E-Mail Marketing Influences Long-Term Customer Value

In a classic Multichannel Forensics analysis, we look at how customers interact with various products, brands, and channels.

When marketing is executed properly, cannibalization is minimized.

When marketing is executed like we execute it, cannibalization is a daily reality. So if we're going to have one advertising channel cannibalize another, we may as well put ourselves in a position where long-term customer value increases as a result of the cannibalization.

Take e-mail marketing. Of all the marketing disciplines I study, e-mail marketing is the least well understood. E-mail practitioners focus almost exclusively on short-term metrics (open rate, click-through rate, conversion rate) that give a highly incomplete picture of the value of the advertising channel. This isn't the fault of most e-mail practitioners --- they simply haven't been given the tools necessary to analyze the medium properly.

In a recent Multichannel Forensics project, I was able to illustrate the following:

• E-Mail customers were the most likely to shop other advertising channels.
• E-Mail customers had an average annual spend, at a customer level, but spent more than the average online shopper. Migrating a customer from an online shopper to an e-mail shopper caused an incremental increase spend in the short term, even if the sale cannibalized an existing online purchase.
• Because e-mail customers were the most likely to shop other advertising channels, there was a gain in long-term customer value associated with e-mail marketing. Each dollar a customer spent because of e-mail marketing generated $0.33 of incremental long-term spend across all other channels (catalog, search, affiliates, television, radio, newspaper), over the course of the next five years.

It is the last point that is most important. The e-mail marketing community has been abnormally slow to embrace the concept of a "customer file". Catalog marketers, however, embrace the "customer file" as their most valued asset. Catalog marketers actively map out the evolution of their customer file, playing extensive what-if games to understand how today's activities influence the long-term health of the business.

Can your e-mail vendor community provide this type of information for you? Or your Business Intelligence team? Or your Web Analytics team? Or your existing E-Mail Marketing team? It is important to accurately measure how e-mail marketing interacts with your existing customers, advertising, products, brands, and channels.

Matchback Comment From "Anonymous"

An individual named "Anonymous" left the following comment this week:

• "I have the best matchback algorithm in the industry and you are completely wrong. 90% of our orders are sourced to catalog mailings, we get about 5% from emails. Why don't you show us a graph of your brilliant algorithm that shows how emails drive more sales. You don't have one because you don't know what you're talking about. This is the most retarded thing I've ever seen. Anyone can tell just from the order flow that catalogs drive virtually all the sales (all the orders come in right after a catalog drops). Who benefits from your airhead analysis? Emailers?"

Courtesy of my web analytics tools, I can see the companies represented by folks who leave comments like these. What a shame that the individual deprived us of the name of the company s/he represents.

Most catalogers know to compare matchback results to mail/holdout results.

If matchbacks suggest that 80%+ of volume are matched back to a catalog --- and mail/holdout tests suggest that you can mail fewer catalogs without a significant drop in sales, then matchback analytics are wrong.

If matchbacks suggest that 80%+ of volume are matched back to a catalog --- and mail/holdout tests suggest that there is a linear drop in sales as each catalog is taken away from the customer, then you are in the same company as the individual leaving the comment above.

That assumes, of course, that the individual leaving the comment was savvy enough to execute mail/holdout tests.

Sometimes our industry steps to the plate, swings, and misses.

Mulder and Scully on Cataloging

Let's assume that the main characters on "The X-Files", Fox Mulder and Dana Scully, are investigating the dynamics behind catalog marketing.

Mulder: "Hey Scully, check this out, this customer says she ordered at PC Connection after reading a tweet about a 20% off promotion."

Scully: "Mulder, a matchback analysis clearly indicates that this customer received a catalog thirty days ago. The catalog had to have caused the customer to order, right?"

Mulder: "That doesn't prove anything."

Scully: "It proves everything, Mulder. Why do you think that the customer was even out on Twitter searching for PC Connection promotions?"

Mulder: "Is it even possible that word of mouth and popular sentiment on Twitter and brand equity and natural search influenced this customer more than a catalog mailing?"

Scully: "Mulder, we know scientifically that customers who shop multiple channels are the most valuable customers. We proved that the order curves for the online channel are nearly identical to the order curves for the telephone channel. We proved that catalog marketing caused a customer to give us her e-mail address. We proved that paid search doesn't happen without a catalog driving the activity. We proved that co-op names perform better than list rental. We know that Twitter doesn't scale, we know that blogs don't drive high-converting traffic. We've covered this ground over and over again. You were at the Catalog Conference last year, you saw the proof!"

Mulder: "What if everybody is wrong, Scully? What if all of this is just a big conspiracy perpetuated by the Direct Marketing Association?"

Scully: "This is all one big conspiracy?"

Mulder: "I'm just asking the question. After all, the DMA sponsors the Catalog Conference, the conference where you claim you saw the 'proof'."

Scully: "It's a stupid thesis, Mulder. You're suggesting that the Direct Marketing Association is one big shadow organization pulling strings from behind the scenes?"

Mulder: "Just like when Smoking Man was conducting experiments on my sister. You didn't believe that, but it was true."

Scully: "Mulder, this would imply that EVERYBODY is in on it. This means that printers are in on the conspiracy."

Mulder: "Sure, they want to perpetuate the devastation of the rain forests, hoping to colonize South America".

Scully: "And what about Catalog Choice? They're in on it?"

Mulder: "They're the counter-insurgency, giving the impression of a force of good battling the evil of the industry".

Scully: "Mulder, you don't have a shred of evidence to prove any of this!"

Mulder: "I don't?"

Scully: "You don't! Science exists for a reason. It is science that offers a roadmap to the future. If a cataloger proves that 90% of e-commerce orders happen within 30 days of mailing a catalog, then the whole catalog ecosystem --- Abacus, Quad Graphics, Millard, Strategic Paper, Experian, the USPS, LENSER Marketing, CheetahMail, even Alan Rimm-Kaufman and Amy Africa and Google, the whole lot of them are responsible for generating the order. And they all deserve to be rewarded for that.. How the heck do you think customers decide to order something? Do you think they just think up interesting things to buy out of thin air? Or does offline advertising create demand, causing customers to desire to buy something?"

Mulder: "You're attractive when you passionate about something, Scully. And don't get me started on Google. Google was invented in Roswell, NM, in 1948 in an alien spaceship."

Scully: "Mulder, can you be serious for just one minute? We establish best practices for a reason. We know that we have to mail twenty catalogs per year to obtain the desired forty percent annual retention rate. And our business partners help us do just that."

Mulder: "I suppose you couldn't obtain the same result with nineteen catalogs? Couldn't you conduct an experiment, mailing one group of customers twenty catalogs while mailing another group of customers just nineteen catalogs? Isn't that what science is all about, Scully?"

Scully: "I suppose you're right."

Mulder: "And if I'm right, couldn't you run an experiment testing eighteen catalogs instead of nineteen? And if the results are positive, then try seventeen instead of eighteen?"

Scully: "If I follow that logic, then eventually we might not be mailing any catalogs anymore. Then what? What does that make us?"

Mulder: "Zappos?"

Scully: "But that's just plain silly. Zappos has other ways of generating business, like monopolizing the bins at the security checkpoints in airports with Zappos advertising."

Mulder: "Maybe the security employees are actually Zappos employees. Maybe Zappos is a front for the Department of Homeland Security."

Scully: "C'mon, Mulder, knock it off".

Mulder: "Ok, Zappos isn't a front for the Department of Homeland Security. But Julia Child turned out to be a spy, would you have believed that two years ago?

