Gliebers Dresses: Executive Response To The Strategy Presentation

It is time to Skype-in and hear feedback from the Gliebers Dresses Executive team.

Glenn Glieber (Owner): "... and there she was, Anna Carter herself, standing in the same Starbucks line that I was standing in. You should have seen her face when she found out that I pre-paid for her mocha!"

Meredith Thompson (Merchant): "Kevin, is that you?"

Kevin: "Yup, it is me!"

Glenn Glieber: "Good, glad you are here. We wanted to let you know what we thought of your presentation and recommendations.

Meredith Thompson: "First of all, we really liked the idea of testing smaller catalogs. Honestly, we are still amazed that half of our housefile business will happen if we stopped mailing catalogs today, we don't quite know how to wrap our heads around that. But because Sarah's team executed the test and you sign off on the results, we need to seriously think about the implications. We're not convinced that reducing contact frequency is good, but we do think smaller page counts could be beneficial."

Sarah Wheldon (Marketing): "And we think it is a good idea to reduce frequency among customers with an e-mail address. So we're going to accept your recommendation to reduce frequency from twenty-four to twelve mailings a year for customers who possess an e-mail address."

Lois Gladstone (Finance): "You also convinced us that we must not cut customer acquisition any further. We understand that we lose half of our customer base each year, so we must acquire new customers."

Roger Morgan (Operations): "But we also realize that we're being killed by having $12.95 shipping and handling, and we cannot afford to offer inexpensive shipping and handling to everybody all of the time. So we want to become as competitive as we can, given where our business currently is."

Lois Gladstone: "So we decided that we are going to implement a new program. Any customer who orders and keeps four dresses will receive free shipping and handling for the remainder of the year."

Sarah Wheldon: "We think this strategy gives us a chance to compete with online brands that take market share by offering low price dresses coupled with free shipping."

Roger Morgan: "And it gives us a chance to move volume into the first half of the year, allowing us to not have to lay off contact center and distribution center employees."

Lois Gladstone: "Your data suggested that if we can achieve a 10% increase in productivity, the program will generate a ton of profit over the next twelve months. We need a ton of profit over the next twelve months. Once the business is fixed, we'll be able to afford to go after new customer acquisition."

Kevin: "What data are you using to validate your assumption that you'll achieve a 10% increase in productivity over the next twelve months?"

Roger Morgan: "Here in my hand I have a research report I purchased yesterday morning from Woodside Research. They surveyed 1,129 consumers. 58% of consumers said that participation in a loyalty program caused them to have a more favorable relationship with the brand, and 87% of consumers loved receiving discounts and promotions as part of a loyalty marketing strategy."

Sarah Wheldon: "It could be that this strategy changes customer perception. Our shipping and handling is just too expensive, so this might be a way to re-engage customers."

Meredith Thompson: "And I want to completely eliminate all barriers to purchasing merchandise. The merchandise should stand on its own merits, it shouldn't be harmed by shipping and handling practices. This loyalty program makes it all about the merchandise. If the customer demonstrates loyalty to us, we'll eliminate shipping and handling expense for them."

Pepper Morgan (Creative): "We haven't talked about your micro-site idea, yet. We think there might be merit to that idea. I'd really like to tackle the concept of a micro-site for the 15-39 year old customer audience. I think that is a great idea, one that would be a lot of fun!"

Meredith Thompson: "I'm really concerned about that idea. Kevin, you fail to factor branding into this equation. Gliebers Dresses stands for quality, value, and service. When you create a micro-site, you create a new brand. I don't want to alienate our existing customers. Our existing customers have an expectation of the quality, value, and service that we'll deliver. Why make it hard for the customer to shop this merchandise by re-branding it as a separate micro-site? I don't get it?"

Roger Morgan: "In a recent Neptune Research report, 1,340 consumers were surveyed. 61% of consumers want brands to create an integrated multichannel shopping experience. A separate micro-site takes us in a direction opposite of an integrated multichannel shopping experience."

Sarah Wheldon: "I don't necessarily think that a micro-channel website is a bad thing, it can be a good thing if we can find new ways to market to younger customers. But I'm worried about the catalog opportunity. A separate micro-site might dictate a new catalog strategy, and we don't have the resources to produce catalogs for this customer audience."

Pepper Morgan: "But we wouldn't market to these customers with catalogs, we'd simply find new ways to market to customers."

Sarah Wheldon: "Do we think that these customers are going to magically show up at our website? We have to do something to drive the customer to the website."

Pepper Morgan: "Kevin said that bow-tie-guy's test indicates that half of our sales happen organically, without the aid of marketing. How do you explain that?"

Sarah Wheldon: "We had to advertise to those customers at one point to acquire the customer, and then to develop brand loyalty. All of that advertising created a situation where the customer might be willing to shop today, without the aid of advertising."

Kevin: "Who would own the marketing initiatives for a micro-site?"

Meredith Thompson: "Oh, that one is easy. I'd own the merchandise assortment, Pepper would own the look and feel of the website, Sarah would own all marketing initiatives, and Roger would own site maintenance and site improvements."

Kevin: "Who would own final decisions? For instance, if Pepper wanted to put videos up on YouTube, who would make that call?"

Pepper Morgan: "I'd make that call."

Sarah Wheldon: "That's my call, that's a marketing initiative."

Roger Morgan: "Well I think I own that call. That video shouldn't go up on YouTube, it should be prioritized into my book of work, and my team would publish the content on the micro-site when resources permit it to be published. I want the SEO juice that comes from the video, I don't want YouTube to get that. Since I'm accountable for making our site natural-search friendly, I should own the decision to have the video on my site."

Lois Gladstone: "I'm not certain we have the budget to put broadband-quality video on our website."

Pepper Morgan: "If I had to wait two months to put a video up, when I can publish the video on YouTube this afternoon, I'd publish the video on YouTube this afternoon. And then I get around expense issues, it doesn't cost us anything to publish the video on YouTube."

Sarah Wheldon: "And who would market that video for you? That's why this is in my area of responsibility, this is why I need to own this process. I need to make sure that catalogs and e-mails support the video via a multichannel advertising strategy."

Pepper Morgan: "Honestly, I don't need your advertising support, and I cannot wait to publish the video three months from now so that we can add a page to the catalog to market the video. As part of this launch, my entire team will develop a social media presence, and we'll advertise it ourselves. I don't think we need traditional marketing to market this video, we'll do it ourselves."

Sarah Wheldon: "Social Media doesn't work. We only have a couple hundred followers on Twitter. Two hundred views on YouTube doesn't do anything to drive sales."

Pepper Morgan: "Twitter doesn't work if all we do is offer followers 20% off promotions. Twitter will work if we speak to the 15-39 year old customer the way she wants to be spoken to.

Glenn Glieber: "Kevin, you can clearly see here how time-consuming these new initiatives are. We've just wasted an entire executive meeting flapping our gums about something that we may not ever implement. We need to focus on 2% solutions that grow the core brand."

Kevin: "Maybe we can agree to disagree. What you just demonstrated to me is that there is not a clear online marketing leader at Gliebers Dresses. I heard four individuals proclaim partial ownership of a potential online marketing program. This makes it very hard for Gliebers Dresses to move into the future. At the end of this discussion, you discounted the new program, not based on the merits of the new program, but based on how much time you spent taking about disagreements over ownership of the strategy. As a result, you focus efforts on areas like catalog marketing, areas that are slowly becoming less productive, but have clearly defined roles and responsibilities that allow you to work without friction."

Meredith Thompson: "But that's how we've always acted around here. We have vigorous discussions. We allow all voices to be heard. This makes us better. This isn't a dictatorship, Kevin, a multichannel business requires a matrixed approach to management, one where all voices are heard. Leaders have to be good at working in a matrixed relationship."

Glenn Glieber: "Well, another perfectly good hour has been shot on ideas that we may never implement. Kevin, we listened to your recommendations. We're not going to cut back on customer acquisition spending, and we are going to start a loyalty program with the $800,000 you helped save us by reducing catalog mailings to customers who have an e-mail address. I'd say you more than paid for yourself, so we'd like to keep you around for awhile and tap your knowledge as we run into future challenges. We'll chat next week!"

Team: "Thanks Kevin!"

Kevin: "Thanks everybody, have a nice day."

