhere between 1953 and the 1970s, a bypass was built around Manitowoc. US-141 was re-routed to the west side of town. An interchange diverted traffic from the old route. New signs were posted --- the old route was re-named "Business 141".

Of course, businesses didn't benefit from "Business 141". Traffic flew around the west side of Manitowoc. Time-pressured travelers saved ten minutes on their trip to Green Bay by taking the new US-141, avoiding "Business 141". Like in so many towns across America, downtown businesses began to fail. The core of the city began to die.

America is all about progress. In 1980, a new highway was built, maybe a football field west of US-141. This was called "Interstate 43", or "I-43". This new freeway had a handful of on-ramps and off-ramps. US-141 was eliminated, renamed as a county highway. "Business 141" was renamed "Business 42", in honor of the state highway that also bypassed the city.

Naturally, businesses didn't benefit from "Business 42". Well, that's not entirely true. Any business built close to the interchange between I-43 and "Business 42" did well. Wal-Mart, Applebees, Holiday Inn, and a veritable plethora of "brands" were very successful. Mom & Pop stores struggled, as the core of the city transitioned from a commerce hub to a tourist destination.

Today, Manitowoc is the city you stop at for a potty break at on the way from Milwaukee to Green Bay, or the city you bypass on your way to Door County for a much-needed vacation. Fifty years from now, when we replace the automobile with bio-fuel air transportation, will we lament the death of the "brands" along I-43?


You might wonder what Manitowoc and "Business 141" have to do with this blog? Today, I read this post on F. Curtis Berry's Blog, about the ACMA, the "American Catalog Mailers Association".

Of course, I know almost nothing about this organization, but I find the concept refreshing. To me, this isn't about "rebranding" US-141 as "Business 141", when we all know that I-43 is coming. Instead, I perceive it as a group of industry leaders and catalogers, taking a stand against everything that is conspiring against it. These folks are not "rebranding" themselves as "multichannel merchants". These folks are "catalogers", fighting for the very survival of the craft they love.

These folks may succeed, they may fail. They should be applauded for defending themselves during a time of palpable industry crisis.

I'm not part of this club. I spent the past twelve years honing catalog, online and database marketing skills on the West Coast, where things are done very differently than they are in the Midwest and New-England based catalog world. But I am rooting for them. Where was this group when the State of Wisconsin rebranded US-141 as "Business 141"?

Honor Roll For May 3, 2007

A few articles worthy of MineThatData Honor Roll consideration.

• Valeria Maltoni has a smart discussion about Urban Outfitters and Anthropologie retail marketing strategies.
  

• Spike at the Brains on Fire Blog makes an interesting observation at the end of this post about spreading good news. How often do we, as e-mail, online and catalog marketers view our craft as "spreading good news"?
  

• One of the most popular topics on this blog is the "square root rule". Born out of the old catalog advertising rule that a ten percent increase in pages circulated yields a five percent increase in demand, Alan Rimm-Kaufman further developed the concept. Today, I read this discussion from John Hagel about how power laws are changing business.
  

Blockbuster Versus Netflix

Blockbuster, the retail movie rental king, is increasingly challenged by Netflix, the online movie rental king.

So, Blockbuster implements an online rental program, leveraging retail stores as a key component in the new program.

And then the financial results come in, and they look awful. Forbes magazine has a headline that says "Online Service Costs Blockbuster". Forbes also lists an article that says "Blockbuster Gains On Netflix". Forbes also mentions "Netflix Losing Ground". Which article is "right"?

First, one needs to consider that Blockbuster executed a $35,000,000 advertising campaign to educate the public about the new program. If we assume that the advertising campaign was executed in an effective manner, it is highly unlikely the program will pay for itself in the short term. It may never pay for itself in the long term.

The article states that Blockbuster added 800,000 new subscribers, bringing their total to 2,800,000. Netflix added 481,000 subscribers, bringing their total to 6,800,000 --- but more important, new subscribers were dampened by about 200,000 verses prior quarters.

In other words, Blockbuster may have dramatically over-spent (as is evidenced by the cost of the advertising campaign, directionally similar to the increase in loss verses last year) to acquire new customers, and cannibalize Netflix business.

