Lands' End E-Mail Follow-Up

I wrote earlier in the week about what I felt was an odd image in a Lands' End e-mail campaign.

A reader forwarded a YouTube video from the photo shoot where the image came from. The video is embedded below.

We'll assume that the image is real. Thank you, readers, for providing "checks and balances".

Lands' End E-Mail Marketing Contact Strategy

I am frequently asked what the "right" level of e-mail integration coupled with contact strategy should be. Maybe you can take a peek Lands' End and their actual e-mail strategy into my e-mail inbox (I'm guessing they have multiple versions of e-mail campaigns, and even send them to different customers on different days), and decide for yourself. Is this good strategy? Or would you do something different?


October 15 = Free Shipping ends today - shop the latest for Men

October 16 = $10 off Men's Sport Shirts: flannel, denim & more.

October 18 = Lands' End Shop @ Sears: ready for cold & snow head to toe.

October 20 = Boo who? Whoever misses the Free Shipping deadline.

October 23 = FREE SHIPPING (hurry) - Warm up & save on fleece blankets.

October 25 = Free Shipping, 2 days left & mix-match-men's savings.

October 27 = Free Shipping, last chance, all orders - click or treat!

October 30 = $10 off select outerwear - like these four favorites.

November 3 = Last day of Free Shipping! Plus, save on Kids' Squalls

November 7 = Free Shipping kicks off holiday shopping.

November 8 = Men's fall savings - subscribers get first click.

November 11 = Last day: Free Shipping to kick off holiday shopping

November 13 = Free Shipping ends soon. Men's No Iron Chinos, $29.50

November 15 = Hurry for Free Shipping & Men's in-season Overstocks

November 17 = Free Shipping ends today! Plus $50 off Lighthouse Luggage

November 19 = Free Shipping now - Outerwear Headquarters & more

November 22 = Hurry for Free Shipping! Save on Turtlenecks.

November 24 = What did St. Nick Pick? Shop today's amazing value

November 25 = Last day! Free Shipping sitewide

November 26 = FREE SHIPPING: Extra gravy for Thanksgiving Weekend (added 11/26 7:24am PST).

November 26 = Happy Thanksgiving - help us say thanks to military families. (added 11/27 5:27pm PST).

November 27 = FREE SHIPPING + 25% off Sherpa Fleece today only (added 11/27 5:28pm PST).

November 28 = Free Shipping + 25% off No Iron Dress Shirts; $10 off, just $29.50 - St. Nick Pick (added 11/28 12:14pm).

November 29 = Free Shipping + 25% off Kids' Squall Parkas - save $20 today, now $49.50. (added 11/29 9:45am).

November 30 = FREE SHIPPING + Up to 30% off Windfall Squall jackets: save $20 - $40. St. Nick's Pick! (added 11/30 9:40am).

December 1 = WOW! FREE SHIPPING + 35% off our famous Down Vest. $19 today only!

December 2 = FREE SHIPPING + 30% off Weatherly Jackets: $39.50 today only

December 3 = Last Day for Free Shipping! Any size order.

Free Shipping: Today Only

Speaking of selling money, valuing it over merchandise, can you find any place in this e-mail where Lands' End is promoting merchandise?

This isn't a criticism of Lands' End. Instead, this is an illustration of our addiction to money & gimmicks. It's obvious there is an inventory problem that requires an e-mail message like this, and to cure the inventory problem, we, without hesitation, elect to poison the e-mail customer file. And then next spring, we'll wonder why we generate $0.04 per e-mail marketing message when promoting full-price outerwear, forcing us to promote free shipping again.

My Keynote Address At The DMA08 Conference & Exhibition

If I were invited to give the keynote address at the DMA Conference in Las Vegas (I realize I cannot compete with the multichannel marketing knowledge of Playboy CEO Christie Hefner or the direct marketing brand known as Extreme Makeover Home Edition Host Ty Pennington, both delivering keynote addresses), it would go something like this:


Good morning attendees, and welcome to the final day of DMA08! For those of you who dipped your toe in some of the fine gaming opportunities available in the greater Las Vegas metropolitan area, you probably enjoyed a better return on investment than you recently observed in your 401k account ... or in your recent direct marketing campaigns.

I had a conversation with the CEO of a very traditional direct marketing brand last night. This individual painted a bleak outlook of her brand. She's done all of the things she is "supposed" to do. In spite of a thirty percent increase in postage in 2007 and a twenty-five percent decrease in customer acquisition performance in 2008, she continues to mail catalogs to her customers and prospects, because it is considered a multichannel marketing "best practice". She boosted the amount of recycled paper in her catalogs in an effort to "go green", even though tests suggest that recycled paper reduces response to the catalog by two percent. In her head, she knows the days of catalog marketing are waning. In her heart, she badly wants to see if she can do something to delay the inevitable, because catalog marketing is part of her soul.

She continues to maximize her paid search campaigns, though the cost of each click is twenty percent more than it was three years ago, and she doesn't understand the algorithmic bidding process for keywords.

She doubled the frequency of her e-mail marketing campaigns to two per week, allowing her customers to choose which version of a campaign they receive. In the past three years, the performance of her e-mail marketing campaigns declined by twenty percent. E-Mail marketing vendors preach to her that e-mail marketing has the best ROI, but she knows that the medium drives very little volume, and works less well with each passing year.

She dove head-first into social media. Her CEO blog is one of the most read in the industry, and her pages on Facebook and MySpace invite conversation. She listened to customers who complained about her products via Twitter and Plurk, investing money in a new quality assurance department, a department that reduced defective merchandise by ninety percent. And she tried to measure the performance of her social media entourage. Social media loyalists have only one-fourth the conversion rate of her loyal e-commerce purchasers, causing the finance folks to fume about her disproportionate focus on emerging marketing technologies.

Her marketing team tried numerous word of mouth campaigns, without any success. She's hired the best digital marketing agencies to create the campaigns, only to be told by agency leaders (after the campaigns failed) that she must offer merchandise that is buzz-worthy. If it were only that easy.

Her brand was one of the first to embrace mobile commerce, though her Executive team feels the time required to experiment in this space is not worth the six hundred customers who are experimenting with this channel.

