My Interview With Seth Godin

Note 4/4/2009: This is an April Fools Day Story.

I'm so excited to share with you a recent interview I conducted with marketing expert and famous author Seth Godin!

Mr. Godin was kind enough to make a trip to the Global Headquarters of MineThatData and graciously share his thoughts on the changes occurring in what we affectionately call the Multichannel Marketing (aka Catalog) industry.

So today, April 1, 2009 (ahem), I share "the interview" with you!


Kevin: Mr. Godin, thank you so much for making the trip to the MineThatData Global Headquarters.

Seth: Nice to be here, Kevin. I'm a big fan of the work you're doing with Multichannel Forensics. Are these heated leather floors we're standing on?

Kevin: Laminate.

Seth: Oh.

Kevin: Have you ever shopped from a catalog?

Seth: Absolutely. I've always enjoyed the Garrett Wade catalog. The best catalogs are the ones that made it through "The Dip". If you want a German-Made Sodbuster Knife, you know that the Garrett Wade catalog will have it. They understand who their target audience is, and their relevant and timely e-mail messages inform me of needs I didn't even know I had.

Kevin: What do you think of the catalog industry, not the catalog industry of 1989, but the catalog industry of 2009?

Seth: Like many industries, the catalog industry is being transformed by the internet. This is good for customers. Customers have more choice than ever before, and customers have access to the best prices.

Kevin: But this isn't always good for catalogers. The productivity of catalogs, especially those sent to customer acquisition segments, is declining, rapidly.

Seth: I always say that "the new thing is never as good as the old thing". Catalog brands had a spectacular run alongside the baby boomers, and had huge advantages over retailers. The catalog brand "knew" who their customer was, sending timely, targeted, and relevant messages to enthusiastic customers. Catalogers, in many ways, invented Permission Marketing. But the old thing (catalogs) are going away, and what we're replacing catalogs with (e-mail, websites, blogs, social networks, search, tribes) simply aren't as good yet at creating demand.

Kevin: Why do you think that the old thing, the catalog, is going away?

Seth: Catalogs used to be the best vehicle to provide targeted, relevant, personal messages. As a result, the catalog industry built huge systems. An entire list industry grew to support catalogers. Printers, paper reps, the USPS, merge/purge houses, they all evolved to support the delivery of the most targeted, relevant, and personal messages that ever existed. And that worked well, for a period of time. But the system didn't deserve to last forever. The cost structure associated with this huge system is unsustainable. The system is being replaced by three separate but powerful dynamics.

Kevin: And those dynamics are?

Seth: First, a customer can receive a personalized message via e-mail or RSS that costs the cataloger nothing to send. Each catalog costs, what, $0.75 to deliver to a customer, with a whole bunch of intermediaries taking their $0.10 of the pie? The economics are no longer sustainable when a competitor can send a personalized, relevant e-mail campaign that the customer opted-in to receive. The customer has some control over e-mail delivery, and has complete control over content via RSS. Look at your business, Kevin. You have almost 2,000 subscribers, and you spend absolutely nothing acquiring subscribers, do you? And yet, those 2,000 subscribers pay your mortgage for you.

Kevin: But e-mail marketing might generate only $0.15 per e-mail delivered, while a catalog might generate $3.00 or $4.00 per catalog. So the new style of marketing isn't "working", if you will.

Seth: The new thing is never as good as the old thing.

Kevin: What else?

Seth: Second, the customer is now in charge. In 1989, the customer shopped from distance only when she received a catalog. In 2009, the customer determines when and how she wants to shop. The catalog marketer must make the transformation from pushing merchandise at the customer to allowing the customer to pull information when she has a need. This is maybe the hardest thing for a cataloger to do --- to transform from pushing messages to facilitating the pull of information.

Kevin: It's especially hard when the cataloger is going through a customer acquisition death spiral.

Seth: And that brings me to my third point. The cataloger always controlled the start of a relationship, by renting lists from and exchanging lists with competitors. That strategy worked in 1989. But in 2009, the customer demands control over the relationship, and she's not going to tolerate receiving a catalog in her mailbox that she didn't ask to receive. The future demands that the cataloger be a "leader of a tribe", if you will.

Kevin: Describe what you mean by being a "leader of a tribe"?

Seth: Instead of renting names and addresses, the cataloger will transition to the role of a tribal leader. The Garrett Wade marketing role will evolve, speaking to an individual who lives a lifestyle that demands a Japanese Pattern Crosscutting Timbersaw. Garrett Wade identifies a group of individuals who have common interests, providing the tools needed for tribe members to achieve their potential. The tribe partners in the marketing role with Garrett Wade, they invite individuals to join, individuals who share common interests.

Kevin: But that sounds like a lot of work.

Seth: It is a lot of work!

Kevin: So here's the problem. The catalog brand has numbers that they need to hit, now, in order to keep people employed. What you're talking about sounds futuristic, esoteric, theoretical, almost unachievable.

Seth: I always say that "The best time to change your business model is while you still have momentum". Catalogers still have momentum. And it isn't easy to give up the idea of sending catalogs to a mass audience that doesn't have choice. Get over it! While you think about a different business model, folks like Zappos successfully apply a different business model. It might be the only option if the catalog industry wants to stay in business, long-term.

Kevin: Our time is almost up. Do you have anything else you wish to share with the catalog industry?

Seth: I'd tell the catalog industry to make things happen. Take initiative! You practiced permission marketing before permission marketing was popular. You have a virtually endless number of channels to practice permission marketing in today, and you have loyal customers who are waiting for you to lead them into the future. So lead them there!

Kevin: Mr. Godin, thank you so much for taking the time to speak with the MineThatData "tribe".

Seth: My pleasure, Kevin!

April Fools Day

You can do a hundred good things at work. And then, something happens, and you feel like a fool. You remember feeling like a fool for years, maybe decades.

At Lands' End in 1995, I selected the best 1.3 million names for a catalog mailing. We were supposed to mail the best million households, and leave 0.3 million as a contingency. I sorted the list in the wrong order, mailing households 0.3 to 1.3 million. Ooops. You know you made a mistake when the catalog is in-home for two days, and is 40% below plan. The merchants, your CEO, and your boss are all very interested in finding out why the catalog is failing. After I found the error, I had to fess-up. Fun stuff. We sent out another 300,000 catalogs to make up the demand --- so my sin only cost my company $150,000 of profit.

A similar problem happened at Nordstrom in 2004. We mailed something like 3 million folks a 124 page catalog, and 3 million folks a prospect catalog, 64 pages --- the best customers were supposed to get the bigger version. Two days after the in-home date, we observed a problem ... the big book is -50% to plan, the smaller book is like 80% over plan. Oh, if you want to see inventory managers get frustrated, go ahead and switch customer lists sometime!

One of my executive team peers told my President that s/he "wanted blood". This person wanted to know the name of the individual working in my department who made the mistake.

I admitted the mistake of my team to our entire direct-to-consumer division and marketing division via e-mail, I apologized. I didn't give up the name of the person to this executive --- I did tell my President and my CMO. You cannot offer enough blood to an executive who thirsts for it.

You find out who is on your side when you make a fool of yourself. And honestly, there's value in that, right?

We all make mistakes. Some are public, some aren't. Today's a good day to think about being more tolerant of the fools who make mistakes.

A Multichannel Forensics Presentation For CEOs

Given the state of the economy and the trajectory of the catalog / e-mail marketing industry, I thought I'd give MineThatData Nation access to a presentation I prepared for the CEOs who recently inquired about partnering on a Multichannel Forensics project.

Multichannel Forensics Presentation For CEOs (pdf format ... fewer than 30 slides).

The slides outline what a typical project looks like, given the requests of multichannel CEOs this spring, and roughly outlines project costs!

If you're a member of the e-mail marketing community, there's content at the end of the presentation for you, too!

Albums, Games, Catalogs

Give this a read. Today's catalog is a lot like an album, isn't it? And the references to video games and the iPhone are interesting to take note of.

The album has a dozen or more songs from an artist, and comes out once every "x" years. We all know that only one or two of the songs are exceptional, so we go online to find what we want.

Catalogs have a hundred pages, and come out once every "y" weeks. We all know that only one or two of the items are what we want, and then we go online to comparison shop and ultimately make our decision.

The internet is obliterating tradition. After being on the wrong side of a technology shift at Nordstrom in 2004, I vowed to do my best to not be on the wrong side of technology again. We're locked in a fascinating shift from profitable channels to popular channels that are hard to monetize.

If You Had $1,000 Of Your Own Marketing Funds To Invest

You might be interested in seeing the results of last month's poll --- "If you had $1,000 of your own money to invest in marketing, which channel would you invest in?" Only 26 responses, but the results are worth considering (the responder could pick up to three choices ... visit the site to take the poll, still one day left):

1. 73% = E-Mail Marketing.
2. 57% = Paid Search.
3. 23% = Affiliate Marketing.
4. 23% = Shopping Comparison Sites.
5. 15% = Blogs.
6. 15% = Catalog Marketing.
7. 15% = Direct Mail.
8. 11% = Twitter.
9. 7% = Facebook.
10. 7% = SMS / Text Messaging.
11. 3% = Mobile Marketing.
12. 3% = TV / Newspaper / Radio.
13. 0% = MySpace
14. 0% = Portal Advertising.
15. 0% = Banner Advertising.

Obviously, this poll isn't scientific, it only represents what 1.5% of this audience thinks. And yet, the shiny new toys (Twitter, Facebook, Blogs, Mobile) are not channels you'd spend money in. Nor are traditional tools (catalogs, direct mail, TV, radio, newspaper).

Nope, you'd invest in e-mail and paid search.

And yet, CEOs are always telling me about two fundamental truths.

1. E-Mail marketing has unlimited potential, but never achieves it, yielding $0.15 per e-mail when done with little effort ... yielding $0.25 per e-mail when executed in a targeted, personalized manner.
2. Paid Search doesn't scale ... you "max" out your opportunity --- online CEOs are all looking to "detether" from Google.

So what is it? Are these the places to invest money because of their own inherent potential, or are the alternatives poor performers?

Modern Catalog Marketing: 2014

Have you had a chance to review any of the presentations from the recent NEMOA conference? OMG, as the kids and social media experts say, what a refreshing array of content! Great job Janie Downey!

• Bill LaPierre of Millard, with a must-read on cataloging, absolutely awesome!
• Monica Smith on the mind of the multichannel customer. I've only met Monica once, she's a very bright individual.
• Mike Bowcut of REI shares a fantastic presentation of stuff he's learned at REI, a reasonable and professional and well-argumented discussion of the role a catalog plays in marketing.
  

Give all of the presentations a chance.

These discussions lead us into the future. Think about cataloging in just five years, say in 2014.

It is likely that the circulation plan for a catalog marketer in 2014 will look very different than the circulation plan looks today.

