Part 4: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

For a recap of this series, please read part one, part two, and part three. For a view of the simulation tool used to create the scenarios in this series, click on the Multichannel Forensics Two Channel Simulation Link.

This exercise was created to give everybody, catalogers, vendors, customers, blog participants and third parties, an opportunity to understand how actual customers behave based on a simulation of actual customer behavior. The simulation ends speculation and opinions. The simulation simply illustrates how customers behave, and the business consequences that management may eventually have to deal with.

There is no getting around the fact that phone and mail volume are crippled when catalogs are not mailed. Many jobs would be lost if catalog mailings were limited only to loyal customers. Good, hard working call center staff, distribution center staff, and folks who make a living working in the catalog ecosystem (printers, co-ops, list brokers and managers, paper reps, USPS, merge/purge vendors, contact management software vendors), will have their lives interrupted if things ever get to this point. In many ways, this four part series should encourage the cataloger to partner with third party opt-out services in an effort to stem an outcome that is this bleak.

Remember, there is light at the end of the tunnel. Notice that at the end of the simulation, in years four and five, sales rebound, and profit increases. There is hope! Catalog management can follow a prescription to make sure that if things ever get bleak, the business is insulated from the dire situation illustrated in this series.


Catalog Management Prescription To Avoid A Dire Outcome

It is better to partner with third party opt-out services now than to deal with the dire consequences of this simulation later.

Test significant increases in online marketing NOW! See how far you can push the envelope in e-mail marketing, affiliate marketing, shopping comparison sites, portal advertising, banner/ppc advertising, paid search.

Do everything possible to make your site natural/organic search friendly. Contact our friend Alan now, and have his organization help you with natural/paid search strategies that insulate you from tough choices associated with the long-term prognosis of catalog marketing. His catalog marketing experience is very beneficial for making the transition from catalog to online marketing.

Test not mailing catalogs for a quarter to various segments of your customer file. At the end of the quarter, run matchback analytics on the mailed group, and the holdout group. Truly learn what will happen to your business if you were not allowed to mail catalogs.

Run Multichannel Forensics simulations (there are free links on the homepage of the blog), so that you know the long-term trajectory of your business. You may find that your phone/mail customers are very willing to shop online if not mailed catalogs, which would be highly beneficial to you!

Cultivate organic business. This is easier said than done, but is means EVERYTHING to your business. Organic business happens when customers purchase from your brand because they love you, not because you advertise to the customer. Organic e-commerce sales protect you from any catalog or online advertising issues. Organic e-commerce sales are highly profitable. In this simulation, had the catalog brand had significant and growing organic e-commerce sales, the outcome wouldn't have been as dire.

Be proactive! Test everything now! There is hope!

Part 3: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

In part one of this series, we explored how rapidly a catalog brand implodes when prospecting is discontinued. In part two of this series, we got to see the bottom of the pit, with the majority of employees being laid off from a crippled catalog business.


Light At The End Of The Tunnel

Most catalogers shudder at the thought of third parties telling them how to run their business. In reality, the third parties wouldn't exist if customers weren't frustrated. Do not mail legislation wouldn't be a possibility unless customers were tired of their mailbox being stuffed with advertising they weren't interested in. So this is a reality that we helped create via our actions.

But there is light at the end of the tunnel! The reality is that there is an online channel, a channel that allows customers to purchase from catalog brands, regardless whether catalog advertising exists or not.

Take a look at the profit and loss statement from years four and five of the simulation. Please click on the image to enlarge it.



Notice that the business is finally growing. Yeah!!

What happens is that the catalog side of the business hits rock bottom. Customers who are no longer mailed catalogs trickle over to the online side of the business, purchasing small amounts without advertising. The end result is a business that is beginning to become profitable again.

Of course, the business is sixty percent of the size it was five years ago. But that's the consequence of not prospecting via paper for a long period of time.

From this point forward, this is an online brand. In reality, the brand could quit mailing catalogs, as the entire exercise of mailing catalogs to loyal phone customers only breaks even.

In part four of the series, we'll talk a bit about the strategic implications of this simulation.

Part 2: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

We explored what happens in year one when catalog prospecting (and reactivation) is discontinued due to do not mail legislation. Now let's take a peek at years two and three in our simulation.



