The Nordstrom Piano

Reverend Billy might suggest that the decision to discontinue live piano music in select Nordstrom stores is an indicator of the coming "shopocalypse".

For some, this is like McDonalds taking down the Golden Arches, or Nike removing the swoosh from their shoes. The decision erodes the story the consumer tells herself about why she chooses one retailer over another.

I detest it when bloggers indiscriminately rip big companies in the name of generating additional "subscribers" ... I mean, really, how different is that from when big companies make bad decisions in the name of shareholder value? Real people, good people, work at big companies, doing good things. I don't like to see these people harmed.

I also detest it when big companies indiscriminately humble the very consumers they depend upon for their existence, exploit low-wage workers to satisfy shareholders, or slowly deviate from the things that made them special, different.

Do we buy from a retailer because they hire a person to play piano? Do we buy from a retailer because they meet a need at an acceptable price? Do we buy from a retailer because they are nearby and convenient? Do we buy from a retailer because the employees treat you well?

Or do we buy because of the way these factors "interact" with each other?

Most likely, it is the latter. And nobody is smart enough to forecast how one factor interacts with another. We just wait and see.

Books You've Purchased

Don't know why I didn't do this sooner ... I recently joined the Amazon Associates program.

I get to see some interesting information. For instance, about eleven percent of you buy something when clicking-through one of my two book links. More than half of those purchases end up being something that I didn't author.

Here's what you end up purchasing:

• Hillstrom's Multichannel Forensics (thank you).
  
• Hillstrom's Database Marketing (thank you again!).
• Super Crunchers by Ian Avres.
• Libey and Pickering on RFM and Beyond, by Don Libey and Christopher Pickering.
• Web Analytics An Hour A Day by Avinash Kaushik (ok, you're not buying this book, but you should be). It's the 2,441st most popular book on Amazon, written by one of our "Friends of MineThatData". I bought the book ... so far, so good. All proceeds are donated to charity.
  
• The Business of Database Marketing by Richard Tooker.
• Optimal Database Marketing by Ronald G. Drozdenko.
• Data Mining Techniques by Michael A. Berry.
• Competing on Analytics, by Thomas H. Davenport.
• Strategic Database Marketing by Arthur Middleton Hughes.
• Marketing Metrics by Paul W. Farris.
• Waiting For Your Cat To Bark by Bryan Eisenberg.
• The Long Tail by Chris Anderson.
• Know How, The Eight Skills That Separate People, by Ram Charan.
• Made To Stick, by Chip Heath.

Diminishing Returns, The Square Root Rule and Peak Profit

We've previously talked about diminishing returns in marketing.

Understanding how diminishing returns impact profit is something that anybody can do.

You don't have to be accountable for paid search or online marketing or catalog marketing to understand how effective your strategy is at a macro level.

And the level of science is irrelevant. Most statisticians would become paralyzed by all of the assumptions being violated here. You're not trying to be a perfect statistician. You're trying to approximately understand where marketing spend is optimized.

Here's Example #1:

• Your paid search marketing budget is forecast to be $1,000,000 this year. You also expect to generate $4,000,000 demand. You convert demand to profit at a rate of 40%.

• Profit = $4,000,000 * 0.40 - $1,000,000 = $600,000.

• Using the square root rule, we can measure where "peak profit" occurs.

	Square
Spend Levels	Root	Demand	Profit
$500,000	0.707	$2,828,427	$631,371
$600,000	0.775	$3,098,387	$639,355
$700,000	0.837	$3,346,640	$638,656
$800,000	0.894	$3,577,709	$631,084
$900,000	0.949	$3,794,733	$617,893
$1,000,000	1.000	$4,000,000	$600,000
$1,100,000	1.049	$4,195,235	$578,094
$1,200,000	1.095	$4,381,780	$552,712
$1,300,000	1.140	$4,560,702	$524,281
$1,400,000	1.183	$4,732,864	$493,146
$1,500,000	1.225	$4,898,979	$459,592

Here's where you have a series of choices. You are generating $600,000 of profit at $1,000,000 of paid search spend. However, "peak profit" occurs at $600,000 of spend. If you want to achieve better profitability, you spend $400,000 less, and give up nearly a million dollars of demand.

Folks who measure lifetime value combine short-term and long-term profit, and probably end up spending more than a million dollars based on those findings. Notice how diminishing returns occur, especially after a million dollars of spend.

Also notice how few online marketers measure anything beyond "cost per order" --- there's an opportunity for online marketers to improve their "tool box" with this style of analysis.


Example #2:

• You spend $40,000,000 on catalog marketing. Although your productivity has been in decline for several years, your catalogs are still profitable. You generate $170,000,000 of demand across channels, with 40% converted to profit.

• Where does "peak profit" occur?

	Square
Spend Levels	Root	Demand	Profit
$20,000,000	0.707	$120,208,153	$28,083,261
$24,000,000	0.775	$131,681,434	$28,672,574
$28,000,000	0.837	$142,232,205	$28,892,882
$32,000,000	0.894	$152,052,622	$28,821,049
$36,000,000	0.949	$161,276,161	$28,510,464
$40,000,000	1.000	$170,000,000	$28,000,000
$44,000,000	1.049	$178,297,504	$27,319,002
$48,000,000	1.095	$186,225,670	$26,490,268
$52,000,000	1.140	$193,829,822	$25,531,929
$56,000,000	1.183	$201,146,713	$24,458,685
$60,000,000	1.225	$208,206,628	$23,282,651

Here, we see that "peak profit" occurs at $28,000,000 of catalog spend. However, the amount of profit difference between $28,000,000 of spend and $40,000,000 of spend is not significant. Most marketers would err on the side of spending more, in this instance, due to the obvious benefits of growing the customer file.

Again, you don't have to be responsible for online marketing, catalog marketing, or e-mail marketing to do this type of analysis. Take the initiative to get your hands on some data, partner with your finance team if necessary, and analyze where "peak profit" occurs in your marketing efforts. Find out where diminishing returns take a bite out of profit.

Gift Wrapping At Amazon.com

Here's a thorny challenge.

Maybe you're like me (most likely you're not like me, but that's a topic for another day). Being 1,700 miles from family, you visit Amazon to purchase a gift for your nephew for Christmas.

You select the gift, then you select gift wrapping. Except, the item isn't eligible for gift wrapping. The item comes from one of Amazon's partners.

In this case, you run into a unique challenge in multichannel marketing. Amazon uses a vendor that allows for a different customer experience than the experience typically promoted by Amazon.

If you were CEO of a brand that had business partners with different customer service capabilities than your brand, how would you deal with this challenge?

A Record Cyber Monday!

At least it was a record "Cyber Monday" at The MineThatData Blog.

• Site visitors were up 150% over last year's Cyber Monday bonanza.
• RSS subscribers were up 700% over last year.
• There were no incentives, doorbusters, or "free" promotions of any kind required to drive this kind of traffic.
  

The Shop.org SmartBrief suggests that this was a record Cyber Monday. Some record. Shop.org and the National Retail Federation claim to have invented "Cyber Monday" in 2005. So, online sales on the Monday after Thanksgiving outperformed last year's sales, and those of 2005.

I'm willing to bet that most online retailers could make this claim for at least 325 different days during 2007 ... for instance, on October 22, 2007, online sales outperformed those of October 22, 2006, and outperformed those of October 22, 2005, suggesting record performance on October 22 of this year.

And you didn't need to offer special promotions to make magic happen on October 22.

And that's the sad part of all of this. By creating an online holiday that never really existed, business leaders believed the hype, and discounted their brand with %-off and free shipping promotions in an effort to "remain competitive". What a shame.


Update 11/28/2007, 6:00am PST: Another press release from Shop.org suggests that 72,000,000 Americans were planning to shop on Cyber Monday. Shop.org also estimated that $700,000,000 was spent online on Cyber Monday. Let's do some math ... $700,000,000 spent online divided by the 72,000,000 customers "planning" to shop online = between $9 and $10 spent per planned online shopper. We know that number isn't mathematically possible (average order sizes are often +/- $100), suggesting the online research is highly flawed. In reality, it is more likely that about 7,000,000 customers were planning to shop online on Cyber Monday. Ugh, endless hype.

Who Benefits From Flawed Matchback Analyses?

This is my final discussion about matchback analyses for awhile, as I'm sure many of you are ready to read about other topics. But I got chewed on, I was told to stop talking and get on the multichannel bandwagon. That bandwagon may be financially hurting some catalogers. Somebody needs to talk about that.

Let's think about the industries that benefit from incorrectly executed matchback analyses. Mind you, I'm not picking on any specific individual --- I've observed many folks in these industries who counsel clients in a positive way.


