Multichannel Retailing Week: The Chief Marketing Officer

With each passing day, I become more convinced that the role of Chief Marketing Officer is the hardest job in Multichannel Retailing.

The issues facing the CMO are very similar, regardless whether you're looking at a Catalog/Online retailer, a Retail/Online organization, or a Catalog/Retail/Online business.

Retail and Direct Marketing trade journals hound CMOs to "integrate" their marketing efforts, providing a common look, feel and theme across all activities. Catalogs should look like the website, the website should be reflective of the stores, catalogs should drive traffic to stores, stores should acquire traffic that will ultimately buy online, and merchandise offerings should be common across channels.

However, actual cross-channel marketing results measurement indicates that consistency and integration, while most likely beneficial to the customer, is not beneficial to the profit and loss statement. What performs best in e-mail campaigns (look, feel, style, merchandise assortment) is often different than the style and merchandise offering that works best in catalog. Online marketing requires a different merchandising strategy. The affiliate programs that work best may not be "brand appropriate". Traditional marketing activities frequently drive traffic to stores, not to websites or telephone channels --- with a different messaging, promotional rhythm and creative style required to drive the store traffic.

CMOs are heading toward a series of compromises that protect the p&l statement, while helping fulfill consultant/vendor/customer vision of a good multichannel customer experience. CMOs do use available resources to align promotions, retail floorset and website homepage merchandising changes. It appears unlikely that multichannel retailers will ever achieve the nirvana recommended by consultants/vendors. And that is probably fine.

Investment allocation has become a huge challenge for the multichannel retail Chief Marketing Officer.

There are many marketing activities that the CMO manages. Each activity has varying levels of measurement accuracy, and varying lengths of time to evaluate profitability. Today, the CMO does not have the right information necessary to make or defend investment decisions. CFOs know this, frequently challenging CMOs to do better.

• Catalogs are probably the best measured activity. Specific profit and loss can be tracked across any timeframe, in the telephone channel, the online channel, or retail channel. Because it is so thoroughly measured, catalog marketing ends up benefiting from over-investment.
• E-mail campaign performance is often under-reported. E-mail campaigns can drive sales far beyond the 1-2 days the campaign is active. E-mail campaigns frequently drive as much business to a retail channel as they do to the online channel. Most CMOs do not have the analytical resources necessary to understand either phenomenon. As a result, e-mail investment is compromised.
• Paid and natural search, portal marketing, and affiliate marketing performance are all under-reported for multichannel businesses with a retail channel, due to the same issues observed in e-mail marketing. In addition, we don't understand what a "shared" brand relationship between Google and our brand means to the long-term loyalty of the customer.
  
• Traditional advertising (television, radio, newspaper) can never be accurately measured. Vendors are providing solutions to estimate the impact of these advertising channels. CMOs can use these tools to estimate the impact of traditional advertising across channels. However, "double-counting" of sales can occur with these methods --- i.e. the e-mail marketer counts a sale as being driven by e-mail, while the traditional advertising marketer counts the sale being driven by newspaper advertising. Again, vendors are working hard to develop fractional allocation methods.
• Brand Advertising is dying. Since so many CMOs know this arena far better than catalog/online/e-mail advertising, this arena receives a disproportionate amount of focus. This is the hardest marketing activity to measure, requiring the longest timeframe to evaluate for success. In reality, "branding" has never been more important --- everybody offers the same merchandise at the same price. Our "brand" becomes the only real differentiator for the customer. The sum of all experiences the customer has with a business becomes the "brand" perceived by the customer. To properly manage a "brand", the CMO should be given accountability for all aspects of the customer relationship. To date, not many CMOs have this experience. The COO may be a stronger individual at managing the call center experience than the CMO, may be better at responding to customer complaints.

Over the next ten years, the multichannel CMO will acquire skills that will make the CMO position more valuable than it is today.

