Abacusification And The Merch Curse

We spent the past two days talking about the problems e-commerce and catalog brands have with loyal customers who adore the merchandise the brand used to sell.

1. The curse of great merchandise.
2. For best customers, the merch curse is worse.

In yesterday's example (averaged from actual e-commerce and catalog transactions), best customers spent 65% of their dollars on classic merchandise, stuff offered by the brand for at least the past four years.

Conversely, new and marginal customers spent 37% of their dollars on classic merchandise, 63% of new products offered by the brand for at least the past four years.

This brings us to the concept of Abacusification, named after the venerable catalog co-op (Abacus) that enables catalogers to mail prospects at a comparatively low cost. To be fair, the concept applies to all co-ops and list rental brands.

Abacusification occurs when a catalog/e-commerce brand shifts a disproportionate percentage of circulation (usually 20% or more) into co-op names. At this point, the co-op statistician has a disproportionate amount of influence over response rates, long-term customer retention rates, and the merchandise assortment offered by the catalog/e-commerce brand.

Using yesterday as an example, Abacusification is demonstrated by the fact that new customers spend two-thirds of their money on new products, while loyal customers spend two-thirds of their money on existing products.

What the heck do you do if you are the merchant responsible for this brand? Over time, you end up aligning your merchandise with the Abacusification of your customer file --- it happens naturally, without you even noticing it. Conversely, you notice that long-time loyal customers start to disappear --- well, you probably don't notice this, you simply notice that time-honored merchandise no longer performs as well, so you de-emphasize classic merchandise.

Within a few years, the Abacusification of your customer file is complete. Your customer file is composed of co-op dominated names that have merchandise preferences different than your legacy customers.

To be fair, this may have always happened when you worked with your list rental and list management partners. The difference is this --- in the past, the lists you selected determined your long-term merchandise assortment --- as you acquired customers from your competitors, you ultimately evolved your merchandising assortment along with the interests of the customers shopping your competitors.

Under Abacusification, the co-op statistician drives the evolution of your merchandise assortment.

There may be nothing wrong with having a co-op statistician have this much influence over the direction of your brand --- you may find the evolution to be more profitable than strategies you otherwise would have practiced. That being said, it makes business sense to have oversight into the practices of the co-ops you partner with. The co-op should be transparent, opening the books for you, showing you exactly how they determine who they decide to mail on your behalf, providing reporting that makes it perfectly clear who is being chosen.

Ok, your turn. What have you learned when you've analyzed your customer file in this manner? How often do you produce this reporting? How do you manage this challenge? Or do you view all of this as bunk?

Abacusification

Please click on the image to enlarge it.

I'm about to board a plane to visit a traditional cataloger.

Traditional catalogers think differently than online pureplays, think really different than retailers who execute direct marketing via websites, catalogs and e-mail campaigns.

Most of the traditional catalogers I've worked with have annual repurchase rates that are under fifty percent. When the annual repurchase rate dips below forty percent, the traditional cataloger is in what is called "Acquisition Mode".

Anytime the annual repurchase rate is under fifty percent, the focus of marketing activities is on customer acquisition.

These days, catalogers shifted their focus on new customers from the list rental industry to the compiled list industry.

There are a half-dozen B2C compiled list vendors of note. Ask most catalogers about compiled list vendors, and they will focus on one "brand" ... Abacus., now a division of Epsilon.

Most of the catalogers that communicate with me put at least half of their customer acquisition circulation in compiled lists, with Abacus often getting the lion's share of the circulation.

Abacus deserves kudos for transforming catalog customer acquisition. Few companies have been as disruptive in catalog marketing as Abacus --- that includes all the companies associated with online marketing, including Google. Abacus had to do something right, or catalogers wouldn't have generously allocated the majority of their customer acquisition circulation to the guiding hands of Abacus-based statistical modelers.

One of the interesting theoretical discussions about Abacus, and the "Abacusification" of cataloging, surrounds the long-term impact of having a statistician in a far-away outpost determining the strategic direction of your catalog brand.

Try this analysis on for size. If you are a cataloger with half of your acquisition circulation in Abacus, then segment your file into two groups. The first group represents all customers who were acquired in 2006 from Abacus. The second group represents all other new catalog customers acquired in 2006.

Next, analyze the merchandise that the Abacus group purchased. Compare the "taper report" as some call it (ranking best sellers from #1 to #whatever) for Abacus names, vs. all other names. Does the merchandise rank order the same way, or are there variances?

If the merchandise ranks in the same order, there's no need to take the analysis farther, no need to read the rest of this article.

But if the best selling items for Abacus-sourced names are different than the best selling items for all other new names, you're about to be plopped in the middle of a unique theoretical challenge.

If this is happening to your business, it means that Abacus is providing names that are interested in your brand for fundamentally different reasons than the rest of your new customers.

Long-term, this will have a profound impact on your brand. In the chart at the top of this article, I outline the trend that many catalogers are heading toward, a trend where in five years, 3/4th of the active customer file will be sourced from Abacus.

And if the merchandise that Abacus (and honestly, this works for all compiled list vendors, not just Abacus) customers purchase is truly different than the merchandise purchased by other customers, then the merchandising and creative decisions you make over the next five years will evolve.

Without even noticing, you will respond to what your customers "want". Certain items will "work well". You'll feature those items more often. You'll feature the items other customers purchase less often, less prominently.

Within five years, the merchandising of your brand will have evolved out of your control. With 3/4th of your active customer file coming from Abacus, you'll be offering product that Abacus names like, presented in a way that Abacus names like to see merchandise presented.

This might be perfectly acceptable for your catalog brand. You might generate robust profits, your business might grow beyond your wildest dreams. I'm not saying this is a bad thing.

I am saying that as a business leader, you won't own your brand.

Abacus will own your catalog/telephone customers.

Google will (and already does) own your online customers.

You will merchandise your catalog, and present merchandise the way Abacus customers want the catalog merchandised. You will ultimately respond to the wants and needs of customers who buy from your business because of the actions of a small number of statisticians who made decisions based on equations developed years ago.

The end result is something that I call "Abacusification". Again, I'm not saying this is a bad thing --- your business might thrive because of this.

It is, however, a fascinating end-game for the catalog industry, one I would never have envisioned in 1990 when I sat down for my first day of work at Lands' End.