The Most Important Catalog And E-Mail KPI: The Organic Percentage

Last week, I received an e-mail from a loyal blog subscriber. This person did the mail/holdout testing that many catalog brands execute. This person learned that more than 70% of the business that you see in best-practice based catalog results analysis happened regardless whether a catalog was mailed or not.

This phenomenon is known as the "Organic Percentage". You execute a mail group and a holdout group, very simple testing.

Organic Percentage: Mail & Holdout Test Groups
	This	Other	Website	Total
	Catalog	Catalogs	Demand	Demand
Mail Group	$3.00	$4.00	$8.00	$15.00
Holdout Group	$0.00	$5.00	$9.50	$14.50
Increment	$3.00	($1.00)	($1.50)	$0.50
Organic %, Catalog = (3.00 - 0.50) / 3.00				83.3%
Organic %, Total = 14.50 / 15.00				96.7%

This outcome is seldom if ever mentioned by e-mail vendors or catalog marketing vendors. The opposite outcome is mentioned all of the time --- we hear that catalogs and e-mails drive sales across all channels. This outcome is more common than the oft-publicized "catalogs drive sales to all channels" outcome we read about.

Almost nobody talks about reducing marketing expense and increasing profit because we are mis-attributing orders to customers who would have ordered anyway. The vendor ecosystem would be hurt if this outcome were published on a frequent basis.

In this case, 96.7% of customer demand happens anyway .. only 3.3% of the $15.00 is because of catalog marketing.

Quantifying the organic percentage is the single most important thing that catalog and e-mail marketers will do in 2009.

Acting upon the organic percentage is the single most important thing that catalog and e-mail marketers will do in 2010.

At this time, the majority of my Multichannel Forensics projects require me to greatly reduce marketing expense while keeping demand coming in at a high rate. It is likely that you'll be spending a ton of time on this issue in 2010 as well.

Mega-Metrics: The Organic Percentage

For traditional direct marketers, there is no single metric that is more important to calculate than the organic percentage.

Simply put, the organic percentage is the percentage of demand that is generated independent of marketing activities. For many catalogers, the percentage is calculated as the percentage of demand that is independent of catalog marketing.

We care about this, of course, because our matchback analytics frequently attribute orders to catalog and e-mail marketing activities, orders that would have happened regardless of any catalog or e-mail marketing.

Catalog marketers are growing comfortable with this percentage, because of the actionable ways it gets put into use. Organic percentages of maybe 10% suggest that your catalog is the reason your business exists!

Organic percentages of maybe 35% to 40% suggest a considerable amount of over-mailing. These businesses are probably attributing too much business to catalogs and direct marketing in their matchback algorithms.

Organic percentages of 80% or more suggest a powerful brand that is complemented by direct marketing, not driven by direct marketing.

For my catalog readers out there, work closely with your co-op or other matchback provider, calculating this important percentage. If that number creeps up over 30%, it is time for serious catalog contact strategy testing. For my online marketing readers out there, this is another good place to partner with a Coremetrics, Omniture, or Unica, folks who can help you get to the bottom of this important metric.

Consulting Project Focus Is Changing

The Multichannel Forensics projects you're asking me to work on have taken a turn.

Two years ago, you asked me to explain how customers interacted with channels.

One year ago, you asked me to explain how customers interacted with both channels and merchandise divisions, with an eye toward forecasting the future.

Then you saw what the future held, and it wasn't pretty.

Today, you ask me to use Multichannel Forensics to identify customers who will keep purchasing if advertising is significantly reduced.

The framework isn't significantly different than Multichannel Forensics projects from a few year ago. I still measure how customers interact with products, brands, and channels. And I still forecast the long-term trajectory of your business by product, brand or channel.

The mechanics of the project, however, have changed. We use whatever data is available to understand how customers move along the continuum above --- organic, social, algorithm, advertising, and begging. We attempt to identify where the customer resides on this continuum.

Customers who respond to begging (discounts, promotions, free-shipping, GWPs) are at the bottom of the ladder. We'll need to market to them, and we'll need to give them a reason to purchase. These may be profitable customers, but we'll have to work hard at creating gimmicks to encourage them to purchase. This is the realm of the marketer, especially in Fall 2008. In so many ways, we ruined e-commerce with our obsession of begging customers to purchase.

