Ripple Effects and Cyber Monday

One of the reasons we run Online Marketing Simulations (Book, Kindle, Digital Download, Hire Me) is because we want to understand what I call "Ripple Effects".

We're all familiar with Ripple Effects, right? Our economy collapsed based on the actions of a relatively small number of players, folks who did things that rippled through our economy, one domino at a time.

You'll use Online Marketing Simulations to understand, for instance, how Cyber Monday discounts and promotions ripple through your customer ecosystem.

Say you offered customers 15% off plus free shipping during Cyber Monday 2008. You now have one year of data to plug into your simulation. You'll get to see how customers who took advantage of this generous promotion behaved.

• Did these customers ever purchase full-price merchandise again?
• Did these customers ever pay for shipping and handling again?
• Did these customers ever purchase anything again?
• Did you convert full-price customers to discount hounds?
• Did you change the type of merchandise that the customer now prefers (i.e. low-price-point items)?

And you will get to see how changes in customer behavior ripple through your ecosystem. If your Cyber Monday promotions converted customers to low-price-point items in the future, then you'll see that high-price-point items are not selling as well, resulting in changes in merchandising strategy, changes that impact gross margin in the future, requiring more items to be sold, requiring more promotions to move items, further lowering gross margin ...

You get the picture!

You can simulate all of these things. You can plug in a smaller number of full-price buyers on Cyber Monday instead of a high number of promotional Cyber Monday buyers, and then see how this ripples through your business over the next five years. Pay close attention to the merchandise that sells in the future. Pay close attention to the discounts and promotions you'll have to give away in the future.

This is a great way to use an Online Marketing Simulation!

A Special Cyber Monday Opportunity Just For You!!!

Here's one for you, the loyal MineThatData reader, contact me now for more details.

Are you interested in learning more about who shopped your website on Cyber Monday or Black Friday, whether they are new customers or lapsed customers or loyal customers?

Do you want to learn whether those customers will ever shop your brand again on a day other than Cyber Monday or Black Friday?

Do you want to know how the long-term value of a Cyber Monday or Black Friday shopper compares to any other customer?

Do you want to learn more about the discount/promotional activity of Cyber Monday / Black Friday buyers, compared with buyers purchasing during the rest of the year?

Yeah, I'd want to know that information, too, if I were running a business. And I doubt your Web Analytics solution will easily provide you with these answers.

So here's a special promotion for you, the loyal MineThatData fan.

You send me your purchase transactions (one row for every item the customer ever purchased). I will answer the questions listed above for the low fee of just $2,999.

Now that's a Cyber Monday / Black Friday promotion you simply cannot refuse.

It's Cyber Monday. You're in a promotional frame of mind. Why not learn if your decisions pay off in the long-term?

Contact me now for details about the data you need to send to me!!!!

Dear Catalog CEOs: Co-Ops

Dear Catalog CEOs:

During the past six weeks, I've been asked more questions about co-ops than any other topic in catalog marketing.

You know what co-ops are, right? These are the companies that your marketing team sends the name and address of your best customers to. The co-op compiles the information, models it based on purchase habits across companies, then resells the information, at +/- $0.04 to $0.07 per name to your competitors. In kind, you get access to the names and addresses of customers who shop your competitors, for +/- $0.04 to $0.07 per name.

Your marketing team felt like the co-op relationship was nothing short of "dreamy", back in 2004. They sent files with important purchase information about each customer to the co-ops, and then they got access to names at what seemed like an inexpensive cost. They funneled your campaign performance through tools like ChannelView. The tools suggested that paper drove business to all channels, preserving a historical business model (catalogs drive sales) that your staff felt comfortable with.

A combination of "cheap names", matchback analytics like "ChannelView", and hosted database solutions meant that catalog marketing became "easy" for your marketing team. They no longer had to worry about updating a customer database (the second most important asset you have after merchandise), they no longer had to do the hard work associated with matching orders back to catalogs, and they no longer had to do the hard work of knowing which lists worked.

In fact, they no longer had to know much of anything. Co-ops did all of the important stuff for them, even housefile modeling and merge/purge assistance. Co-op list performance was better than typical outside list performance, and housefile performance improved.

Fast forward to 2009. The economy is in shambles. Customers are performing much worse than they performed in the past, and customer acquisition performance is even worse than housefile performance.

Who is to blame for poor customer performance?

Your marketing team might blame the co-ops, the very organizations they blessed with the keys to the business in the past decade.

As business leaders, if we could go back to 2004 (or earlier), and re-think the concept of outsourcing customer acquisition, database analysis, merge/purge, housefile modeling, and database maintenance to other companies, would we have outsourced all of our intelligence to a third party?

Would you allow this to happen with Google today? Heck no!

In the past five years, we forfeited critical business intelligence in four key areas:

1. We forfeited the intelligence associated with knowing which "lists" worked for the ease associated with having an algorithm that we don't understand choosing random names for us.
2. We forfeited the intelligence associated with having to know how every part of our business performed when we do the hard work yourself, instead opting to have the co-op matchback tool do the work for us, even if it meant that the matchback tool grossly over-stated actual performance, causing us to seriously over-mail housefile customers.
3. We forfeited the intelligence associated with managing our own database, instead opting to have the co-op do the work for us and then feed their database (which used to be our database) into their matchback algorithm (a conflict of interest).
4. We forfeited the intelligence associated with our online customers, instead opting to have Google do the work for us, then having Google use our own information against us to help our competitors.

If your marketing team walked into your office today and said they were going to do this, you would likely ask them what your business gets in return for a business intelligence bloodletting of this manner, right? And you'd be looking for an answer that was better than "... an annual cost savings of $439,000."

The great tragedy of catalog marketing isn't rising postage costs or economic challenges or third-party opt-out services.

No, the great tragedy is that we, as business leaders, outsourced all of our customer knowledge to the co-ops. And in return, we achieved marginal cost savings and a 10% increase in new customers.

I'd rather have the consumer intelligence we used to have.

Do you realize that, for many catalogers, 40% to 80% of the 36 month customer file is now comprised of co-op names? By default, our businesses succeed or fail largely because of the choices made by analysts at co-ops over the past four years. Does everybody in your business understand that? Does your CFO understand that? Does your Chief Merchandising Officer understand that?

What do you know about the customers the co-ops selected for you? What are their preferences? Are these Baby Boomers, Gen-Xers, or youthful Gen-Y individuals? Do they prefer full-price merchandise, or are they only buying from you because they love the promotions they receive? Are they rural customers, suburban customers, or urban customers? Do they buy over the telephone because they need help with their purchase, or because they are afraid of the internet? Do they crave new merchandise from your brand, or do they continually buy the same merchandise, over and over? Are they evolving to online purchases, or will they stay loyal to purchases driven by catalog mailings? What is the right contact strategy for these customers? Can these customers support a reduction in catalog mailings, instead buying from e-mail campaigns? Do they respond to dense catalog offerings, or branding presentations? Do they see items in catalogs, then go online and buy other merchandise instead? Will they spend just as much on 48 pages as they will spend on 148 pages?

When your marketing team outsourced the business intelligence you used to own, you lost the ability to answer many of these questions. Sure, you now know that customers in the "synergy model" respond to free shipping promotions. Now tell me what you do with that information?

An Executive at a co-op recently told me that "... co-op employees aren't responsible for knowing your business, you are responsible for knowing your business, co-ops only provide you with cheap names."

If you knew that fact five years ago, would you have allowed your marketing team to outsource all of the customer intelligence they used to own?

Your marketing team will probably agree with you that it is time to truly understand customer behavior. Should your hosted database solution and matchback analytics strategy not provide you with what you are looking for, I am available to help you, right now ... contact me now for assistance.

As always, I am here to help you through this transition.

Thanks, Kevin

Gliebers Dresses: Home Page Design, Part 2

Welcome to this week's Executive meeting.

Glenn Glieber (Owner): "... you know, there's really nothing like getting a standing ovation from an enthusiastic crowd, even if there are only 65 people in attendance. When you are acting, you have to channel your character. I really felt like I was Myles Standish!"

Pepper Morgan (Chief Marketing Officer): "Kevin, welcome to our meeting."

Kevin: "Thanks, Pepper. Where's Meredith?"

Pepper Morgan: "She took today off."

Roger Morgan: "Well, we have test results. And they are interesting."

Pepper Morgan: "Overall, the current home page had an 8% conversion rate. Meredith's design had a 5% conversion rate."

Lois Gladstone (Chief Financial Officer): "So the old design was clearly better. My goodness, how much money did this test cost us?"

Pepper Morgan: "Well, there's a couple of interesting findings. Average Order Value for the existing home page was $125, while AOV for Meredith's strategy was $150. Therefore, dollars per visitor in the existing home page was $10.00, and was $7.50 for the new home page."

Lois Gladstone: "How many visitors saw the new creative?"

Pepper Morgan: "20,000".

Lois Gladstone: "So we lost $50,000 demand, and maybe $15,000 profit, much less the cost to execute the test, because our merchandising leader wanted to test something, and because Kevin supported doing the test. We don't need to keep losing money, folks."

Pepper Morgan: "Here's what is interesting, Lois. The customers in the loyalty program performed different than anybody else. For loyalty customers, conversion rate was 12% for the existing site, but was 18% for the new site. And AOV was $150 for the existing site, but $225 for the new site. In total, the existing home page generated $18.00 a visitor, while the new home page generated a whopping $40.50 per visitor."

Lois Gladstone: "How is that possible?"

Pepper Morgan: "Because new customers absolutely hated the new home page. They couldn't stand it. But it appears that our very best customers loved that we did something new, creative, and innovative. And I think that is what Meredith was leaning toward when she wanted to try this strategy. She felt that customers who love our merchandise are absolutely bored with what we do."

Roger Morgan: "So maybe we could recognize visitors, based on prior purchase habits, serving up different home pages based on whether the customer is in the loyalty program or not?"

Pepper Morgan: "And that solution would be far more profitable, based on these test results, than to do what we've always done. See, Meredith was right, and Roger was right. New visitors need a site that makes navigation easy. Our best customers want to be romanced. Just think about it. Is every single customer the same, or do different customers at different stages have different needs? Why do everything the same way?"

Roger Morgan: "Because we don't have the technology to do this in-house. Our database and web infrastructure don't support executing a strategy like this."

Pepper Morgan: "Kevin, what do you suggest?"

Kevin: "There are many vendors who would be happy to help Roger with serving up different pages based on customer preferences. And I can easily segment customers into those who are best, those who are new, and those who have varying merchandise interests. I can feed those customers into any of many vendor platforms, and then the proper home page or landing page can be served to the customer. Over the course of a year, you'll be far more profitable doing this."

Glenn Glieber: "Well, it's a good thing we had the courage to do this test! Ok, on to the rest of the meeting. Our next topic is about the temperature in the building. The employees think it is too cold, and they are right, because I asked Roger to turn the thermostat down to 62 degrees to save money. So I think we should raise the thermostat to 63 degrees, what do you think?"

Analyst Spotlight: Profit

Dear Analysts:

You asked me to help you understand what CEOs and Executives are looking for from the analyst community. Today, we're going to focus on profit.

Always remember that Executives care about two things.

1. Increased Sales.
2. Increased Profit.

And there are three reasons that Executives care about these two things.

1. As long as Sales and Profit increase, they get to keep their job.
2. If Sales and Profit increase consistently over time, under their watch, they get promoted.
3. Executives usually have a bonus structure that pays if both Sales and Profit increase. And for most Executives, the bonus structure is very rewarding, and consequently, very motivating.

