Profit

Here's a quiz question to offer to your staff on this first Monday of December:

"You spend $1,000 on a paid search campaign. 3,000 users click through to your site, with 1% converting to a purchase. Customers spend a total of $3,000. 30% of the sales flow-through to profit. Was the paid search campaign profitable?"

Profit is missing from the language of marketing.

I reviewed the language of the twenty-five most popular marketing bloggers. During the life of the blogs on the list, the average marketing leader mentioned the word "profitable" in a median of just six blog posts ever, "profit" in a median of just thirty blog posts ever (and that includes the phrase "non-profit", and includes press releases about corporate profit). In fact, fifteen of the twenty-five bloggers used the phrase "profitable" three or fewer times ever --- and that's across an average of 250 to 1,000 posts.

These are your favorite marketing experts. The majority seldom if ever talk about profit.

Profit becomes part of the DNA of a business. It has been my experience that profit knowledge is kept in small tribes.

• Business Intelligence. BI employees are great at creating and querying cubes. Too often, the components of profit are not contained in the cubes.
• SAS Programmers. A completely different family of employees than BI experts. These crafty workers revel in writing neat code more than they focus on measuring profit. Of all employees, this is the one place where everything could be brought together.
  
• Web Analytics. This KPI-enamored throng of earnest employees use software that can, but frequently doesn't integrate profit components. So we've created an entire generation of good analysts who do not have profit as part of their DNA.
• E-Mail Analytics. Our e-mail community thinks about return on investment, and that is good! Because e-mail is almost free on a variable cost basis, there hasn't ever been a need to teach profitability. E-mail is always profitable.
• Catalog Circulation. These folks measure profit down to the penny, and for good reason. When you spend $0.75 sending out catalogs, your finance team requires that you become excellent at calculating profit.
• Paid Search. Another group that is really good at measuring profit, and for good reason. When you spend $0.75 per click, your finance team requires that you become excellent at calculating profit.
• Portal Advertising. This group can measure profit, but requires really good systems in order to build this discipline.
• Affiliate Marketing. Since you pay a commission, this style of marketing is generally profitable, and as a result, profit isn't always measured.
• Social Media. By and large, these folks do want to measure influence.
  
• Brand Marketing. By and large, these folks do want to measure influence.

More than anything, a profit culture requires a leader, somebody who wants to understand how everything fits together. The problem isn't solved by combining silos, it is solved by a passionate leader. The emergence of e-commerce and then social media have only served to further fragment the ability of a company to create a profit culture.

So why couldn't you be the profit expert? Sit down with your finance team, learn each piece of the profit and loss statement, and start measuring profit!

Free Labor

Remember the old days when we paid copywriters to tickle the buying bone of a consumer? Now we give customers access to special deals, in exchange for writing for us.

How About A Few More B2B Volunteers For Zip Code Forensics?!

We're still looking for a few more volunteers for the B2B version of Zip Code Forensics.

Thanks to all of you who volunteered data during the past week, I hope you enjoy using your own custom-built model in the weeks prior to the development of the official B2B model.

We also received word from one of our volunteers that the model performed 20% better than a control group, in actual testing --- and performed essentially the same as co-op models (better in terms of profit due to the fact that Zip Code Forensics is free).

For your viewing pleasure, I present you with the B2C version of Zip Code Forensics, illustrating the Charlotte, NC area. This is an e-commerce dominated area, with significant pockets of high-potential customers in the Lake Norman / I-77 corridor, and south of the city. Unlike most cities, Charlotte has good performing e-commerce zips in the central city area.

Wal-Mart Black Friday Opening Turns Fatal

We encourage this behavior with our discounts, promotions, and advertising featuring "doorbusters". Then folks actually bust down the door, ending a life. In some ways, we marketers need to consider our level of accountability here.

Look at some of the behavior we encourage, all so that we can make a few extra dollars of profit. And what if we're losing money on these promotions?

Measuring Paid Search, E-Mail, And Social Media Influence Via Matchbacks

Ted asks "how do you measure influence rather than direct sales"?

Direct marketers use Matchback Analytics to attribute sales to the activity that theoretically caused the purchase to happen. Matchbacks were originally designed to prove that catalog mailings were responsible for web sales. Now, matchbacks are well suited to measure influence.

Let's look at a few customer orders.

Order #1: Customer received catalog on November 1. Customer purchased online on November 10, using the keycode from the back of the catalog. This one is easy, the catalog gets credit for the order.

Order #2: Customer received catalog on November 1. Customer received marketing e-mails on November 3 and November 5. Customer purchased online on November 10, and did not use a keycode. The catalog brand would probably allocate this order to the catalog, ignoring any role that e-mail marketing played in the purchase.

Order #3: Customer received catalog on November 1. Customer received marketing e-mails on November 3 and November 5. Customer clicks through to the website from a paid search term on November 10, purchases online, and does not use a catalog keycode. Catalogers would like to allocate this order to the catalog, paid search mavens might want to allocate this order to paid search, e-mail marketers probably lose out in this instance.

Order #4: Customer received catalog on November 1. Customer clicks through to the website from a blog featuring merchandise offered in the catalog. Customer purchases online on November 10. Catalogers would immediately allocate this order to the catalog.

In the last three instances, the marketer "assumes" that one form of media drove the order, and creates business rules to proceed with allocation of sales. And, of course, in the last three instances, the catalog marketer makes incorrect assumptions. The assumptions are better than the assumptions made in 1999, but the assumptions are flat-out wrong.

When a catalog brand measures influence, there are two different allocations.

There is direct allocation, as illustrated above.

Then we have influence allocation.

In Order #2, the catalog gets credit (if that is how matchback business rules are written), while each e-mail campaign gets half-credit for influence.

In Order #3, the catalog gets credit, while two e-mail campaigns and paid search receive one-third credit for influence.

In Order #4, the catalog gets credit, while social media receives 100% influence credit.

Each quarter, we produce a table that illustrates, for each channel, direct attributed sales, and influenced sales.

	Direct Sales	Influenced Sales	Index
Catalog Marketing	$10,000,000	$1,200,000	0.12
E-Mail Marketing	$1,000,000	$4,000,000	4.00
Paid Search	$2,000,000	$4,000,000	2.00
Other Online Marketing	$1,000,000	$1,000,000	1.00
Social Media	$100,000	$3,000,000	30.00
Mobile Marketing	$100,000	$1,000,000	10.00

What you are likely to see is that emerging channels have a high "influence index". In other words, we don't attribute orders to the emerging channels --- we simply don't have business rules to do this, so we attribute orders to the most established channels. But if we focus on influenced sales, we notice that channels like e-mail and paid search and social media play a bigger role, helping cause an order to happen.

Influenced sales make a huge difference in viewing a "mutlichannel strategy". In the illustration above, e-mail, paid search and social media are key influencers. They do not get direct ROI attribution, but are clearly used by the customer as part of the purchase process. From a strategic standpoint, these channels should receive strategic attention. Or maybe catalog marketing should not receive direct credit for all orders!

Either way, the marketer views the world differently when focusing on both ROI and influenced orders.

A final note: In a perfect world, the marketer executes catalog and e-mail test/holdout groups, then measures influence in mailed/holdout groups, subtracting the differences to measure true ROI and true influence.

Charming Shoppes Shuts Down The Lane Bryant Catalog

One of our loyal subscribers forwards us this press release from Charming Shoppes.

The press release speaks of the end of the Lane Bryant Catalog and associated severance charges.

But keep on reading! The press release gives an assessment of the cash situation at Charming Shoppes, assuming different levels of 2009 (fiscal 2010) comp store sales performance. The press release also talks about a strategy change in merchandising, to private-label merchandise that delivers a better gross margin.

Critics might chastise this business, focusing on prior mis-steps. Until you've sat at an Executive table at a business that is trying to dig out out trouble during less-than-optimal times, you might not be able to appreciate the tension that exists. The press release talks about the sensitivity analysis they ran. Each day you look at your "flash sales report". A minus eighteen comp gives you an ulcer. A minus three percent comp gives you hope. You go through that kind of stress every day at 7:00am.

I'm sure there will be those who are critical of yet another retailer dumping the catalog marketing channel. Maybe, just maybe, the critics should take notice of what is becoming more than a trend. We know from Zip Code Forensics that retail is an urban/suburban channel. We know that cataloging is a exurban/rural channel. It shouldn't be a surprise that retailers are abandoning catalog marketing, that they are finding it unprofitable in an age where all the information exists online.

Lands' End E-Mail Marketing Contact Strategy

I am frequently asked what the "right" level of e-mail integration coupled with contact strategy should be. Maybe you can take a peek Lands' End and their actual e-mail strategy into my e-mail inbox (I'm guessing they have multiple versions of e-mail campaigns, and even send them to different customers on different days), and decide for yourself. Is this good strategy? Or would you do something different?


October 15 = Free Shipping ends today - shop the latest for Men

October 16 = $10 off Men's Sport Shirts: flannel, denim & more.

October 18 = Lands' End Shop @ Sears: ready for cold & snow head to toe.

October 20 = Boo who? Whoever misses the Free Shipping deadline.

October 23 = FREE SHIPPING (hurry) - Warm up & save on fleece blankets.

October 25 = Free Shipping, 2 days left & mix-match-men's savings.

October 27 = Free Shipping, last chance, all orders - click or treat!

October 30 = $10 off select outerwear - like these four favorites.

November 3 = Last day of Free Shipping! Plus, save on Kids' Squalls

November 7 = Free Shipping kicks off holiday shopping.

November 8 = Men's fall savings - subscribers get first click.

November 11 = Last day: Free Shipping to kick off holiday shopping

November 13 = Free Shipping ends soon. Men's No Iron Chinos, $29.50

November 15 = Hurry for Free Shipping & Men's in-season Overstocks

November 17 = Free Shipping ends today! Plus $50 off Lighthouse Luggage

November 19 = Free Shipping now - Outerwear Headquarters & more

November 22 = Hurry for Free Shipping! Save on Turtlenecks.