In fact, if the suffix "2.0" is behind any term, her social media team gave it a try. She's been lauded for being an innovator. One of the leading social media bloggers praised her for being "a bright light in the dark tunnel of permission marketing".

In terms of the topics discussed at this conference, her brand is one to be admired. She and her team have done all of the things the experts speaking at this conference told her to do.

And yet, it isn't working. If all of these speakers are right, then why are her results so wrong?

In 2007, her sales were down 3% compared with 2006, due to softness that began in November 2007.

In 2008, year-to-date, her sales are down 12% compared with 2007. Telephone sales are down 20%, and e-commerce sales are down 4% compared with 2007. Her e-commerce team is facing the first sales decline they've ever experienced.

The majority of the e-commerce marketing team honed their skills during the updraft of the e-commerce channel, and have no experience driving sales in an environment where the customer no longer wants to or needs to or can afford to buy non-essential items. The e-commerce team responded to sluggish sales by offering the only incentives they've ever tried --- free shipping and 20% off offers. Sales increased slightly, but the impact on the bottom line was unfavorable. The finance team lacks confidence in the ability of the e-commerce team to "move the sales needle". The finance team realized, for the first time, that it is really, really hard to create demand via e-commerce. How the heck do you get your award-winning website in front of a customer who has never heard of you, and has no interest in buying from you ... today?

The inventory management team is also frustrated with the e-commerce team. Over the past decade when there were big inventory issues, the catalog marketing team churned out clearance catalogs that moved excess merchandise. The clearance catalogs were targeted to sale buyers, folks who loved sale merchandise. The e-commerce team, however, lacks the marketing tools necessary to advertise overstocked items to a mass audience --- they can only advertise to folks in a "state of need". The inventory management team are afraid they are not going to get bonuses this year.

The inventory management team isn't as worried as the catalog marketing team is. This team believes that layoffs are coming in 2009. They don't know where they are going to find a job in a world where catalog marketing continues to contract. They know more about how to drive a profitable direct marketing program than anybody else in the company, and feel like they would fit well in the e-mail marketing department. The e-mail marketing team is already well-staffed with experienced e-mail marketers, however. Not surprisingly, the catalog marketing team is busy building relationships on "LinkedIn". You can tell how strong the economy is by simply counting the number of LinkedIn requests you receive each week. LinkedIn has the potential to be very popular during 2009.

Most marketing folks are resentful of the social media marketing team. This team has been unable to prove that their efforts drive sustained sales or profit, but they seem to have a lot of fun with their campaigns. They receive a ton of public praise from bloggers and followers on Twitter, are asked to speak at all the major social media conferences. They are very proud of a three point increase in "share of voice" over the same period of time when sales decreased. In reality, the other departments are jealous of the social media folks, just like folks were jealous of the e-commerce folks eight years ago. It's much more fun to be on the cutting edge than to be left holding the bag for the majority of the business.

The merchants are under pressure, too. They spent two years building a state-of-the-art multichannel merchandise analysis system, and spent the past year learning how to analyze multichannel merchandise trends. Many of the staffers feel frustrated, because the "art" of merchandising is being replaced by the science suggested by the new system.

The merchandising team heaves their frustration on the information technology team. If the merchants want to present items in a new and creative manner in the catalog, they simply shoot the models and merchandise as they wish, partnering with creative services. Online, everything is templated for them. Sure, the shopping cart is in the upper right hand corner of the screen, complying with established best practices, but the merchants and information technology team are constantly grumbling about the direction of "Web Tech 2.0", the new version of the multichannel e-commerce website (the first significant upgrade since 2002).

Speaking of multichannel marketing, the CEO told me that she cannot find one example of the "1+1+1=6" principal that the multichannel marketing vendor community keeps telling her exists. Her experience is that the channels are cannibalizing each other, not adding significant incremental value. Worse, she feels like she'll have to use a hundred channels five years from now in order to get the same level of sales she obtains today with a handful of channels.

Now the CEO deals with new challenges. Her finance team pressured the organization into "turning" merchandise six times per year, because it was far more profitable to do so. Now that this discipline is part of the DNA of the company, the CEO cannot obtain the short-term financing she used to receive to fund frequent inventory turns, due to the credit crisis gripping the global economy. She's afraid that her merchandise assortment will be stale and meager in 2009, further alienating customers. She's upset that she ran her business with honesty and integrity, only to see Wall St. greed create instability in her business model. She doesn't understand why the taxes her organization paid in an honest manner are going to help folks who misbehave, while she has to consider downsizing her staff in response to their actions?


How many of you feel like the CEO of the company I spoke with last night?


Of course, conferences offer great networking opportunities, and offer the chance to learn about best practices being employed by leading brands and gifted leaders. All of this is good.

Few speakers at this conference are allowed to present the reality I just described.

The reality is that direct marketing, the craft many of us have practiced since the 1960s, is disappearing. So is e-commerce, as we know it ... a cold, discount/promo/low-price wasteland that offers few emotional benefits. Conversely, social media offers the humanity that is missing from e-commerce. If only social media drove sales and profit instead of comments and feedback.

One might consider this to be a dire message. On the contrary, I believe we are on the precipice of what I call a "direct marketing reformation". We're about to become direct merchants once again, dropping fancy marketing hype in favor of an honest relationship with the customer.

Direct marketers make progress when times are tough --- when times are easy, we simply enjoy the updraft, focusing on ideas that are easy to implement, calculating whether our annual bonus will be 27% of our salary or 33% of our salary.

But when times are tough, "the tough get going" (the music video plays in the background ... audience sings along, clapping). It's like we're "living on a prayer" (another video pops up, remember those three minute masterpieces from the 80s? That's when you had to be "multichannel", video on MTV and song on the radio --- now, videos are dead, hmmmmmm). Big applause from the audience.

We're halfway there.

It won't happen in 2009, and it probably won't happen in 2010. But sometime during 2011, somebody is going to figure out how to fuse traditional direct marketing, e-mail marketing, digital direct marketing, e-commerce, social media, Google, widget-based marketing, mobile marketing, portal advertising, and whatever comes between now and then. And when somebody fuses these elements together in a way that resonates with the consumer, LOOK OUT! A hundred micro-channels all interacting seamlessly, effortlessly, without coordination from a centralized marketing borg. A fusion of algorithms and sweat equity that actually brings humanity to the cold, lowest-price buying process. We will recapture the spirit of the "direct merchant".