The USPS: Ever wonder why it seems like there are more catalogs in your mailbox these days, compared with a decade ago? Here's a secret ... if you mail every one of your internet buyers a catalog, a matchback analysis might tell you that the catalogs drove all online orders within twelve weeks of the catalog mailing ... even if search and e-mail marketing and organic demand were truly responsible for the orders. The USPS (and now the good folks in the UK as well) commission studies that "prove" that catalog mailings drive online orders. I'm not saying catalog mailings don't drive online sales --- I'm just saying we are significantly overstating the importance of catalog mailings via flawed matchback algorithms.

The Co-Ops: Catalogers love co-ops these days. Catalogers get names that perform better, and get them at a lower cost than via list vendors. So co-ops have a financial incentive to promote flawed matchback algorithms (though some truly try their hardest to do a good job). By "proving" that catalogs drive online orders, catalog clients order more names from the co-op, driving co-op sales and profit. An even bigger conflict of interest occurs when co-ops actually execute the matchback algorithm for the client.

Merge-Purge Houses: The cataloger gets matchback results from the co-op, orders more names, names that are merged at the merge-purge house, driving increased sales and profit for the merge-purge house. Also, many merge-purge houses run matchback analyses for catalogers, earning $$$ for their efforts.

Printers: If catalogs are "proven" to drive 70% to 80% of online sales (which does occasionally happen, but not as often as we're being told), then printers benefit, too. The cataloger mails more catalogs than they normally would, which drives sales and profit for the printer. If the printer delivers catalogs deep into the mail system, then the printer can earn more $$$ too.

Paper Industry: Some of my feistier conversations have been with folks in the paper industry. More catalogs means more paper, which means more $$$ for those in the paper industry.

List Industry: I'm much less critical of the list industry, because by and large, these folks acted with integrity for the past decade, recommending that clients shift names from lists to the co-op industry, knowing all-too-well that it would result in the death of the list industry. But flawed matchback analyses help those in the list industry as much as they help the co-ops.

Trade Journals: We read about multichannel marketing and matchback analyses in trade journals. These publications depend upon the vendor community for advertising revenue. The vendor community depends upon the trade journal to "get the word out". This symbiotic relationship benefits from promotion of matchback analyses that may not accurately reflect the "truth".


So, let's look at the ecosystem that depends upon matchback analyses that are sometimes flawed.

Co-ops and merge-purge vendors do the matchback analysis, attributing too many online orders to the catalog channel. This causes the cataloger to order more names from co-ops and list vendors than they should, financially helping co-ops and list vendors. These names go into the merge-purge process, financially helping merge-purge vendors. Next, the names go to the printer. Paper reps financially benefit from over-mailing, as do printers. The printer delivers the catalogs deep into the mail system, where the USPS benefits by delivering too many catalogs to customers. Then trade journals tell us all about multichannel customer behavior, funded by the profits the vendor community get from matchback analyses.

It looks to me like the entire catalog ecosystem benefits from flawed multichannel matchback analyses. The only parties who don't benefit are customers, who may not want the catalogs, and catalogers who over-mail catalogs, causing harm to the profit and loss statement.

This is why I've been told to stop talking, to "get on the multichannel bandwagon". This is why I try hard to freely share information with catalogers and multichannel retailers.

Three Types Of Catalog Buyers, And Profitability

Catalogers face big challenges when evaluating the profit of catalog mailings. Given that matchback analyses have long over-stated profitability (at the benefit of the vendors providing these analyses, or the list/co-op industry, folks who depend upon inflated catalog results for improved financial success), we've trained a generation of catalog and online marketing experts to evaluate catalog profitability in a suspect manner.

Some catalogers are studying profitability by evaluating quarterly contact strategy tests. These catalogers purposely choose to not mail segments of customers for three months at a time. At the end of the test period, the difference in performance between the mailed and control group is evaluated.

There are three types of catalog buyers that are frequently evaluated.

First, let's evaluate customers who only shop via telephone. These customers are the easiest to measure, because they seldom buy online, meaning our old-school analytical techniques are still effective.

Quarterly Test Results
Audience = Telephone - Only Buyers
	Phone	Online	Stores	Total
Mailed Group	$15.00	$2.00	$2.00	$19.00
Not Mailed Group	$0.00	$1.00	$1.50	$2.50
Increment	$15.00	$1.00	$0.50	$16.50
Demand			$16.50
Net Sales	80.0%		$13.20
Gross Margin	50.0%		$6.60
Less Book Cost			$3.00
Less Pick/Pack/Ship	11.0%		$1.45
Variable Profit			$2.15

This analysis is straightforward. The mailing strategy generated $16.50 demand and $2.15 profit per customer. Matchback analyses are typically accurate among this audience, due to limited spend in the online or retail channels. As long as online/retail spend is minimal, matchback analyses are accurate.


The second segment of customers provide more of a challenge. In the past twelve months, these customers shopped via telephone, and shopped via the internet. Here is what the results can look like within this audience/segment.

Quarterly Test Results
Audience = Telephone + Online Buyers
	Phone	Online	Stores	Total
Mailed Group	$7.00	$8.00	$2.00	$17.00
Not Mailed Group	$0.00	$4.00	$1.50	$5.50
Increment	$7.00	$4.00	$0.50	$11.50
Demand			$11.50
Net Sales	80.0%		$9.20
Gross Margin	50.0%		$4.60
Less Book Cost			$3.00
Less Pick/Pack/Ship	11.0%		$1.01
Variable Profit			$0.59

This is where matchback algorithms begin to fail. The matchback algorithm will take credit for all $8.00 per customer spent online, allocating that revenue to the catalogs that were mailed. Mail/holdout tests tell us the true story, however. Had catalogs not been mailed, $4.00 would have happened online anyway.

Your matchback vendor tells you that you got $7.00 over the phone, and $8.00 online, so all is good! In reality, you got $7.00 over the phone, and $4.00 online --- profit isn't nearly as good.


The third audience includes customers who only shop online. Multichannel pundits strongly believe that catalog mailings drive these customers online. Here's what one might observe, after a quarterly contact strategy test.

Quarterly Test Results
Audience = Online - Only Buyers
	Phone	Online	Stores	Total
Mailed Group	$2.00	$13.00	$2.00	$17.00
Not Mailed Group	$0.00	$9.00	$1.50	$10.50
Increment	$2.00	$4.00	$0.50	$6.50
Demand			$6.50
Net Sales	80.0%		$5.20
Gross Margin	50.0%		$2.60
Less Book Cost			$3.00
Less Pick/Pack/Ship	11.0%		$0.57
Variable Profit			($0.97)

This audience is treated incorrectly by matchback algorithms. Your matchback vendor will tell you that you got $2.00 via the phone, and $13.00 online, yielding $15.00 total. Your matchback vendor will tell you that this is good!!

However, your mail/holdout test results tell you something different. Had you not mailed catalogs, you still would have gotten $9.00 of the $13.00 online. Therefore, when you run the incremental profitability calculation, you find that catalog marketing is unprofitable in this audience.

The reality is that natural search, paid search, e-mail marketing, affiliate marketing, portal advertising, shopping comparison marketing, word-of-mouth, and brand recognition all contribute to the $9.00 of volume you achieve if you don't mail catalogs to this customer.


This type of analysis is sorely missing in modern catalog planning. Some matchback vendors understand these issues, and genuinely try to help us. Sometimes, the thought leadership simply isn't there --- and it is costing catalog marketers millions of dollars of profit.

My level of frustration on this topic continues to grow. Recently, I was told by a vendor-based industry leader to stop talking, and "get on the multichannel bandwagon".

I have no problem with multichannel marketing. I do have problems with industry leaders that mislead (maybe not purposely) catalogers in a way that harms catalogers, but helps the very vendor industry that depends upon catalogers for success.

More RSS Feeds Posted On The MineThatData Blog

When I asked for feedback about this blog, I learned that this blog was used as a homepage (by the way, I've awarded the free book, thanks for all of the feedback!).

So I've expanded the number of RSS feeds featured on the right side of the page. Each day, you'll be able to enjoy content from many different sources in the direct marketing industry, including the following:

• DMNews, Multichannel Merchant, Catalog Success, Direct Magazine, Seth Godin, Marketing Sherpa, Forrester Research, Shop.org, Marketing Profs Daily Fix, Avinash Kaushik, Alan Rimm-Kaufman, Jim Novo, David Raab, Tamara Gielen, Juice Analytics, LunaMetrics, Becky Carroll, James Taylor, Adelino de Almeida, Sandro Saitta, Jeff Larche, Suzanne Obermire, Chris Baggott, Alison Bolen, Customer U Blog, Michael Fassnacht, Sandeep Giri, Rick Whittington, Anthony Power, Gretchen Scheiman, Pat LaPointe, Dean Abbott, Sarah Clelland / Snow Patrol, Mark Brownlow, Mack Collier, Grant Johnson / Johnson Direct, Manuel Lima / Visual Complexity, Ted Grigg, Harry Joiner, F. Curtis Barry, Bob Bly, Charlene Li, John Hagel, Varien's e-Commerce Cache Blog.

