Virtual CEO: Marketing Strategy

You are sitting in your Monday morning Executive meeting at a Multichannel Retailer. You review the numbers from the past weekend, and talk about the week ahead. At each meeting, you discuss one strategic issue.

This morning, your strategic issue is the development of a corporate blog. Your executive team has many points of view.

The Marketing Executive wants to use a blog as a way to improve the communication between customers and the leadership team. Maybe more important, the Marketing Executive knows that a key competitor just launched a blog that gives customers an opportunity to evangelize merchandise.

The Merchandising Executive wants to use a blog as a way to communicate new and exciting merchandise to loyal customers, and that communication can only happen if a merchandiser or a copywriter is writing the copy.

The Inventory Executive doesn't want to communicate new and exciting merchandise, because if customers love the new merchandise, the product will sell-out quickly, and customers will be disappointed. The Inventory Executive wants to use the blog to feature merchandise that is not selling well.

The Information Technology Executive will manage and maintain a blog if one additional staff member is hired --- there are simply too many projects to manage with existing staff.

The Operations Executive wants the folks who answer customer questions over the telephone to maintain the blog, because these folks are closest to the customer.

The Finance Executive is opposed to a blog, because confidential corporate information could be released to the public, and suggests bringing legal representation into the room to discuss all of the bad things that could happen.

The Human Resources Executive believes that a blog is a great way for some of the most talented copywriters to get increased exposure, especially in a year when the average employee will only get a 3% cost of living increase.

The Database Marketing Executive loves anything that can potentially be measured.

The Online Marketing Executive doesn't necessarily care about the content of the blog, but thinks the blog should be maintained by the Online Marketing department. These folks thoroughly understand the important link between search results and blogging frequency.

The Catalog Marketing Executive wants to use customer feedback from the blog in upcoming catalogs as ways to market the benefits of the brand.

The Public Relations Director is one-hundred percent opposed to any forum that allows customers the opportunity to bash the brand, and will side with the Finance leader in getting legal involved.

Virtual CEO: How would you navigate these differing points of view? Given the information offered here, what would you decide --- blog, or no blog? If you decided to have a blog, which Executive would you support, and why?

Virtual CEO: How Best To Increase Net Sales?

Let's assume that your e-commerce website enjoyed another year of rampant, unfettered growth. Kudos to you!

From a customer standpoint, do you know why your business grew last year?

There are dozens of scenarios where a business could enjoy a significant sales increase over the prior year. Let's explore four scenarios.

Example #1: The business achieves increases by increasing the number of new customers.

Example #2: The business achieves increases by increasing the rate with which last year's loyal customers repurchase this year.

Example #3: The business achieves increases by increasing prices. As a result, fewer customers purchase, but a smaller number of affluent customers spend more.

Example #4: The business achieves increases by getting customers to purchase more times per year, and by getting customers to purchase more items per purchase.


Ok, time for you to be Virtual CEO for the day. Which of the four examples would you want to happen in the business you are running?

To me, Example #1 helps fuel future growth, because there are more customers willing to purchase next year. Example #2 is very, very hard to accomplish, but again, fuels future growth by yielding more customers for subsequent years. Example #3 is risky. Short-term growth that comes at the expense of growing loyal customers is dangerous. Example #4 might be the hardest to accomplish.

Virtual CEO: Coldwater Creek and Inventory Management

Through comments and e-mail, many loyal readers of The MineThatData Blog voiced their opinion on creating a good customer experience when items are sold-out on a website. This discussion started when Becky Carroll talked about items being pulled from her shopping cart during a recent online shopping experience at Coldwater Creek.

What has been discussed can be summarized around at least four key constituents.

First, you have the customer, who rewards outstanding shopping experiences with loyalty and word-of-mouth.

Second, you have the inventory executive, responsible for the unforgiving task of not buying too much merchandise (requiring markdowns, and less profit), while at the same time not buying too little merchandise (causing lost sales, less profit, and a reduction in customer loyalty).

Third, you have a management team that prioritizes the work of the information technology folks, ultimately determining what the online customer experience looks like to the consumer.

Fourth, you have the Chief Executive Officer, responsible for determining an incentive plan for her leaders, an incentive plan that rewards leaders for accomplishing company objectives.

In most direct-to-consumer businesses, one of the primary objectives is to maximize fulfillment while minimizing markdowns. There is a sweet spot where profit is maximized. When too much merchandise is purchased, markdowns occur.

Markdowns are horrible for a business, because the business freely gives up profit to pay for mistakes in execution and anticipation of fashion. A $100 item that has a $50 cost of goods yields $50 of profit. Marking the item down to $69 to clear it reduces profit on that item from $50 to $19. Worse, the customers who buy the item are often discount-oriented customers, meaning there are fewer loyal customers willing to pay for something at full price.

Lost sales are also horrible for a business, as evidenced by Becky's post. Lost sales can create a bad experience if not executed correctly, and can reduce customer loyalty.