Traditional direct marketing focused on customers who respond to advertising. This is a segment of the customer file that is decreasing in size. We look for attributes that suggest a customer must be advertised to, in order to purchase. Customers who order over the telephone, customers who give catalog key-codes when shopping online, customers who click-through e-mail campaigns, customers living in zip codes classified as "Catalog Crazies". These customers are unlikely to buy in the future unless they are marketed to.

Then we have customers who use algorithms to purchase. Yup, these are the customers who use tools like paid search to purchase merchandise. These customers are different. They don't always respond to future advertising, and when they do respond, they combine advertising and algorithms to make decisions. This is where your Net Google Score comes into play. Catalog brands really struggle with algorithm customers, and online marketers struggle with e-mail marketing programs for algorithm customers.

Increasingly, we find ourselves managing social customers. If you're Crutchfield, you have customers who buy merchandise, customers who write reviews, and customers who are referred from blogs to your site. The latter two groups represent "social customers". Social customers are different than are typical catalog customers, and are different than typical e-commerce customers. Catalogers are way behind the curve when it comes to managing social customers. In fact, almost everybody is behind the curve regarding social customers. Hint: Social customers don't necessarily embrace catalogs, and sometimes get really angry when they are stuffed in the mailbox.

Finally, we get to the most valuable customer on the planet, the organic customer! I receive a lot of criticism about my assertion that there are customers who do not need to be advertised to. Why? I don't know. Many of you think customers only buy something if they are advertised to. Amazon.com gets a lot of organic business. Now it is true that maybe Amazon sent an e-mail at one time, and you bought because customers like you purchased certain texts. But that doesn't explain the fact that you see "Outliers" discussed on a blog, so you go and buy the book on Amazon (that makes you a social customer!). Or maybe you read about the book in New York Magazine, then buy it on Amazon (that makes you an organic customer). Organic demand is the most important kind of demand to generate, because it comes without advertising cost. Retailers have thrived for centuries via organic demand. E-commerce is a hybrid of retailing (organic demand) and cataloging (advertising demand).

So how did project work change?

These days, I score customers across each of the five dimensions listed above. If the customer generates organic demand, the customer gets an "A", if not, the customer gets an "F". The same process happens for Social Customers, Algorithm Customers, Advertising Customers, and for Customers Who Respond To Begging.

Once customers are graded, we monitor migration. Does the "Begging" customer migrate to "Organic" status? If so, then discounts and promotions work! Does the "Algorithm" customer slide down to "Begging"? If so, then Google isn't doing us any favors. Is the "Advertising" customer married to advertising? If so, then we have to keep streaming the catalogs at this customer. We apply the migration patterns, understanding the long-term trajectory of your business. Finally, we identify the customers who we can stop marketing to, without a significant dip in business.

Online pureplays are using this methodology, too ... they want to understand who should receive e-mail marketing, and they want to understand how deep they should dive into paid search.

Retailers ask me to do this, so that they can identify retail shoppers who are unresponsive to direct marketing, customers who have a high organic percentage.

Catalog Choice should love this (especially given the slowdown in user growth in recent months), because the end result of the project is the discontinuation of catalog marketing to customers who no longer respond to advertising, while protecting the catalog relationship among highly responsive customers.

That, my dear readers, is a description of the type of project I am being asked to work on by online marketers, retailers, and catalog brands. And it is big-time fun!

Hillstrom's Contact Strategy Optimization On A Budget

Hillstrom's Contact Strategy Optimization On A Budget is a new e-book and spreadsheet available from the MineThatData Store at Lulu.com.

Contact Strategy Optimization is not a new concept. During my time at Lands' End in the early 1990s, we worked with a team of IBM researchers on an optimization solution that formed the embryonic version of the solutions offered by Decision Intelligence.

During the past two weeks, many of you told me that you don't want to spend tens or hundreds of thousands of dollars on black box algorithmic solutions that optimize the number of catalog contacts to various customer segments. That being said, you told me you want a solution ... one that can be implemented by Business Leaders, Analysts, and Managers ... one that can be implemented on a budget.

