E-Commerce And Catalog Management Case Study: Does Operational Management Matter?

Please click on the image to enlarge it.

The purpose of this series is to view a broken e-commerce/catalog business from the viewpoint of a new CEO.

Recall that this business has largely been mediocre or unprofitable during the past five years, resulting in the overhaul of the management team.

A new CEO needs to quickly assess several factors, many of which we'll discuss in this series. An easy first step is to look at the metrics associated with operational management of the brand.

In the attached profit and loss statement, we notice that the operational management of the business hasn't been optimal.

• Notice that merchandise fulfillment rate hit a high of 94.5%, but was only 90.9% last year.

• Return rates were as low as 25.0%, but were 27.4% last year.

• Gross Margin improved some (48.8%), but has been as high as 50.0% in the past.

• Pick/Pack/Ship expense has been as low as 11.5%, finishing last year at 11.8%.

A new CEO will ask the CFO to run a version of last year's profit and loss statement with historical best operational metrics plugged into the profit and loss statement.

So take a look at the attached image. With historical bests plugged into the profit and loss statement, we turn a loss of $258,000 into a profit of $327,000.

Now obviously all of these factors are interconnected (gross margin decreases when sales decrease, due to clearance-related needs). But the exercise is important to the new CEO. In this case, the CEO realizes that if s/he can "run the operations" of this business at historical high levels, profitability significantly improves.

In reality, the CEO wants for this business to operate at a 10% EBT rate, meaning that ten percent of sales are converted to profit. The business was twelve points away from this level (-1.9% EBT). Fixing the operational management of this business makes up at least four of the twelve point shortfall.

In other words, the CEO will make operational excellence one of his/her top objectives for the upcoming year.

Your Homework Assignment: Operations play a key role in getting a brand to high levels of profitability. What is the next thing you would look at in this profit and loss statement, when diagnosing what is wrong with this business?

Retail Is Struggling

J.C. Penney merges marketing and merchandising functions across online/retail channels, then cuts 100 - 200 jobs. I'll bet that the 100 - 200 people who lost their jobs aren't big fans of multichannel integration.

Ann Taylor lets go of 13% of their corporate staff, 180 jobs amid a tepid retail environment. In addition, 117 stores will be closed.

Talbots to shut down 78 kids and mens stores. Sure this is old news, but it is reflective of what could be a widespread problem in 2008. This economic downturn could weed-out a lot of over-assorted retail square footage.

Eddie Bauer cuts 16% of its corporate staff, even as sales improved in Q4.

Home Depot cuts 500 corporate jobs, 10% of the corporate staff. Assume these are $75,000 a year jobs (including benefits). Take the $210,000,000 that former CEO Robert Nardelli garnered as part of his golden parachute, divide it by $75,000, and you are able to keep these 500 folks gainfully employed for another five years.

Dell plans to close 140 shopping mall kiosks.

Starbucks will close 100 underperforming stores.

If you are a retail real estate executive, you have to be wondering who the retailers are that will line up for the store locations made available by the great recession of 2008?

Old Navy updates their logo, and elects to move away from families, now focusing on a fashion-based twenty-something target audience.

Trees rejoice as USPS volume drops by 3% in Q1-2008.

E-Commerce And Catalog Management Case Study: A Failing Business

Please click on the image to enlarge it.

When we read about improving the performance of a catalog / e-commerce brand, we frequently read about "extremes".

On one hand, we focus extensively on the "tactics" that improve the performance of marketing campaigns. E-Mail subject lines, call-to-action, catalog page counts, branded vs. non-branded keywords, prospect mailings, there's a veritable plethora of tactics that folks can improve upon. Better yet, there's no shortage of folks who can help drive tactical solutions.

On the other hand, we focus on "brand management". Boy, do we love to focus on brand management. Everybody is an expert at what Starbucks should do to grow same-store sales. Folks have no problem telling brands that they have to become "multichannel", or that implementing a transparent, authentic blog will cause a brand to grow in a "viral" manner.

Unfortunately, neither end of the spectrum meets the needs of the newly appointed CEO of a multichannel e-commerce/catalog brand that experienced several years of sour performance. More often than not, the newly appointed CEO needs to implement a "meat and potatoes" approach to fixing the profit and loss statement.

The brand we'll study in this series (click on the image please) achieved "best" performance five years ago. Since then, the brand wobbled between mediocre and awful performance, resulting in the firing of the management team.

Let's review net sales and earnings before taxes performance.

Net Sales Performance (Year 5 = most recent year)

• Year 1 = $12,600,000.
• Year 2 = $12,400,000.
• Year 3 = $10,700,000.
• Year 4 = $11,200,000.
• Year 5 = $13,500,000.

Earnings Before Taxes Performance

• Year 1 = $661,000 (5.2% of Net Sales).
• Year 2 = ($315,000) (-2.5% of Net Sales).
• Year 3 = $63,000 (0.6% of Net Sales).
• Year 4 = $550,000 (4.9% of Net Sales).
• Year 5 = ($258,000) (-1.9% of Net Sales).

Clearly, this business is in need of fixing.

Over the course of the next several posts, we'll talk about the ways that a newly appointed CEO uses "meat and potatoes" and "multichannel forensics" to address the performance of a floundering brand.

Your homework assignment: Study the image at the top of this post. What areas of the profit and loss statement suggest mismanagement of this brand?

Attention CEOs, Owners, Presidents, And Marketing Executives: The F. Curtis Barry Executive Forum

The agenda for the Executive Forum (February 24-26 at the fabulous Lago Mar Resort and Club in Ft. Lauderdale) continues to impress catalog and online executives.

The good folks at F. Curtis Barry & Company tell me that an impressive array of CEOs, Owners, Presidents, and Marketing Executives with broad-based p&l responsibility have signed up for this three-day event.

An exciting agenda of topics have been assembled for this event:

• List of Talking Points
• Strengths, Weaknesses, Opportunities and Threats to a Catalog/Multichannel brand.
• Planning for 2008 and beyond.
• How to make money in this business.
• Multichannel Forensics (that's me!).
• Merchandising Strategy and Direction.
• Assortment Planning and Benchmarks.
• Vendor Structure and Supply Chain.
• Multichannel Strategic Issues.
• Clearance Strategies.
• Purchasing, Forecasting, and Inventory Management.
• Operations

Three days, a wonderful location, great agenda topics, and your CEO, Owner, President and Marketing Executive peers make for a fantastic opportunity!

Please join me at this industry-leading event. Register here.

Survey Question: What Will E-Mail Marketing Look Like In 2015?

For those of you who subscribe via RSS or E-Mail, please visit the MineThatData Blog Homepage to take this week's survey question.

Question: What will e-mail marketing look like in 2015?

• E-Mail continues to be a campaign-based branding and promotional tool.
• E-Mail becomes a trigger-based targeting strategy that increases sales among engaged consumers.
• E-Mail evolves in ways we cannot yet forecast.
• E-Mail marketing is a craft that is irreparably harmed by spam, over-mailing, and/or better technology.

Please visit the homepage and vote for your choice!

Survey Results: What Do You Think The Catalog Industry Will Look Like In 2015?

Thanks to all of you who responded to our survey question: "What do you think the catalog industry will look like in 2015? Here are the results of the survey:

• Catalogs will be the primary driver of web sales = 0%.
• Catalogs will be the primary driver of web sales among a targeted subset of the audience = 42%.
• Catalogs evolve in ways we cannot yet forecast = 39%.
• Ecological and cost pressures end the craft of cataloging = 19%.

The MineThatData audience has a sizable number of professionals in the catalog industry. Surprisingly, not one respondent felt that catalogs would be the primary driver of online sales in 2015.

I have a few questions for you, the loyal reader.

1. Who is the targeted audience that you believe will be catalog-responsive in 2015?
2. What are some of the ways that you believe catalog marketing will evolve over the next seven years?
3. If you believe that the craft of cataloging will end over the next seven years, what are the "end times scenarios" that bring the industry down?

Contact Strategy: A Starting Point

Those of us in the multichannel catalog and retail world like to "optimize marketing spend".

If you're a cataloger, you become obsessed with "incremental" or "cannibalization" rates. If you're an online marketer, you love comparing CPA's across various marketing activities. Retailers ... well, it's a lot harder to accurately measure the incremental impact of various retail marketing activities, isn't it? Not impossible, but harder.

There are a few ways to think about optimizing marketing spend. If you have deeper-than-average pockets, you might work with the folks at Decision Intelligence. You'll get your money's worth from the mathematical wizardry they offer.

For those of us looking for a simpler solution, let's think in the most basic of terms. Let's offer a starting point for thinking about contact strategy management.

Catalog-Only Customers: On average, these folks won't buy unless they are advertised to. Via mail/no-mail tests, it is a straightforward exercise to figure out the right amount of advertising spend per customer segment.

• No Advertising = 5% Repurchase Rate.
• 50% Advertising = 41% Repurchase Rate.
• 100% Advertising = 50% Repurchase Rate.
• 150% Advertising = 56% Repurchase Rate.

Online-Only Customers: These folks will buy without advertising. We are frequently misled by these customers, thinking our e-mail and catalog marketing activities "caused" them to purchase. In reality, we have to divide spend into "organic" spend that happens without advertising, and spend that only occurs when the customer is advertised to. We only learn this by executing tests, or we estimate it via a Multichannel Forensics simulation.

• No Advertising = 28% Repurchase Rate.
• 50% Advertising = 36% Repurchase Rate.
• 100% Advertising = 40% Repurchase Rate.
• 150% Advertising = 43% Repurchase Rate.

Catalog + Online Customers (aka "Multichannel" Customers): Easily the most flummoxing segment of customers on the planet. Catalogers think their marketing activities drive 85% of the activity with this segment. E-mail marketers believe they manage the customer relationship with this segment. Search marketers feel they drive increases in sales and profit. The reality, however, is that the customer "combines" none/some/all of these activities when buying merchandise. As a result, you feel like you're stuck mailing the catalog, delivering multiple e-mail campaigns, and paying for various keywords in order to facilitate a purchase. Are you?

• No Advertising = 41% Repurchase Rate.
• 50% Advertising = 58% Repurchase Rate.
• 100% Advertising = 65% Repurchase Rate.
• 150% Advertising = 70% Repurchase Rate.

Your starting point is to figure out the baseline repurchase rate, spend per repurchaser, and revenue (repurchase * spend) for each customer segment.

Next, you estimate (using relationships like the square root rule, or better yet, using test/holdout results) what happens when you advertise at 50%, 100% or 150% of normal ad-dollars (and increments in-between).

Once you estimate the optimal spend level, identify the most effective marketing activities. In many cases, this requires a decent amount of testing (e-mail and catalog contact strategy testing). Among "multichannel buyers", carefully analyze how many marketing channels are combined in each purchase, when various marketing activities are withheld from the customer.

At some point, you obtain a baseline of knowledge that allows you to do one of three things.

1. Try your own contact strategy optimization.
2. Hire experts like the folks at Decision Intelligence.
3. Go halfway, using tools like Multichannel Forensics to simulate the long-term impact of short-term ad-spend decisions.

Most important is the starting point, folks. Segment the customers, understand that "organic" demand occurs for many customers, and estimate if you are over/under spending.

53 Vital Multichannel Website/Online Marketing Tips

Here is the hyper-link to forward to your multichannel catalog and retail colleagues:

http://minethatdata.blogspot.com/2008/01/53-vital-multichannel-websiteonline.html

1. Create widgets that allow your customer to create a sub-store on their own homepage (Google, My Yahoo, etc.).
2. Give your customers access to their historical online visitation behavior.
3. As a perk, allow your multichannel or most loyal customers to create a widget-based personalized homepage.
   