CEOs like to provide incentives to Inventory Executives, incentives that protect the profit of the overall business. An Inventory Executive might receive a larger bonus payout if he hits the 'sweet spot' between lost sales and markdowns. An Inventory Executive quickly loses his job when he fails to hit the sweet spot.

As a result, the Inventory Executive has a significant incentive to endorse any strategy that protects the profitability of the business, and the long-term prospects of keeping a well-paying job. This person could encourage any activity that is, theoretically, not a great customer experience, if it means that more data is collected on items where the Inventory Executive makes a mistake.

I am not saying this is what happens at Coldwater Creek. I am saying that seventeen years in this industry help me understand what the business is up against.

So here is a challenge for all of my readers who responded via comments and e-mail on behalf of the customer (I have yet to receive one response supporting the leaders of a business).

Pretend you are the CEO of Coldwater Creek. Knowing what you now know about managing inventory, how would you set up a bonus plan for your leadership team that achieves the following:

• Protects the 'sweet spot' where your inventory team doesn't purchase too little merchandise, or too much merchandise.
• Provides incentives for your creative or online marketing team to write language that is customer friendly when merchandise is not available, or is about to run out.
• Provides incentives for your IT staff to work outside of company-stated priorities to fix problems like the shopping cart issue that frustrated Becky, while still addressing company-stated priorities.
  
• Provides incentives for your analytical folks to develop analytical tools to correctly forecast potential sales when items run out.

What would your bonus plan look like for your leadership team, to accomplish these objectives?

An even more intriguing question to consider --- what do you do when your CEO and Inventory VP don't have a passion for the customer experience, won't allocate resources to fix the problem, are not likely to be fired in the next few years, and are delivering outstanding sales and profits? Now what?

Virtual CEO: Blue Nile

Blue Nile, an online retailer of jewelry, has an interesting set of challenges to face in the future.

During a recent call with analysts to discuss third quarter results, management made several interesting observations.

• Ad spend as a percentage of revenue is four percent, and has held constant in spite of increases in the cost of online marketing.
• With brands moving online to advertise, management has decided to not compete by spending more on online advertising. Management states they lowered prices instead. The reduction in prices resulted in twenty-four percent increase in year-to-date net sales. However, gross profit only increased by eleven percent, due to price reductions. Gross profit is about twenty percent of net sales.
• Management is focusing on increasing conversion on the website, believing this is a key driver of future profitability. Management states that conversion rates are improving, compared with last year.
• Repeat purchasing skews toward non-engagement merchandise (which has better gross margins than engagement merchandise).

Time for you to play Virtual CEO. If online marketing costs are going to continue to increase, what would you do to grow your business?

• Follow the updraft in online marketing costs by spending more for the same amount of traffic.
• Lower prices, and accept the risk of a less-affluent audience. In other words, are you willing to trade your target audience for one that is less affluent, as a way of combating increased online marketing expenses?
• Do you have a different strategy you would employ?

Online pureplay retailers face the potential for long-term profitability decreases as the cost of online marketing increases. How would you strategically attack this problem? What marketing tactics would you employ to drive repeat business (which yields a higher gross profit)?

Virtual CEO: Green Mountain Coffee Roasters

Green Mountain Coffee Roasters is a multichannel retailer based out of Vermont. With net sales of more than $200,000,000 in the past year, this business has found a niche in the highly competitive world of specialty coffee. By giving five percent of pre-tax profits to socially responsible initiatives, the business is able to give back while increasing shareholder value.

Four percent of all pounds of coffee sold are via the catalog and online channel. This yields somewhere between five and ten million dollars of sales via the direct channel.

Of interest is a statement in their most recent 10-K statement that the business uses the catalog and website to extend the brand in geographic areas where Green Mountain Coffee Roasters does not have a retail presence.

My question for you, the Virtual CEO, is this: Do you think that online and catalog sales of coffee products represent a good proxy for determining future retail markets? Could a database marketer mine this information effectively, or, do you think these "distance" customers are fundamentally different than the customers who make up the retail segment?

Virtual CEO: L.L. Bean

The Harvard Business Review publishes free weekly podcasts. Podcast number nineteen featured an interview with Leon Gorman, Chairman of L.L. Bean. Mr. Gorman spoke about L.L. Bean's multichannel growth strategy, which includes retail expansion on the East Coast.

Mr. Gorman states that sales via the online channel have exceeded sales in the catalog channel, and that he believes customers need catalogs, websites and retail stores in order to have a comprehensive multichannel shopping experience.

Time for you to play Virtual CEO. If you were CEO of L.L. Bean, and had access to an additional twenty million dollars, how would you invest that money?

Would you mail more catalogs? Would you invest in online marketing? How about traditional advertising channels like television, radio, newspapers, or magazines? Would you build new stores? If you chose to build new stores, would you build them in the Northeast, where L.L. Bean has brand recognition, or would you push the L.L. Bean retail chain to new markets like Chicago, or even Denver?

Realistically, L.L. Bean has maximized its direct-to-consumer audience. If Bean wants to grow, it almost has no choice but to invest in the retail channel. It should be fun to watch the evolution of this business. It's a shame they aren't publicly traded --- if they were, we'd have access to more financial information!