Scully: "Back to the facts in cataloging. We need to focus on established best practices. Lands' End scaled back on catalog mailings in 1999, and look at what happened to them!"

Mulder: "Nordstrom stopped their catalog marketing program in 2005, and look at what happened to them!"

Scully: "I want to believe, Mulder."

Mulder: "Then conduct the experiment, Scully. Conduct the experiment".

E-Mail Forensics

You're asking more and more for projects that are vaguely similar to what I would call "E-Mail Forensics".

• Tell me how e-mail buyers perform.
• Tell me how e-mail clickers perform. Do they become buyers?
• Tell me how e-mail inactives perform? Should I prune them?
• What merchandise divisions do my e-mail customer file purchase from?
• What merchandise divisions do my e-mail customer file view online?
• Does my e-mail list purchase offline? Do e-mails influence offline behavior?
• What is the lifetime value of an e-mail address?
• Are there hidden "personas" in my e-mail file? Can you identify them?
• Can you simulate the impact of zero, one, two, three e-mail campaigns per week?
• Are the vendors right? Should I do the additional work to create personalized, targeted e-mail campaigns?
• Does the merchandise offered in an e-mail marketing campaign end up being the merchandise that is purchased online by e-mail subscribers?
• Does e-mail marketing drive incremental sales, or are all of the sales cannibalized from other sources?
• What is the average life of an e-mail address? What happens to long-term value when an e-mail subscriber unsubscribes?
• How does e-mail marketing interact with catalog marketing?
• How does e-mail marketing interact with paid search?
• If e-mail marketing causes paid search to happen, should I be conducting a fully integrated profit and loss statement? How do I do that?
  
• How can I accurately forecast the incremental sales of each e-mail marketing campaign?
• How should I merchandise each e-mail marketing campaign to maximize sales?
• Is it important to collect e-mail marketing addresses in stores?
• What is the five year sales trajectory of my e-mail customer file?
• If an individual customer has three e-mail addresses, which e-mail address should I market to?
• If an e-mail marketing message causes a customer to visit the website and not purchase, have I improved the net present value of my customer file?
• How does a "square inch" analysis translate to e-mail marketing?
• Can you segment my e-mail file into actionable customer cohorts?
• Are various e-mail suffixes (@gmail.com) more valuable than others?
  

These are the questions you're asking me to address. Combined, they form a product, a product I loosely call "E-Mail Forensics".

What am I missing? What would you like to see in an e-mail forensics project? Ready to work on a project? Send me an e-mail with your needs!

New England vs. Silicon Valley

There are fundamental differences in the way our customers shop, based solely on geography.

New England is home to a veritable plethora of viable catalog brands, and we see a lot of orange on the map, don't we? A catalog in the mailbox is a welcome part of the day in New England.

Meanwhile, 3,000 miles across the country we find Silicon Valley. This is the hub of technological innovation! Notice that almost the entire metro Bay Area is light green or dark green --- an e-commerce hotbed.

It should not come as a surprise that the most popular third-party catalog opt-out service is located in California. For many in this region, a catalog in the mailbox is an unwelcome intrusion, symbolic of the destruction of the planet, or a relic of a bygone marketing era, at minimum.

The catalog marketer of the 2010s will have a three-pronged marketing strategy, based on customer differences and geographical variations.

1. A catalog marketing strategy for the 50+, rural, Mountain and New England based catalog shopper.
2. An e-commerce marketing strategy for the middle-aged suburban customer.
3. A social shopping strategy for the under-40, suburban/urban customer who fully integrates technology with lifestyle.

This won't be easy, but it is essential to the profitability of the businesses we manage.

Web Visits And Lifetime Value And Data Mining

One of the great sins of e-commerce is the website visit that does not result in a purchase.

We've been told for fifteen years that this is a disaster, and can usually be fixed with a few easy steps.

Of course, the problem is never easily fixed --- always improved, but we never see website conversion rates increasing by up to 339% after implementing various vendor strategies, do we?

Have your data mining expert give this exercise a try. Instead of building models using recency and frequency and monetary value and whatever additional variables you want to include, have your modeling expert add dummy variables for the following.

• Shopping Cart Abandoned 1 Month Ago.
• Shopping Cart Abandoned 2 Months Ago.
• Shopping Cart Abandoned 3 Months Ago.
• Website Visit, No Shopping Cart, No Purchase, 1 Month Ago.
• Website Visit, No Shopping Cart, No Purchase, 2 Months Ago.
• Website Visit, No Shopping Cart, No Purchase, 3 Months Ago.

What many folks find is that unconverted website visits and abandoned shopping carts are not the end of the world! In fact, these activities tend to increase future customer value, as illustrated in the graph above (months four and twelve in the graph).

Future value is sort of like a heartbeat ... each additional purchase (months six and eighteen in the graph) results in a shot of adrenaline, causing the heart to beat.

Each unconverted website visit or abandoned shopping cart results in a mini-jolt, as evidenced in many statistical models. Given that we observe this behavior, we don't get in a panic if the customer doesn't purchase. Instead, we view the activity as part of a relationship.

We seldom ask somebody to marry us after a first date, and in e-commerce, we have the opportunity to view each visit as a stepping stone in a long-term relationship. Simulations show that these unconverted visits are not the end of the world ... rather, they are part of an overall relationship with the customer. If the customer comes back multiple times, that can be a better outcome than demanding conversion in one visit, never to see the customer again.

Or at least that's what the data suggests.

Monday Notes

Note #1: If you're willing to do this, send me an e-mail outlining how much you're paying, per name, to each of your co-ops to pull a name out of their database (for housefile modeling and for customer acquisition). I'm working on a pricing elasticity and long-term customer value spreadsheet, showing how customer acquisition performance improves as prices come down. Unfortunately, you already know what happens when pricing increases via the USPS.

Note #2: If you're considering call center reductions, give this idea a chance. I've talked about this numerous times before, but it might be time to let your call center staff loose "creating demand". Have then all open Twitter accounts, and in their down time, ask them to find every possible customer service issue on the internet that involves your business, and see if they can solve the problem for the customer. I'm increasingly becoming convinced that the future of customer service is the outbound use of a call center --- using tools like Twitter, rather than taking inbound sales calls. These are talented people --- put them to work in a constructive way, rather than employing folks via the robotic process of fielding calls.

Note #3: If you are a cataloger (and about 1/3 of this audience represent the catalog industry), can you explain why nobody will publicly talk about about the fact that catalog customer acquisition is dying? Is there a good reason why nobody wants to talk about solutions?

Sunday Notes

Story #1: Brookstone performance was in the tank in 2008 --- no shame in that, the economy hurt many folks. Recall the marketing blitz employed by the Brookstone/Abacus alliance? You don't hear much from the PR folks these days, given that catalog customer acquisition is going through a death spiral. And that's ok ... now we can have discussions that are more honest in nature, with co-ops as partners, not saviors.

Story #2: Microsoft goes into retail. Hint to direct marketers looking to expand via retail ... .not every story ends up being a fairy tale (Apple). Direct is a skillset not understood be retailers. Retail is a skillset not understood by direct merchants. Ask Coldwater Creek if they're enjoying the retal ride they initiated earlier this decade?

Story #3: Direct Marketing. I'm speaking to a group of MBA grad students, about 25 folks age 22-35. I asked for a show of hands, how many folks purchased because a catalog was mailed to them in the past year? Answer = 2. I asked for a show of hands, how many folks purchased because a e-mail campaign was sent to them in the past year? Answer = 4, 2 folks say it was an Amazon e-mail that caused the purchase. I asked for a show of hands, how many folks purchased via e-commerce in the past year? Answer = 25 of 25. The future of direct marketing is not e-mail marketing and cataloging. We need to change at a rate that is at least as fast as our customers are changing.