Some "Friends of MineThatData" had invalid RSS feeds, and therefore, weren't included. If you think your blog should be included in this list, send me an e-mail, and I'll review the content to see if it is appropriate.


You might be wondering about some of the comments folks offered for this blog. Here's a sampling of comments:

• More discussions about retailers.
• Shorter posts.
• More discussions about analytics, and show the actual solutions.
• More free spreadsheets (mentioned often).
  
• Re-define what a "catalog customer" is.
• Impact of price of oil on direct merchants.
• Diminishing returns of increased advertising.
• More on time series modeling.
• More on business applications of data mining (mentioned often).
  
• Make big ideas implementable for small businesses.
• More B2B ideas and discussions.
• Talk more about measuring campaigns across channels.
• Keep the list of posts broad, not narrow in scope.
• Talk more about ROI.

Organic Demand

One of the least understood concepts in cataloging is the concept of "organic demand".

A long time ago (aka 1994), catalogers controlled every aspect of their business. Sales were not generated unless a catalog was mailed.

Conversely, retailers thrived almost entirely on the concept of "organic demand". In other words, because there was an Ann Taylor store at the Galleria, sales were going to be generated. Ann Taylor could do absolutely no advertising whatsoever, and yet, the store would have loyal customers shopping every few months.

Back in 1994, you analyzed all customers who purchased in 1993. For catalogers, the relationship looked like this:

• Normal Mail Stream = $150 spent in 1994.
• Do Not Mail Catalogs = $0 spent in 1994.

Back in 1994, the relationship looked like this for retailers:

• Normal Advertising Campaign = $150 spent in 1994.
• No Advertising At All = $130 spent in 1994.

For catalogers, advertising meant everything. For retailers, advertising marginally increased sales.

Starting in 1995, e-commerce ruined each discipline.

See, e-commerce is a true hybrid of cataloging and retailing. Today, a cataloger might have the following relationship:

• Normal Advertising Strategy = $150 spent in 2007.
• No Advertising At All = $70 spent in 2007.

In 2007, cataloging incorporates the concept of "organic demand". Customers will purchase from Cuddledown, regardless whether catalogs are mailed, e-mails are delivered, or paid search campaigns are executed. Without advertising, customers will simply visit http://cuddledown.com and buy merchandise.

And this is where we, as direct marketers, fail miserably. We want to "attribute" every single order to one of our marketing strategies. We are systematically frustrated by the customer who simply types http://cuddledown.com and buys something.

So we do a matchback analysis, and claim that a catalog mailed eight weeks ago must have been responsible for this order.

If you work for a cataloger, and struggle with the concept of "organic demand", demand that occurs without any advertising, set up an appointment to meet with a non-competitive retailer. If you work at Cuddledown of Maine (an example, not a critique of this wonderful brand), why not call the folks at a non-competitor like Best Buy, and arrange for a two day field trip? Learn how retailers cope with the concept of organic demand by spending time with folks who deal with this concept, a concept that requires a fundamentally different style of measurement.

A Veritable Harvest Of Information

For your weekend reading pleasure:

Chad White covers the e-mail campaigns of the top one hundred retailers, so that you don't have to. Here is a summary from the past few days.

Mark Brownlow shares places to get good ideas for e-mail campaigns.

From Johnson Direct, a brief discussion about handwritten thank you cards.

Marketing Sherpa ... how to get your business book published!

Forrester Research continues to dive head-first into Facebook issues and privacy.

Tamara Gielen talks about competition in E-Newsletter Ads. Her e-mail blog is one of my favorites for reasonably unbiased information.

David Raab knows how to review software. Here's a discussion about SAS real-time decisioning.

Avinash Kaushik shares six recommendations for measuring blog success. By the way, his book on Web Analytics is a HUGE success, with proceeds donated to charity.

The Rimm-Kaufman Group has an excellent post on paid search for companies just starting out in the world of paid search.

Here's a story about the Seven Perils of Segmentation from the esteemed Jim Novo.

An oldie but a goodie from Jim Fulton on hiring, training and nurturing Database Marketers.

The folks at Juice Analytics tell us how to optimize a low traffic site.

Ron Shevlin vents about the content at conferences.

Enterprise decision management cult icon James Taylor talks about the revival of personalization.

Adelino de Almeida shares his thoughts about Starbucks and their television marketing strategy.

Sandro Saitta reviews the book, Web Dragons, a book about search marketing.

Targeted B2B marketing is one of the topics that Jeff Larche discusses this month.

RRW Consulting shares a retention case study that's worth reading.

Alison Bolen shares a few comments from a recent interview that SAS founder Jim Goodnight gave.

Customer U talks about no-cost customer research tools.

Michael Fassnacht writes about a presentation he watched on the "Read/Write" culture (I also watched this presentation, it's a good use of 20 minutes).

Sandeep Giri talks about the polarization of business intelligence solutions.

Jonathan Starets co-created a campaign that was a top three finisher for DMA Marketer of the Year.

Rick Whittington has a series on Holiday Shopping Tips. Here's tip number one, put best selling items on the homepage.

Anthony Power mentions that last month's DMA conference lacked buzz.

Gretchen Scheiman links to an article that discusses the history of e-mail.

Pat LaPointe doesn't think Google is about to dominate marketing dashboards.

UK-based Catalogue/E-Business allows readers to ask questions of direct marketing experts.

On the F. Curtis Barry blog, there's a discussion about how contact centers handle e-mail.

Harry Joiner talks about resume spam.

Ann Handley at Marketing Profs now offers snack-sized newsletters.

Mack Collier offers his readers a veritable plethora of link love to his Marketing Top 25.

Damien Francois writes about intelligent machines over at his blog.

Don Libey shares his thoughts about mergers and acquisitions with DMNews.

Cyber Monday: Whoopie!

Having digested my turkey dinner, it is time to focus on where commerce is headed over the next few weeks.

Grizzled direct marketing veterans spent portions of the past ten decades forecasting sales volume between Thanksgiving and Christmas. It was an important job, because you had to have just the right staffing level to handle the call volume on "peak day". Every cataloger had to predict the day that would be the "peak day" between Thanksgiving and Christmas.

And then the internet channel came along. Suddenly, everything needed to be "re-discovered". You didn't walk down the hall to talk to the catalog forecasting manager to identify which day would be "peak day".

Nope, there would be a new term, called "Cyber Monday". It would be the Monday after "Black Friday", with Black Friday being the day when you woke at 2:00am so that you could stand in line for the opening of the Kohls store at 4:00am so that you could enjoy the myriad of benefits associated with a vintage "doorbuster" promotion.

Some people tried to do good with the term.

But for many others, it represents an opportunity to get attention. "Cyber Monday is the First Monday in December", or "Cyber Monday is the last Monday before Christmas", or "There are actually four Cyber Mondays", or "You better have discounts or promotions or you'll be left behind on Cyber Monday", or "You'll be dead without an e-mail strategy for Cyber Monday".

Most assuredly, you still have a peak day, dependent upon consumer demand and your catalog/e-mail/paid search/organic traffic/free shipping/last day for expedited shipping strategy.

Somebody in your company knows what day this is. Go ask that person what day really matters in your company.

Theoretical Catalog Circulation And E-Mail Question

Catalog circulation is a beautiful blend of art and science.

When you send a catalog that costs $0.80, you must generate a suitable return on investment. In other words, short-term plus long-term profit must exceed this huge cost threshold, or you cannot afford to mail the catalog. Out of necessity, the catalog circulation manager must be scientific, must be rigorous, must focus on every tiny detail.

E-Mail marketers never had to deal with this challenge, given that the discipline, on a variable cost basis, is close to free. The cost structure encourages vastly different behavior. The e-mail marketer can be much less rigorous, and yet be far more successful than the catalog circulation expert.

Take the example of an e-mail opt-in subscriber who failed to interact with any of the past forty weekly e-mail campaigns your company chose to send to this customer.

E-mail marketers, please make a case for whether this customer should or should not receive next week's e-mail campaign (which has essentially no variable cost associated with it), given that the customer chose to ignore the past forty campaigns, and that the customer gave you no inclination that the customer does not want to see future campaigns.

Fast Forwarding

A decade ago, I spent considerable time reading about what the folks at the Santa Fe Institute were doing.

These folks take advanced mathematics to a whole new level (compared to mere mortals like you or I).

