The Death Spiral

Last week, folks were actively talking about "The Death Spiral".

We deal with "The Death Spiral" in our Multichannel Forensics projects, don't we?

In this instance, we have a traditional multichannel business that is stuck at about $30,000,000 in annual sales. And given the state of the economy, the business isn't profitable. One of the opportunities is to give up on catalog customer acquisition altogether.

So here we go ... in year two, the Executive team makes the decision to stop acquiring customers via catalogs. This seems like a good idea, right? All of that customer acquisition activity is unprofitable, and causes folks to visit third-party opt-out services to get off your mailing list.

Here's what the business looks like, now that catalog customer acquisition has disappeared.

"Hasta La Bye-Bye", as a former co-worker used to say. This business is now in "The Death Spiral". A business that generated more than $30,000,000 begins to crumble (by the way, the annual retention rate here is more than 50%, reasonably healthy), falling to $23,000,000, then $15,000,000, then $11,000,000, and finally $10,000,000.

Each of these decreases would require the Executive team to take a hatchet to headcount ... especially in the call center and distribution center. The business, however, may be more profitable, allowing Management to hold on to corporate center staff. And at some point, Management will face the inevitable question ... "Should we kill the catalog altogether?"

Those of us who run Multichannel Forensics projects for our clients know the next question ... "How many online customers do we have to acquire to keep the business growing?".

The answer is ... "A Lot!"

This business will have to acquire about 42,000 new online customers per year, growing to that total ... and the business only gets back to $17,000,000 in annual sales.

This is "The Death Spiral" that folks talk about.

Customer Acquisition means everything to most businesses. We're being told to focus all of our efforts on retaining customers "during these challenging economic times". And we should do that. But for most of us, we should spend a lot more energy developing a credible customer acquisition strategy that fuels the future of our business.

The reality is that, for many of us, we're in the process of "resetting" the size of our businesses. Traditional customer acquisition strategies are dying, and if we don't formulate a strategy of customer acquisition "diversification", we're going to reset the size of our business, really fast.

Customer Acquisition: How? Now! And The Future

We've talked some about the two questions, coming from different camps:

• Catalog Marketers: How are we going to acquire customers when catalog customer acquisition becomes too expensive and unproductive? How are the online folks doing it?

• Online Marketers: How can we "detether" from Google, and start acquiring customers on our own? How do the catalog marketers do it?

If the internet were a baseball game, it would be entering the top of the third inning.

• Top of the 1st = Dot.Com Mania.
  
• Bottom of the 1st = The "Multichannel Era".
• Top of the 2nd = Social Media & Social Networking, aka Web 2.0.
  
• Bottom of the 2nd = "The Great Implosion", Global Economic Distress.
  

In the top of the third inning, marketers have figured something out. The secret to success, as it turns out, is the ability of a business to acquire customers in a profitable manner. It turns out that the "traditional" approaches, used by specific marketing genres, are not sufficient to grow a business.

It also turns out that nothing scales anymore. No one source, not even the big sources (catalogers = co-ops, online brands = Google) provide enough new customers to allow the business to grow. And it turns out that all of the micro-channels provide a micro-amount of new customers. Social media, in particular, has proven to be anything but a vehicle that drives new customers.

So the desperate plea from CEOs that inquire via my inbox is this ... "How do we acquire new customers ... NOW!!??"

We're in uncharted territory.

In so many ways, we're pioneers, taking the Oregon Trail out west. And when we get to the West Coast, we'll find that Seattle and Portland and San Francisco and Los Angeles and San Diego and Vancouver haven't been built yet. Traditional channels like catalog co-ops & lists are dying a slow death. Web 1.0 channels like paid search have plateaued for many. And emerging channels don't provide enough volume to matter.

In other words, it's our job to build the future.

The future requires that each company build a "prospect" list. This is old news to the catalog marketer, it is revolutionary to the online marketer.

The prospect list will have two components.

1. "Known Prospects". We will work extra-hard to identify ANYTHING that we can about prospects. We'll link cell phone numbers, e-mail addresses, credit cards, physical home mailing addresses, social security numbers, cookies, post office boxes, work addresses, home phone numbers, user-ids, confirmation numbers, registration numbers, you name it. Each piece of information is gold, and we'll purchase information when we can to complement what we already know about a prospect.
2. "Unknown Prospects". We're going to do just about anything in order for prospects to follow along, to become "fans". Think about the music industry --- there are bands that you enjoy listening to, though you've never purchased an MP3/CD, and you've never attended a concert.

Unknown Prospects are going to be a difference-maker in the future. This is counter-intuitive to the traditional direct marketer, one who always marketed to an existing customer or a known prospect.

We're going to see traditional direct marketers and online marketers morph into entertainment marketers. We'll see companies like Orvis (for example) offering multi-faceted entertainment programming. Think about the possibilities.

• Traditional catalog marketing for the 55+ exurban/rural audience.
• Classic e-mail marketing campaigns for the multichannel customer.
• Online marketing tactics like paid search and affiliate marketing and portal ads.
• Social media to connect fans to employees.
• Advertising via cable, radio, etc.
  
• The "Orvis Channel", a component of the website, offering original programming that exemplifies the Orvis lifestyle. Why advertise when you can produce your own programming? This programming will stream --- prospects can watch programming in real-time, or download programs at their convenience. Customers and prospects will be able to interact with the programming, making it different than watching a static episode of "ER", for instance.

Traditional conversion rate marketing becomes a thing of the past. We won't care that only 0.3832% of the audience of a show on the "Orvis Channel" purchased something. We will care that 148,903 prospects watched an episode on the "Orvis Channel", and that 20% of those prospects watched multiple programs, recruited other prospects, and eventually bought something eighteen months later.