AppStore Retention Curves From Andrew Chen

Sometimes I think Andrew works in a parallel universe!

Go through the slide set on his blog --- does this not look like all the goodies we learned about catalog marketing over the past twenty-five years?

Neat!

Big Mistake

I'm absolutely obsessed about auditing database marketing results. I once told my circulation team at Nordstrom that I would outsource every single job in the department if we didn't get better at auditing our results. You better believe accuracy improved.

So last week I am in a conference call with a client. At one point, they are praising my efforts. My head is swelling! I truly am the greatest Database Marketer of all time.

And then the owner chimes in. "By the way, Kevin, you spelled the name of my company incorrectly throughout the entire document".

The sound you heard all across the Pacific Northwest was the sound of air rushing from my skull. My giant ego had just been popped.

The folks at this company were appreciative and forgiving. But that doesn't excuse the mistake.

Audit everything. Have somebody else audit everything!

Amazon Promotion, Co-Ops, Micro-Channels

Last Friday, Amazon sent a promotion to their affiliates. The affiliate could earn a commission by putting up a link to a free download of "Let's Get It On" by Marvin Gaye.

The promotion doesn't matter. And the style of marketing isn't necessarily innovative, either.

It is important to review, however, the evolution of direct marketing, because many of us employed in traditional direct marketing are trying so hard to preserve direct marketing as we knew it, instead of embracing what it is becoming.

In the music industry, control is shifting from "industry" to "music". In the article, Mr. Godin references the concept of a "micro-market". Sounds awfully similar to what we describe as a "micro-channel"! And the article talks about the "middle geography disappearing" in music --- this is exactly the same as catalog customer acquisition dying in our industry.

In the 1980s and 1990s, the list broker was the gate keeper. A quirky relationship existed.

• The list owner got paid.
• The list broker / manager got paid.
• The customer did not get paid. The customer had to spend in order for the list owner and list broker / manager to get paid.
  

In the 2000s, the fundamental relationship did not change --- co-ops displaced list brokers / managers. The essential structure of control remained the same --- there was a gatekeeper (co-ops).

As we close in on 2010, power is shifting.

In this case, Amazon doesn't go to a co-op to buy one-time access to 5,000,000 MP3-loving households modeled by a co-op statistician. No, Amazon bypasses the gate keeper, going directly to me.

This is the real dynamic behind the death of catalog customer acquisition. The gate keepers lost control --- no fault of their own, customers simply changed their behavior.

And so our job changes as well.

• How do we create something of value so that information from our business is on an individual customer's "My Yahoo" page every morning?

• How do we create a Twitter presence that adds value, so that more than just 394 people follow us --- how do we stay away from "we have swimsuits on sale?" as our only message?
  

• How do we build a network of 25,000 micro-channels, and create a mutually beneficial relationship (one not necessarily based on money)?

It is this development of micro-channel relationships that define the 2010s.

Build-A-Bear Workshop Multichannel Initiatives

Fascinating comments from management that reflects our new world order, and yet, comp store sales were still down 16.8%.

• Guest surveys data shows that 10% of all store guests are highly influenced to visit because of Build-A-Bearville, and they visit our stores more often and on average, spend more on each visit. Having millions of eyeballs or unique visitors per month, gives us the ability to consistently inform and engage this community, similar to the impact a direct mail piece would have had in the past.

• Over 925,000 viewings of Holly & Hal animated webisodes were seen in the theater in Build-A-Bearville. Holly & Hal Moose became our biggest holiday animals ever sold We believe that our ability to tell the story across the multiple entertainment platforms drove the increase in units sales of these items.

• In Build-A-Bearville, we can leverage our relationship with David (Archuleta) in ways not possible before with an online interview, music video and song clip. In the past, we've had artists appear at select malls, but through the internet and our virtual world, we can essentially share that personal experience with millions of guests around the world.

• The first initiative was a sale of Bearville's game cards, which provide the player with 10,000 Bear Bills, our online currency, to spend in the virtual world, and a choice of virtual ride like a hover board or a scooter. The cards are sold online and in our stores and other selected third party outlets. We sold 25,000 game cards in just nine weeks during the holiday season and as you can imagine, the gross margin on a virtual item is quite high. As evidence of the passion our guests have for these products, over 95% of game cards are redeemed within the first 24 hours after being purchased.

We can keep trying to merchandise the catalog well, or we can start thinking about how people use technology in new and innovative ways. The latter requires a willingness to fail, something we aren't always comfortable with.

A Test ... Local Minima ... E-Commerce

Earlier this week, I executed a test.

You were my subjects!

This article, in my opinion, was well written, topical, and offers significant thought leadership. You were interested in it, you downloaded the white paper at an above-average rate. This is the "10" in the chart.

This article should have inspired thought, but was a complete snoozer. This is an "8" in the chart.

And then I wrote this one about Twitter --- almost no business value and not particularly well written. This one was the most popular article of the past two months, forwarded across the world in blogs and via Twitter. I received positive comments. I received hate mail. I received comments that were so inappropriate that they had to be deleted. The audience was "engaged". And I apologize if you were offended by the article --- I am speaking of Twitter from a marketing perspective, not from use of the tool for personal reasons. From a marketing perspective, we fail from time to time.

This article was a "4" in the chart.

I did this test, on purpose, to prove a point.

When we optimize on the basis of the wrong set of metrics, we evolve in a negative or mediocre direction. If my goal was to have the most subscribers and the highest level of engagement, I'd be writing satire about social media, because that riles-up the audience and gets people to read and interact.

Remember calculus? We used to talk about "local minimas". On this graph, the "catalog filter" article represents a local minima. This article is so much more important than pap about Twitter, but the metrics suggest otherwise.

Genius-level articles are few and far between. But the really good ones don't get much interaction, don't attract a lot of readers. The mediocre ones, those attract a huge audience.

This translates to e-commerce. We focus all the time on the average things, because the average things seem to work --- our metrics are calibrated to reward mediocrity. And when we try to do something excellent, the audience rebukes us. Try to innovate, try to do something wild and crazy with your homepage sometime --- watch your conversion rate plummet --- you won't make that mistake again! Our short-term metric, conversion rate, forces us toward mediocrity.

And yet, the local minima is where the excellence happens. We should all be so lucky to have a testing budget that allows us to detect strategy that can work on a long-term basis.

Now that I read this, I think I just re-invented Seth Godin's "The Dip". See, there's no original ideas left out there!

Libey's DailyDM

I've read the commentary on Twitter and other blogs in the past day, so I'll forward this to you as well.

Don Libey has launched Libey's DailyDM, a portal, if you will, in to everything that is direct marketing, be it online marketing or direct marketing or catalog marketing or hologram marketing!

Give it a try --- see if you can find interesting commentary or viewpoints!

Full Disclosure: Mr. Libey edited and published two of my books.

Bizarro World

A tale of two businesses. Both examples happened recently.

• Business A contacts me, wanting help retaining customers. This is an online brand that is in Acquisition Mode. The days of easy Google gravy have come to an end. Management wants to "de-tether" from Google, and wants to know how the offline folks spend money in a cost-effective manner to keep customers.

• Business B contacts me, wanting to trim offline marketing expense. This is a traditional catalog brand that is in Hybrid Mode. The days of easy co-op customer acquisition have come to an end. Management wants to know how to stop spending money in offline marketing, and wants to know how the online brands keep customers in a cost-effective manner.