For instance, in April 2009, this is what a typical plan might look like:

• Catalog (128 pages) in-home on 4/1, mailed to 300,000 housefile names and 500,000 prospects.
• Catalog remail of the 4/1 catalog (128 pages) on 4/15, mailed to 200,000 housefile names and 150,000 prospects.

In April 2014, this is what a typical plan might look like:

• Catalog (96 pages) in-home on 4/1, mailed to 100,000 housefile names and no prospects.
• Catalog (32 pages) in-home on 4/15, mailed to 150,000 housefile names and 100,000 prospects.

If this is the direction we're heading in (and many of you tell me this is the direction you're considering), you have the following homework assignment:

1. How will we acquire enough new customers to offset the 550,000 reduction in customer acquisition circulation?
2. How will we offset the sales lost by a reduction in housefile circulation of 450,000?

The answers have been discussed this week. It's time for us to get busy testing! And worst/best of all, there aren't any easy answers. You are telling me that you want solutions, things that work today, now! Unfortnuately, it isn't going to work that way. The online companies ask me to find ways that you can acquire customers offline. Catalogers ask me to find ways to acquire customers online. The only common theme is that it is becoming very hard to acquire new customers. Going forward, acquiring new customers is the primary responsibility of a direct brand.

The cataloger of 2014 becomes a media company. There's no reason to view Crutchfield any different than Martha Stewart. The multichannel view of the world is replaced by the micro-channel view of the world. The lines between merchant, media brand, and community developer blur. A catalog is just one of hundreds of micro-channels that in sum make up the "Crutchfield" brand.

That's a future that is actually exciting, a future where a catalog brand isn't dependent upon catalogs for growth.

Modern Catalog Marketing: Business Intelligence

Sometimes Business Intelligence is considered to be a four letter word.

In Business Intelligence, people like me decide to create software that makes it possible for someone like you to query a database and obtain answers. There's just one problem. People like me are seldom able to define software tools that are desired and easily used by non-techies (with the notable exception of Google).

Conversely, there's an emerging faction in Business Intelligence, a group of non-techies trying to create KPIs and dashboards and reports for the non-technical person. This may be a better approach, though most sophisticated questions cannot be answered using this approach, requiring folks to revert back to the "techie" issue.

So as a result, many folks are exasperated by Business Intelligence.

The modern catalog marketer doesn't care about tools or schemas. The modern catalog marketer simply wants to get questions answered, using any tool or database design that facilitates actionable findings.

The modern catalog marketer is in the process of re-inventing the customer database.

The modern catalog marketer does not outsource the customer database. Rather, the modern catalog marketer imports data from external sources, and spends the money necessary to maintain all important facts about the customer relationship.

The modern catalog marketer extracts summarized data from the web analytics platform, and integrates that data with all other customer data.

The modern catalog marketer obsesses about linking the following pieces of information:

• Name and Mailing Address.
• E-Mail Addresses, Many-To-Many Relationship (many e-mail addresses linked to many name/mailing addresses).
• Telephone Numbers.
• Credit Card Numbers.

The modern catalog marketer categorizes the top 2,500 referring URLs into micro-channels, and actively measures the evolution of referring URLs, mining actionable trends.

The modern catalog marketer measures lifetime value, by micro-channel, updating the data on a weekly basis (at minimum), or in real-time (when appropriate).

The modern catalog marketer utilizes rapid segmentation to classify customers on the basis of traditional marketing, digital marketing, or social marketing, and acts upon these classifications in a way that increases long-term profit.

The modern catalog marketer knows, at a household level, the future percentage of demand that will be generated without the need for advertising of any kind.

The modern catalog marketer will bring in temporary help to analyze key business issues, and will make every effort to institutionalize the business intelligence offered by the consultant.

The modern catalog marketer will build a database of "prospects", and will happily maintain a relationship with folks who have not previously purchased.

• Acquiring name/address where possible.
• Acquiring e-mail address where possible.
• Acquiring phone number where possible.
• Storing "cookie-level" identifiers where possible.

The modern catalog marketer has a dashboard of 100 mega-metrics that every employee is required to review at least once per week.

The modern catalog marketer is led by a CEO that actively teaches employees which mega-metrics to track, and shares why they are important.

The modern catalog marketer is led by a CEO that offers bonuses (not retention bonuses), on an annual basis, when various mega-metrics (i.e. annual customer retention rate) are substantially improved.

The modern catalog marketer captures the "advertising combinations" that led to a customer placing an order, storing each combination in the database.

The modern catalog marketer knows that there are too many advertising combinations and merchandise combinations to make sense of the business. So, the modern catalog marketer utilizes tools like Factor Analysis / Principal Components Analysis to reduce multidimensional issues down to two simple dimensions.

The modern catalog marketer knows the "ROI" of every advertising channel, by campaign/month/quarter/season/year, and can produce a report or summary within ten minutes if asked.

The modern catalog marketer converts every customer service issue into actionable information that is stored in the customer database. The modern catalog marketer considers this information before making any circulation decision.

The modern catalog marketer demands that anybody who presents customer information do so without using technical terms or acronyms.

The modern catalog marketer integrates the Web Analytics team with all other analytical folks in the company, and requires all analysts to know all facets of business analysis.

The modern catalog marketer can produce an RFM segmentation for any merchandise division or advertising micro-channel within fifteen minutes.

The modern catalog marketer can produce a profit and loss statement for any merchandise division or advertising micro-channel or ad-hoc customer segment within fifteen minutes. This is done by actively storing all contact and cost information in the customer data warehouse.

The modern catalog marketer can tell you what happens to the five-year sales trajectory of the business if any customer acquisition marketing activities are maximized or are discontinued.

The modern catalog marketer has staff who use computers that utilize quad core processors.

The modern catalog marketer doesn't have to work through the "IT" department to get more file storage space on a network server.

The modern catalog marketer doesn't have to work through the "IT" department to purchase statistical or business intelligence software.

Modern Catalog Marketing: E-Mail Marketing

Many catalogers spend way too little time thinking about e-mail marketing.

The modern catalog marketer views the world in a different way.

The modern catalog marketer actively tests varying combinations of catalog mailings and e-mail campaigns to comparable audiences. These folks (those who execute the tests) frequently learn a secret --- e-mail marketing is a much stronger marketing channel when catalogs don't exist.

In the rapid segmentation process, the modern catalog marketer wants to quickly assign customers into the "digital marketing" path. These customers see a reduced diet of catalogs, with the cataloger attempting to make up some of the volume with inexpensive e-mail marketing campaigns. It doesn't always work out this way, but you have to run the tests, don't you?

The modern catalog marketer uses tools like e-mail to introduce new items without having to spend money on expensive paper to subsidize awareness.

The modern catalog marketer realizes that a lack of an e-mail address results in a more likely assignment into the "traditional marketing" segment.

The modern catalog marketer has between five and twenty different versions of an e-mail campaign, assigning different customers to different versions.

The modern catalog marketer uses clickstream data (i.e. what the customer looked at), merchandise purchased, recency/frequency/monetary, and customer preferences to determine which version of an e-mail campaign the customer receives.

The modern catalog marketer does not measure e-mail campaign success by open rates, click through rates, or conversion rates. The modern catalog marketer evaluates e-mail performance based on the change in annual retention rate, and change in annual customer profitability, caused by e-mail marketing.

The modern catalog marketer is very willing to deliver a month's worth of e-mail campaigns that do not sell a single item.

Conversely, the modern catalog marketer actively plans the sales per e-mail at a customer segment level, planning these metrics months in advance.

The modern catalog marketer is willing to accept $0.05 per e-mail delivered without a promotion, and is willing to forgo $0.15 per e-mail delivered with a free shipping or %-off offer.

The modern catalog marketer lets the customer determine contact frequency.

The modern catalog marketer gives the e-mail department a seat at the leadership table.

The modern catalog marketer knows exactly how much of paid search expense is caused by e-mail marketing, and blends that aspect of paid search expense (and conversion) into the e-mail profit and loss statement.

The modern catalog marketer runs matchback analytics with e-mail getting more priority than catalog marketing, just to understand what the results imply/suggest.

The modern catalog marketer executes a post-mortem of every single e-mail marketing campaign, analyzing every item offered in every version of the campaign. Every link in every e-mail campaign is analyzed. The merchandising, inventory, creative, web production team, online marketing team, catalog circulation team, and e-mail marketing teams are all present. The CEO participates on a quarterly basis, if not more often.

The modern catalog marketer tests every possible creative treatment, blatantly disregarding established best practices in an endless thirst to discover new and exciting ways to present merchandise.

The modern catalog marketer realizes that e-mail marketing is about merchandising and service, not about geeky metrics and tactics.

The modern catalog marketer instinctively knows how every single item will perform if offered in an e-mail campaign, and actively shares that information with every employee in the company.

The modern catalog marketer "households" e-mail addresses. In other words, the modern catalog marketer will combine kevinh@minethatdata.com and kevin.hillstrom@gmail.com, and evaluates the performance of the all e-mail marketing activities at the "household" level.

As you can see, the modern catalog marketer views e-mail very differently than the way the average catalog marketer views e-mail marketing.

Modern Catalog Marketing; Catalog Merchandising

The modern catalog marketer takes a different approach to merchandising a catalog.

During the "catalog era" (1880 - 1995), the catalog WAS the store. If you didn't put an item in the catalog, you didn't sell the item.

During the "multichannel era" (1996 - 2008), the catalog was one component of numerous channels that all had the same look and feel, the same message, the same merchandise. Blah blah blah blah blah blah. We failed to capitalize on the strengths of each marketing channel, instead watering down the presentation in every channel. Bad idea. This might not have happened, of course, had the online pioneers of the late 1990s done everything "their way", in a non-integrated, silo-based manner, giving the store away for the sake of monetized eyeballs.

The modern catalog marketer realizes that catalog marketing is now a niche channel, tailored to the 55+ exurban/rural customer who prefers to order via the telephone but will shop on the internet.

This gives the modern catalog marketer the freedom and flexibility to merchandise the catalog in any way that benefits the customer.

If the customer is truly the 55+ exurban/rural customer who prefers to order via the telephone, you merchandise the catalog in a traditional manner. You know that the first twenty pages are critical, you have to have "order starters" in the front of the catalog. You know that you don't bury your best sellers on pages 72-73. You execute the craft you love.

If your customer is the vaunted "multichannel customer", you have a whole different set of challenges. In these cases, 70% of the customers who will purchase because a catalog was mailed to the customer purchase online. This means that catalog marketing is a "two-step" process.

And this two-step process creates problems. For the merchant or inventory manager, it looks like an item must be advertised in the catalog in order for it to sell online. But when looking at the customer, as we did at Nordstrom back in the day, we saw that as much as 40% of the merchandise that sold online (because of a catalog mailing) were items not featured in the catalog. It was hard to see from a merchandising standpoint, because the 40% of demand spread out over hundreds or thousands of items. For instance, we knew that we sold just as much Mens merchandise (incrementally, measured via mail-holdout tests) whether we advertised Mens in the catalog or not. So it looked like the catalog didn't drive anything to non-catalog-featured items. But it did, when viewed at a customer level!