4. Stop guessing what your customer wants --- pay CLOSE ATTENTION to the widgets your best customers put on their personalized homepage!
5. Don't treat your RSS feeds like e-mail campaigns.
6. Allow every store manager to create a personalized/widget-based "store page", and encourage store customers to interact with that page instead of your typical e-commerce homepage.
7. Allow your best store employees to have their own personalized/widget-based "store page", and encourage your store customers to interact with that page instead of your typical e-commerce homepage.
   
8. Have gifted employees write heartfelt blogs about your brand. Give them twenty-four months to build an audience. Keep your PR department out of this activity.
9. After twenty-four months, measure the profitability of customers who interact with the blogs your employees write.
   
10. Retail websites serve three purposes: E-Commerce, Research, and Entertainment. Decide which of these elements is most important to your customer.
11. Catalog websites serve three purposes: E-Commerce, Research, and a Catalog Order Form. Decide which of these elements is most important to your customer.
12. Your catalog/retail audience is homogeneous. Your website audience is heterogeneous. Merchandising a website is more difficult than merchandising a catalog, or a store.
13. Divide your online audience into "segments" based on the activity that drives them to the website (i.e. visitors from Google (paid/natural, branded etc.), from E-Mail, from Catalog, from Retail, from Portals, from Shopping Comparison Sites, from Affiliates, from Widgets, from Blogs). Measure everything across sub-audiences. Merchandise to each individual audience.
14. It is very likely that your customer visits your site three or four times between purchases, rendering metrics like conversion rate useless.
15. Instead of measuring conversion rate, measure the probability of a prior loyal visitor visiting again this month.
16. Instead of measuring conversion rate, measure the average number of visits made if a loyal visitor visits again this month.
17. Instead of measuring conversion rate within one session/day, measure the probability of a loyal visitor purchasing over a seven/thirty day period of time.
18. Instead of measuring conversion rate within the online channel, measure the probability of a website visitor purchasing via mail/phone/store within a seven/thirty day period of time, and add those conversions to your online conversions.
19. Your website is a home with many entry doors. Customers are less and less likely to ring the doorbell to the front door.
20. Use Multichannel Forensics to identify if e-commerce customers become retail customers.
21. Shopping cart abandonment is not a bad thing. For many customers, the shopping cart is simply a "wish list repository", a place to hold items the customer wants to purchase in your store at a later date.
22. If you want to increase the conversion rate of your website, pay attention to "ugly" websites.
23. In your customer database, record the number of days since last website visit.
24. In your customer database, record the number of days since last visit to all of your key landing pages.
25. In your customer database, record the number of days since last visit from Google and other search engines.
26. In your customer database, record the number of days since last visit from an E-mail campaign.
27. In your customer database, record the number of days since last visit from Portal advertising, Shopping Comparison sites, Affiliate marketing, etc.
28. In your customer database, record the number of days since last visit from a blog.
29. In your customer database, record the number of days since last visit to each of your key merchandise divisions.
30. In your customer database, record the number of days since the customer used your internal search function.
    
31. Measure customer interaction with the sub-channels on your website (paid search, natural search, branded search, non-branded search, e-mail, widgets, portals, shopping comparison, affiliates, etc.).
32. Once measured, target your e-mail and search marketing strategies around customer interactions with sub-channels.
33. Retail Executives: Please treat your online marketing team as equal partners.
34. Catalog Executives: Please treat your online marketing team as equal partners.
35. Online Executives: Please meet your retail and catalog executives "half-way"!
36. Similar to catalog marketing, there is a relationship between online merchandise density and sales per visit.
37. Pay close attention to the items catalog buyers purchase online. Which non-catalog-advertised items are customers purchasing?
38. Pay close attention to the items retail customers purchase online. Which non-retail items are customers purchasing?
39. Personas are communication tools that allow your executive team to understand who is interacting with your website. Executives understand personas better than they understand conversion rates.
40. Online Executives: Go "on the road". Visit every store manager, every one of your call centers and distribution centers, and evangelize your craft to those who are not immersed in it.
41. Link customer behavior across multiple computers for a complete view of customer interaction with your brand.
42. Try something different with e-mail marketing. Stop the "sameness" that plagues the retail/catalog industry, test anything that is not a "best practice".
43. Require each executive to respond to one customer complaint per month/quarter on a "complaint blog", and actively listen to customer comments in response to executive posts.
44. Require each store manager, or teams of store managers, to execute online marketing campaigns from time to time, to learn and appreciate your craft.
45. Require online marketing managers to work the sales floor in your store two days per year.
46. Require each store marketing manager (television, newspapers, magazines) to execute online marketing campaigns, and require these folks to measure success across all channels.
    
47. Require each online marketing manager to execute store marketing campaigns, and require these folks to measure success across channels.
48. Require store merchandisers to actively monitor "what sells online".
49. Require online merchandisers to actively monitor "what sells in stores".
50. Test the difference in customer behavior when marketing campaigns are integrated (same across stores/website), and when marketing campaigns are run independent of each other (different across stores/website).
51. Retail executives: Your website may well be a media channel. Split your website into two parts, an e-commerce part, and a media channel. Treat each "sub-channel" appropriately. Hint: You're better at managing a media channel, your online marketing folks are better at managing the e-commerce channel.
52. Web Analytics: Complement your traditional session/daily metrics with time-based metrics based on fixed groups of customers. There isn't a difference between a customer visiting four times and buying once during a month, and a customer visiting once and buying once during a month.
53. The days of +25% online sales growth are winding down. If you are an online marketing executive, be ready to prove your worth in a +4% comp-sales online world.

Contact Strategy Evolution

Pretend you are a loyal customer of a leading catalog brand. Let's see how the leading brand might have contacted you, over the years.

1965:

• You enjoyed receiving your three big books a year, 600 page monsters featuring the entire store. You mailed your order to the brand on October 1 along with a check covering the purchase amount, hoping the merchandise would arrive in 4-6 weeks.
• Total marketing contacts = 3.

1985:

• You stumbled across a "specialty brand" that mails you twelve catalogs a year, smaller monthly reminders averaging 124 pages each. You phone your order in on October 15, giving a credit card for payment.
• Total marketing contacts = 12.

1995:

• Your favorite specialty brand "branched out" into other product classifications, sending you twenty-four catalogs a year.
• Total marketing contacts = 24.

1999:

• E-commerce, the dot-com craze, and Y2K preparedness dominate the landscape. In addition to 24 catalogs, your favorite specialty brand started sending a monthly e-mail campaign, and has a website where you can purchase merchandise. You visit the website on a quarterly basis.
• Total marketing contacts = 36.
• Consumer-driven contacts = 4.
• Total interactions = 40.

2002:

• The surprising rise of Google allows you to "shop around". You use Google once a quarter for shopping purposes. Your favorite brand has upped e-mail contacts to 24 a year. You visit the website on a monthly basis.
• Total marketing contacts = 48.
• Consumer-driven contacts = 16.
• Total interactions = 64.

2005:

• Google owns the world, having become your starting point for your shopping habits. You use Google once a month to research product offered by your favorite specialty brand. Your favorite specialty brand ramps up the e-mail program to one per week, and maintains 24 catalog contacts per year. You visit the website once every three weeks.
  
• Total marketing contacts = 76.
• Consumer-driven contacts = 29.
• Total interactions = 105.

2008:

• Your leading specialty catalog brand adds RSS feeds to the mix, allowing you to see new and exciting merchandise offerings once every three days. E-mail contacts have increased to three every two weeks. You visit the website once every three weeks, and you use Google to search for comparable merchandise once every three weeks.
• Total marketing contacts = 102.
• Total pull-based contacts (RSS) = 17.
• Customer-driven contacts = 34.
• Total interactions = 153.

During my twenty years in this industry, I haven't observed significant gains in annual repurchase rates or annual purchase frequency. I observed significant decreases in response to catalog and e-mail marketing activities.

Then I step back, and truly see how we contact customers. It all makes sense. We simply average high response in a dozen activities across a hundred activities, yielding low response.

Sure, customers can opt-out of catalog and e-mail marketing ... but once the customer is in, we make sure we're in their mail-box/in-box a couple times a week.

As leading brands, we work out tail off to make each interaction, each contact, as productive as possible. We are driven, using real-time metrics, to employ "best practices" that maximize ROI. We micromanage metrics like click-through rates, never stepping back to see if all the changes in click-through rate actually cause an annual increase in repurchase rate.

At the end of a year, we've saturated the customer with more than a hundred contacts ... contacts that produce the exact same annual repurchase rate, the exact same number of purchases per year.

And then we wonder why customers are fed up with spam and junk mail, when this process is repeated across the five brands the customer purchases from on a regular basis, not to mention another fifty catalog brands that try to entice you into purchasing via unsolicited customer-acquisition-based mailings.

Google, Ann Curry, Cute Kids, Catalog Choice, And Four Hours

Within four hours of writing about the Catalog Choice piece on The Today Show, Google ranks my article #2 (as of 4:03pm PST) for the search term "Ann Curry and Catalogs", driving a truly disproportionate amount of traffic to my article.

The pace with which human beings, social media, traditional media, machines, and algorithms rapidly, uncontrollably and unpredictably interact with each other should cause all of us to take notice.

Some folks would have you believe that the customer is now in control. Analyzing my blog visitation statistics, I'd argue that Google is firmly in control.

Ann Curry And The Today Show Feature The Cute Kids Cancelling Catalogs

If you were at work this morning when The Today Show featured a piece on how to cancel catalogs, please watch the segment here.

Ann Curry sat at a computer monitor, and opted-out of Red Envelope, Pottery Barn and Mrs. Fields catalogs.

Kudos to Catalog Choice and those cute kids for getting attention via grass roots efforts. This goes to show you how individuals and small teams can make a difference. How things get done in this world is rapidly changing ... Catalog Choice provides a great example of how to market a useful service via social media, illustrating how mainstream media does the work for you when social media is executed properly.

Catalog Choice reports that they've had an onslaught of traffic today. Ted Wells reports that 500 visitors an hour are checking out his blog.

The Today Show, via their website at MSNBC, is challenging all schools to do what the cute kids accomplished. Here is a link to the Today Show Challenge.

Of course, there's some level of irony involved in having NBC and The Today Show take shots at companies like Red Envelope, Pottery Barn, and Mrs. Fields.

When I ran Ann Curry's video on the MSNBC site, I was subjected to unsolicited advertising from Best Buy, I could not fast-forward over the ad, MSNBC forced me to watch it. I might have wanted to opt-out of that advertising opportunity, however, I could not.

Here's a sampling of the national companies that pay the salaries of employees of The Today Show via unsolicited commercials I did not have a choice to opt-out of while watching the program in real-time this morning:

• Honda, Smuckers, Hyundai, Pillsbury, Olay, Air Wick, Dannon, Clorox, Turbo Tax, Slim Fast, Pampers, Cheerios, Kashi, Olive Garden, Progresso, Oreo, Bank of America, Head and Shoulders, Nestle, Lysol, Visine, Capital One.
  

Obviously, I cannot speak to any details on the practices of these companies ... I am simply hopeful that all of these companies don't over-harvest trees or mis-use fossil fuels to produce the products, services and packaging that paid the salaries of the folks bringing us The Today Show, the show that promoted Catalog Choice.