• Ownership of the "customer experience". It is my opinion that marketing will evolve. Marketing will be more about "pleasing" a customer than about "creating demand". The CMO will have to own the end-to-end customer relationship. This means the information technology folks cannot own the website. The COO cannot own management of the call center. One can envision a CMO utilizing Human Resources staff to support customers, much in the same way that Human Resources staff support employees today.
• Holistic Measurement. Over the next decade, measurement tools will improve. The CMO will trust an analytics expert who "speaks the language of the CMO" to holistically measure catalog marketing, portal marketing, paid/search marketing, affiliate marketing, e-mail marketing, and traditional advertising along the same set of metrics, across all channels, over the same timeframes.
• Investment Strategy. Via holistic measurement, the CMO is armed to defend investment strategies as a partner to the CFO. Today, the CMO is often viewed as being far less "analytical" than the CFO. As a result, the CFO owns the business investment strategy. In the future, the CMO and the CFO will have to be partners for the CMO to succeed.
• Online Proficiency. Today, CMO skills are frequently skewed toward traditional advertising. Over the next ten years, a generation of online marketers will assume CMO roles, and will bring a new and refreshing view of the marketing world to the executive table.
• Metric Proficiency. Today, CMOs are comfortable with market research metrics. Over the next decade, the generation of online marketers who assume CMO titles will bring a proficiency to understanding metrics that will greatly enhance the credibility of the CMO.
• Management Style. The CMO of the future will be very gifted at managing individuals with wildly divergent skills and interests. The CMO will balance the career needs of traditional advertisers and catalogers who are experiencing the decline of their craft. The CMO will mentor online and e-mail marketers who, to-date, do not have the cross-functional skills and abilities of other marketers. The CMO will be more adept at selling long-term strategies to business partners. The CMO will be able to get more done through strong partnerships with the Information Technology leader. The CMO will get creative individuals to work with analytics staff.

If vendors/consultants/research organizations/customers ever hope to see their vision of multichannel retailing fulfilled, management will need to hire CMOs with a broad set of skills, skills required to manage the business of the future. Management will need to give CMOs more responsibility than they have today. As we go through this transition, it appears the opposite is actually happening --- CMO tenure is under two years. I believe this is a temporary phenomenon, necessary because of the transition from traditional advertising to our new multichannel marketing reality. We are transitioning from campaign-based management of the business to a holistic, long-term management of the customer. Eventually, marketing leaders will acquire the skills necessary to complete this transition.

Those are my opinions. It is time for your thoughts. What challenges do you think the CMO faces in multichannel retailing, and how should the CMO address them?

Profit And Loss Responsibility

About two months into a new fiscal year, the occasional ups and downs in a business begin to average out. You begin to have a good idea whether your year is heading in a positive direction, or if it is starting to become difficult to achieve bonus levels this year.

If you have profit and loss responsibility, your year is at an interesting inflection point. Most of the folks working in our multichannel businesses don't get to see the interplay between executives, especially when sales levels are not meeting expectations.

The merchandise executive feels a lot of pressure. Her merchandise is not selling, and there could be many reasons for this. Maybe the database marketing executive didn't mail the right customers. Maybe the online marketing executive isn't attracting the right traffic to the site. Maybe the brand marketing/creative leader is depicting the merchandise in an unflattering manner. She needs help understanding what is happening in the relationship between her customers, and her merchandise. No focus group of nine individuals, no survey of 3,000 loyal purchasers will provide the insight she needs to make decisions today.

Working with merchants who take accountability for sub-par business results is an absolute blessing.

The inventory executive feels a lot of pressure. He is bonused on outstanding fulfillment, great gross margins, and rapid inventory turn. When the business goes south, he needs to liquidate merchandise quickly. He'll demand additional clearance catalog mailings, increased e-mail frequency, free shipping, 20% off your order, whatever it takes to sell out from under the pile of unwanted garbage the merchants bought. The customer experience becomes secondary to moving merchandise at any cost.