Multichannel marketing is not about pummeling the best customer with messages from twenty-seven channels while at the same time having a conversation with the customer via social media. We're going to figure out something new, something relevant to the way the customer behaves in 2008. A direct merchant is not a direct marketer. We're about to go through a reformation.

I leave you with the words of Richard C. (Dick) Anderson, the second President of Lands' End. You can read the words from this link on the Lands' End website. They are copied here, word for word, unchanged from his presentation to the audience at DMA91.

"When I first became involved with Lands' End as a director in 1978, it was on the strength of my extensive experience in advertising. And both Gary Comer and I wanted to convey the uniqueness of the Lands' End experience. Somehow, reflecting on how best to do this, on a trip through the warehouse, my guide — the manager, chose to say: "I just wish we didn't have to call our business mail order." Mail order, at that time did not enjoy the most savory reputation, you may remember.

This triggered in me a vision of the original great merchants of British history, for some reason or another. The way they prowled the seven seas and brought treasures back to London from the four corners of the earth, and a phrase occurred to me which is now a part of our name and certainly a part of our philosophy. We are, as you will recognize...direct merchants.

I call this to your attention because the majority of you in attendance here — and I who represent Lands' End — may differ widely in the ways we do business. But, however distribution possibilities evolve — old ones, new ones — we share the same identity. We are all merchants. And for me, that is an honorable and vital identity — even in this day when it is fashionable to hold forth on the subject of marketing in all its forms. I don't decry that exactly, but I'm more comfortable considering myself a merchant. And here's why. In my view...

• A marketer deals with many; a merchant deals with one.
• A marketer moves from the mind; a merchant moves from the heart.
• A marketer is logical; a merchant is perceptive.
• A marketer does business across the world; a merchant does business across the counter.
• And finally, a marketer bets his all on a System; a merchant bets his all on His Store.

Fellow merchants, I salute you on behalf of each of the 5,500 employees of Lands' End, in whose behalf it has been my privilege to address you.

They thank you for that privilege. As do I."

I recall being at Lands' End when this statement was made. I was a marketer. I would have bet my all on my system, a series of statistical equations that determined who received nearly every single Lands' End housefile catalog. Today, I side with Mr. Anderson. Our future is about betting on our store, not on a marketing system.

Social Media, Competitive Intelligence, And Web Analytics

Have you ever wondered why I occasionally write obtuse articles like this one on free shipping at Lands' End (check the organic/natural results for Free Shipping Lands' End on Google).

Or this article about Williams Sonoma and Multichannel Growth?

Or an article about Abacus, a popular co-op in the multichannel catalog world?

All are part of a strategy to gain what I call "Competitive Intelligence".

Maybe you noticed that Father's Day is just around the corner? There's a veritable plethora of folks who are interested in getting Dad a lightweight coat from Lands' End. They also want free shipping. Because I wrote the article about Lands' End free shipping, Google sends visitors to my site. In kind, I use Google Analytics and SiteMeter (here are my site statistics) to understand the rhythm around free shipping for Father's Day. I get to see the build-up prior to Father's Day, the days customers are most interested in obtaining Free Shipping, and the drop-off prior to shipping cutoffs.

Now if I can do this with my humble little blog, imagine what L.L. Bean could learn about Lands' End, Eddie Bauer, Orvis, you name the competitor, by hosting comparable content? And imagine how much more effective these brands would be, given their scale, compared to my humble efforts?

Miller Brewing Company accomplishes this style of competitive intelligence with their "Brew Blog", writing about their competitors on a daily basis.

This stuff isn't rocket science.

For me, the Lands' End example is more fun than anything else. More important is the work I do to understand my competitors.

For instance, I frequently write about matchback analysis, especially as it relates to co-ops like Abacus. Because Multichannel Forensics indirectly compete with matchback programs from companies like Abacus, it is a good thing for me to have folks searching for matchback solutions, searching for products from Abacus, to visit my site.

I get to track the evolution of terms that folks use. Catalog marketers use the phrase "Lifetime Value" to understand the long-term potential of customers. Online marketers and E-Mail marketers seem to prefer the term "Return on Investment" or "ROI". If I want to partner with online marketers on long-term customer value studies, I won't attract them to my site by writing about Lifetime Value.

I also have numerous competitors, folks who provide similar products and services to those offered by yours truly. By writing about these folks, or by hosting their RSS feed on my site, I get occasional visitors from Google who are searching for information about my competitors. I assure you, this information is very enlightening!! I get to see who the companies are that want to hire my competitors. I get an idea for the type of service the company has a need for. If necessary, I adjust my content, products, and services accordingly. I get to see the articles you like, ones written by my competitors.

Once, a competing organization fired a long-standing and high-ranking employee. The company announced the firing on a Tuesday. One day earlier, I had numerous visitors who arrived via Google searches that combined the competing brand name and the name of the individual who was fired. If I wanted to, I could have fact-checked the story and "scooped" the mainstream media.

Hosting a blog is so much more than the social media pap spewed by the punditocracy. The competitive intelligence gained from this effort means everything to a small business like mine. And best of all, the tools needed to obtain the competitive intelligence are free. FREE!

Now imagine for a moment what your brand could accomplish with a combination of Social Media, Competitive Intelligence, and Web Analytics?

Great Moments In Database Marketing #1: Incremental Value

Our top rated Database Marketing moment takes us back to 1993 - 1994. Yeah, way back then, people were doing sophisticated work. Honestly!

Way back in the early 1990s at Lands' End, we had seven different business units that marketed to customers, either through standalone catalogs, or though pages added to catalogs.

As growth became more and more difficult (pay close attention online marketers ... your world is heading in this direction), management elected to mail targeted catalogs to targeted customer segments.

In other words, a Mens Tailored catalog concept was developed, with a half-dozen or more incremental catalogs mailed to customers who preferred Mens Tailored merchandise. A Home catalog concept was developed, with nine or more incremental catalogs mailed to customers who preferred Home merchandise.

Seven concepts were developed. Each concept was growing.

But the core catalog, the monthly catalog mailed for three decades, was not really growing anymore. And total company profit (as a percentage of net sales) was generally decreasing over time.

Something was amiss.

