Retail And Mass Transfer

This is the line waiting to get in to the Old Country Buffet in Factoria, WA, on a Friday evening at 7:30pm.

Two years ago, you could walk past this dining establishment and you'd be lucky to see twenty patrons dining on a veritable plethora of hot-light heated goodies. Now, you wait fifteen minutes for a table.

In the same mall, there is a specialty apparel retailer. Within ninety seconds of taking this low-res image, I snapped an image of the traffic within this store. Yup, you guessed it --- no traffic
at all. In fact, I didn't see a single employee either --- maybe management read the Sequoia Capital Death Spiral presentation.



The last image is of the Apple store in Bellevue Square. These are products you don't need, and yet, this store is absolutely nuts. And when you walk into the store, it feels vibrant. Plasma monitors telling you where you stand in the queue, recommending you sign up for future Genius consultations online due to the long wait --- tons of employees, yet not nearly enough to handle the throng.



From a Multichannel Forensics standpoint, we're experiencing transfer, actually, mass transfer. As our perception of the world changed, we made immediate changes to our shopping habits. Instead of spending $42 on dinner for two at Chili's, we transferred our loyalty to a $22 dinner for two at the Old Country Buffet. Instead of buying apparel, we hang on to what we already own, but we transfer apparel dollars to music and accessories at the Apple store.

Obviously, we don't have the ability to understand macro-economic transfer (HINT ABACUS & THE CO-OPS --- YOU HAVE THIS CAPABILITY AND COULD CREATE A PRODUCT THAT CAN HELP YOUR CLIENTS UNDERSTAND THIS ACTIVITY!).

But we do have the ability to observe transfer when it comes to the products we sell. It is critically important to analyze how customers are migrating out of expensive items, into inexpensive items --- migrating out of fashion and into staples.

As these trends become evident, we forecast the long-term trajectory of the trends --- capitalizing on the trends without having to fire employees as an expense management best practice.

Multichannel Forensics A to Z: Transfer Mode

In Multichannel Forensics "Transfer Mode" is a situation caused by customers moving from one product, brand or channel to another.

These are the situations that disrupt established business models. Customers transfer from CDs to MP3s. Customers transfer from SUVs to small hybrid vehicles. Customers transfer from newspapers to internet-based news sources.

Our job is to evaluate trends that are in Equilibrium Mode, evaluating the repurchase indices for persistent increases. Persistent increases suggest a growing trend, one management is wise to heed.

Imagine if record labels had embraced file sharing and MP3s? Imagine if newspapers embraced new media instead of holding on to paper? Imagine if GM or Ford had their version of the Prius before Toyota?

Transfer Mode is the most frightening of the modes in Multichannel Forensics. It also offers the most opportunity for those who have the vision to see how trends might play out.

Redirection: How Catalogs Create Demand For Online Pureplays

Given that catalogers seem to enjoy yesterday's discussion about the failure of catalog and multichannel marketing, is is appropriate to share the following outline concerning demand generation in 1994, 2001 and 2008. Of course, what follows in the image is only a theory of mine --- no hard evidence to prove one way or another. Click on the image to enlarge it.



















My theory suggests that catalog marketing is as effective as it has ever been. However, Google and Social Media have stepped in and redirected demand that would have gone to your brand.

Redirection (otherwise known as "transfer" in Multichannel Forensics) happens in many different ways.

• Google and SEO --- think about how many of you found my blog via Google/SEO?
  
• Google and Paid Search.
• Social Media --- Check out Manolo's Shoe Blog as an example.
• User Generated Reviews --- You see an item advertised in the Crutchfield catalog, you read a review from a customer on Amazon.com, and you ultimately buy the item on Amazon instead of Crutchfield.

Redirection is lethal for a brand that doesn't play along. Since this is just a theory, I don't have any solid numbers to back up my thesis --- I would surmise, however, that maybe 25% to 50% of your demand is "at risk" for redirection.

This theory suggests that we have two important objectives.

1. Prevent redirection of demand away from our brand.
2. Induce redirection of demand to our brand.

A metric like the "net promoter score" would be useful, wouldn't it? You look at the percentage of demand that is redirected to your brand, then subtract the demand that is redirected away from your brand. The net is your score --- positive is good, negative is bad. Think of Zappos. Their score has to be amazingly good, right? Footsmart sends a catalog, the customer checks prices online, and buys at Zappos where she gets the item tomorrow via free shipping. Footsmart gets a negative score in this instance.

Abacus/Epsilon --- what do you think? You could so easily help the catalog industry that pays your freight by generating an index of this nature for your clients. There you go, free product development information from The MineThatData Blog! You've got bright people, make something happen! Heck, toss me a few pennies, and I'll develop the prototype.