J. Crew: A Multichannel Money-Printing Machine

Less than six years ago, it was easy to pick on J. Crew.

There aren't many people picking on J. Crew (JCG) these days, are there?

Through the first nine months of 2007, J. Crew generated a staggering 13.8% EBIT as a percentage of Revenue, according to their most recent 10-Q statement.

Take a look at the financial performance by "channel":

J. Crew Financial Performance Through Three Quarters
	YTD 2007	YTD 2006	Change
Catalog Pages Circulated			-5%
Telephone Sales	$56.7	$60.4	-6%
E-Commerce Sales	$194.7	$135.0	44%
Total Direct Channel	$251.4	$195.4	29%
Retail Store Sales	$654.2	$566.7	15%
Other Revenue	$29.2	$23.3	25%
Total Revenue	$934.8	$785.4	19%

Notice that in spite of a 5% decrease in catalog pages circulated, e-commerce sales increased 44%. Here is what management had to say about catalog circulation:

"We continue to see a shift of Direct customers from catalog to the Internet. We evaluate the efficiency of our circulation strategies on a continuing basis and make adjustments as we deem appropriate."

Do you think the adjustments are working?

Based on all of the data I've analyzed over the past decade, I am convinced that most of the brands we manage have fat to cut in the print channel. We need to do a better job of evaluating each advertising channel as an investment.

Financially, we're told to diversify our investments if we want to protect our retirement income. Similarly, we need to do a better job of re-allocating our print investment into better-performing online advertising channels. Our measurement methodologies and belief systems prevent us from making necessary progress.

Survey Question: What Will The Catalog Industry Look Like In 2015?

Let's try something new.

For those of you reading via e-mail or RSS feed, please visit the homepage (http://minethatdata.blogspot.com), and take the survey on the right-hand side of the page.

The question: What will the catalog industry look like in 2015?

73 Vital Multichannel Catalog Tips

Please feel free to forward this article to anybody you feel would benefit from the information. Add your tip in the comments section of this post.

Here is the hyperlink you can forward to your multichannel colleagues: http://minethatdata.blogspot.com/2008/01/73-vital-multichannel-catalog-tips.html

1. Remail catalogs are on their last legs. Where possible, use new creative, the customer knows the difference.
2. Honor all catalog opt-out requests, regardless of source.
3. Urban customers like to use catalogs to shop retail stores.
4. Suburban customers like to use catalogs to shop your website.
5. Rural customers like to use catalogs to purchase merchandise over the telephone.
6. It is very likely that you are under-investing in online marketing (paid search, portals, etc.).
7. Online customers have lower lifetime value than catalog-sourced customers. Get over it!!
8. Profit and loss statements should be generated, by item, on a quarterly basis, measuring profit across all channels.
9. Statistical models almost always outperform RFM models.
10. RFM models are perfect for understanding comp-segment performance.
11. Increased product density in catalogs is generally correlated with increases in phone/mail channel sales.
12. If your customer acquisition activities are at a break-even level (on each incremental segment, or in total), you are probably under-investing in customer acquisition, throttling the long-term growth of your brand.
    
13. Ease up on mailing online-only buyers.
    
14. Ease up on mailing retail-only buyers.
15. Use mail/holdout groups to understand if catalogs need to be mailed to "multichannel customers". Determine how much of the sales volume will happen without mailing any catalogs.
16. Matchback algorithms over-state the effectiveness of catalog marketing.
17. Multichannel Forensics (white paper, book) should be used to understand when customers are willing to switch channels, or no longer need catalog advertising to purchase from your brand.
    
18. If you double the number of pages in a catalog, expect a 50% increase in sales volume.
19. Do not test new merchandise or new creative strategies in mailings targeted to new customers.
20. Thoughtfully evaluate the mix of new and existing merchandise offered to your best customers.
    
21. Pay close attention to the Zappos business model. Pay REALLY close attention!
22. If more than one out of every five catalogs you mail is sourced from a co-op database, pay very close attention to the merchandise preferences of co-op customers vs. all other customers --- your future merchandising assortment may be driven by co-op statisticians, not by you!
23. If more than one out of every five online purchases is sourced from Google, pay very close attention to the merchandise preferences of Google customers vs. all other customers --- your future merchandising assortment may be drive by Google, not by you!
24. Accurately forecast segment-level household counts. Your inventory management team thanks you for your support!
25. Don't cut back on customer acquisition during an economic downturn, or during an inflationary expense environment.
    
26. Use Multichannel Forensics to forecast the five year trajectory of each of your channels, and then pro-actively change the trajectory of each channel in a favorable manner.
27. Don't outsource your intellectual capital. Keep smart people, and pay them what they are worth.
28. Learn from your online marketing and e-mail marketing staff.
29. Cross-train your catalog marketing, online marketing, e-mail marketing and social marketing experts.
30. If your catalog marketing, online marketing, e-mail marketing and social marketing experts do not defend all of their decisions via profit and loss statements, immediately train each individual on how to produce a profit and loss statement.
31. Listen to your business intelligence and data mining staff for advice. Don't ask these folks to drive your business strategy.
32. Adding a 20th catalog to your contact strategy will probably not cause a proportional increase in sales.
33. Adding a 20th catalog to your catalog strategy will probably cause a proportional increase in expenses.
34. Multichannel customers are not always your best customers.
35. Execute and analyze mail/holdout tests in every catalog and e-mail marketing campaign.
36. A growing minority of consumers view your catalog marketing efforts as "junk mail", as being a threat to the environment. Respond to this trend!
    
37. If a catalog customer has not purchased in two years, but visited your website yesterday, mail this customer a catalog.
38. All of your future catalog and e-mail targeting strategies will require a database of summarized online visitation behavior.
39. The best catalog marketing in the world will not overcome shoddy financial or operational management of your brand.
    
40. Customers who order three or more items, only to realize these items are not available, will have lower lifetime value than customers who receive the items they wish to purchase.
41. Channel data ages differently. Catalog purchases have a long half-life. Online purchases have an average half-life. Retail purchases have a short half-life.
42. Do not allow phone/mail transactions to drive your overall merchandising strategy. These transactions are disproportionately driven by age 50+ rural shoppers.
43. Keycode/Source Code response management is a dying craft.
44. Your list management, list rental/exchange firm, or co-op partner should be viewed as a "trusted adviser".
45. Conversely, list management, and list rental/exchange folk, or co-op partners should be branding themselves as "smart people" rather than "list people".
46. If you merchandise a catalog for multichannel success, you will probably end up mailing an unsuccessful catalog. Pick a primary channel, and merchandise to the target customer of the primary channel.
47. The merchandise mix of items purchased in a store is likely to be different than the merchandise offered in the catalog you mailed to a store customer. Optimal catalog merchandising to drive store sales is a complex and misunderstood process.
48. Forty-eight pages may drive just as much online and store volume as do eighty-four pages.
49. When an online/store shopper is willing to purchase without marketing assistance, gladly stop marketing to the customer.
50. As you add channels, pay close attention to your purchase metrics. During the past decade, we haven't significantly "pushed the peanut" on repurchase rate, orders per repurchaser, items per order, or average order size, in spite of additional channels and additional marketing expense.
51. Special catalogs have special products at higher-than-average price points.
52. The first twenty pages and the back cover of your catalog mean EVERYTHING. This is not real estate worthy of experimentation or careless branding strategies.
53. Identify order starters (the items that cause a customer to purchase) in catalog and e-mail marketing activity. Capitalize on these items across all marketing activities.
54. Your database must have summarized and detail-level catalog, online and retail purchase behavior, updated on a weekly basis, at a customer level.
    
55. Your database must have summarized and detail-level online visitation activity, updated on (at worst) a daily basis, at a customer level.
    
56. Your database must have summarized and detail-level marketing expenditures at a customer level.
    
57. If you purchase campaign management software for your direct mail and e-mail activities, expect staffing turnover due to differences in skill-sets between traditional circulation tasks and campaign management circulation tasks.
58. Demand oversight and a collaborative relationship with your co-op statistician. This person has a disproportionate influence on your brand.
59. Long-term, you are an online brand that mails catalogs, not a catalog brand with a website. Start transitioning your staff today for this long-term certainty.
60. You can successfully integrate all of your merchandising and inventory systems across channels. You may not have the marketing expertise to take advantage of multichannel systems integration.
61. The days of charging $14.95 for one week shipping/handling are coming to an abrupt end. See tip #21 for more details.
62. You will be amazed how much waste is pared from your marketing activities when you're no longer able to charge $14.95 for shipping/handling.
63. Challenge the ACCM, and DMA conferences to feature speakers with innovative and relevant ideas. Demand that our best conferences provide you with a roadmap to the future.
64. Talk openly about how Catalog Choice will impact the long-term future of your business.
65. Talk openly about how you would alter your marketing strategy if you were not allowed to mail catalogs to customers who have never previously purchased from your brand.
66. Become best friends with the folks who work in your Finance department.
67. Become best friends with your Web Analytics expert.
    
68. When vendors talk about huge targeting and data mining successes, be skeptical. It is likely that the success is due to previous failures in marketing strategy, not in targeting/data mining strategy.
69. Listen to the passion your Chief Merchandising Officer has about merchandise. If you find a talented person anywhere else in your organization who has comparable passion for his/her craft, hold on to that person with all your might!
70. Realize that almost nobody in your organization understands the economics, response, and profitability of your catalog, e-mail and online marketing efforts.
71. Become the person in your organization that thoroughly understands the economics, response, and profitability of your catalog, e-mail and online marketing efforts.
72. How will you ever innovate if all you do is follow "best practices"?
73. If you want to improve your multichannel marketing strategies, listen to your customers before you listen to vendors / research organizations.
    

Online Marketing And Optimal Investment Strategy

Next time you're meeting with an online marketing executive, ask the executive how much s/he is willing to spend to acquire a customer.

You might hear one of three different answers:

• We want each individual marketing activity to perform at or above break-even.
• We want the sum of all marketing activities to perform at break-even.
• We want the long-term value of customers to exceed what it costs to acquire a customer.

Which answer is "best"?

Each strategy has advantages.

In the short-term, executing marketing activities that don't lose money protect the short-term profit and loss statement.

In the long-term, losing money in the short-term that is offset by sales and profit over the next few years makes the most sense.

I frequently use a one-channel Multichannel Forensics spreadsheet to play with different scenarios for clients.

Here are results for each investment scenario, simulated over five years using the data entered in the spreadsheet:

Results Of Three Simulation Runs: Long-Term Profit
	Worst	Sum Of All	Maximize
	Segment	Activities	Lifetime
	Is Break/Even	Is Break/Even	Value
Variable Profit	$433,358	$469	($899,172)
New Customers	26,926	53,735	73,824
Profit per New Customer	$16.09	$0.01	($12.04)
Incremental Profit	$433,358	($432,889)	($899,641)
Incremental Newbies	26,926	26,809	20,089
Incremental PPNC	$16.09	($16.15)	($44.78)
Total Business Demand (in Millions)
Year 1	$35.7	$41.1	$45.1
Year 2	$36.3	$44.4	$50.4
Year 3	$35.6	$46.7	$54.9
Year 4	$34.9	$48.5	$58.6
Year 5	$34.4	$50.1	$61.9
Sum Of Years 1 - 5	$176.9	$230.8	$270.9
Total Variable Profit (in Millions)
Year 1	$6.4	$6.5	$6.0
Year 2	$6.6	$7.2	$7.0
Year 3	$6.5	$7.6	$7.8
Year 4	$6.3	$7.9	$8.5
Year 5	$6.1	$8.1	$9.1
Sum Of Years 1 - 5	$31.9	$37.3	$38.4

Take a look at the incremental statistics. The first strategy generates $16.09 profit per new customer. Incrementally, the second strategy generates $16.09 profit per new customer, followed by a loss of $16.15 per new customer. The second strategy acquires double the customers of the first strategy. The third strategy generates customers at a profit of $16.09, then a loss of $16.15, then a huge loss of $44.78 per customer. The third strategy generates nearly three times as many new customers as the first strategy.