Suddenly, I'm in the bizarro world.

These are interesting times, and not because of the endless pap we're fed about "... in these challenging and unprecedented economic times, leading brands are considering social media and mobile marketing and personalization as keys to unlocking customer loyalty ... "

Maybe we're finally being forced to think, to really think.

We're thinking about two fundamentally similar, but opposite questions.

1. I'm spending money and not getting anything for it.
2. I'm not spending any money and not getting anything for it.

Both questions fail to address the real issue.

• If I had not purchased from my own business in two years, is there anything that I could do to get me to purchase again, anything that protects my profit and loss statement?

Business becomes very interesting if the answer to that question is "no".

The world changes when we answer "no" to that question. We're no longer catalog marketers or online brands or multichannel retailers. Instead, we're forced to consider our own viability. We're no longer focusing on putting a shopping cart in the upper-right-hand-corner of a static home page. We're asking ourselves the fundamental question --- why do we exist?

Here's where all of the innovation begins.

Catalog Filter

If you needed to talk to somebody who "knows" modern catalog marketing, who would you speak with?

I can tell you who to speak with about fulfillment. These folks know all about paid search. I can talk to this organization about renting lists. Or speak with these folks about co-op names. I can find e-mail marketing experts here. And nobody is willing to pay for the services of this organization, but we all sure like having them out there lobbying for us. If we want to suppress catalogs to individuals who don't want dead trees in their mailbox, we go here. Want a robust database and inexpensive demographic appends? Talk to these people. Need to bask in the fellowship of an organization of peers? Join this organization. Or work with these folks for the best possible paper pricing. And then integrate that organization with your favorite printer while you're at it, then cross your fingers that the government doesn't clobber you with another unreasonable postage increase.

That's only a small part of the ecosystem, isn't it?

And if you were to ask any of those folks how to execute modern catalog marketing, you would get an incomplete answer, wouldn't you? The paper rep would tell you that some small company is growing by 39% right now because of catalog marketing. The database marketing firm would demand you integrate all your data, because Best Buy did that, and look at their performance! The co-op would tell you to keep the gas on customer acquisition, the e-mail marketing expert would tell you to focus on customer retention. The social media expert might tell you to abandon all of that and focus on the 2 in 100 individuals currently using Twitter.

What is likely to emerge from the great decentralization and outsourcing of catalog marketing is what I call the "Catalog Filter". This is an individual who can synthesize information, who can separate noise from strategy.

This individual knows that paper is dying. This individual also knows that you cannot just jump off the paper bandwagon today. This person builds a bridge to the future.

This individual sees through marketing speak. She knows that "buy online, pickup in stores" is nice for the customer, but is expensive and may not increase long-term customer value by a penny. She knows that Google is destroying e-commerce while giving the impression that it is causing e-commerce to grow. She knows that algorithms are dehumanizing the shopping experience. She knows how to merge offline advertising with online execution. She knows exactly how much profit is generated five years from now by the marketing and operational tactics that are executed today.

The "Catalog Filter" does not follow the industry script. As you know, the industry script is written to benefit service providers. The catalog filter is there to benefit YOU, to give YOU a roadmap to the future, to integrate and synthesize ideas for YOU!

This individual is about to emerge from the ether. I don't think this person is a traditional catalog marketing expert. This person is, however, a person with considerable catalog marketing experience, a person who can see the future but doesn't try to jump over the present.

The longer it takes the economy to rebound to "normal" (i.e. not the bubble years of 2003 - 2006), the faster this "Catalog Filter" will emerge.

In your opinion, who do you think fits this bill? Is there an individual, or an organization, that can be the "Catalog Filter"? Who do you trust?

Twitter Is A Lot LIke Digging Through A Restaurant Dumpster For A Fresh Donut

Maybe you've heard about this social networking tool called "Twitter".

If you listen to the pundits, you'll come to the conclusion that this is the most spectacular marketing tool ever created. The "twitterati" will tell you that this is a game changer, a tool that, with just a little tweaking, could cure cancer.

They'll quickly tell you that Dell made a million dollars over the course of eighteen months using Twitter. WOW! Think what you could do, if you used Twitter?!

Of course, Dell sells $60,000,000,000 (sixty billion) of merchandise a year. So if you have a respectable $50,000,000 brand, and you do just as well as Dell did (and they're good), you might sell $833 this year on Twitter. OMG, WTH, LOL :) :) ! The twitterati will defend this fact by pointing out that the $833 will have the best ROI of any marketing channel.

With that kind of brand promise, I, too, took the Twitter plunge. Here's my page, here's the RSS feed.

I've written more than one hundred and seventy updates, earned more than two hundred and eighty followers, and learned a few things about the Twitter ecosystem.

• You can look really important! I could write something like "@PresidentObama I'm sorry you're having a tough time with cabinet appointees. Keep your chin up!". It turns out that a whole bunch of people do just that, as a method of gaining awareness and encouraging new followers. Or they follow you with the sole purpose of encouraging you to follow them. You get the opportunity to waste time judging the motives of others, something you get to do every day in the real world.
  

• Not everybody is using Twitter. Wow! You wouldn't know that by reading the various SmartBrief publications, or by reading any of the Top 25 Marketing Blogs. In fact, if you took a random sample of 100 residents in the United States, you'd quickly realize that maybe 2 in 100 are on Twitter. Not 2 in 3, 2 in 100. How are you going to reach the other 98 people in the random sample? Maybe Twitter is the next big thing. Maybe it is the next Geocities. Maybe it is a glorified version of the pen pals folks had thirty years ago. Time will tell.
  

• You offend people if you don't follow them. I'm officially following fewer than five folks, and I do this on purpose because I want to conduct an experiment --- I want to see what happens if you do the opposite of everybody else. Instead, I follow many of you, as well as a limited number of the Twitterati, on My Yahoo page. I'd rather test and learn than to follow the sheep and do exactly what you're told. And quite honestly, I don't need to know that you're drinking a hot cup of cocoa after shoveling snow.
  

• There might be a small return on investment. I was invited to speak at a conference through a connection on Twitter. Of course, that connection may have happened without Twitter, but such is life --- the direct connection on Twitter led to the speaking opportunity.

• Twitter is an immense ecosystem of micro-communities. I review the page of every person who follows me. Everybody has 117 followers and is following 209 people. Nobody is famous, but everybody is micro-connected, an infinite array of micro-channels about every conceivable topic.
  

• Twitter is a vast wasteland of infinite pap that includes a half-dozen nuggets of well-disguised gold. You'll dig through six hundred messages like "@goobertoe CRM strategies really are the future. Someday, we'll all be communicating via relevant, timely 1-to-1 messages" or "@socialmediapundit These luddites just don't get it. They're dead men walking". And then you're ready for more waste when you see a message from @piddlepuppy that says "Check out this video e-commerce application http://tinyurl/zzzzz". The use of tiny urls to compress urls into the 140 character limit conceals some of the value of Twitter --- all of a sudden, you realize that @nordstrom is publishing video interviews from Fashion Week.

• Far more important than having a Twitter presence is MONITORING ACTIVITY on Twitter. It turns out that Twitter is spectacular for real-time search ... boy oh boy Google, how did you miss this one? If you want to see what people are saying about CRM in real time, you can do so. Search on Twitter is a lot like digging through a restaurant dumpster for a fresh donut.

And maybe that final sentence summarizes my first month on Twitter. You have to dig through a ton of garbage to get something of value. The signal-to-noise ratio is not favorable. And don't line up behind all the hype from the twitterati --- because two years from now, the same folks who told you to have a blog in 2005 and be on Twitter in 2008 will tell you to be somewhere else in 2010. Do something on Twitter if there's a reasonable business plan behind the idea.

