Lifetime Value And Organic Buyers

We're being asked to reduce marketing expense in 2009.

A current best practice is to calculate lifetime value. Customers with sufficient "LTV" receive outbound marketing, while customers with low "LTV" are not targeted with outbound marketing.

This year, the process is changing. We're being asked to not only forecast lifetime value, we're being asked to identify customers who experience lifetime value reductions because of our actions.

This sounds odd, but it really isn't an unusual concept. In the past, we'd identify a 13-24 month customer who loses $10.00 per order, and has $5.00 of LTV. This customer would be suppressed from subsequent campaigns because net LTV is -$5.00.

In 2009, we need to identify the customers who are likely to generate "organic demand" in the future. Amazingly, these customers can experience lifetime value reductions if we market to them, because the customer was going to purchase merchandise anyway.

The majority of CEOs working on Multichannel Forensics projects are asking me to identify organic customers. This is becoming an important part of the marketing process.

For the Statistical Modeler, this represents yet another "offshore drilling" opportunity --- a chance to work on something unique and new.

For the Catalog Marketer, this is a chance to reduce expense while not harming the top line.

For the E-Mail Marketer, this is a golden opportunity to reduce contacts to customers likely to order anyway.

And for the optimization whiz, go ahead and set up a bunch of marketing experiments. Testing is the best way to identify customers likely to generate organic demand!!

Day Of Week

In recent Multichannel Forensics projects, there has been a increased focus on understanding the days that online buyers purchase merchandise.

Here's what you might want to pay attention to.

1. Customers who order over the telephone in the first two weeks following a catalog in-home date (or first two days following an e-mail in-home date) are dependent upon advertising.
2. Customers who order online, and order in the first two weeks following a catalog in-home date (or first two days following an e-mail in-home date) are probably dependent upon advertising.
3. Customers who order online, and order during "dead periods", when no catalog or e-mail campaign is active, are "organic" customers, customers likely to purchase in the future without the aid of advertising.

Pay really close attention to scenario #3, folks, as you can save a lot of expense here without compromising sales levels.

These days, I code every day of the year, based on whether that day is a "traditional direct marketing day" or whether it is an "organic day". Customers ordering on "organic days" are less likely to need advertising to fuel future purchases than are all other customers.

Demand that your matchback vendor provide you with visibility into this phenomenon.

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!

Organic Demand

One of the least understood concepts in cataloging is the concept of "organic demand".

A long time ago (aka 1994), catalogers controlled every aspect of their business. Sales were not generated unless a catalog was mailed.

Conversely, retailers thrived almost entirely on the concept of "organic demand". In other words, because there was an Ann Taylor store at the Galleria, sales were going to be generated. Ann Taylor could do absolutely no advertising whatsoever, and yet, the store would have loyal customers shopping every few months.

Back in 1994, you analyzed all customers who purchased in 1993. For catalogers, the relationship looked like this:

• Normal Mail Stream = $150 spent in 1994.
• Do Not Mail Catalogs = $0 spent in 1994.

Back in 1994, the relationship looked like this for retailers:

• Normal Advertising Campaign = $150 spent in 1994.
• No Advertising At All = $130 spent in 1994.

For catalogers, advertising meant everything. For retailers, advertising marginally increased sales.

Starting in 1995, e-commerce ruined each discipline.

See, e-commerce is a true hybrid of cataloging and retailing. Today, a cataloger might have the following relationship:

• Normal Advertising Strategy = $150 spent in 2007.
• No Advertising At All = $70 spent in 2007.

In 2007, cataloging incorporates the concept of "organic demand". Customers will purchase from Cuddledown, regardless whether catalogs are mailed, e-mails are delivered, or paid search campaigns are executed. Without advertising, customers will simply visit http://cuddledown.com and buy merchandise.

And this is where we, as direct marketers, fail miserably. We want to "attribute" every single order to one of our marketing strategies. We are systematically frustrated by the customer who simply types http://cuddledown.com and buys something.

So we do a matchback analysis, and claim that a catalog mailed eight weeks ago must have been responsible for this order.

If you work for a cataloger, and struggle with the concept of "organic demand", demand that occurs without any advertising, set up an appointment to meet with a non-competitive retailer. If you work at Cuddledown of Maine (an example, not a critique of this wonderful brand), why not call the folks at a non-competitor like Best Buy, and arrange for a two day field trip? Learn how retailers cope with the concept of organic demand by spending time with folks who deal with this concept, a concept that requires a fundamentally different style of measurement.