The database marketing executive feels a lot of pressure. She is often the first person to be blamed for sub-par business results. It is so easy to assume that the wrong customers were mailed catalogs, that the e-mail campaigns were not actually delivered to the customer, that the post office forgot to deliver 200,000 catalogs, that the techno-geeks who forecast sales made big mistakes. It is hard for executives to accept the fact that customers didn't want to purchase our merchandise. This is the time of year that the database marketing executive starts trying to craft a story about customer behavior --- a story that doesn't offend folks, but adequately gets her off the accountability hook.

The finance executive feels a lot of pressure. He knows that additional mailings, online advertising, price reductions, shipping promotions and any of a number of additional incentives will cause expenses to not leverage well against sales. He'll demand that the database marketing executive re-forecast the customer file, and re-forecast sales for the remainder of the year. The board/owner will need to know the expected profit impact of the sales implosion. The finance executive will take more heat from the board/owner than is deserved.

The brand marketing/creative executive feels a lot of pressure. She is trying so hard to provide an outstanding experience for the customer. She reads a dozen blogs that preach the critical importance of "managing the brand". She reads another dozen blogs that constantly harp on how brands fail to treat customers well, marketing blogs that take repeated potshots at companies for failing to meet customer expectations. Then she looks at her business peers, who are about to trample the customer experience to move merchandise at any cost.

How does she convince them that this is bad for the business?

Worse, how does she provide a viable alternative for clearing $10,000,000 of overstocked merchandise, one that doesn't trample the customer experience? Do any of the marketing bloggers have a credible, creative solution to this problem? How about the vendor community?

This is a key element of profit and loss responsibility that vendors, bloggers and pundits fail to appreciate. There is tremendous pressure to bail out the profit and loss statement, tremendous pressure to get out from under yesterday's poor merchandising decisions today, tremendous pressure to save one's job. Few of the options (discounts, promotions, price cuts, free shipping, additional mailings, additional e-mail contacts, you name it) are good for the long-term customer experience or are good for "the brand". Comments like 'the brand should have offered great merchandise that the customers wanted to buy in the first place' fail to solve the problems the executive has to navigate through today.

Without viable alternatives, the brand marketing/creative executive is in a no-win situation. You can see why the average Chief Marketing Officer lasts 23 months --- no viable short-term solutions to move overstocked product, no way to protect the customer from the impending onslaught of advertising of crappy merchandise, no way to truly succeed in her job.

The operations executive is nervous, because a continued downturn in business results in staffing cuts in the phone center and distribution center. Who wants to go through that experience?

The human resources executive deals with secondary issues created by stress. Employees begin snipping at each other. Some employees quit, heading instead for the lucrative surroundings of a successful business. HR is not a fun place to be during a downturn.

The information technology executive is nervous, because the executive team is demanding that website improvements be completed now, to improve business. The executive team also is demanding business intelligence solutions from information technology folks --- the executives want to know why customers aren't purchasing, and cannot articulate questions in a way that an information technology executive can effectively program into a report.

Profit and loss responsibility changes the way one thinks about a business.

When business exceeds expectations, it is easy to think about theoretical issues like return on customer, providing an exceptional customer experience, enhancing the "brand", developing new business opportunities, figuring out how to grow to three billion dollars in sales, giving customers a say in advertising, developing a CEO blog, you name it.

But when the business fails to meet expectations, all that fun stuff goes out the window. One bad year costs the executive her bonus. Two bad years costs the executive her job. Short-term decisions are made to save the profit and loss statement, to buy another six months of time to acquire new merchandise that the customer might want to purchase.

And when the company is publicly traded, all of these issues are magnified by shareholders demanding a return on investment today. Most of you reading this blog are indirect shareholders --- you have 401k accounts, and you're not patient when your 401k account loses value, are you? You indirectly contribute to the problems you openly grumble about.

One can see how special visionary leaders are --- the rare individual who can keep an eye on strategic, visionary issues, while navigating choppy waters every-other or every-third year.