So, in order for an Executive to truly be interested in what you have to offer, your analysis needs to be aligned with increasing Sales, and increasing Profit. Increasing both will perk up the ears of any Executive. Increasing just profit (in other words, recommending to decrease sales as a way to increase profit) is a very slippery slope that most Executives aren't interested in (though it can be exactly what a company needs).

Now, it isn't hard to calculate the annual sales impact of what you are communicating. For instance, say you execute an online optimization test, and you find that you can increase conversion rates by 7%, increasing the rate from 5% to 5.35%. Say you have 3,000,000 annual visitors. And assume that the average order value is $100.

• Annual Sales Increase = 3,000,000 * (0.0535 - 0.0500) * $100 = $1,050,000.

As an analyst, you're half-way there. Next, you need to convert the $1,050,000 to profit.

To do this, go find a friend in your Finance department. In fact, set up a meeting with the CFO (Chief Financial Officer). Now this may surprise you. Of all the members of the Executive team, the CFO is most likely to take a meeting with you.

Here's why. Your CFO knows where your business is headed (sales up/down, profit up/down). Your CFO might be dying to trim the advertising budget, your CFO might be dying to add money to the advertising budget to prop up sales, your CFO might be livid with the IT team for not implementing website improvements that could boost sales today.

So if you have any information that could help the company increase sales or profit, your CFO wants to know about it. Now.

Here's where you benefit. After you present your findings to the CFO, ask for help converting sales to profit. Ask the CFO to share with you the formula for converting sales to profit.

At most companies, there is a percentage that Finance folks use to quickly convert sales to profit. This number is called the "flow-through rate" or the "profit factor". The metric represents the percentage of sales that convert to profit after backing out returns, unfulfilled items, cost of goods sold, marketing discounts, pick/pack/shipment of items, and call center / distribution center staffing costs. Across the businesses I work with, this percentage varies, usually between 10% (companies like Overstock.com that sell $500 items with a $425 cost of goods) to as much as 50% (companies that sell $500 items with a $200 cost of goods).

Assume that the percentage is 30%. In our case, sales increased by $1,050,000. We multiply this number by 0.30, yielding an estimated amount of profit of $315,000.

Is $315,000 a good number? Who knows?

Here is where you can work with your Finance team for some additional information. Ask the Finance team for a year-end projection of Sales and Profit. If they are willing to share the information (most Finance folks at most companies will be willing to provide you with numbers that are close to accurate), you're likely to see something like this:

• Annual Sales = $15,000,000.
• Annual Profit = $800,000.

Now you have some "context". If you are working for this company, you just found a way to increase annual profit from $800,000 to $1,115,000.

I promise you, that if you have found a way to increase company profitability by about 40%, your CFO is going to annoint you as The Savior to a vast audience of Executives.

This is what is important, Dear Analysts.

• Do not communicate that your multivariate optimization testing strategy increased conversion rates by 7%.
• Do communicate that you found a way to tweak the website so that company profit increases by 40%.

Which of those two sentences is more likely to resonate with your Executive team?

Analysts seldom succeed on the merits of their work. Analysts have a good chance of succeeding when they communicate via the language of the Executive. The most important word in Executive parlance is "profit".

"Profit".

Learn how to calculate "profit".

Make friends with an Executive in Finance.

Demonstrate to your Executive team, via "profit", that you have the keys to business success!

You can do this!

Optimizing Customer Acquisition

Buy the book on Amazon.com, or buy the Kindle version here. Finally, e-mail me for a copy of a free OMS spreadsheet so that you can follow along with our examples.

Ok folks, open up your spreadsheets. Take a look at the five year sales projection for this business.

• Year 1 = $75.9 million.
• Year 2 = $70.4 million.
• Year 3 = $66.7 million.
• Year 4 = $64.4 million.
• Year 5 = $62.9 million.

Now let's try something different. Go down to the customer acquisition portion of the spreadsheet, and do the following:

• Enter "0" into cell B452.
• Enter "10,142" into cell B441.
• Enter "11,463" into cell B443.

Look at the five year trajectory of this business:

• Year 1 = $75.8 million.
• Year 2 = $70.5 million.
• Year 3 = $67.1 million.
• Year 4 = $65.0 million.
• Year 5 = $63.9 million.

This doesn't look like much of a difference, does it? Of course, we're only looking at changes to three of 240 different customer acquisition segments.

Here's the point I want to make. Those of us in the Web Analytics and Online Marketing community do everything possible to improve conversions today. This creates inefficiencies in our business. Use the OMS framework to understand the customer acquisition strategies that improve the health of your business long-term.

Think about being in this business five years from now ... having an extra million in demand might mean an additional $400,000 in profit, enough money to save five jobs.

All of these little details add up over time. When we optimize our business for today, we potentially cost ourselves our job in the future.

Dear Catalog CEOs: The Big Book

Dear Catalog CEOs:

Just like that, the inevitable happened. JC Penney discontinued their "big book".

A quick scan of the homepage of DMNews showed no link to the article, as of last Thursday. Multichannel Merchant did have a small link on their homepage, though the link was about 1/4 the size of the heading of a competing article titled "Harness The Power Of Employee Bloggers".

Let that sink in for just a moment. JCP canning the venerable big book is less news worth than is harnessing the power of employee bloggers.

Oh, sure, the multichannel pundits will spin this any of a number of ways. They'll tell you that this decision in no way impacts the vital importance of print marketing in the multichannel marketing arsenal. They'll remind you that Sears eliminated their big book in 1993, and their business struggled ever since. They'll cite metrics from research organizations that suggest something like 7 in 10 online purchases are influenced by offline marketing techniques, with print and radio leading the way.

Neil Stern is quoted in the article as saying that "Penney had the name, infrastructure and broad product reach to become an instantly formidable player in what is essentially transforming retail in this century. The big book effectively helped them build that bridge."

It took twenty years to build the bridge that allowed the big book era to end.

The next question that must be asked is "How many years will it take for the targeted catalog mailer era to end?"

Thanks to Google, direct marketing has become ruthlessly efficient. Waste kills the profit and loss statement.

Now if you are marketing to a 68 year old woman in North Dakota, by all means, enjoy the myriad fruits of your catalog labor.

But if you are marketing to customers under the age of 50, it is time to calculate that all-important metric called the "organic percentage". Take 10% of your twelve-month buyer file, and divide it into two segments. The first segment receives catalogs as they normally would, for the next six months. The second segment is not allowed to receive one single catalog. At the end of six months, compare the sales of the two groups.

• Group Mailed Catalogs = $50.00.
• Group Not Mailed Catalogs = $40.00.

The "organic percentage" is calculated as $40.00 / $50.00 = 80%. Simply put, this is the most important metric you will ever calculate. In this example, catalogs only generated $10.00 of incremental volume ... the other $40.00 happen without catalog mailings, a full 80% of the total happening organically, independent of catalog mailings. Run a profit and loss statement on the $10.00 of incremental volume, not the $50.00 that your matchback vendor is telling you catalogs generated. You may not like what you see.

This is the little secret that the catalog vendor community, and your co-op matchback vendor in particular, don't want you to know. They want you to keep renting names at $0.06 a pop, they want you to keep mailing catalogs, falsely attributing sales to print.

A few weeks ago, I mentioned this methodology (test/control and organic percentage calculation) to a Catalog CMO. The Chief Marketing Officer told me that "... if what you are suggesting is so useful, why aren't the co-ops recommending this to us, after all, they are the thought leaders in our industry?"

Good question. A really good question.

Now that "The Big Book" era has ended, it is only a matter of time before targeted catalog mailings face the music. Granted, this evolution may take another twenty years. But in the meantime, there's billions of dollars of profit sitting out there, waiting to be picked up off the ground.

I'm begging you. Execute the test mentioned earlier. Calculate your own "organic percentage". Run a profit and loss statement based on demand only attributed to catalogs. Find the audiences that no longer respond to catalog marketing, and stop mailing them. Then enjoy watching semi-truck trailers packed full of greenbacks pull up to your Finance department door.

As always, I am here, ready to help you through this transition.

Thanks,

Kevin

Gliebers Dresses: Big Books

Welcome to the Gliebers Dresses Executive Meeting.

Glenn Glieber (Owner): "... it simply isn't a day that I thought I'd ever see."

Meredith Thompson (Chief Merchandising Officer): "Kevin, is that you?"

Kevin: "Yup, it's me."

Roger Morgan (Chief Operations Officer): "I assume you've heard the news, Kevin?"

Lois Gladstone (Chief Financial Officer): "Yes, I'm sure he heard about it. BT Nickels is discontinuing their twice-yearly big book catalog mailings."

Pepper Morgan (Chief Marketing Officer): "I spoke with Janice Fosterberg at ResponseShop, our co-op and matchback vendor, and she said that they are making a HUGE mistake. She said that they ran several analyses on BT Nickels data, and it shows that those gigantic, 600 page catalogs are responsible for 10% of their retail sales and 80% of their e-commerce sales. She thinks they will absolutely regret the day they made this decision. And Ralph Throckmorten is their print rep, and he said they are going to lose a ton of paper discounts because of this decision. He said this will drive up the incremental cost of their other catalog activities, making them less profitable, causing them to trim circ. He doesn't like where this is headed."

Roger Morgan: "I'll bet that ResponseShop regrets that they made this decision. At $0.06 per pop, they're losing millions of dollars."

Pepper Morgan: "Well, they're going to continue to mail what they call 'skinny books', you know, 84 page catalogs with targeted merchandise to specific niche audiences within their catalog file. So I'm sure ResponseShop is going to continue to be lathered with $0.06 payments for some time to come."

Meredith Thompson: "But what a sad day. I mean, this really is a sad day. Back in the late 70s, I relished ordering from the BT Nickels catalog. It came in the mail, and we just fought over who got to see the catalog first. And remember, they only put 20 lines on their order form, heck, that wasn't nearly enough space to order everything you wanted, so you had to attach another piece of paper with all of the other items you wanted to buy. Then you mailed in your order, and you had to mail it around October 1, because delivery took 4-6 weeks, remember? And sure enough, just before Thanksgiving, your order arrived. The whole process was magical. That big book was magical."

Glenn Glieber: "And it is a sad day for all of those workers in British Columbia who will be denied the right to harvest a renewable resource because the big book is now gone. Where will they work now? I'm sure the folks at Catalog Select, the third-party opt-out service, are having lots of fun at the expense of catalogers, knowing all that paper has just been taken out of the mail system. Maybe they can provide jobs for all of the workers who are being slowly displaced by technology."

Roger Morgan: "I ordered a computer chess game from BT Nickels back in the mid-80s. I played that computer chess game every day. You couldn't find it in stores anywhere, the only place you could find it was in that big book catalog."

Lois Gladstone: "And now, you download a free app on your iPhone and you can play chess against a computer or against any one of a half-million iPhone chess enthusiasts worldwide."

Glenn Glieber: "What is an, uh, what did you call it, an 'app'?"

Lois Gladstone: "Yes, an app ... it is an application, a computer program that you wirelessly download onto your iPhone. In the old days, you'd buy a computer game at Best Buy for $24.95. Now you buy an app for $1.99."

Roger Morgan: "And many of the apps are free. For some retailers, those apps are like free marketing."

Glenn Glieber: "I love free marketing!"

Pepper Morgan: "And that's the punchline, isn't it? Why send 600 pages at a cost of $7.50 per catalog to a customer when the customer holds the entire world in her hands on an iPhone?"

Glenn Glieber: "Are we doing any of these app things, Pepper?"

Roger Morgan: "Oh, not yet, Glenn. Pepper put apps for the iPhone and Droid platform on the book of work, but we're buried right now with a Holiday season information technology lock-down. There's no way we can work on that stuff right now, we simply cannot interfere with computer systems that are taking Holiday orders."

Glenn Glieber: "What's a droid?"