Glenn Glieber: "Ok, it's on to the next item on the agenda. The November catalog currently has 140 pages. I'm hoping to save a few dollars by cutting back to 136 pages. Pepper, could you come up with a creative strategy to still feature 140 pages of merchandise within 136 pages, and Sarah, could you forecast the impact on sales by offering 136 pages to the customer instead of 140 pages? Thanks, everybody!"

Gliebers Dresses: Strategy Presentation

It's time to share my recommendations with the team at Gliebers Dresses.

Glenn Glieber (Owner): "... and so we have arrived at consensus. All employees who use the supply requisition form (SRF) for a new computer monitor and obtain a signature from a member of the Executive team will be eligible for a flat-screen LCD monitor."

Meredith Thompson (Merchandise): "Kevin, is that you?"

Kevin: "Yup, it's me."

Glenn Glieber: "Kevin, your work has been indispensable during the past thirty days. You've given us plenty to think about. We don't always agree with your opinions, but we do appreciate your feedback."

Kevin: "Well thank you!".

Glenn Glieber: "Given your feedback, we'd like to bring you back on a frequent basis to help us work through our day-to-day challenges. Are you up for that?"

Kevin: "Certainly!"

Glenn Glieber: "Good! Now let's start going through your recommendations."

Kevin: "Please take a look at the following slide."



Kevin: "I listened to all of your feedback. I interviewed each and every one of you. I combined your ideas with my geeky math. My recommendation is to stop over-mailing catalogs to customers who participate in your e-mail marketing program. I recommend walking these customers down from twenty-four catalogs a year to twelve catalogs a year, even though the data suggests we can mail zero catalogs a year. This allows us to not take too dramatic an action, one that could hurt the business if the analysis and test results are wrong. I created a series of equations that will tell you which e-mail subscribers can support fewer catalogs. I will work with Boris Feldman to help implement those equations. We should be able to act upon this within fifteen days."

"This strategy allows you to save $800,000 a year in marketing expense."

"Next, I am asking you to spend an additional $1,300,000 a year on customer acquisition, and I strongly recommend that you spend that money equally, between catalog marketing and online marketing, if not skewed more to online marketing. This means you are going to spend an additional $500,000 a year in marketing. This is money you can find, find $650,000 for the rest of this year and test different strategies, spend $1,300,000 more next year."

"Using this strategy, profit will increase by about $500,000 per year, and sales begin to grow. As profit grows and you get the courage to expand the strategy, I strongly recommend that you re-invest the profit in customer acquisition. Over five years, this strategy generates an additional $2,500,000 in profit, that's nothing to sneeze at."

"I advise against implementing a loyalty program at this time, simply because the numbers do not support long-term profitable growth based on an assumption of a 10% lift in customer performance due to the loyalty program. It would require more money to fund the discounts and promotions associated with a loyalty program, money that Mr. Glieber communicated is not available. I do acknowledge that there would likely be a short-term profit bump, maybe several million dollars of profit during the first year, if the program truly generated a 10% increase in sales per customer We cannot make an accurate guess as to the sales increase in year one."

"I would advise you to strongly consider testing smaller catalogs, 48-64 page catalogs that replace 124-148 page catalogs. Many companies find that it is most profitable to send three 64 page catalogs than it is to send three 148 page catalogs, or just one 148 page catalog. Times are changing, and a small contact can be more profitable than a large contact. Small contacts can also be more productive than remail catalogs (catalogs where the guts of the catalog are the same, but the covers are changed to make the catalog look different). Small contacts could have a targeted merchandise assortment, mailed only to the customers who like the merchandise in the targeted catalog. I can work through these scenarios if you would like for me to."

"I advise leadership to seriously consider who on the Executive team owns online marketing decisions. It is obvious to me that Ms. Thompson (merchandising) owns the catalog, and that all decisions stem from her leadership. Decades of meetings caused your organization to know exactly what role each leader is supposed to play. In the online channel, however, I sense that roles and responsibilities have not been clearly defined. Marketing owns promotions, online marketing strategy, e-mail marketing, blogging, and Twitter. Operations owns the how the website is coded, they own maintenance of the website. Creative seems to own things like video marketing. All areas of responsibility are dependent upon each other. It seems that any individual can recommend making website improvements or changes, and those changes are implemented or not implemented based on a collaborative arrangement between operations and other departments. Your business appears to be multichannel, in that your merchandise and marketing strategies are aligned between channels. You do a nice job of making things look multichannel to the customer. That being said, I believe that your online channel would benefit from having an "owner", one person who is ultimately accountable for all online initiatives."

"I bring this up, because I do not perceive there to be a vision for the online channel. Given that the future growth of this business happens online, regardless of the advertising channel that drives customers to the website, it seems really important that the website have a leader who drives website best practices, future social media and video opportunities, and current catalog and online marketing conversion performance. I believe that having a leader who drives online performance will result in a better conversion rate, which reduces the need for spending money on new customer acquisition. Honestly, this isn't my idea. This is your idea, many of you voiced this issue to me in one way or another. I'm simply in a position to be able to say it back to you."

"There is one other recommendation I'd like to offer to you. I'd like for you to consider launching a micro-site, one that focuses on customers age 15-39. You can call it whatever you like, but market it to customers age 15-39, not to customers age 55-60. To me, this is the place where you get to experiment. Try marketing without a catalog. Try your social media experiments, try your video marketing experiments. Try optimizing the website with established website best practices. Use this as a place to test the ideas and concepts you've always wanted to test. And given that your audience is 15-39, you'll have a better chance of having new marketing ideas work, because you'll be speaking to an audience that is receptive to new marketing ideas. Roll out your Quiceanera strategy and Sweet 16 strategy and mobile marketing strategy and any of these new strategies within this audience, and see if you can grow this business. If you want to promote these businesses in your catalog, go ahead and do so, but focus on the micro-site as a unique entity that you are trying to grow using new marketing strategies. Any strategies that work can be considered for the primary Gliebers Dresses website. Should the primary business continue to struggle, you may find that this effort gives you a viable business that can be grown in the future."

At this point, the room sounded very quiet. A thousand thoughts run rampant through my mind, positive and negative. "They hated this" ... "Maybe the video connection wasn't working properly" ... "Maybe I've just been fired" ... "Maybe this is the most brilliant strategy they've ever heard."

Glenn Glieber: "Kevin, there's a lot of information you shared here. Would it be ok if we bring you back in to our meeting tomorrow? We'd like the opportunity to noodle over your thoughts for the rest of the day, and then speak with you tomorrow. Is that acceptable to you?"

Kevin: "Absolutely."

Glenn Glieber: "Thanks, Kevin. Our next topic is our leadership luncheon next week, where we reward our best employees for great performance. I'd like to recommend we order box lunch sandwiches from Rhondas. Our choices are Roast Beef, Ham, Chicken Salad, Tuna, and Vegan. What would all of you like to have?"

Roger Morgan: "Can I have a BLT sandwich?"

Gliebers Dresses: Setting The Table

There are six members of the Gliebers Dresses Executive team.

Each team member has a different perspective on the state of the business. Some, like Lois Gladstone (Finance), are convinced that a loyalty program will make a big difference.

Notice that most of the Executive team members have not truly played their cards. Glenn Glieber, the owner, said that he likes free marketing. He did, however, rule out aggressive customer acquisition strategies due to a shortage of cash. Sarah Wheldon (Marketing) and Meredith Thompson (Merchandising) expressed their love of catalog marketing, though neither offered a viable solution to return this business to profitability. Both Pepper Morgan and Roger Morgan privately shared ideas with me. Neither leader shared a solution publicly.

It is possible that members of this team will not be thrilled with whatever I propose.

I cannot do anything about merchandise productivity. I can recommend optimal marketing spend levels. Clearly, the best improvement in long-term profit happens when two strategies are implemented.

1. Dramatically ramp-up customer acquisition spend, especially online, but also in catalogs.
2. Significantly cut back catalog marketing when the customer opts-in to receive e-mail marketing messages. The data suggests that catalogs could be cut back from 24 a year to just 6 a year.
   

The data show that as customers continue to migrate online, they become less loyal. This trend cannot be avoided, it is simply a consequence times that are changing.

The data also showed that online marketing synergizes with catalog marketing. When you send a catalog, the customer uses search to comparison shop, so there is some level of co-dependence between marketing strategies at Gliebers Dresses.