If your catalog is merchandised to the vaunted multichannel customer, then you know that traditional square inch analyses are largely meaningless. You merchandise the catalog not based on the best selling items, but rather, the items that drive the customer to the website.

Ultimately, the catalog is measured on the basis of the profit it generates. But just as important, you measure the percentage of customers who receive a catalog and VISIT the website. This percentage is often a big one --- you'll often observe that 35% of customers who receive a catalog VISIT the website within three weeks of receiving the catalog. Does that make the catalog a failure? No, quite the opposite. The catalog can be a success ... the website may be the weak link, failing to convert the customer. When do we talk about that?

So if your customer is a multichannel customer, you merchandise the catalog in an entirely different way, seeking to identify items that create interest, items that drive the customer to the website.

The modern catalog marketer thoroughly understands the role of the catalog --- niche channel to a niche audience vs. website/store driver. The merchandising strategies are entirely different, based on the customer you're talking to. We're better off talking to separate customers than mass-advertising to all customers.

Modern Catalog Marketing: Rapid Segmentation

In the future, mailing catalogs is going to become prohibitively expensive. USPS costs will increase, while the productivity of many housefile customers will decrease due to a proliferation of micro-channels. The business model, as we knew it, is evolving.

Therefore, it will become important to execute what I call "rapid segmentation".

Immediately after a first purchase, the modern catalog marketer will overlay external purchase data, demographics, web analytics information (referring URLs, pages viewed, prior visits), and the prices/channels/merchandise purchased, to create a "profile" of the first time buyer.

The first time buyer will be placed in one of at least three different trajectories.

• The traditional customer --- the 55+ exurban/rural customer who likes shopping via the telephone. These will be the customers that the catalog marketer speaks to with catalogs.

• The digital customer --- a "Web 1.0" customer who likes e-mail marketing and search and all the traditional online marketing stuff. Our websites will be calibrated toward these individuals, seeking to maximize conversion among this audience. This segment will receive far fewer catalogs than the traditional customer receives.
  

• The social shopper --- a "Web 2.0" customer who shops us for very different reasons. This customer will receive few if any catalogs, and we'll be glad to accept whatever profit this customer wants to pass our way. We'll also gladly accept the good will this customer passes our way via social media. Hint --- retail customers, by and large, are social shoppers.
  

It will be critical for us to rapidly segment the new-to-file buyer. Mailing catalogs to customers who don't want them will create negative feedback in the social media world, and will represent a significant waste of marketing dollars.

Rapid segmentation will lead to merchandising changes. As the catalogs become a targeted piece to a 55+ exurban/rural telephone shopper, the merchandise assortment will shift to what that audience prefers.

Conversely, the digital customer will be "micro-targeted" to with e-mail campaigns and paid search keywords that result in specifically merchandised landing pages.

The social shopper will be one where marketing resources are conserved. In many ways, these customers represent the profitable future of the modern catalog marketer. The history of the cataloger has always been about spending large sums of money up-front. The future of the social shopper eliminates all of this waste.

Rapid segmentation will be repeated after each subsequent purchase. Customers will move back and forth between segments --- usually moving from traditional direct marketing to social shopping, but occasionally going the other way, that's what makes this fun.

Some companies will mine this information internally (hint Williams Sonoma, L.L. Bean, big companies with staff).

Some companies will overlay this information from co-ops (hint Abacus, Z24, NextAction, you know who you are).

Some companies will overlay web behavior --- using clickstream information to make this decision.

Some companies will use all of the information that is available.

All modern catalog companies will have to perform this level of segmentation.

Modern Catalog Marketing: Customer Acquisition

The most important topic in catalog marketing these days is the death of catalog customer acquisition.

For so many folks, catalog customer acquisition productivity (after matchback) declined by an average of 5% to 10% a year, every year, since 2003. Couple that with the dire increases in the cost to mail a catalog (back in 2007), and a huge drop in Fall 2008, and you have a recipe for a death spiral.

Catalog customer acquisition has held up when 55+, exurban/rural customers who like shopping via the telephone are targeted. Unfortunately, this audience is in decline, and will not be replaced by younger customers who crave catalog marketing.

Modern catalog marketers will be required to diversify.

The modern catalog customer acquisition department hosts individuals who specialize in different disciplines. These can be folks hired internally, or may represent folks that work in the vendor community.

• Traditional catalog customer acquisition managers, the folks who work with Millard or Merit Direct or Abacus.

• Digital customer acquisition managers, the "Web 1.0" staffers who focus on SEO / SEM / Affiliates / Display Ads / Shopping Comparison Sites, all the stuff we've grown to know and love.
  

• Offline customer acquisition managers. The most successful catalog businesses I've worked with have offline programs that do not include catalog marketing. These businesses acquire customers via innovative offline programs --- the customers often have marginal long-term value, but the customers do offset the declines in catalog customer acquisition.

• Social media managers. I would find your most passionate half-dozen or dozen customer service representatives --- usually found in your call center, and I would unleash them on the social media world --- blogs, Twitter, Facebook, you name it --- have them solve problems and interact with customers and prospects.

The catalog companies that have the most robust customer acquisition programs tend to execute two or maybe three of these four areas really well. Average catalogers execute catalog customer acquisition well.

I would create a report or dashboard, whatever you want to call it, that tallies the customers acquired via each of these four key areas --- drawing comparisons vs. last month, ytd vs. ly ytd, rolling twelve month periods, etc.

The important part of this whole process is diversification. We're going to have to accept a world where we willingly acquire ten customers with $5 LTV, as opposed to prior strategies of focusing on acquiring one customer with $50 LTV.

And you folks in the Web Analytics community --- we need your help. The future of customer acquisition requires measurement of a series of activities, all linked together, resulting in an outcome. We'll need to know that a prospect visited the site five times before purchasing --- a process today that is largely measured as a series of failures, but is truly a success.

Modern Catalog Marketing

Over the course of the next week, we're going to look at what I call "Modern Catalog Marketing".

Last week, I offended the social media community. This week, my loyal catalog readers might not agree with everything (or anything) I have to say. There are so many of us in the catalog industry who strongly believe that the economy will improve, and customers will revert back to a love of shopping via printed images.

There are other voices that are worth listening to, traditional voices like Jim Gilbert. And too few of us are supporting the efforts of the American Catalog Mailers Association. We work in a fascinating industry, one where we willingly step all over the rights of our most loyal customers, willingly sharing their name/address with co-ops so that competitors can offer our best customers their merchandise, but we won't share $5,000 to help this organization mitigate future USPS cost increases. We sure like it, however, when they succeed and we save money.

I am going to take a different approach than most folks. The traditional catalog folks will work hard to help you maximize your traditional catalog efforts, and that's all good and is needed. I am going to present you with one man's version of "the future", and how we'll navigate our way to this version of the future.

Here's my central thesis:

• Long-term, the USPS is going to offer us less service at a greater cost.

• Long-term, younger customers in urban/suburban areas will continue to abandon catalog marketing in favor of "shiny new technologies".

• These two trends will make it prohibitively expensive to acquire new customers via catalog marketing. In many ways, we're almost there.
  

• The death of catalog customer acquisition will not be fatal to catalogers. The death of catalog customer acquisition will be very damaging, however, to the catalog vendor community.

• Housefile direct marketing, as we know it, is evolving. The customer of the future will demand to be contacted on her terms. She will dictate catalog and e-mail marketing frequency. And we'll be fine with that, we'll evolve and change.
  

• Traditional catalog marketing, as we've always known it, is trending toward a 55+ aged exurban/rural customer that prefers romance over technology.

• Housefile direct marketers will expend tremendous energy segmenting customers after a first purchase into a "traditional" path, a "digital" path, or a "social" path. Traditional customers will be marketed to in a traditional sense. Digital customers are the classic "Web 1.0" customer (e-mail, search, display adds, affiliates, shopping comparison sites). Social customers are the emerging "Web 2.0" customer, becoming less and less responsive to marketing. This segmentation strategy will be essential to minimizing expense.

• Given these trends, every cataloger will be forced to answer a question: Are we in business because we love selling merchandise, or are we in business because we love producing catalogs? It is my belief that those who will survive love selling merchandise. It is my belief that most catalogers love producing catalogs.

• The businesses that are well-positioned for the future are those that diversify sources of new customers and simulate the long-term impact of all 1-5 year decisions.

This week, we'll explore these topics. Your thoughts are welcome, in fact, they're needed.

Return On Investment And Employee Accountability

My career has been defined by return on investment (ROI). For the most part, if I did not deliver a significant return on investment for my company, I lost my job. As a consultant, I don't get paid, and I don't get hired if I don't deliver ROI to my clients.

As a Statistical Modeler, if my models didn't generate a million dollars of incremental profit, per year, every year, my job was in jeopardy.

As a Circulation Director, if my team did not generate a couple million dollars of incremental profit, per year, every year, I'd lose my job.

As Vice President of Database Marketing at Nordstrom, if my team did not generate millions of dollars of incremental profit, per year, every year, I'd lose my job. In fact, I had the President of my division call me into his office, back in 2001, telling me that the reason the business was failing was because of my ineptitude, or the ineptitude of the chief merchandising officer. He told me that the merchant or I would lose our job if things didn't improve.

Six months later, he lost his job. Eleven months later, the chief merchant lost her job.

There are many jobs in a company that require consistent improvement in ROI, in order for the individual to keep his/her job.

• A merchant's job is measured every single day. The merchant is required to pick the right merchandise, and if customers don't like it, the merchant loses his/her job. In many companies, garden-variety employees get to see how every merchant is performing.
  

• The inventory staffer is measured every single day. Have a bad fulfillment rate across the items you are responsible for, and you lose your job. The CEO/President and CFO pay really close attention to how inventory staffers manage the business. Not surprisingly, inventory people get canned when there's too much merchandise and too few customers.
  

• The online marketer is measured every single day. Run a terrible paid search program, have display ads that are unprofitable, hook up with affiliates that have a poor reputation, and you lose your job.

• The e-mail marketer is measured every single day. Every person in the company can watch your performance fluctuate. Sink your productivity from $0.18 per e-mail to $0.14 per e-mail, and you lose your job. What's really sad is that when the e-mail marketer performs really well, the e-mail marketer doesn't get the credit that is deserved.
  

• The catalog circulation director is measured every single day. Fail to acquire enough new customers, over-circulate catalogs, or make a circulation mistake (mailing the wrong people), and you lose your job. Up until a few years ago, there were few people more responsible for ROI than the catalog circulation director.
  

• The finance staffer is often measured. These folks disperse funds to appropriate projects, and are often measured by Return On Invested Capital. When your finance department screws up, they are fired.