White Paper For CEOs And Owners: Investment Strategy From Don Libey

One of the things missing from our "5 Easy Ways To Tweet Your Way To Twitter Success" culture is a genuine, strategic discussion about how to grow a business that will sell for a reasonable multiple of EBIDTA.

In doing some research on the topic for a current client grappling with this very issue, I ran across an article, written by Don Libey nearly ten years ago. The article perfectly articulates the concept of investing in customer acquisition in a way that allows a CEO/Owner to harvest an additional million or two million from a future change in ownership.

I asked Mr. Libey if I could publish his article. He agreed, so long as I complemented the article with a few examples from my Multichannel Forensics work.

This article is a must-read for any CEO / Owner looking to maximize the long-term value of a business.

Please download the free white paper: "Investment Prospecting: Building Business Valuation through Strategic Planning".

Lapsed Buyers And E-Commerce

Most businesses have a lot of lapsed buyers. These are customers who have not purchased in thirteen or more months.

In catalog marketing, there are many established best practices for marketing to lapsed buyers. Catalogers frequently bump their list up against the co-ops, mailing a 24 month buyer (one who hasn't purchased in the past two years) who recently purchased from a competitor. And this strategy works. Catalogers can profitably mail and reactivate customers who have not purchased in five years.

Ok, now you're an e-commerce business leader, one who doesn't believe in the fossilized version of direct marketing employed by traditional multichannel merchants. The customer hasn't purchased in twenty-four months, and does not have a mailable e-mail address.

How do you encourage this customer to shop with you again? In other words, how do you create demand with a customer, a customer you choose not to contact with traditional direct marketing?

This is our future ... and we need to be thinking about how to deal with it.

Business Intelligence Quiz

Here's a problem your CMO wants you to solve.

• Find all customers who have an e-mail address, and have purchased at least one time from one of your stores in 2007. Calculate the probability that this customer visited your website during 2008, calculate the average number of website visits, and the average number of purchases during 2008. If the probability of this customer segment visiting the website is greater than 70%, pull all e-mail addresses for an e-mail campaign.

Use the comments section to describe the software tools you would use to solve this problem, and why you would use the tools you recommend to our readers. List the pros and cons of the various tools you recommend. Here is a list of possible tools:

• Coremetrics
• Omniture
• Google Analytics
• SPSS
• SAS
• Microsoft BI Suite / SQL
  
• Oracle or SAP or Siebel or other large enterprise tools.
• Business Objects
• MicroStrategy
• Microsoft Access and Microsoft Excel
• Tableau Software
  
• R
• Cognos
  
• Unica
• Any other tool not mentioned here.

Customer Retention: The Myth

If you analyze customer data, you're painfully aware of the myth of "Customer Retention".

Here's your exercise for this week. Go back as far as you have customer data, and calculate the following metrics ... standard metrics in any Multichannel Forensics analysis.

1. Customer Retention Rate: The number of customers who purchased in 2007 and then again purchased in 2008. Repeat this exercise as far back as your database allows you to.
2. Orders Per Buyer: Total annual orders divided by annual buyers.
   
3. Average Order Value: Sum all demand, divide by the number of orders, annual.
   

Here are a few secrets about each metric.

1. Customer Retention Rate: Unless you do something that fundamentally changes your industry (introduce the iPod, or magically encourage customers to pay $5 for coffee at any of six store locations within two blocks of your office building), it is rare to see this metric move by a total of six or seven points. Maybe if you under-advertise to customers, you can move the percentage more, but otherwise, "it is what it is".
2. Orders Per Buyer: Very difficult to move. Honestly, how do you get a customer to buy something four times a year instead of two times a year? Moving this metric by + 0.2 orders per year is an amazing accomplishment.
   
3. Average Order Value: Very easy to move. This metric depends upon Price Per Item and Items Per Order. You can get customers to purchase expensive items, or cheap items. And you can get a customer to add items to an order ("do you want fries with that").
   

The two metrics that ultimately comprise true customer loyalty (Customer Retention Rate and Orders Per Buyer) are very hard to move.

The one metric that ultimately measures short-term spending (Average Order Value) is easy to move.

You're going to read an awful lot about getting through challenging times by "focusing on your best customers". This sounds so good, so tempting, so easy.

The reality is that it is very difficult to improve customer retention. Honestly, what could Talbots do to get you to genuinely spend more? Better merchandise? That takes seven to twelve months, and is a huge guess that, when done by very bright people, has at best a 60% chance of succeeding. Better customer service? That's a five or ten year process. Talbots needs to increase sales today.

In the short-term, you crawl under every possible rock, plugging every possible leak in the profit and loss statement. The profit improvements are re-invested in customer acquisition --- the newly acquired customers pay you back over the next 2-5 years. And so the cycle goes.

A Look Ahead

The most important component of the Multichannel Forensics project is the five year, forward-looking sales forecast.

For many of us, we've experienced three or four or even ten consecutive years of customer acquisition response degradation. After adjusting for the sometimes epic collapse of Q4-2008, there's been a consistent drop in performance of maybe ten percent per year, for each of the past several years.

With the economy fundamentally changing e-commerce growth rates, we can no longer count on easy online sales growth. Without easy online sales growth, catalog customer acquisition activities are about to be exposed in a big way.

Here's an example. Let's assume that catalog customer acquisition continued to decline at ten percent a year, for each of the next five years. And let's assume that online customer acquisition (customers not driven by catalog mailings) only increases by five percent per year, for the next five years. What do we observe?

2008 Results	HHs	Rebuy	Spend	Value	Demand
Existing Buyers	49,182	55.0%	$300.00	$165.00	$8,115,030
LY New Catalog	15,000	40.0%	$250.00	$100.00	$1,500,000
LY New Online	10,000	30.0%	$225.00	$67.50	$675,000
Lapsed Buyers	125,000	8.0%	$200.00	$16.00	$2,000,000
TY New Catalog	13,500	100.0%	$160.00		$2,160,000
TY New Online	10,500	100.0%	$140.00		$1,470,000
Total Volume					$15,920,030
2009 Forecast	HHs	Rebuy	Spend	Value	Demand
Existing Buyers	46,050	55.0%	$300.00	$165.00	$7,598,267
LY New Catalog	13,500	40.0%	$250.00	$100.00	$1,350,000
LY New Online	10,500	30.0%	$225.00	$67.50	$708,750
Lapsed Buyers	153,132	7.2%	$200.00	$14.40	$2,205,099
TY New Catalog	12,150	100.0%	$160.00		$1,944,000
TY New Online	11,025	100.0%	$140.00		$1,543,500
Total Volume					$15,349,616
2010 Forecast	HHs	Rebuy	Spend	Value	Demand
Existing Buyers	44,903	55.0%	$300.00	$165.00	$7,409,004
LY New Catalog	12,150	40.0%	$250.00	$100.00	$1,215,000
LY New Online	11,025	30.0%	$225.00	$67.50	$744,188
Lapsed Buyers	178,279	6.5%	$200.00	$12.96	$2,310,495
TY New Catalog	10,935	100.0%	$160.00		$1,749,600
TY New Online	11,576	100.0%	$140.00		$1,620,675
Total Volume					$15,048,961
2011 Forecast	HHs	Rebuy	Spend	Value	Demand
Existing Buyers	44,417	55.0%	$300.00	$165.00	$7,328,748
LY New Catalog	10,935	40.0%	$250.00	$100.00	$1,093,500
LY New Online	11,576	30.0%	$225.00	$67.50	$781,397
Lapsed Buyers	201,940	5.8%	$200.00	$11.66	$2,355,432
TY New Catalog	9,842	100.0%	$160.00		$1,574,640
TY New Online	12,155	100.0%	$140.00		$1,701,709
Total Volume					$14,835,426
2012 Forecast	HHs	Rebuy	Spend	Value	Demand
Existing Buyers	44,053	55.0%	$300.00	$165.00	$7,268,777
LY New Catalog	9,842	40.0%	$250.00	$100.00	$984,150
LY New Online	12,155	30.0%	$225.00	$67.50	$820,467
Lapsed Buyers	224,815	5.2%	$200.00	$10.50	$2,360,019
TY New Catalog	8,857	100.0%	$160.00		$1,417,176
TY New Online	12,763	100.0%	$140.00		$1,786,794
Total Volume					$14,637,383
2013 Forecast	HHs	Rebuy	Spend	Value	Demand
Existing Buyers	43,612	55.0%	$300.00	$165.00	$7,196,057
LY New Catalog	8,857	40.0%	$250.00	$100.00	$885,735
LY New Online	12,763	30.0%	$225.00	$67.50	$861,490
Lapsed Buyers	247,252	4.7%	$200.00	$9.45	$2,336,001
TY New Catalog	7,972	100.0%	$160.00		$1,275,458
TY New Online	13,401	100.0%	$140.00		$1,876,134
Total Volume					$14,430,875