There is a belief that shipping and handling fees coupled with an outdated distribution center are hurting customer loyalty. I can run scenarios on what might happen if shipping and handling prices and delivery options are changed, though without reasonable test data, this will be hard to do.

What I am going to recommend to the Management team is a solution that represents a compromise between the best strategy (a 50% increase in customer acquisition spend) and the current mindset (reduce customer acquisition spend).

1. Increase customer acquisition spend, per year, by 20%, about $1.3 million per year.
2. For customers with an e-mail address, I will recommend reducing catalog contacts from 24 per year to 12 per year.
3. While I won't recommend it here, profit will undoubtedly increase by adding a second e-mail marketing campaign per week.
   

This strategy increases five-year profitability by $2.5 million dollars (click on the slide above) ... that's a nice return on investment considering that my projects typically cost between $9,000 and $40,000, depending upon the size of the company.

This strategy does yield marginal growth, though I doubt the level of growth is going to be enough to satisfy management.

At some point, however, there is an opportunity for a 'bigger' discussion. My strategies help optimize the direct marketing contact strategy and the online marketing strategy. My methodologies illustrate where the business is heading. I was able to demonstrate to management that some of their strategies would have had catastrophic consequences, so there is a lot of value in running those scenarios for management.

The 'bigger' discussion is about the target audience that Gliebers Dresses markets to, the merchandise assortment, and the tools that Gliebers Dresses uses to market to the target audience. If Gliebers Dresses truly wants to grow and be profitable, then Management will have consider the impact of following the Baby Boomer audience into her 60s and 70s. There are a lot of customers age 15 - 45, customers that have different needs, and are not necessarily as responsive to analog marketing (i.e. catalogs). The latter audience requires a different marketing and merchandising mindset, doesn't it?

The 'bigger' discussion is hard to have, because the management team has to fix the business now. The 'bigger' discussion is scary. It requires a thoughtful long-term plan, a re-evaluation of strategy, marketing practices, consideration of demographics, and an assessment of the merchandising assortment. It may require a new customer service platform. It can tear employees away from the jobs they love to do.

With those thoughts in mind, I prepare to present the recommended strategy to management.

Gliebers Dresses: A Change Will Do You Good

It is Monday, and that means it is time to Skype-in to the Gliebers Executive Team meeting.

Glenn Glieber (Owner): "... and she says to me, 'Don't you stand behind your product?', and I said 'Of course I stand behind my product. But you bought the dress in 1997 and now you want to return it? Go return it at L.L. Bean, they'll give you your $79.99 back.' I know times are tough, but that kind of behavior ain't right. And then Harriet jumps on her blog and says we don't honor our returns policy, and I'm getting phone calls from the Milwaukee Journal-Sentinel about our lack of ethics. What is wrong with people?."

Meredith Thompson (Merchant): "Kevin, is that you?"

Kevin: "Yup, it's me."

Glenn Glieber: "Nice to have you here, Kevin. You mentioned that you're going to start leading us out of the wilderness. Let's give it a shot and see where it takes us.

Kevin: "What I want to do today is tee-up the recommendations I'll make later this week by sharing with you important test results from your marketing department."

Pepper Morgan (Creative): "What test, Sarah?"

Sarah Wheldon (Marketing): "Boris Feldman ran a test, a year-long test, to measure profitability when catalogs are not mailed and when e-mails are not delivered to customers."

Pepper Morgan: "Cool!"

Meredith Thompson: "What? We didn't mail catalogs to customers? Are you serious? Is that the reason our business is in the toilet --- because marketing is busy treating our business like a giant petri dish? My customers love seeing my assortment, we need to get it in front of her!"

Roger Morgan (Operations): "Bow-Tie-Guy might have done something interesting. I recently read a Neptune Research report that says multivariate testing is critical to the success of an e-commerce brand."

Kevin: "Take a look at the slide I forwarded you (click on the image at the top of this post). Boris Feldman created four test segments. One segment was treated normally. One segment was not allowed to receive catalogs. One segment was not allowed to receive e-mail campaigns. One segment did not receive any marketing all year long."

Meredith Thompson: "Oh my God. No marketing, all year long?".

Kevin: "Yes, that's correct. Now take a look at the last column. The last column reports the average annual profit generated by a customer. Which strategy was most profitable?"

Pepper Morgan: "Zero catalogs and fifty-two e-mail campaigns. Holy cow!"

Meredith Thompson: "This is insane. The most profitable strategy a catalog brand can employ is one where the catalog brand sends zero catalogs? Honestly, Kevin, you're nuts, no offense. Why would you even bother to share this with us?"

Sarah Wheldon: "That's why I never shared the test results with all of you. I don't trust the results at all. We're a catalog brand, and the results suggest a catalog brand should stop mailing catalogs."

Kevin: "We might be getting ahead of ourselves. In no way am I saying that you should stop mailing catalogs. I'm simply sharing the test results. I went back and ran my own scenarios. The two most profitable potential combinations were 6 catalogs and 52 e-mail campaigns, followed by 6 catalogs and 39 e-mail campaigns. The data simply suggest that if the customer already volunteered an e-mail address to Gliebers Dresses, then Gliebers Dresses can reduce catalog marketing expense and generate more profit in the process, because the customer is telling you she wants to receive advertising in a digital form."

Roger Morgan: "Isn't it an established best practice to be 'multichannel' with your marketing activities? In other words, we really should be mailing catalogs and sending e-mails to customers, because that's what multichannel customers like. And the more multichannel customers you have, the more successful your business is. It's that kind of circular logic that makes a multichannel business like ours thrive."

Kevin: "The data suggest that multichannel customers might like to hear from Gliebers Dresses across multiple advertising channels. The data also suggest that there is an opportunity to 'optimize' the number of contacts, saving expense while generating additional profit."

Pepper Morgan: "Kevin, can you talk a bit about the other columns in the table?"

Kevin: "The test tells us many different things:

1. If catalogs aren't mailed, demand shifts into e-mail marketing.
2. If e-mails aren't mailed, demand shifts into catalog marketing. In other words, e-mail marketing and catalog marketing are not complementary. They cannibalize each other.
   
3. If catalogs are sent to the customer, the customer goes online, and uses paid search as a research tool. The more you spend on catalog marketing and e-mail marketing, the more the customer uses paid search, costing you more marketing expense.
4. If you market more to the customer, then the customer uses affiliates and banner ads and portal advertising more often.

Sarah Wheldon: "Isn't that nuts? The more we spend, the more the customer uses other tools, causing us have to spend more? I'll bet Google likes that! No wonder I keep reading articles suggesting we should increase marketing, not decrease it, during challenging economic times."

Kevin: "Here is the single most important finding in the table. Everybody please write this fact down. If you do not market to these customers, customers will still spend 50% of the money they would spend if you marketed to them all year via catalogs and e-mail marketing messages."

Roger Morgan: "What?"

Kevin: "This is a good thing, folks! If you stop marketing altogether, your customers will continue spending half of what they used to spend. Your brand is strong enough that half of your sales will just happen, without any need for marketing whatsoever."

Meredith Thompson: "I knew customers loved our merchandise!"

Glenn Glieber: "I love free marketing!"

Roger Morgan: "You mean customers hold on to the catalogs for years, or they bookmark our URL in Firefox?"

Kevin: "Or they are simply loyal to your brand. Whatever the reason, the customer keeps spending some money. I call this the 'organic percentage'. Your organic percentage is 50%. This means that there are customers who are more profitable when they receive much less advertising. We can save money with these customers, and re-invest the money in different programs."

Lois Gladstone (Finance): "Like a loyalty program. This would be a great way to fund a loyalty program! We send fewer catalogs to customers, and then re-invest that money in loyalty programs. And then we can keep spending money on customer acquisition, like Kevin recommends."

Pepper Morgan: "Didn't Kevin show us that our business still falls off the cliff if we do a loyalty program?"

Lois Gladstone: "That's if we cut back on customer acquisition. I'm not saying we cut back on customer acquisition. I'm saying we stop mailing so many catalogs to customers with an e-mail address, and then we re-invest the money in a really good loyalty program, and we keep spending money on customer acquisition like Kevin says. That's how we'll get out of this mess!"

Glenn Glieber: "The program could have points, you know, you get 10 points for every $100 you spend. And then we'll have double point days, you buy a Quinceanera dress and you get 20 points for every $100 you spend. Buy a Wedding dress, and you get a 100 point bonus, because it is your big day."