We studied the housefile, and learned that the "best" customers were being "bombed" by catalogs ... upwards of forty a year. Every business unit, making independent mailing decisions, mailed essentially the same customers. And all of our metrics, when viewed at a corporate level, indicated that customers were not spending fundamentally more than they spent several years ago when the new business concepts didn't exist.

So we developed a test. We selected ten percent of our housefile, and created seven columns in a spreadsheet. We randomly populated each column with the words "YES" or "NO', at a 50% / 50% proportion. Each business unit was assigned to a column. When it came time to make mailing decisions for that business unit, we referred to the column assigned to the business unit. If the word "NO" appeared, we did not mail the customer (if the customer qualified for the mailing based on RFM or model score criteria).

In statistics, this is called a 2^7 Factorial Design.

There are two reasons for designing a test of this nature.

1. Quantify the incremental value (sales and profit) that each business unit contributes to the total brand.
2. Identify, across customers segments, the number of catalogs a customer should receive to optimize profitability.

What did we learn?

1. Each catalog mailed to a customer drove less and less incremental increases in sales. If a dozen catalogs caused a customer to spend $100, then two dozen catalogs caused customers to spend $141, and three dozen catalogs caused customers to spend $173. The relationship roughly approximated the Square Root Rule you've read so much about on this blog.
2. Each business unit, on average, was contributing only 70% of the volume that company reporting suggested the business unit was contributing. In other words, if you didn't mail the catalogs, you'd lose 70% of the sales, with customers spending 30% elsewhere.

The latter point is critical.

Take a look at the table below, one that illustrates the profit and loss statement reported by finance, and one that applies the results of the test.

Test Results Analysis		Finance	From
		Reported	Test Results
Demand		$50,000,000	$35,000,000
Net Sales	82.0%	$41,000,000	$28,700,000
Gross Margin	55.0%	$22,550,000	$15,785,000
Less Marketing Cost		$9,000,000	$9,000,000
Less Pick/Pack/Ship	11.0%	$4,510,000	$3,157,000
Variable Profit		$9,040,000	$3,628,000
Less Fixed Costs		$6,000,000	$6,000,000
Earnings Before Taxes		$3,040,000	($2,372,000)
% Of Net Sales		7.4%	-8.3%

The test indicated that what appeared to be highly profitable business units were actually marginally profitable, or in some cases, unprofitable. In this example, the business unit is "70% incremental", meaning that if the business unit did not exist, 70% of the sales volume would disappear, while 30% would be spent anyway by the customer, spent on other merchandise.

Imagine if you were the EVP responsible for a business unit that appeared to generate 7.4% pre-tax profit, only to have some rube in the database marketing department tell you that your efforts are actually draining the company of profit?


Why Does This Matter?

This style of old-school testing (which is more than a hundred years old, with elements of the testing strategy now employed aggressively in online marketing) tells you how valuable your marketing and merchandising initiatives truly are.

Catalogers fail to do this style of testing, not realizing that a portion of catalog driven sales would still be generated online (or in other catalogs). In 2008, most catalog marketers are grossly over-mailing existing buyers. Catalog Choice, in part, exists due to catalogers mis-reading this phenomenon.

E-mail marketers seldom execute these tests, not realizing that in many cases almost all of the sales would still be generated online. E-mail marketers, ask your e-mail marketing vendor to partner with you on test designs like the ones mentioned in this article. You may be surprised by what you learn!

Online marketers are more likely than most marketers to execute A/B splits at minimum, with some executing factorial designs. Many online brands evolve in a Darwinian style, fueled by the results of factorial designs. Online marketers know that you make mistakes quickly, and you correct those mistakes quickly.

Web Analytics folks have the responsibility to tell management when sku proliferation no longer contributes to increased sales. It is important for Web Analytics folks to lead the online marketing community, shutting off portions of the website in various tests to understand the incremental value of each additional sku.

What are your thoughts on this style of testing? What have you learned by executing tests of this nature?

Lands' End Free Shipping. Do You Follow The Rules?

At dinner Thursday evening, a guest asked me about my profession. When I mentioned the companies I've worked for, she said, "Oh Lands' End! Did you know that I get free shipping from Lands' End on every order?"

She told us that she assembles her order online, then calls the 1-800-356-4444, and reads the items residing in her shopping cart. Then she "gets crabby", telling the agent she will not pay for shipping and handling. The agent, being a kind, humble person from Southwestern Wisconsin, waives the $16.95 fee on her $210 order.

The obedient soul who follows directions pays 8% more than the crabby individual.

I've sat in executive meetings where this topic comes up. In every case I can remember, my leadership partners and I elected to give a better price to the crabby customer.

Our industry will have made progress when we figure out how to not be punitive to kind customers who follow the rules.

Customer Modeling

Sometimes you wonder what your department should be named.

Back in 1994, after spending my entire career (6 years) scratching and clawing my way to the title of "Manager", I was offered the opportunity to name my new department. Our job was to build statistical models that determined the customers that received Lands' End catalogs.

Given my extensive management experience, I opted for a no-nonsense name ... "Customer Modeling". After all, that's what we did, we modeled customer behavior!

We printed business cards. We changed the department name in our internal business systems. I was one happy manager.

About a week later, the phone rang. The conversation went something like this:


Phone: "Hi, may I speak with the manager in charge of modeling?"

Kevin: "Yes, you're speaking with that person. My name is Kevin, how may I help you?"

Phone: "Yea, my name is Chick Mather, I'm a partner at Pyramid Agency. Listen, I represent a model, Therese Jones. You might be familiar with her work. She's a long-time model in the Garnet Hill catalog, and recently did a photo shoot with The Territory Ahead catalog. I'm hoping I can send her portfolio to you, as I think she'd be a wonderful addition to the Lands' End brand. Please provide me with your name and address, and I will expedite her portfolio to you."

Kevin: "Huh?"

It only took a dozen calls, over a two week period of time, to realize I'd made my first mistake as a manager.

Customer Modeling became Analytical Services, until I realized that people focused more on the word "service" than the word "analytical". All too often, we were asked to tell folks how many people used the code "XG143" to purchase chinos. We wanted folks to ask us meaningful questions, strategic questions. By being a "service", you set yourself up for a role where you provide counts.

So in 2001, I went with the term "Business Intelligence".