Now look at the long-term demand/profit trajectory of each strategy. The first strategy nets $35.7 million demand and $6.4 million variable profit in year one ... culminating in $34.4 million demand and $6.1 million variable profit in year five. In other words, this business is being starved for new customers in the long-term.

The second strategy (break-even new customer acquisition, in total) yields $41.1 million demand and $6.5 million variable profit in year one ... culminating in $50.1 million demand and $8.1 million variable profit in year five. The strategy actually generates more profit in year one (as new customers re-order), and results in rapid growth through year five.

The third strategy (lose a ton of money in new customer acquisition) generates $45.1 million demand and $6.0 million variable profit in year one ... with $61.9 million demand and $9.1 million variable profit in year five.

What matters to the online marketing executive is this: Given a choice between marketing investment strategies, you are generally best-off, in the long-term, to lose money in the short term on your marketing strategies. In other words, you are likely to have the best long-term success in your paid search and portal advertising strategies if what you lose investing in new customers is offset with future profit that exceeds what you lost acquiring the customer.

Many times, these are not the answers that executive leadership wants to hear. The profit and loss statement must work this year, right?

Your job as an online marketing executive is to run simulations that illustrate what happens to your business, long-term, when marketing spend is not allocated as generously as it could be.

Your simulations will become even more important when our recessionary environment throttles the organic online growth rates that propelled this channel into prominence.

Two Adaptations: Environmental And Privacy Policy

Market forces will require catalogers to make two adaptations in the future.

Adaptation #1 = Environmental Policy: I predict that in 2008, we will see the first of numerous catalogers who openly publish "environmental policies" on their website, and/or in catalogs. Market forces and third parties are going to require our industry to actually talk about the positive things we do, or require us to start doing positive things!! We will craft statements that read like a privacy policy, but will speak to the positive things we're doing to stave off a global crisis.

Adaptation #2 = Privacy Policy: We've either read or written statements like this: "We may occasionally provide your name and postal address to a select group of companies whose products and services you may find of interest". If you think our industry is fed up with third parties and lobbying partners managing our opt-out process for us, wait until organizations dig into the italicized statement above. Market forces will eventually require us to have a more collaborative and forthright arrangement with our customers. In the next few years, we'll allow our customers to make the decision whether they want to be informed about products and services they may find of interest.

Industry leading catalogers will take these steps in 2008, charting a path to our future. Who do you think will lead the catalog industry in the practice of publishing an "environmental policy"?

E-Mail Strategies And A Study From Return Path

A recent study documented on the Return Path website chided retailers for sending what consumers considered "Junk E-Mail".

I think all of us have sat in the seat of the consumer, and understand how irrelevant many e-mail marketing campaigns appear when they arrive in our in-box.

Now, I want to make it clear that I am not taking sides here (nor is this a criticism of Return Path in any way, shape or form). I just want to present a case from the viewpoint of a General Manager accountable for delivering a healthy profit and loss statement. The GM is given four choices (sales and profit are based on actual e-mail marketing relationships):

1. Send two e-mail campaigns per week to the entire e-mail list of 500,000 customers. Total sales = $9.9 million. Total profit = $2.9 million.
2. Send two e-mail campaigns per week to the top half of the e-mail file, send no e-mail campaigns to the bottom half of the e-mail file. Total sales = $8.1 million. Total profit = $2.4 million.
3. Send one very smartly designed e-mail campaign per week to the entire e-mail list of 500,000 customers. Total sales = $6.5 million. Total profit = $1.9 million.
4. Send one very smartly designed e-mail campaign per week to the top half of the e-mail file, no e-mail campaigns to the bottom half. Total sales = $5.3 million. Total profit = $1.6 million.

Again, I'm not taking sides here. I do want for you to see things via the eyes of the business leader.

If a business leader is required to deliver increases in sales and profit (and if the brand is publicly traded, the business leader has a fiduciary responsibility to increase shareholder value), the numbers listed above drive the business leader toward choice #1. The business leader may feel pressured to increase e-mail frequency, mailing non-responders in an effort to deliver promised sales and profit forecasts, delivering less-than-compelling e-mail campaigns that deliver half the productivity of a well-designed campaign (as is illustrated in this example).

The challenge for all of us is to present a compelling case that illustrates how fewer campaigns offering relevant, targeted content actually increases sales and profit more than choice #1 outlined above.

Until this happens, we'll continue to see business leaders opting for choice #1. This choice is opposite from the strategy advocated by many e-mail experts, the opposite strategy desired by a consumer, but is often the choice most beneficial to the brand in the short-term (i.e. twelve months).

P.S.: I realize I'll get comments about high opt-out rates and consumer frustration and sender reputation and long-term profitability. If you elect to take this route, please pretend you're speaking to the General Manager of a direct-to-consumer brand --- present a compelling case with realistic metrics and accurate financial information --- no rhetoric please.

The Catalog Marketing/Circulation Department In 2012

Click on the image to enlarge it.

If you are an executive at a multichannel catalog brand, you're probably thinking about how the skills and abilities of your staff will evolve over the next five years.

The traditional circulation department of 1995 featured folks dedicated entirely to the craft of circulating catalogs. Due to technology limitations, staffers focused on managing lists. Mainframe systems allowed analysts to extract customer information. Customer acquisition staffers coordinated list rental/exchange activity. The merge/purge house coordinated all of this activity.

The circulation department of 2008 is a hodge-podge of transitional activities. We can't afford huge increases in fixed-expense headcount, so we try to cover multiple channels with comparable staffing levels.

The circulation department of 2012 is no longer a circulation department.

In 2012, we transition our teams into new roles. Because 70% or more of our sales occur online (regardless of the marketing activity that causes the sale), the online leader is recognized as the leader of the entire department.

We transition our staff for different roles.

Sales forecasting, typically a catalog-based activity, now reports through an online director.

Channels become "strategies", with the nuts-and-bolts work done by software (i.e. campaign management software like Unica Affinium), or done by staffers at various vendors (i.e. CheetahMail, Coremetrics, Experian, Millard, Abacus).

The analyst simply coordinates activities and provides significant vendor oversight. The analyst spends the remainder of his/her time coordinating a potpourri of strategies suggested by business leaders, and communicates the effectiveness of the strategies, collaborating with folks managing the corporate consumer data warehouse.

Jobs disappear and evolve. Traditional catalog jobs are outsourced to the vendor community, allowing internal resources to be allocated to the jobs of the future.

One of the new jobs is the Social Media Strategist. This person tracks "the conversation" happening between consumers and brands. It's pretty easy to do this today. If you are Lillian Vernon, and you want to track what folks are saying about layoffs at your organization, you type in this search term, then track this RSS feed. In the future, you will dedicate one individual to this activity, a person who works hard to improve the relationship between customers and your brand.

Each strategist (e-mail, search, social media, catalog internal lists, catalog external lists, other online media) co-ordinates data feeds that populate the consumer data warehouse. In a potentially frightening version of the future, proprietary consumer data harvested by each strategist are linked to external databases (i.e. Abacus, Google).

Roles and responsibilities evolve. Folks who enjoy traditional campaign management move into the vendor community. Individuals will manage a fragmented and chaotic environment controlled by the customer. The customer will tell the cataloger that she only wants four catalogs a year, and she wants them in February, May, October and November. The customer will tell the cataloger that she only wants twelve e-mail campaigns per year, to be received on the first of the month. The strategist somehow has to coordinate a million dissimilar consumer requests with software solutions that have yet to be created.

Customer control will cause a reduction in sales, so the strategist will harvest online information, hoping to identify the moment when the customer is ready to purchase something. Some version of search marketing is likely to evolve as the primary function of the circulation department during the next decade.

None of us can accurately predict the future. We can see, however, that the skills required to participate in the circulation department of the future will be very different than the skills required to manage the work flow today. We have a responsibility to look into the future, transitioning our staff for future jobs.

E-Mail And Multichannel Forensics

Our industry spends a lot of time talking about the mechanics of e-mail marketing. We don't spend enough time talking about the long-term behavior of e-mail customers.

Within the Multichannel Forensics framework (book, white paper), we can simplify our view of customer behavior along two dimensions --- those with e-mail addresses, and those who do not subscribe to our e-mail marketing program.

Many multichannel catalogers and retailers observe advantageous behavior among the audience participating in an e-mail marketing program.

• Customers who participate in e-mail marketing programs are usually more valuable than customers who choose not to participate.

• After controlling for the fact that e-mail marketing participants are more valuable than those who choose to not participate, the actual e-mail marketing program generates incremental revenue.
• Example: 100 campaigns per year * $0.25 per campaign = $25.00 of incremental sales that are not generated by those not in the e-mail marketing program.

• Subtle changes in customer behavior (increased or decreased opt-out rates or opt-in rates) have long-term consequences for your brand.
• Example: In the attached simulation, I present a "base case" where a multichannel marketer grows the online business from $40 million to $50 million over five years. If this business fails to offer a compelling e-mail marketing program, maybe 10,000 fewer new customers sign up for the program each year. If this happens, the business does not achieve $50 million in year five --- instead, the business hits $48 million in year five. For businesses at/around 6% EBIT, this trend can gobble up 20% of your long-term EBIT --- all because of the effectiveness of an e-mail marketing program.

Multichannel marketers continue to manage a unique dynamic --- marketing channels are proliferating, but the sales potential of each channel continues to decrease, with the sum of all marketing activities representing tepid overall growth.

In the short-term, we've calibrated our measurement systems to understand what happens (in some cases, in real time) when we execute a campaign.

In the long-term, we will use tools like Multichannel Forensics to understand the impact each marketing channel has on the growth of the brands we manage. We will understand how our short-term behaviors impact long-term growth, adjusting strategies accordingly.

Standardized Multichannel Performance (SMP)

Sometimes, it is difficult for a CEO/Owner to understand whether catalog productivity is increasing, or decreasing.

Let's look at a Spring catalog, over the past three years, plus the forecast for 2008 (sales volume in 000s):

Four Year Performance For The Spring Catalog
Year	Pages	Circ	Phone	Online	Stores	Total
2005	124	800	$1,900	$800	$500	$3,200
2006	116	1,000	$1,950	$850	$624	$3,424
2007	132	1,200	$2,175	$1,100	$663	$3,938
2008(p)	140	1,300	$2,425	$1,350	$675	$4,450

In 2008, the circulation team wants to increase pages and increase circulation, citing increased volume across all channels.

Sound good?

Let's find out if the plan is good.

I introduce a metric called "Standardized Multichannel Performance", or "SMP".

For this business, we standardize the performance of each catalog to a 100 page catalog circulated to 1,000 households. By doing this, we can theoretically compare each catalog on a "comparable" basis. We do this adjustment if we don't have any good "comp segment" information to compare.

Step 1: Calculate an adjustment factor as follows:

• ((100 pages / actual pages) ^ 0.5) * ((1,000 circ / actual circ) ^ 0.5).
• 2004 example: ((100 / 124) ^ 0.5) * ((1,000 / 800) ^ 0.5).
• 2004 example: (0.806 ^ 0.5) * (1.25^ 0.5).
• 2004 example: (0.898) * (1.118) = 1.004.