Lois Gladstone: "And once you hit 150 points, you get free expedited shipping for the rest of the year. I only fly on United Airlines because I get to sit in Economy Plus once I hit 25,000 annual miles. There's nothing Delta could do that would cause me to switch. That's the kind of thing I'm talkin' about."

Glenn Glieber: "This thing could go viral, too. You earn 25 points for every customer you recruit to join the loyalty program. It's like really inexpensive new customer acquisition, and Kevin said we needed to keep the gas pedal pushed to the floor on new customer acquisition."

Roger Morgan: "We'll give 25 point bonuses if the customer uses a new channel for the first time. You take that online-only customer, and you give them 25 bonus points if they purchase using the telephone. Then, the customer is multichannel, and is worth so much more. This thing really is multiplicative, isn't it? And the customer wins, because she earns points that launch her closer and closer to free expedited shipping?"

Glenn Glieber: "Maybe we just do free expedited shipping, all day, everyday, every customer."

Lois Gladstone: "We've run the numbers on that one. It doesn't work."

Sarah Wheldon: "Are we saying that what is broken with this business is customer loyalty? I think that's what we're saying. And if that is what we're saying, then we're saying that the issue with loyalty isn't our merchandise, we're saying that the issue is marketing, that if we just had some catchy marketing strategy, we'd be fine. So our way of addressing the problem is to come up with a loyalty program that, in reality, isn't a loyalty program, but is a game that allows some customers to pay less to have merchandise shipped to them. Which means that we don't believe our problem is a merchandise issue, and that fundamentally, we don't believe our problem is a marketing problem, though Kevin says we can mail fewer catalogs to customers with an e-mail address. We believe our problem is our customer service, it is the cost we charge a customer to have a package delivered to her in a timely manner. What we're really saying is that the cost of great customer service is prohibitive to us, and that cost causes us to be uncompetitive, so customers are leaving us for other companies. Isn't that what we're really saying?"

And for a brief moment, the room is quiet.

Lois Gladstone: "I think we're saying we have to fix this business, now. Since it takes nine months to develop a new line of merchandise, we have to look at alternatives, you simply don't fix merchandise issues overnight. And because free shipping and handling all day everyday is fatal to our business model, we have to find another strategy."

Meredith Thompson: "I don't believe the issue is with the merchandise."

Glenn Glieber: "Ok, folks, we need to wrap this up. Kevin, can you bring your recommended strategy with you to Wednesday's meeting?

Kevin: "Certainly. I will present my strategy for optimizing the current marketing plan and a plan for acquiring new customers."

Glenn Glieber: "Good, we'll see you Wednesday. Now on to the next agenda item. It's come to my attention that some employees are eating Teriyaki at their desk for lunch, and that other employees find the odor offensive. So beginning today, no employees are allowed to eat offensive smelling foods at their desk. Roger, will you draft an e-mail communication from the entire Executive team, outlining this new policy."

Meredith Thompson: "Define the foods that smell offensive?"

Gliebers Dresses: Chief Operations Officer (COO)

I knocked on the office door of Roger Morgan, Chief Operations Officer at Gliebers Dresses.

The walls of his office were covered with giant sheets of paper, and the smell of magic marker permeated the office. Within seconds, I had what felt like an ice cream headache from the odor of the markers. Boxes and parallelograms dotted the giant sheets of paper, all connected by a series of complex, multi-directional arrows. The flowchart documented the path an order takes from being captured in a call center or online, to the distribution center, and then to the corporate data warehouse.

Mr. Morgan closed the door behind me. I secretly hoped that the room was well ventilated.

"Take a look at this, Kevin!" Mr. Morgan showed me a Powerpoint slide he created earlier in the morning.

• Call Center Employees With The Largest Average Order Values In 2008 Generate Average Order Values Of $148 In 2009.

• Call Center Employees With Normal Average Order Values In 2008 Generate Average Order Values Of $139 In 2009.

• Call Center Employees With Below-Average Order Values In 2008 Generate Average Order Values Of $136 In 2009.
  

"I've been tracking this metric for the past three years. Our best call center employees consistently outperform everybody else. My five best call center employees generate an incremental $350,000 demand, $100,000 profit, each year. They're so good at their job that they literally encourage customers to spend more."

"I thought about your data from last week --- you said that telephone customers have better annual retention rates than online customers. Your findings match my findings. Telephone customers have bigger average order values than online customers. And the biggest telephone orders come from the best employees. Online, there's almost no human element, outside of live chat. The human element is so important to a direct business. Pepper says e-commerce is stripping the human element out of business, maybe she is right."

Glenn Glieber personally hired Mr. Morgan in 1991 as a COBOL programmer. Mr. Morgan became Chief Operations Officer in 2000, after Gliebers Dresses made it through the Y2K challenge with almost no need for incremental programming support. I asked Mr. Morgan about the craziness surrounding Y2K.

"I have a successful career because I wrote code that included a four-digit year instead of a two-digit year. Attention to detail makes all the difference."

I wondered how the Operations guy gets things done at Gliebers Dresses.

"Nobody ever listens to the operations guy. People complain a lot. We process 450,000 orders a year, and we make a significant mistake on 0.05% of the orders, 225 in total. But that's almost one order a day. So every day, I get a lecture from somebody about how my team failed."

I asked Mr. Morgan what he meant when he said that "nobody ever listens to the operations guy."?

"There's a lot of problems with our business, obviously. I listen to customer calls every single day. I hear the 61 year old woman asking questions on the phone, telling my employees that the merchandise is too young and trendy for her. I read customer comments on Twitter, suggesting that our website is old fashioned, very Web 1.0 --- and I know I have to balance that feedback with the fact that our 61 year old female shopper will be freaked out if we migrate the website out of Web 1.0 mode. And I hear all of the complaints from marketing and creative about how they can't innovate given our platform. That drives me crazy."

What, exactly, is driving Mr. Morgan crazy?

"We don't optimize what we already do. Why don't we have ten versions of an e-mail campaign, based on prior buying behavior? E-mail sales will instantly improve by 25%. That's low hanging fruit, put bow-tie-guy on that one or let my team do it."

"We argue about placement of the shopping cart like it is the single biggest deciding factor in determining how our website performs. If we simply followed shopping cart best practices, we'd improve performance by another 10%, it's that simple. I've got twenty ideas from Woodside Research and Neptune Research that we could implement right now, each would improve productivity by 5% - 10%. I really think we could dramatically improve the productivity of the website if we simply followed established best practices. We don't have to innovate. We simply have to execute better. Our conversion rate could improve from 8% to 12% if we just plugged the holes in the purchase funnel.

I asked Mr. Morgan if the website was his area of responsibility, then why wasn't he implementing his own ideas and reaping the benefits?

"Because we sit in these meetings and argue about how much conversion would improve if we had a forty second greeting video featuring runway action from Milan instead of taking the customer directly to the homepage. I prioritized that idea at the bottom of the book of work, and by burying it down there, it will never get done. I could implement ideas, but then my Executive team partners call me a 'cowboy', and they won't partner with me on anything else. Trust me, I've been there! So I need to navigate the political waters on these things, using Woodside Research and Neptune Research to back up my ideas. I have a lot of ways we could improve productivity, right now."

I asked for an example.

"We talked earlier about shopping cart abandonment. Our abandonment rate is 68%. The customer finds out that shipping and handling is $12.95, and buh bye, she's gone. We lose a lot of new customers because of shipping and handling. You wouldn't need to be here talking to me, no offense, if we somehow solved that problem. We'd have all the new customers we needed."

How do you fix the shipping and handling problem when your company is not profitable?

"I don't know how we can compete. Finance analyzed this thing to death, we cannot increase sales enough to cover the profit we'll lose by giving away shipping and handling. And honestly, the folks at Zappos don't have free shipping, they have $3 shipping per item. But they get you your shoes in one day. We can't get our merchandise out of our distribution center in two days. In fact, our entire distribution center needs a multi-million dollar overhaul, we need robotics and the whole nine yards. We should have a distribution center closer to our west coast customers. We cannot afford a west coast distribution center when we're not profitable."

I asked Mr. Morgan how to get out from under the problems the company faces.