Years later, I remember a finance person telling a roomful of my peers that the term was an oxymoron. A year later, that term was trumped by a new leader offering the name "Consumer Insights".

In the past fifteen years, we've stripped modeling, analytics, services, business, and intelligence from what we do. Now we simply provide insight.

For most of the folks we work with, that's what they really want ... insight. If they only had the facts, they could make great decisions.

It's a shame we did such a poor job that nobody cared about the modeling, analytics, services, business, and intelligence we can provide.

Talent

Please click on the image to enlarge it.

Yesterday, we talked about individuals who have "it".

Today, we take a brief look at the subject of talent.

The vast majority of folks who have talent don't have "it". To be successful, talented folks have to navigate at least two interesting dimensions within any company.

First is the style of the folks who "truly run the company". I'm not talking about the CEO or President or that ilk, though those could be the folks who truly run the company. Rather, I'm talking about the individuals who, by experience or talent or ego or ruthless power trips gained control of the organization. You know exactly who these individuals are. Minutes after making your first decision as a leader, somebody asks you if you "ran your idea past Janet", and you say "who's Janet?" You just learned who truly runs your company.

What is important about these individuals is their style. Do they "control" the agenda, or do they delegate "control" to others? For instance, maybe you work for an online retailer that is really run by the information technology department. Regardless what the CEO says, the information technology department really determines what happens, and what doesn't happen. Does this team determine strategy? If they do, then your organization has a "Leadership Controls" style. Does this team do what the business wants them to do? If that is the case, then your organization has a "Leadership Delegates" style. Either way, this team is the unofficial leadership team in your business.

The second dimension focuses on the company culture. Does your culture support "individuals" making independent decisions, or does your culture require "teams" to make decisions?

Combined, there are four different cells that an organization can be classified into.

I previously worked at three large apparel companies. Let's see how they fit into this framework.

From 1990 - 1995, I felt that Lands' End fell into the "Delegates / Independent Actions" quadrant. The leaders generally allowed each area to make decisions that were in the best interest of each area. In fact, much of the consternation between people occurred when divisions did not get along, or needed to work well together. Independent actions were generally preferred. While there were teams, teams generally didn't make big decisions. Overall, the culture supported smart people doing what they felt was best for the portion of the business they were accountable for.

From 1995 - 2000, I felt that Eddie Bauer fell into the "Controls / Teams" quadrant. I can specifically remember our CEO entering my office, telling me that I could no longer publicly share consumer insights, and that going forward, all information would flow through him, allowing him to shape the message that employees heard. There's nothing inherently bad with that --- but it is a form of leadership "control" --- leadership isn't delegating my area of expertise to me. Furthermore, the culture loved "teams". In 1997, Eddie Bauer relieved the Catalog Executive of his duties. His role was replaced by the "Catalog Business Team", a group of individuals who jointly determined where the catalog/online business would head. This team worked ... we had the most profitable year in the direct division's history in 1999. Team cultures can also have a hard time making significant changes, when necessary.

From 2001 - 2007, I felt that the Nordstrom culture was in the "Controls / Independent Actions" quadrant. This is one quirky quadrant. At Nordstrom, there were a group of individuals who were the true leaders, the folks who truly made decisions. These folks generally complemented the strategy suggested by a half-dozen Sr. Leaders. Combined, these fifteen or twenty folks "controlled" what was done. Try something outside of the framework of these twenty individuals, and you would struggle. Conversely, the culture loved independent decision making, advocating a "use your best judgment" approach to decision making. The lowest paid employee in a store had the authority to make decisions that nobody at Eddie Bauer would ever allow somebody to make --- several cross-functional teams would need to collaborate at Eddie Bauer to allow store employees to have wide-ranging decision making authority.

Talent must either fit into the appropriate quadrant, or must be able to successfully change the organization.

At Lands' End, a talented Eddie Bauer person would be criticized for wanting to have too many meetings, for trying to build too much consensus, for never getting anything done.

At Eddie Bauer, a talented Nordstrom person would be criticized for "being a cowboy", for making too many decisions without the proper study and consideration required of a disciplined company.

And at Nordstrom, a talented Lands' End person would be chewed-up and spit-out for not "following the rules" set forth by the true leaders of the company (I watched several former Lands' End employees get bounced based just on this criteria alone). Nordstrom would genuinely appreciate the entrepreneurial spirit exhibited by these folks, but would detest how these folks were not pointed in the direction that leadership was pointed in.

There are many challenges associated with being "talented". For talented employees seeking employment opportunities, quadrant identification is very important. The prospective employee must determine if the quadrant the business falls into is congruent with his/her skills. If the quadrant is different, the employee has to determine whether s/he can fit into another quadrant, or whether the employee can "change" the quadrant.

All too often, the employee tries to make everybody else change to his/her style, without considering what the organization "wants" to do. Maybe the employee was hired to cause change outside of the natural quadrant the brand fits into, in which case, the employee might have to create stressful situations.

It is my opinion that truly talented leaders adapt their style to the quadrant their brand belongs to.

Your thoughts?

Profitability

Profit is the reason we are allowed to remain gainfully employed. Conversion rate doesn't keep us employed. Profit keeps us employed.

How often do we hear e-mail marketers talk about, or ever demonstrate the profitability of their activities? I'm not talking about "ROI", nor an 8% improvement in open rate. How often do these industry experts talk about "profit"? Same for search marketers, or other online marketers.

In some ways, a generation of marketers are being trained to look at the business in unique and different ways. That's good. However, this generation isn't always focused on the metric that matters most.

"Back in the day", Lands' End measured the profitability of every spread in a catalog. Every major catalog was analyzed by a team of merchandising, creative, inventory and circulation staffers.

If I remember correctly, each spread in the catalog was grouped into one of four categories.

• Spreads that generated 30% or better variable profit (profit before fixed costs) were coded "GOLD".
• Spreads that generated 20% to 30% variable profit were coded "GREEN".
• Spreads that generated 10% to 20% variable profit were coded "BLUE".
• Spreads that generated less than 10% variable profit were coded "RED".

Each spread was hung on the wall of a conference room, in sequential order, hung on tag-board of different colors ... the color representing the profit category the spread fell into. At the bottom of the spread, the profitability of each item in the spread was itemized --- demand, fulfillment rate, return rate, net sales, gross margin, marketing cost, and pick/pack/ship expense.