• Store Managers are actively measured. If your comps are negative, you're finished --- even if the merchants and the marketers screwed everything up.
  

If you are one of these individuals, you go to work every single day with a cloud over your head. You are hyper-accountable.

And because you are hyper-accountable, you start to look at other employees in your company. There are many employees who are paid what you are paid, or are even paid more than you for a comparable skill level. These employees are important, needed individuals. But the metrics aren't always in place to determine return on investment. How would you measure the return on investment in these cases?

• Catalog or Internet Photography: How do you know when you have a creative staffer who has "an eye" for the right way to present merchandise? At least photography can be tested. But you won't find a dashboard in your company that measures the sales generated by your creative people, will you?
  

• Information Technology: Under what circumstances does the IT staffer hurt the business to the point where all employees are suffering? How would you measure it? Even worse, most employees are aware that IT employees are paid on a different wage scale (i.e. more) than are employees who are directly accountable for generating sales. You won't find a dashboard in your company that points to the IT staffers who generated the most sales. Sure, IT folks can miss deadlines and make mistakes ... but that happens with all employees. So what metrics do you look to in order to correlate sales generated by an IT staffer?
  

• Social Media: A growing contingent of social media experts are suggesting that you don't measure ROI in a traditional manner in social media, just read the Social Media SmartBrief or some of the top 25 Social Media bloggers to review the arguments. If you're one of the marketers who are actively measured on a daily basis, you're not always thrilled with your co-workers who Twitter and blog all day long and then suggest they shouldn't be measured the same way that, say, an e-mail marketer is measured. But you need these people, you need pioneers who are taking a westbound path on the Oregon Trail, right? So what are the metrics used to evaluate the pioneer?
  

• Offline Marketing: How do you measure the ROI of a newspaper ad, a billboard, radio, television, sponsorship? Not surprisingly, these are the programs that are the first to be cut in economic downturns ... but that isn't deserved either, just because it is hard to measure. Many of these programs can be tested, but aren't.
  

• Human Resources: How do you measure the return on investment of an HR staffer who is able to arbitrate arguments between employees? You really can't "test" HR staffer effectiveness to identify what impact that has on company sales, can you?
  

• Copywriter: In so many companies, copy evaluation is subjective. But it matters. At least copy can be tested, and in paid search, it is actively tested.
  

The Business Intelligence movement yielded three classes of employees.

• Employees where the relationship to sales can be easily and directly measured.
• Employees where the relationship to sales can be inferred via periphery metrics and testing.
  
• Employees where the relationship to sales cannot be measured.

If you can possibly become an employee who is measured on a daily basis, become that person. Those who are measured tend to rise to leadership positions within companies --- you see merchants running companies, you see finance folks running companies. Whether for good or bad, you don't see as many folks who aren't directly accountable for sales in leadership positions.

And if your area of responsibility can be measured via periphery metrics, by all means, identify every single periphery metric you can, and prove that you're moving the needle on something.

Finally, if you are one of the employees who love working in areas that are not directly accountable for sales, that's not your fault --- you need to do what love, right? So how does an organization evaluate your performance in a fair comparison to folks who are directly accountable for sales generation?

What are your ideas?

Mega-Metrics: Address Value

We in the "multichannel" industry are pulled in a lot of different directions. We're told we need to be everywhere, offering everything to the customer.

Our Multichannel Forensics projects suggest that each piece of information about a customer offers a different amount of business value.

For instance, take a look at the following table:

Incremental Value Of Various Addresses
	% of	12mo.	Address
	Pop.	Value	Value
Mailing Address	98%	$100.00	$98.00
Internet Connection	85%	$50.00	$42.50
E-Mail Address	80%	$20.00	$16.00
Mobile Phone w/SMS	50%	$15.00	$7.50
Twitter Account	2%	$10.00	$0.20

Having a mailing address is important. The mailing address allows us to market to customers wishing to receive our marketing activities. And we can easily prove that our efforts generate a considerable amount of revenue. Given that most folks have a mailing address, we can multiply the audience percentage by the demand value, arriving at "potential", in this case, $98.00.

Having an internet connection is important, too. Customers generate organic demand. Customers also respond to paid search efforts, interact with shopping comparison sites, you name it. Therefore, internet access is important.

E-mail addresses are important, but less so. They are dependent upon having an internet access, and for many catalogers, they are dependent upon catalog marketing as well (the e-mail address doesn't happen unless a catalog generates an order, causing the customer to volunteer an e-mail address). Still, the e-mail address provides a good amount of potential, given that most people have an e-mail address.

Now take a look at Twitter. This is an area that has relatively unproven marketing potential, coupled with the fact that fewer than 2% of US Citizens have a Twitter account. Multiply both facts together, and you quickly learn that Twitter has minimal potential (as of today). Twitter certainly has less potential than, say, mobile marketing, a generally untapped channel with significant potential due to the prevalence of cell phone users. Of course, this doesn't mean you don't experiment with the shiny new tools, you absolutely should. But we should also be cognisant of the sales potential of any activity today, while still planning for the future.

Today's multichannel marketer does a good job of assigning value to each marketing channel, based on two dimensions.

1. The future value of the marketing channel, in dollars (sales, or better yet, profit0.
2. The penetration of the marketing channel (mailing address = 98%, Twitter = 2%).

The table listed above is adjusted as each channel changes in value (i.e. as Twitter increases in penetration while direct mail performs marginally worse over time), and experiences penetration changes. The table gives us a view of the world that is far different than the marketing literature we read on a daily basis.

Mega-Metrics: The Organic Percentage

For traditional direct marketers, there is no single metric that is more important to calculate than the organic percentage.

Simply put, the organic percentage is the percentage of demand that is generated independent of marketing activities. For many catalogers, the percentage is calculated as the percentage of demand that is independent of catalog marketing.

We care about this, of course, because our matchback analytics frequently attribute orders to catalog and e-mail marketing activities, orders that would have happened regardless of any catalog or e-mail marketing.

Catalog marketers are growing comfortable with this percentage, because of the actionable ways it gets put into use. Organic percentages of maybe 10% suggest that your catalog is the reason your business exists!

Organic percentages of maybe 35% to 40% suggest a considerable amount of over-mailing. These businesses are probably attributing too much business to catalogs and direct marketing in their matchback algorithms.

Organic percentages of 80% or more suggest a powerful brand that is complemented by direct marketing, not driven by direct marketing.

For my catalog readers out there, work closely with your co-op or other matchback provider, calculating this important percentage. If that number creeps up over 30%, it is time for serious catalog contact strategy testing. For my online marketing readers out there, this is another good place to partner with a Coremetrics, Omniture, or Unica, folks who can help you get to the bottom of this important metric.

Social Media Experts: Would You Accept This Challenge?

A $100,000,000 brand that generates $7,000,000 of pre-tax profit offers you a challenge.

• You will quit whatever job you have, and you will work for free for one year. You will also pay the company a $5,000 non-refundable deposit.
  
• You get to implement whatever social media marketing program you want to implement. No strings, no interference, you're the boss.
  
• At the end of twelve months, you and the company get to split all of the profit generated by your marketing program, 50% / 50%.

Do you quit your job, pay the non-refundable deposit, and accept this challenge?

If you're a social media expert, and you truly believe in your field of study, and you answer "no", please explain your answer. Under what terms would you say "yes"?

Mega-Metrics: Migration Mode

When we evaluate how customers are migrating between micro-channels, we need to calculate migration modes for each micro-channel. Here's how we do that.

Step 1: Take a calendar year (2007), or any twelve month period of time. Create an indicator (1 = yes, 0 = no) whether the customer purchased from a micro-channel during that timeframe.

Step 2: Take the next calendar year (2008), or any subsequent twelve month period of time. Create the same set of indicators (1 = yes, 0 = no).

Step 3: Take any one indicator in Step 1 (say the customer purchased because of Google Paid Search), and store those customers in a file.

Step 4: For all customers in Step 3, calculate the percentage of customers who.

1. Purchased in the dataset in Step 2.
2. Purchased from any of the indicators in the dataset in Step 2.

Step 5: For each of the indicators in Step 4, take the percentage buying from an indicator, and divide it by the total repurchase rate.

Step 6: Classify each index on the basis of the following criteria.

• Isolation Mode = An index between 0.00 and 0.20.
• Equilibrium Mode = An index between 0.20 and 0.50.
• Transfer Mode = An index greater than 0.50.

Isolation Mode is important, because it happens when a customer becomes loyal to a product, brand, or channel. I see this all the time with Google. Yahoo! and MSN searchers are in Equilibrium Mode with Google, but Google searchers are in Isolation Mode with Yahoo! and MSN. In other words, once the customer becomes loyal to Google, the customer stays with Google.

Equilibrium Mode is where all of the subtleties of a business happen. In social media, we've seen the slow leak from blogging to micro-blogging, as users migrate away from blogs to their own Twitter page. For catalogers, there has been a decade-long leak from customers ordering over the telephone to customers ordering via websites. For online channels within retailers, you'll see that customers rarely stay loyal to the online channel ... often, the customer slowly leaks back to the retail channel.

Transfer Mode happens when there is a mass exodus from a product, brand, or channel to another product, brand or channel.

Work with the good folks at Coremetrics or Omniture to have these metrics generated for you, there's no reason they cannot calculate these metrics, at a micro-channel level, to assist you in understanding how customers are interacting with micro-channels. For you catalogers who partner with Unica, they certainly have the skills necessary to do this, just ask them! And for those of you lucky enough to have a SQL/SAS/SPSS programmer, this is brutally easy to do!

Mega-Metrics: Merchandise Profitability And The Item Resume

An area of opportunity for the Business Intelligence community is in assessing merchandise profitability. Here's a sample profit and loss statement for an item during the 1st quarter of 2009, what I call the "Item Resume".

Quarterly Merchandise Profit And Loss Statement
Demand	$8,000
Fulfillment Rate	90.0%
Return Rate	25.0%
Net Sales Percentage	67.5%
Net Sales	$5,400
Gross Margin Percentage	55.0%
Gross Margin	$2,970
Less Catalog Expense	$1,150
Less Paid Search Expense	$250
Less E-Mail Mkt. Expense	$50
Less Affiliate Mkt. Expense	$100
Less Portal Adv. Expense	$200
Less Pick/Pack/Ship	$621
Variable Operating Profit	$599
% Of Net Sales	11.1%
Ad To Sales Ratio	32.4%
% Of Demand: New Buyers	47.0%
% Of Demand: Organic, Non-Advertising	33.0%
% Of Demand: Repeat Item Buyers	29.0%
% Of Demand: Online	62.0%

Now this isn't just one mega-metric, but rather, a compilation of numerous mega-metrics. Our job is to evaluate the item resume.

Is the item profitable?

Does the item generate demand organically, or is the item dependent upon advertising to generate sales?

Does fulfillment rate or return rate hurt the profitability of the item?

Does the item recruit new customers?