"I think we go with Glenn Glieber's advice, we find fifty 2% solutions. Let's just follow best practices, and recapture the incremental revenue that's leaking out of the bucket. A simple improvement in the conversion rate, from 8% to 10%, would result in a sales increase of maybe seven million dollars. SEVEN MILLION DOLLARS! Who wouldn't like to see that money drop to the bottom line? Now we have two million in earnings before taxes, and we take that money and reinvest it in the infrastructure of the business."

Fifty two-percent solutions. Seems like we all have fifty two-percent solutions. And somehow, business performance doesn't change a whole lot. Sometimes, simple implementation of ideas can be the secret sauce.

Gliebers Dresses: The Loyalty Opportunity

It's Wednesday, which means it is time to Skype-in to the Gliebers Executive Meeting.

Glenn Glieber (Owner): "... and then I just looked at him and said, 'you know what, Barry, you're fired.' I simply channeled my inner Donald Trump. Do you think anybody from my generation would ever consider 'live tweeting' a company meeting? Communicate this to your respective teams. There will be no, and I repeat, NO, live tweeting of any Gliebers Dresses meeting"

Meredith Thompson (Merchant): "Kevin, is that you?"

Kevin: "Yup, it's me."

Lois Gladstone (Finance): "I hope you have good news for me today! How did my scenario look? Are we most profitable by cutting customer acquisition spending by fifty percent, pocketing two million dollars of cash, and investing a million dollars in a loyalty program that increases customer retention by ten percent?"

Kevin: "Let's take a look at the slide I sent you prior to the meeting (click on the image above). I added a scenario, labeled "cut + loyalty". That is the scenario that Lois is advocating. The outcome is a mixed blessing. During the next twelve months, this is easily the most profitable strategy."

Lois Gladstone: "Yes!!!"

Kevin: "But as we move out into years three, four, and five, there aren't enough new customers available to participate in the loyalty program. Even though we are adding six or seven million in demand, per year, based on your guess of the impact of a loyalty program, the lack of new customers cause the business to spiral into free-fall once again. By years four and five, we're unprofitable again."

Lois Gladstone: "Ok, so this scenario doesn't work. What if we try another scenario?"

Kevin: "The best scenario I found is to cut customer acquisition spend by a million dollars, and then funnel every penny back into a loyalty program. If the loyalty program increases loyalty by ten percent, and that is an 'if', then the business is stuck at $63 million in annual demand, and $0.9 million in annual profit. Basically, we can add an additional $0.6 million in annual profit under that scenario.

Pepper Morgan (Creative): "What are you saying, Kevin?"

Kevin: "I am saying that there are two ways we're going to grow this business. The first way is to increase merchandise productivity. You're already working on that, and if you had any easy answers, you'd already be executing them. The second way is to understand that with a 53% retention rate, or even a 58% retention rate, you must keep the gas pedal on new customer acquisition. You need to spend a large sum of money acquiring customers, every single year, in order for the business to grow."

Glenn Glieber: "Kevin, how many times do I have to tell you this? We don't have a couple million dollars of cash laying around to burn in the new customer acquisition fire pit."

Sarah Wheldon (Marketing): "And we're already struggling with our acquisition tactics. Our work with ResponseShop suggests that we're acquiring as many customers as we can, and the productivity of the names we are acquiring is slowly eroding. I'm not confident we can acquire a lot more new names."

Roger Morgan (Operations): "Neptune Research issued a recent paper that said that marketing dollars are moving from analog channels online. Are we acquiring all the customers we possibly can online?"

Sarah Wheldon: "I don't have any extra marketing dollars in my budget to spend on online customer acquisition. We're already spending to our long-term value targets, and I really believe the catalog is causing most of the online conversions anyway. We send a catalog, we drive the customer online, the customer finds a discount coupon via an affiliate, and buys from us. We give away the discount, and we give seven or eight percent to an affiliate. I don't like the way purchases happen online. I have to keep giving away margin and promotion dollars just to get an online order. I don't think any of us had that in mind when we were introduced to e-commerce fifteen years ago."

Pepper Morgan: "Didn't Williams Sonoma just say that they are dramatically cutting catalog circulation, investing money in online marketing where the return on investment is better? Couldn't we find poor performing catalog circulation on our housefile, not send catalogs to them, and re-invest the money in online marketing?"

Sarah Wheldon: "Oh gosh, that only works for retailers. Next thing you know, you're going to tell me that Nordstrom killed their catalog marketing program and actually became more profitable. That was during the housing bubble, they are a retailer, and all of that is completely irrelevant to our business model, no offense Kevin. We're a traditional cataloger. All catalogers know that the Nordstrom and Bloomingdales and now J. Crew and Williams Sonoma stories are just fluff. Their retail channels make up everything they lose when they stop mailing catalogs. We're different."

Pepper Morgan: "Ok Sarah, what is your solution? You can't keep saying no to everything everybody says. Offer us a solution."

Sarah Wheldon: "We'll fix this business when the merchandise productivity improves. Comparable segments are spending ten or fifteen percent less than they were spending thirty months ago. We can't manipulate the profit and loss statement by saving money in one place and then increasing loyalty through some program that gives away free dresses or free shipping."

Meredith Thompson: "Or maybe we'll fix it when my product is exposed to the right audience."

Kevin: "There are other things we can do. Assuming you are inviting me back on Monday, I'd like to share test results compiled by Sarah's team, testing that may give us a way to save money and spend more on customer acquisition."

Sarah Wheldon: "What information?"

Kevin: "The test that Boris did?"

Roger Morgan: "You mean bow-tie guy? He did a test?"

Kevin: "Yes, he executed a year-long test, and his test results actually give us a few options to improve our new customer acquisition problem without spending any more money."

Glenn Glieber: "I like free marketing!"

Kevin: "Ok, when I come back on Monday, I'll illustrate one possible way to improve sales and profit without an immediate improvement in merchandise productivity."

Glenn Glieber: "Thanks for popping in again today, Kevin. Fun Stuff! Back to business. The next item on the agenda is our parking lot. It seems that Greg Burns is parking his motorcycle in the covered Executive parking area. We can't have that. He claims his motorcycle is eco-friendly and should be protected from the elements if he is going to continue trying to protect the planet. Executive parking is an earned perk, not one granted to people trying to save the planet. Roger, I'd like his motorcycle towed tomorrow if he does this again, can you do that for me?"

Gliebers Dresses: Chief Creative Officer

Pepper Morgan looks seriously out of place at Gliebers Dresses.

She appears to be twenty years younger than the rest of the Executive Team. And get this ... she actually wears the merchandise she presents online and in catalogs.

The walls of her office are filled with free-hand drawings of spreads that will appear in upcoming catalogs. You'd almost think she was an old-school cartoon animation expert. Her desk is littered with drawings on scraps of paper. Her desk is also covered with flight itineraries.

"My daughter (Sonora) says I spend more time on an airplane than I spend with her. She's probably right, though I got to see her score a goal in a soccer game last Saturday, so that was 'kewl'!!. And it was hilarious to tweet her goal on my iPhone and then have other Moms at the game re-tweet the goal to their followers. Her goal went viral around the soccer field in a matter of seconds. That's the power of social media!"

In person, Ms. Morgan is more outspoken, more opinionated, and far more interesting than she comes across in Executive meetings.

"I've learned to pick and choose my battles at Gliebers. I'm different from these people in three ways. I'm a generation younger than most of the long-timers. I spent my formative years working on the Anna Carter catalog and website, so I'm speaking Portuguese when these folks are speaking Spanish. But most important, I believe in the customer. These people believe in the catalog."

What does it mean to 'believe in the catalog'?

"At some point in your career, you make a decision. Are you working to serve the customer, or are you working because you adore your niche? At Anna Carter, we were thoroughly dedicated to serving the customer. If she wanted us to advertise dresses via banners hanging from a blimp, we'd do that for her. At Gliebers Dresses, we are thoroughly dedicated to producing a catalog twenty-four times a year. We don't generate sales to achieve a profit, we generate sales to fund catalog research and development activities. These folks have a passion for producing catalogs."

Is that necessarily a bad thing?

"I'll give you an example. We use the same images of Patty (the best selling model in the catalog) over and over again. Some of the images go back to 2002. Sure, that saves us a few pennies in catalog and online production expense. But come on!!! As best I can tell, the customer has seen Patty an average of twelve times per catalog, twenty-four times per year, for seven years. That's more than 2,000 images of Patty being shoved down the throat of our 55-60 year old customer, not counting e-mail campaigns."