I became acquainted with a pair of individuals at the Santa Fe Institute who were working on retail simulations. They developed a computer model that illustrated how customers walked through a store, with the trip culminating in a purchase, or the customer leaving the store. The simulation depicted dozens or even hundreds of simulated shoppers walking a simulated store.

Within the simulation, you could see what happened if the line at the checkout was too long, or if merchandise was sold-out in a department, or if the store was too crowded.

I asked these individuals to visit us at Eddie Bauer. I invited a team of peers and leaders to the presentation. The simulation developers shared the tool with the folks I invited to the meeting, using verbal language associated with the simulation software tool.

Eddie Bauer employees stared at the tool. One person said something like "How would you apply this tool to our business?" The meeting ended. There were no questions. I thanked the folks from the Santa Fe Institute for their time.

We never mentioned the meeting, or software tool, again.

When we watch television on our DVR, we skip commercials. We seldom skip all the parts between the beginning of a show, and the end of a show. What happens in-between is important to the conclusion of the show.

Similarly in business, we cannot fast forward our co-workers from where they are to where we want for them to be. Our job gets even harder when we have to fast forward ten employees, or a thousand employees, or fifty thousand employees. Sometimes we expedite the process, we "trump" individuals by having a leader point the organization in a certain direction. But at a grass roots level, fast forwarding is hard work.

Do you have examples of concepts you tried to evangelize in your business, only to find that the business wasn't ready to embrace your ideas? What did you do when you ran into obstacles?

Offer Your Suggestions, And You Might Win A Free Book On Multichannel Forensics

More than a thousand of you read this blog on a daily basis.

Why?

I'm looking for a little feedback.

If you're willing to send me an e-mail or leave a comment, share why you read this blog, your company category (client or vendor), industry (catalog/multichannel, retail/multichannel, online pureplay, e-mail, search, web analytics, business intelligence), and what you'd like to see me talk about in the future. Criticisms are welcomed, feel free to tell me what you're sick of!

You can leave an anonymous comment.

If you choose to identify yourself (probably best done via e-mail), you'll be entered into a drawing for a free copy of my new book, "Hillstrom's Multichannel Forensics". That's a $95 value, folks!

Thank you in advance for taking a moment to help me understand how to provide you with a better experience.

Thanks,
Kevin

Hologram Marketing On The Horizon

We're evolving toward Hologram Marketing at Darwinian speed:

• Brookstone 3-D Online Store.
• From Alan Rimm-Kaufman --- sku-level videos.

Co-Ops, E-Mail Targeting, and Modified RFM

Long time reader "Ray" asked if the co-ops offer a comparable product to Modified RFM for e-mail targeting. That's a good question!

Many of my readers work at co-ops. Co-ops already use product-specific information to decide which catalogs customers receive. Co-op readers, do you have a comparable product to Modified RFM for e-mail targeting?

It would seem likely that the depth of customer information across companies would give co-ops significant competitive advantages over e-mail vendors who do not possess the depth of data held at co-ops.

Co-op readers, please provide your answer in the comments section of this post.

Emphasizing New Product In Modified RFM E-Mail Targeting

Here's another quirk. You have new product that you want to feature in your e-mail targeting strategy.

If the has never been sold, you probably cannot come up with a weighting score for this product. In this case, you make up manual rules for deciding who gets that version of the e-mail campaign.

But if the product has been available for a few months, you may get a decent weighting score. In these cases, you may need to artificially increase the weights, in order to allow enough customers to receive this version of the e-mail campaign (multiple versions on the same day, customer only receives one version on that day).

More On Modified RFM For E-Mail Targeting

Many wonder what to do when you have two potential versions of an e-mail campaign. Which version should a customer receive?

Companies loaded with analytical talent have interesting algorithms to make these decisions. Yesterday, we talked about a shortcut that gets us 80% of the benefit for about 5% of the work.

But what do you do when one version of an e-mail campaign is so much more productive than another? In other words, say you have a Mens and Womens version of an e-mail campaign, and the customer could receive either version, but the Mens version is much less productive (sales per e-mail) than the Womens version?

A shortcut is to evaluate the historical difference in productivity, and apply that to the "weighting" score from yesterday's post. In other words, if the Mens version performs at 65% the level of a Womens version, multiply your Mens weighting scheme by 65%.

Again, this is statistical blasphemy. But you don't work at a company where you have thirteen statisticians sitting around waiting for new and exciting challenges. You're lucky to have one good analyst, and the demands upon this person's time are many. So take the shortcut, and get 80% of the benefit for 5% of the work. And when you have the money and/or human resources to do e-mail targeting the right way, by all means, pursue the ideal answer.

Modified RFM For E-Mail Targeting

RFM is great for targeting one catalog to one customer. However, RFM is tough to manage in a multichannel environment.

This becomes clear in e-mail targeting. Say you have a Mens version of an e-mail campaign, and a Womens version of an e-mail campaign --- a customer could receive either version on the same date. Use this customer as an example:

• Customer spent $100 on Mens merchandise in the past three months.
• This customer also spent $200 on Womens merchandise 7-12 months ago, and spent $100 on Womens merchandise 13-24 months ago.

Which version of the e-mail campaign do you send to a customer? You could use RFM --- your customer is a 0-3 month $100 mens buyer, and is simultaneously a 7-12 month $300 womens buyer. Which "segment" carries more "weight".

This is where we apply "Modified RFM".

Have your statistician build a regression model one time --- and use the "weights" or "coefficients" for your modified RFM scheme. I realize this is statistical blasphemy, however, we aren't managing clinical trials for cancer drugs, we're deciding which version of an e-mail campaign a customer receives.

Step 1: Pick a "dependent" variable for "Mens". I like to look at the past twelve months.

Step 2: Create a series of "independent" variables:

• Dollars spent on Mens in past three months (prior to the dependent time period).
• Dollars spent on Mens 4-6 months ago (prior to the dependent time period).
• Dollars spent on Mens 7-12 months ago.
• Dollars spent on Mens 13-24 months ago.
• Dollars spent on Mens 25+ months ago.

Step 3: Regress these five variables against your dependent variable. The "coefficients" become "weights" for e-mail targeting, as you'll see soon.

Step 4: Repeat Steps 1-3 for Womens merchandise.

Now, we can evaluate which version of an e-mail campaign a customer should receive. Let's look at our example:

E-Mail Targeting Strategy: Mens Weights
	Spend	Factor	Weight
00 to 03 Months	$100.00	1.600	160.0
04 to 06 Months	$0.00	0.600	0.0
07 to 12 Months	$0.00	0.300	0.0
13 to 24 Months	$0.00	0.150	0.0
25 to 99 Months	$0.00	0.050	0.0
Total Weight			160.0

E-Mail Targeting Strategy: Womens Weights
	Spend	Factor	Weight
00 to 03 Months	$0.00	1.600	0.0
04 to 06 Months	$0.00	0.600	0.0
07 to 12 Months	$200.00	0.300	60.0
13 to 24 Months	$100.00	0.150	15.0
25 to 99 Months	$0.00	0.050	0.0
Total Weight			75.0

For the Mens version of the e-mail campaign, the customer receives a "weight" of 160.

For the Womens version of the e-mail campaign, the customer receives a "weight" of 75.

So, you should send the customer the Mens version of the e-mail.

For your next campaign, you don't have to build models again --- remember, we're not trying to cure cancer, we're just figuring out which version of an e-mail campaign will improve response a bit. Just apply the same weights built in your prior modeling process, and decide who gets which version.

The key here is to not build separate RFM schemes. Instead, you build variables in your database that summarize purchases by 0-3 month, 4-6 month, 7-12 month, 13-24 month, and 25+ month time periods. Then you "weight" those purchases based on importance. This gives you a good targeting strategy.

Statistical purists will blast me for misuse of appropriate statistical techniques. That's fine. We're just trying improve e-mail marketing performance, while minimizing use of internal resources, or minimize expense incurred when hiring consulting statisticians. This gets you 80% of the benefit for about 5% of the work.

Yea, but ...

During my first year of consulting, the most frequently asked question is this:

... "What happened to customer behavior, sales, and profit, when you quit executing your traditional catalog marketing program at Nordstrom?"

At conferences, via e-mail, phone calls, lunch appointments, or client visits, I take the time to explain what happened.

And then I wait for the two most common words I hear in response to my experiences.

"Yea, but ..."

These two simple words are used to discount what was communicated, to suggest that one's opinion matters more than actual experiences held by another.

• "Yea, but you grew your website without a traditional catalog program because you had 100 stores to support the website."

• "Yea, but that won't work for my brand because my customers love my catalogs, whereas your catalogs looked tacky to me".

• "Yea, but I've read that multichannel customers are the best customers, so you have to have a catalog".

• "Yea, but did you stop and think about how you spammed your customers by e-mailing them twice a week? Long-term, you can't get away with that."
  