Visually, a story was told in that conference room. One could visually understand why a catalog worked, or why it didn't work. We'd have a discussion about how to present merchandise, how to merchandise the front of the catalog (an important factor that more folks could pay attention to).

Fast forward to today. How many online marketers can give you, the direct-to-consumer executive, a set of metrics that clearly and easily tell you the profitability of items online. Do you have any reporting that tells you the profitability of a landing page? How about the home page?

Every employee should intuitively understand the connection between selling merchandise, marketing merchandise, and generating profit.

Seriously ... take a spin through the e-mail marketing and search marketing literature/blogosphere/vendor-speak. Count how many times you see the word "profit" mentioned.

Let's help these bright marketers make the connection between their efforts, and the profitability of the businesses we manage. We're failing these individuals, we're not training them to be the accountable leaders we need them to be. We need to protect the future of our industry.

Customers Who Return Too Much Merchandise

Click on the image to enlarge it.

The year was 1993, the company was Lands' End. It was my job to identify customers who "returned too much merchandise".

A deep dive into the database indicated that a small number of households purchased frequently and returned more than 75% of their purchases.

The analysis indicated that these customers were very likely to purchase in the future, and if they purchased, they would return at least 67% of the merchandise they bought.

And if customers ordered frequently and returned at least 67% of the merchandise, it was an unprofitable customer relationship. In other words, after adding the cost of fulfilling orders, marketing to the customer, and processing returns, we would lose a substantial amount of profit.

If we didn't market to the customer, we'd lose top-line sales, but increase profitability.

We made the decision to stop mailing catalogs to these customers, reserving the right to mail maybe one catalog per quarter to these households.

It didn't take long for these customers to realize that they weren't getting catalogs. It didn't take long for these customers to voice their displeasure about not getting catalogs. It didn't take long for the "customer advocate", an employee responsible for taking the side of the customer, to become frustrated with my analysis.

There's a fine line you walk when you accept any returns, no matter the situation. Customers are entitled to return merchandise. However, the company has a responsibility to maximize profitability for ownership/shareholders. We let customers return whatever they wanted to return. We retained the right to decide who we marketed to, and how often we marketed to the customer.

Here's my question for you, the loyal reader ... what is the right balance between marketing strategy and customers who return a lot of merchandise?

Multichannel Business Models

Fifteen weeks as an independent multichannel strategist provide me with a new perspective on multichannel business models. I can see that there are at least six ways that retailers/catalogers are leveraging the online channel, the channel responsible for the "multichannel" moniker. Each business model has unique advantages, and unique challenges.

Model #1 = Simple Online Presence

• These businesses generate the vast majority of their sales by customers who send orders via the mail, or by calling a sales representative in a contact center. The order was stimulated by the mailing of a catalog. The online channel is not a significant driver of sales for businesses in this situation. The customer does not utilize the online channel as a shopping vehicle. At least eighty percent of the net sales happen via the mail, or via telephone. The average customer is at least fifty-five years old.
  

Model #2 = Online Order Form

• These are catalog businesses that use cataloging as the primary marketing vehicle, but provide a robust online experience that causes customers to place their orders online. These businesses struggle with the concept of being "multichannel", because all analytical work indicates that the catalog drives eighty percent or more of online sales. In reality, these businesses are not "multichannel", they are really catalog businesses that take orders online. Still, it is not uncommon for these businesses to generate half of all orders online.

Model #3 = True Catalog Multichannel Model

• It has been my experience that this is the least understood of all business models. These are catalogers that generate at least half of their annual net sales online. However, these catalogers typically believe that the catalog is responsible for driving the online sales. In reality, the online channel developed a foothold in these business models. If catalogs were not mailed to customers, online orders would happen anyway. This is very hard for catalog executives to understand, to digest, to develop strategies against. Company reporting and matchback reporting indicate that the catalog drives online sales. Mail/Holdout testing indicate that at least half of the online sales would happen regardless whether catalogs were mailed or not. These businesses have robust e-mail, paid search, natural search, affiliate, portal and online marketing programs that generate incremental sales. It is this business model that many industry experts and consultants target when they talk about "multichannel marketing".

Model #4 = Retail Business, Catalog Heritage

• These are interesting business models. Be it Coldwater Creek, Williams Sonoma, Lands' End or now Dell, these businesses practice true multichannel marketing, but with a strong focus on ROI. The catalog heritage drives measurement of all advertising activities across all channels. If an aspiring individual wanted the best multichannel lab to build multichannel skills in, I believe these environments provide the best place to gain valuable, portable experience.

Model #5 = Online Business, Retail Heritage

• A Neiman Marcus, Saks or Macy's fit into this business model. The online channel is strictly complementary to the store experience, as the stores are responsible for the lion's share of sales and profit. Management says the right things about multichannel marketing, and do invest in the online experience. That being said, the purpose of being multichannel is to do everything possible to please a store customer. This strategy leads to sub-optimization of the direct channel. Over time, these businesses will lead the online industry in "entertainment". The online channel (and supporting catalog channel) will likely become the entertainment and informational arm of the brand. Of course, a giant retail presence will cause a ton of traffic to migrate online, driving a huge volume of online sales. But the online sales will not be driven by brilliant online marketing or catalog marketing strategies. The online sales will happen because the online channel acts as the entertainment/informational arm of the retail brand experience. There's nothing wrong with this. But it does require a very different set of marketing skills --- traditional online and catalog marketers may be frustrated by this business model. Traditional analytics individuals may not be pleased with the depth of analytical insight required to run these businesses (i.e. the business is run by "brand instinct", not by analytical findings and ROI).
  

Model #6 = Online Pureplay

• These businesses are fundamentally different than the five models described above. These businesses were born online, and utilize a marketing strategy fundamentally different than other businesses. Traffic is driven by online marketing strategies. To compensate for what I call "channel disadvantage" --- not having catalogs or stores, these businesses utilize free-shipping, free-returns, and rock-bottom pricing to gain a competitive advantage. These businesses need to grow to a size large enough to overcome margin and shipping revenue shortfalls. Zappos is probably the best example of a business in this category. The online marketing departments in these companies offer spectacular laboratories for learning online marketing strategies. If I were a college student today, this would be one of my primary industries to target for employment.
  