Do prior item buyers purchase the item again?

This style of reporting is sorely missing in our KPI / Dashboard / Customer-Centricity / Conversion-Rate / Shopping Cart Abandoned world. Show me the last time you've read an article that featured this style of reporting? Now, tell me what your merchandising team would think of this reporting ... would they be able to make better decisions?

Reader Interaction With This Blog Is Changing

For those of you who provide services for B2C and B2B companies, you may be noticing significant shifts in how your blog interacts with the world.

Here's what I observed.

• March 2006 = 25 Subscribers, 25 Daily Visitors (10 From Blogs, 10 From Google).
  
• March 2007 = 300 Subscribers, 100 Daily Visitors (40 From Blogs, 50 From Google).
• March 2008 = 1,000 Subscribers, 250 Daily Visitors (30 From Blogs, 175 From Google).
• March 2009 = 1,700 Subscribers, 125 Daily Visitors (30 From Twitter, 7 From Facebook, 50 From Google, 20 From Blogs), 400 Twitter Followers. Major change in Google algorithm in February cuts search traffic by 65%.
  

For the individual/company trying to provide services for the B2C / B2B audience, this represents a big shift in how folks are consuming information. We keep telling the companies that we work with how the world is changing, how they must adapt to a changing world. Well, how about us? Are we adapting to the changing world?

• Dependence on Twitter results in a lack of "link love" that fuels Google's view of your online presence. As a result, your Google "page rank" or modern equivalent if you will, doesn't grow at the same rate, and therefore, organic search becomes less effective, making it harder to develop an audience.
  
• Twitter, at 140 characters, makes it harder for the marketer to explain topics with any level of depth, and hence, makes it harder to develop credibility on deep topics.
• Twitter, adopted by 2 of every 100 folks in the United States, limits our ability to speak to the audience we wish to speak to. I'm lucky if 10 of my 400 Twitter followers would ever hire me for my consulting practice. At this time, Twitter is important for experimentation, but it is dangerous to depend upon it as a marketing channel.
  
• Word of mouth becomes more and more important ... we'll all need folks talking about us online and offline to fuel growth.

Times are changing ... for everybody. I'm curious to see how those of us who advise clients are evolving and adapting? Care to share?

Mega-Metrics: Micro-Channels Purchased From

This is a mega-metric that almost nobody is tracking.

And yet, this metric is our future.

We calculate Annual Micro-Channels purchased from by identifying the number of twelve month buyers, then summing the total number of unique micro-channel combinations the customer purchases from.

Micro-channels are a combination of the referring URL and the physical channel the customer purchased from. Referring URLs are usually summarized --- for instance, at Nordstrom, back in 2006, we combined all blogs, calling all of them one "micro-channel".

There are two trends we need to follow. First, there is an explosion of micro-channels, and if your business is not seeing customers purchasing from multiple micro-channels, it may mean that your customers are either unwilling to shop multiple micro-channels, or that you are not taking advantage of the veritable plethora of micro-channels that now exist.

Second, the shift in micro-channel behavior has never been faster. So this becomes really important. If you see stagnant growth in micro-channels purchased from, but a huge shift in micro-channel behavior (customers who used to use Google now use Twitter), then you have huge micro-channel cannibalization happening.

Micro-channel cannibalization is rampant on this blog. Three years ago, all of my visitors came from other blogs. Eighteen months ago, it was a combination of subscribers and Google juice. Today, visitors are a combination of subscribers, much less Google juice, and many more visitors from Twitter. There is no doubt that Twitter utterly cannibalized blog visitors, and is now in the embryonic stages of cannibalizing Google searchers.

These trends are happening, in real-time, on your e-commerce website. You'll want to measure annual micro-channels purchased from, and you'll want to use Multichannel Forensics to measure how customers are migrating between micro-channels. You'll want to work with the good folks at Coremetrics or Omniture to calibrate this (and all) mega-metrics.

Mega-Metrics: Annual Repurchase Rate

In my opinion, the most important mega-metric is the Repurchase Rate.

Repurchase Rate is the single most important indicator of customer loyalty. We calculate repurchase rate by dividing our database into two time periods. We identify all customers who purchased during, say, 2007. Then, we calculate the percentage of 2007 customers who purchased again during 2008.

In Multichannel Forensics, we divide the annual repurchase rate into three categories.

• Retention Mode: Annual Repurchase Rate > 60%.
• Hybrid Mode: Annual Repurchase Rate between 40% and 60%.
• Acquisition Mode: Annual Repurchase Rate less than 40%.
  

When I worked at Nordstrom, we were largely in Retention Mode ... our store customers loved us. We were able to retain more than 70% of our store customers, year-over-year.

When I worked at Eddie Bauer, we were largely in Hybrid Mode ... we retained between 40% and 60% of our customers, year-over-year. Hybrid Mode is the most enjoyable business model to work in, because you have so many levers to improve business success. At Nordstrom, you weren't going to improve the retention rate from 76% to 91%, it simply wasn't mathematically possible. But in Hybrid Mode, you can make a difference!

When I worked at Eddie Bauer, we had a Home division. That division was in Acquisition Mode, with an annual repurchase rate under 40%. The only way this business was going to grow was by acquiring new customers at a faster and more profitable rate than last year, period. You simply cannot get a customer who just purchased a couch to buy another couch! During my time at Eddie Bauer, we were only able to get the Home division close to break-even once --- and during that year, we did that by renting the entire Pottery Barn list, over and over and over. We mailed more Pottery Barn names than we mailed Eddie Bauer names ... at least that's the way I remember it!

Acquisition Mode is the least understood by direct marketers, and it is a scenario that is about to become a really big deal to online marketers.

You see, so many of the folks working in the online channel manage an "Acquisition Mode" business. As mentioned earlier, these channels/businesses succeed when new customers are increased at a profitable rate, year-over-year. Thanks to Google and offline cannibalization, this was easy to do, year-after-year. A generation of online marketers grew their business without the hand-to-hand combat other channel leaders had to deal with. In 2009, the easy flow of new customers, courtesy of Google or offline channels, is ending.

This is where things get really interesting, folks. If your online channel is in Acquisition Mode, and an easy flow of new customers from other channels or Google is drying up, you have challenges in front of you. So be sure to measure your annual retention rate right now --- it is so easy to do!! Understand the dynamics of your business, and begin to plan for the consequences of your business model.

The Business Model

Here's the kind of question a catalog CEO is likely to ask me via e-mail in 2009:

• "Hi Kevin, I'm the CEO of 'BRAND-X' and am a big fan of the blog, keep up the good work! I have a few questions for you. We've always believed that our catalog is our business. We generate 75% of our online business because a catalog was mailed to a customer in the three weeks prior to an online order. We believe that we've maxed-out our paid search opportunity. We don't believe that display ads are the answer. In fact, we're not convinced online marketing is the answer, the genre doesn't scale, and the customers we acquire online are worth just half of what offline customers are worth. We e-mail our customer file six times a month, and yield a paltry $0.14 per e-mail --- great ROI, but no opportunity to drive real sales growth ... and if we do a highly targeted and trigger-based program we get, what, $0.22 per e-mail? It doesn't scale. We think social media is nothing more than hype --- we have a Twitter presence and Facebook presence and MySpace presence and we have a Blog, all of which generate maybe $2,000 of sales a year ... lots of buzz and word of mouth and employees spending time Twittering when they could be generating business for me ... it simply isn't scalable today. We have a mobile website that is lucky to garner 1,500 visitors a month at a 3% conversion rate. Kevin, we see the writing on the wall ... the productivity of our catalog customer acquisition activities via list rental and co-op participation are down 40% from where they were back in 2004. So if none of the other stuff "works", if you will, and we cannot drive new customer acquisition with catalogs, how do you propose we map out a route to the future? Even more important, how do we create demand if the primary vehicle for creating demand is being marginalized? I mean, you say you killed a catalog program at Nordstrom and grew sales, but Nordstrom can get away with that because they have a retail presence ... we don't, so their strategy just won't work for us. Thanks, and I look forward to reviewing your comments."

Notice that this is a leading question, logical, but leading. The individual asking the question is leading the reader to a pre-destined conclusion --- that nothing new is going to work so therefore the answer lies in improving how traditional catalog marketing is executed --- we just have to work harder, right? Now give me the five easy steps for making that happen!

If you continue to have a discussion with this individual, you'll spend time talking about how to maximize page counts, how to rearrange in-home dates, how to get Abacus to produce a better model for free, how to front-load the catalog with "winners", how to get the circulation director to target only the best customers, how to co-mail catalogs with indirect competitors, a discussion about whether to have $12.95 shipping or $14.95 shipping, how to get better printing efficiencies that result in cost savings, how to spend less with merge/purge vendors, how to continue to achieve improvements in paper cost, a discussion about dots on the cover of the catalog calling out new products ... in other words, you'll have a discussion about tactics, not a strategic discussion about the business model.

The real question is about "the business model". What is the business model that replaces the business model I've managed for the past twenty or thirty years?

Business leaders are disappointed when I tell them that the answer to their question is " ... there is no business model that replaces the business model you've worked in for the past twenty or thirty years." If you disagree with that answer, give Clay Shirky's essay about the newspaper industry a read.

Seriously, if a replacement business model existed, wouldn't everybody be doing it right now? Wouldn't it be so obvious that the transition to the future would be easy and self-evident?

Now to be fair, there are companies that use a direct-to-consumer business model that is very different than cataloging, and they are growing sales. You're already familiar with the stars ... Amazon and Zappos, for instance. The fact that Zappos will sell more shoes online in five years than Nordstrom sells across all channels should make any business leader sit up and take notice.

Those businesses, however, had the luxury of building a path to the future from scratch. Your catalog business is different --- for you, it is like a NASCAR team executing a pit stop for four tires and fuel and a spring adjustment while still racing around the track at 190mph.

The danger for a NASCAR team is that if a pit stop happens under green flag conditions, the team will likely lose a lap to the competition, and will not be able to gain the lap back.

The danger for the catalog brand is that if a serious effort at re-inventing the business happens, the business may see a 50% sales decline, and may not be able to gain the business back once the new business model is in place (should Multichannel Forensics work suggest this is the outcome).

The real question, then, is the sustainability of the business model. At what point does catalog customer acquisition become so bad that we are forced to experiment, forced to try two-hundred micro-channels hoping that seven will lead us to the future? At what point do we decide to find three online customers with a lifetime value of $10 each instead of one catalog customer with a lifetime value of $30? At what point is it worth investing the time and money to figure out how to create demand online?

2003 - 2007 was the time, because we had the luxury to test back then, given the comparatively healthy nature of the economy.

2009 - 2010 is a good time, too, simply because of the economics of our current environment.

I wouldn't wait much longer.

Your thoughts? Do you empathize with the CEO mentioned eariler? What do you think is the path to the future? Or is catalog marketing simply in a slump that will go away when the economy improves and customers again trust catalogs in mailboxes from companies they've never purchased from?