November 24 = What did St. Nick Pick? Shop today's amazing value

November 25 = Last day! Free Shipping sitewide

November 26 = FREE SHIPPING: Extra gravy for Thanksgiving Weekend (added 11/26 7:24am PST).

November 26 = Happy Thanksgiving - help us say thanks to military families. (added 11/27 5:27pm PST).

November 27 = FREE SHIPPING + 25% off Sherpa Fleece today only (added 11/27 5:28pm PST).

November 28 = Free Shipping + 25% off No Iron Dress Shirts; $10 off, just $29.50 - St. Nick Pick (added 11/28 12:14pm).

November 29 = Free Shipping + 25% off Kids' Squall Parkas - save $20 today, now $49.50. (added 11/29 9:45am).

November 30 = FREE SHIPPING + Up to 30% off Windfall Squall jackets: save $20 - $40. St. Nick's Pick! (added 11/30 9:40am).

December 1 = WOW! FREE SHIPPING + 35% off our famous Down Vest. $19 today only!

December 2 = FREE SHIPPING + 30% off Weatherly Jackets: $39.50 today only

December 3 = Last Day for Free Shipping! Any size order.

Executive Comments From Macy's, Urban Outfitters

Karen M. Hoguet, Macy's, on Internet Sales: "The truth is the dot-com business continues to grow faster than the comp store sales and do well. We are also moving towards more of a multi-channel strategy. Remember, when you buy on the Internet you can return to our stores. That negative gets deducted from store sales, not from the Internet sales. Hence it's getting very murky between the two definitions. Also we currently are testing, in Florida, the ability of being in the store and having the sales associate say, 'We don't have that in stock, let me go get it for you on macys.com', which so far seems to be working very well. We are encouraged by not only what dot-com can do on its own, but more importantly how it is being integrated into the marketing and merchandising for the stores as well.

Urban Outfitters achieves record sales and profit --- and runs opposite of vendor-suggested multichannel best practices by increasing direct sales by 41% on a circulation decrease of 9%.

• From Glen T. Senk, about circulation decreases: "We have not finalized the circulation plans for next year. However, the brands have done a spectacular job marketing the websites and there's a paradigm shift and this is a major shift in the way people are buying particularly for Urban Outfitters and Anthropologie where we have a very developed brick and mortar business. The customer shops between the catalog, brick and mortar and the web absolutely seamlessly. In fact, we've had a lot of internal discussion about combining our direct sales and our retail comp sales going forward. We're thinking now about starting to report two ways because really the two businesses have become interchangeable. If you look at the third quarter for example, our comp increase would have gone up by a whole four points as a company. Instead of being 10 comp we would have been 14 comp and of course the biggest increase would be at Free People where if you combine the direct business and the comp base we actually would have been 28 comp. We're able to do this because of the way we're marketing the website and we have a myriad of initiatives. All of the brands have new sites; we launched the new web platform about a year and a half ago. The blog activity is tremendous. The viral marketing is tremendous. The penetration of direct-to-consumer business in total is up roughly 150 basis points and we don't know how high that is but we believe it can be significantly higher and we're more profitable in our direct-to-consumer business than we are in our brick and mortar business."

• And this from Mr. Senk, about the percentage of the total business coming from the direct channel: "We're going to let the customer decide. We wouldn't be surprised if it ended up long term in the 20% to 30% range in terms of total penetration. It's so exciting to be part of this and when you look at the changes, the speed with which things are happening is exponential. The speed of information, the functionality on websites, people's ability to deliver merchandise quickly, access to information, networking, product review, shopping with friends, getting the sites more tacked up; this is all happening so quickly it is fantastic."

How We Got Into This, How We Will Get Out

How We Got Into This Mess?

• Trusted others to keep USPS costs down.
• Didn't see the significance of CAN-SPAM and do-not-call, didn't understand that these movements empowered customers to choose, and they would begin to choose control over the mailbox too.
• Considered social networking as something that kids do, looked to monetize conversations instead of participating in conversations.
  
• We templatized e-mail into a stale creative offering of vapid off-price promos and free shipping.
• Didn't understand that online customer acquisition requires a veritable plethora of micro-channels to scale in a manner like catalog customer acquisition scales.
• Focused on offers, not merchandise.
• Focused on customer retention, a metric that is too hard to move.
• Failed to acquire enough customers to get us through tough times.
• Failing to recognize that customers need new information on a constant basis, instead we employed remail strategies to minimize expense.
• We trusted algorithms first, people second.
• Spent nearly a decade trying to prove, via matchbacks, that direct marketing drives sales to other channels. Should have spent a decade trying to drive sales to any channel using new micro-channels.
  

How We Will Dig Ourselves Out Of This Mess?


Understand That There Are Five Kinds Of Customers (Hint, Those At The Top Are Best).

• Organic: These customers buy because the love us, and are most profitable. These customers continue to purchase without any advertising.
  
• Social: These customers buy for social reasons, and are highly profitable.
• Algorithm: These customers buy because an algorithm (Google) drove them to our business. We give control of our business to the algorithm, a good thing for small brands.
  
• Advertising: The realm of the marketer. Traditional advertising is dying, including catalog and e-mail marketing.
• Begging: The realm of the marketer in 2008. The customer buys because of free shipping, discounts, and promotions. This is the worst form of marketing, yet marketers are increasingly addicted to the combination of advertising and begging, while customers are increasingly migrating to Social/Algorithm solutions.
  

Realize That Geography Dictates Multichannel Marketing Strategy

• Urban Customers are saturated with retail opportunities. Your website is a research-based tool, not necessarily used for e-commerce. Mobile marketing and social media need to be retail focused among these customers.
  
• Suburban Customers represent the traditional "multichannel customer" that marketing experts love to talk about. This is where mobile marketing and social media have potential, where catalog and e-mail marketing truly drive business across all channels. This is the home of the matchback analysis.
  
• Exurban Customers are direct marketing customers. Retail is too far away to be convenient. E-commerce rules here, and catalog marketing can be used to drive e-commerce.
• Rural Customers represent the future potential of catalog marketing. In the land of dial-up internet access and a lack of cell phone coverage, traditional direct marketing is still relevant.
• Zip Code Forensics prove that there are geographical locations that are highly responsive to catalog marketing --- specifically, rural New England and the Rocky Mountain states.
  

We Operate In A Giant, Connected, Non-Linear Ecosystem. We Measure Too Many Things In An Isolated, Linear Manner

• Web Analytics experts must integrate their tools and data with all company data, or risk becoming irrelevant as the Business Intelligence community integrates data for them.
• E-Mail Analytics must move beyond open rates and click-through rates and conversion rates. What is the long-term value of e-mail marketing? How does e-mail marketing influence behavior across micro-channels?
  
• Social Media influences activities, it usually doesn't directly cause sales to happen. We need to measure influence, not cause.
• Mobile Marketing may be the "next big thing". Until then, we need to experiment and measure influence, focusing less on direct sales.
  
• Video Marketing may be the "next big thing". Until then, we need to experiment and measure influence, focusing less on direct sales.
  
• Business Intelligence needs to move beyond drill-down queries and fancy software interfaces. Measure how customers interact with products, brands and channels.
• Multichannel Forensics offer a framework for understanding the behavior of customers in a giant ecosystem.
  

The Future Of Our Business Is Tied To Micro-Channels

• Mass audiences no longer exist.
• Catalog customer acquisition no longer scales in a sustainable manner.
• And no single online channel offers the size of audience that catalog customer acquisition currently offers.
• Therefore, the future of direct marketing leverages hundreds or even thousands of micro-channels.
• Today, there aren't enough micro-channels to "switch to". So we're in limbo for awhile.
• This is the time to experiment, to test hundreds of micro-channels, to use Multichannel Forensics to understand how customers flow between micro-channels.

And There Are Two Things We Must Measure, To Be Successful

• The Organic Percentage tells us what happens if we don't market to customers. It is the most important metric for a direct marketer to track. Catalogers who know this percentage do not over-mail, do not saturate the majority of the customer base. They save a lot of money that can be re-invested in online micro-channel development.

• The Net Google Score is critical for understanding whether Google is helping or hurting your brand. It is my belief that catalog brands are posting very negative net Google scores, caused by advertising that drives catalog customers online, resulting in those customers buying from brands that shine online.

The Future Is So Bright, I've Got To Wear Shades!

• The next two years are not likely to be a lot of fun.
• But after that, there is a lot of potential!
• Potential will be realized once the innovation of 2009-2010 bear fruit.
• Expect catalog marketing to evolve to an opt-in customer retention vehicle for customers in Exurban and Rural areas.
• Expect that some retailers will completely re-invent e-mail marketing, fusing the best of e-mail selling with social media warmth and humanity.
• Expect consolidation among co-ops as customer acquisition performance implodes. Co-ops that survive will focus on consumer intelligence, delivering brilliant insights that fuel understanding of customer interactions with products, brands and channels.
• Expect to see the Business Intelligence community integrate Web Analytics, providing a more complete view of customer behavior than illustrated by Web Analytics tools.
• Expect to see Business Intelligence analysts fail to explain customer interactions with products, brands and channels at a level needed by Management.
  
• Expect a shift away from marketing to lists.
• Renting and exchanging names is a dying practice (see here). Third party opt-out services will exert influence, severely harming the business model of the co-op database. This battle could get testy, folks.
• Printers will try to help direct marketers migrate from "campaign-based" mailers to personalized mailings with product tailored to the interests of the customer.
  
• Expect a shift to participation with communities. Hundreds or thousands of communities.
• Traditional multichannel marketing is suffering from vendor-itis.
  
• Micro-channel marketing is about to take off.
• Marketers will continue to saturate the same customers with the same message across channels. Smart marketers will realize that each micro-channel offers an opportunity to reach new audiences, increasing total sales.
  
• Hologram Marketing is only ten years away, and when it comes, expect major disruption among the current online leaders (Google, Amazon, etc.).

B2B Brands: A Customized Zip Code Forensics File Just For You!