"And we cannot get rid of Patty. I tried to introduce Roxy (a younger, more contemporary model) two years ago, but the same items sold 15% worse in the catalog when Roxy wore them. Interestingly, Roxy's items sold 10% better online, but nobody cared. Roxy only got four in-home dates, and then Glenn and Meredith sent her to the creative scrapheap. Are we going to keep shooting Patty when she's 77 years old and craving elastic waist slacks? How far do you allow your traditional customers and your leadership to take the creative treatment of your brand? After all, I thought it was my job to determine the creative direction of this brand."

I asked Ms. Morgan to talk a bit about the future of creative.

"I think we're currently in a state of transition. We left analog marketing back in the 1990s, but Web 1.0 e-commerce didn't do creative professionals any favors. Copywriting became writing copy for Google. Where's the fun in testing 'Sundresses on Sale' vs. 'Sundresses with Free Shipping'? Now to some extent, copywriting moved into blogging, but marketing took ownership of blogging, something that we creative people should be really good at, right? So that stinks. All of it is boring, all of it lacks creativity."

"Have you ever tried to do something clever with e-mail marketing? Can I be creative, or do I have to worry about using 18 fewer pixels in a pre-header, whatever that means? When did our days shift from selling merchandise to focusing on pre-header pixels? And we focus on stuff like pre-headers so that 1 in 700 people buy from an e-mail instead of 1 in 770? And then somebody will say that they improved e-mail ROI by 10% because of a steely-eyed focus on pre-header pixels --- even though only 1 in 700 are responding anyway. 699 out of 700 recipients don't purchase. How much time are we really wasting for something that 699 in 700 won't buy from, time that could be spent actually selling merchandise or listening to the customer? Honestly, the e-commerce revolution caused marketing and information technology to take accountability for so many of the activities that used to be done by creative people. And now marketing and information technology are executing those things at a sub-optimal level."

I asked Ms. Morgan once again about the future of creative.

"I think the future is a fusion of video and social media, the injection of humanity into the utterly sterile world of e-commerce. My job will be to generate great content, stories and videos about how we complement the lives of a busy middle-aged fashion-focused woman who cannot afford Neiman Marcus but wants to look as good as the Neiman Marcus customer."

"My team will produce the content, we'll engage and interact with and participate with customers online. We may even introduce an entertainment channel with original programming. This content will be available on our site, but more likely, we'll widgetize it so that our biggest fans can distribute the content wherever they want ... and by doing that, we bypass marketing and information technology. Social Media will be an inexpensive distribution channel. Social Media has already replaced the Post Office, we just don't know it yet. Why spend $0.80 telling a story in print when your fanatical customers will spread the story for you without cost via Social Media?"

I suggested to Ms. Morgan that her vision was unique to the catalog industry.

"Probably. But that is where creative is heading. There isn't going to be a difference between creative and marketing in the future. Campaigns will be eliminated, everything will be personal, and not personal like a 'Dear Kevin' line in an e-mail campaign. Each customer will have to decide whether they want to volunteer to do our marketing for us. 99% of customers don't want to do anything. 1% of the customers will do our marketing for us, without cost. My job is to give that 1% of the customer file something compelling to share with others. For us, 1% of our customer file will replace the post office. For other brands, 1% of the customer file will replace television advertising or radio advertising. That's a tough transition for a marketing professional. It's an absolutely invigorating transition for a creative professional. Our time is coming."

I asked Ms. Morgan why she was so biased against e-commerce?

"I'm not against e-commerce. I'm against unimaginative, rule-based online shopping. If I want to do something revolutionary in the catalog, I simply go do it. If I want to do something revolutionary in e-commerce, I have to have the information technology department code it for me. Have you ever tried to work with the information technology department? You never get what you want, it takes eighteen months to give birth to an idea assuming it gets prioritized in the 'book of work', a bunch of techies mock you for not understanding e-commerce conversion best practices, and the whole world has moved on by the time your watered down idea is implemented. And once your watered down idea is implemented, you're mocked because your idea didn't perform, you're mocked because your idea is now behind the times. Why would anybody want to go through that? Worst of all, those information technology folks know that they can bury the requests they don't like. That's not an optimal way to run a business."

"And then you have the algorithms. These things suck the romance out of shopping. Just last week, our cross-sell algorithm said that customers who loved our Sweet 16 dress line also loved Wedding dresses. What's up with that? You should have read the hate mail we received, Moms chewing us out for recommending that sixteen year old girls consider marriage. And yet, bow-tie-guy (Boris Feldman, CRM Manager) says that customers who buy our Sweet 16 dress line do eventually buy Wedding Dresses. You end up having to make a decision. Do you let the algorithm decide what you do, or do you let common sense decide what you do? Right now, the triune god of algorithm/lowest-price/free shipping has complete control over e-commerce."

I asked Ms. Morgan why she never shared these opinions in the Executive meetings?

"I do my work behind the scenes, jumping on every single chance to align my work with projects that hint at the future of e-commerce. You don't push a company forward by belittling the CEO just because he doesn't know the difference between a widget and a tweet. You don't make progress by humiliating the marketing executive for always taking the easy way out and renting names from a database. You don't innovate by telling the web development team that the website looks like it is optimized based on feedback gathered at a Shop.org conference in 2002. There are many times, even when you're talking, Kevin, where I'll side with my Executive team partners, trying to build support. I want for all of us to succeed. It's hard to succeed when you're a contrarian."

I wondered if Ms. Morgan's vision is achievable?

"I think it's achievable, but things are going to have to get really bad before it can be achieved. Right now, nobody has the stomach for shifting resources from things that used to work well to things that are unproven."

I asked Ms. Morgan about all of the hand drawn images in her office. Didn't the hand drawn images reflect the kind of old-school cataloging and e-commerce that she was rebelling against?"

"Maybe it is easier to see the future in other disciplines than it is to see the future in your own area of expertise. I love drawing on paper. I don't like drawing on the computer. This is the way my mentors taught me how to do my job. It brings me peace."

A lot of folks at Gliebers seem to uncomfortably straddle the peace of the past and the uncertainty of the future.

Gliebers Dresses: New Customer Acquisition

It's time to Skype-in to the Gliebers Dresses Executive Meeting.

Glenn Glieber (Owner): "... it's just common sense, folks. If we can get every fifteen year old in America to purchase her Quinceanera Dress from us, we steal market share and we'll hook the customer for life. Sarah's been saying for years that our customer file is too old. And think about the marketing opportunities. We could get Miley Cyrus or Hillary Duff to do an interview, and then publish the interview in our catalog. The kids love those two, right? We could probably even sell the catalog at the checkout in the grocery store, $4.00 or something like that, people would just love that! We could have a special Twitter thingy to build community among the kids. This idea would probably go viral, wouldn't it? Quinceanera for the Hispanic community, and then there's the Sweet 16 opportunity, too!. Brilliant! Sarah, I'd like to see the marketing plan for all of this by early this afternoon. Great idea, Pepper!"

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

Kevin: "Yup, it's me."

Glenn Glieber: "Kevin, do you have a tidbit for us to consider today?"

Kevin: "I have a few tidbits about the future sales trajectory of your business."

Roger Morgan (Operations): "I hope you factored in the impact of the economy, Kevin. Woodside Research says the economy will bounce back in Q1-2010. If I were you, I'd apply a 10% bump to any forecast your developing, just to factor in the likely impact of a global economic resurgence."

Kevin: "Well, I think ..."

Lois Gladstone (Finance): "Didn't we factor in a 10% bump in our 2007 forecast, and then buy a whole bunch of inventory to meet the forecast, and then get our rear end handed to us when we had to liquidate all that stuff when sales didn't hit the forecast? Didn't we end up having that big tent sale in Birmingham to get rid of all that junk?"

Meredith Thompson: "It wasn't junk, it was a bad forecast."

Sarah Wheldon (Marketing): "Oh, that was a cold day. 39 degrees on December 15 in Birmingham, and we're trying to move three million in excess dresses under the guise of a Christmas blowout sale inside a tent next to an abandoned K-Mart store.

Roger Morgan: "Good hot dogs, though. We sure sold a lot of hot dogs."

Kevin: "Speaking of selling, I'd like to share a slide with you. This slide shows where Gliebers Dresses is heading over the next five years."


Glenn Glieber: "What does this tell us, Kevin?"