• "Yea, but that won't work for my brand because Abacus/Experian told me that 83% of my online orders came from customers recently mailed catalogs".

• "Yea, but that was 2005-2006, and customers behave differently today."

• "Yea, but that won't work for my brand because my merchandising assortment is identical, regardless of channel."

• "Yea, but that won't work for my brand because my customer is 64 years old, and doesn't trust the internet."
  

• "Yea, but online marketing doesn't work unless you're an online pureplay offering free shipping."

How often do we close our minds by using these two simple words? I think back to my days as a Vice President, and all the times my team brought ideas to me, ideas I would simply dismiss by saying "yea, but".

If you're an executive, try something different next week (it's a short week with Thanksgiving and all). Try going the whole week without saying the words "yea, but".

E-Mail And Catalog Profit Visualization

"Back in the day" at Lands' End, we had a team that measured the profitability of every spread in our core catalogs.

Even though this information was stored in a database for easy retrieval, the most effective presentation of the profitability of each spread (in my opinion, or IMHO to use the parlance of the day) occurred in a conference room.

Each spread was adhered to colored tag board.

• Gold Tag Board = 30% or better variable operating profit for that spread.
• Green Tag Board = 20% to 29.9% VOP for that spread.
• Blue Tag Board = 10% to 19.9% VOP for that spread.
• Red Tag Board = Worse than 10% VOP for that spread.

When we sat down to review a catalog, each spread was posted in the conference room, in order, from page 2-3 to the back cover.

Instantly, the "profit story" became clear. Visually, a rookie database marketer like myself could see what worked, what didn't work. Visually, I could see how merchandising and creative themes interacted to generate profit. I could see how one model yielded gold/green results, while another model turned customers off.

If you are an e-mail marketer, and you wish to effectively communicate with old-school marketers at your company, give this strategy a try.

Maybe you sent 20 e-mail marketing campaigns last quarter. For each campaign, sum the performance of all of your targeted versions, and adhere the main creative treatment to a piece of colored tag board. Do this for each of the twenty campaigns, and post the performance for all to see.

Each targeted version gets real estate on the tag board as well, with its own background color (gold, green, blue, red, or whatever scheme you wish to employ). Most certainly, you're measuring the profitability of each targeted version of an e-mail campaign, rolling the profit of each version up to a total level of profitability, right?

Invite your old-school CMO into the conference room, and review your twenty campaigns in this manner. Stop talking about open rates, click-through rates, conversion rates, landing pages, Outlook 2007, HTML vs. Text, rendering problems on mobile phones, and all the other gobbelty-gook that causes your old-school CMO to tune out. Simply focus on the colors. Explain how you're going to do more "gold and green" strategies. Explain why the CMO's recommendations resulted in "blue and red" performance.

And then, behind the scenes, build an OLAP-styled repository to store your historical results. Store open rates, click-through rates, conversion rates, dollars-per-e-mail, sales driven to the telephone, sales driven to stores, test results, profitability, and "gold/green/blue/red" status.

By the time your CMO is comfortable with your presentation style, you might even be able to surprise her with your OLAP-styled repository. Ok, maybe not!

And if you practice web analytics for a profession, would it be so hard to apply these principals to your landing pages, so that you can bridge the gap between all of your fancy data and the old-school marketers who don't understand what you're talking about? Give it a try!

Attention CEOs, CMOs, Owners, Principals: The F. Curtis Barry & Company Executive Forum

I'm pleased to announce that I will be facilitating a session at the Executive Forum! If you are a CEO, CMO, Owner, or Principal of a Multichannel Catalog, Online or Retail business, this event is for you!

Leaders of the top multichannel (catalog, e-commerce, and retail) companies will gather in Ft. Lauderdale, FL on February 24-26, 2008 at the Lago Mar Resort and Club for Executive Forum 2008. The annual event, co-sponsored by F. Curtis Barry & Company and MineThatData, draws executives from top multichannel companies who come together to network and share ideas in an open forum setting. There is limited space available, 40 seats (2 people max from each company), so don't hesitate to register.

What will be discussed at Executive Forum 2008?

Click here to read the growing list of hot topics and talking points that will be covered and discussed in detail at Executive Forum 2008.

Schedule for Executive Forum 2008

Executive Forum 2008 begins on Sunday, February 24, 2008 at 2:00 PM in the hotel conference room. Executive Forum 2008 wraps-up on Tuesday, February 26 at 2:00 PM.

Click here for general agenda for Executive Forum 2008. Topics and times will be split out closer to the time of Executive Forum 2008.

Cost for Executive Forum 2008

$100 Early Bird Special - If you officially register and pay in full by December 31, 2007, we will apply a $100 discount to the full price fee of $895. This will make your early bird special $795 per participant. The Early Bird Special applies to each participant registered from your company. Limited to 2 participants per company.

Full Price - If you officially register after December 31, 2007 the registration fee is at full price of $895 per participant.

Hotel for Executive Forum 2008

The hotel for Executive Forum 2008 is the Lago Mar Resort and Club in Ft. Lauderdale, FL. The special room rate is $265/night. Please let them know that you are with the F. Curtis Barry & Company group to receive this special room rate.

Note - All reservations and cancellations are to be made by each individual. The room rate, taxes, and any incidentals are not included in Executive Forum 2008 fee and must be paid by each individual.

Cancellation Policy for Executive Forum 2008

If you must cancel for any reason, please notify us in writing by January 7, 2008 to receive a full refund. Cancellations from January 8, 2008 through January 18, 2008 will receive a 50% registration refund. Refunds cannot be granted on cancellations on or after January 24, 2008. You may, however, transfer your registration to another person at any time.

Registering for Executive Forum 2008

Click here to register for Executive Forum 2008

Past Executive Forum Reviews

Executives who have attended gave Executive Forum “rave reviews,” citing it as a “must attend” for their companies. Here are a few:

“Very good program, came away with several actionable ideas.”
– Bill Stanners, Chief Financial Officer, Norm Thompson Outfitters

“You got more than enough good information to cover the cost of the trip.”
– Jay Alpert, President, Professional Cutlery Direct

“The Forum was much more valuable than other conference-type events. I gained many ideas for the future.”
– Jay Allen, Marketing Director, Rochester Clothing

“Great opportunity for information sharing. Informal networking is just as valuable as the formal sessions.”
– Greg Kadens, Partner, Chiasso

“Priceless”
– Layne Lowery, President, Health Resources

"Prior years I walked away with 2 quick $70,000+ ideas. This year my takeaway is much more strategic.”
– Liz Plotnick, Snay, Chief Operations Officer, Gooseberry Patch

“Good people, good ideas, high caliber facilitation, and 2 very productive days.”
– Charles Silver, Vice President Marketing, Bloomingdale’s Direct

Who do I contact about Executive Forum 2008?

Please contact Jeff Barry at jbarry@fcbco.com or 804-740-8743.

United Kingdom: Catalog Driving 70-80% Of Online Orders?

Jim Fulton points us to this article, authored by the Catalogue Exchange in the UK. The article suggests that catalogers, using traditional matchback algorithms, are driving 70% to 80% of their online orders via catalog mailings.

The UK online market is a lot like the US online market five years ago. We read a lot of these articles in the US five years ago.

Early in the maturity of the online channel, catalogs are going to be the primary driver of online volume. Most likely, the study is directionally accurate.

Things get very interesting once the customer is trained to shop online, and decides she no longer needs the catalog to shop online. For some brands, this change in behavior never happens. For others, this happens very quickly. I lived through this change at Nordstrom --- folks with a traditional catalog mindset, very bright folks, don't understand the phenomenon when I describe it to them.

If you're reading this in the UK, here's a checklist for you:

• This study was published by a group of individuals with a vested interest in promoting catalog marketing. Just keep that fact in mind.

• Multichannel Forensics represent another way of understanding the long-term impact of catalog advertising, across all channels.
  

• Matchback analyses are highly biased. Want to learn how biased they are?
  
• Identify who you were going to mail your next catalog to.
  
• Take a sample of the audience.
  
• Split that sample in half.
  
• One half receives your next catalog.
  
• One half does not receive the next catalog.
• After twelve weeks, do a matchback analysis on the sample that received the catalog.
• After twelve weeks, do a matchback analysis on the sample that did not receive a catalog --- just don't tell your matchback vendor that they didn't receive the catalog.
• In this group, zero (0) customers ordered online because of the catalog --- they didn't receive the catalog!! If you matchback vendor tells you that online orders happened because the catalog was mailed, you've identified the magnitude of your matchback bias.
• Subtract the difference between matchback results in the mailed and not-mailed group. This is the true number of orders your catalog drove to the online channel.