Please click on the image to enlarge it.

Recall that we were managing a $32 million dollar business that was generating $3 million in profit. This business would have still been growing in sales and profit, in all likelihood.

However, without a steady diet of new customers, this business is starving. The business is now half the size it used to be, generating about $16 million in sales, and around a half million in profit. Take a look at the catalog-driven component of this business. Catalog used to drive $13 million to the call center, and $12 million to the internet. Without catalog prospecting, only loyal customers are left, and these customers drop off at a rate of about fifty percent a year. By year three, catalogs are only driving $4 million a year. A few million dollars are made up via the online/organic channel, as a few catalog customers decide to buy online in spite of the fact that they no longer are advertised to.


Key Issues, After Three Years:

Seventy five percent of the remaining call center staff must be laid off, as there isn't enough volume to provide jobs for these individuals.

Twenty five percent of the remaining distribution center staff must be laid off, as there isn't enough volume to provide jobs for these individuals. Management must also consider what to do with a distribution center that is half empty, compared with three years ago.

Given the severe decrease in profitability, management would have to seriously consider mass layoffs among salaried staff.

The reduction in profitability severely limits the ability of the catalog brand to invest in anything.


Light At The End Of The Tunnel

In part three of this series, we'll show how the cataloger becomes an online brand, and begins to grow once again. Hope isn't lost. As leaders, we'll need to consider what we can do today to grow the business in a way that insulates us from the headaches associated with discontinuity in catalog marketing.

Part 1: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

Alan talks about third party opt-out services in the catalog industry, wondering what would happen if catalog prospecting were illegal?

So let's run a simulation and find out! Because I was part of the elimination of a catalog division at Nordstrom, I've experienced what happens when you aren't allowed to do catalog prospecting anymore. I took the metrics and customer behavior obtained in that painful multi-year experience, and plugged them into a simulation model that analyzes a $30,000,000 multichannel cataloger.

We know that when do-not-call legislation was enacted, marketers could not market to folks if their last purchase was more than eighteen months ago, or if the household had not purchased previously. We'll go with that assumption for catalog marketing in this simulation.

Here's the profit and loss statement of a multichannel cataloger, assuming catalog prospecting is allowed, and assuming that catalog prospecting is not allowed.



Click on the image to enlarge it.

As catalogers know, there are four primary sources of revenue generation. Demand is generated from catalogs, over the phone or mailed to the brand by the consumer. Demand is generated from catalogs over the internet. Demand is generated from online marketing. Finally, demand is organically generated online (the least well understood aspect of demand generation for catalogers).

If catalog prospecting were stopped, the cataloger is starved of a significant source of future revenue. A considerable amount of unprofitable prospecting is offset by future profitable sales generated by the new customers. In total, this brand sees demand from catalog marketing decrease by about fifty percent. Variable catalog marketing expense decreases by seventy percent, because catalogs are no longer mailed to 13+ month recency buyers and prospects. However, the fixed costs associated with producing catalogs remains constant, eating up any profit increase.

A very small amount of phone business transfers to the online/organic channel. But for the most part, these customers buy because catalogs are mailed to them, so they stop buying when catalogs are no longer mailed.


Key Issues, Year One:

Phone demand decreases by fifty percent. This means half of the call center staff must be laid off.

Total demand decreases by one-third. This means one third of the fulfillment center staff must be laid off.

The online marketing budget is doubled, in an attempt to grow the brand. With luck, this investment is at break-even. In many cases, this will accelerate losses. We assume break-even in this case.

Total profit decreases by one-third, restricting the ability of the cataloger to make capital investments or make any kind of investment.

The fixed costs associated with producing catalogs (about $1,000,000 per year in this simulation) are about to play a major role in squelching the profitability of this brand. Catalog prospecting allows the catalog to spread out fixed costs across a much larger customer base.

After one year, the cataloger has been hobbled. Management will part ways with at least a third of the employees. Sales and profit decrease by a third.

In Part 2 of this series, we'll see what happens to the cataloger in year two and year three. I'm sorry to say that the story doesn't improve for a little while. But there is hope as we look to years four and five.