Step 2: Multiply the adjustment factor by actual multichannel sales volume.

• Adjustment Factor * Multichannel Sales Volume
• 1.004 * $3,200 = $3,213.

In this catalog were 100 pages, mailed to 1,000 households, it would have generated an SMP of $3,213, just over $3.2 million dollars.

Now, we repeat this process for every catalog in the series.

Four Year Performance For The Spring Catalog
Year	Pages	Circ	Phone	Online	Stores	Total	SMP
2005	124	800	$1,900	$800	$500	$3,200	$3,213
2006	116	1,000	$1,950	$850	$624	$3,424	$3,179
2007	132	1,200	$2,175	$1,100	$663	$3,938	$3,129
2008(p)	140	1,300	$2,425	$1,350	$675	$4,450	$3,299

If we mailed a similarly sized catalog to a similar audience, the "SMP" suggests that this catalog would have decreased in performance, from $3,213,000 in 2005 to $3,179,000 in 2006 to $3,129,000 in 2007.

In other words, this catalog is performing worse, year over year.

And in 2008, your circulation team is forecasting a productivity increase of ((3,299 / 3,129) - 1) = 5.4%.

Unless your circulation team found lists that are expected to perform exceedingly well, or your merchants found product that is significantly better than in prior years, you may have a catalog forecast that is not achievable.

Catalog execs should have this little formula tucked-away in a spreadsheet. Choose a page count that is "average" for your business. Choose a circulation depth that is "average" for your business. Once you identify these metrics, calculate "SMP" for each catalog, as well as the catalogs you have planned for this year. You should be able to identify productivity trends and forecast errors easily, using this methodology.

How Do I Know When Catalog Buyers Need To Continue Receiving Catalogs?

There are two ways to look at this topic:

• Non-Traditional View:
• Use Multichannel Forensics: Over the past several years, if catalog customers remain in "isolation mode" and online customers are in "equilibrium" or "transfer mode", then catalogs are your primary reason for being.

• Traditional View:
• Look at Demand per Thousand Pages Circulated on an annual basis for a segment of customers (adding in your matchback results for sales driven by catalogs to the online channel). If this metric is flat or increasing over time, your catalogs are highly relevant. If this metric is decreasing, either customers no longer pay attention to the catalogs, or the merchandise is not enticing, or the creative isn't enticing, or there are pricing issues.
• Look at your "opt-out" rate across customer segments --- what percentage of last year's purchasers are saying they no longer want to receive catalogs? Is this percentage increasing over time?
• Look at the number of pages a customer was mailed, over time. Is this metric increasing while DMPC decreases? If so, your customer wants fewer catalogs, or fewer pages per catalog.
  

I hesitate to look at the metrics within any one catalog. Aggregate results over the course of a year, looking at DMPC (Demand per Thousand Pages Circulated), a metric that at least controls for the number of pages a customer was mailed during the year.

Basically, the answer to the question is sitting right there in your database!

Cute Kids Opting-Out Of Catalogs To Be Featured On The Today Show January 23

According to the blog of the folks who originated the cute videos about kids opting-out of catalogs, Ann Curry of the Today Show "loves the idea" --- the content/topic will be aired on the January 23 edition of the Today Show.

Cute Video:

Announcement From Ted Wells' Catablog:

How Do I Know When Catalog Buyers Don't Need To Receive Catalogs Anymore?

A loyal reader recently asked how he could understand when customers who shop via phone/mail and via the web are ready to forgo catalog marketing, are ready to shop on the web without a veritable plethora of paper advertising?

Good question!

For those of you who own the Multichannel Forensics book, turn to pages 72-79 for an example of the evolution of a catalog business that transitions to an online business.

One thing you can do is run the Migration Probability Table for your multichannel customers (phone/mail and web buyers during the past twelve months). Run this table for each of the past five or six years.

If your customers are ready to shop without the aid of catalog advertising, you will see at least four things happen.

1. The "phone/mail" channel will be progressively changing modes from isolation to equilibrium to maybe even transfer mode. This means phone/mail customers are becoming less and less likely to stay within the phone/mail channel.
2. "Phone/mail" channel loyalty will de-evolve from hybrid to acquisition mode.
3. The "online" channel will be progressively changing modes in the opposite direction, from transfer to equilibrium to isolation.
4. "Online" channel loyalty will evolve from acquisition to hybrid or retention mode.

It's not much more complicated than that. Once customers evolve to a point where the online channel is getting close to or is in "isolation" mode, customers are then ready to purchase without the aid of catalogs.

The folks at Catalog Choice should be advocating this analytical technique --- they'd befriend catalog brands, save trees, make catalog brands more profit, and please customers.

Everybody wins.

Netflix: 2001 to 2012 Sales Trajectory

I'm spending an increasing amount of time helping new online businesses develop long-range sales forecasts.

There are two important components of a long-range sales plan for a new business.

First, we have to estimate how likely customers are to defect.

Second, we have to estimate how many customers we can attract via marketing, and what those customers will spend.

By being a publicly traded company, Netflix freely provides us with a rich history of marketing spend, and the customers attracted by marketing spend.

If you like, download a Netflix 2001 - 2012 spreadsheet I created, a spreadsheet that outlines historical results and a projection for the future. Change marketing spend in row 13 for years 2008 - 2012, to get an idea of how Netflix sales and profit might vary based on different marketing spend levels.

The spreadsheet is driven by churn rate, and more importantly, the marginal effectiveness of marketing and customer acquisition. The graph at the top of the page illustrates this trend at Netflix. In the early years, Netflix was able to greatly improve the effectiveness of marketing activities.

But after 2003, cost per new subscriber steadily increases as marketing spend increases. One can play with different marketing spend levels, understanding the long-term sales and profit potential of Netflix.

Give this simplistic spreadsheet a try. Give me a holler if you want a model built for your new or existing online business.

Profit Per New Customer (PPNC)

One of the least utilized metrics in the online, e-mail and catalog world is "profit per new customer", or "PPNC".

We start with a paid search marketing program. The marketer spends $10,000 and observes these results.

Profit And Loss Statement
Clicks	20,000
Conversion Rate	1.00%
Customers	200
Average Spend	$125.00
Demand	$25,000
Net Sales (80%)	$20,000
Gross Margin (55%)	$11,000
Less Marketing Cost	$10,000
Less Pick/Pack/Ship (12%)	$2,400
Variable Profit	($1,400)
Cost Per Click	$0.50
Cost Per New Customer	$50.00
Profit Per New Customer	($7.00)

There are two metrics that we commonly look at ... cost per click ($0.50), and CPA, or Cost per New Customer ($50.00).

In this case, the marketer is spending $50.00 to acquire a new customer.

The metric that really matters is profit per new customer (PPNC).

In this example, the brand loses $7.00 profit for every new customer.

Next, the brand compares this metric with the long-term value of the customer. For instance, this segment of customers might generate $15.00 profit in the next twelve months.

In total, the marketing activity is responsible for (-$7.00 + $15.00) = $8.00 profit, over a twelve month period of time.

Where possible, we want to evaluate profit per new customer (PPNC), instead of easier-to-compute metrics like cost per click or cost per new customer.

DMA Enhances Product To Compete With Catalog Choice

Kudos to the Direct Marketing Association for enhancing their mail preference solution. The enhanced product more closely resembles the product offered by Catalog Choice, and is free to consumers (though a credit card number must be given to validate the request).

We shall see which service the customer trusts more, maybe that will be the only fun part of all this for us catalogers.

Catalogers --- you've been amazingly quiet over the past two weeks. What are your thoughts on all of this activity?

Profit And Loss Responsibility

If there's anything the past three weeks have taught me, it is that there are two kinds of marketers.

1. Those who have had P&L responsibility.
2. Those who have not been blessed/cursed with P&L responsibility.

Those who have had profit and loss responsibility seem more likely to defend "what has always been done".

Those who have not been blessed/cursed with this responsibility seem more likely to take risks.

Why don't we analyze a multichannel business, and see what profit and loss responsibility does to one's psyche?

Table #1: Current Profit And Loss Statement
	Catalog	Online	Online	Online	Onilne	Total
	Ph/Mail	Via Catalog	Via E-Mail	Marketing	Organic	Volume
Demand	$50,000	$25,000	$5,000	$10,000	$10,000	$100,000
Net Sales	$40,000	$20,000	$4,000	$8,000	$8,000	$80,000
Gross Margin	$20,000	$10,000	$2,000	$4,000	$4,000	$40,000
Less Ad Cost	$7,500	$3,750	$50	$1,250	$0	$12,550
Less Pick/Pack/Ship	$4,600	$2,000	$400	$800	$800	$8,600
Variable Profit	$7,900	$4,250	$1,550	$1,950	$3,200	$18,850
Less Fixed Costs	$5,000	$2,500	$500	$1,000	$1,000	$10,000
Earnings Before Taxes	$2,900	$1,750	$1,050	$950	$2,200	$8,850
EBT … % of Net Sales	7.2%	8.7%	26.2%	11.9%	27.5%	11.1%

Here's a perfectly healthy business. The catalog channel, e-mail channel, and online channel combine to yield a business that generates $80 million in net sales and $8.9 million in earnings before taxes.

Now let's say that somebody in management says "We don't need catalogs anymore ... customers can simply use the internet to shop!!"

If you've had profit and loss responsibility, you're likely to think that this is what your profit and loss statement will look like:

Table #2: Elimination Of The Catalog Program, Catalog Demand Lost
	Catalog	Online	Online	Online	Onilne	Total
	Ph/Mail	Via Catalog	Via E-Mail	Marketing	Organic	Volume
Demand	$0	$0	$5,000	$10,000	$10,000	$25,000
Net Sales	$0	$0	$4,000	$8,000	$8,000	$20,000
Gross Margin	$0	$0	$2,000	$4,000	$4,000	$10,000
Less Ad Cost	$0	$0	$50	$1,250	$0	$1,300
Less Pick/Pack/Ship	$0	$0	$400	$800	$800	$2,000
Variable Profit	$0	$0	$1,550	$1,950	$3,200	$6,700
Less Fixed Costs	$0	$0	$2,000	$4,000	$4,000	$10,000
Earnings Before Taxes	$0	$0	($450)	($2,050)	($800)	($3,300)
EBT … % of Net Sales	0.0%	0.0%	-11.2%	-25.6%	-10.0%	-16.5%

Once you've had profit and loss responsibility, you are likely to be terrified of ending anything! Heck, look at the numbers!

The executive team would be likely to assume that all of the phone/mail volume, and half of the online volume, would disappear if catalogs weren't mailed. $8.9 million of profit becomes a loss of $3.3 million. This business is sunk!

Of course, the folks who originated the idea that all of the volume would simply move online will chime in, citing anecdotal evidence of Aunt Helen in St. Louis who throws her catalogs out, only buying online from credible brands.

If you're lucky, your circulation team tested what happens when catalogs aren't mailed. Most folks who execute these tests realize that a third of the volume will occur anyway, while two-thirds is driven by advertising.

So, let's add a third of the catalog-driven volume back into the profit and loss statement.