Also, pay attention to comments that Blockbuster retail sales decreased significantly verses prior year. Only Blockbuster knows if the online business is cannibalizing their own retail sales.

This is where Multichannel Forensics can be applied both within and across businesses, with the advantage going to Blockbuster. Blockbuster has retail and online channels, and has competitive data provided by Netflix. Management can use Multichannel Forensics to forecast long-term changes in retail and online growth, and can incorporate Netflix information into the simulation. Over the next few years, Blockbuster management can see the long-term financial impact of their decision (which will hopefully be better than what is being reported today), and can project the potential damage inflicted upon Netflix.

What a wonderful, real-life laboratory we have in Blockbuster and Netflix. We see that multiple channels can be better for the customer, expensive for the multichannel brand, and can erode the growth of the online pureplay. I look forward to seeing what Netflix does to compete against this multichannel intrusion into their space.

If you were Netflix, how would you compete against Blockbuster?

CEO Concerns About Reducing Catalog Marketing

Lots of phone calls with business leaders over the past month. All ask me essentially the same question.

Question: "Postage is about to put a squeeze on my expense structure. Should I begin transitioning out of catalog marketing?"

Strategically, there are a lot of things to think about. Listed below are a sampling of the issues CEOs need to consider.

• How old is your average catalog customer? If your catalog customer is 55 or older, you need to embrace your catalog marketing efforts.

• What percentage of your direct-to-consumer net sales come from the telephone? If this percentage is more than fifty percent, you need to embrace your catalog marketing efforts.

• What percentage of your direct-to-consumer advertising budget is in search, affiliates, portals and e-mail marketing? If you aren't already spending at least twenty percent of your direct-to-consumer advertising budget online, you need to embrace your catalog marketing efforts for awhile, until you learn all the ins and outs of online marketing.

• Multichannel Forensics: If prior catalog buyers are in isolation mode (meaning they do not at least try out ordering online), you need to embrace your catalog marketing efforts.

• Testing: This is as good a time as any to hold out catalog mailings to a group of loyal catalog customers for a period of at least six months. When you do this, what happens to online spend? Does it increase, decrease, or stay the same? If it decreases or stays the same, you need to embrace your catalog marketing efforts.

• E-Mail Marketing: A colleague forwarded me an e-mail marketing campaign. The e-mail did not sell merchandise --- rather, it told the customer to look for their catalog in the mail. If your e-mail marketing strategy is to market your catalog, you need to embrace your catalog marketing efforts.

• Customer Acquisition: What happens to new customers if you stop traditional catalog prospecting activities? The future of your business is new customers --- if you don't acquire new customers via the online channel, you need to embrace your catalog marketing efforts.

• Paid Search: When you analyze paid search performance, do you find that customers ordering via paid search also received a catalog? If so, you need to embrace your catalog marketing efforts.

• Online Marketing Budget: What happens if you double your online marketing budget? What is the impact on online sales? If you don't know the answer to this question, you need to embrace your catalog marketing efforts until you can answer this question.

• Staffing: Do you have a transition plan for all of the folks who have served your catalog efforts for the past two decades? Contact center and distribution center considerations are not trivial.

• Merchandise Strategy: Can you appropriately forecast sku-level sales if you don't have a catalog driving customers to the online channel? Does the mix of merchandise purchased change between online-only customers, verses online customers fueled by catalog marketing?
  

• Customer File Management: Have you run a five-year simulation of the expected change in your customer file? In other words, will you have enough customers, repurchasing at high-enough rates, spending enough money per repurchaser, to fuel the future of your online business? If you don't know the answer to this question, you need to embrace your catalog marketing efforts until you complete your Multichannel Forensics analysis.

One Positive Day: May

As you know, I like to start each month with positive news about businesses.

Brooks Brothers makes it easy for websites to become affiliates. Follow the simple instructions, and you, too, can begin to earn money ... commissions range between 5% and 7%. Many online retailers practice this strategy, Brooks Brothers makes it very easy for the end user to sign up.

Bellacor has an RSS feed for their Clearance Center.

Tweeter has an Expert Advice section, available as an RSS feed (see the left side of the page). It looks like the feed is about a month old.

When you visit Monterey Bay Clothing Company's home page, you notice a different visual presentation than when visiting most sites. Based on this page, what form of marketing drives visitors to the home page?