Without the dynamic, organic growth of the e-commerce channel, sales begin a slow tumble, as catalog customer acquisition fails to provide the opportunities once enjoyed by catalog brands.

This is what we need to adjust to. We're not going to see a rapid return to the economic conditions of the bubble period --- but we will see a continued flattening of organic e-commerce growth, and we will continue to see the death of catalog customer acquisition.

Strategically, we need to work on a plan for replacing what have now become expensive catalog customer acquisition names from co-ops. This should be one of the top three objectives we have for 2009 --- customer acquisition experimentation.

Silo Busting

These days, it is popular to want to "bust down silos", especially among members of the vendor and consulting community.

Silos are loosely defined as organizations of individuals working independent of each other. In a retail brand, silos might include online marketing teams and retail marketing teams working on initiatives without significant collaboration or coordination. In a catalog brand, the catalog marketing team operates independent of the e-mail marketing team, or the online marketing team.

Intuitively, the logic makes sense --- if everybody is working on the same page, the customer should theoretically benefit, right? The customer better benefit, because working as an integrated unit is hard work, much harder than having independent teams operating as a loose federation .

All theories, of course, should be proven with valid metrics, metrics that increase owner or shareholder value.

So here's my challenge to you, the vendor or consultant who promotes silo-busting strategies. Share with our readers a case study where tearing down silos resulted in the following:

• An increase in annual repurchase rate.
• An increase in orders per buyer per year.
  
• An increase in the percentage of customers who purchase across channels.
• An increase in overall profitability.

Use the comments section to forward links to our audience.

I've had the benefit of working in silo-based environments, and in fully integrated environments. There's something to be said for getting people to work together, regardless of org structure.

Micro-Channel Profitability

Don Libey asks the following question (of more than a hundred) in his February Multichannel Advisor newsletter:

• Has anyone shown me the actual, proven profitability for pay-per-click, affiliates, adwords, social media, and all the other micro-stuff? Is it accounted for in the same way as catalogs or any other marketing effort? Is it accurate? How do I know that?

I've always been an advocate of evaluating marketing activities on a variable cost basis. I've always believed that mailing another 10,000 e-mails does nothing to the fixed cost structure of the business, once you decide to mail the first 1,000,000 in your weekly campaign.

Maybe I've always been wrong.

Take your average $50,000,000 online/catalog brand. Assume that it costs about 4% of net sales to keep the wheels on the website --- servers, bandwidth, widgets, web analytics tools, commissions to 3rd party vendors for each sale, IT staff, programming code for new applications, inventory system alignment across channels, you name it.

4% of $50,000,000 is $2,000,000.

Finally, assume you have 12,000,000 annual website visitors.

One could make an argument that each visit to the website costs $2,000,000 / 12,000,000 = $0.167.

Imagine adding $0.167 to every paid search visitor. Or to every organic search visitor? Or every visitor who randomly visits from Twitter? Here's a paid search example:

	Current	With Fixed
Clicks	5,000	5,000
Conversion Rate	2.1%	2.1%
# of Buyers	105	105
AOV	$95.00	$95.00
Demand	$9,975	$9,975
Net Sales	$7,481	$7,481
Gross Margin	$4,115	$4,115
Less Marketing Cost	$2,500	$2,500
Less Est. Fixed Costs	$0	$835
Less Pick/Pack/Ship	$860	$860
Profit	$754	($81)
Profit Per Buyer	$7.18	($0.77)

The most important part of this exercise is to think! I'm not saying one way is right or wrong, but we have a responsibility to consider whether our activities are truly profitable or not --- we need to ask ourselves if some channels get a free ride while others carry too much of the freight.

Who Says Newspapers Cannot Monetize Content?

Newspapers need to monetize online content in order to stay in business.

And catalog brands need to continue to acquire customers via the internet.

Combine the two, and you've got this when you click through your NY Times RSS feed.

Don't know if you can tell ... but Horchow is offering free shipping.

CEO Questions About Online Marketing And Profitability

There are two hot CEO topics in 2009, based on my e-mail inbox:

1. Help me reduce advertising expense without a drop in sales.
2. Help me calculate the true profitability of my online marketing efforts.

Online marketing experts ... your fifteen year run of management by conversion rate is coming to an end. And that's a good thing!

The discussions are different than they used to be. Lately, the online marketing employee is being considered a scarce resource. Allocation of scarce resources is becoming a trendy topic ... and it should be, given the scarcity of employees after layoffs.

One individual asked it if was ok to add the human costs associated with managing a blog and maintaining a presence on Twitter to the variable costs associated with the website traffic generated by those activities, and then link those costs to the variable costs associated with picking, packing, and shipping merchandise generated by those activities.

Another individual wanted to know if she could calculate the incremental variable cost of each website visit, and then allocate that expense against visitors that browse the website on a frequent basis, calculating the true profitability of "best" customers.

A CEO wanted to allocate the cost of all website visits driven by an e-mail marketing campaign back to the e-mail campaign that caused the visits to happen --- holding e-mail marketing accountable for the 19 of 20 visits that did not result in a conversion but did chew up website expense.

So the scarcity of employees is causing a renewal of focus on activities that generate profit over buzz.

Ten years ago, the catalog industry went through a transformation. All expenses were carefully monitored, and all revenues were carefully tied to the catalog marketing effort that may have been responsible for generating the sales. This was the genesis of the matchback algorithm. The popping of the internet bubble resulted in a new era of accountability.

Today, the online / e-commerce industry is about to go through a similar transformation. The popping of the housing bubble is leading us to a new era of accountability.

E-Mail Strategy

Which of the following three strategies would you recommend to management?

Strategy #1:

• Two e-mail marketing campaigns per week, untargeted, delivered to the entire list, no promotions or offers (THIS IS THE CURRENT STRATEGY).
  
• List Size = 100,000.
• Average Sales Per E-Mail = $0.10.
• Average Opt-Out Rate = 0.25%.
• Average New Subscribe Rate = 0.35%.
  
• Average Weekly Demand = $20,000.
• Average Weekly Profit = $7,000.