The research strongly suggests that B2B brands have a different geographic customer profile than do B2C brands.

Therefore, it makes sense to have separate models --- one segmentation strategy for B2C, one for B2B.

So, I'm looking for a half-dozen B2B volunteers who wish to contribute data. You send data with one row per zip code, columns including zip code, 12-month phone sales, 12-month online sales, 12-month retail sales for that zip code.

I build a custom model for B2B brands, and everybody benefits.

Of course, there's no cost to you. E-Mail me your questions, I look forward to hearing from you.

B2C brands --- Zip Code Forensics is free for those who contribute data, $5,000 a year for everybody else.

E-Mail Priority And Catalog Covers

Matthew has a few questions that he'd like to see if you might be willing to answer. Here are his questions, as e-mailed to me. Please discuss, and leave your answers in the comments section of this post.


What is the importance of catalog cover testing when your company is in Retention mode? I believe that it is necessary to prevent a cover that would bomb from slipping through and going full-scale. But at this point the brand should be established and major changes to covers would/should be unlikely. My point here is that I believe it is often the flagship test of a catalog and receives the most attention. A cover test is not a viable method for generating incremental revenue.

Where would Multi-Channel marketing be if Email came before Direct Mail? Emails win in ROI and Catalogs win in Sales per Mailing so what would be different? Would we be excellent at segmenting our email audience and only blasting to our most profitable customers? Would Catalogs get sent to everyone because of their tremendous Sales per Mailing and Response?


Please use the comments section of this post to offer Matthew your thoughts.

Multichannel Stocks: OMG

On March 16, 2007, I started tracking a set of online/catalog brands, comparing stock performance against the fabled "bricks and clicks" brands that the punditocracy told us we had to be like.

The online/catalog brands included Amazon, Blue Nile, CDW, Dell, Drugstore.com, eBay, Overstock.com, and PC Connection.

The retailers included Best Buy, Cabelas, Circuit City, Coldwater Creek, Eddie Bauer, J. Crew, J.C. Penney, Nordstrom, Office Depot, Office Max, Talbots, and Williams Sonoma.

Since 3/16/2007, online/catalog stocks in my list are down 53%.

Since 3/16/2007, retail stocks in my list are down 87%.

Now granted, the stock price of a company is not always correlated with the operating performance of a company.

I'd simply ask you to question the best practice advice of the marketing punditocracy. Research, measure, ask questions, and develop your own point of view. Bricks and Clicks is not benefiting many multichannel retailers at this time.

Catalog And E-Mail Drive Retail Sales Via Matchback Analytics In Some Instances

Jim Wheaton brings us an article that those of us who've analyzed the data firmly believe in --- that after controlling for prior customer frequency, multichannel customers are not fundamentally better than single-channel customers. The article explores how analysis of customer behavior can trump established marketing beliefs.

I am reminded of a meeting in 2003 at Nordstrom. Our sales rep from Abacus visited, suggesting that matchback analytics would prove that our catalog marketing efforts drove a billion dollars or more of retail volume (our retail business was maybe $5 - $6 billion at that time). Abacus clients were using matchbacks, learning that retail customers who received catalogs were likely to buy in stores in the days after receiving a catalog. Our Abacus rep took a leap of faith --- the mailing of catalogs caused a billion dollars in retail sales --- the catalog caused the sales to happen.

And Abacus was right, based on the analytics available to them. You run a matchback analysis, and you see that retail customers buy in the days following the mailing of a catalog.

Multichannel Forensics, however, suggest a subtle distinction that we must keep in mind.

• Matchback algorithms are reasonably accurate when the retail channel is in Acquisition Mode.

• Matchback algorithms are somewhat accurate when the retail channel is in Hybrid Mode.

• Matchback algorithms are highly inaccurate when the retail channel is in Retention Mode.

If you don't have the bandwidth to run a Multichannel Forensics analysis, at least run mail/holdout groups through your matchback algorithm, subtracting the difference in matches.

There is a faction of the marketing community that sees matchbacks as a religion, and this is ok, because it is sometimes better to do matchbacks than to do nothing. That being said, subtle performance differences and profit increases happen when we combine Multichannel Forensics, Test/Holdout Groups, and Matchback Algorithms --- for catalog mailings and especially e-mail campaigns.

Back to Nordstrom. We did the testing, we did the Multichannel Forensics analysis, and we did Matchback Analytics. Our findings ran contrary to the best practices suggested by the marketing establishment.

We killed our catalog program in June 2005. From July 2005 - June 2006, comp store sales were positive. In other words, without $36,000,000 of catalog advertising that matchback algorithms suggested were driving maybe a billion dollars of retail sales, we were able to increase retail sales. Multichannel Forensics and Test/Holdout groups told us that a retail brand in Retention Mode yielded highly misleading Matchback results.

So this is the deal. The vast majority of the marketing establishment believes that catalog and e-mail marketing drive sales to other channels, as evidenced by matchback analytics. And these folks may be correct, especially if channels operate in Acquisition Mode. When channels operate in Hybrid Mode or Retention Mode, the rules change --- the organic percentage overrides matchback analytics.

Forest Ethics E-Mail Message

Forest Ethics sent me this e-mail message today (click on the image to read the message --- I crossed out the name of the author to protect the individual who sent the message).

I did not previously opt-in to receive messages from Forest Ethics.

I have two questions for you.

Question #1: If a cataloger sends a catalog (a message crafted on paper harvested from trees, a practice that probably damages the planet) to a customer who shopped on the website of the catalog brand, and the customer did not opt-in to receive catalog marketing and doesn't want to receive catalog marketing, would Forest Ethics feel that this practice is harmful and should be stopped?

Question #2: If Forest Ethics sends an e-mail message (a message sent by servers that run off of electricity largely fueled by coal via practices that probably damage the planet) to an individual who previously interacted with Forest Ethics in some manner, and the individual did not opt-in to receive e-mail messages from Forest Ethics and doesn't want to receive messages from Forest Ethics, would Forest Ethics be practicing a tactic similar to that of the cataloger in Question #1?

I'm quite confident that Forest Ethics did not intend to spam me or to annoy me. They simply wanted to share an interesting story with me.

Maybe in the future, all of us can try to see things from the point of view of another individual or organization, realizing that the vast majority of folks are not evil ... that many of us send things that somebody else doesn't want to receive.

The Free Shipping Death Spiral

I will preface this by saying that I don't have a problem with free shipping --- in fact, if you want to run you business model by offering free shipping 24/7/365, have at it!

It is the promotional nature of free shipping that sets the customer file into a free shipping death spiral, especially when our businesses need shipping/handling revenue to maintain profitability.

Run a unique Multichannel Forensics analysis, creating six segments.

1. Pays For Expedited Shipping, January - October.
2. Pays For Regular Shipping, January - October.
3. Takes Advantage Of Free Shipping Promo, January - October.
4. Pays For Expedited Shipping, November - December.
5. Pays For Regular Shipping, November - December.
6. Takes Advantage Of Free Shipping Promo, November - December.

The free shipping death spiral happens when customers in segment (6) are in isolation with segments (1) (2) (3) (4) (5).

The free shipping death spiral happens when customers in segment (3) are in isolation with segments (1) (2) (4) (5), but are in equilibrium with (6).

The free shipping death spiral happens when the conditions above exist, combined with customers in segments (1) (2) (4) (5) being in equilibrium/transfer with customers in segments (3) and (6).

The free shipping death spiral happens when newly acquired customers enter via (3) and (6), then follow the conditions above.

Under these conditions, those who shop via free shipping will only shop via free shipping, and those who shop via free shipping during the holidays will only shop in the future via free shipping during the holidays. Even worse, customers who used to pay for shipping are leaking into free shipping, then not paying for shipping again.

If your business can be highly profitable under these conditions, no worries --- though I'd ask why not go to a free shipping 24/7/365 business model?

Even if we're locked into the free shipping death spiral, we can mitigate impact in segments (3) and (6) by minimizing January - October marketing activities that offer regular shipping charges, and in segment (6), by simply minimizing all marketing activities from January - October.

Multichannel Cannibalization: Here's How It Happens

We don't like to talk about cannibalization. It's a bad word. I once had a CEO tell me "Don't ever mention that term again. Cannibalization suggests we're eating our young, and that's not what we do in marketing, is it?"

So in Multichannel Forensics, we almost never mention the term "cannibalization", using "Equilibrium" and "Transfer" to suggest that the analyst look into the topic of cannibalization.

Here's how channels inspire cannibalization.

Let's take a look at a catalog brand, back in 1990. This brand mailed a dozen catalogs a year. Here is a demand and expense profile for an average customer segment.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$72.00	$13.20
Targeted Catalogs
Organic Online Demand
E-Mail Marketing
Search Marketing
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$12.00	$72.00	$13.20

Catalog brands expanded in the early 1990s. They increased targeted mailings and remails and any other mailing strategy to increase demand. The profit and loss statement changed as a result.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$63.00	$10.05
Targeted Catalogs	$6.00	$30.00	$4.50
Organic Online Demand
E-Mail Marketing
Search Marketing
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$18.00	$93.00	$14.55

The new mailings cannibalized the old mailings. However, total demand and total profit increased. Sure, the customer was contacted fifty percent more often, but as long as profit increased, nobody complained.

Then folks invented this internet thing, and the world changed forever. Now customers generated organic demand --- they no longer needed to be marketed to, but would spend money anyway. Though matchback algorithms allocated demand back to catalogs, those who executed mail/holdout tests knew better --- they knew that demand was cannibalized from catalog advertising to e-commerce (and we surmised that demand was cannibalized from retail to e-commerce).

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$51.00	$5.85
Targeted Catalogs	$6.00	$24.00	$2.40
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing
Search Marketing
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$18.00	$110.00	$20.50

Notice how the base catalogs are being marginalized as customers shift behavior.