The Writers Strike And Multichannel Marketing

I like to follow Ken Levine's blog, especially during the writer's strike. It's one thing to read a blog, it's quite another to read the blog of a writer.

TV writers want to be compensated when their work airs in the digital realm. When viewers watch "The Office" on television, writers receive some level of compensation. When viewers watch "The Office" on NBC.com, writers do not receive compensation.

How similar is this to the challenges folks in multichannel cataloging face?

When you boil it down, writers want credit for their work ... credit being compensation.

In multichannel cataloging, we see the same thing.

E-Mail marketers truly believe (and rightly so) that they drive significant volume. But they are sometimes hounded by catalog marketers who believe that e-mail marketers couldn't even do their job if the catalog didn't generate an order, causing an e-mail address to be collected.

Search marketers can't measure the business they drive to stores ... and if they could accurately measure it, their budgets would at least double in size.

Catalog vendors are desperate for respect. A printer has to prove that printed material causes online and retail sales to happen. The USPS must prop up mail volume. Co-ops depend upon occasionally biased matchback algorithms that suggest paper is the primary cause for online and retail orders. List brokers and list managers watch dollars flow out of their industry, into paid search ... or worse, they recommended that their clients use the co-ops, only to see the co-ops steal their business, causing consolidation.

The internet changed everything.

Writers want compensation when their work is consumed online.

Catalog, e-mail and paid search marketers and vendors want credit/compensation when consumers use their work to purchase merchandise online or in stores.

The only fair way to replicate a writers strike is to not execute your marketing tactics for a period of time.

In marketing, that isn't called "going on strike". It is called "a test".

If you want to prove that your catalog is so critical to your brand, take five percent of your customer file, and withhold catalog mailings for one year ... see what happens.

If you want to prove that your e-mail marketing is an integral part of your sales promotional strategy, take five percent of your e-mail file, and withhold e-mail campaigns for one year ... see what happens.

If you want to prove that search marketing is responsible for driving sales in stores, try taking five percent of key merchandising keywords, and withhold search marketing campaigns for these keywords for one year ... see what happens.

One year is an important time frame for marketing tests. See, customers don't notice when one of thirty-eight catalogs, or one of sixty-seven e-mail campaigns is missing.

Customers do notice when catalogs stop coming. Customers do notice when e-mails no longer show up. Customers then change their behavior.

This is what you want to measure ... you want to measure what happens when customers have no choice but to use other alternatives to shop. This proves the true value of your marketing channel.

I've executed these tests many times over the past twenty years. The results are never what you'd expect, never similar to what you see when you execute simple A/B splits in short-term marketing strategies. Customers are fascinating --- they do all sorts of unpredictable things when you take marketing away from them for a long period of time.

Your Long-Term Profit And Loss Statement

Multichannel catalogers face unique long-term profit and loss challenges.

For some catalogers, here's how the long-term profit and loss statement might evolve:

Current And Future Profit And Loss Statement
	Current/Catalog	Future/Online
Demand	$30,000,000	$30,000,000
Net Sales	$25,500,000	$25,500,000
Gross Margin	$12,750,000	$12,750,000
Catalog Marketing Cost	($3,825,000)	($750,000)
Online Marketing Cost	($1,275,000)	($2,310,000)
Pick/Pack/Ship	($5,100,000)	($5,100,000)
Shipping Revenue	$2,040,000	$0
Overhead	($2,550,000)	($2,550,000)
Earnings Before Taxes	$2,040,000	$2,040,000

We've been evolving toward the future/online profit and loss column for decades.

"Back in the day", catalogs were "big books", four or five hundred page monsters that cost a fortune to mail, delivering a gigantic amount of sales per catalog mailed. And I mean 'gigantic'!!!

The 1970s and 1980s were a time of transition, as specialty catalogers (i.e. L.L. Bean among hundreds of others) used computer algorithms to "target" customers with specific interests. The targeted catalogs were smaller in size, maybe between 48 and 248 pages. Instead of mailing the catalogs seasonally, the catalogs were mailed to "best customers" on a "frequent" (i.e. monthly or even weekly) basis.

Sending smaller, targeted catalogs on a frequent basis to "best" customers changed the profit and loss structure of cataloging. We saw the death of big books, with Wards, Sears and Spiegel (among others) feeling the wrath of the change in strategy.

Seasonal big books gave way to weekly/monthly targeted mailings. And then the internet showed up.

We embraced e-mail marketing, only to see the medium tainted by unscrupulous marketers. Even so, e-mail may just be a transitional marketing tool, bridging cataloging and online marketing.

We embraced the concept of "multi-channel", the concept that customers wanted to research and explore merchandise in catalogs, on websites, and in stores, before buying in the channel they preferred.

But more and more, I see trends indicating that long-term, the same audience won't shop from multiple channels. Instead, the internet channel will be the "primary" (if it isn't already) direct-to-consumer channel. The catalog/telephone channel will serve a small segment of the customer file that prefers this style of shopping. In online/retail situations, online represents the "research" channel, with retail representing the "purchase" channel.

This leads to an interesting set of dynamics. Long-term, the catalog will serve an ever-decreasing audience. Coupled with increased mailing costs and the onslaught of 'green initiatives' that will haunt catalogers in the next decade, the long-term profit of cataloging, while not doomed, is certainly "at-risk".

It seems plausible that the profit and loss statement at the start of this post represents a possible long-term future for many catalogers.

Online marketing should be (but isn't always) a more efficient marketing platform than sending paper to less-qualified prospects. Brands may use the cost savings from reduced cataloging to offer consumers free-shipping. Brands will hope that efficient online advertising and free-shipping will make up for the sales lost by not mailing catalogs.

The question for you, the catalog or retail marketer, is this ... do you think that you could replace cataloging with online marketing and free shipping, and maintain the integrity of your profit and loss statement?

Interaction

If you are an E-Trade customer with more than a hundred thousand dollars in your account, how brand loyal are you these days?

If I told you on January 1 of this year that E-Trade would be fighting for its life later in the year, would you have believed me?

Our digital society operates on a complex series of "interactions". Interactions are hard to predict ahead of time, but appear easy to see after the fact.

Assume that you purchase inventory at American Eagle Outfitters. Last October, your brand posted a +12% comp. In January of this year, as you made your commitments for this October, could you have predicted the series of economic factors that would conspire to cause customers to actually decrease spend with your brand this October by 3%?

Because if you had predicted this and acted upon it, you wouldn't be sitting on a boatload of inventory that has to be marked down, putting pressure on your profit and loss statement.

The future of multichannel retail belongs to leaders who can see how five or six different factors could combine to yield superior results.

And few of us in multichannel retail have been trained to operate in a world where success is based on combinations of factors that interact favorably with each other. Instead, we want to know the next 'big idea'. And we want it to be an easy big idea ... like re-arranging words in the subject line of an e-mail campaign, or a paid search campaign that works really well and is really inexpensive.

Those who are good at forecasting the interaction of separate factors are believed to have 'gut instinct'.

In our multichannel businesses, you'll know many people have acquired this 'gut instinct' when you start reading about how combinations of factors interacted to cause sales increases.

E-Mail Marketers will start talking about how modules of merchandise interact with creative templates to yield increases in response. When do e-mail marketers ever talk about this?

Database Marketers will stop telling you what happened in the past, and will start telling you what is going to happen ... and will give you a menu of options to avoid trouble.

Catalog Circulation Marketers will clearly explain the merchandising and creative strategies that cause customers to thumb through a catalog and then buy something on the internet or in a store. When is the last time a catalog circulation expert clearly explained this interaction to you in an actionable way, actually telling you how to paginate a catalog in a way that profitably increased sales across channels?

Online Marketers and Web Analytics experts will actually tell us how to assort a website, similar to how good catalogers paginate a catalog. We'll move from landing pages to merchandise themes, themes that replicate customer interests, themes that go beyond the severe limitations imposed upon e-commerce by information technology.

Who do you think is great at seeing how five or six separate factors fit together? Who acts upon these concepts, and drives sales in a profitable way today? Who will do well in the future? Do you have the tools to manage your business differently?

File Power

Folks who've been around the block a few times know that executives want to surround themselves with database marketing wizards who can predict the future.

With many businesses now struggling to post increases, executives are going to look to analytical folks, hoping to see evidence of a "turnaround".

A tool that is readily available to you is called "file power". It's not terribly hard to calculate, and should be run on a monthly basis. Let's calculate "file power" for an online business for November 2007.

Step 1: Identify all customers who purchased online from 11/1/2005 to 10/31/2006. Example: 100,000 customers.

Step 2: Calculate the average online spend, per customer, for this audience from 11/1/2006 to 10/31/2007. Many customers will have a value of $0, because they did not purchase. Example: $75.55 per customer.