Strategically, it is very important to understand where your business model falls on this continuum. The way you utilize multichannel marketing and advertising strategies is highly dependent upon the customer base you have, coupled with your heritage and objectives.

Cataloging makes less sense for business models five and six. Traditional cataloging strategies are frequently not congruent with brand-based retail models and online pureplays.

Online marketing makes less sense in the short term for business models one and two. These business models are supported by customers who are not willing to shop on the web without the benefit of catalog merchandise presentation.

Matchback and analytical expertise are probably most critical in business models three and four. Catalog businesses that migrated from model one to model two to model three have the best opportunity to overcome postal increases, because the customers shopping these businesses will purchase online if catalog frequency is reduced.

Your turn, my loyal reader! What e-commerce business models are missing from this list? How might you change these categorizations to make more sense?

Are Relationships Changing?

My first two jobs were at intensely competitive companies.

At the Garst Seed Company, we were fourth in market share, losing money, fighting for our existence. We were fighting against the big boys at Pioneer.

We were downright competitive at Lands' End, too. Stuck in the middle of the country, with L.L. Bean to the east and Eddie Bauer to the west, we wanted to win in the early 1990s.

Two of my favorite experiences were part of cross-functional teams. Getting Eddie Bauer Direct to go from break-even to an at-the-time record $26,000,000 EBIT was fun, and it was especially neat to see merchants, brand marketers, finance, information technology, online marketing, contact center operations, creative and circulation all work together to make it happen. We openly talked about and shared ideas. And for a brief period of time, we were a well-functioning team.

The other really enjoyable experience was in 2003-2004, when Jim Bromley unified a similar team, a team that turned Nordstrom Direct from an epic failure to a money-printing machine.

Since then, the internet and blogosphere seem to have changed things.

Our allegiance to cross-functional teams within a company is being transformed by cross-company teams within an industry.

I see this happening every day. I follow an e-mail discussion group that talks about various topics within the e-mail industry. There are blogs for just about every possible discipline. Fans of any discipline can readily exchange ideas and thoughts with each other, across industries, within industries. You'll see folks from one competitor share ideas with folks from another competitor.

The changing face of relationships was illustrated to me earlier today. In the e-mail forum I follow, an individual asked if anybody leveraged partnerships with the web analytics folks to complement the metrics used to analyze e-mail campaigns.

This question was almost unfathomable to me. Fifteen years ago, you would simply walk down the hall and ask somebody to help you.

Today, you float your idea into the ether, to see if others in your field are already implementing your suggestion.

I'm not sure whether this is good or bad. In the old days, you'd develop your ideas internally. Some companies would win, some would lose. You learned things when you left your company, and went to work somewhere else.

Today, the ideas are homogenized. How many clever e-mail, web analytics, marketing, creative or merchandising ideas can there be if they can all be readily shared in nano-seconds on a blog or message board?

Ok, your turn. Do you notice that relationships are changing? Is this good or bad for an individual person's career? Is this good or bad for the profession we work in? Is this good or bad for the companies we work for?

How Much Do I Spend On Online/Catalog Advertising?

Lands' End was a fun place to work in the early 1990s. There were a lot of interesting minds, tossing around interesting ideas.

One of our debates was about the optimal level of advertising spend. One camp, led by our Circulation Director, believed that you circulate to an incremental 7% pre-tax level (prior to subtracting fixed costs). The theory was that the return on investment had to be sufficient to cover fixed costs ... that if you actually subtracted fixed costs from the equation, you were circulating to about break-even.

Another camp believed that you circulated to -5% pre-tax levels, because this way, you were capturing long-term profit that you were losing in the short term. At the end of five or ten years, your business was much bigger, because you acquired/reactivated a lot more customers than in the situation where you maximized short-term profit.

At Eddie Bauer, we circulated to break-even (prior to subtracting fixed costs), then shifted our strategy to invest to below break-even, in order to maximize the long term health of the business.

At Nordstrom, we tried our hardest to convince folks to invest in online marketing activities that maximized the long term health of the total business. We probably under-invested in the online channel, though we had the data to tell us what the 'right' thing was to do. The process of assigning a marketing budget did not provide us the flexibility to maximize the online channel (and ultimately, to grow store sales). This is a good lesson --- it doesn't matter what data you have, there are internal processes and existing cultures that simply cannot be changed.

In the past, we didn't have the right tools to understand the long-term impact of short-term advertising decisions. With Multichannel Forensics readily available these days, we can simulate different strategies, and identify the best long-term strategy.

I crafted an online/catalog business simulation, and ran three scenarios.

• Scenario #1 = Maximize profit each year.
• Scenario #2 = Maximize total profit over the course of five years.
• Scenario #3 = Maximize profit five years from now --- make that year as profitable as possible.

The table below show the results of the three simulations. All numbers are listed in millions:

Maximize Short-Term Profit
	Demand	Ad Spend	Profit
Year 1	$44.6	$5.6	$2.1
Year 2	$42.0	$5.2	$1.7
Year 3	$40.9	$5.1	$1.4
Year 4	$40.4	$5.0	$1.2
Year 5	$40.1	$4.8	$1.1
Totals	$208.0	$25.8	$7.4
Maximize Long-Term Profit
	Demand	Ad Spend	Profit
Year 1	$59.2	$9.9	$1.5
Year 2	$66.6	$11.0	$2.0
Year 3	$70.6	$11.6	$2.3
Year 4	$72.8	$12.0	$2.4
Year 5	$74.0	$12.2	$2.4
Totals	$343.2	$56.7	$10.6
Maximize Only 5th Year Profit
	Demand	Ad Spend	Profit
Year 1	$66.4	$12.5	$0.6
Year 2	$80.3	$14.9	$1.6
Year 3	$88.6	$16.3	$2.2
Year 4	$93.4	$17.1	$2.5
Year 5	$96.3	$17.6	$2.6
Totals	$425.0	$78.4	$9.5

Let's review each simulation.

In the first run, profit is maximized by year. Therefore, profit in the first year is $2.1 million. However, a much smaller business exists going into year two, with too few customers to generate large volumes of profit. Still, the management team tries to maximize profit in year two, then year three, year four, and year five. As a result, this business actually contracts. If we followed the rules of Wall St. (maximize short term profit), we may not protect the long term health of our business.