Mega-Metrics: Attribution Combinations

Oh those online marketers ... looking to attribute orders to the right marketing channel.

Allocation / Attribution is a largely futile effort. We simply cannot get in the mind of the customer, can we?

We can test. Testing works really well in the direct marketing world, but testing for attribution purposes works less well in the online marketing world.

So here's what you can try ... I've had success with this.

• Create what I would call "combinations". When a customer visits your site on March 3 via paid search, and purchases on March 5 via an e-mail campaign, you create a "combination" that captures the first touch and the last touch. In this case, the combination is "PAID SEARCH / E-MAIL".

• If the customer only had one visit (say from an affiliate marketer), then the combination is "AFFILIATE ONLY".

• The pundits will jump in and suggest that we're missing everything that happens in-between first touch and last touch. Let them jump in and argue.
  

• Pay CLOSE ATTENTION to what happens on the next purchase. What are the combinations that are most likely to happen NEXT? Does "PAID SEARCH / E-MAIL" lead to "E-MAIL / PAID SEARCH"? Or does it lead to "PAID SEARCH / E-MAIL"? Or does it lead to "ORGANIC ONLY"? The mega-metric to calculate is the percentage of folks who migrate to different combinations in the future.
  

We care about what happens next, because what happens next tends to dictate what the primary driver is. Over time, you'll learn that certain advertising channels tend to "drive" orders, while other advertising channels tend to "complement" orders.

Once you identify the channels that drive orders, you begin to understand how you might attribute orders to ad channels better --- and you'll make better investment decisions.

The combinations help you see how customers migrate over time ... helping you figure out "what to do next" as opposed to helping you figure out "what just happened". Ultimately, you'll plug the most popular combinations into a Multichannel Forensics simulation, and you'll see what is about to happen to the future trajectory of your business.

Mega-Metrics: Monthly Conversion Rate

Almost all of us have analyzed the results of marketing activities via the "conversion rate". The online industry is fueled by conversions. Directionally, the metric works.

And yet, the metric is fundamentally wrong.

At Nordstrom, we analyzed our multichannel shoppers to death. We knew the following happened, on a monthly basis --- called the "3-2-1" rule.

• The multichannel shopper visited our website three times a month.
• The multichannel shopper visited at least one store two times a month.
• The multichannel shopper purchased one time a month, usually in a store.

An online conversion rate is woefully inadequate when measuring this type of behavior. So is shopping cart abandonment. All we really care about is that, over a period of time, did the customer buy from us? We don't care how the customer got to the end result --- we only care about the end result!! With that in mind, conversion rates and shopping cart abandonment rates are feckless --- they simply do not measure how customers actually behaved.

While still flawed, we evaluated a "Monthly Conversion Rate".

• Take all customers who visited your website in the past month.
• Of those visitors, what percentage purchased something, in any channel?
  
• Divide monthly purchasers by unique monthly visitors.

Now some of you will send me e-mail messages and leave anonymous comments, nitpicking the fact that I forgot to think about concepts "A", "B" and "C". And you'll keep using conversion rate as your favorite metric. Life is richer when individuals have different ideas for solving problems.

What is important is the business intelligence you gain from a monthly conversion rate. All of a sudden, you realize that your conversion rate isn't a measly 4.398541842304%. Instead, your website facilitates a monthly conversion rate of 37% across all channels. Heck, you're not the failure that the vendor community portrays you to be!!!!!!! You're actually more successful than you thought. That's not a bad thing.

So instead of beating me up over all the reasons this metric is wrong, work with your BI team, or with Coremetrics/Omniture to create this metric, and start enhancing the way you evaluate your business --- pick a different timeframe or metric --- just do something to advance your industry!

Mega-Metrics: Average Order Value

Average order value is one of the most well tracked mega-metrics.

As mentioned earlier, average order value is the multiplication of items per order and price per item. Because it is the product of two metrics, increases or decreases in the metric are dependent upon the sub-metrics that comprise it.

During the bubble years, average order value frequently increased. Upon drilling down, we saw that items per order were slowly decreasing, while price per item was rapidly increasing, yielding an increase in average order value.

Traditional direct marketers know that management of average order value results in short-term profit. This is why McDonalds asked you if you wanted "fries" with your meal --- the add-on resulted in an increase in short-term profit. Walk into Walgreens sometime ... the employee at the cash register will tell you that chocolates are the featured item of the day, long before checking out the first of your three items. Walgreens is looking to increase average order value.

Traditional direct marketers also know that the organic component of average order value dictates long-term value. In many cases, new customers spending $150 per order are worth more, long-term, than are customers spending $110 per order. If you're not making these inferences from average order value, go look at your most valuable sources of new customers, and you are likely to see this phenomenon in action.

Some folks argue that "what gets measured gets done". Well, average order value gets measured. And as a result, there are a ton of marketing programs in place, designed to get you to spend more of your hard-earned money.

Mega-Metrics: Price Per Item

Price Per Item is one of those mega-metrics that we simply don't track as often as we should.

We frequently track average order value, in fact, we obsess about average order value.

But average order value is the combination of two metrics ... items per order ... and price per item.

Price per item is where we see inflation happening. During the bubble years of 2003 - 2006, it was not uncommon to see price per item increasing by between five percent and ten percent per month.

And during the fourth quarter of 2008, with folks taking 20% - 60% off of the price of every item, the metric exposed us to deflation.

This metric is interesting, because it can provide hints to changes in the economy. When I worked at Nordstrom, I got stomach cramps as the average price per item rose in 2004, 2005, and 2006, while other important metrics like retention rate and purchase frequency did not rise much. Now you listen to a Nordstrom investor conference call, and you'll hear management talk about reducing prices by 20% across the store to reflect the new reality of the economy. The warning signs were there.

Price per item is not a sign of customer loyalty. Price per item is a measure of the interaction between the economy, competitive pressures, and the ability of the merchant to optimally price merchandise at a profitable level. In that sense, it is maybe one of the two or three most important metrics leaders track.

Pay close attention to this metric. If sales growth is only coming from price per item, then the business is not truly growing. Growth happens when customers are retained at increasing rates, and when new customers are profitably added at rates greater than in prior years.

Mega-Metrics: Orders Per Buyer Per Year

Orders per buyer is a key metric that leading direct marketers track, on an annual basis.

Simply sum all orders in your database in a twelve month period of time, then divide that number by the total twelve month buyers in your customer file.

Iterate through this metric on a month-by-month basis, and plot your results.

This is an important metric, because we so strongly believe as marketers that our activities cause customers to become more loyal to us. Well, if that is so, you'll see it, plain as day, in this metric.

It has been my experience that getting customers to order more times per year is a very, VERY hard thing to do. You can add a veritable plethora of micro-channels, a ton of stores, you can spend a fortune on loyalty marketing, and you are not likely to move this metric much. Some folks are able to move this metric --- this will happen if you aren't already actively marketing to your existing customer base.

Pay attention to this metric, beginning in September 2008. Did your customers cut back on the number of orders, or did you simply lose customers altogether, once the Great Implosion began?

Also pay close attention to this metric by channel. You're likely to observe that your online channel has fewer orders per year than your retail channel ... your catalog advertising channel somewhere in-between.

Mega-Metrics: 12 Month Buyers

This week, we're going to explore some of the important metrics calculated in your garden-variety Multichannel Forensics analysis.

We start with the twelve month buyer file.

The metric is easy to calculate. Count the number of customers who purchased from your business in the past twelve months.

Next month, do the same exercise, and keep iterating through time.

Now graph the results.

The healthiest businesses do not grow by increasing spend per customer, or by increasing average order value. The healthiest businesses grow by continually increasing the number of customers who purchase in a twelve-month period of time.

I like to calculate several sub-metrics for the rolling twelve month buyer file. If I have, say, 50,000 twelve month buyers, I like to monitor the following:

• The number of buyers who are existing (purchased last year, purchased prior to last year).
• The number of buyers who are new (purchased last year, and are new to the file).
• The number of buyers who were lapsed prior to the past twelve months.

The trends across these three metrics are so important to measure. Over time, you'll clearly get to see what it is that is driving growth in your customer file (hint, it is usually customer acquisition activities).

You can use this style of mega-metric for any business. E-mail marketers frequently keep track of twelve-month e-mail buyers, as well as e-mail twelve-month clickers, comparing to last month and last year.

This metric is a lagging metric --- in other words, it only tells you what has happened, it has no predictive power. But it is an important one to track. This metric is worth posting at the front door of your office building, for all employees to view and understand.

Coremetrics: Online Sales On The Decline

Enjoy this link from Marketingcharts.com / Coremetrics, suggesting online demand is waning.

A few years back, I was in a meeting with catalog and online marketing leaders --- I, of course, represented the old-school, dingy, fossilized, curmudgeon-based, calcified world of catalog marketing. Our channel was something like -20%, year-over-year, while the online channel was something like +50%, year-over-year (never mind that catalogs and store buyers fueled the online channel). The online leader turned to me, and in front of our peers, demanded to know what I was going to do to fix my portion of the business --- the online leader crowed about the online business "holding everything up".

As I read the online marketing literature, I see no solutions from the folks who drilled us over the past decade. Now, the economy is to blame ... they were brilliant when their channel cannibalized old-school direct marketing and retail ... but aren't accountable for a decline in sales.

We know, all-too-well, from our Multichannel Forensics projects, that the entire online ecosystem is an organism that must have a healthy host (the offline economy) to survive and thrive. Shut off the offline economy, and you starve the online economy.

All of us, direct marketers, analysts, online marketers, are going to professionally benefit from this experience. We're going to learn an awful lot about selling over the next few years, and we're going to be much stronger leaders as a result. We won't reward channel leaders in the future, we'll simply reward those who sell.

J. Crew Results

If you want to review thoroughly enjoyable comments from J. Crew management, take a look at the most recent investor conference call. Management offers surprisingly candid views on folks who are copy-cat merchandisers. They also plan to reduce catalog circulation, following successful tests in Q4-2008 ... this is the irony of the multichannel model, folks. We were taught that we had to mail catalogs to drive sales --- except that the retailers testing this stuff are cutting back on catalogs or discontinuing them. Hmmmmm.

If you check to see if J. Crew has a Twitter presence, you'll see they have parked the J. Crew name.

But no need to worry --- other folks do the marketing for J. Crew. 1,119 folks follow the Jcrewaholics on Twitter, or follow via the Jcrewaholics blog. When I posted a comment about J. Crew on Twitter last night, Jcrewaholics pinged me back in about five minutes ... mind you, they probably never knew I existed prior to my comment on my Twitter page.

Imagine what all this stuff looks like in five years, should momentum really pick up. If this discipline can be done right (a huge "if"), how much marketing would really be needed?

Multiple Channels And Long-Term Value

Here's one for you.