Step 3: Identify all customers who purchased online from 11/1/2006 to 10/31/2007. Example: 110,000 customers.

Step 4: Multiply Step 2 by Step 3. This is called "file power". Example: 110,000 * $75,55 = $8,310,500.

This metric is re-run, every month, using the four steps listed above. The dates used in the analysis move forward by one month.

There are many ways to complicate this measure, to make the measure more accurate. Feel free to experiment.

Looking at this simple metric on a monthly basis will be telling.

At the end of my tenure at Nordstrom, this metric pointed south, month after month. In other words, the metric suggested we were running out of "file power". Comps were still increasing, year-over-year, but the customer file was running out of gas.

The metric is reasonably good at suggesting that a downturn will occur. The metric occasionally struggles to predict future upswings --- typically, great merchandise will inspire customers to purchase, fueling the customer file, causing "file power" to increase a month or two later.

Ok, your turn. What does your "file power" look like? Did you see this business downturn coming?

Diagnosing The Challenge

It looks like 75% of retailers tracked by Chain Store Age had October comp store sales under three percent.

Many nervous executives are going to ask what you can do to help lift business out of this slump.

A good place to start is to diagnose how various segments of customers are performing, year-over-year.

For instance, let's assume you have a segment of customers that is considered "best". During October 2007, you observed this level of performance:

• Number of Households On 10/1/2007 = 100,000.
• Percent Who Purchased In October 2007 = 15.0%.
• Spend Per Purchaser, October 2007 = $100.00.
• Net Sales Per Household, October 2007 = 0.15 * 100 = $15.00.
• Total Sales = 100,000 * 15.00 = $1,500,000.

Now, re-run the analysis for October 2006, using a comparable group of customers.

• Number of Households On 10/1/2006 = 105,000.
• Percent Who Purchased In October 2006 = 16.0%.
• Spend Per Purchaser, October 2006 = $97.00.
• Net Sales Per Household, October 2006 = 0.16 * 97 = $15.52.
• Total Sales = 105,000 * 15.52 = $1,629,600.

Compare each metric, year-over-year:

• Number of Households = -4.8%.
• Percent Who Purchased In October = -6.2%.
• Spend Per Purchaser In October = +3.0%.
• Net Sales Per Household = -3.3%.
• Total Sales = -8.0%.

What caused total sales to be down by 8.0%?

• More than half the problem occurred because there are fewer "best" customers compared with last year.
• The rate at which best customers purchased in October dropped by 6.2%. That's not good.
• Sales were helped some by spend levels that actually increased by 3%.

This analysis should be done for "best" customers, "average" customers,
"marginal" customers, and new/reactivated customers.

You want to identify where your shortfall is occurring. If you see the same trends across all segments, you have brand weakness or overall economic pressures suppressing your performance.

But if some customers are impacted, while others continue to perform well, you have unique challenges. If you're best customers are performing well, while marginal, new and reactivated customers are under-performing, you may have a portion of your customer base "trading down" to other brands they can afford, as an example.

If business stinks long enough, you'll notice a trend where all metrics look good, but there aren't enough customers to fuel growth. Called "file momentum", this is one of the more frustrating challenges merchants face --- they fix business problems, but have to wait to see the fruits of their labor.

As business conditions erode, be sure to stay on top of the metrics that tell you which customers are under-performing.

The End ... And The Beginning

The sour performance of many retailers during October signals the end of an era, in this author's humble opinion.

After recovering from 9/11, retailing (stores, catalogs, websites) experienced (overall) growth fueled not by real gains in employee wages, but instead fueled by banks offering cheap money to homeowners looking to augment stagnant wages.

Throughout the past year, the dominoes have been falling, one by one. I see it across many of the Multichannel Forensics projects I work on, I consistently see certain customer segments that have run out of momentum. In many cases, segments running out of gas are being "masked" by other segments that are still gaining, year-over-year.

Without an influx of cheap money, families will need to address staggering debt levels. We'll see fewer banks making $300 iPods and $600 handbags and $2,200 LCD monitor purchases possible.

In the short term, this will be good news for marketers who attract an audience via free shipping, %-off offers, or other games that manipulate consumer demand. Consumers will look for deals to get through this year's Christmas shopping season.

The real fun begins next year, especially next March. Once we get through the post-Christmas sale period, we'll see how consumers respond to a spring assortment of full-priced merchandise. I'm not optimistic that the response will be great --- my opinion is that the overall economic climate will suppress demand for spring merchandise.

This is where a "new beginning" occurs. This "new beginning" is healthy for our industry.

We won't grow sales via "gimmicks" or "best practices" in a less-than-robust economy. We won't turn around sour sales by having compelling subject lines in e-mail campaigns, or by using a different trim size in catalogs, or by offering free shipping with no hurdle online.

We will grow sales by offering compelling products and services, by offering consistently outstanding customer service, by meeting or exceeding the needs of a debt-strapped family.

Catalogers and retailers have been through this song and dance every few years, for a century or longer.

For e-mail marketers and online marketers, this downturn offers the potential to be "the beginning" of something special. All of the things you've learned, to-date, have been learned while the online economy pointed due north. It's easy to appear to do a good job when sales organically increase 20% or 40% or 100%, year-over-year, every year.

The truly gifted e-mail marketers and online marketers will emerge from the next few years with strategies that worked in a sour economy, not "best practices" that appear to work in an economic updraft.

These gifted e-mail and online marketers will become the future leaders of our retail, catalog and online businesses.

Personally, I am looking forward to seeing who emerges from this period of economic funk. Who do you think our future leaders will be, and what will be the DNA that identifies these individuals?

Move That Merch!

If your business is struggling, you're thinking ahead to January, that glorious month of off-price bliss.

You can move excess merchandise when everybody else is moving it.

You can also use the Christmas shopping season as a proxy-clearance season.

Sit down with a finance representative, and somebody from your inventory management team, and run some numbers.

For instance, how much of a lift do you get on free shipping with a hurdle? How much additional lift do you get on free shipping with no hurdle? Expedited shipping? You name it, run the numbers, and see if it is more cost-effective to move merchandise with incentives now, or if it is better to recover pennies on the dollar in January.

This is another place where Multichannel Forensics come into play. You can run a three channel simulation, where your channels are "Christmas/Promo", "Post-Holiday-Sale", and all other time periods. If the long-term value of a Christmas shopper using a promo is greater than a post-holiday-sale customer, use promotions now to clear excess merchandise.

Comps And Pressure

On Thursday, retailers will release comp store sales performance for October. Some are not expecting optimism.

One of the harder transitions you make as an employee is the transition from a healthy business to one that is struggling.

In the healthy business, you focus on objectives and projects, with varying levels of stress.

But when business goes in the toilet, your job is to immediately fix your business.

And this is a challenge, because in many cases, business doesn't stink because of anything you did. It isn't your fault that banks and homeowners partnered to fuel our economy on the paper value of homes. It isn't your fault that oil is surging close to $100 a barrel. It isn't your fault that Wal-Mart opened a new store and cannibalized 17% of your business.

It is your fault to not be prepared.

Every few years, businesses experience a downturn. Your job is to have everything in order, so that when leadership runs through your department with hair on fire, you are ready to respond to them.

If you are in business intelligence, you have algorithms pre-written to answer executive-level questions. You have bandwidth set aside to answer extra questions.

If you are in e-mail marketing, you have a "bible" of "what works", already documented and ready to be shared with anybody who wants to start adding e-mails to the calendar with clearance/sale merchandise. You walk your executive over to the "bible", and teach the executive how your craft works, while at the same time meeting a short-term business need.

If you are in online marketing, you've done your homework on clearance-based search marketing. You already have the answers for your executive. You tell your leader that if she spends $100,000, she will clear $300,000 of merchandise.

If you are in catalog marketing, you've compiled results from all sale/clearance mailings during business downturns. You've standardized the results for changes in the business climate, since the last downturn.

If you love the profit and loss statement, you have already analyzed the cost/benefit, both short-term and long-term, of cutting the budget. You'll already know that a dollar cut from the budget today costs you three dollars of net sales in 2010.

As our economy edges closer to recession, your job is to be ready to answer questions, to lead your executive team.

Of course, your leaders will probe you for a "big idea" that will magically turn things around. If those ideas existed, you'd already be doing them.

But by being ready, you prevent your leadership team from running you in endless circles looking for tactics that clear inventory. And in the short term, that's often the primary concern --- how to get out of excess inventory. Until excess inventory is cleared, you cannot try new things.

Get your ducks in a row now, so when negative business performance lights a fire under your executive team, you're ready to respond, ready to reduce the pressure/tension everybody feels.

Multichannel Experience And Pricing

Multichannel experts suggest that the look and feel of our marketing strategies should be the same across channels. We're told to offer the same prices across channels, same promotions across channels, same merchandise across channels. We're told that our customers demand this experience.