Table #3: Elimination Of The Catalog Program, 2/3 Catalog Demand Lost
	Catalog	Online	Online	Online	Onilne	Total
	Ph/Mail	Via Catalog	Via E-Mail	Marketing	Organic	Volume
Demand	$0	$0	$10,000	$20,000	$20,000	$50,000
Net Sales	$0	$0	$8,000	$16,000	$16,000	$40,000
Gross Margin	$0	$0	$4,000	$8,000	$8,000	$20,000
Less Ad Cost	$0	$0	$100	$1,250	$0	$1,350
Less Pick/Pack/Ship	$0	$0	$800	$1,600	$1,600	$4,000
Variable Profit	$0	$0	$3,100	$5,150	$6,400	$14,650
Less Fixed Costs	$0	$0	$2,000	$4,000	$4,000	$10,000
Earnings Before Taxes	$0	$0	$1,100	$1,150	$2,400	$4,650
EBT … % of Net Sales	0.0%	0.0%	13.7%	7.2%	15.0%	11.6%

Now we're getting some place. Earnings before taxes improve to $4.7 million. Still, sales and profit are not where they were, prior to eliminating the catalog. Those accountable for the P&L dig their heels in!

A final scenario is run. E-mail marketing goes from one campaign per week to two campaigns per week. And online marketing spend increases from $1.2 million to $5.0 million dollars, assuming this money can actually be spent in an efficient manner (and hopefully, somebody would have tested this before getting to this stage). Quadrupling online marketing results in a doubling of online volume, in this example.

Here's the profit and loss statement.

Table #4: Elimination Of The Catalog Program, Increase Online Budget
	Catalog	Online	Online	Online	Onilne	Total
	Ph/Mail	Via Catalog	Via E-Mail	Marketing	Organic	Volume
Demand	$0	$0	$14,140	$40,002	$20,000	$74,142
Net Sales	$0	$0	$11,312	$32,001	$16,000	$59,313
Gross Margin	$0	$0	$5,656	$16,001	$8,000	$29,657
Less Ad Cost	$0	$0	$200	$5,000	$0	$5,200
Less Pick/Pack/Ship	$0	$0	$1,131	$3,200	$1,600	$5,931
Variable Profit	$0	$0	$4,325	$7,801	$6,400	$18,525
Less Fixed Costs	$0	$0	$2,000	$4,000	$4,000	$10,000
Earnings Before Taxes	$0	$0	$2,325	$3,801	$2,400	$8,525
EBT … % of Net Sales	0.0%	0.0%	20.6%	11.9%	15.0%	14.4%

At this point, earnings before taxes are about equal to the current profit and loss statement, a statement that includes catalog marketing.

Of course, the business loses about $20 million in net sales, suggesting that a portion of the catalog volume was not being generated efficiently.

Here's the rub. Those who have never had profit and loss responsibility are willing to change strategies, in large part because they've never been accountable for delivering promised sales and profit numbers to owners/shareholders. Those who have had profit and loss responsibility are often not willing to change strategies, because the risk involved in trying something different might cost them their job.

In-between those who advocate risk, and those who have to deliver numbers, are a set of assumptions that can help leaders feel comfortable with a different business model, a different strategy, a different approach.

What is needed is a healthy mix of strategy, database research, open-mindedness, and fiscal accountability.

The future of the catalog industry will include all three of these components.

What Happened? What Will Happen?

This is the final post in a recent series of discussions about customer frustration with catalogers.


What Happened?

A portion of the population are using a combination of social networking tools, internet technology and external funding to express dissatisfaction with a perceived abundance of unsolicited catalogs.


Are Consumers Really Upset With Catalogers?

It has become obvious that some consumers, and maybe a signification minority of the population, are dissatisfied with catalogers. The internet makes it very easy for folks to express their frustration. For example, read about folks who are frustrated about unwanted catalogs and junk mail.


Did Consumer Behavior Change?

Consumer behavior in 2008 is different than in 1995, the final year that catalogers owned the field of Direct Marketing. In 2008, consumers (by and large) want control over the shopping experience. Today, the consumer wants to "opt-in" to the brands she wants to have a relationship with. She wants to determine if she has a relationship with Williams Sonoma, The Territory Ahead, or Bloomingdales, not the other way around.

The consumer has been trained to anticipate this type of relationship. In e-mail marketing, the consumer (for the most part) opts-in to the marketing programs she wants to be part of. In search marketing, the consumer decides which paid ad to click on, which natural search result to follow. In retail, the consumer has always had control --- nobody forces her to shop at The Limited unless she wants to shop at The Limited.

Elsewhere, consumer control is increasing. The consumer uses a DVR or a VCR to avoid television advertising. She opts-in to the blogs and media she wants to participate in. She can opt-out at any time.


Isn't Cataloging An Opt-In Form Of Marketing?

For the most part, the consumer does not have control over catalog marketing. Catalog businesses do not survive without a fresh supply of new customers. Therefore, catalogers must "prospect", or send catalogs to customers who have not previously purchased from a brand.

A customer checks her mailbox, and finds a J. Jill and an Eddie Bauer catalog. She never purchased from J. Jill or Eddie Bauer. These catalogs are, by definition, "unsolicited", meaning the customer did not request or "opt-in" to receive these catalogs.

When you read about consumer dissatisfaction with catalogers, the "unsolicited" catalogs are a large source of the frustration.


Are Catalogers Doing Anything Different, Causing Frustration?

Catalogers made numerous (but subtle) strategic changes that cause a consumer to believe she is receiving more unsolicited mail than in the past.

• Industry Consolidation. During the past decade, firms purchased numerous catalog brands that were struggling financially. When multiple catalog brands are being managed by one firm, it is common practice to merge the customer files of each brand. The firm may elect to "cross-market" catalog brands, resulting in customers receiving catalogs the customer may not have previously received. The customer perceives this "cross-marketing" as "unsolicited mail".
  

• Co-Op Databases. The biggest change in cataloging is the use of co-op databases. Catalogers give the name and address of catalog purchasers to companies like Abacus. The co-op combines information about the merchandise a customer purchased, across all participating catalog brands. For a small fee (less than a dime per name/address), the cataloger benefits by being able to mail "similar" customers, those who have yet to purchase from the catalog brand but possess similar behavior. The cataloger, however, does not determine who receives the catalog --- the co-op statistician identifies "like" customers, the cataloger trusts the co-op statistician to make this decision. By and large, this has been a good relationship for the catalog brand, as co-op statisticians are able to find prospects with acceptable response rates at a low cost. The consumer, however, might lose in this situation. The co-op statistician might over-mail some consumers, causing those consumers to perceive an excess in "unsolicited catalogs". The co-op does not share profits with catalogers or customers. It would be interesting to see what happened if the consumer demanded a share of the profits generated by the co-op.
  

• Online Customer Behavior: When a customer purchases from the website of a catalog brand like Orvis, Garnet Hill or Norm Thompson, she may or may not perceive she is buying from a catalog company. We can never know how the consumer truly perceives the brand. If the consumer perceives her relationship as an "online" relationship, catalogs are perceived to be unsolicited. However, much of the catalog vendor ecosystem depends upon catalogers for financial well-being. The co-op collects money each time prospecting occurs. The printer collects money each time a catalog is mailed. The paper industry thrives off of a strong catalog marketing program. The post office relies upon catalogers for revenue. Trade journals live off of the advertising of vendors who depend upon catalogers. The catalog ecosystem thrives if the online customer is mailed a catalog. Over time, catalogers were re-branded as "multichannel merchants", to signal the perceived importance of mailed catalogs in the growth of the e-commerce industry. The disconnect between customers (who may not want catalogs after an online purchase) and the catalog ecosystem (an ecosystem that thrives on mailing online customers catalogs) cause problems.

What Does This Mean For Consumers?

We are likely seeing the early days of consumer dissatisfaction. Consumers will demand control over unsolicited catalogs (i.e. prospecting). Consumers will demand control over the number of catalogs they receive from the brands they purchase from. The noise will get louder, and more widespread, until the consumer perceives control shifted from the brand to her.


What Does This Mean For The Direct Marketing Association?

It is entirely possible that the DMA will be forced to respond to growing customer dissatisfaction, either by adhering to state or federal legislation, or by yielding to the growing popularity of services like Catalog Choice. Telemarketing and e-mail marketing are fundamentally different today than they were five years ago. Catalog marketing is likely to be altered in a similar manner, over time.


What Does This Mean For Catalog Brands?

The catalog business model will be forever changed. Catalogs will become an "opt-in" marketing strategy, maybe within as little as five years. Consumers will decide if they want to receive catalogs, and consumers will dictate how many catalogs they receive per year. Consumers will decide if they want to be part of a "prospect pool", a group of customers willing to receive catalog marketing from brands the customer has yet to purchase from.

The catalog brand will not be able to prospect in the traditional sense. Catalogs will be used to advertise merchandise to existing housefile customers who enjoy this style of advertising.

The best catalog brands will begin, well in advance of these changes, to shift catalog marketing dollars to the online channel. The catalog brand will be forced to accept online shoppers with lower annual repurchase rates, lower average order sizes, lower lifetime value, and marginal loyalty.

Traditional catalog brands will demand the development of advanced targeting techniques, in an effort to entice prior customers who have not purchased in several years to buy again. Traditional catalog brands will focus on building internal lists of opt-in catalog customers and prospects that are mined for various catalog mailing activities.


What Does This Mean For The Catalog Vendor Ecosystem?

There will be winners and losers in the catalog vendor ecosystem.

Co-ops will undergo dramatic transformation with the loss of unsolicited prospecting. Co-ops will reinvent themselves as miners of information about existing housefile customers.

Printers will survive by adapting to the needs of the opt-in catalog customer. Expect printers to execute "micro-catalogs", catalogs that offer targeted merchandise based on past purchase history and website browsing activity. This idea is not a new one, having been bantered around for the past two decades --- but the economics of opt-in cataloging will necessitate dramatic changes in merchandise targeting and personalization. Printers will lead the way on this front.

Printers will have to lead the way, because the volume of catalogs in the mail in an opt-in catalog world will be greatly reduced. This will drive up the cost of postage, which in kind will lower the number of catalogs that a catalog brand can afford to mail. "Micro-catalogs" will have to offer variable merchandise (i.e. different merchandise offered to different customers on the same in-home date) in order to generate enough sales to offset the high cost of postage.



What Does This Mean For The Catalog Employee?

Baby boomers created the explosion in catalog marketing between 1980 and 1995. For the baby boomer, this new catalog reality will be difficult to cope with. I expect a mass transition in the leadership of catalog brands as opt-in cataloging becomes a reality.

For the employee looking to transition a business model, there will be unparalleled business opportunities. Savvy leaders will be financially rewarded after successfully transitioning catalog businesses online while at the same time shepherding the creation of an "opt-in micro-catalog" business model.

For call center and distribution center employees, this will be a time of disruption. Call centers will become "instant response centers", geared to offering online shopper assistance. The instant response center will not be staffed to the levels of today's call centers. The best catalog brands will proactively train employees for the future of our industry, minimizing disruption.


What Does This Mean For The Customer?

Customers will have more control over what appears in their mailbox. This will be heralded as a "good thing". A to-be-determined amount of "impulse purchases" will cease to exist, without advertising to generate the purchase. The consumer will become even more engaged with the online channel, and will depend even more upon Google and consumer recommendations to direct her to the brands she trusts. At some point, consumers will rebel against Google, feeling that the giant search brand "controls everything".


Will There Be Hope?

This transition will not be without pain. Many industries are being transformed by the internet. Cataloging is to e-commerce as the CD is to the MP3 file. Look at what is happening in the television industry, or newspaper industry.

For catalogers, the transition is overdue, and when it is suddenly forced upon the industry, challenges will exist everywhere.