Roger Morgan: "That is Google's cell phone platform, they are competing against the iPhone."

Glenn Glieber: "And Pepper, you were thinking of doing droid marketing too? Is that free?"

Pepper Morgan: "Our iPhone and Droid and Blackberry apps would all be free."

Glenn Glieber: "And the customer could thumb through a digital pdf or something like that on their droid? I mean, could we have a 600 page big book in pdf format for the customer to thumb through on her i-droid? And then maybe we could make it available on the Kindle too, heck, we could charge customers $0.99 for a 600 page big book in pdf format."

Pepper Morgan: "Well, we'd prefer that the customer visits a mobile version of our website."

Glenn Glieber: "But we already have a catalog, and the catalog drives customers to our website, so why does the customer need to use a free droid to go to a special version of our website? I mean, I like the cost structure of the whole thing, but that's not how people shop, is it? Haven't we been taught that customers use paper to place online orders?"

Lois Gladstone: "It's how some people shop."

Glenn Glieber: "Are you telling me that more people would shop via these free droids than would shop a big book like BT Nickels used to send?"

Meredith Thompson: "Absolutely not. I'm sure a half-million or a million customers would still buy from a big book. Apps haven't broken through for retailers yet. And that's the problem with all of this marketing hype. A million customers will order from a big book, but everybody declares it to be dead because it is too expensive. 20,000 people order from an app, but that's all you ever hear about, the 20,000 cool people who order via mobile marketing."

Roger Morgan: "But that's the thing. A big book from BT Nickels cost $7.50 to put in the mail. One of our 124 page catalogs costs $0.75 to send to a customer. An iPhone app costs us essentially nothing, outside of staffing and development costs."

Glenn Glieber: "I get the big book. It's the whole assortment, sitting on your coffee table. And I get our catalogs, because they are targeted with razor-like precision to customers who love dresses. But this i-droid app, that doesn't make any sense to me. Are you saying that a customer holds a phone in her hand and buys dresses from us?"

Lois Gladstone: "And listens to music."

Roger Morgan: "And tweets to her friends."

Lois Gladstone: "And reads news headlines."

Meredith Thompson: "And uses Google Earth to take a magical trip to the Palouse."

Lois Gladstone: "And gets urgent weather messages from the National Weather Service."

Roger Morgan: "And reads books."

Lois Gladstone: "And does online banking."

Roger Morgan: "And watches NFL Thursday night games on it."

Pepper Morgan: "I'm saying that next spring, we will launch a mobile shopping website with free apps for all lines of smartphones."

Glenn Glieber: "Smartphones! I remember when we had party lines back in the 1970s. My daughter would be speaking with her boyfriend, and then she'd freak out because old man Barnaby from three houses down the road was listening to her conversation."

Roger Morgan: "Have you noticed, folks, that the cell phone carriers have all raised their data plans to something like $129 a month for two people. I mean, what's up with that? Everything else is getting cheaper, but if I want to download a bunch of free apps I have to pay $129 a month, every month? And then you look at Sonora's text messages. Do you realize that she sent and received 2,084 text messages last month? Mercy!"

Pepper Morgan: "Roger, the average kid sends and receives 2,200 text messages a month. 2,048 is actually well below average."

Glenn Glieber: "Do we send out free text messages to our customers?"

Meredith Thompson: "I just think we keep losing something as technology takes us in a digital direction. That 600 page BT Nickels catalog sat on the table for four months. Then our 124 page catalogs sat on the table for four weeks. Then an e-mail marketing campaign sat in my in-box for four hours. And now the customer will research our mobile website for what, maybe four minutes? Honestly, we're running out of time to romance a customer, aren't we?"

Kevin: "Here's something for all of you to consider. What is your marketing strategy? Honestly, what is your strategy for communicating with and engaging customers? You're doing all of the things that the multichannel experts tell you to do, catalogs, e-mail marketing, search, affiliates, social media, banner ads, mobile marketing, you name it, you are willing to dip a toe in it. I think it is great that you are thinking of doing something with mobile marketing. But what is your strategy? Could anybody in this room offer me a one-paragraph description of your multichannel marketing vision for the next five years? Could you tell me which channels will be emphasized, which channels will be de-emphasized, which channels have mass-audience appeal, and which channels are destined for niche audiences? BT Nickels is clearly telling you what they think the future of print is. There's no reason Gliebers Dresses cannot have a vision for how each of your marketing channels are forecast to evolve, and then you market to the projected evolution of each channel."

Meredith Thompson: "I think that's easy. We're being 'multichannel' because the best customers are multichannel customers, and we want to be everywhere the customer is. So if she is walking down the street and sees an Ann Taylor Loft store and decides she wants a dress and then thinks, 'oh goodness, maybe Gliebers Dresses has something like that', she can just punch up her iPhone app, and bingo, we just took a sale away from Ann Taylor Loft. It's really that competitive, I think, at least for 20,000 tech fanatics using apps."

Kevin: "That's your imagination, and imagination is really good. But imagination is not a strategy. How many of you shop with your iPhones when you are spending a weekend in Boston? Seriously, how many of you do that? Or how many of your friends do it? Just because a tech blogger says this is the future doesn't mean it is the future ... unless, of course, you do something so innovative with the channel that you literally create the future. That seems to be what is completely missing from multichannel marketing. Everybody is doing something because you are supposed to do something, same items and same prices and same imagery and same promotions in all channels, so that the best customer gets pummeled with the same message 97 times in eight different channels. Who said that is a good customer experience? Vendors selling multichannel solutions? Having a website that store customers can buy from and vice-versa isn't a genuine strategy, it's a tactic. Why not be the first to have a strategy? Outline, for each channel, what the purpose of the channel is, who the unique customers are who are served by that channel. Clearly state how you plan on using each channel in a way that is congruent with other channels. Clearly state how you plan on using each channel in a way that is completely different from every other channel. Clearly state how you will use each channel is a way that is different from the way your competitors use channels. Clearly state how customers, not marketers and vendors, benefit from all of these channels. Clearly state what defines 'success' in a channel, and what must happen for you to decide to shut down a channel. That's what BT Nickel had to have done with their big books. Prioritize every channel, because they sure aren't all equal in stature. Communicate your strategy to every employee. I dare any cataloger to provide a document that has this level of thought in it. You can lead the pack. Do it!!"

Glenn Glieber: "That sounds like a fascinating project, Pepper, why don't you tackle that one? And be sure to be clear about where we are going with droids and stuff like that. Have something on my desk by the end of day tomorrow. Ok, great meeting! And we'll certainly miss the BT Nickels big book, won't we?"

Sharing Information With Executives

Yesterday, I mentioned to folks on Twitter that I used three different analytics tools to measure the same thing. I was trying to quantify how many people viewed a page.

• Tool #1 Counted 15 "hits".
• Tool #2 Counted 10 "hits".
• Tool #3 Counted 9 "hits".

I offered the comment "... how do we trust information when three tools give us different answers?" I also mentioned that CEOs don't like different answers from different sources, they like for information to tie out.

It was the latter comment that frustrated a few analysts.

Last week, we talked about the gulf between analysts and executives, in fact, this was one of the most popular posts written this year. But as Mr. Peterson would say, people like to grumble about things, but it is much harder to do something about it.

So let's start doing something about it!

Let's review a series of topics about analytics that frustrate business leaders, and discuss what we can do to bridge the gap a bit.

Executive Pet Peeve #1 = Numbers That Don't Tie Out: Always remember that business leaders get reporting from sources that are reasonably "iron-clad". The CFO says that net sales were $22,000,000 in October and profit was $1,500,000. The Chief Merchant says that she sold exactly 2,493 units of an item. All day long, the business leader is dealing with numbers that "tie-out", they match metrics found in other sources.

Then here comes you, the web analytics expert, sharing that your reporting says that net sales were $19,000,000 in October, because your web analytics software package doesn't capture all sales. Granted, your did some spectacular work, and found many interesting customer trends in your analysis. But as soon as you leave the boardroom, your CEO will look at your CFO and say "... Ralph's numbers don't tie out with our order entry system or with finance numbers, how can that be? Can we trust Ralph's analysis?"

You already know that Alexa and Quantcast yield different outcomes, and you already know that Coremetrics and Google Analytics yield different outcomes. You can explain the differences, you are comfortable with the differences. But your executive team does not have to deal with this level of uncertainty with, say, merchandise reporting (though honestly, other sources don't tie out either, they just won't share that fact with you).

Solution: Know the biases in your data, and willingly share them before people start to question the data. Maybe your web analytics solution misses 15% of sales. Match this information with your order entry system (or have a tech person do this for you), and understand where the sales that don't tie out come from. Then tell a story that matches the worldview of your executive team. For instance, if you are missing sales, it is fine to confess that fact, saying "Well, we've thoroughly audited this problem, and it turns out that our analysis is disproportionately focused on our best customers, and as you know, one of the three biggest initiatives for 2009 is to get more sales out of best customers, so the data I am presenting supports a big company initiative." Also, take all references to any triangulation you did out of the spotlight. In other words, if you are analyzing data from different sources, clearly state in your documentation/appendix that you did that, and clearly state what the biases are. But you are the expert, so sell your story to your leadership team, earn their trust by being confident that directionally, you are recommending a great strategy. And then, be right! If your conclusions are consistently right, executives will stop asking questions about data integrity!

Executive Pet Peeve #2 = Misaligned Objectives: Your executive team isn't going to tell you all of the things they are focusing on. It is possible that they are being pressured by the credit division to increase credit utilization or the credit division will have to sell the portfolio, so the executive team asks you to analyze conversion rates among proprietary credit card holders on your site. They simply don't give you any background about the request, other than to produce a report for them. And you do a great job on the analysis, showing that credit card holders are converting less and less often (maybe because they've maxed-out their credit limit). This answer may not be aligned with what the executive team needed to hear --- they gave you a task and were hoping for one outcome, you provide them with another outcome. And then, you try to complement your analysis with a recommendation to drive non-proprietary credit traffic via paid search, in an effort to optimize conversion rate. Your recommendation, while spot-on, is not what the executive wants to hear. And as a result, the executive is going to do one of three things ... the executive is going to have you go on a fishing expedition to find one metric that meets her needs (a very frustrating process, if you are an analyst), or the executive will tell you that something is wrong with your analysis, or the executive will politely thank you for your work, without telling you that you failed to meet her expectations.

Solution: Ask questions when you are assigned a project. Ask the executive if there are any land mines to look out for. Ask the executive to provide you with any background information that can help you provide a better analysis. Ask the executive what the "expected outcome" of the analysis is. Ask the executive how the executive will judge if you did a good job? Ask the executive if there is an "extra credit opportunity" ... in other words, are there follow-up analyses and projects that you could do that would even better compliment the work? After doing this a few times, you will get a feel for what your executive sponsor is "really" looking for, and you'll do a much better job of completing future projects. The responsibility for ferreting out information is on you, dear analyst, because executives are not going to ever volunteer enough information to inform your work ... in fact, in some cases, they simply cannot tell you the real reason for an analysis (i.e. they need numbers to determine if 5% or 10% of the workforce will be let go next month).

Executive Pet Peeve #3 = Loyalty. I once had an employee who sent me an e-mail, suggesting that I purchase a service from a vendor. At the end of the e-mail message, the employee quoted a vendor tagline. I later learned that the employee brought in a vendor for an informal visit, listened to the sales pitch, and then was recommending the vendor to me. I knew that the employee was loyal to the vendor, and not to me. I was an executive at Nordstrom, and without a doubt, I expected my analytics employees to be more loyal to me than to vendors that were pitching products and solutions to them. I expected my employees to be loyal to me, to my department, to my company, and most of all, loyal to the "voice of the customer", communicated via solid analytical rigor.