Too often, we view the world through tactics, like catalog marketing or e-mail marketing or paid search or SEO or affiliate marketing. How often do we view the world in the context of "redirection"? How might we approach competitive advantage via the concept of redirection?

Can A Catalog Brand Survive As An E-Commerce Pure-Play?

The April survey question was "Can A Catalog Brand Survive As An E-Commerce Pure-Play, One That Does Not Mail Catalogs?" Here's how you responded to the survey question:

Can a catalog brand survive as an e-commerce
pureplay, one that does not mail catalogs?
Yes, Customers Will Just Shop Online	44%
Yes, But Sales Will Plummet	35%
No, The Cataloger Will Soon Be Out Of Business	21%

The reasonably even distribution of answers is congruent with the data I see across various Multichannel Forensics projects. Some companies would be out of business within a few months. Some companies would see a dramatic decrease in sales. And some companies would thrive.

Yes, Customers Will Just Shop Online:

• Brand has a retail channel that is dominant.
• Online channel is more than fifty percent of direct-to-consumer sales.
  
• Online channel has a broader merchandise assortment than the catalog has.
• Customer never enters catalog key-code when ordering online.
  
• Brand is not "over-mailing" customers.
• Brand is in "Retention Mode".
• Catalog is in "Transfer Mode".
• Customer is largely urban or suburban, age 18-45.
  
• E-Mail and Paid Search performance improves in mail/holdout tests.
  

Yes, But Sales Will Plummet:

• Brand does not have a retail channel, or has a small retail channel.
• Online channel is less than fifty percent of direct-to-consumer sales.
  
• Online channel has the same merchandise assortment as the catalog.
• Customer sometimes enters catalog key-code when shopping online.
  
• Brand is in "Hybrid Mode".
• Catalog is in "Equilibrium Mode".
• Customer is largely suburban, age 35-55.
  

No, The Cataloger Will Soon Be Out Of Business:

• Brand does not have a retail channel.
• Online channel is less than thirty percent of direct-to-consumer sales.
• Customer always enters catalog key-code when shopping online.
• Brand is in "Acquisition Mode".
• Catalog is in "Isolation Mode".
• Customer is largely rural, age 50-80.
  

In my experience, these general guidelines hold up pretty well. We could get away from a catalog marketing program at Nordstrom because our customers largely fell into the first classification --- middle-aged, urban/suburban customers offered a better merchandise assortment online and in stores. But if you are a cataloger of fine cheeses with an older/rural customer base, you'd be out of business without your catalog.

Multichannel Forensics: Calculating Migration Mode

Before we go into various studies, we need to know how to calculate the migration mode of each product, brand, or channel.

Here's an example for the online channel of a multichannel retailer.

Step 1: Calculate the annual repurchase rate for online customers, across all channels. Answer = 55%.

Step 2: Calculate the annual purchase rate for online customers within each channel.

• Total Company = 55%.
• Catalog Channel = 5%.
• Online Channel = 35%.
• Retail Channel = 30%.

Step 3: Calculate the purchase index for each channel, measured as the channel purchase rate divided by the total company purchase rate. Though we will calculate the metric for the online channel, we're only interested in the metric as it relates to the catalog and retail channels.

• Catalog Channel = 5% / 55% = 0.091.
• Online Channel = 35% / 55% = 0.636.
• Retail Channel = 30% / 55% = 0.545.

Step 4: Classify each metric into isolation mode, equilibrium mode, or transfer mode (oscillation mode occurs when two channels transfer to each other).

• Isolation Mode = Index between 0.00 and 0.20.
• Equilibrium Mode = Index between 0.20 and 0.50.
• Transfer Mode = Index greater than 0.50.

• Catalog is in Isolation with the Online Channel.
• The Online Channel Transfers customers to the Retail Channel.

Given the dynamics of this business, customers ultimately migrate from the website to retail stores.

Multichannel Forensics: The Building Blocks

We'll start our Multichannel Forensics series with a quick refresher course.

There are three loyalty modes for every product, brand or channel.

• Retention Mode: When at least 60% of prior year customers purchase again this year (if your business doesn't support a twelve month repurchase period, use a timeframe that is appropriate.

• Hybrid Mode: When between 40% and 60% of prior year customers purchase again this year.

• Acquisition Mode: When fewer than 40% of prior year customers purchase again this year.

We need to classify each product, brand or channel into one of these three modes, so that we can understand the primary way that growth will happen. So many brands are in "Acquisition Mode" and don't realize it, depending heavily on customer acquisition for long-term health.

There are also four Migration Modes that each product, brand or channel fall into.