As marketers, we capitalize on this behavior. We add e-mail marketing, tossing 52 e-mail messages at a customer.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$49.00	$5.15
Targeted Catalogs	$6.00	$22.25	$1.79
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$7.50	$2.47
Search Marketing
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$18.16	$113.75	$21.66

From a profit standpoint, this is sort of the peak --- right around the turn of the century we maximized profit.

And then we really started diving into online marketing, thinking we could take full advantage of search/Google.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$46.75	$4.36
Targeted Catalogs	$6.00	$20.75	$1.26
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$6.50	$2.12
Search Marketing	$3.00	$10.00	$0.50
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$21.16	$119.00	$20.49

We continue to cannibalize other channels, still increasing demand (and this can be argued, too, based on the mail/holdout tests I've seen across the industry, but let's assume here that there are increases).

We still need to grow, so we add portal advertising and affiliates and shopping comparisons. We keep pushing the envelope.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$42.00	$2.70
Targeted Catalogs	$6.00	$19.50	$0.82
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$5.00	$1.59
Search Marketing	$3.00	$10.00	$0.50
Online Marketing	$3.00	$10.00	$0.50
Social Media
Mobile Marketing
Grand Totals	$24.16	$121.50	$18.37

Demand continues to increase (again, verify via mail/holdout groups in catalog and e-mail), but we are so heavily cannibalizing total demand that profit is decreasing. We're wobbling now. The traditional channels (catalogs and to a lesser extent, e-mail) are seriously cannibalized as demand flows out of those channels, into the new channels. Also notice that the new channels just aren't able to generate a lot of volume. All of the channels need to be there to keep demand growing.

Now we add social media into the picture, with customers trusting other customers more than they trust marketers, further cannibalizing marketing channels.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$41.00	$2.35
Targeted Catalogs	$6.00	$18.50	$0.48
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$5.00	$1.59
Search Marketing	$3.00	$9.00	$0.15
Online Marketing	$3.00	$9.00	$0.15
Social Media	$0.00	$4.50	$1.58
Mobile Marketing
Grand Totals	$24.16	$122.00	$18.54

And now we're adding mobile marketing to the mix, being told that it is the "next big thing". For now, however, it isn't big --- and the business we get is frequently generated by our best customers, causing more cannibalization among existing advertising channels.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$38.00	$1.30
Targeted Catalogs	$6.00	$17.50	$0.13
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$5.00	$1.59
Search Marketing	$3.00	$8.75	$0.06
Online Marketing	$3.00	$8.75	$0.06
Social Media	$0.00	$4.50	$1.58
Mobile Marketing	$0.50	$4.50	$1.08
Grand Totals	$24.66	$122.00	$18.04

After adding a ton of channels to the marketing mix, we find that the traditional channels are no longer very productive. Base catalogs, once responsible for driving $72 of volume, now drive just over half that total. And targeted catalogs are basically a break-even proposition.

Good leaders can trim expense, so we kill the targeted catalogs we used to mail. Now, demand flows out of those catalogs, back into the base catalogs, improving the profit and loss statement.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$47.00	$4.45
Targeted Catalogs	$0.00	$0.00	$0.00
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$5.00	$1.59
Search Marketing	$3.00	$8.75	$0.06
Online Marketing	$3.00	$8.75	$0.06
Social Media	$0.00	$4.50	$1.58
Mobile Marketing	$0.50	$4.50	$1.08
Grand Totals	$18.66	$113.50	$21.07

This is how multichannel marketing works. We add channels at faster rate than we reduce spending in traditional channels --- cannibalizing old channels and sub-optimizing profitability.

Our job is to react much faster to micro-channel and multichannel cannibalization. But that's hard to do, isn't it? Instead, it is easier to focus on the fact that customers use all of these channels, and use of all channels is a good thing, which it is.

Another element of this deal is that very few customers use all channels. Most Multichannel Forensics projects suggest that customers are very loyal to one, and at most, two advertising channels. It's just really hard for us to isolate individual customer behavior --- so instead we watch large groups of customers, segments, and notice that segments seem to use a lot of channels.

When we get good at segmenting customers based on predicted future channel activity, we help generate a lot of profit for the companies we work for.

The Five Stages Of Multichannel Grief

You're probably familiar with the five stages of grief, especially if you had a boatload of money in a 401k account.

Our industry is certainly going through this process, as catalog marketing rapidly evolves into an opt-in preference for a specific minority of the population (which isn't a bad thing).

Here's one view of the five stages. Where do you think we are? What do you think acceptance looks like?


Denial

• Online pureplays like Amazon will never make it, all they do is lose money and offer stock options to inexperienced employees.
  
• Zappos will never make it, they cannot afford free shipping and next day delivery.
• "Do Not Call" won't impact us, because we're not like sleazy telemarketers.
• "CAN-SPAM" won't impact us, because we're not like sleazy spammers.
• The USPS would never jack up our postage rates while giving the banking industry a pass.
• Customers love catalogs, they love curling up by the fireplace, with a warm blanket, reading catalogs from companies they've never purchased from.
• Nobody sits in bed with a notebook computer on their lap, shopping for merchandise.
• Catalogs still work, all you have to do is run a matchback program to know that.
  

Anger

• Who are these third-party opt-out services telling me I cannot mail catalogs to customers?
• Why do third-party opt-out services consume non-renewable resources like coal and oil but tell me I cannot consume renewable resources like trees?
• The DMA wasn't on our side, we need to create a new organization that looks out for us.
• Those bankers ruined the economy, and now my business is in the tank.
• I cannot compete with big box retailers who knock-off my products and sell them for 15% less than I can sell them for.
• I cannot compete with Zappos and their free shipping, rapid-delivery model.
  

Bargaining

• If we do paid search and social media and mobile media and e-mail marketing and retailing, maybe we'll have enough channels for everybody to love us and then maybe we can mail catalogs to everybody.
• If we participate in third-party opt-out services, maybe we'll get good PR.
• If you're willing to buy from us during these challenging economic times, we'll take up to 60% off your order and give you free shipping.
• If you're willing to give us your e-mail address, we'll tell you about special offers and discounts.
• If you're willing to participate in a co-mailing program with me, we'll both save a few pennies.
• If you're willing to manage my database and do my matchbacks, I'm willing to do all of my customer acquisition and housefile circulation via your algorithm.
• If I use recycled paper in my catalogs, will you promote the fact I am a "green marketer"?
• Ok, Amazon, it looks like your business model is going to work. If you (Amazon) will sell my merchandise on your site, I'll give you seven percent of every transaction.
  

Depression

• I cannot believe sales dropped by twenty percent in the last month or two. This is awful.
• I wish it were 1993. Things were simpler, and better back then.
• I'm doing all of this social media stuff and nobody cares.
• I'm doing all of this paid search stuff and it doesn't scale.
• I have an e-mail marketing list of a million people and almost none of them respond, ever.
• I'm doing mobile marketing and only a hundred and forty folks care.
• I've added a couple dozen new micro-channels over the past five years, and yet customers (until last month, when things got ugly) still spend the same amount they've always spent.
• I cannot believe I have to bail out banks, only to have the banks make it very hard for me to borrow money to run my business.
• What a shame that I have to let go of ten percent of the workforce to even have a chance to be profitable next year.
  

Acceptance

• Let's cut the catalog marketing budget way back when marketing to online-only buyers, especially those who interact with online marketing channels.
• Let's let the customer opt-in to future catalog marketing when buying online.
• Let's acknowledge that e-mail marketing doesn't dramatically move the sales needle, and completely re-invent the medium.
• Let's not view new channels as "the next big thing", let's experiment.
• Let's completely open the books with non-competitive brands, allowing all of us to learn what others are doing well.
• Let's view ourselves as direct marketers with a catalog advertising channel, rather than catalog multichannel brands.
• Let's accept the premise that you don't have to offer all customers all marketing channels.
• Let's let the customer decide how s/he wants to interact with us.
• Let's acknowledge that cataloging is a rural endeavor, online marketing is an exurban/suburban practice, and retailing is a suburban/urban discipline.
• Let's run our business off of the profit we generate, not the amount of credit we can access.
• Let's acknowledge that without people, algorithms don't exist.
• Let's remember that the vast majority of the vendor community genuinely cares about us and wants to help us.
• Let's invent new ways to create demand.

Motrin: The Smartest Social Media People In The Room

You couldn't throw a Thanksgiving turkey into the oven without hitting a blogger who expressed disdain for this Motrin video. A group of angry Twitter Moms rebelled, the social media punditocracy jumped all over this groundswell of dissatisfaction, and a blogosphere-based marketing firestorm of at least one thousand blog posts in twenty-four hours circled the globe.

But the coup of the whole thing was to goad Seth Godin into commenting about the response on his blog. By doing this, Motrin gained instant and exclusive access to 150,000 loyal marketing executives who subscribe to Seth's Blog. Even better, most of these folks have their own blogs, with an occasionally unique and unduplicated readership. Within seconds, a half-million marketing executives are publicly talking about Motrin.

When is the last time you could say that about Motrin?

You see, Motrin just established a new best practice in social media marketing.

• Post a video that may or may not offend some customers.
• Carefully monitor Twitter and Friendfeed for potential blowback.
• Allow bloggers to virally move the story around the globe.
• Put an apology on the site too late to appease the blogosphere, creating additional blowback. Make sure the apology sounds like it was written by a lawyer so that the blogosphere further erupts.
  
• Hope the mainstream media picks up the story.
• Manipulate Google into encouraging searchers to learn more about Motrin by driving blogs into the top ten search results for the term motrin video. No need for paid search here!
  
• Reap the benefits as folks visit Rite Aid in droves to buy Motrin.
  

Links are the currency of the internet. Over the past three days, Motrin gained thousands of links at essentially no cost. Most bloggers spend their entire lives hoping to get the kind of link-based traction Motrin gained in just forty-eight hours.

As you already know, you cannot possibly hope to ever measure the ROI of social media, but the experts tell you that you must have a social media strategy. Therefore, it must be obvious to you that Motrin management carefully manipulated the over-zealous and judgmental nature of the marketing blogosphere to spread the Motrin brand name to marketing executives who purchase Advil and Tylenol. Every-day headaches created by pressing marketing issues exacerbated "... in these challenging economic times" will now be cured by Motrin.