Solution: Your company might truly need a product or solution from a vendor. Your job, as an analyst, is to provide the business case for the product/solution. How would the product or solution or analysis help the executive? Not surprisingly, executives are looking for solutions that allow them to keep their job. I mean, take a look at many executives, they go from company to company, being hired and fired every few years. Most business leaders want to keep their job, and are under a lot of pressure to do so. So make it easy for them. Any analysis, product, or solution that makes it easier for a business leader to keep her job and to look good among executive peers is an analysis, product, or solution that is going to be used. You can be totally honest, offering all of your own unique ideas and solutions in any work you do. But first, demonstrate to the executive that you are there to help the executive, then provide facts/analytics that support the business leader, and then in an appendix, go ahead and share all of your own ideas. If the executive knows you are loyal to the executive, then you are likely to be called upon more often. This doesn't mean you are "sucking-up" to the executive. Nope, it means quite the opposite. It means you are respecting the needs of the company, still offering your point of view in an appendix. Eventually, most executives will trust you, and when that happens, look out! They won't question you as much, they will listen to your recommendations, and they will support you publicly with other business leaders. At that point, you are in a position to enact change!

Executive Pet Peeve #4 = Errors. An executive wants every number to be accurate. Any error, even if it isn't your fault, becomes your fault if you present it incorrectly as part of a project for an executive. Executives demand accurate information.

Solution: Audit every single piece of work you do. Demonstrate somewhere (an appendix) that your numbers tie out to another source. Ask somebody else to look over your work.

Executive Pet Peeve #5 = Agenda. An executive wants a loyal employee. But sometimes, loyal employees (I've done this) develop an "agenda". And if the agenda is not congruent with the executive, look out. Maybe you want to do multivariate testing on the home page, but the executive you work for is having a battle with another executive in another department, and wants to "be right". In this case, even though you are doing the right thing (by wanting to execute a multivariate test), you might appear to have an agenda (i.e. prioritizing testing over the executive). And once you appear to have an agenda, you are banished to the island of misfit toys. You'll see this happen all of the time when a new executive takes a job --- the new executive has a vision for what she wants to accomplish, and if your agenda is not aligned with the new executive, it doesn't matter how good of a job you do, you're going to be banished to the island of misfit toys.

Solution: Know your corporate culture! This sounds like bad advice, but it is important. For instance, your culture may support testing, but may not be receptive to the findings derived from tests. In that case, test like crazy, and gain as much knowledge as possible, so that you will have the facts when a business leader is ready to accept them. If you do have an agenda that is not congruent with your business leader, consider implementing your agenda on different projects with different business leaders, if your executive is supportive of that. Or, consider working for a different executive altogether (or a different company), if your agenda is different from that of leadership.

Ok, there's a few issues and solutions for you to consider. It's been my experience that business leaders are not going to volunteer a lot of information, and sometimes do not want to hear some of the things you are talking about. They are probably not going to meet you half-way, so why not try to find out what they need?

Now, it's time for you. What wasn't addressed here that should be addressed in a subsequent post? Leave your ideas in the comments section of this post, thanks.

This Week In Business: The Most Important Time In A Customer Relationship

If you are like me, you've read a lot of content about customer loyalty.

If you are able to analyze actual customer transactions, you quickly learn that the most important time in a customer relationship is the three months following a first purchase. When I run a life table analysis, I'll frequently observe that something like 40% of customers will ever purchase again --- and within the first three months, half of the 40% place their subsequent order.

My simulations strongly suggest that the two levers that really propel a business into the future are customer acquisition and first-time to second-time buyer conversion.

So focus on this important time in a customer relationship --- manage the tactics you love to employ (free shipping, discounts, promotions, all of that stuff), and add a customer service strategy (i.e. actually ask the customer if everything went well during the first order, ask the customer if she needs anything else). Treat this early timeframe with urgency!

A Laundry List Of Attributes

There's no reason that an Online Marketing Simulation (buy the book at Amazon.com or buy the Kindle version of the book) has to focus only on e-commerce purchase attributes.

For instance, here's a laundry list of attributes that are worth capturing:

• Customer subscribes to e-mail campaigns.
• Customer unsubscribes to e-mail campaigns.
• Most recent e-mail campaign click-through date.
• Customer only buys via free shipping.
• Customer prefers expedited shipping.
• Customer frequently abandons shopping cart.
• Customer never abandons shopping cart.
• Customer spends more than 15 minutes on your site.
• Customer spends less than 15 seconds on your site.
• Customer likes visiting clearance/sale pages/products.
• Customer actually read your privacy statement (hint, pay attention to this).
• Customer participated in live chat.
• Customer clicked on Facebook or Twitter icon.
• Customer generated a review of one of your products.
• Customer volunteers demographic information.
• Customer gave you contact information in an offline channel.
• Customer who clicked on "contact us" link.
• Customer watched one or more of your videos.
• Customer is a proprietary credit customer.
• Customer buys gift cards for others.
• Customer redeems gift cards.
• Customer clicked on your "careers" link.
• Customer clicks on your store locator link.
• Customer adds items to a "wish list".
• Customer clicks on your "Espanol" link.
• Customer returns merchandise.
• Customer returns more than 2/3 of merchandise purchased and has purchased 3+ times (hint, stop marketing to this customer).
• Customer purchased an extended warranty.
• Customer asks to have product automatically sent to her on a monthly basis.
• Customer utilizes rebates.
• Customer shops by brands.
• Customer shops by products.
• Customer enlarges images.
• Customer clicks on Top Sellers.
• Customer clicks on a toolbar to share products via social media.
• Customer clicks on "read reviews".
• Customer abandons items rated at two or fewer stars on a 1-5 scale.
• Customer uses site search function.

And on and on and on the list goes!

Take this information, and categorize the customer into one of forty segments, based on all of the information in the list. Combine the forty segments by five "grades" of productivity (A, B, C, D, F), and you have the perfect setup for an Online Marketing Simulation!

Dear Catalog CEOs: Selling?

Dear Catalog CEOs:

I am hearing the whispers ... "if this Holiday season isn't considerably better than last year, we're going to have to evaluate the viability of our brand."

Owners and CEOs frequently ask me to do a quick sales forecast for the next five years. A file is sent to me (CD/DVD in the mail or a file is posted on an ftp site) with various customer attributes, one row for every item a customer has ever purchased. The columns include things like household_id, order date, item number, merchandise division, quantity, price, demand, disposition (returned, item not shipped, etc.), payment tender, physical channel (phone, mail, web), advertising channel (e-mail, affiliate, search, catalog).

With this information, I look at past purchase behavior, and develop a sales forecast for the next five years. Maybe the following historical trend is representative of your business:

• 2004 = $48 million.
• 2005 = $52 million.
• 2006 = $54 million.
• 2007 = $52 million.
• 2008 = $48 million.
• 2009 = $42 million.

My job is to forecast 2010 - 2014. I'll take a run through the next five years, assuming that all marketing practices in 2010 - 2014 are the same as in 2009:

• 2010 = $39 million.
• 2011 = $37 million.
• 2012 = $36 million.
• 2013 = $35 million.
• 2014 = $34 million.

At this point, the Owner / CEO will ask me what would happen if the economy improved by 10%. I run a simulated forecast, assuming that the economy improves significantly.

• 2010 = $43 million.
• 2011 = $42 million.
• 2012 = $42 million.
• 2013 = $43 million.
• 2014 = $44 million.

We run different scenarios, based on different sets of assumptions.

• "What happens if we cut customer acquisition spend?"
• "What happens if we reduce spend on existing customers?"
• "What happens if we shift offline ad spend online?"
• "What happens if we eliminate eight pages in every catalog?"
• "What happens if we improve homepage conversion by ten percent?"

Based on the assumptions, we iterate toward what we perceive to be a fair "valuation" of the business, based on sales potential and profitability.

CEOs and Owners: You can use the Multichannel Forensics framework to understand what your catalog business might be worth. Ask your analytics team to follow the framework, generating forecasts for you.

I can easily produce the forecasts for you as well, e-mail me for details.

You'll have to admit, having this information is pretty darn important, especially if this Holiday season doesn't turn out as optimistic as one might hope.

Ad Curves

Folks on Twitter asked me to write a brief about "Ad Curves", a methodology I use to estimate what happens to sales when, say, the e-mail contact frequency is doubled, or catalog pages are cut in half, or the paid search budget is increased by 50%.

If you're interested, and I know you are interested, please download the brief here.

Hint: If you combine Online Marketing Simulations with Ad Curves, you can identify the optimal, most profitable advertising investment strategy over the next five years, optimizing long-term performance instead of optimizing conversion rates. Executives really like the outcomes outlined by these tools/techniques!

Analysts and Executives

If you are an analytics expert, and only have time to read one long blog post this year (i.e. an article longer than 140 characters), read this article from Joseph Carrabis. Jim Novo tweeted the article yesterday, thanks for pointing it out.

The article helps illustrate a huge gulf between Analytics experts and Executives, one that is about as big as the Gulf of Mexico.

Let's go back to 1994. I was Manager of Analytical Services (what would now be called 'Business Intelligence', to use the parlance of the day) at Lands' End. And I had just analyzed the results of a year long 2^7 factorial design (called MVT, or 'Multivariate Testing', to use the web analytics parlance of the day).

The results of the test were, to say the least, controversial.

One VP managed a $40,000,000 business unit that generated $2,000,000 profit, as measured by Finance. The test had 128 segments, 64 of which did not receive any catalogs from this business unit. Comparing the 64 segments that received catalogs from this business unit to the 64 segments that did not receive catalogs from this business unit yielded the following results:

• Receive Catalogs From This Division: Total Business = $900,000,000, $8,000,000 profit.
• No Catalogs From This Division: Total Business = $885,000,000, $8,300,000 profit.
• Incremental Difference: $15,000,000 Demand, ($300,000) profit.

In other words, when you stop mailing catalogs from this division, customers re-allocated their demand to other catalogs. A $40,000,000 business unit that generated $2,000,000 profit was, in reality, a $15,000,000 business that was losing $300,000 profit.

The results were statistically significant, meaning that if we rolled out a strategy where we shut down this division of the company, we'd make the right decision at least 95 times in 100.

My job was to present my findings (there were similar findings for other business units) to the VP team that led each of the business units involved in the test. The results were from a perfectly executed test with statistically significant findings that no Analyst, I repeat, NO ANALYST, would question. Any Analyst would ask how quickly the new strategy could be implemented.

I stood in front of the team of Executives, including our CEO. I shared the results.

What do you think happened?

Let's just say that the audience didn't respond with enthusiasm.

Imagine being an Executive, earning $175,000 a year, having some dweeby, geeky, inexperienced, dolt-like wing-nut pimple of an employee pull out 85 powerpoint slides generated from the results of a 2^7 factorial design that suggests the Executive should shut down his division, now. Do you think the Executive will embrace the findings? Do you think the Executive will say, "Ok, that sounds great. I'll just lay off 155 employees and wrap things up before Christmas, and I'm sure I'll get another job in another city after pulling my kids out of the school they love, because your results are absolutely self-evident?" Or do you think the Executive will fight tooth and nail for his/her job, and the jobs of the people s/he leads?

Hint: The Executive will do the latter. And so would you.

What is completely missing from our real-time, web analytics, business intelligence, on demand, multi-channel integrated world of data is leadership.

Leadership doesn't lie about or create false expectations about the power of web analytics or business intelligence. You're not going to triple your conversion rate by switching from Omniture to Coremetrics. You're not going to increase comp store sales by 5% by implementing Business Objects, MicroStrategy, SPSS, or SAS. Leadership will clearly communicate what the data is, and what it means.