And yet, I feel that hope exists. An industry that has largely done things the same way for decades will be transformed. There will be creativity the likes of which haven't been seen in our industry. Many of us will make it through the transition, enjoying a customer base that trusts us, that pulls information from us (instead of us sending unsolicited marketing to them), that advocates on our behalf, that finds new customers for us. We will celebrate with our best customers, we will find ways to reward our best customers (and I don't mean 20% off coupons or free shipping).

I believe in the future of our industry. I will be there with you, every step of the way, helping us get through the transition that is coming.

More Folks Fed Up With Catalogers And Direct Mail

Enjoy this from the Church of the Customer blog. This blog is one of the most widely read marketing blogs in the world, with 133,000 daily subscribers.

The author advocates the opt-in model for catalogs ... which as catalogers know is vastly different than the current practice of using co-ops and list organizations to trade names per the specs of the privacy policy of each brand.

Co-ops, are you paying attention? This doesn't bode well for you, either.

Right, wrong or otherwise, what is being advocated by a significant minority of individuals would end the craft of cataloging. Thank goodness all us catalogers are actively migrating our business model to the internet, right?

Multi-Channel Profit Tip: Long-Term Forecasting

Please click on the image to enlarge it.

Most of our multi-channel subscribers manage mature businesses. In other words, the multi-channel brand is maybe a decade old, or more.

In mature multi-channel businesses, catalogs are rapidly evolving toward an advertising channel for housefile customers. With the cost of paper, recycled paper, postage, and merchandise delivery increasing, and prospecting universes decreasing (and yes, your co-op universes will begin decreasing, you'll just not know it as long as co-op statisticians continue to improve targeting skills), new customer acquisition will become an online necessity.

Catalogers don't like this reality, and for good reason. Online customers typically have lower annual repurchase rates, lower annual spend, and lower lifetime value than customers acquired via catalog marketing.

2008 is the year that multichannel brands must embrace long-term forecasting. The long-term health of the multichannel brand depends upon an accurate forecast of the future.

In the attached example, the multichannel brand is being starved of new phone/mail customers acquired via catalog marketing.

So the brand must continue to drive customer acquisition online. Catalogs may be one source of new customers. All the other online favorites (paid search, natural search, affiliates, e-mail, portal advertising, shopping comparison, blogs, social networks) become critical.

In this example, notice that by year five, the entire brand stalls. Even though online customer acquisition is at least fifty percent more than it is today, the brand stalls, because of the continued leakage in the phone/mail/catalog channel.

Multichannel Profit Tips:

• Use long-term forecasting (aka Multichannel Forensics) to understand the future trajectory of a multichannel business.
  
• Develop a five year investment strategy that allows you to hit the appropriate number of long-term acquired customers required to grow the total brand.
• Determine if it is possible to increase online customer acquisition by fifty percent over five years if cataloging is not as viable a customer acquisition channel.
  
• Run profit and loss scenarios assuming increased merchandise delivery costs, postage costs, paper (and recycled paper) costs. Understand if you will be able to leverage your fixed costs in five years as operational costs increase.

Ours is an industry at an inflection point. We really need to start simulating future outcomes that provide us the best path to long-term profitability.

E-Mail Marketing And Conditional Response

My all-time favorite analytical procedure is called the "life table".

I enjoy the methodology so much (in my opinion), that I devoted a whole chapter to the application of the life table in catalog marketing in my Database Marketing Book.

These days, e-mail marketing is tailor-mailed for adaptations of the life table.

In multichannel retailing and cataloging, we're told not to over-mail our customers, as we might damage our reputation with ISPs or damage our reputation with our customers. This is probably good advice. Still, the analytical side of me wants to have the customer tell me when too much is too much. Here's where a modified version of a life table, called "conditional response", can help.

Basically, we ask the question "what is the probability of a customer clicking-through an e-mail campaign to visit your website, given the fact that the customer failed to click-through the past 'x' e-mail campaigns?"

For e-mail marketers in the multichannel world, this is ultimately the core issue. Successful e-mail marketing should cause a customer to want to act (on a website, in-store, over the phone).

So we want to look at the number of times a customer fails to act when receiving e-mail marketing. If a customer failed to act after twenty consecutive e-mail campaigns, what is the likelihood of the customer acting in a positive way on the twenty-first e-mail campaign?

Take a peek at the sample table below:

E-Mail Campaign Performance By Conditional Response
	Action:	Website	Average
Campaigns	(Open Rate *	Conversion	Order	$ per	Opt-Out
Ignored	Click-Through)	Rate	Size	E-Mail	Rate
0 to 4	14.39%	2.43%	$100.39	$0.35	0.53%
5 to 9	10.07%	2.36%	$101.39	$0.24	0.61%
10 to 14	7.05%	2.29%	$102.41	$0.17	0.70%
15 to 19	4.94%	2.22%	$103.43	$0.11	0.81%
20 to 24	3.46%	2.15%	$104.47	$0.08	0.93%
25 to 29	2.42%	2.09%	$105.51	$0.05	1.07%
30 to 34	1.69%	2.02%	$106.57	$0.04	1.23%
35 to 39	1.19%	1.96%	$107.63	$0.03	1.41%
40 to 44	0.83%	1.90%	$108.71	$0.02	1.62%
45 to 49	0.58%	1.85%	$109.80	$0.01	1.86%

In this table, we observe key e-mail metrics by consecutive e-mail campaigns that the customer failed to act upon.

Notice that after saying "no" to fifteen to twenty-four consecutive e-mail campaigns, the customer becomes much less responsive (in this example). This is the stage where the e-mail marketer considers changing strategic direction, because the customer is no longer responsive --- and the table suggests that the customer will become even less responsive in the future.

Catalogers can do the same thing --- measuring how responsive online customers are after saying "no" to the past fourteen catalogs.

So give the tool a try, it's a great way to identify the point where customers "just say no" to you!!

A Sad Outcome Of The Efforts Of Catalog Choice

Catalog Choice continues to use brilliant, grass roots style marketing activities to send the craft of cataloging to the recycle bin of formerly important business models.

• Subscribe to the Catalog Choice RSS feed, to stay updated on their activities.
• Here is the new Catalog Choice Facebook group, educating 40,000,000 Facebook users about the ills of unsolicited catalogs.
• Or simply visit the Catalog Choice homepage, to keep up to date on their initiatives.

I've spent all but three years of my career in the catalog/multichannel industry. I recall the days when my industry was praised by environmental types for not contributing to air pollution, gasoline consumption, and carbon dioxide emissions.

I don't harbor ill-will toward Catalog Choice. They simply created a service that 350,000 frustrated individuals (to date) chose to utilize. Catalog Choice knows how to use modern marketing tools to "spread the word".

I am frustrated for two reasons. One leads to a sad outcome.

First, I am exasperated with my own industry. It is our own scorched-earth policy of over-mailing online customers who don't want to receive catalogs, and our delegation of circulation responsibilities to co-ops without appropriate oversight that caused so many unsolicited, unwanted catalogs to end up in consumer mailboxes. Worse, the Direct Marketing Association told us to ignore the desires of our own customers. Forty percent of catalogers are siding with the DMA, according to a recent Catalog Success survey. We're going to get the end-game we deserve.

The sad outcome of the growing popularity of Catalog Choice occurs when "the little guy" loses his/her job.

While estimates vary greatly, somewhere between $80,000,000,000 and $150,000,000,000 annual sales are generated over the telephone due to catalog mailings.

Let's assume a conservative estimate of $70,000,000,000 sales generated over the telephone. Let's also assume that the average call center and distribution center employee is responsible for processing $400,000 of sales per year.

If Catalog Choice is successful, they may be able to eventually get 10% of the population to opt-out of catalogs (and their presence alone might cause legislation that boosts this number far beyond 10%).

Catalog Choice would facilitate the elimination of seven billion dollars of sales (not to mention what is driven to the web, which I am purposely ignoring to simplify the message).

Worse, Catalog Choice facilitates the loss of $7,000,000,000 / $400,000 = 17,500 call center and distribution center full-time jobs, or 35,000 part-time jobs. And I'm not counting jobs in a vendor community that supports the catalog industry.

These aren't executive-level jobs. Executives get to keep their jobs, because the online channel still needs to be managed. The very folks who created this problem will still be employed.

Nope, these are the kind of jobs that anger me the most. These are $11.00 per hour call center and distribution center jobs. In many cases, these are $11.00 per hour jobs in rural areas like New Hampshire, Vermont, Maine, and Wisconsin, places where there simply aren't other jobs.

These jobs belong to farmers, who work in the distribution center after milking cows at 6:00am, before having to milk cows at 6:00pm.

These jobs belong to spouses looking to supplement income in order to pay a an adjustable rate mortgage that they had to take out to be able to afford a nice home.

These jobs belong to hard working, honest individuals, folks who want to be able to afford to buy a hybrid car, to be able to put solar panels on homes, who already recycle everything they can in their homes, who want to be able to afford compact florescent light bulbs, who unplug electronics to conserve energy, who took this job to be close to home to minimize the gasoline expense and pollution generation required to get a better-paying job in the big city.

Poorly designed catalog contact strategies that cause eco-friendly organizations to take a stand will cause good, honest, hard-working individuals in the lower-middle class to lose their jobs. Even if all of the sales shift online, jobs disappear when sales are generated via the online channel.

If you are an executive at a catalog organization, and you truly believe that Catalog Choice wants to be a business partner of yours, why not invite the leadership of Catalog Choice to your office? Pay for the visit out of your budget. Give them a tour of your call center. Have them meet the individuals who work there. Actually talk to the individuals who will pay the price of this growing trend.

And once you've completed the tour, sit down with Catalog Choice and come up with a solution before it is too late. There's still time for a solution. Remember, Catalog Choice states that they want to eliminate "unsolicited" catalogs, not catalogs that consumers "want" to receive.

Zappos: The Legend Continues

At 8:40pm Wednesday evening, I ordered a pair of shoes from Zappos.

At 5:00pm Thursday afternoon, my pair of shoes arrived at my front door. Free shipping, free returns (although we know they embed a $3 shipping charge in the price of the shoe, and we willingly accept that for this kind of customer service).

In three years, when we in the "multi-channel" (aka catalog) industry are no longer able to send catalogs on a mass-scale to potential (and many existing) customers, we'll need to consider a new business model.

We'll take the fifty percent of our catalog budget that we're no longer allowed to use on prospecting and online customer mailings, and we'll split it two ways.

First, we'll use half of that money on online marketing strategies.

Second, we'll upgrade our distribution center capabilities, and we'll eat the $14.95 we charge for shipping today, instead moving much closer to a business model that Zappos utilizes.

We should play out these scenarios in 2008, using Multichannel Forensics to understand what our future might look like. We have an opportunity to be proactive.

We should pay close attention to Zappos. They built a half-billion-dollar-plus business in less than a decade, without catalogs. They did it by treating the customer extremely well.

Catalogers, Please View These Videos

Watch each video: http://www.parkschool.org/blogs/ted_wells/2007/12/20/catalog-movies/.

Some of those kids claim to have had their parents opt-out of between forty and eighty catalogs. Poor Spiegel --- the second video shows how to specifically opt out of Spiegel catalogs ... 1-800-345-4500 phone number and automated CRM system and all.

Testing Issues

Recall that my focus in 2008 is on multichannel profitability.

Experimental design (aka 'tests') is one of the most useful tools available to help us understand multichannel profitability.