• Isolation Mode: This happens when the customers in a product, brand or channel do not migrate to other products, brands or channels. For instance, customers who purchase Mens apparel are unlikely to buy Womens apparel. Mens apparel buyers are in "Isolation Mode".

• Equilibrium Mode: This happens when the customers in a product, brand or channel are willing to try other products, brands or channels. For instance, customers who purchase Womens apparel might purchase Mens apparel for their spouse. Womens apparel buyers are frequently in "Equilibrium Mode". This mode is common, and is responsible for all of the interesting dynamics that occur when customers shift from one product line (DVD Players) to another (Blu-Ray DVD Player).

• Transfer Mode: This happens when the customers in a product, brand or channel are actively switching loyalty. Over the next decade, automobile purchasers will actively transfer loyalty from gas-guzzling cars to hybrid cars and other technologies. CEOs need to recognize this mode, and react in a positive way in order to protect jobs.

• Oscillation Mode: Sometimes, customers switch back and forth between products, brands or channels. This is known as "Oscillation Mode". Computer buyers purchase software and peripherals, then switch back to buying a new computer, then switch to software and peripherals, resulting in "Oscillation Mode".

The combination of Loyalty Mode and Migration Mode yield the unique situation a product, brand or channel resides in.

Maybe you are a catalog CEO. If your catalog channel is in "Acquisition/Transfer" mode, your job is to scale back on catalog advertising over time, as your customers won't allow you to grow this channel anymore.

Maybe you are a Merchandise EVP. If your product is in "Retention/Isolation" mode, you thoroughly control your merchandise line. Your customers are loyal to your products, and do not switch loyalty to another merchandise line. You have the potential to be a rock star.

Maybe you are the General Manager of the Online Channel of a Multichannel Brand. If your channel is in "Hybrid/Equilibrium" mode, you have a very interesting channel to manage. Your customers want to shop your store channel, but aren't avid store customers. Strategically, you can influence your customers by the marketing techniques you use. Do you want your customers to shop online, in stores, or anywhere? In many ways, you get to decide!

This week, we'll look at several case studies, examples that help CEOs understand how to manage multichannel complexity!

Nine Ways Catalogs Interact With Websites

Please click on the image to enlarge it.

Spending two days at a multichannel marketing conference helps crystallize one's image of where our industry is heading.

My biggest revelation from 12,000 miles of travel and two days of multichannel discussions is that we have not given business leaders the tools necessary to identify the roles channels/advertising play in what used to be the Catalog industry.

So here are nine ways that catalogs interact with websites. For each classification, think about how different the marketing strategies need to be to yield satisfactory business results. Which of these nine situations is your business classified in?


Dissimilar Customer Audience: When catalog is in isolation, and the online channel is in isolation, you have two completely different customer audiences purchasing from each channel. You have a multichannel business, one that your customers don't use in an integrated manner.

Tries Online, Prefers Catalog: Infrequently, catalog is in isolation while the online channel is in equilibrium. This used to happen in the late 1990s, when catalog customers tried to purchase online, only to find the purchase experience preferable via the telephone. Today, businesses with a target customer between the ages of 65-85 might be in this situation.

Online Channel Is Not Appealing: When customers shop online, then transfer their sales back to catalog (catalog = isolation, online = transfer), you know that the customer does not find the online experience appealing. This usually represents a good time for a site redesign.

Classic Channel Shift: The most common catalog scenario occurs when catalog is in equilibrium and online is in isolation. This means the catalog is driving sales online, and when the catalog succeeds at doing this, the customer tends to stop using the telephone to place future orders. Long-term, this spells trouble for the catalog as a purchase channel, and is a harbinger of significant change for the catalog as an advertising vehicle.

Outside of the catalog industry, think about other business models that are going through this transition (old channel = equilibrium, new channel = isolation):

• CDs to MP3s
• Newspapers to Online News
• Gasoline-fueled Cars to Hybrid/Electric Cars.
• CRT Computer Screens to LCD Computer Screens.
• Desktop Computers to Laptop Computers.
  

Classic Multichannel Business: Multichannel pundits suggest that many catalogers exist in this situation (catalog = equilibrium, online = equilibrium). In other words, in this situation, customers freely pick and choose the channel they wish to purchase in. Products and solutions from the vendor community are frequently created to solve the challenges faced by companies in this situation. Unfortunately, few catalogers are in this situation.

Over-Marketing: Catalogers that offer a myriad of promotions to get customers to purchase online occasionally find themselves in this situation (catalog = equilibrium, online = transfer). The customer shops online only when prices are cheap or promotions make the online channel temporarily irresistible!