Leadership makes connections between Executives and Analysts. An Executive is far more likely to trust an Analyst if the Executive has worked with the Analyst, and realizes that the Analyst is actually representing "The Voice of the Customer". It is the job of the Analyst to convert geeky, dweeby, nerdy findings into a "story" that resonates with the Executive. The Analyst cannot do this unless the Analyst has been in meetings with the Executive, knows how the Executive thinks, and knows what the Executive needs to be successful. You don't ever set up an Analyst to fail by throwing the Analyst in with the wolves. You create a safe environment, so that the Analyst can share findings without having to duck a flurry of fists.

Leadership teaches, constantly. It is never about being "right". Too often, the Analyst has data that appears to be compelling. The leader teaches context, always trying to illustrate that the Analyst is there to support a greater mission, and by doing so, the Analyst will benefit. I'd rather have an Analyst with a Bachelor of Science degree providing solid findings in a team environment than a Doctorate employee demanding that the company implement highly sophisticated findings immediately, regardless of the repurcussions.

Leadership translates information into English, or the language used in the country where you work. In other words, you remove the geek-speak, the web analytics parlance or the business intelligence parlance or the statistical mumbo-jumbo that you use when talking with Analytics experts. Nobody cares that a landing page conversion rate will outperform another landing page, based on a test of 22,948 visitors with a T-score of 2.07. Every Executive cares that the test suggests that annual sales will increase by $394,000 if a certain strategy is employed, and that the Executive will make the right decision 95 times in 100.

What is missing today is Leadership. It is missing from the Vendor community, it is missing all across Executive teams that lead Corporate America, and it is sorely missing from conference agendas. We need fewer "three easy steps to Twitter success" lectures. We need more "how to communicate with an Executive in order to be effective" lectures.

If you are an Analyst, find one person, any person, in your company who appears to make magic happen through people, by working well with others. Ask to adhere yourself to this person for three months, so that you can see how this person does her job. Then emulate this person. Your company is not going to do this for you, you must take the initiative yourself.

If you are an Executive, invite an Analyst to a meeting as an observer. Have the Analyst sit in the back of the room, and don't let the Analyst speak unless spoken to. Let the Analyst hear real business issues, and let the Analyst listen to the interactions that happen as decisions are actually made. There's no more valuable thing for an Analyst than to see how things actually work, so that the Analyst can calibrate work in a way that makes the Analyst more effective.

Analysts and Executives. Leadership is the glue that could actually join these two audiences in a mutually beneficial relationship.

Gliebers Dresses: Home Page Design

Welcome to this week's Executive meeting.

Glenn Glieber (Owner): "... so I will be performing at 2:30pm and 7:30pm at the community theater. Look for me, I'll be playing the role of Myles Standish!"

Meredith Thompson (Chief Merchandising Officer): "Kevin, is that you?"

Kevin: "Yup, it's me."

Roger Morgan (Chief Operations Officer): "Today, we're going to talk about home page design."

Meredith Thompson: "Well, I want to talk about home page design. What we do at Gliebers Dresses is just so awful. It's not aspirational. If I'm a customer, I want to be romanced."

Roger Morgan: "What is awful about our website?"

Meredith Thompson: "Everything! Like I said, it isn't aspirational. It's a bunch of images and a hundred links. I mean, who cares about our privacy policy? And we spend more space touting our loyalty program than we spend touting merchandise."

Pepper Morgan (Chief Marketing Officer): "Describe what you want to see, Meredith."

Meredith Thompson: "Gladly. Here, let me draw this up on the grease board. I'm imagining a white, blank screen. A store front gets bigger and bigger, as if you are approaching it, a building with the words 'Gliebers Dresses' listed above doors that are opening. You walk through the doors, and music begins to play, maybe Madonna's 'Frozen' or something hip like that. Models begin to walk by, absolutely beautiful women of all sizes, all wearing our dresses, striding past. Now you're presented with rounders, with tags on top of the rounders telling the departments that the merchandise represent. I mean, just imagine seeing this, and then look at our website, which is a lot more like Newegg."

Roger Morgan: "Meredith, what you described violates just about every e-commerce best practice out there. The customer has something like two seconds to be impressed, and if she's not impresses, she's on her way to the next website. Neptune Research did a study and said you have to have at least one hundred links on the home page, or the customer won't convert at an optimal rate."

Lois Gladstone (Chief Financial Officer): "How much would something like that cost?"

Roger Morgan: "Well, first of all, we'd have to put the project on the book of work and prioritize is appropriately. Second of all, I don't think cost is the concern, I think conversion is a concern. How the heck does the customer find what she wants when fake women are walking past her on a computer screen?"

Meredith Thompson: "Roger, that's why I am a merchant and that's why you code websites. You're a tech person, you don't know anything about aspirational retail. If it were up to you, you'd have a home page with 820 links coded in Microsoft Frontpage. My job is to lead the customer. You cannot lead the customer with hyperlinks and thumbnail images. Nobody, I repeat nobody, likes to shop that way."

Roger Morgan: "And yet, Woodside Research tells us that the best performing home pages are the ugliest home pages."

Meredith Thompson: "That's because a bunch of tech folks do everything. At almost all companies, it's impossible for the merchant to sell product because the tech folks impose their will. Maybe if merchants could do what they wanted to do, merchandise would fly off the shelves. I mean, this is garbage. Modern e-commerce is all about merchants providing great product, only to have the IT department stifle all innovation. Pepper, help me out here."

Pepper Morgan: "Why don't we just test Meredith's hypothesis? There are dozens of companies that allow you to easily test different pages or offers, let's just plug in one of those services, and see what works best?"

Meredith Thompson: "Never. You lead the customer, you don't test and iterate. Testing is for cowards."

Roger Morgan: "No! I've paid thousands of dollars for research reports over the years, and those research reports tell us what the best practices are. Why ruin conversion rates just to test the ideas of a merchant?"

Pepper Morgan: "Roger, you believe in best practices, don't you? Well, when you're testing different strategies, you are employing best practices, right?"

Roger Morgan: "I think best practices are in place so that you don't have to test, somebody else did the work for you, and you get to benefit from their experience. Lois has to be happy with that, because we save money that way."

Pepper Morgan: "And Meredith, I think it is reasonable to test your strategy. If it works, you are brilliant. If it doesn't work, then maybe you can appreciate all of the efforts of all employees who are trying to help you sell your merchandise."

Meredith Thompson: "No, no testing. We need to have courage, to take a stand. Do you think I test my products? It is clearly NOT a best practice to test the merchandise that works best, you take your shots and you believe in your skills and you lead the customer. Testing is for cowards, for people who have no confidence or skill."

Pepper Morgan: "Kevin?"

Kevin: "When a business is generating ten percent pre-tax profit, these discussions don't happen."

Meredith Thompson: "What do you mean?"

Kevin: "Businesses that are winning tend to have a climate of trust."

Roger Morgan: "Are you saying we don't trust each other?"

Kevin: "I think you support each other. This whole discussion went sideways because Meredith doesn't trust the creative team, because Roger doesn't trust that merchandising might have ideas that fall within his area of expertise, and because Meredith and Roger don't trust Pepper to do what all marketers do, that being testing of strategies, because the tests might expose faulty strategies that Meredith and Roger are accountable for. In an environment of trust, Roger and Pepper would be happy to test Meredith's strategy, and Meredith would be happy to do a test, not a rollout."

Glenn Glieber: "Kevin, aren't we paying you to help us improve our profitability? All you did was throw stones at our business leaders."

Kevin: "Ok, allow me to say this differently. Testing is a best practice in marketing. Therefore, I think it is wise to test Meredith's strategy, and if her strategy works, go with it. If her strategy doesn't work, then go with what you are currently doing."

Glenn Glieber: "Fine, we'll test the strategy. Pepper, hire a vendor to help us implement the test. Meredith, work with Pepper on your idea of what the new home page looks like. And let's get this test done soon, I want to be able to impact 2010 if we can. Now, on to the next topic. I have two free tickets to my performance as Myles Standish, who wants them?"

Subtle Differences

Buy the book on Amazon.com, or buy the Kindle version here!

Time to open up your spreadsheets! (e-mail if you would like a copy).

Ok, enter the value "0.00" into cells C6 - G6. Next, enter the value "0.00" into cells B101 - B340. Finally, enter "1,000" into cell B189.

Next year, we'll retain 38.4% of these customers (cell C11). These customers will order 1.49 times (cell C16), buying 2.47 items per order (cell C17), paying $48.02 per item (cell C18). Notice that as time goes by, these customers become more loyal, buying more expensive items. By the end of year five, these customers are purchasing $83.00 items.

Now, enter "0.00" into cell B189. Enter "1,000" into cell B190.

Next year, we'll retain 36.8% of these customers (cell C11). So basically, these customers are very similar to the customers outlined earlier. However, these customers will order 1.6 times next year, buying 3.0 items per order, paying $40.89 per item.

In other words, these customers are subtly different --- about the same repurchase rate, but buying more items per order, and buying cheaper items as well.

Over time, these customers also buy more expensive items, but only spend $71.89 per item by year five. But notice that these customers are worth more in year five than the customers in the first segment (spending $77,000 in year five, vs. $57,000 in the other segment).

There are such subtle differences between customers in the businesses we manage. Our dashboards and reports suggest similarities. Over time, similar customers with subtle differences in purchase behavior diverge, becoming fundamentally different customers. When we optimize our business for short-term results, we miss out on the things that cause us to have a healthy business in the long-term.

This Week In Business: Cyber Monday

In the movie "The Matrix", a "bluepill" was a person who was still connected to the Matrix. A "redpill" was a person who had been freed.

As you already know, "Cyber Monday" is just nineteen days away. One might think of Cyber Monday as falling into the bluepill category.

Over in reality, the redpill marketer knows that traffic is higher on the Monday following Thanksgiving ... in fact, traffic is always higher on Monday than on Sunday. The redpill marketer, like every other day of the year, is trying to link customer needs with products that solve customer needs.

The bluepill marketer is connected to the Matrix. This is a blissful place, a never-ending maze of marketing enlightenment and discovery.

Offline marketing must be in-home two weeks prior to Cyber Monday, because you cannot be in-home the week before Thanksgiving, that's death. Offline marketing must be fully integrated with all digital Cyber Monday campaigns, and fortunately, there's no shortage of agencies who will help integrate marketing messages for you, messages like "Take 10% off and get free shipping, this Cyber Monday only!"

Messages need to be incorporated across all channels, because you cannot have inconsistent messaging, that would represent a bad customer experience. So the e-mail campaign you receive at midnight on Cyber Monday has a header saying "Take 10% off and get free shipping on Cyber Monday only!" Maybe there's even a few doorbuster items featured in the e-mail campaign, though you cannot really bust down a door online, but if you are a retailer, you want to use the term 'doorbuster' to integrate your online campaigns with your Black Friday 'doorbuster' retail campaign. Never mind that last year, a Wal-Mart worker died during a doorbuster promotion when the door actually busted down and customers trampled the employee, that was an unfortunate incident unrelated to the marketing phrase 'doorbuster', a phrase proven to help generate incremental sales.

The doorbuster items are featured via paid search with "Take 10% off and get free shipping on Cyber Monday only" copy that leads the customer to a landing page. Now this landing page had better be well-merchandised, because we don't want to lose the customer, no, we need the customer to migrate through the purchase funnel, sliding faster and faster toward that fabled hallmark of online marketing success ... the 'conversion'!

Should the customer mistakenly abandon a shopping cart, well, then we've all got a problem. Fortunately, the bluepills have a solution for this, and it is called a 'trigger-based e-mail marketing campaign'. Here, the customer is reminded that she left an item in her virtual shopping cart, but this time, she is offered a different subject line ... "Take 20% off and get free shipping on Cyber Monday only".