We run into a ton of problems when designing and analyzing 'tests'. Let's review some of the problems.


Problem #1: Statistical Significance

Anytime we want to execute a test, a statistician will want to analyze the test (remember, I have a statistics degree --- I want to analyze tests!).

In order to make sense of the conclusions, the statistician will introduce the concept of "statistical significance". In other words, the statistician will tell you if the difference between a 3.0% and 2.9% click-through rate is "meaningful". If, according to statistical equations, the difference is not deemed to be "meaningful", the statistician will tell you to ignore the difference, because the difference is not "statistically significant".

Statisticians want for you to be right 90% of the time, or 95% of the time, or 99% of the time.

We all agree that this is critical when measuring the effectiveness of a cure for AIDS. We should all agree that this isn't so important when measuring the effectiveness of putting the shopping cart in the upper right-hand corner of an e-mail campaign.

Business leaders are seldom given opportunities to capitalize on something that will work 95% of the time. Every day, business leaders make decisions based on instinct, on gut feel, not having any data to make a decision. Knowing that something will work 72% of the time is a blessing!

Even worse, statistical significance only holds if the conditions that existed at the time of the test are identical to the conditions that exist today. Business leaders know that this assumption can never be met.

Test often, and don't limit yourself to making decisions only when you're likely to be right 99% of the time. You'll find yourself never making meaningful decisions if you have to be right all the time.


Problem #2: Small Businesses

Large brands have testing advantages. A billion dollar business can afford to hold out 100,000 customers from a marketing activity. The billion dollar business gets to slice and dice this audience fifty different ways, feeling comfortable that the results will be consistent and reliable.

Small businesses are disadvantaged. If you have a housefile of 50,000 twelve-month customers, you cannot afford to hold out 10,000 from a catalog or e-mail campaign.

However, small business can afford to hold out 1,500 twelve-month customers out of 50,000. The small business will not be able to slice and dice the data the way a large brand can. The small business will have to make compromises.

For instance, look at the variability associated with ten customers, four of which spend money:

• $0, $0, $0, $0, $0, $0, $50, $75, $150, $300.
• Mean = $57.50.
• Standard Deviation = $98.63.
• Coefficient of Variation = $98.63 / $57.50 = 1.72.

Now look at the variability associated with measuring response (purchase = 1, no purchase = 0).

• 0, 0, 0, 0, 0, 0, 1, 1, 1, 1
• Mean = 0.40.
• Standard Deviation = 0.516.
• Coefficient of Variation = 0.516 / 0.40 = 1.29.

The small company can look at response, realizing that response is about twenty five percent "less variable" than the amount of money a customer spent.

Small companies need to analyze tests, sampling 2-4% of the housefile in a holdout group, focusing on response instead of spend. The small company realizes that statistical significance may not be achievable. The small company looks for "consistent" results across tests. The small company replicates the rapid test analysis document, using response instead of spend.


Problem #3: Timeliness

The internet changed our expectations for test results. Online, folks are testing strategies in real-time, adjusting landing page designs on Tuesday morning based on results from a test designed Monday morning, executed Monday afternoon.

In 1994, I executed a year-long test at Lands' End. I didn't share results with anybody for at least nine months. What a mistake. We had spirited discussions from month ten to month twelve that could have been avoided if communication started sooner.

Start analyzing the test right away. Share results with everybody who matters. Adjust your results as you obtain more information. It is ok that the results change from month two to month three to month twelve, as long as you tell leadership that results may change. Given the fact that the online marketers are making changes in real-time, you have to be more flexible.


Problem #4: Belief

You're going to obtain results that run contrary to popular belief.

You might find that your catalog drives less online business than matchback results suggest. You might find that advertising womens merchandise in an e-mail campaign causes customers to purchase cosmetics.

You might find that your leadership team dismisses your test results, because the results do not hold up to what leadership "knows" to be true.

Just remember that people once thought the world was flat, that the universe orbited Earth, and that subprime mortgages could be packaged with more stable financial instruments for the benefit of all. If unusual results can be replicated in subsequent tests, the results are not unusual.

Leadership folks aren't a bunch of rubes. They have been trained to think a certain way, based on the experiences they've accumulated over a lifetime. It will take time for those willing to learn to change their point of view. It does no good to beat them over the head with "facts".

Multi-Channel Advertising Strategy

We don't read a lot about the nuts and bolts of properly executed multi-channel advertising strategies these days, do we?

We know we're supposed to execute 'em. We don't always know what we should do.

Let's look at a multi-channel retailer executing a Valentine's Day multi-channel advertising strategy.

The retailer uses three traditional advertising tools, all geared to drive sales to the call center, the website, and retail stores.

• An 80 page catalog featuring favorite Valentine's Day merchandise, mailed on or around January 23.

• A postcard mailing, informing the customer that the sale ends February 14. This postcard is mailed on or around February 4.

• Two e-mail campaigns, featuring hot items available in all channels. One e-mail campaign is delivered on January 30, another is delivered on February 6.

The multi-channel database marketing team tested eight different contact strategies. The following table illustrates the results of the test, across all channels:

Multi-Channel Advertising Results: Valentine's Day Promotion
Catalog	Postcard	E-Mail		Ph/Mail	Website	Store	Total	Profit
Yes	Yes	Yes		$5.80	$6.25	$12.60	$24.65	$6.49
Yes	Yes	No		$6.25	$5.35	$13.05	$24.65	$6.50
Yes	No	Yes		$5.80	$6.40	$12.25	$24.45	$6.73
Yes	No	No		$6.15	$5.85	$12.05	$24.05	$6.62
No	Yes	Yes		$3.45	$5.40	$12.75	$21.60	$6.17
No	Yes	No		$3.75	$4.90	$12.75	$21.40	$6.12
No	No	Yes		$3.90	$5.30	$11.30	$20.50	$6.14
No	No	No		$4.00	$5.00	$11.00	$20.00	$6.00
Catalog Marketing = Yes				$6.00	$5.96	$12.49	$24.45	$6.58
Catalog Marketing = No				$3.78	$5.15	$11.95	$20.88	$6.11
Incremental Benefit				$2.23	$0.81	$0.54	$3.58	$0.47
Postcard Marketing = Yes				$4.81	$5.48	$12.79	$23.08	$6.32
Postcard Marketing = No				$4.96	$5.64	$11.65	$22.25	$6.37
Incremental Benefit				($0.15)	($0.16)	$1.14	$0.83	($0.05)
E-Mail Marketing = Yes				$4.74	$5.84	$12.23	$22.80	$6.38
E-Mail Marketing = No				$5.04	$5.28	$12.21	$22.53	$6.31
Incremental Benefit				($0.30)	$0.56	$0.01	$0.27	$0.07

There's a lot of interesting information in the table, don't you think?

First, take a look at the eight test panels. The strategy that drove the most volume included a catalog, a postcard, and potentially the two e-mail campaigns.

However, the most profitable strategy was to mail a catalog and the two e-mail campaigns.

Reviewing results across eight test panels can be a challenge. At the bottom of the table, results are summarized by advertising channel.

Catalog advertising appears to be the most profitable strategy (not always the case), driving an incremental $2.23 to the phone/mail channel, $0.81 online, and $0.54 to stores. The average customer spent $3.58 across all channels, generating $0.47 profit.

Postcard advertising changes customer behavior. Notice that postcard advertising cannibalized phone/mail sales and website sales (not always the case), but worked very well in the retail channel, increasing volume from $22.25 to $23.08 per customer. The average customer spent $0.83 incremental volume, generating a loss of $0.05 per customer.

E-Mail advertising also caused a shift in customer behavior. The two e-mail campaigns cannibalized the phone/mail channel, significantly benefited the online channel, and did drive incremental volume in stores. E-mail marketing (usually the case) drove the least volume, but was much more profitable than postcard marketing --- driving $0.27 volume and $0.07 profit. By the way, your typical e-mail metrics suite (open rate, click-through rate, conversion rate) fail miserably when analyzing multi-channel strategies ... the metrics mentioned above miss the phone/mail cannibalization and miss incremental retail sales.

Multi-channel advertising strategies are challenging to manage. We're told we have to "do everything", that we have to "integrate everything". To understand if the pundits are offering the right strategy for our business, we need to test different strategies.

In this example, we learned that each advertising strategy benefits one channel. Store Managers, for instance, are going to be proponents of postcard marketing, because they will clearly see the traffic increase from postcard marketing in stores. And good luck sitting down with a store manager, telling her that next year you won't execute the postcard strategy because it was unprofitable. Ha! Catalog marketing benefits the phone/mail channel ... without catalog marketing, the phone rang 40% less often.

There are subtleties involved in multi-channel advertising strategies. Catalogs and e-mail campaigns mailed early in the week benefit phone/mail and online channels. If catalog and e-mail campaigns are mailed later in the week, stores are likely to get a little more help.

Also look at what happens to store sales across each test group ... on average, marketing increases sales by maybe five percent, on average. This is a very typical outcome ... and oh, by the way, your matchback vendor might attribute the other 95% of store orders to the three marketing activities, grossly overstating the results of your marketing activities. This happened to me during my days at Nordstrom, a reputable matchback vendor mis-allocated store orders to marketing activities ... one has to be on top of their game to ignore what appear to be brilliant results!

Only well-executed tests and rapid test results help the marketer avoid matchback biases.

Rapid Test Results

In 2008, I'm going to focus energy discussing how test results and Multichannel Forensics increase profitability, and hopefully decrease customer dissatisfaction. Today, we begin the discussion by exploring the concept behind a project I call "Rapid Test Results".

One of the easiest ways for multichannel catalogers, retailers and e-mail marketers to understand customer behavior is through the use of "A/B" tests.

In an "A/B" test, one representative group of customers receive a marketing activity, while the other representative group of customers do not receive a marketing activity.

The catalog industry uses matchback algorithms to understand multichannel behavior. As most of us understand, matchback algorithms over-state the effectiveness of marketing activities.

Conversely, e-mail marketers understate the effectiveness of e-mail marketing activities when using open rates, click-through rates, and conversion rates.

Therefore, we need to improve the understanding of our marketing activities. One way to do this is to create and analyze more "A/B" tests, often called "mail/holdout" tests.

It can be very easy to execute these tests.

However, we don't always have the resources necessary to analyze and understand the test results.

If you are an executive who falls into the latter category, I have something for you. It is called "Rapid Test Results".

For my loyal blog readers, executives, and current customers, I have an inexpensive proposal just for you. The Rapid Tests Results Analysis Document outlines an inexpensive project that gets you results to the tests you executed, within just a few days of sending your information for analysis purposes.

If there's one thing I learned in 2007, it is that e-mail and catalog teams are minimally staffed! And yet, the information that can be gleaned from tests executed by e-mail and catalog marketing teams can shape the future direction of your organization.

So if any of the following criteria are met by your organization, please consider a Rapid Test Results Project:

• You are an e-mail marketer who believes your e-mail campaigns drive more sales and profit than you can measure via standard metrics like open rate, click-through rate, and conversion rate.

• You are a catalog marketer who wants to truly understand if multichannel customers respond to catalog marketing, and want to truly learn the impact of catalog marketing on the online channel.
  

• You are a catalog marketer who wants to reduce catalog marketing expense (and benefit the environment) by limiting contacts to internet customers.

• You do not have the analytical resources to analyze test results quickly.

• You do not have the systems support to measure test results by different customer segments, across different channels, or across different merchandise classifications.
  

• Your executive team does not understand the constraints and limitations that prevent your team from analyzing all of your tests in a timely manner.