So I wrote this e-book, outlining a reasonably simple approach to identifying the most profitable combination of catalog mailings and e-mail marketing messages to different customer segments.

What Do You Get, What Will You Learn?

• You'll learn that matchback algorithms over-state the importance of catalog marketing, causing us to mail too many catalogs to our customers.

• You'll learn that the "organic percentage" is the most important metric to understand when considering an appropriate contact strategy.

• You'll learn that contact strategy testing is critical to understanding multichannel customer behavior.
  

• You'll learn how cannibalization between catalog mailings and e-mail marketing messages directly influence a profitable contact strategy.

• You'll apply versions of the "square root rule", identifying profitable strategies.

• You'll receive access to a URL where you can download a spreadsheet that allows you to play "what if" games using your own assumptions and your own customer segment performance.
  

This is not meant to be an elegant or mathematically perfect solution. This e-book and spreadsheet are written for you, the Executive or Analyst who has to come up with solutions on a limited budget.

Do you not have a quarter of a million dollars to spend on an optimization solution, but have access to $79? If so, purchase "Hillstrom's Contact Strategy Optimization On A Budget"! For those of you who criticize me for giving away too much information, you'll be happy, because the contents of this e-book will not be made available on this blog.

$79 is a fair price, considering you'll be given tools that could result in hundreds of thousands of dollars of annual profit, don't you think?

So visit the MineThatData Store on Lulu.com, and download this e-book for the nominal fee of $79.

The Most Important Catalog Marketing Metric: Organic Percentage

The most important metric in catalog marketing is called the "organic percentage".

The metric is defined as the percentage of demand, at a segment level, that would occur if no catalog mailings were delivered to a customer.

Most of the catalogers I speak with assume that the organic percentage is zero --- in other words, if catalogs were not mailed to a customer segment, the segment would not spend any money.

Of course, this assumption is false, perpetrated by biased matchback algorithms that incorrectly assign online orders to catalogs mailed to the customer, when in reality, the catalog had nothing to do with the generation of the order in question. You'll know that your matchback results are biased if the percentage of demand you add on to your acquisition segments (after matchback) is significantly lower than it is for housefile customers.

Catalogers who attempt contact strategy tests, say over a three month period of time, find relationships like this.

• Telephone - Only customers have an organic percentage around 10%.
• Telephone + Online customers have an organic percentage around 25%.
• Online - Only customers have an organic percentage around 40%.

In other words, if no catalogs are mailed to an online-only customer, the online customer will still spend 40% of the demand they would spend if they are mailed all of the catalogs during the quarter.

The organic percentage metric is critical, because it dramatically impacts your calculation of profit and loss. If you have a high organic percentage, then you are significantly overmailing customers, regardless of what your matchback analytics vendor tells you. If you have a low organic percentage, then you have no choice but to mail catalogs in order to generate demand.

The image at the beginning of this post shows the difference in profitability for the same segment of customers, comparing a 10% organic percentage to a 40% organic percentage. The ten percent level requires four mailings per quarter. The forty percent level maximizes profit at just one mailing per quarter. Think about what you could do with the expense from the three additional mailings?

If there were just one metric I'd ask catalogers to track at a segment level, during 2009, it would be the "organic percentage" metric. Knowing this metric fundamentally changes how you decide to contact different customer segments.

How important is this percentage? Take a brand like Nordstrom. This is an $8.5 billion dollar business that is luck to generate ten percent of that total from marketing activities. Therefore, the organic percentage is ninety percent. This brand generates ninety percent of sales without the aid of traditional marketing activities. That's a strong brand.

Think about Zappos. There's the volume they generate due to online marketing and search marketing, and then there's the volume they generate via word of mouth. I'd guess that half of their volume happens without the aid of marketing, plus or minus twenty percent.

And then think about a traditional cataloger. The traditional cataloger believes that the vast majority of demand happens becaue of catalog mailings. If mail/holdout tests validate this, then the cataloger is at the mercy of catalog marketing --- if customers are no longer responsive to this form of marketing, demand dries up.

The goal, of course, is to build a brand that has a high organic percentage, not needing advertising to drive sales and profit.

We can learn how much of customer demand is generated by advertising by executing thorough mail / holdout tests, in both catalog marketing and e-mail marketing.