In a world of fully integrated multichannel marketing, the customer quickly races out to Twitter (on her mobile phone, of course), to see what other Cyber Monday shoppers are saying. Here, the customer finds a special promotion, only for Twitter followers ... "Take 25% off and get free shipping on Cyber Monday only".

It is this promotion that closes the deal! The customer, exhausted from her Cyber Monday prowl through Cyberspace, finally checks out, using a promo code from Twitter. Her $125 purchase with $14.95 shipping and handling only costs her $93.75.

Minutes later, nearly in real time, the Web Analytics professional is busy allocating this order to the marketing channels that drove the purchase. No actual tests were executed here, because you simply cannot afford to give away sales on Cyber Monday. Instead, a set of percentages based on established best practices will be used to allocate the order across marketing channels. No simplistic last-click allocation methodology will be allowed on Cyber Monday!!

• Offline Direct Marketing is credited with 15% of the order.
• The Midnight E-Mail marketing campaign is credited with 25% of the order.
• The Paid Search ad is credited with 15% of the order.
• The Shopping Cart Abandonment trigger-based e-mail marketing message is credited with 15% of the order.
• The Promo Code from Twitter is credited with 15% of the order.
• The Mobile Marketing department is credited with 15% of the order, too!

Internal fighting ensues, as marketing managers responsible for Twitter, triggered e-mail marketing, paid search, campaign e-mail marketing, mobile marketing, and offline direct marketing all argue that they deserve a greater share of this order. But we're measuring things in real-time, the company must know how every Cyber Monday order was generated no later than Tuesday at 7:00am when the information appears as a KPI on the corporate dashboard, so this allocation strategy will dictate the parsing of orders for now. Thank goodness that a new web analytics platform was installed, one that integrates offline and online data with budgeting decisions. But it is too bad that the offline data cannot be downloaded into the system for a week. The Web Analytics team will issue new reporting two weeks later, adjusting the allocation algorithm for the inclusion of offline orders. Hopefully somebody will pay attention to the adjusted results.

At midnight, Cyber Monday ends. Real-time reporting illustrates that this was the best Cyber Monday ever, with sales exceeding 2008 levels by 9%, closely mirroring predictions from Woodside Research. By 3:00am, it will be revealed that multichannel marketing campaigns were the most effective at driving Cyber Monday sales, and that social media discounts and promotions accounted for up to 30% of Cyber Monday sales, proving once again the importance of having an integrated marketing message across all channels, supported by real-time analytics that integrate data across all touchpoints.

The day after Cyber Monday is a day of satisfaction, a day to crunch numbers, a day to reflect. On Wednesday, the process begins anew, as peak shopping days before the Holiday season are just around the corner. It is time for more marketing, more campaigns, more measurement, more real-time analysis, more KPIs and dashboards, more promotions, more discounts, more landing page optimization, maybe even a few A/B tests tossed in for good measure.

For the bluepill, it is a non-stop rush, pure marketing bliss, resulting in $93.75 of revenue per customer. Sales were up 49% vs. not having any Cyber Monday support, resulting in $139.95 of volume.

For the redpill, Cyber Monday was a day when a customer spent $125, plus $14.95 shipping and handling, for a total of $139.95. Finance will tally the results at the end of the month.

Your Digital Marketing Plan

Give this article a read. It's not your industry, and I'm not promising any of this will work for your business, but the article gives ample opportunities to think about online marketing through a social lens. Check out the homepage design these folks put up on a whiteboard. Interesting, isn't it?

And notice how they are asking fans to e-mail ten friends, tracking results with CRM software. Are any of us, supposedly sophisticated database marketers, doing this? Notice their CRM-based tracking via Twitter as well.

How do these lessons apply to your business? What is stopping you from trying these strategies? Read this, not like a 53 year old direct marketing Director or 39 year old online marketing Executive, but like an outsider might read it.

Firing Customers

E-mail me if you want a copy of the OMS spreadsheet to follow along with on our examples. Click here to buy the book on Amazon, or click here to purchase the book for your Kindle.

The concept of firing customers is a popular one. We read a lot of content that tells us to focus on the 20% of our customer base, the part of the customer base that generates most of the demand.

I'm not here to tell you that the strategy is right or wrong. I'm here to give you the tools to understand what it means to fire customers.

In our OMS spreadsheet, we grade customers with a grade of "A", "B", "C", "D", and "F". So today, we're going to attempt an experiment.

Open your spreadsheet. Notice the five year sales trajectory of this business.

• Year 1 = $75.9 million.
• Year 2 = $70.4 million.
• Year 3 = $66.7 million.
• Year 4 = $64.4 million.
• Year 5 = $62.9 million.

Clearly, this business is in free fall. So, let's do something odd. Let's fire every customer with a grade of "D" or "F". These customers cannot purchase again, ever. We'll literally block them from buying from us. Any customer that falls into a grade of "D" or "F", during the next five years, is prevented from buying again in our simulation.

Enter the value "0.00" into cells C245 - C340. This means that customers with a grade of "D" or "F" cannot buy again. We'll keep acquiring new customers. Take a look at the results.

• Year 1 = $73.4 million.
• Year 2 = $66.1 million.
• Year 3 = $60.4 million.
• Year 4 = $56.1 million.
• Year 5 = $52.9 million.

In the first year, firing customers has almost no impact on sales ... sales decrease from $75.9 million to $73.4 million.

In the fifth year of the simulation, firing customers has a significant impact on sales ... sales decrease from $62.9 million to $52.9 million.

Your job is to determine if this type of decision increases profit, or decreases profit. My job is to show you that there is a cumulative impact that results from the decisions we make today. So many of us in the Web Analytics community and Online Marketing community look to optimize conversion rate, seeking to optimize the performance of the business today.

Hint: The Online Marketing world is "inefficient". When everybody is trying to optimize short-term results, you gain a competitive advantage by optimizing long-term performance. Use the OMS framework to do this!!

Dear Catalog CEOs: Our Multichannel Mess

Dear Catalog CEOs:

Want to have some fun? Go back to 2002, and read this roundtable interview with numerous catalog CEOs, facilitated by Catalog Age magazine.

Remember Catalog Age? A publication dedicated to catalog marketers? Well, they changed. The rebranded themselves as Multichannel Merchant, and when the world changed again, a portion of their empire evolved into The Big Fat Marketing Blog. What comes after that? But they did change with the times.

After reading the article from 2002, I don't find thinking that is significantly different than the thinking that pervades our industry in 2009. We grumble about postage. We say it is getting harder to prospect. We say that online marketers are raising the customer service expectation bar. We say that banner advertising doesn't work.

For many in the catalog industry, the phrase "multichannel" means nothing more than a bunch of channels and tactics that are there to support the continued production of catalogs.

Our industry invented the "matchback", a methodology that allows us to over-inflate catalog importance and deflate the credit we give to all other channels. At a time when all other marketers were increasing their investment in online marketing, we were allocating our investment back to the old stalwart, the catalog.

At a time when all other marketers were figuring out how to optimize landing pages, we were figuring out how to optimize printed pages.

At a time when all other marketers were using java script to dynamically generate online content based on consumer preferences, we were drinking java while dynamically figuring out how many pages had to be sent to cause an online order to happen.

At a time when all other marketers were optimizing their search marketing activities, we were searching for the best co-op to find names to send our marketing activities to.

At a time when all other marketers were learning all of the ways that customers integrated themselves with websites and social media, we integrated our websites with our retail and catalog channels, largely because our vendor partners encouraged us to do so.

We took the road less traveled by. And that has made all of the difference.

Last week, a person commenting on a blog suggested that I don't offer solutions, I just point out the obvious.

I feel like I've offered more solutions on this blog, for free, than any person in the catalog industry. Go back over the past 3-4 years and read the content, then compare it with the content from the vendors in the catalog industry. I'm trying to communicate how we can stay in business. It seems that unless the solution includes mailing a catalog, the industry doesn't perceive the solution as being viable.

Here is a laundry list of tactics, strategies, and potential solutions. Why not give a few of these a try?

1. Immediately test reduced frequency to best customers, and measure the incremental profit you achieve when reducing contact frequency.
2. Immediately test reduced pages per contact to all customers, and measure the incremental profit you achieve when reducing pages per contact.
3. Immediately calculate the "organic percentage", the percentage of demand that you will generate if you stop all catalog marketing. Calculate the profitability of your business sans catalog marketing.
4. Do not mail any catalogs next July. Instead, take your catalog investment, and allocate it across all online marketing channels. Carefully measure how customer behavior changes next July.
5. Execute mail and holdout tests in EVERY catalog, across EVERY customer segment. DO THIS NOW! Have your matchback vendor match online orders to the control group --- this quantifies how much damage your matchback vendor has done to your business by over-stating your catalog results. I cannot stress how important this is.
6. Set up a holdout group for at least six months, if not one year, and do not mail catalogs to this holdout group during this time. Within this audience, test halving your e-mail contact strategy, and test doubling your e-mail contact strategy.
7. Invest as much time on your online landing pages as you invest in catalog landing pages. Put your online landing pages up on the hallway walls of your office, just like you do with your catalog spreads, and measure the resultant profitability of every single action a customer can take on your landing pages.
8. In every meeting you have, you must spend equal time talking about catalogs and about your website. Yes, EQUAL TIME!
9. In every catalog marketing meeting you have, invite your online marketing experts in, and have them critique your catalog marketing activities. You've spent ten years having your catalog marketing experts integrate your website into your catalog business, now try doing the opposite, and see what happens.
10. Test your catalog creative, to find the style of creative that is most effective at driving customers online.
11. Test offering only best selling products in catalogs to prospects.
12. Test offering only new products in catalogs to existing customers.
13. Immediately change strategy and diversify your marketing activities if 50% or more of your online business is sourced from catalog marketing.
14. Use Multichannel Forensics to quantify if customers are likely to continue shifting online, or have finished their channel shift.
15. Optimize your catalog business for rural, 55+ year old customers who shop via the telephone.
16. Optimize your online business for EVERYBODY else.
17. Have your team create a marketing plan for a situation where you are not allowed to rent or exchange name and address without prior customer permission. More than anything else, this exercise will prepare you for the future.
18. Have your team create a marketing plan for a situation where every single catalog cost 50% more than it costs today. This exercise will prepare you for the future.
19. Develop a five year sales plan by advertising channel, if you don't already have one in place. It is irresponsible to not be prepared for the future.
20. Visit a non-competitive online e-commerce brand, and facilitate four days of knowledge exchange. On Day 1, the e-commerce brand tells you how they acquire customers. On Day 2, you explain to them how you acquire customers. On Day 3, the e-commerce brand tells you how they optimize online conversion. On Day 4, you tell them how you optimize offline conversion. Tell me you aren't going to learn something from this exercise.
21. Stop laying off your call center staff, and instead, unleash a fraction of these individuals in the social media ecosystem, sort of like how Zappos does.
22. Stop treating online customers from online advertising sources like catalog customers. Enjoy making additional profit after employing this strategy.
23. Spend more time optimizing fulfillment rates, return rates, and distribution center expenses than you spend managing social media.
24. Ask every one of your contact center and distribution center employees why they would shop from your catalog if they can find a similar product at the same price via an online brand that offers free shipping. Carefully record their responses. Change your strategy, based on their responses.
25. Spend more time with your search vendor than you spend with your co-op vendor.
26. Spend more time with your e-mail vendor than you spend with your co-op vendor.

I could go on and on, forever.

Maybe the economy will improve in 2010. Maybe customers will re-embrace catalog marketing. And maybe the old business model will thrive once again.