Strategy #2:

• Two e-mail marketing campaigns per week, untargeted, delivered to the entire list, each with a free shipping offer.
  
• List Size = 100,000.
• Average Sales Per E-Mail = $0.20.
• Average Opt-Out Rate = 0.20%.
• Average New Subscribe Rate = 0.40%.
  
• Average Weekly Demand = $40,000.
• Average Weekly Profit = $9,000.

Strategy #3:

• One e-mail marketing campaigns per week, untargeted, delivered to the entire list, no promotions or offers.
  
• List Size = 100,000.
• Average Sales Per E-Mail = $0.15.
• Average Opt-Out Rate = 0.15%.
• Average New Subscribe Rate = 0.30%.
  
• Average Weekly Demand = $15,000.
• Average Weekly Profit = $5,250.

Strategy #4:

• One e-mail marketing campaigns per week, untargeted, delivered to the entire list, each with a free shipping offer.
  
• List Size = 100,000.
• Average Sales Per E-Mail = $0.25.
• Average Opt-Out Rate = 0.15%.
• Average New Subscribe Rate = 0.35%.
  
• Average Weekly Demand = $25,000.
• Average Weekly Profit = $5,625.

Strategy #5:

• One e-mail marketing campaign per week, ten versions highly targeted only to the "active" e-mail list of 20,000 addresses, with free shipping offers given only to the 10,000 who like free shipping offers.
• List Size = 20,000.
• Average Sales Per E-Mail = $0.50.
• Average Opt-Out Rate = 0.10%.
• Average New Subscribe Rate = 0.20%.
• Average Weekly Demand = $10,000.
• Average Weekly Profit = $2,500.

Which of the five strategies would you employ? If you chose strategy #5, describe why you would choose this strategy.

Feedback Loops

One of our biggest opportunities in 2009 is to better understand the role feedback loops play in our business.

Feedback loops are everywhere. Our linear metrics make it nearly impossible to detect them.

• We offer discounts and free shipping in e-mail campaigns. Performance improves by 50%, so we offer more discounts and free shipping, attracting a larger e-mail subscription base, a base that craves discounts and free shipping. Then we realize that our full-price merchandise and marketing isn't working, but the inexpensive stuff sure seems to work, so we offer more of the inexpensive stuff, which the discount/free-shipping crowd crave.
  

• Catalog customer acquisition is struggling, so we invest more energy getting catalog-productive names from co-ops. These names are often from rural areas, and are unlikely to buy online unless they are mailed a catalog. Then, our matchback algorithms (sometimes executed by the very organization giving us the names) show us that we must mail catalogs to get online orders, forcing us to acquire more names via the co-ops.

• Our websites fail to convert customers at an acceptable rate, so we "Google-ize" them. Then the site converts customers better, so we dive deeper into "Google-ization".

Feedback loops are easy to spot in Multichannel Forensics. You'll see that free shipping and e-mail marketing are in equilibrium mode, for instance. I've observed cases where businesses create a list of 100 important customer attributes, then measure, via the Migration Probability Table, how customers move between the attributes. In this 100x100 matrix, feedback loops are easily detected.

Our Web Analytics systems are not set up to detect feedback loops, nor are the drill-down based Business Intelligence tools that work off of static, non-dynamic data. These days, it is really important to have a smart business leaders directing a SAS or SPSS or SQL or R programmer, converting feedback loop hypotheses into actionable computer code.

We hear a lot about "globalization", about how everything is now connected, how things spread like a virus. Our businesses, our customers, interact in this ecosystem. And within our own business, we have a unique ecosystem, one where customers freely migrate between products, brands, and channels.

We have an opportunity to spend 2009 creating the reporting and analytic tools that allow us to see the feedback loops, allowing us to act before we're consumed by the negative results of many feedback loops.

Do I Need To Keep Mailing Catalogs, Or Can I Stop?

The comments about catastrophe happening if you don't mail catalogs anymore are once again circulating throughout the industry.

And depending upon your point of view, that may just be the end result --- catastrophe. Or, your business could be more profitable without them. How would you know?

I have a pretty simple set of rules.

• If you don't have a way to replace all of the customers you acquired via catalog marketing (at the same cost or cheaper), you'll die if you stop mailing catalogs for customer acquisition purposes. This is the most important rule to remember. Don't listen to all of that customer retention marketing stuff you hear about in the trade journals, vendor papers, and blogs. It's important ... but not one-tenth as important as managing customer acquisition in a disciplined manner.
  

• If you don't know your organic percentage (the percentage of demand you continue to get if you stop mailing catalogs), you'll probably face catastrophe if you stop mailing catalogs.

• If your customer base is 50+, and is predominantly in an exurban/rural area, you'll probably face catastrophe if you stop mailing catalogs.

• If your organic percentage is above 70%, your catalog marketing program is not integral to your brand. Nice, but not integral.
  

• If your organic percentage is above 40%, and you mail more than 15-20 catalogs a year, start cutting catalogs ... NOW! Not all of them, but many of them.
  

• If your organic percentage is in the 10% to 20% range, you'll probably face a catastrophe if you stop mailing catalogs.

• If you're still generating half or more of your sales via the telephone, you'll probably face a catastrophe if you stop mailing catalogs.
  

So yes, from the perspective of a catalog brand that has a loyal customer base of 50+ year old women in rural areas shopping over the telephone with an organic percentage of 15% and a robust list rental and co-op marketing program --- YES, you'll face catastrophe if you stop mailing catalogs.

But for the rest of catalog marketers ... it is time for some serious experimentation!

Of course, you can know what to do by knowing your organic percentage (hint --- mail/holdout tests), by knowing your customer distribution via Zip Code Forensics, and by knowing your channel dynamics and customer acquisition projections via Multichannel Forensics.

E-Commerce Strategy

Here's a common set of findings for a Multichannel Forensics project, executed for a decent-sized specialty retailer, one with stores, an e-commerce site, and catalogs.

• Catalog Buyers (telephone orders, e-commerce orders matched back to a catalog) have a 53% annual retention rate. They are in equilibrium mode with e-commerce and stores --- in fact, catalog buyers are more likely to place a next order via e-commerce or stores than in catalogs.

• E-Commerce Buyers (non-catalog sourced orders) have a 45% annual retention rate. They are in isolation mode with catalogs, but are in transfer mode with retail. In other words, the e-commerce buyer will not go back to shopping via old-school catalogs, but is very likely to leave e-commerce in the future for retail store purchases.
  

• Retail buyers have a 38% annual retention rate. They are in isolation mode with catalogs, and are in isolation mode with e-commerce. In other words, once a customer shops in a store, the customer becomes unlikely to shop via catalogs or e-commerce.

• Management is upset that customers appear to migrate to channels that have ever-decreasing customer retention rates. Lifetime value calculations bear this out. The catalog buyer has a LTV of $50. The e-commerce buyer has a LTV of $35. The retail buyer has a LTV of $25.

• Retail store comps are at -10%, while e-commerce is at +10%. Catalog comps are at -20%.
  

• 60% of all new customers are acquired in retail stores. 25% of all new customers are acquired via e-commerce. 15% of all new customers are acquired via catalog marketing.
  

• Retail buyers visit the e-commerce website an average of eighteen times per year.

• E-Mail marketing drives $0.10 per customer to e-commerce, and $0.10 per customer to retail stores.

• Catalogs drive $1.50 to the telephone, $0.50 to e-commerce, and $0.15 to retail stores, per catalog.

• E-commerce paid search orders are matched to the mailing of a catalog in half of all instances. In 1/3 of all cases where a customer visits the site via paid search, an order occurs at a retail store within three days.