Motrin: The Smartest Social Media People In The Room!



Added 11/17/2008 --- 9:51pm: FYI, this article was written with satire in mind :)

Retail And Mass Transfer

This is the line waiting to get in to the Old Country Buffet in Factoria, WA, on a Friday evening at 7:30pm.

Two years ago, you could walk past this dining establishment and you'd be lucky to see twenty patrons dining on a veritable plethora of hot-light heated goodies. Now, you wait fifteen minutes for a table.

In the same mall, there is a specialty apparel retailer. Within ninety seconds of taking this low-res image, I snapped an image of the traffic within this store. Yup, you guessed it --- no traffic
at all. In fact, I didn't see a single employee either --- maybe management read the Sequoia Capital Death Spiral presentation.



The last image is of the Apple store in Bellevue Square. These are products you don't need, and yet, this store is absolutely nuts. And when you walk into the store, it feels vibrant. Plasma monitors telling you where you stand in the queue, recommending you sign up for future Genius consultations online due to the long wait --- tons of employees, yet not nearly enough to handle the throng.



From a Multichannel Forensics standpoint, we're experiencing transfer, actually, mass transfer. As our perception of the world changed, we made immediate changes to our shopping habits. Instead of spending $42 on dinner for two at Chili's, we transferred our loyalty to a $22 dinner for two at the Old Country Buffet. Instead of buying apparel, we hang on to what we already own, but we transfer apparel dollars to music and accessories at the Apple store.

Obviously, we don't have the ability to understand macro-economic transfer (HINT ABACUS & THE CO-OPS --- YOU HAVE THIS CAPABILITY AND COULD CREATE A PRODUCT THAT CAN HELP YOUR CLIENTS UNDERSTAND THIS ACTIVITY!).

But we do have the ability to observe transfer when it comes to the products we sell. It is critically important to analyze how customers are migrating out of expensive items, into inexpensive items --- migrating out of fashion and into staples.

As these trends become evident, we forecast the long-term trajectory of the trends --- capitalizing on the trends without having to fire employees as an expense management best practice.

Smart vs. Dumb

Question #1: Your business is down ten or fifteen percent, vs. last year. Is this because all of a sudden, we became dumb, or is this because of the economy?

Question #2: Your business thrived during the bubble years of mid-2003 to mid-2007. Did that happen because we were exceptionally smart, or did that happen because of the economy?

When we do a post-mortem on the implosion of capitalism, assuming there are any humans still working at the companies we manage, we'll need to parse out the role business smarts played during the updraft, and we'll need to parse out the role our lack of knowledge played in the collapse.

Indianapolis

Going into 2009, we have an opportunity to view marketing differently.

This is Indianapolis. It's a "green" market, meaning the good folks of this area prefer e-commerce, especially those north of the city.

Industry experts suggest that customers want a seamless experience across channels. And that might be the best thing to do.

It might be worth considering what you do with a retail customer living in on the southwest side of town. This is an area that is not responsive to direct marketing. If you're marketing to a small audience on this side of town, direct marketing might not be the most effective way to get a message out to the customer.

That's where the secret sauce comes in. Our future is bright when we look at each channel as a customized tool, tailored to the individual.

In other words, we can offer six marketing channels to one customer, or we can offer a unique marketing approach to six customers. Long-term, the latter makes sense, an approach we'll adapt to over time.


Hillstrom's Zip Code Forensics: Free For Brands Contributing Anonymous Zip Code Sales By Channel, $5,000/year For Everybody Else.

Substance, Part 2

On Monday, in response to my criticism of industry leadership, I asked for submissions for papers or industry articles from the vendor community that move the needle, that help us increase sales in a meaningful way.

To date: No vendor feedback. Interesting, because as you see in the image here, folks are more than happy to pay trade journals for ad space.

Eight Ways To Use Multichannel Forensics To Trim Ad Expense

Undoubtedly, you're running a veritable plethora of scenarios for 2009. Now is a good time to leverage Multichannel Forensics to make appropriate cuts in the advertising budget.

Online Marketing:

• You spread dollars across Google, Yahoo!, and MSN. Consider reductions in spend if customers acquired via MSN migrate to Google in future purchases, as an example, as the dollars in MSN might represent duplicate spend.
  

• Carefully track micro-channel evolution in affiliates and shopping comparison sites. If customers acquired via a shopping comparison site do not respond to e-mail or catalog marketing, suppress them from those advertising channels.

• Know your NET GOOGLE SCORE. How much demand does Google drive to your business, how much demand does Google take away from your business? Your Chief Marketing Officer needs to run around like his/her hair is on fire if the Net Google Score is negative.
  

Catalog Marketing

• Now is the time to identify online-only customers who do not shop your brand due to catalog marketing. If your Multichannel Forensics project points out a large number of customers in this segment, you have a significant opportunity to reduce expense without losing top-line sales.

• Know your ORGANIC PERCENTAGE. If forty percent of your volume among catalog buyers would happen without catalog marketing, you can take a hatchet to your catalog marketing budget, significantly increasing profitability. Your Chief Marketing Officer needs to run around like his/her hair is on fire if the Organic Percentage is high and yet catalog expense is flat or increasing.

• Remail Strategy. Identify customers who purchase from remail catalogs, segment them as being part of a new "channel", and run a full Multichannel Forensics analysis on these customers. Many catalogers can eliminate remails, offsetting new creative expense with increased demand and profitability.

E-Mail Marketing

• Create four micro-channels ... those who purchase from e-mail marketing campaigns, those who interact with e-mail marketing campaigns (i.e. click-through), those who never interact with e-mail marketing campaigns, and those who do not have an e-mail address. Thoroughly understand how these four micro-channels interact with all other channels in your business.

• Among customers who receive both e-mail marketing campaigns and catalog marketing campaigns, test eliminating e-mail / catalog / both. Some folks have learned that e-mail marketing performance doubles or triples in the absence of other marketing programs --- given that e-mail is close to free, from a variable cost standpoint, we want demand generation among nearly-free channels.

Shopping Cart Abandonment And Conversion Rate

1) Customer visits on 11/1, places item in shopping cart.

2) Customer visits on 11/5, browses, leaves item in shopping cart.

3) Customer visits on 11/7, deletes item from shopping cart, calls over the phone, and buys an item after talking to a customer service rep.

Question #1: Do you have a conversion rate or shopping cart abandonment rate problem?

Question #2: If your answer to question #1 is "No", are you accounting for this behavior in your web analytics tool, so that you can clearly see any real shopping cart abandonment rate issues?

Question #3: If the customer in (3) purchased online, do you have a conversion rate or shopping cart abandonment problem?

Discuss!

Coach: Multichannel And E-Mail Comments From Management

Here's a few tidbits from the recent Coach investor conference call.

• Gross Margins are around 74%. Do you understand the gravity of that number? A handbag costs them $100, then they sell the handbag for $399. That's how you generate profit, folks!
  

• Only 11% of sales happen in Department Stores.

• "... and what we are seeing is a huge opportunity around segmentation and customization which will begin to effort against this holiday. So you will see us doing a more tailored approach around e-mail. In terms of open rates and e-mail response rates, we are disciplined there. We do not bombard people with a lot of e-mails if they choose not to engage, so we control that carefully. Our e-mail productivity is strong."

• "While e-mail can be an effective way to get a lot of messaging out there because it is virtually free from a cost standpoint, we are not going to use that irresponsibly. We are careful to not bombard consumers with email messaging that we believe to be intrusive. It is not an enormous piece of our overall online business, but it is an important messaging tactic for us. We are optimistic about engagement and open rates within Coach.com."

• New Coach retail stores average $2.0 to $2.1 million in net sales, annually.

• Jennifer Black asked if the customer still buys four or five handbags a year as she did a while back, and was told that the trends have not fundamentally changed. Wow! That's some handbag mojo, folks!

Housing Market Deflation Correlates With Zip Code Forensics

Don Libey forwards us this map of the United States as illustrated in the NY Times (see via this link, related article here), illustrating states with high "debt to value" ratios.

His question ... does this data correlate with Zip Code Forensics?

The answer ... yes.

We can match state-level data to the zip-level data in Zip Code Forensics. Statisticians would point out the flaws associated with doing this. Point taken.


Catalog Crazies, the most productive zip codes in the United States, have an average debt-to-value ratio of 63.0%.

Online Bliss, among the most productive zip codes in the United States, have an average debt-to-value ratio of 63.5%.

Catalog Fans, zip codes with average productivity, have an average debt-to-value ratio of 63.8%.

Online Spend, zip codes with average productivity, have an average debt-to-value ratio of 66.2% (oh oh, a trend is beginning).

Catalog Preference, zip codes that perform well below average, have an average debt-to-value ratio of 67.8%.

Online Preference, zip codes that perform well below average, have an average debt-to-value ratio of 69.0%.

In other words, Zip Code Forensics identifies regions that have customers who, on average, have an additional four to six percent equity in their homes. These customers are less impacted by the mortgage/housing crisis, and therefore, have more money to spend on other things.

And you can have access to this data for free! Contribute your anonymous annual sales data by zip code by channel to the database, and you'll receive this segmentation system. If you do not wish to contribute your data, the cost for an annual license is $5,000.

Download the paper to learn more.

Blue Nile: -20% In October 2008

Here's a link to the transcript from the investor conference call. See page four for comments about variable marketing costs being ten percent of net sales ... that's the total flex that Blue Nile has in their business model --- worse than catalogers, far better than retailers.

This is where magic happens, folks. We've never truly been asked to drive e-commerce sales increases ... everything we've accomplished has been on the updraft of a channel that cannibalized other channels.

Now we get busy. Now we innovate. And we'll be much better off for going through this experience. We are going to invent truly new and effective methods for driving online sales. Really!

Multichannel Forensics And The Five Customer Types

By now, you know that I advocate segmenting customers into one of five different segments, as illustrated here.

Why?