If those things don't happen, isn't it time to pull ourselves out of the multichannel view of the world that was so popular in 2002? If the multichannel view of the world yielded success, would so many companies be struggling, struggling long before the economy imploded or before postage increased?

As always, I am here to help you!

Thanks,
Kevin

Digital Download Now Available: Online Marketing Simulations

Oh sure, I can offer merchandise across multiple channels!

You can buy the book on Amazon.com, $19.95 --- click here.

You can buy the Kindle version via Amazon, $4.99 --- click here.

And now, you can purchase a digital download of the new book for $4.99 via Lulu.com --- click here.

If you are a "best customer", you'll purchase this book in multiple channels, right? I mean, multichannel customers are the best customers, so that means you'll probably purchase multiple copies in multiple channels!

Gliebers Dresses: Bonuses

Welcome to the weekly Gliebers Dresses Executive Meeting:

Glenn Glieber (Owner): "After watching Brett Favre mulch his former team, I started thinking about Sarah Wheldon. It's really the same situation, in so many ways."

Meredith Thompson (Chief Merchandising Officer): "Kevin, is that you?"

Kevin: "Yup, it's me."

Lois Gladstone (Chief Financial Officer): "I'd like to take time today to talk about bonuses."

Roger Morgan (Chief Operations Officer): "I love bonuses! Bonuses are how I pay for just about all of my major home improvements, and they are used whenever I need a new car."

Lois Gladstone: "Well, Roger, I've got some bad news for you."

Roger Morgan: "Oh no."

Lois Gladstone: "We have less than two months left in the calendar year. As you already know, we are eligible to earn up to 60% of our salary via an annual bonus payout. Our bonus is broken down into three components. 35% of the bonus is based on achieving total net sales goals. 50% of the bonus is based on achieving total profit goals. 15% of the bonus is based on individual objectives, based on your area of expertise. "

Pepper Morgan (Chief Marketing Officer): "Here it comes ..."

Lois Gladstone: "Based on year-end projections, here is where we stand. Year-end net sales are forecast to be $45,000,000. In our bonus structure, this will earn us a grade of "D", so we get 25% of 35%, or 9% of our salary. Year-end profit is forecast to be $0, break-even. In our bonus structure, this also earns us a grade of "D", so we get 25% of 50%, or 13%. Assuming that every Executive member earns a grade of "C" on individual performance, we tack on another 50% of 20%, or 10%. This means that the average bonus for this team will be (9% + 13% + 10%) * 60% = 19%.

Roger Morgan: "After taxes, I won't even be able to buy a Hyundai for 19% of my salary!"

Meredith Thompson: "I'm worried about our rank-and-file staff. Their bonus target is just 15%. On average, they will get, what, 5%? If they are earning an average of $50,000 a year, that's a paltry $2,500.

Lois Gladstone: "But here's the problem. That paltry $2,500, which also goes to contact center staff who work 3/4 of the year, really adds up. Add in our bonuses, add in bonuses for our Directors and Managers who are at 30% and 20% bonus targets respectively, and you're looking at a million dollars or more that we pay out in bonuses, roughly 2% of EBIT. For Gleibers Dresses, bonuses are going to be the difference between being a break-even company, and being a company that is profitable in the face of The Great Recession."

Meredith Thompson: "What are you thinking about doing, Lois?"

Lois Gladstone: "I'm thinking of taking away bonuses from any individual who has not achieved the level of 'Director' or 'Vice President'. It just makes good financial sense to do this, and to do this now, while the economy is just plain awful. Employees are just happy to keep their job right now."

Pepper Morgan: "Aren't bonuses supposed to inspire us to perform well? Without the incentive, who's to say we would have even achieved profitability?"

Roger Morgan: "I agree with Pepper. And for crying out loud, we're like the only company who pays a bonus to call center and distribution center staff. It is our competitive advantage. It is the way we get to hire the best employees in all of New England. It's like free marketing for us."

Glenn Glieber: "I love free marketing!"

Meredith Thompson: "How can you even think about taking something away from our people? If we did this, it would be devastating to our employees."

Lois Gladstone: "If we did this, we'd protect the profitability of our company. The only way we stay in business is if we generate profit. And right now, what we're doing as leaders are not generating enough profit to allow us to continue running our business 'as-is'. If we had magical merchandising or marketing ideas that were proving to yield huge levels of profit, I'd feel differently."

Meredith Thompson: "But why take money away from the folks who need it most?"

Lois Gladstone: "Well, of course they need it the most. But our compensation package is a bit too generous. We need to scale it back to levels that are competitive with our competitors. Anna Carter sure doesn't pay a sales rep on the phone a bonus, I can tell you that."

Meredith Thompson: "Kevin, help!"

Kevin: "I know you are planning on freezing salaries this year, and you've already communicated that to your employees. Couldn't you give each employee a 3% salary increase at the time you take away the bonus, so that the employee doesn't feel completely ripped off?"

Lois Gladstone: "Absolutely not. Salary increases are like compound interest. Next year, when you give the employee a 3% increase, it is actually 3% on top of 3%, or a two-year increase of 6.1%. That's why bonuses are such a good idea, as a compensation philosophy. You take away that compounding of interest, which, in the long-term, helps a business be a lot more profitable."

Meredith Thompson: "But you're also taking away the bonus, Lois! The employee just gets clobbered."

Lois Gladstone: "Look, I didn't bring on the economic crisis, did I? But it is my job to respond to the crisis in a way that protects all of us. Do we want for this business to be profitable? If we do, then we do one of two things. We can increase merchandise productivity, something we're not good at. Or we can reduce expenses. Salaries and bonuses are two components of the expense structure. Until we figure out how to grow our business via merchandise and marketing productivity, I am taking away annual bonuses from hourly staff, analysts, and manager staff. I am freezing wage increases for all employees, including us sitting here at this table. The combined impact of these decisions is $1.2 million that goes straight to the bottom line, making Gleibers Dresses profitable once again."

Kevin: "So the question is, what are you going to do with the money at the end of 2010? Pepper showed me reporting that suggests if we invested the money in various paid search activities, we could generate profit within the calendar year. Wouldn't that be a good thing? If you are taking something away from employees, can't you at least demonstrate to them that you are going to make an investment that protects their jobs, long-term?"

Lois Gladstone: "It's my job to protect shareholder value, and in this case, Glenn is the shareholder. At the end of 2010, we'd pay our fair share of federal taxes, and Glenn would pocket the savings as personal profit, being the owner of this business."

Meredith Thompson: "By doing that, it means that profit would significantly increase, and that means we'd all get paid bigger bonuses, right? And Lois, a portion of your bonus is based on personal performance, so in essence, you'll double-dip on your bonus. That's lovely! In essence, we're now taking money away from our own employees, so that we can pay ourselves more. That's just sheer greed."

Lois Gladstone: "None of this would be necessary if merchandise productivity were better. And we need to keep our leadership bonuses, in order for the compensation structure to remain competitive. Otherwise, our Executives will leave. We want to keep the best Executive talent, right?"

Meredith Thompson: "Not true. Not true. We could break-even again next year. We are making a conscious choice to take money away from employees, so that the company is more profitable, so that we can earn bigger bonuses and so that Glenn can take home two-thirds of a million dollars."

Lois Gladstone: "As owner, Glenn can do what he wants to do. This is his business, he owns it, the employees do not own it. It is our job to make sure Glenn is paid as much as is humanly possible. That's capitalism. I am only doing my job. And if we want to avoid problems like this in the future, we better get a lot more efficient with other expenses, or start putting merchandise and marketing out there that customers crave. Roger, Pepper, if you disagree, make sure your voice is heard, but regardless, the train is leaving the station."

Pepper Morgan: "I'd rather invest the money in marketing, so that our customers pay us back, so that we earn more profit, so that all employees can earn salary increases and have their bonuses re-instated."

Roger Morgan: "Lois, are you going to come to the contact center and distribution center and communicate this message? People are going to be livid. They should hear the message from the person responsible for the change in compensation strategy."

Lois Gladstone: "Each department head will communicate the strategy to their employees, just like we've always done. We'll have human resources draw up 'talking points', illustrating why we need to make this decision, pointing out that this is better than another 20% headcount reduction. In this economy, with 10% unemployment, employees will be happy to simply keep their job, right?"

Roger Morgan: "This is how the middle class gets wiped out. When business is good, they borrow money out of their homes at 5% interest. When business is bad, they lose their job or they lose their bonus or their salaries are frozen. No matter what, the employee keeps getting further and further behind."

Lois Gladstone: "Or maybe the employee needs to figure out how to make this company more money. Maybe the employee needs to take personal accountability. Maybe the employee shouldn't lounge around on a 90 minute lunch break. Maybe the employee should try to make Gliebers Dresses more money instead of tweeting about salary freezes to the social media folks. The only reason we come to work each and every day is to make this enterprise as profitable as possible. That's it. All of those niceties and mission statement quotes and dedication to customer service, that's all secondary to the main point of capitalism, that being to earn as much money as you possibly can. The culture of this place needs to change. People need to be accountable to profit, and if they generate profit, the business will take care of them. Listen, folks, if your people don't like this, they're free to leave. They should go find another job, have at it! Prior to me arriving last year, this place was run like a family. It needs to be run like a business if it is going to survive."

Roger Morgan: "Glenn, are these your thoughts channeled through Lois, or what?"

Glenn Glieber: "I think we've lost focus on profit, to some extent. We spent this year talking about marketing and merchandising strategies. None of what we've talked about is working. We've cut marketing expenses to the bone. I'm not sure I know what else to do in order to make us profitable. I don't see any other way out. I lost 40% of my 401k last fall. I invested all of my profit either back into the business, or into my 401k. The economy cost me 40% of my career. Think about that. I've run this business profitably for 39 of 42 years, and just like that, 40% of my 401k was gone, the same thing as losing 16 years of effort, 5,800 days of toil and effort vaporized just like that. I devoted my life to this business. I deserve a better end to the story. I'm tired. I'm not sure I'm going to keep coming in to work in 2011 and beyond. So, yes, if I want to benefit from the profit of this business, I am entitled to channel some of my wishes through Lois. And it is her job to find a way for my business to be more profitable. I'd rather freeze salaries and eliminate bonuses than lay off another 20% of the workforce. And that's all I have to say about that topic. Now, on to the next item on the agenda. I wanted to communicate to each of you that we will no longer be serving Snickers bars, Milky Way bars, or Three Musketeer bars in the vending machines, because they keep getting stuck, and Henrietta Geldon in purchasing is sick of hearing employees thump their fists on the vending machine. Roger's team tells me that Twix bars slide out much easier, so we will be switching to Twix bars, going forward. Any questions?"

Different Customers, Different Behaviors

Online Marketing Simulations (buy the book on Amazon.com) routinely show us that different customers exhibit different behaviors.

Go to the sample spreadsheet (e-mail me for a copy), and do the following:

• Enter 0.00 in C6 - G6.
• Zero-out cells B149 - B340.

Here, we're running a simulation, evaluating only how customers with a Grade = A (the very best customers) perform over time. Play close attention to cells J5 - N7, these cells represent the sales trajectory of best customers across three advertising channels.

Don't save these results. Close the spreadsheet, then open it again, and do the following.

• Enter 0.00 in C6 - G6.
• Zero-out cells B101 - B292

Here, we're running a simulation, evaluating only how customers with a Grade = F (the most marginal customers in your database) perform over time. Look at cells J5 - N7. What do you observe? Well, Channel 2 gets disproportionately more sales, while Channel 3 gets disproportionately less sales.

This happens in your business too, folks. You will see that your best customers have purchase preferences that are different than are the preferences of marginal customers.

Use this information to your advantage. Know which marketing channels appeal to best customers, and to marginal customers!