• You have a "buy online --- pickup in store" option. You find that your best customers use this option, but the option does not increase long-term customer value at all.
  

Given the findings listed above, describe your marketing strategy for catalog marketing, for the e-commerce website, and for driving traffic into retail stores.

And even more important, describe your e-commerce strategy for this brand. Do you focus on e-commerce, or do you make your website a research tool for store purchases, or both? And if the answer is both, describe how you do both!

Discuss.

Small Is Winning

I'm familiar with a small catalog startup. This business is bucking all the trends --- a pure catalog brand with a website that basically serves as a glorified order form. Here's something shocking, folks ... this business is growing, and they aren't on Twitter, and they don't have a blog. I know, it seems impossible, given the rhetoric we read.

When you ask the owner how this brand grew, you learn that there are two key elements to their marketing success.

1. Co-Ops. This brand participates in some of the big co-ops, and by participating, they get access to the very best catalog names that exist ... all for a few pennies per prospect.
2. List Rental. This brand works with maybe the most reputable list rental name brand in the industry --- harvesting decades of experience from the leaders of this brand.

Not surprisingly, this brand is thriving. They went from $0 to about $25 million in less than three years. They cannot hire people fast enough, in the midst of the worst economy of the past sixty years.

There's no reason why this business can't hit $100 million in a decade.

And then there's another catalog brand that I'm familiar with. This business, generating under a billion dollars in sales, is struggling. They simply cannot acquire enough catalog customers to keep the wheels on. Housefile customers are performing maybe 10% worse than two years ago --- largely due to the impact of our economic situation. But catalog customer acquisition is off by maybe forty percent during the same timeframe.

This brand acquires the majority of their names from two key sources.

1. Co-Ops.
2. List Rental.

How does one brand thrive by using co-ops and list rental, while the other brand struggles to stay afloat due to horrific co-op and list rental performance?

One possible answer is size.

Back in the 1990s, large catalogers were very hesitant to participate in the co-ops, and for good reason.

Let's pretend that only two companies in the same industry are in a co-op --- one with 100,000 twelve month buyers, one with 10,000 twelve-month buyers. 4,000 of the customers overlap, meaning that there are actually 106,000 unique twelve-month buyers in the co-op.

Now it is time for each business to pull some names out of the co-op. The big company actually has access to 6,000 households, but it needs maybe 50,000 households to meet customer acquisition goals. Meanwhile, the small company actually has access to 96,000 names, while it only needs access to maybe 10,000 names to meet its customer acquisition goals.

Co-ops will take steps to protect the larger companies. And large companies will quickly mention that all 100,000,000 households are already in the co-ops, so there is nothing they can do about the situation anyway.

Still, the die has been cast. Small companies gain significantly more benefit from co-ops than do large companies. Big companies, due to the scale necessary to feed the customer acquisition beast, are getting access to grade "C" and grade "D" households. By default, they already have most of the grade "A" households.

For about the same cost, small brands are getting access to grade "A" households. By default, their customer acquisition activities are destined to be much more productive. The co-op ecosystem benefits the small brand, helping the small brand grow faster, helping the small brand gain markeshare from the larger brands.

Online, this trend happens in real time. I just did a search for "mock turtleneck" on Google. Here, small brands are on equal footing with the big brands. You'll see Lands' End, Target, Orvis, L.L. Bean, and Nordstrom appear near the top of the paid and natural search pile. But you'll also see Clothing Warehouse and CheapesTees.com. You'll see ShopStyle and Like.com, brands who offer a huge assortment from all brands --- you can compare in one place and then shop where you like.

Now clearly, big companies float to the top in search. But in aggregate, the small companies sum to a level of a "formidable competitor", cannibalizing business that would have gone to bigger companies.

Small is winning.

The nature of modern e-commerce favors the small. Offline, the co-ops and small brands (unintentionally) benefit by having access to big company names that are re-distributed to the smaller companies. Online, Google (unintentionally) benefits by simply directing traffic to any site that plays by the rules that Google gets to determine.

I'm aware of an online pureplay that happily recognizes the benefits of being small --- they notice that every time their biggest retail competitor advertises, their paid and natural search results improve.

None of these issues are good or bad ... they just are what they are. Small is winning. A whole new genre of marketing awaits large brands. The online marketing leaders of the next five years will figure out how to win this battle.

Costco E-Mail Campaigns

I have no information about whether this style of e-mail merchandising and creative works or not ... but it sure is different. Click here to see a recent Costco E-Mail Campaign.

Your typical merchant or creative staffer might say "Hey, you cannot have a spa gift certificate located next to a set of Michelin brand tires." If I had a dollar for every time I heard something like that, I could buy a set of Michelin brand tires ... or a spa gift certificate.

So many e-mail campaigns look the same ... one featured item "Our Best Hooded Sweatshirts At The Best Prices Of The Season!" coupled a free shipping offer (hurry, free shipping ends on Wednesday), some tabs across the top of the e-mail campaign featuring key merchandising divisions, and mouse print on the bottom of the e-mail campaign that makes lawyers feel comfortable.

Here's the challenge. We're moving into a new era of merchandising. Somehow we have to communicate that we stand for something, even if that means featuring a tray of Sliced Meats and Cheeses next to a Nutrisystem 35 Day Favorites Meal Plan.

And think about what Costco can learn from this e-mail campaign? It's one thing to measure an e-mail campaign that features one item. It's quite another thing to quantify which of 77 unique products the customer clicks on --- to do a Multichannel Forensics analysis on the items customers cross-shop. Who do you think learns more about what works and what doesn't work? Who can evolve and adapt faster?

Back in the day, we agonized over how to merchandise a catalog. We had to agonize, because we had to plan nine months ahead of time for the catalog, and when it went in the mail, it HAD to work. There was no room for sloppiness.

This e-mail campaign can be put together on a Monday, delivered the following week, yielding a ton of knowledge insights in just four days. Two weeks later, somebody can start the process all over again.

It is this "rapid cycle of learning" that we have to learn to master.

Simple Business Forecasting For E-Commerce And Cataloging

We now have a responsibility, an important one, to take a look at what our future looks like.

E-Commerce leaders need to understand the "inflection point", that point where customer acquisition stalls and the online business stops growing organically. Catalog leaders need to understand what happens when catalog customer acquisition ceases to be a viable channel.

Take a look at this business. Here is a common table run by direct marketers, reviewing how the customer file (as of 2008/01/01) purchased during 2008 ... and then the forecast for 2009 and 2010.


This business has stalled. Assuming that customer acquisition and customer retention stay the same in the future, this business will not grow. Among catalogers, we know that for many, customer acquisition is dying.

Take a look at the forecast for the next two years, assuming that customer acquisition drops by 20% each of the next two years.


Notice that the business starts sinking ... slowly. Now let's look at this same trend, for 2011, 2012, and 2013.


The business is imploding. This is the challenge we face.

Those of us managing the catalog channel have to decide if we can find micro-channels online that can replace what we're losing via catalog customer acquisition --- and if we cannot find those customers, we have to seriously consider what size of business we are comfortable managing in the future.

Those of us managing the e-commerce channel have little experience with this style of business analysis --- we've grown very comfortable taking "Saturn Research" channel growth estimates and applying them to our sales growth trajectory.

Ok, your turn. What has been your experience with this style of forecasting, and what have you done with the forecasts you've generated?

Happy Data Analyst Day!!

Thoroughly enjoy the one day of the year especially for you, the person who analyzes corporate or customer data!