Catalog = Brand Advertising: When catalog is in transfer mode, and the online channel is in isolation mode, the catalog marketer is gearing up for a big change. Telephone shoppers are leaving in a mass exodus for the online channel. Once online, the customer won't shop via telephone again. Long-term, the catalog strategy is likely to change for a company in this situation. The catalog will likely evolve into a potentially useful brand advertising vehicle that communicates the broad assortment of merchandise available online.

Catalog = Sales Driver: When catalog is in transfer mode, and the online channel is in equilibrium mode, it is likely that the catalog is a very effective selling vehicle. The customer does not perceive differences between the channels, willing shopping via telephone or website. Better yet, the catalog is causing online orders. Long-term, this business model has a good chance of having a viable catalog advertising vehicle.

Ideal Multichannel Business: I have yet to see a catalog business operate in this mode (catalog = transfer, online = transfer, yielding true oscillation between channels). This would truly represent multichannel nirvana!

Mailbag: When Stores Close

"You talk about what happens when catalogs go away. What happens to sales when a store goes away"?

When stores close, the dynamic between catalog and online sales isn't terribly exciting. Stores frequently operate in "isolation mode", meaning customers shop the store, but are unlikely to shop online, and very unlikely to shop in catalog.

When the store closes, maybe eighty percent of the store base simply won't shop online, or in catalogs, regardless of how powerful your brand is.

The other twenty percent seem to wait awhile, then slowly transition back to the online channel, or catalog channel (so long as the brand advertises to them via catalog).

The most interesting part of store closings happen in multi-store markets. In these instances, Multichannel Forensics provide a rich portrait of the interactions between customers and stores. If you close a store that is in "transfer mode", those customers will quickly shop another store, potentially boosting sales at the other store.

If you close a store that is in "isolation mode", well, then those sales are likely to be lost. That might be fine, especially if the store being closed is unprofitable.

So, when you're thinking of closing a store, take a look at what Multichannel Forensics tell you. Stores in "isolation mode" will result in lost sales when the store is closed. Stores in "equilibrium mode" will result in some sales being reallocated to other stores. Stores in "transfer mode" may send a large portion of their sales to another store. Don't expect magical things to happen online or in catalog when the store closes.

Multichannel Forensics And Executive Leadership

Recall that there are two key elements in Multichannel Forensics.

First, how well do you retain your customers?

• If you retain more than sixty percent of last year's customers (in other words, more than sixty percent of last year's customers purchase again this year), you are in Retention Mode.
• If you retain between forty and sixty percent of last year's customers, you are in Hybrid Mode.
• If you retain less than forty percent of last year's customers, you are in Acquisition Mode.

Second, what do you customers do after they purchase from you?

• Do they only purchase your products, brands or channels (called Isolation Mode)?
• Do they like to try out other products, brands or channels (called Equilibrium Mode)?
• Do they switch to other products, brands or channels (called Transfer Mode)?
• Do they switch back and forth between products, brands or channels (called Oscillation Mode)?

The combination of modes determines the business strategy for a product, brand or channel.

Let's evaluate Circuit City, as an example. It is well documented that customers shop Circuit City via the online channel, then either purchase merchandise in-store, or purchase online and pick up product in the store.

Retail executives manage channels that have very different dynamics:

• The retail channel frequently operates in Retention/Isolation Mode. In other words, last year's store customers purchase in-store again this year, and are not likely to shop other channels.
• The online channel frequently operates in Acquisition/Transfer Mode. In other words, last year's online customers are unlikely to purchase online this year --- instead, the customer shifts purchasing to the store channel.

When business units operate under vastly different modes, leaders are needed to complement the mode of the business unit.

The leader of the online channel should be collaborative, one who does what is best for the total business. Her bonus structure should be based on her ability to facilitate customer purchases within any channel, not just her channel. The strategic development of her channel should be crafted around the natural behavior of her customer --- to shop in stores in the future.

The leader of the retail channel can be a different individual. Teamwork skills and collaboration may not be as important, because this individual has customers who are not likely to switch to the online channel --- and if the customer does switch, it is only to get information about retail merchandise.

Multichannel retailing is all about exploiting the strengths of each channel. It is not about "sameness", not about replicating the customer experience the same way in every channel.

This holds true for the leaders of each product, brand or channel.

In the Circuit City example, it may make sense to have a very experienced leader manage the online channel. This leader should be well versed at collaboration, consensus, humility, leading through others. This leader should be comfortable with not getting credit for all the good she does to make other leaders look good.

Conversely, it may make sense to have newer executives work in products, brands or channels that are in "isolation mode". In these instances, the leader has control over things, and has fewer moving parts to worry about.

All too often, we assign new leaders to smaller business units, business units with the least "risk". In reality, we should think about putting our most talented leaders in the most challenging roles. Those roles tend to happen in "equilibrium" or "transfer" mode.