Today's online marketing executives have not gone through a lot of these business cycles. The online channel has pointed straight up for a decade. It's only a matter of time before the pressures all executives feel are thrust upon our new generation of online marketing executives.

Under Pressure

Profit is being squeezed out of our multichannel businesses, especially in the online and catalog channels.

This is an example of what a reasonably healthy online/catalog profit and loss statement might look like today.

Demand	$50,000,000
Merchandise Fulfilled	$45,000,000
Returns	$11,250,000
Net Sales	$33,750,000
Gross Margin	$16,875,000
Less Catalog Marketing	$4,000,000
Less Online Marketing	$2,000,000
Less Pick/Pack/Ship	$4,050,000
Variable Operating Profit	$6,825,000
Less Fixed Costs	$4,050,000
Earnings Before Taxes	$2,775,000
EBT As A % Of Net Sales	8.2%

This business generates $2.8 million profit on $33.4 million net sales, yielding a healthy EBT of 8.2%.

Then, the USPS elects to make mailing catalogs more expensive. If you simply absorb the cost of this increase, your profit and loss statement might look like this:

Demand	$50,000,000
Merchandise Fulfilled	$45,000,000
Returns	$11,250,000
Net Sales	$33,750,000
Gross Margin	$16,875,000
Less Catalog Marketing	$4,360,000
Less Online Marketing	$2,000,000
Less Pick/Pack/Ship	$4,050,000
Variable Operating Profit	$6,465,000
Less Fixed Costs	$4,050,000
Earnings Before Taxes	$2,415,000
EBT As A % Of Net Sales	7.2%

The USPS increase takes a full percent of your Earnings Before Taxes.

Even more interesting, however, is the looming trend toward free shipping and free returns. Long-term, I don't think we can escape this trend. The customer will demand we provide this service for free. A customer will gladly pay $3.00 for a $0.60 cup of coffee at Starbucks, but she won't pay to have a dress shipped from Columbus, OH to her home in Portland, OR.

Free shipping and free returns will put a lot of pressure on the profit and loss statement. If free shipping and free returns drove enough top-line sales to offset the expense, every multichannel retailer would already be offering free shipping and free returns. Let's take a look at the future p&l, after absorbing the expense of free shipping and free returns.

Demand	$55,000,000
Merchandise Fulfilled	$49,500,000
Returns	$14,850,000
Net Sales	$34,650,000
Gross Margin	$17,325,000
Less Catalog Marketing	$4,360,000
Less Online Marketing	$2,000,000
Less Pick/Pack/Ship	$5,890,500
Variable Operating Profit	$5,074,500
Less Fixed Costs	$4,050,000
Earnings Before Taxes	$1,024,500
EBT As A % Of Net Sales	3.0%

Ooops.

Free shipping and free returns are likely to increase the overall return rate, and reduce shipping and handling income, costing our business another $1.4 million of Earnings Before Taxes.

Remember, our business was generating $2.8 million in profit before the USPS increases, $2.4 million after, and maybe $1.0 million after having to move to free shipping and free returns.

Business leaders will be put in a difficult situation. Expenses will have to be cut, in order to maintain a healthy level of profit. I see two areas where this is likely to happen.

First, catalog circulation will be dramatically cut, mostly in low-productivity areas like prospecting. This is why you see our vendor community so up in arms.

The second area will impact the customer. Items with high return rates will not be featured in advertising, and may not even be offered at all, in an effort to lower the overall return rate. Free shipping and free returns will encourage customers to take more risks, but it will encourage businesses to take fewer risks to make the p&l work. Ultimately, the customer is going to lose the breadth of merchandise assortment she has grown used to.

Multichannel CEOs and CMOs: Start planning today for the pending pressure our profit and loss statements will face in the future. This is a good time to test free shipping and free returns (for an extended period of time, not just a few weeks in December), and project the financial impact this will have.