I recently ran a regression model to predict future value, based on the following attributes:

• Months Since Last Purchase
• Life-To-Date Demand
• Life-To-Date Merchandise Divisions Purchased From
• Life-To-Date Advertising Channels Purchased From

All variables were significant. Life-To-Date Advertising Channels was the least significant variable, with the least impact on future demand. Here's a table with results:

	Coeff.	T-Statistic
Constant	94.387	27.3
Square Root Of Recency	(41.483)	(45.8)
LTD Demand	0.103	127.7
Square Root Of Merch Divisions	25.972	25.2
Square Root Of Advertising Channels	5.077	5.6
Future Value, $500 6 Month Buyer
Merch = 1, Ad Chan = 1	$75.32
Merch = 2, Ad Chan = 1	$86.08
Merch = 3, Ad Chan = 1	$94.34
Merch = 1, Ad Chan = 2	$77.43
Merch = 2, Ad Chan = 2	$88.18
Merch = 3, Ad Chan = 2	$96.44
Merch = 1, Ad Chan = 3	$79.04
Merch = 2, Ad Chan = 3	$89.80
Merch = 3, Ad Chan = 3	$98.05

Notice that each additional merchandise division a customer purchases from adds more future value than does each additional advertising channel (catalogs, e-mail, paid search, affiliates, portal advertising, etc).

The lesson here isn't that multiple channels are bad. They're good!

The lesson is to think about channels as a transition-based attribute, and not as a customer-value attribute.

Think about your own behavior.

In 1989, you phoned a call center, ordered merchandise from a catalog, and waited 4-6 weeks for it to arrive.

In 1999, you received a catalog, then keyed your order in to a website.

In 2002, you received a catalog and an e-mail campaign, then keyed your merchandise into a website.

In 2004, you searched Google for competing products, then used the search feature on the website to place an order.

In 2007, you were caught up in the buzz about a product on a blog, then purchased on the website.

In 2009, maybe you were caught up in the buzz about a product on Twitter, then purchased on the website.

None of these channels make you a better or worse customer. They simply represent your transition through the maze of evolving technology. It turns out that good customers move through the transition faster than marginal customers.

If you're a member of the research community, selling $1,999 reports, please help us out. The "multichannel customers are worth 3x - 10x more than single channel customers, and make $100,000 a year" comments are holding back our industry.

Honestly, if this logic held, wouldn't Netflix be on the verge of bankruptcy while Blockbuster thrived?

Wouldn't Abe's of Maine be closing, not Circuit City?

Wouldn't Amazon.com be struggling, not Borders?

Analysts And Actionable Findings

Last year, I saw a former boss at a conference. This individual said "You're business must be struggling, after all, most people couldn't understand any of your findings."

Nice to see you, too!

One of the challenges for those of us who analyze data is to provide actionable findings. This is easier said than done.

Findings fall into at least four categories.

• The results simply aren't actionable. This happens for at least two reasons. Our business leaders ask us to provide information that isn't actionable "tell me how much more multichannel customers spend compared with single-channel customers". More often, this happens because we genuinely provide something that isn't actionable --- interesting (customers who visit the e-mail registration page view another 2.483 pages on the website), but not truly actionable. This is a character flaw of the analyst. All of us possess this character flaw. We dazzle ourselves with our own ability to create metrics, without considering if anybody outside of the analyst community finds our metrics valuable.
  

• The results are actionable, the business leader cannot digest the results. This one is painful for any business analyst. Have you ever tried to explain interaction terms in a logistic regression model to a traditional direct marketer? You hold the key to the secrets of your business, but the person you are explaining the results to owns a different set of skills, and may not ever be able to understand what you are trying to explain.
  

• The results are actionable, the business chooses to not act upon the results. This isn't quite as frustrating, because the analyst can accept that the business chooses to not act upon actionable findings --- heck, this happens dozens of times a day, every day. Of course, these businesses get stuck, unwilling to learn and evolve. We've all worked in environments like this.
  

• The results are actionable, the business acts upon the results. You'll have a very happy analyst team when you see this happening. However, this relationship requires a high level of trust. As an analyst, you'll have had to have been right a lot of times, helping your leader look good time after time, in order for the trust to exist to allow the business leader to act upon your findings.
  

For me, the most challenging environments are those where you have genuinely actionable results that folks struggle to understand due to legacy knowledge. You're like Galileo, trying to explain to everybody that the Earth rotates around the Sun, while all around you the chorus redirects everybody to the industry script.

It's been interesting to read the blog comments and e-mails, of late. A faction of the direct marketing community is really struggling with the rapid pace with which customer behavior and direct marketing fundamentals are changing. We analysts have a responsibility to somehow communicate complex, non-linear processes to a community that prefers to view the world in a linear manner. We're not going to be successful by making our message more complicated, even if the way customers are behaving is inherently more complicated.

Conversion Rate Fail

At Nordstrom, we had the "3-2-1 Rule" for our 1,000,000+ multichannel customers.

• Three Monthly Website Visits.
• Two Monthly Store Visits.
• One Monthly Purchase, 85% of the time in a store, 15% of the time online.

Using any web analytics package, we calculate an online conversion rate of 5%:

• Online Conversion Rate = (15% of one monthly order happening online) / (3 visits) = 5%.
  
• True Monthly Customer Conversion Rate Across Channels = 100%.
  

When I talk about non-linear direct marketing issues, I'm talking about issues like this one. This customer jumped in and out of our brand every six days. We needed a new set of metrics to understand the behavior of this customer, a set of metrics that measured success, not failure.

Always keep the mind open to the possibility that we're not actually measuring reality with the tools we've been given.

Multiple Marketing Channels At Zazzle

Perhaps you've heard of Zazzle, the four-year-old company that lets you create your own personalized merchandise. The business is experiencing dramatic growth, even in a lousy economy.

The concept of personalized merchandise is not a new one.

How personalized merchandise is marketed can be viewed as "new". You're not going to see traditional catalog marketing as part of the Zazzle marketing mix.

We start with the Zazzle homepage.

There's also the Zazzle blog, complete with RSS feed or e-mail subscription feed. Zazzle also hosts a Tech Blog, a Seller Blog, and the ArtsProjekt Blog, all with RSS feeds and e-mail subscription feeds.

Zazzle also hosts a forum. Please take a look at the staggering number of topics and posts. For instance, Bill at Thecampfireshop has a question about skateboards, while chic_geek asks questions about her gallery.

According to Blogsearch, there are more than 3,000 blogosphere mentions of Zazzle ... in the past week.

And then there's Twitter, where it looks like there are at least a half-dozen mentions of Zazzle per hour.

Go ahead and toss in an alliance with MySpace, for good measure.

Zazzle also focuses on traditional search and e-mail marketing programs. There are discounts based on geography, like this Boxing Day promotion. And Zazzle allegedly lures shopkeepers away from the competition as well, engaging in traditional brand-related warfare. Shopkeepers are important to the business model, in that they spread the word for the brand.

So why invest all this time on a Monday exploring a company like Zazzle? Well, it is becoming very clear that direct marketing in 2009 is a very different craft than it was in 1989 ... or in 2004. Look at the marketing tactics employed by this company. It becomes obvious that the tactics are the lifeblood of the company, rather than add-ons that complement traditional programs like catalog marketing. It is so much cheapter to get folks to market your business for you than to spend $0.65 per individual sending out a catalog every three weeks.

Our homework assignment is to learn about business models like Zazzle, identifying the pieces that fit into our business model. What are they doing that we could incorporate into our strategy? And what are they doing that we should stay far, far away from?

A Few Twitter Tidbits

Here's some of the stories I've been tracking over on Twitter --- follow along, @minethatdata.

Macy's: 1.5bil cash, 9.0bil debt: http://tinyurl.com/b8wnuq Interest = 50% of earnings.

Urban Outfitters direct-to-consumer up 20%, catalog circulation up 7%. Website visits were up 31% in the quarter --- http://tinyurl.com/ahzmcj.

Silos, schmilos: http://tinyurl.com/buhrve

Shoes.com looking to drive organic search: http://tinyurl.com/d3qhpe

56% of retailers think multichannel customers are more valuable: http://tinyurl.com/csy298. This means that 44% of retailers think multichannel customers are equal to or less valuable than other customers.

Hacker Group Blog on shifting money from offline to online, Century 21: http://tinyurl.com/adeov6

Hologram Marketing inches closer: http://tinyurl.com/cf3l78

Non-Linear Direct Marketing

Last week, I made a comment about online marketers ... "they're the folks who stare at you when you mention anything that cannot be immediately quantified with a conversion rate metric". Ted asked for clarification, suggesting that conversions, from a direct marketing standpoint, were a good thing.

It is my belief that direct marketing has always been non-linear. If direct marketing were linear, cannibalization would not exist.

It is my belief that direct marketing has always been treated as a linear process.

For instance, we've always talked about the purchase funnel, with linear concepts like "aware-consider-shop-buy-own". Given this linear process, we set up our KPIs, our "metrics", around this purchase funnel. Does the customer visit more than just the homepage? Does the customer put an item in the shopping cart? Does the customer buy something (conversion)?

These metrics allow us to measure success. The online marketer is uniquely qualified to measure each step in this process.

But ask the online marketer to answer any question that is non-linear, and the process falls apart. For instance, ask your web analytics expert the following set of questions:

• Of all the customers who abandoned a shopping cart last week, what percentage visited the site again this week? And of those who visited the site again this week, what percentage purchased something?

You can answer this question with many web analytics software packages. That being said, few web analytics experts can answer this question for you. Even fewer online marketing experts can answer this question for you. If you ask this set of questions, you are very likely to get a blank stare. Go ahead and try it sometime!

This is important, because a customer originally labeled as a "failure" by a linear set of metrics (the customer abandoned a shopping cart) becomes a "success" because of a purchase the following week.

• Our Metrics (Linear): Shopping Cart Abandonment = 50%, Conversion Rate = 50%.
• Actual Outcome: Conversion Rate = 100%.

Now granted, this process is technically "linear" according to the definition of a purchase funnel. But the behavior of this individual customer does not fit our linear set of KPIs --- a successful outcome is actually recorded as a series of unsuccessful steps.

This is one reason that I typically review annual timeframes with a Multichannel Forensics analysis. We can see interactions better, we can see if a series of negatives result in a positive, we can see if combinations of advertising fundamentally change customer behavior.

Channel Migration Visualization

Many database marketers who practice Multichannel Forensics categorize customer activity on the basis of the channel the customer purchased from. Others take this a step further, combining the physical purchase channel with the advertising channel that drove the order.

Example:

• A brand has two physical channels: Telephone and Website.

• A brand has eight advertising channels: Catalog, E-Mail, Paid Search, Organic Search, Affiliates, Shopping Comparison Sites, Portal Advertising, Blogs, Twitter, Uncoded.
  