Kevin: "Given your current base of customers, your current online marketing strategy and catalog mailing strategy, and your current customer acquisition strategy, the data tells us that your business has stalled. Unless there is a significant improvement in merchandise and creative productivity, the business is stuck at about $63 million in annual demand, and will eek out a tiny profit each year."

Lois Gladsone: "How can you know this, Kevin? My team produces the sales forecasts for the company, and we aren't showing a trend like this."

Meredith Thompson: "And obviously you haven't taken into account our Quinceanera promotion, or the emerging prom business. I don't know how you dream up numbers like this without any context whatsoever."

Kevin: "Let me ask all of you a question. Didn't you have initiatives and promotions and strategies for each of the past three years? And didn't you feel optimistic about those strategies before executing them? In spite of optimism, this business lost a ton of volume and profit over the past three years. Regardless of initiatives and promotions, there is a natural rhythm to business. The customer has a 53% repurchase rate, buys twice a year, and spends $137 per order. And you spend about $6.5 million acquiring new customers. Given these dynamics, I can generate reasonable forecasts."

Pepper Morgan (Creative): "What do the columns mean, Kevin?"

Kevin: I ran three scenarios for you. The first scenario looks at where your business is heading over the next five years. The second scenario looks at what happens if we reduce customer acquisition spend from $6.5 million to $3.3 million."

Lois Gladstone: "Ah, yes, get rid of all that unprofitable customer acquisition spend. And look what happens. The business is instantly more profitable!"

Kevin: "For a year or two. After that, your business is starved of new customers. Your business shrinks. And your business becomes unprofitable, because you don't have enough business from existing customers to cover your fixed costs."

Lois Gladstone: "But that's just a guess, right?"

Kevin: "An educated guess based on the way your existing customers behave, coupled with your expense structure."

Lois Gladstone: "Yeah, but, we'd invest that money in loyalty programs, and that would cause our customers to become more loyal, and that would increase sales and profit.

Kevin: "That's a hypothesis that we'd have to either prove or disprove. Now take a look at the last set of columns. Here, we increase customer acquisition by 50%. And we take a bath during the first year. But by year five, this business is growing and is more profitable."

Glenn Glieber: "Here's my problem, Kevin. We simply cannot afford to invest almost $10 million in customer acquisition under the promise that the business will be stronger in five years. We don't have any cash to do that. Where do I find an additional $3.2 million to spend acquiring customers who are even less profitable today than the ones we're already trying to acquire? If anything, I need to reduce marketing spend to keep the business afloat."

Lois Gladstone: "I'd cut the customer acquisition spend, and then re-invest it in customer retention activities."

Sarah Wheldon: "Describe the retention activities you're thinking about?"

Lois Gladstone: "Like a frequent buyers club ... buy five dresses and get the sixth one free, or buy three dresses and get free shipping for the rest of the year. Something to hook the customer to us, that's what we need."

Meredith Thompson: "Does the customer buy from us because of the merchandise, or because of gimmicks?"

Lois Gladstone: "Kevin, on Wednesday, could you run a scenario where we cut customer acquisition activities by 50%, and then we invest $1,000,000 of the customer acquisition money in a loyalty program that improves customer loyalty by 10%? Would a scenario like that be more profitable than what we are doing today?"

Kevin: "Sure, I'll be happy to do that."

Glenn Glieber: "Another great Multichannel Forensics tidbit! Thanks for hopping on today, Kevin, we'll see you on Wednesday.. Now, on to new business. I received an awful lot of complaints about the shampoo that was used to clean the carpets last week. Seems that several employees think the shampoo was toxic and caused rashes on the ankles and shins. Roger, we need a shampoo solution. Doesn't Costco have some 'green' shampoo that we could use, helping us save the planet while at the same time minimizing the risk of rashes?"

Case Study: Back To My Office To Run Some Numbers

Whenever you work on a Multichannel Forensics project, it is a good idea to "take the temperature of the room".

At Gliebers Dresses, we'll have success if we can find a solution that gets people in the room to work together.

This doesn't mean that we lie about the results. Absolutely not. We will be 100% accurate in the reporting of our findings.

But we will find common themes in the data that unify the room. We will find cases where catalog marketing is absolutely essential to the success of the business. We will find instances where we can reduce advertising cost, instances that don't hurt sales much but do increase profit.

Lois Gladsone is the Chief Financial Officer. She is motivated to reduce unprofitable expenses. She seems to have come to a pre-determined conclusion, that customer acquisition is unprofitable. So my job is to validate or disprove her assumption.

Meredith Thompson is the Chief Merchandising Officer. She needs to know that customers love her product. One way to expose a customer to merchandise is to put expensive catalogs in the mail to customers who might be interested. There are many other ways to expose customers to merchandise.

Sarah Wheldon is the Chief Marketing Officer. Clearly, her teammates feel they can perform the role of the Chief Marketing Officer, and that suggests that her teammates do not have confidence in her skills --- that they may even believe that the struggles of the business are her fault. We have to give her tools that demonstrate that her thought process is on a different level than the rest of her staff. Boris Feldman's year-long test represents that opportunity.

Glenn Glieber is looking for fifty two-percent solutions. My job is to give him a series of solutions!

Everything that the management team looks at is historical in nature. I have to present to management a vision of the future. This is done by illustrating the future trajectory of the business, assuming they continue current business practices.

• We know that 61% of telephone buyers purchase again next year. So we multiply last year's telephone buyers by 61%, then we distribute these customers across telephone and online channels. This process is repeated for the online channel.

• New customers are added to the telephone and online channels.

• Now we repeat the process for year two, then year three, then year four, and then again in year five. This is a classic application of a Multichannel Forensics project.
  

We'll end up with a five year forecast for the business. Based on forecasted new customer counts and marketing spend, we can project the next five years. Here's what the next five years look like, based on my spreadsheet model (here's a sample spreadsheet --- different data).

• Year 1 = $62.8 million demand, $0.3 million profit.
• Year 2 = $62.8 million demand, $0.3 million profit.
• Year 3 = $63.0 million demand, $0.3 million profit.
• Year 4= $63.5 million demand, $0.4 million profit.
• Year 5 = $64.1 million demand, $0.4 million profit.

In other words, this business is stuck. Only a significant increase in merchandise productivity, or a change in customer acquisition practices will cause this business to move. Nobody will be happy with this level of performance. People lose their jobs when a business stalls like this, especially the Chief Merchandising Officer and the Chief Marketing Officer.

Ok, let's try something. Ms. Gladstone believes that customer acquisition activities are unprofitable, and are hurting the business. So I go back to my spreadsheet, and I crunch the numbers, cutting back customer acquisition activities by 50% for each of the next five years. Here's the result:

• Year 1 = $53.8 million demand, $1.5 million profit.
• Year 2 = $46.9 million demand, $0.4 million profit.
• Year 3 = $43.2 million demand, -$0.2 million profit.
• Year 4= $41.5 million demand, -$0.4 million profit.
• Year 5 = $40.8 million demand, -$0.6 million profit.

Oh goodness. If we follow the advice of Ms. Gladstone, everybody will be pleased after one year of following her prescription. Sure, the business gets more than 10% smaller, but profit increases somewhat. You can only imagine the glee in the Executive meetings, as everybody celebrates how they "fixed" the business. But look at what happens over time. The business is a third smaller, and is unprofitable. The finance, merchant, and marketing leaders wouldn't survive this level of deterioration. In fact, the business may not survive this level of deterioration.

It turns out that Gliebers Dresses needs to acquire ample quantities of new customers to be successful in the long term. Without a healthy customer acquisition program, Gliebers Dresses becomes an irrelevant brand.

I will always run the opposite scenario. I use my spreadsheet models to show what happens if we acquire 50% more new customers than what we are currently acquiring.

• Year 1 = $70.3 million demand, -$0.6 million profit.
• Year 2 = $76.3 million demand, $0.3 million profit.
• Year 3 = $79.9 million demand, $0.8 million profit.
• Year 4= $82.3 million demand, $1.1 million profit.
• Year 5 = $84.1 million demand, $1.3 million profit.

These simulations illustrate how sensitive a business is to customer acquisition. If Gliebers Dresses is willing to make an investment in the future, then long-term profit significantly improves. But the business isn't in a position right now to invest another three million acquiring customers that will result in a short-term loss.