If you travel often, stop in a McDonalds restaurant in Boston, and then stop by a McDonalds restaurant in Topeka.

You're likely to find different pricing for similar items.

You're likely to find differences in the menu ... maybe a McRib sandwich is offered in Topeka but not in Boston.

Retailers have a long history of charging different prices in different regions. Retailers offer different merchandise in different regions. We accept this as a fact of life, in reality, it is necessary for the retailer to do this in order to run a profitable business.

If we accept that retail can/should be "different", why can't multichannel marketers offer different promotions, different offers, different merchandise, different contact strategies, different creative treatments by channel?

Centralized E-Mail Marketing

From time to time, we read about the importance of having a centralized e-mail marketing program, one where the message is controlled by a centralized group. Some theorize that the customer benefits from a coordinated corporate effort.

This type of organizational structure can work. The leader of the centralized team must provide a myriad of "rule breaking" opportunities for others, must allow innovation.

I once observed an environment where a splinter group ran their own e-mail campaigns for various business leaders, outside of the centralized program --- they had full support of executive leadership, they had their own set of selection criteria, their own opt-in and opt-out guidelines, their own creative templates. The performance metrics of their campaigns were not fed into the centralized data repository.

In a centralized environment, this communicates a strong message --- a significant minority of individuals do not respect the centralized environment.

See, catalog marketing is hard. As a result, you seldom saw splinter groups executing catalog marketing campaigns without CEO support.

E-Mail marketing delivery is comparatively easy. A rogue store manager with an e-mail list of 175 recipients can deliver a targeted message from her Microsoft Outlook software tool.

The challenge is to figure out how to work with individuals with diverse needs and personalities, creating a flexible system that benefits internal customers as well as external customers. We focus too much energy on the latter, we need to focus more energy on the former.

Mailbag: Multichannel Strategy

I am frequently asked to describe multichannel marketing strategies that "move the needle" --- in other words, I am asked to share ideas that dramatically increase sales (i.e. increase total sales by more than ten percent, on a consistent, sustained basis for at least one year).

Assuming your brand already has a credible e-mail marketing program, paid search program, portal advertising strategy, affiliate marketing program, and other online strategies, I'm not confident the concept of integrating marketing strategies across channels yields a measurable, sustained increase in sales.

Sure, it might be great for the customer to redeem offers in the channel of their choice.

Sure, Circuit City allows customers to buy online and pickup in stores (now, how much do you think this strategy boosted comp store sales?).

Sure, it might be great for the look and feel of catalogs, e-mail campaigns and websites to be integrated, or to have the same merchandise available across all channels.

Given those strategies, help me find one company that has implemented all/some/any of the multichannel strategies we're told we have to implement, and observed a consistent, sustained increase in sales of, say, ten percent, measured annually?

Seriously, use the comments section of this post to name the brand, the tactics they used, and the sustained increase in sales caused by the multichannel strategies we're told we have to employ.

Zappos And Repeat Customers

A quote from Tony Hsieh of Zappos, cited in Catalog Success:

"When we first started, we did what ever other dot-com did: Spent a lot of money on ad campaigns to acquire as many customers as possible. This is a good idea if your goal is to lose as much money as possible. Instead, we started focusing on repeat customer behavior." Zappos.com increased the percentage of customers who buy again within the next 12 months from 20.5 percent in 2001 to 51.3 percent in 2006.

Recall that in the Multichannel Forensics framework, a 51.3 percent annual repurchase rate places Zappos in "Hybrid Mode". This means that Zappos has to balance customer retention and customer acquisition activities, in order to be successful.

It is easy to move the annual repurchase rate from 20 percent to 50 percent in a new business. Once the business model is established, the annual repurchase rate is unlikely to ever move more than +/- 10 percentage points in a year.

Which means that, in order for Zappos to grow, the strategic focus swings back to ... customer acquisition!

Coldwater Creek New Store Financial Strategy

For those of you who write me looking for information about company expectations for new stores, this comes to us from the last Coldwater Creek Investor Conference Call:

"Our store economic model has been to build stores that are about 6000 square feet, achieve sales of $500 a square foot at maturity which is three years down the road and those stores pay back from an economic or cash standpoint in less than 12 months. We continue to believe in that model and in that strategy."

714

I was probably ten years old when my Grandfather and my Dad took me to a Milwaukee Brewers baseball game.

And in the 9th inning, with the home team trailing (again), the manager called upon a pinch hitter named Henry Aaron.

The crowd rose to their feet, hoping for a pinch hit home run that would save the day.

Aaron connected with a pitch, and the crowd roared as the ball sailed up and up an up, between center and left field. We felt the excitement, the possibility, of a home run from the greatest slugger of all time.

But as the ball began to drop, we noticed that the center fielder hardly moved at all. Sliding a few feet to his right, he easily collected the "can of corn". Game over.

My Grandfather reminded me that everybody was so excited because Aaron broke the record of 714 home runs, established by Babe Ruth. Aaron started his career with the Milwaukee Braves, and was ending his career as a Milwaukee Brewer.

Given that inspiration, I decided that I, too, would break that record.

With a giant pink bat, and a half-dozen over-sized plastic balls, I set out to do what only Henry Aaron had done.

Our yard was surrounded by a horseshoe-shaped gravel driveway. Near the apex of the driveway was home plate. Any ball hit onto the road, or over the road, was a home run.

I'd throw the ball in the air with my left. As the ball peaked in mid-air, both hands gripped the bat. I launched my swing, hoping/expecting the ball to fly over the road. I contrived a series of "games" pitting "teams" against each other, to make the home runs feel more meaningful.

Late that summer, I hit home run number 715.

And then I stopped playing the game. Like Aaron, I broke the record, no need to continue.

In business, what is the incentive once you "break the record"? Maybe your business never achieved ten percent pre-tax profit. Your owner or board hire a new executive team, and this team sets out on an ambitious plan to achieve this objective.

Four years later, you make it, you hit ten percent pre-tax profit. You celebrate for a few days. And then what?

I once worked for a leader who was masterful at "creating an enemy". Somebody was the enemy, and it was our job to "defeat" the enemy. At the end of the year, if we beat the enemy, we "won".

This went on for a few years. The technique, if you sided with this leader, was motivating. I doubt it was much fun for the "enemy".

And then suddenly, the leader left us, and in some ways became our enemy. The whole game was a lot less satisfying from that point forward.

Each year, it is essential for leaders to put tangible, achievable, challenging objectives out there. It is essential for leaders to properly celebrate achievements.

Unlike sports, we have to move on. Once we "break the record", we don't get to rest in peace in the hall of fame. Life goes on. We need to come up with tangible things that "get our teams excited".

When I look at the multichannel industry, I don't see a lot of excitement these days. We really need something to lift our spirits. We can wait for something, or we can create something. Let's create something.

One Positive Day: November

Recall that we start each month on The MineThatData Blog by trying to do/say something positive.

When I do database marketing reviews for different organizations, my favorite hour is spent with analysts, the folks who do the actual work.

See, I always ask the executive I'm working for to have one hour with 3-4 analysts. I get odd looks after making this request. To date, not one executive turned me down.

The analysts walk into the room with an element of trepidation. I mean, why does this consultant want to speak with this group of individuals?

Of course, I want to speak with this group of individuals because THESE FOLKS GET THINGS DONE!

The executive believes they have a targeted e-mail marketing program that leads the industry.

The analyst has to execute the program. She knows that she has to download files to her personal computer, because there isn't enough server space to store the file on the network. And if there were enough space to store the file, somebody in IT would tell her to delete a 2-gig file because it is taking up too much space.

We read about brands that employ a 1-to-1 relationship with their consumers.

Try being an analyst who has to send a file to Experian with 86 different (and highly targeted) bind-in inserts --- especially when the executive team changes their mind an adds nine new versions of the bind-in insert one day before the file is due at Experian!

It is the analyst who honestly tells you what is actually being executed, and what is really just "leadership speak".

It is the analyst who is figuring out how to better optimize a search marketing program while riding a bus because her 1992 Toyota Tercel is in the garage, being repaired.

It is the analyst who works with sub-standard hardware, so that the whole company can meet financial objectives.

It is the analyst who comes in on a Saturday afternoon to make sure that a computer program ran correctly because there is a problem connecting from homes with a DSL or dial-up connection.

It is the analyst who arrives at work at 6:30am and compiles the "morning numbers", so that the executive knows what is happening with the business when she arrives at 7:00am.

Today, we celebrate a positive view of the analyst-level individuals, the folks who execute our strategies and initiatives. Why not give a little bit of your leftover Halloween candy to your catalog, e-mail, and online marketing analysts?