Because the five segment definitions accurately portray levels of profitability and loyalty. Even more important, you get to see how your business is evolving.

There are several dangerous combinations in this structure.

Advertising and Algorithms interact in a bad way. The cataloger knows this all-too-well, right? The cataloger sends a million catalogs out into the ether, only to drive the customer to Google, where the customer has fifteen choices for nearly identical product at comparable prices.

Honestly, there's nothing Google likes more than traditional advertising, because traditional advertising sends a customer to Google, where the customer clicks on paid search links. One brand spends money, Google intercepts the demand, and benefits financially by re-distributing the demand to paying advertisers.

Advertising and Begging interact in a bad way, unless you are an inventory manager. The marketing executive creates demand by begging via advertising vehicles. Customer loyalty is now shot, as the customer is being paid to buy something --- worse, Advertising and Begging can drive the customer to an Algorithm. Google loves Advertising stuffed with Begging!

Social shopping is something we're only starting to consider. Retailers have known the power of social shopping for centuries --- but online leaders only recently discovered social media. Advertising can interact with Social shopping in a positive way. Begging can interact with Social shopping in a positive way. Algorithms can steer customers to interactions with other customers, benefiting Social shopping. Algorithms can also steer your customers elsewhere. This is why it is so important to know your Net Google Score.

Organic customers buy from you because they are loyal to you. This is the most important customer to cultivate. Zappos and Amazon and Starbucks and Apple are loaded with organic customers, customers who buy from those brands regardless of Begging, Advertising, Algorithms, or Social opportunities.

From a Multichannel Forensics standpoint, we assign customers into one of these five classifications. We then measure the long-term evolution of customers, as the customer flows in and out of each classification, increasing or decreasing profitability.

We especially pay close attention to what happens when we migrate customers into the Begging segment ... do customers transfer into Begging, then stay isolated in Begging, not wanting to shop unless a discount or promotion is available? That's something we must closely monitor in 2009, given the fire sales we are having this fall to move inventory.

Substance

Some of you are taking time out of your day to communicate to me that you feel the message I am communicating is punitive or unfair to individuals or organizations that do not deserve such a message.

I apologize if the message comes across that way, because I do not intend to be punitive or unfair.

You may have noticed that there is a sense of frustration in my voice ... not frustration with the economy, but frustration with our response to what is happening in the economy.

I try to read every single article I can about catalog marketing, e-commerce, retailing, multichannel marketing, paid search, web analytics, e-mail marketing, you name it. I don't care if the content comes from blogs or trade journals or press releases or from 10-K statements.

What I read, save for a few gems out there (and there are some genuine must-reads), lacks the substance required to move the needle.

When I speak to you, folks who are working in the trenches trying to save your business, I observe a resilience and optimism that gives me faith in the future of our business.

But when I read what our industry leaders communicate to us, I do not see enough substance.

Everybody knows that it is important to cut expenses right now, so I don't need to read something about this in a presentation from folks looking to preserve cash previously invested in other companies. Nor do I need to read something from a vendor that suggests "... leading brands proactively mitigate expense to ensure the long-term survival of the brand". We already know that!

Or we read about "... brands that seamlessly integrate channels experience breathtaking increases in share of wallet". And yet, Circuit City filed for bankruptcy protection today, an industry leader in the field of providing a seamless experience across physical and virtual channels.

We're told that we must have a social media presence, yet if you ask a hundred people outside of the maybe five or ten million folks using Twitter what "Twitter" is, you'll get blank stares from 94 of them.

We're told about the nine best practices to offer discounted merchandise "during these challenging economic times". We already know that these are challenging economic times, and we're not going to improve in 2009 or 2010 if we focus on best practices for offering discounts and promotions in 2008.

We're told about breakthrough methods for being customer-centric, but we must click through the ad, at which time we're asked to give up all of our personal information for the right to learn about these breakthrough methods.

We're seldom given facts. We're given pretty language " ... multichannel brands have never faced a confluence of factors that utterly demoralized a debt-laden consumer." That sounds good, right? But there's no substance there, nothing that moves the needle, nothing that you can use to improve business performance today.

If you feel I'm being punitive, then let's change things. I'll focus more on positive messages and solutions. In exchange, here's what I'm asking for from you.

• If you're a reader of this blog, working in a B2C or B2B brand, use the comments section to point out articles or thought leadership that you believe pushes the needle.

• If you're a vendor, blogger, trade journal writer, etc., up the ante. Move beyond the well-written scripts that sound great but don't offer solutions. Provide my readers with needle-moving solutions. Use the comments section to point to examples, so that my readers know where to go. Send me examples of breakthrough strategies that truly move the needle, maybe I'll publish them for this audience to consider. Offer our readers something meaningful for free, like Zip Code Forensics --- do something that genuinely helps our audience, our industry, without any expectation of future compensation.
  

Come back to this post during the week, and check out the comments section. With 1,400 subscribers and more than 200 visitors a day, there should be a lot of quality articles/links put in the comments section for us to consider. I'll pull really good stuff out of the comments, placing it in a separate post so that everybody may learn from it.

So contribute! Offer substance!

Sequoia Capital Death Spiral Presentation

This presentation from Sequoia Capital circled the internet a couple thousand times --- a presentation that suggests startups might be well-served by taking a hatchet to expenses now, rather than going through a death spiral of tiny cuts.

The theory sounds good. Of course, Sequoia Capital didn't offer any evidence that this is the best strategy. But it is a nice presentation with lots of graphs indicating pending doom.

All of you who run Multichannel Forensics forecasts know the real impact of cuts in marketing, don't you?

• Brands in "Retention Mode" face dire long-term growth and profit consequences by hacking marketing expense today. However, the hatchet-like approach will appear really positive in the short-term, because sales won't decrease much this year.

• Brands in "Hybrid Mode" have a lot of options for cutting marketing expense.

• Brands in "Acquisition Mode" can take a hatchet to marketing expense, knowing that because they do not retain customers at a sufficient rate, the business will bounce back quickly when the economy returns. However, the hatchet-like approach will have dire consequences on top-line sales this year and next year.
  

Before taking the advice of a presentation that offers no proof that taking a hatchet to the business is the "best" advice, run a few scenarios for yourself. Your own data will lead you to self-evident conclusions, conclusions that may run counter to the advice of the folks who created this presentation. Or the data may correlate well with the advice in the presentation. But at least you will make the decision for yourself.

I'm confident you can build these tools yourself, if you need to. If not, I'll be happy to help.

Click on the image below to enlarge it.

An E-Commerce Hotbed: Washington, D.C.

Suburban and Exurban Washington, D.C. is an e-commerce hotbed.

The dark green colors on the map illustrate a segment called "Online Bliss", customers who love e-commerce, customers who spend almost double the national average, per-capita.

In a down market, these are customers you want to rely upon!!

This market illustrates classic patterns --- with weak performance in urban areas, strong e-commerce performance in suburban and exurban areas, and strong traditional direct marketing performance (catalog) in exurban and rural areas.

All of this information can be available to you, for free! FREE!

Hillstrom's Zip Code Forensics is free to brands who contribute anonymous, annual sales at a zip code level by physical channel (phone, online, retail). Show me a list of vendors who are willing to help out, for free?

Hillstrom's Zip Code Forensics costs $5,000 per year for folks who want access to the segments, but are not willing to contribute anonymous, annual sales data.

Marketing Vendors And Customer Centricity: Four Questions

Question #1, To Research Organizations: Your publications tell brand leaders that we have to offer the same merchandise at the same price across all channels. And yet, you charge me $79 for a paper, then offer the same paper at a later date to another individual for 20% off if that customer buys two or more papers. Why do you demand that brands charge all customers the same price across channels, but you feel it is acceptable to rip me off while charging other customers a lower price? Bonus question: If you preach "customer-centricity", as so many research organizations do these days, how is the behavior described above "customer-centric" to me, the sap who purchased your research report at a higher price?

Question #2, To E-Mail Marketing Vendors: You preach the importance of opt-in e-mail marketing strategies, of respecting the customer, of minimizing frequency and eliminating spam. And yet, some of you send me e-mail marketing messages that I never opted in to, and you send me direct mail without my consent. Why are you allowed to explore different best practices than the practices you tell brands they must adhere to?

Question #3, To Software Vendors: Why do you charge me, a sole proprietor, $3,000 for software, but you offered me a volume discount for my employees when I worked at Nordstrom? Why do you charge the small business channel more than you charge a large brand like Nordstrom? Bonus question: If you preach "customer-centricity", as so many vendors preach these days, how is the behavior described above "customer-centric" to me, the sap who has to pay a higher price than the big players pay?

Question #4, To An Organization Hosting A Conference In January 2009: Why did you send me an e-mail message that I did not opt-in to, offering large brands eleven registrations for the price of ten if the large brand sends eleven individuals to your conference, but you won't offer me, a small business owner, a nine percent discount? Bonus question: If you preach "customer-centricity", as so many conferences preach these days, how is the behavior described above "customer-centric" to me, the sap who is only a sole proprietor?

The Hologram Marketing Channel

I recall writing an essay in 2004 about how online marketers would appear to be in the "stone ages" when compared with the hologram marketers of 2015. I even wrote a few things on the topic last year. We can envision the comments ... "customers who shop via both the e-commerce and hologram channel are worth six times as much as customers who only shop via the e-commerce channel or the hologram channel".

Now the heavy hitters are talking about Hologram Marketing, following CNN's surreal and sometimes creepy presentation of holograms during Tuesday's evening's election coverage.

Could there be anything more enjoyable than a hologram from a leading retail brand suddenly appearing in your bedroom, saying the following ...

"Kevin, customers who recently purchased a high definition television also purchased HDMI cables ... I am willing to offer you free shipping and twenty percent off if you take advantage of my offer in the next half hour ... I'll stand here and wait for you to make your decision ... your pillow cases are really nice, would you like for me to find a promotional code from Cuddeldown of Maine for your next pillowcase purchase? ... Wait, before you opt out of hologram marketing, would you like for me to reduce my appearance frequency? ... Wait, we value you as a customer, would you consider opting back in to hologram marketing if we gave you up to sixty percent off of any future HDMI cable purchase? ... ok, I'm sorry, I am leaving your bedroom forever. Now, I introduce Harry the Hologram, who has an offer from our sister company".