Chasing Fireflies: A Cataloger Growing In The Teeth Of A Recession

If you are a paying subscriber to the Puget Sound Business Journal, you can access this article about Chasing Fireflies, a Seattle catalog (gasp) kids apparel startup.

This business started three years ago at $0, and ended 2008 at $22 million in annual sales. The article suggests that, after a flat spring, sales are increasing again this fall.

Here's a link to their website. Here's a link to their Facebook presence, full of both negative customer sentiment and the loyalty of 1,600 fans.

Oh, there would be a long line of pundits ready to bash this business, especially in the online marketing and social media community.

• They use list rental practices to find new customers, a terrible customer experience. FAIL!
• Their e-mail marketing strategy is not targeted or personalized nearly enough. FAIL!
• Their website is probably not optimized for search engine optimization. FAIL!
• They do not have a Twitter presence. FAIL!
• Their homepage is not optimized for maximum conversion. FAIL!
• The actually present merchandise via print, in catalogs (gasp), destroying the planet. FAIL!
• No live chat on the homepage. FAIL!
• No recommendation engine on the homepage for cross-sell & up-sell. FAIL!
• No stores, no "bricks 'n clicks" strategy. FAIL!
• There is no mobile marketing opportunity, no iPhone app. FAIL!
• They send catalogs without allowing you the right to determine contact frequency. FAIL!
• They send e-mail campaigns without allowing you the right to determine contact frequency. FAIL!

I'm sure there's a thousand critical business mistakes that I failed to point out.

And yet, their catalog (gasp) business is growing multiple times faster than Forrester's predicted 8% online growth rate this Holiday season.

How is that possible?

Now, clearly, every company can do a better job, heck, every person can do a better job. But something must be executed correctly in order for a catalog (gasp) company to grow in the teeth of The Great Recession. Might a fusion of merchandising and marketing trump simple marketing tactics?

Paid Search: Low Long-Term Value?

Get your copy of Online Marketing Simulations via Amazon.com.

Paid Search is an absolute enigma, folks.

Talk to online marketing experts, and it is truly a big deal, the primary way many online brands acquire new customers.

Talk to offline marketing experts, and you hear a common theme ... "paid search customers have poor long-term value."

Long-term value is a relative term, comprised of two components ... "involuntary expense", and "voluntary expense".

Voluntary Expense includes all outbound direct marketing expenses that work for/against long-term value. Catalog marketers often begin to send paid search customers a veritable plethora of catalogs. If the paid search customer has no interest in catalog marketing, long-term value is going to decline, rapidly. The marketer is making a voluntary choice to speak with the customer, impacting long-term value.

Involuntary Expense happens after the customer is acquired. If a paid search customer elects to use paid search in the future, the brand experiences "involuntary expense". Sure, the brand could choose to not participate in paid search, but if the brand does participate, expenses are rung up in an involuntary manner, essentially controlled by the customer.

Marketing Executives use Online Marketing Simulations to understand how the customer is likely to migrate and change in the future. Simply isolate the paid search customer, and then see which channels the customer is likely to purchase from over the next five years. You can literally tally-up the offline advertising expense you'll incur, and the paid search expense you'll incur.

If you find that paid search customers are unprofitable, eliminate voluntary expense (i.e. offline direct marketing that you control). You may find that paid search customers have low long-term value only because they don't want to be marketed to with offline direct marketing activities. You may also find that paid search customers who purchase specific items have lower long-term value, or that non-branded terms have lower long-term value, as an FYI.

For those of us managing businesses where we do a lot of outbound marketing (post cards, catalogs, e-mail), long-term value is controllable. It is perfectly acceptable to acquire a paid search buyer that generates $5 of long-term value, and it is perfectly acceptable to acquire a customer via postcard marketing that generates $50 of long-term value. It is how we manage the long-term value that matters! Heck, let's go find ten of the paid search buyers and just deal with the subsequent value difference.

Most important, use Online Marketing Simulations to understand the long-term value of all customers from all advertising micro-channels!

This Week In Business: The Target Customer

Caught between the social media snake oil ("Dell sold $3 million on Twitter, see, it works!") and the current state of affairs ("we have a Twitter presence and we've only been able to encourage 197 customers to follow us") is reality.

The reality is that we don't have a good understanding of our "target customer".

No amount of data can supplement a vision for who the target customer is. And once you have a vision for who your target customer is, marketing becomes a lot easier.

Let's say that your target customer is a 57 year old woman. Do you honestly believe that you will have a robust mobile marketing program? Do you honestly think that you'll get 394,000 fifty-seven year old women to follow your sales messages on Twitter?

Let's say that your target customer is a 27 year old woman. Do you really think this customer wants to receive 27 catalogs in the mail every year?

A thorough understanding of the target customer goes a long way toward executing a successful marketing program.

For instance, we hear a lot these days about e-mail marketing falling by the wayside, being consumed by social media. Well, if your target customer is 45-54 years old, this may not be true. If your target customer is 25-34 years old, this may be 100% true. In either situation, the CMO ignores the screaming voices of the punditocracy, implementing marketing programs that are appropriate to the target customer.

The e-mail marketing community, folks now defending their niche from the onslaught of the social media elite, used to be critical of catalog marketers. Many marketing experts proclaimed that catalog marketing has been dead for a decade. And yet, if your target customer is 55-64 years old, there's still no single better vehicle to encourage a purchase than a catalog. Catalog marketing is alive and well to a certain target customer. Catalog marketing is dead when viewed across the entire demographic spectrum. Catalog marketing is also dead among the 55-64 year old segment hoping to improve the health of the planet.

As you can see, knowing your target market means everything to marketing success. This isn't a revolutionary idea.

We've been punched in the skull a few too many times, when it comes to thinking about marketing strategy. The social media folks, who run in circles who love social media, think social media solves every problem. Print marketing folks will always be able to find a metric that suggests that print marketing matters (67% of people age 18-69 say reading the mail is easier than reading a computer monitor). Banner advertisers know that 8% of the population click on almost all of the ads. E-mail marketers know that one in five subscribers are responsible for the majority of clicks. Based on localized metrics, we generalize, suggesting that everybody can be responsive to our marketing genre.

Heck, the whole "multichannel" movement has largely failed because we made the assumption that every good customer wants to interact with us across multiple channels.

There's never been a more important time to thoroughly know our target customer. We can use this knowledge to determine which marketing strategies are appropriate for customers in different life stages. Increasingly, my projects suggest that each customer has a channel preference, has a channel she is leaving, and a channel that she may be heading toward. We confuse this migration for being a rallying cry for "more of everything". Let's learn as much as we can about the target customer, and then offer the customer a better experience.

Kindle Version of Online Marketing Simulations is Available

Good news for those of you who are into reading books on your Kindle ... Online Marketing Simulations is now available in Kindle format!

Click Here For Paperback Version ... $19.95.

Click Here For Kindle Version ... $4.99.

By the way, loyal blog readers, the Twitter audience is drubbing you in sales totals ... by a factor of nearly 4 to 1. Are you going to stand for this? Are you going to let the Twitterati run circles around you? Or are you going make the technological leap and be competitive and buy this book? I mean, I've been brazen in my claims that you cannot sell anything on Twitter, and yet this book is selling so much better among the analytical types following on Twitter than among this audience. Oh boy!

Also interesting is the fact that the book, in the very early stages, is being embraced by the online vendor community, in fact, it's a bit of a surprise to me. I strongly feel that the methodology should be part of online marketing software tools.

Thanks to all of you who made the debut of the book the 9,500th best selling book on Amazon last Wednesday, I appreciate it! That's quite a feat for a self-published book with no marketing behind it whatsoever.

Dear Catalog CEOs: Demographics

Dear Catalog CEOs:

Unless you are Miles Kimball, there are significant demographic challenges awaiting the industry.

Most commerce happens among customers age 25 - 60. Clearly, customers older than 60 purchase lots of goodies, and the 24 and under crowd have a whole different set of purchase priorities.

But the big, meaty portion of the bell curve is between 25 and 60.

And with each passing year, we transition through a new portion of the bell curve.

A 60 year old customer with catalog preferences leaves the meaty portion of the curve, replaced by somebody who just turned twenty-five.

Think about the products you sell, and the channel you choose to sell those products in. Which customer, the customer who just turned 61, or the customer who just turned 25, is more likely to buy your merchandise?

Which customer, the customer who just turned 61, or the customer who just turned 25, is more likely to be appreciative of receiving a catalog in the mail?

And then we have additional inflection points.

• Age 50 - 60 = Orders via catalogs over the telephone.
• Age 40 - 50 = Orders via catalogs online.
• Age 25 - 40 = Orders online.

The problem here is that a customer doesn't move from the 25-40 online cohort to the 40-50 cohort that orders from catalogs via your website. The advertising habits do not change as the customer ages, meaning that the 40 year old won't become more likely to become a telephone shopper in ten years.

All of this means that the audience that is receptive to catalogs is shrinking, almost unnoticeably on an annual basis, shockingly fast when viewed over the course of a decade.

I have cause for concern when I hear statements like "80% of our e-commerce orders came from customers who received a catalog in the past month." This suggests that management has a disproportionate focus on catalog marketing.

Modern cataloging is a lot like managing a 401k account. You remember the days when a financial advisor would show up at work, and strongly recommend "diversification", right? You weren't supposed to invest all of your retirement money in just one fund. You were supposed to spread your money out across numerous funds, so that if one or two of your funds collapsed, you didn't lose everything.

The exact same logic holds in modern cataloging.

We must diversify. We must cultivate an e-commerce audience that is completely independent of our loyal catalog customer following. We simply have no choice.

I recommend a target of at least 50% or more of e-commerce demand that comes from non-catalog sources.

Let me say that again: At least 50% or more of your e-commerce demand should come from non-catalog sources, or your "portfolio", if you will, is not diversified enough, leaving your business model at serious risk.

I can hear the complaints already.

• "Online customers are price sensitive, I cannot give away the store with cheapest price and free shipping, or I'll go broke."
• "Paid Search customers have poor long-term value, they only care about finding the best deal today, they are loyal to Google, not to my business."
• "E-mail marketing is awful, I only get $0.07 per e-mail message, while I get $2.77 per catalog mailed."
• "Affiliate marketing stinks, why do I have to pay those folks a commission when the customer would have purchased anyway?"
• "Social Media is completely unproven. I don't have time to tweet about my order entry system task force meetings!"
• "Mobile marketing is a fad, nobody cares about an iPhone app when they can browse the entire assortment on my website on a 23" monitor via a broadband internet connection."
• "You don't understand my customer. My customers are unique, they love catalogs."
• "You don't understand my business model, we sell widgets/gifts/apparel/books/tools, and you cannot sell those things online without paper supporting them."
• "My daughter is 27, and she loves receiving Pottery Barn catalogs in the mail. So there. I think the younger generation just needs to be trained to love print."
• "Nobody wants to read things off of a computer screen, print is a far more effective vehicle for communicating a merchandising story."
• "Our matchback vendor tells us things are just fine."

You know what? Every one of those quotes could be accurate.

But looking at the financials of catalog brands all across our great country, it doesn't seem likely that every one of those comments will align in a way that is beneficial to catalog brands. Heck, a well respected industry expert recently told me via e-mail that 1/3 of catalog brands will not exist in their current form on January 1, 2011.

Yes, this is a person that you trust, folks, a person who does not boast, and does not write content online. This is an Executive who is in the trenches with us.

Given that information, it is time to diversify. It doesn't matter that the e-commerce side of the business is less profitable or less loyal or less fun or more fickle.

We simply have no choice. It is time to diversify. Now.

As always, I am here to help you through this transition. We will get through it!

Thanks,
Kevin