Each combination represents a micro-channel. Many combinations have little relevance, and are not included below:

• Catalog / Phone.
• Catalog / Website.
• E-Mail / Website.
• Paid Search / Website.
• Organic Search / Website.
• Affiliates / Website.
• Shopping Comparison Sites / Website.
• Portal Advertising / Website.
• Blogs / Website.
• Twitter / Website.
• Uncoded / Phone.
• Uncoded / Website.

At this point, you have twelve micro-channels, and now you have something. Take a look at the ecosystem revealed by a Multichannel Forensics analysis (click the image to enlarge it).



This is fun stuff!! You can clearly see the path a customer takes as she moves from newbie status to becoming a loyal customer.

E-Mail marketers --- pay close attention to the middle of this chart. I frequently find that e-mail marketing is the "glue" that links a customer as the customer moves from the past (direct marketing, catalog marketing) to the future (social media, organic demand).

Paid Search marketers --- pay close attention to the role you play in this chart. You are frequently a source of new customers, but the customers you bring into the business are often not responsive to traditional direct marketing. That's ok, as long as the brand doesn't try to convert that customer to traditional advertising via direct marketing.

Often, there's a transition the customer goes through.

• Traditional Direct Marketing (Catalogs).
• Traditional Digital Marketing (E-Mail Marketing).
• Loyal Customer Generating Organic Demand.

And there's a digital transition that the customer goes through.

• Paid Search
• Organic Search
• Loyal Customer Generating Organic Demand.

There's a ton of profitability to be had by marketing appropriately to customers walking down one of these two paths. And increasingly, we'll add in social media and micro-blogging and mobile marketing.

Housefile Modeling & Co-Ops

In customer acquisition, you may have a mutually beneficial relationship with the co-ops. You get enough value to grow your business, they generate enough revenue to be profitable.

In housefile modeling, however, the story changes. Clients using Zip Code Forensics, a free tool that outlines the most productive zip codes, tell me that they are achieving 80% to 85% of the performance improvement seen via co-op housefile modeling. Here, however, the difference in cost is enough to turn the tables.

	Co-Ops	Zip Code Fr.	Base Perf.
Circulation	25,000	25,000	100,000
Buyers	313	303	1,100
Response Rate	1.25%	1.21%	1.10%
Average Order Value	$135.00	$135.00	$135.00
Demand	$42,188	$40,838	$148,500
Contribution	$14,766	$14,293	$51,975
Less Book Cost	$13,750	$13,750	$55,000
Less Co-Op Expense	$625	$0	$0
Variable Profit	$391	$543	($3,025)
Profit Per Buyer	$1.25	$1.80	($2.75)

In this example, Zip Code Forensics only gets us 73% of the improvement (you tell me that average number is about 82%) yielded by the co-op housefile model. However, at $0.025 per housefile name, you don't generate enough business to offset the benefit of the freely available Zip Code Forensics segmentation tool.

Unless your co-op is tossing in a bunch of goodies, you're better off using Zip Code Forensics to overlay against lapsed buyers. You went for the lower cost solution when you abandoned the list industry for the co-ops. Why not use a free tool instead of a low-cost solution?

Channel Shift And Online Marketing

These are absolutely delicious times in the world of multiple channels.

Sure, I focus a disproportionate amount of time on catalogers and retailers, because that's what I know. But the most interesting stories are over in the online marketing world.

You know those online marketers. They're the folks that just stare at you when you mention anything that cannot be immediately quantified with a conversion rate metric. They're the folks who organically benefited from all of your offline marketing. They're good people, learning their craft on the fly --- something offline marketers have a much harder time doing.

And in the course of just six months, the world shifted out from under them.

Aaron asks us, "How Much Of Your Pagerank Are You Wasting On Twitter?" Catalogers/Retailers, read this carefully, but as you read the article, make the appropriate substitutions:

1. When you see the word "Google", put in the word "Catalog", or the word "Retail".
2. When you see the word "Twitter", put in the word "Internet" or the phrase "Online Marketing".

Aaron speaks about the exact sort of thing that was announced at Get Elastic today. These folks are reducing blogging frequency, and eliminating Friday link-love, instead spending time on Twitter forwarding readers to good articles. Just like that, a brand that utilized a fruitful combination of social media and Google elects to slowly de-tether from the beast, choosing to spend more time on Twitter.

Too much hype was made over Web 2.0. What is happening now, however, doesn't have a label. It is a fusion of online marketing and offline marketing and Web 2.0 and, most importantly, demand creation, that is threatening to anybody in the online marketing camp.

Demand creation is sorely missing from online marketing and Web 2.0. Improving conversion rates and managing search and placing a shopping cart in the upper right hand corner of the screen is all about capturing as much demand as possible --- a good thing. But it is a fundamentally different process than what one goes through to create demand.

Demand creation results in new channels. New channels, as we have learned over and over again, cannibalize old channels. Search, all of a sudden, is an old channel. Old channels go after the money. New channels go after romance --- and are always criticized in the early going for not delivering ROI.

For my loyal catalog and retail readers out there, this is a time of huge opportunity. You can ignore the pap about selling on Twitter. You can ignore the stories about improving conversion rates by 394%. You can, instead, find new and innovative ways to use combinations of micro-channels in ways others haven't envisioned. Test! Try things. The mighty online marketing empire probably peaked last September, and is now being nibbled all around the edges by the very micro-channels it enabled.

The Hidden Marketing Tool: The Nameflow Model

It appears that Tim Hoermer from Carmot Marketing either has similar interests, or has created something that is mysteriously similar to Multichannel Forensics.

He calls it "The Hidden Marketing Tool: The Nameflow Model".

Read the article --- then you tell me if it isn't essentially eerily similar to Multichannel Fornesics, the widely adapted forecasting process we've described for the past three years.

Wow. Good to see folks using these concepts.

The concept isn't new, of course. Jim Fulton practiced his version of Multichannel Forensics at Lands' End back in the early 1990s (and does very good work as a consultant today), and I saw the concept practiced at Fingerhut in the 1980s.

Stress Test

You may have read about the stress tests banks are being put through.

For those of us in the "multichannel" industry, we, too, need to put the customer file through a stress test.

1. The cataloger really needs to see what happens to the business, over five years, if catalog customer acquisition is shut down.
2. The online brand can stress test the business if offline advertising were executed against the housefile. What happens to profitability, what happens to the retention rate, what happens to orders per buyer when any type of advertising happens other than online marketing?
3. The retail brand can stress test the business when stores are closed. How is the online channel impacted when a market only has one store, and that store is closed? How are stores impacted when one store is closed in a multi-store market?

This isn't an exercise for the CFO. This isn't an exercise for the web analytics expert. This isn't an exercise for the business intelligence staffer. This isn't something your co-op will do for you. This is something that you, the multichannel forensics practitioner, must become proficient at, and must assume the leadership role for in your business.

Now if you really want to stress test your Executive Team, do what Skittles did.

Co-Op Pricing And New Customer Elasticity

Thanks to all of you who forwarded me average co-op costs per prospect and per housefile customer. The data indicate inconsistencies and volume discounts. Some of the smaller brands get hosed on price ... some of the bigger brands get hosed because they contribute so many transactions that smaller companies benefit from.

From an economic standpoint, the data suggest that there isn't a huge benefit to the co-op to lower pricing.

Take a look at the following table, illustrating new customer acquisition, and profitability levels, given different co-op pricing tiers per prospect. The table assumes mailing to an incremental loss of $15.00 per new customer (at the margin).

Co-Op Elasticity Table
Cost/HH	Circ	Buyers	Demand	Profit	Prof/Cust	Co-Op $
$0.00	210,000	2,724	$354,151	$8,453	$3.10	$0
$0.01	195,000	2,587	$336,247	$8,486	$3.28	$1,950
$0.02	185,000	2,493	$324,082	$7,979	$3.20	$3,700
$0.03	175,000	2,398	$311,717	$7,601	$3.17	$5,250
$0.04	165,000	2,301	$299,139	$7,349	$3.19	$6,600
$0.05	155,000	2,203	$286,330	$7,215	$3.28	$7,750
$0.06	150,000	2,153	$279,833	$6,441	$2.99	$9,000
$0.07	140,000	2,051	$266,639	$6,524	$3.18	$9,800
$0.08	135,000	2,000	$259,937	$5,928	$2.96	$10,800
$0.09	125,000	1,895	$246,304	$6,206	$3.28	$11,250
$0.10	120,000	1,841	$239,365	$5,778	$3.14	$12,000

Assume that you're one of the poor souls paying $0.08 per name for prospects from your favorite co-op. You are able to mail 135,000 households (in my example), generating 2,000 new customers, and $5,928 of profit. Your co-op generates $10,800 revenue.

Let's say that you want the $0.05 pricing level that a larger competitor enjoys. Well, you'd benefit! You could now mail 155,000 households (in my example), generating 2,153 new customers, and $7,215 of profit. Your co-op, however, generates just $7,750 revenue.

If we exclude competitive pricing pressure between co-ops, there simply isn't any incentive for co-ops to lower prices for you. And because most co-ops have achieved a critical mass of households and transactions, there isn't enough of a threat of you leaving the co-op to encourage price incentives.

If you decide to participate in a co-op, you need to participate in at least two co-ops, clearly communicating to each organization how you are shifting circulation between them, being fully transparent about overall performance.

Catalog Customer Acquisition

A quote from the non-profit industry, courtesy of Mark Rovner, from pages 114-115 in Seth Godin's "Tribes". See if you see any similarity to our industry.

• " The era of cheap direct mail and high response rates in acquisition is over. The economics of direct mail are failing. That is more or less an uncontroverted fact. It costs more to mail, and fewer new donors come back with each mailing. This trend has been masked somewhat by higher average gifts by donors you already have, but sooner or later, the acquisition crisis is going to affect bottom lines. For some, it already has. What currently passes for an online fundraising model is at best a stopgap."

I've written nearly 1,200 blog posts, maybe 300,000 words. Why couldn't I have summarized my thesis this easily?

Even more important than somebody actually stating what we're all seeing is the last sentence. "What currently passes for an online fundraising model is at best a stopgap."

In our industry, this means that what we're doing online to acquire customers and build relationships is at best a stopgap. The future of online marketing isn't paid search and tossing a few banner ads up there and participating in shopping comparison sites and hosting a Twitter page. In fact, we simply don't know what online marketing will become.

But many of you now tell me you're beginning the experimentation process!

For many of the "experimenters", the outcome is a profitable customer acquisition program with lower-than-average long-term customer value. I've observed a few "whoppers", programs that literally replace catalog customer acquisition, programs that scale beyond traditional online marketing. These programs are not done via catalog marketing, via online marketing, or via social media, though those channels often get credit for the order. They are the outcome of experimentation!

Why our industry leaders refuse to publicly acknowledge the evolution of our craft is puzzling to me. Seriously, find me a series of articles in trade journals, blog posts, or conference sessions in our industry that address the issue that so many of you keep asking me to forecast the impact of.