Channels like Hologram Marketing are coming, not tomorrow, not in 2011. But they are coming. And we CAN avoid what I described in the paragraph above.

Here's a clip of the video from Tuesday evening, courtesy of YouTube.

Zappos: End Of The Innocence

When you finally become profitable (profit built on the backs of people) and can choose between money and people, choose people.

Zappos to reduce workforce by 8%.

In my last post, about Nordstrom, I asked how online marketers would respond to the first downturn they've experienced. Do you innovate, or do you listen to VCs or Wall St., folks who want to protect money more than the people who create money for them?

Maybe folks won't have access to credit, and have no choice but to dump employees to maintain positive cash flow. Regardless, the way businesses (brands) treat human beings is gross.

Wow. Nordstrom. Wow.

My heart goes out to the poor souls and former co-workers responsible for trying to dig out of a big hole at Nordstrom.

A little color about a -15.6% comp store sales decline (as outlined on the Nordstrom investor relations page), helping you understand what that really means.

• Nordstrom Rack, the lower-price retail channel at Nordstrom, actually experienced a 0.7% increase.

• Full-Line Stores, the ones we all think of when we consider Nordstrom, experienced a whopping 20.4% comp store sales decrease.

• Over the past few years, Nordstrom Direct, the online arm of the Nordstrom brand, had their sales included in Full-Line Store comps. This is an important distinction, because it is entirely possible that online sales grew vs. last year, meaning that Full-Line Store sales decreased more than 20.4% ... maybe in the -22% or -23% range.

• In October, total net sales were $97,000,000 behind last year, and I'm confident we'll learn next week that gross margins were cut vs. last year to move inventory. This will probably result in $30,000,000 to $35,000,000 of profit just dropping off the table ... in October. Imagine if this continues into November and December?
  

Remember, there's almost no "flex" in a retail business model, you don't just make up the volume or profit. One can see the retail "discount bloodbath" on the horizon, as prices deflate for the holiday season in a desperate lunge for any remaining dollars that customers are willing to spend.

The lack of "flex" in the business model results in a bunch of people running around like their hair is on fire.

This kind of implosion requires a confluence of events to pile on top of each other. You can blame the economy, of course, but if you're going to do that, you have to wonder why The Buckle, Children's Place, and Hot Topic are posting increases --- and you can't make up excuses like "well, their customers are immune to macro-economic conditions", because nobody is immune to this economic crisis. Those brands must be out-merchandising, out-marketing, and/or out-pricing the competition.

In my last year at Nordstrom (ending March 2007), you could literally see the implosion coming by simply analyzing the customer file. Customer acquisition was poor. Retention rates were suffering, especially among marginal customers. In other words, the bottom of the customer file was dropping out --- a sure sign of the coming apocalypse. Even though comps were still marginally positive, the data foretold of a coming storm. I used to maintain a running tally of comp store sales increases on my office greaseboard. Comps always lagged behind changes in the customer file --- the customer file foretold what was going to happen. One could easily see that a four year run of positive comps were about to end.

The middle-aged, highly-affluent customer, considered the "target customer" at Nordstrom, must be in complete free-fall.

Retailing is a habit, especially high-end retailing like the kind practiced by the folks at Neiman Marcus, Nordstrom, and Saks. You retain customers at a very high rate, and you pray that they will buy every other month. When the customer elects to break the habit, it is hard to reverse the momentum. Really hard.

Nordstrom will once again experience good performance. It is likely, however, that the customer has fundamentally (and maybe permanently) changed her habits. These kind of pendulum swings require all of us to change as well, something I'm confident we'll do.

Retailers and catalogers have been through this cycle before.

But I'm so much more interested in seeing how online marketers will cope with a downturn in business, given that online marketers have no experience driving sales to the online channel when the customer is doing everything possible to protect what few dollars are left in her wallet. Long-term, the brands that out-merchandise the competition win. It will be fascinating to see how online merchants elect to attack innovation.

As you can see in the image above, Nordstrom's online marketing team basically removed product from the homepage, selling only the fact you can get a great deal this weekend.

Hang in there, dear readers. We will innovate our way out of this mess.

October Same Store Sales

Last year, October comps headed south. This year, comps continue to decelerate, yikes!

And yet, some folks are posting gains. The Buckle added 14.5%, Childrens Place added 4%, and Hot Topic increased by more than 8%.

It is possible to do well in this economy. We will turn this around.

Net Promoter Score? Try Net Google Score!

Many database marketers are enthusiastic about computing the Net Promoter Score for the brand they work for. The net promoter score adds positive considerations, then subtracts the negative ones, yielding the net total of positives for a brand. For example, if you have 78 customers saying something positive about you, and 22 saying something negative about you, you have a net promoter score of 78 - 22 = 56.

One of the things we could be computing/estimating is a Net Google Score. The Net Google Score simply tallies the sales that we receive due to paid search and natural search, then subtracts the sales that Google takes away from us. The Net Google Score tells us if Google is on our side, or if we are doing a "good job of managing Google".

We do a good job of measuring the positives. We carefully track our paid search results, we know the sales we get due to a good SEO program.

We do almost nothing when it comes to measuring the sales we lose when customers enter Google and are diverted by competing links/offers.

One of the reasons that traditional advertising (catalog marketing, e-mail marketing, television, radio, newspapers) is dying is due to the Net Google Score. Catalogers know this all too well. Over the past five years, catalog customer acquisition performance declined by between five and fifty percent, depending upon the company, in part because of a negative Net Google Score.

The cataloger spends $1,000 trying to acquire customers, with $970 wasted on customers who had no intention of purchasing. This has always been the way customer acquisition worked.

But within the $30 of advertising that are effective, there is a fundamental change that is happening. Half of the $30 result in a customer purchasing from the brands we manage. But the other $30 of advertising drive a customer to the internet, specifically, Google.

Here is where the customer finds a veritable plethora of goodies. Google facilitates the diversion of funds away from the vehicle that drove the advertising, toward offers that better resonate with the customer. Sales are "lost", even though the advertising vehicle is just as effective as it always has been.

You tell me about this from both sides. Catalog executives lament the fact that customers go off into Google, never to return. Online pureplay leaders tell me that the love it when big brands do traditional advertising, because they benefit for "free".

This is where calculation (or much more likely, "estimation") of the Net Google Score becomes so important. If you can quantify that you are a $50,000,000 brand that has a Net Google Score of -$7,000,000, you instantly know that if you can eliminate that gap, you have a $57,000,000 brand that is probably much more profitable.

You also net out the Net Google Score in your matchback programs. Maybe you have a catalog that appears to drive $2,000,000 ... but after matchback, you add in the $750,000 you drove to your website, yielding $2,750,000 of real volume. Now, you consider the volume you drove to your competitors by advertising and driving customers to Google --- discounting the $2,750,000 of true volume by the Net Google Score. Hmmmmmm.

Long term, we have to ask ourselves if it is worth it to execute catalog marketing that results in a negative Net Google Score.

Short term, we need to begin calculating/estimating the Net Google Score.

A New President

Take a look at the popular votes, in 2008, 2004, 2000, and 1996.

2008 Obama = 69,000,000 votes (estimate).
2008 McCain = 65,000,000 votes (estimate).

2004 Bush = 62,000,000 votes.
2004 Kerry = 59,000,000 votes.

2000 Bush = 50,500,000 votes.
2000 Gore = 51,000,000 votes.

1996 Clinton = 47,000,000 votes.
1996 Dole = 39,000,000 votes.

A few trends. First, the number of individuals voting for President continue to increase at a dramatic rate. Second, McCain actually out-performed President Bush, when compared with 2004. Third, Mr. Obama outperformed Mr. Kerry by ten million votes.

Thirteen million additional citizens voted in 2008, compared with 2004.

Maybe the winner tonight is the United States of America. People voted, people are participating.

And the same thing holds true for online marketing, catalog marketing, and multichannel marketing. Your thoughts matter. Build a foundation for a successful 2010 and 2011. There's going to be a lot of negative economic information coming our way in the next few months. We'll overcome it. We always have.

Nordstrom And Best Buy: Average Comp Store Sales Since 1992

Given that we'll hear about comp store sales on Thursday, it might be instructive to take a look back.

In this case, I averaged annual comp store sales for Nordstrom and Best Buy, from 1992 - 2008 (estimated). Two very different business models, averaged together, yield illustrative trends.

The chart doesn't do a good job of illustrating lousy business back in 1991 - 1992, as Best Buy comps were smokin' during those years.

I recall the sluggish sales that plagued business in 1997 - 1998, starting in the second half of 1997. I was at Eddie Bauer in 1998, my first year as a Circulation Director. I pulled a lot of money out of that circulation plan, week after week after week. That led to major circulation cuts in 1999.

It's easy to see the internet bubble of 1999 - 2000, and the struggles of 2001 - 2002 (our last recession).

The bubble of 2004 - 2006 becomes apparent in the chart. Starting in Q4-2007, business began to suffer, and we'll observe really bad October comps when announced on Thursday.

Since 1991, Best Buy averaged a 7.9% comp store sales increase. That's some major productivity, folks!

Since 1992, Nordstrom averaged a 1.9% comp store sales increase. That's a rate that is below inflation. Take out the bubble years of 2004 - 2006, and the average CAGR is 0.75%.

Ignore all that gloom and doom. This is where we innovate, where our hard work bears fruit in 2010 and 2011. There is absolutely nothing you're going to be able to do to crack open wallets enough to make a substantial difference during the remainder of 2008. Focus on innovation that drives business over the next few years.

Circuit City: Did Multichannel Best Practices Make A Difference?

Circuit City will close 155 stores. Here's how folks on Digg feel about the news.