The programs on the "Orvis Channel" will have a social media component to them, allowing prospects/fans to interact with other prospects/fans. There will be a viral component to this level of interactivity, generating conversation on other platforms. We won't care about having a Facebook or MySpace presence, we will care about having our prospects/fans evangelize our "programming" and merchandise outside of the "Orvis Channel" community.

We'll measure the process that a prospect goes through --- prospect to fan, fan to customer, customer to loyalist, loyalist to evangelist. Lifetime value will be the sum of future profits generated by a customer plus the sum of future profits generated by fans recruited by evangelists.

Is this futuristic? Maybe. Is this style of marketing becoming necessary? Probably. The future is all about acquiring new customers --- and the traditional, Web 1.0, and Web 2.0 methods of acquiring new customers are failing. We're going to need a new, sustainable approach.

What are your thoughts?

The Long Term Impact Of Sluggish Sales In 2008

Many folks are telling me that business in the multichannel direct-to-consumer world is down an aggregate 15% to 25% compared to 2007.

Poor performance manifests itself in the short term, and in the long term. Worse, it manifests itself in a harsh manner across brands/channels in Retention Mode.

Take a look at the table below:

Long-Term Impact Of Bad Performance In 2008
	Retention	Retention	Acquisition	Acquisition
	Mode	Mode	Mode	Mode
	No Cuts	And Cuts	No Cuts	And Cuts
2008	-20.2%	-23.9%	-19.4%	-23.3%
2009	-9.6%	-16.8%	-6.6%	-7.4%
2010	-7.0%	-11.9%	-2.8%	-3.5%
2011	-4.3%	-8.7%	-1.9%	-1.9%
2012	-2.8%	-6.1%	-1.1%	-1.1%

A business in retention mode (annual repurchase rate > 60%) feels the pain much longer than a business in acquisition mode (annual repurchase rate < 40%).

In the table above, we compare what happens when 2008 is down about 20% to 2007, but the business immediately rebounds to normal levels for 2009 - 2012.

The retention mode business is down almost ten percent in 2009 because of a bad 2008, down seven percent in 2010 because of a bad 2008. And then factor in our natural reaction to cut marketing expense --- which accelerates the downturn in 2009 - 2012. This is where many of our retention mode businesses are heading, especially those trimming marketing expense to "get through 2008".

Notice that the acquisition mode business is not hurt nearly as bad. Because this business depends upon new customers, it rebounds quickly.

In an economic downturn, knowing the mode your business is in (Retention, Hybrid, Acquisition) means everything to making marketing expenditure decisions. Run the metrics, and understand what current day decisions mean to the long-term health of your business.

Customer Loyalty vs. Customer Acquisition

Imagine you are running a direct-to-consumer business. Your board of directors wants you to increase sales at a faster rate than sales are growing.

Your board of directors is split on how, from a marketing standpoint, to grow sales. Half the team wants to increase customer loyalty via a loyalty/rewards program. The other half of the team wants to grow the business by ramping-up customer acquisition activities.

What information would you need to help your CEO make this decision?

In lieu of good data, which strategy do you believe is more likely to be successful, and why?

Sharper Image And File Momentum

Sharper Image continues to deal with business challenges, according to Internet Retailer.

Multichannel Forensics sometimes illustrate business oddities. In some instances, merchandise problems can be fixed, and yet, sales will decrease.

For example:

• Assume you start with 100,000 good customers.
• Assume 30% of them repurchase.
• Assume that each customer who repurchases spends $200.
• Assume that you only get 40,000 new customers.
• Assume that each new customer spends $100.
• Total volume = 100,000*0.30*$200 + 40,000*$100 = $10,000,000.
• Total customers = 70,000.

Assume you fix your merchandising woes. Next year looks like this:

• We start with 70,000 good customers.
• Assume 35% of them repurchase (an improvement over LY's 30% rate).
  
• Assume that each customer who repurchases spends $200.
• Assume that you get 45,000 new customers (an improvement over LY's 40,000).
  
• Assume that each new customer spends $100.
• Total volume = 70,000*0.35*$200 +50,000*$100 = $9,900,000.

In this example, you'd post a -1% comp store sales drop ... yet your internal customer metrics are all improved. Your repurchase rate increased from 30% to 35%. Your new customer acquisition counts improved from 40,000 to 45,000.

When businesses go bad, file momentum works against them. This example doesn't explain all the woes at Sharper Image. But the example demonstrates the critical importance of knowing all of your customer metrics. In particular, you need to know customer counts by segment, repurchase rates, spend per repurchaser, and similar metrics for new customer acquisition.

Your merchandising organization depends upon you to provide this service. On the surface, in this example, it looks like the merchants are failing again. In reality, file momentum is the issue --- merchandising of the store has improved.

Customer Acquisition: Full Price or Promotion?

Let's pretend you are the marketing executive at an online retailer.

You have $100,000 to spend acquiring new customers. You can acquire them via normal methods, or you can offer prospects a 20% off your order of $100 or more promotion.

The projected short-term, and long-term results, are included in the following table. Which strategy would you employ, and why?

Profit and Loss Statement
	Acquire With	20% Off Order
	No Discount	of $100+
Customers Acquired	3,400	5,263
Average Order Size	$110.00	$135.00
Total Demand	$374,000	$710,526
Profit Factor	27.0%	27.0%
Contribution	$100,980	$191,842
Marketing Expense	$100,000	$100,000
Discount Expense (70% Utilization)	$0	$99,474
Net Profit	$980	($7,632)
Profit per New Customer	$0.29	($1.45)
Long-Term Value/Profit	$20.00	$18.00
Total Short + Long-Term Profit	$68,980	$87,105