In the second case, online/catalog advertising spend is more than twice as much as in the first simulation. This means the business is more profitable in the long-term, and grows at a much faster rate.

In the third case, online/catalog advertising is fifty percent more than in the second case. This yields a marginally profitable business in year one, but in year five, the business is much larger, and more profitable.

For every online/catalog business, these scenarios can be easily created. The multichannel analyst provides management with three or more scenarios (as outlined above), and lets management determine the future trajectory of the business.

This is an important point --- abstract and geeky topics like lifetime value have little or no meaning to executives. Picking from one of three possible strategies is easy to do if you're an executive, and accomplishes the exact same thing as a geeky, technical lifetime value analysis.

Multichannel CEOs and CMOs: Simulations indicate that it is important to invest in unprofitable customer activities in the short term, in order to protect the long term health of your business. It is important not to focus on "this year". Where possible, invest in the short term, to protect the long term health of your business.

Missing Plan

If you really want to test your professional character, see what happens when your business starts missing plan ... by 45%.

Back in 2001, I was part of a new management team recruited by the esteemed Michael Smith (of Lands' End, Classmates.com and Bag, Borrow Or Steal fame). Our job was to fix Nordstrom.com, a division of Nordstrom that was posting hideous double-digit negative EBIT, year-after-year.

In our first four months, we experienced something that tests professionals who think they're brilliant. A business that was failing mightily began to miss expectations by more than twenty percent. In fact, one series of catalogs missed plan by forty-five percent. That means customers liked the catalog so little that they spent almost half of what they spent in a comparable catalog the year prior --- a year where double-digit negative EBIT occurred.

Here is what the results looked like, with numbers altered to protect the innocent:

Analysis Of Catalog Results
	Rates	Plan	Actual
Circulation		4,000,000	4,000,000
Demand		$35,000,000	$19,250,000
Net Sales	71.0%	$24,850,000	$13,667,500
Gross Margin	52.0%	$12,922,000	$7,107,100
Less Book Cost		$5,000,000	$5,000,000
Less Var. Op Expense	11.0%	$2,733,500	$1,503,425
Var. Op. Profit		$5,188,500	$603,675

When your catalog misses expectations by nearly five million dollars profit (remember, numbers have been doctored a bit, to protect the innocent), folks begin pointing fingers at each other ... quickly! Your new merchandising expert blames the old administration. The old administration blames the new team. Your President suggests you don't know a thing about circulating catalogs.

After the finger pointing subsides, you have to get down to the hard work of planning next year's catalog. You use the catalog that completely failed as your planning base. Your circulation plan for the next year might look as follows:

Next Year's Plan
	Rates	This Year	Next Year
Circulation		4,000,000	1,600,000
Demand		$19,250,000	$10,900,000
Net Sales	71.0%	$13,667,500	$7,739,000
Gross Margin	52.0%	$7,107,100	$4,024,280
Less Book Cost		$5,000,000	$2,479,000
Less Var. Op Expense	11.0%	$1,503,425	$851,290
Var. Op. Profit		$603,675	$693,990

This is called "thinking inside the box". And it is damaging. You end up trimming circulation by more than half, to get rid of unprofitable names. By doing so, you only increase profit by about a hundred thousand dollars. And, you've made the business much, much smaller.

Actually, your customers are making your business much, much smaller, because they're voting with their pocketbook that they don't like you.

But this is where you get yourself in trouble, if you continue to "follow the rules". In other words, if you continue to circulate to a certain cutoff level, you are "certain" to run yourself out of business. You cut marginal names, the very names that will pay the freight in a year or two.

Missing plan by 45% requires you to re-think your business model.

In our case, many more members of the management team "left to pursue other interests, we wish them the best in their future endeavors".

A stable team of leaders "gelled". We "rightsized" the catalog business (fewer titles, fewer pages, fewer in-home dates, capitalize on e-mail and online marketing) A hideous profit and loss statement became one that any leader could be proud of.

You don't learn a lot when your channel is constantly growing by twenty percent, or thirty percent. You learn a lot about business, and about people, when your channel fails to meet plan by forty-five percent.

It will be very interesting to see what happens to today's online business leaders when the online channel begins to decline, an inevitability in the evolution of business channels.

Online Advertising And The Marketing Digital Divide

Using SpyFu, one can get very rough estimates of what leading brands spend on online advertising on a daily basis. The data is prone to errors and inaccuracy, but can be used to view general trends.

Take three companies that thrive on catalog marketing, namely L.L. Bean, Lands' End, and Pottery Barn. Here is what SpyFu suggests these companies spend in online marketing, on an annual basis.

• Annual Average Spend Across These Brands = $10,201,000.
• Average Annual Clicks Generated From The Advertising = 12,015,000.
• Average Cost Per Click = $0.87.

Next, look at three large retailers, namely Macy's, Nordstrom and Neiman Marcus. Here is what SpyFu suggests these companies spend in online marketing, on an annual basis.

• Annual Average Spend Across These Brands = $23,550,000.
• Average Annual Clicks Generated From The Advertising = 33,312,000.
• Average Cost Per Click = $0.78.

Finally, look at two larger-sizes online pureplays, namely Zappos and Blue Nile. Here is what SpyFu suggests these companies spend in online marketing, on an annual basis.

• Annual Average Spend Across These Brands = $40,654,000.
• Average Annual Clicks Generated From The Advertising = 63,483,000.
• Average Cost Per Click = $0.68.

Notice that as we progress from companies with a catalog heritage, to companies with a retail heritage, to companies with an online heritage, the amount of online spend dramatically increases --- and, the average cost per click actually decreases. This is counter to what analytical folks expect to see happen.

I tried to pick companies that had annual traffic that was directionally similar. How the businesses use advertising to drive web traffic is very different. What this does show is that there may be a marketing digital divide. There may be a way for catalogers and retailers to migrate advertising online, and actually see better returns on investment.

As postage escalates, traditional catalogers have an opportunity to emulate the techniques that the folks at Zappos and Blue Nile use. Over the next five years, there is an opportunity to transition advertising strategy from print to online. There is an opportunity to cross over the marketing digital divide.