Circuit City is loved by multichannel experts, pioneering buy-online-pickup-in-store programs that allegedly fuel the "clicks and bricks" advantage for retailers. Check out this presentation from March 2008, promoting "How Web Savvy Customers Are Radically Transforming Retail". In the presentation, Circuit City is lauded for a smart integrated channel strategy.

On the Circuit City homepage today, you'll find free shipping or twenty-four minute in-store pickup. And the brand offers the same price across channels, a strategy the experts love.

Circuit City is doing so many of the things that the experts tell us we must do --- this leader tells us that Circuit City generates an additional $154 from each of these wonderful cross-channel customers. And yet, comp store sales are awful. Online, however, traffic is comparable between Best Buy (via Quantcast) and Circuit City (via Quantcast).

So how is it that all of these brilliant strategies, promoted by so many smart people, result in a brand that generates half the sales per square foot of Best Buy, leading to a decision to close 155 stores? Heck, from 2004 until recently, Circuit City was led by a former Best Buy VP of Customer Segments, and the brand struggled long before deciding to can the 3,400 highest paid employees in 2007.

How does a brand fail when it essentially sells the same merchandise as a key competitor, and executes the multichannel strategies demanded by industry leaders while competitors do not execute similar strategies? Either the strategies don't work, or the strategies have little relevance compared with in-store execution and customer service and store location. Either way, why invest all this effort if it doesn't translate into measurable sales per square foot increases, online conversion improvement, or comp store sales increases?

Now somebody might say "Yabut Circuit City comps would be really bad without these strategies". And that person might be right.

But isn't it time to question what we're being sold? Isn't it prudent to question established best practices? Might it make sense to question the motives of the folks telling us what multichannel best practices are?

Multichannel Forensics studies suggest that multichannel marketing strategies are less important than customer migration patterns across channels. If channel migration patterns result in the customer landing in a channel (retail) that does not resonate with the customer, then the entire multichannel ecosystem (and corresponding strategies) break down. We just don't think about the entire ecosystem often enough, we don't think about the consequences of a hole in one part of the ecosystem.


This isn't about me, however, and it isn't ultimately about Circuit City --- it is about you.

What do you think about the multichannel strategies we're taught to execute? Do they matter? Have they been proven to increase comp store sales, online conversion rates, sales per square foot, or spend/profit per customer? Would you execute multichannel strategies, or would you pare them back in favor of brilliant merchandising and execution and expense management and customer service?

What would you do to re-invigorate Circuit City business performance?

Vote --- Now!

Cast your vote for Mr. McCain or Mr. Obama on the election poll on the right-hand side of the MineThatData Blog. Participate in multichannel democracy!

Coldwater Creek: A Multichannel Case Study

NOTE: This is not an indictment or criticism of Coldwater Creek. This is such a powerful case of how a multichannel brand evolves that it warrants sharing.

In the late 1990s, Coldwater Creek was a growing apparel brand, defying the best practice pundits by offering apparel in catalogs without the benefit of models. Sand Point, ID was the catalog apparel capital of the Pacific Northwest.

Around the year 2000, Coldwater Creek caught the "multichannel bug". Take a peek at the image at the start of this post (source = 10K and 10Q statements from Coldwater Creek).

Let the evolution begin.

Take a look at sales generated over the telephone, sales that are generated by the mailing of catalogs. After hitting $320 million in 1999, sales have dropped like a rock --- projected to land somewhere around $64 million dollars this year. Granted, catalogs circulated have dropped by more than a third, but by and large, the sales drop represents the death of the telephone channel, a channel completely cannibalized by the internet.

The multichannel pundit would say, "Yabut, catalogs drive sales in all channels, do a matchback analysis dude". And the multichannel pundit is right.

Look at online sales. Internet volume hit $142 million in 2001, then basically stalled for two or three years at a time when the rest of the world experienced wild online sales growth. Catalog mailings did not help the online channel, declining drastically during this time.

You can see that catalog expense dropped significantly at a time when retail sales were growing significantly.

And then the bubble hit.

It's easy to see the bubble, when looking in the rear view mirror. Take a look at the explosion in sales between the end of 2004 ($590 million) and the end of 2006 ($1.1 billion). WOW. Stores doubled, retail sales more than doubled, online sales increased sixty percent, with phone sales losing four percent.

At the end of 2006, life is mostly good, though comp store sales are beginning to show signs of weakness. The stock price at the end of the fiscal year was at $25.00, down a bit from a high of $31.00.

Store investment is a multi-year process. Through the view of the glasses we wore in 2006, it would make sense to continue to invest in new store openings. Grow baby grow!!

And then the economy begins to crumble.

It's hard to separate out the effects of the economy, and the impact of going from 114 stores at the end of 2004 to more than 350 stores today (some cannibalization?) --- but the combination of factors drubbed comp store sales. Declines of about twelve percent in 2007 (the 10K statements make it hard to calculate annual comps) are matched by declines of about sixteen percent this year --- and will likely get much worse once Q3/Q4 comps are added to the mix.

In other words, over two years, same stores are generating almost 30% less business than they were two years ago, at the peak of the bubble. Allow me to state the fact another way ... if a store generated $2.5 million in sales in 2006, it is generating $1.8 million today.

This is the failure of the retail model, the failure of the integrated multichannel brand. The management consultants and vendors and research organizations who promote all this "clicks and bricks" stuff haven't always had the benefit of working in a retail environment during an economic downturn. Once you've been blessed with that experience, you view the world in a different manner.

In catalog marketing, if catalogs are failing, you quickly "flex" the business. You cut circulation and get profitable in a hurry --- hurting the top line but significantly improving the bottom line.

In online marketing, you can mix up your website, you can dynamically change your e-mail marketing strategy, you can change your paid search strategy or portal advertising or affiliate program. You can be nimble. You change, you test, you react, you evolve --- quickly.

In retail ... you commit to open stores in late 2006, based on sales projections from data in 2006 --- only to realize a distaster in late 2008. And you cannot easily get out of the stores --- stores have five or ten year leases that the brand has to honor.

The Coldwater Creek of 2008 looks nothing like the Coldwater Creek of 1999. A single-channel catalog powerhouse became a huge retail brand with catalogs supporting a website that supports retail sales. If you want proof of this, take a look at the reductions in catalog and magazine advertising expense, and look at this quote from management in the most recent 10K statement.

• "Shift in Marketing Approach: Historically, we have used a broad based marketing strategy of national magazine advertising and catalog circulation, with television advertising on a test basis. We are now shifting to a more point of sale, in-store focus. Our efforts are focused on maintaining and better engaging our best customers, as well as attracting new customers through select advertising placement. We believe this more focused approach will result in a reduction in our spending in 2008 by approximately $35 million verses fiscal 2007. During the first half of fiscal 2008, marketing expense, primarily including national magazine advertising and catalog circulation, decreased approximately $22.6 million, as compared with the first half of fiscal 2007."

When a brand evolves to a retail focus, it becomes critically important to cover the heavy fixed cost component of all retail stores. A catalog business flexes, an online business is nimble, a retail business is a beast that must be fed, or suffer dire consequences.

Corporate employees began to face the dire consequences earlier this year, with more than sixty employees in the corporate office losing their job.

Take a look at the share price of Coldwater Creek stock. Do you see a bubble here?

• January 2004 = $4.33.
• January 2005 = $13.35.
  
• January 2006 = $22.50.
• October 2006 = $31.06.
  
• January 2007 = $25.39.
  
• January 2008 = $6.74.
  
• October 2008 = $3.59.

Coldwater Creek evolved from a profitable $362 million dollar catalog business with emerging channels in 1999 to a 2008 break-even billion dollar brand with most of the multichannel bells and whistles the pundits could ever ask for..

Use Coldwater Creek as a case study for the ages.

Always remember that established channels lose ground to emerging channels during the growth stages of emerging channels.

Always remember that direct mail advertising drives online and retail sales. Direct mail is "selfless" --- hated by many customers, but a selfless workhorse within a brand.

Always remember that all forms of online marketing and digital marketing drive online and retail sales. Online and digital marketing support a retail channel.

Always remember that retail is a selfish beast, a channel that needs to dominate, a channel that does not like to support other channels.

Always remember to run profit and loss statements for new/existing stores, assuming that your business is twenty percent weaker than it is today --- if that happens, do you have a profitable retail business?

Always remember that correlation does not equal causation. We exploded our multichannel opportunities during the rise of the bubble, diving into the "clicks and bricks" theory. At the peak of the bubble, the "multichannel" concept seemed great, with sales to support theories shared by pundits. Now ... not so great. Where are the pundits when the economy goes bad?

A final question for you: Would Coldwater Creek have been better off being a profitable $400 million dollar catalog+online brand, or is Coldwater Creek better off being a break-even $1.1 billion dollar retail brand supported by a website and catalog advertising?

Zip Code Forensics: The Southwest United States

If you're a multichannel marketer based in New England, you probably don't spend a lot of time thinking about customer behavior in Utah, Colorado, New Mexico, or Arizona.

Hillstrom's Zip Code Forensics (free to marketers who contribute anonymous zip code data, $5,000 for all other marketers --- compare to Claritas Prizm NE here) has a favorable view of the Southwest United States.

Multichannel evangelists suggest that direct marketing works well among customers who have access to retail.

Zip Models suggest otherwise. Notice that the bright orange (traditional direct marketing / catalog) and bright green (online marketing / e-commerce) areas are largely outside of urban areas, away from concentrated retail strongholds.

Honestly, folks, we've been led astray by mainstream multichannel "best practices" thinking. We survey a thousand customers who buy across channels, those customers tell us that they love multiple channels, then we tell retailers we should pursue these customers via $379 research reports and vendor white papers. Who benefits from this form of marketing? You know the answer.


We have an opportunity to think more about what a customer "needs", thinking less about what we want to "give" to a customer. What does the customer living fifty minutes outside of Flagstaff "need"? Does our industry explore this angle? Have you read a research report on the needs of the rural mountain customer in the Southwest United States?

Unlikely.