None of the scenarios gets Gliebers Dresses back to printing money like in the middle of the decade, a time when Gliebers Dresses routinely generated between five and six million in earnings before taxes.

We're midway through a Multichannel Forensics project. I've been able to demonstrate to myself that Gliebers Dresses should not cut back on customer acquisition activities. A long-term test indicated that there are opportunities to reduce advertising spend among existing customers.

In the next week, my approach will include the following tactics:

• Explain the customer acquisition issue to Management. This should be a stimulating conversation.
  

• Research the long-term mail/holdout test, evaluating how e-mail, catalog, and search customers behave when advertising is withheld.
  

• Identify an optimal e-mail and catalog marketing contact strategy for each customer segment.
  

• Quantify the five year profit and loss impact of my proposed strategy.

• Quantify what happens to the business when the economy improves --- can the business grow if productivity improves by, say, 10%?
  

Ok, your turn. What is missing here? What are the pitfalls, given the personalities of the Management team? How do you think people will respond to what has been learned about acquiring new customers?

Case Study: Another Executive Meeting

I'm ready to Skype-in to today's Executive meeting!

Glenn Glieber (Owner): "... and honestly, I don't care if employees are upset with me for replacing Pepsi with Royal Crown cola in the soft drink machine. There's a Shell station just a block away. They can get a 42 ounce belly buster and nachos with hot peppers for just $1.99 if they are so inclined. It's bad enough hearing the Coke contingent gripe all the time about not having Coke products in the vending machine, now this. It never ends with these people."

Meredith Thompson (Merchant): "Kevin, is that you?"

Kevin: "Yup, it's me."

Glenn Glieber: "Folks, Monday's presentation went so well that we're going to ask Kevin to Skype-in at least once a week, preferably twice a week. What do you have for us today, Kevin?"

Kevin: Today we're going to review repurchase rates by physical channel. Recall on Monday we discussed the fact that 53% of Gliebers Dresses customers will purchase again next year. Here's a slide that illustrates channel-specific behavior.



Kevin: "This isn't an uncommon finding, folks. Customers who shop via the telephone tend to be more engaged than online shoppers. But this fact is hurting your business. As customers continue to migrate online, and most of them now have migrated online, they have more choices, and as a result, they become a bit less likely to shop at Gliebers Dresses."

Meredith Thompson: "Is this a symptom of our lousy website conversion? I mean, if we're only converting 8% of our visitors, then technically we're letting 92% of our visitors get away. That has to be correlated with the decline in annual retention rate, right?

Roger Morgan (Operations and Information Technology): "Oh I doubt that. According to Internet Retailer, our conversion rates are far better than most companies. And remember, Woodside Research gave us a score of 86 in their highly regarded 'Online Retailer Experience Awards'. To top it off, I read a blog post on the Closet Fashionista blog where the author said that shopping with us felt like shoplifting, she felt like she was stealing from us because our merchandise represented such a good value. So I don't think this has anything to do with conversion rates."

Sarah Wheldon (Marketing): "Roger, I bought that blog post. We gave the author free dresses for a year in exchange for a few positive mentions on her blog."

Pepper Morgan (Creative): "You astroturfed buzz about us?"

Sarah Wheldon: "It's called 'marketing', Pepper. The Closet Fashionista blog clearly communicates relationships with favored brands in their disclosure policy. All you have to do is go to the blog, click on the disclosure policy link at the bottom of the page, and then find Article 7.3, about two pages into the document. It's right there for everybody to see."

Glenn Glieber: "I love free marketing!"

Lois Gladstone: (Chief Financial Officer): "This brings me back to the idea of loyalty programs. Is there any kind of program we could create that would cause an online customer to become more loyal?"

Pepper Morgan: "Why couldn't we dot-whack the cover of the September Homecoming Catalog with a message encouraging customers to pick up the telephone and shop with us? Why couldn't that work? Maybe we give the customer 10% off if they shop over the phone?"

Roger Morgan: "And then I'll create a contest for our call center employees, whoever does the best job of cross-selling these customers with more merchandise gets $250? We can give $150 for second place, and $100 for third place. That would boost AOV (average order value) enough to cover the cost of the promotion and the cost of the contest, and because the customer is ordering over the telephone, we increase long-term customer value. Everybody wins!"

Pepper Morgan: "We'll enlarge the font of the 1-800 number at the bottom of each page of the catalog, and we'll add four pages to the September Homecoming Catalog, allowing us to tell the story of how wonderful our sales staff are. I'd put the hard working call center employees of New Hampshire up against anybody."

Sarah Wheldon: "Is it possible that this issue has nothing to do with the catalog? Is it possible that we do everything right with the catalog, only to drive the customer to Google, where every storefront in the world is suddenly a click away? And Kevin, this data isn't entirely accurate. You're looking at physical channels. We know that when we mail a catalog, customers buy online. Your analysis doesn't account for that, yet we know that happens."

Kevin: "Yup, it happens all of the time. But we didn't have a field in the database that stored that information so that I could incorporate it into the analysis."

Lois Gladstone: "Loyal customers wouldn't shop our catalog, and then go to Google. They're loyal by definition, why would they comparison shop?"

Sarah Wheldon: "Maybe our most loyal customers wouldn't behave that way, but almost every other customer I mail would behave that way. Remember, from 2000 - 2004 we spent all that time in these meetings talking about how to use catalog creative to drive the customer online to shop, and we gave all those 20% off offers coupled with free shipping. Well, it worked! We did that, and so did everybody else. Now the customer knows that the online experience is a great big flea-market style bazaar where they can find every item at the cheapest possible price and the fastest possible delivery. So we trained the customer to go online, and the customer now uses Google as a research tool."

Meredith Thompson: "Oh I wouldn't go that far. Customers know that we stand for quality, style, fashion, and value."

Sarah Wheldon: "Doesn't every company stand for quality, style, fashion, and value?" What's left when everybody has the same items at the same price? Shipping and handling cost, and speed of delivery. We fail on shipping and handling and speed of delivery."

Roger Morgan: "Come on Sarah, in 2006 Neptune Research did a secret shopper analysis of fifteen leading brands, including us. Our $12.95 average shipping and handling fee coupled with an average of five day delivery put us right in the meaty middle of the bell curve. Anna Carter charges $2.00 more for shipping and handling than we do, and it takes an average of six days for the customer to receive their merchandise."

Meredith Thompson: "Maybe we should mail them more catalogs, or send them more e-mail campaigns. Maybe that would increase the retention rate of online shoppers."

Sarah Wheldon: "Telephone shoppers can be profitably mailed twenty-four times a year. We lose money mailing any more than sixteen catalogs a year to online buyers."

Pepper Morgan: "So let me get this straight. We spent the first half of this decade giving away margin dollars pushing our customers online. Now our customers are online, a place where only 8% of them convert to a purchase in any given visit and we praise that as a good conversion rate, a place where they can find the same item from five different retailers at a cheaper price than we offer and with faster shipping, and as a result our customers have become less loyal? So in response to that, I am recommending that we try to drive our online customers back to the telephone by offering the customer a discount to make the customer more loyal? That's funny!"

Roger Morgan: "That's why we have to have multichannel customers. It's obvious that the online customer isn't desirable. And now, what, three-fourths of our sales happen online? What percentage of our customers could become mutichannel? 40%? 50%?"

Meredith Thompson: "The genie is out of the bottle. Kevin's slide says the online customer simply won't shop via the telephone anymore. How does the online customer become multichannel when the online customer doesn't want to shop another channel?"

Sarah Wheldon: "The customer is multichannel. She's using the catalog to shop online, that's two channels right there. And then she signs up for e-mail. Three channels. She's clearly multichannel."

Pepper Morgan: "And with all that multichannelidity, we're not profitable. So does any of it matter?"

Glenn Glieber: "We're going to have to cut this discussion off right here, folks. Kevin, thanks for Skyping-in today. Will you come back on Monday and do this again?"

Kevin: "Sure, I'll have another Multichannel Forensics tidbit prepared for the Monday meeting."

Glenn Glieber: "Great, thanks Kevin. Now let's move on to the next item on the agenda, entitled 'Call Center Ethics'. It appears that one of our associates lifted a credit card number from Agnes Pinsky of Omaha, NE, as Agnes placed her order, and somehow used that credit card number to fund an evening at the dog track in Council Bluffs. Who wants to take a stab at writing a modification to the call center ethics document?"