This Week In Business: Zappos Twitter Strategy

Well, you can't throw a Pottery Barn catalog without hitting somebody who promises business success on Twitter.

I find the whole Twitter thing vexing. My own presence (follow me here) finally found a groove ... more than 1,000 followers discussing various questions I ask on a daily basis.

But enough about me. You frequently ask me how you might use Twitter to increase sales.

So why don't we look to the leader, Zappos, to see how their folks use Twitter.

As you may already know, Zappos gives considerable flexibility to employees using social media, and allows you to see what all employees are currently talking about. So let's take a brief look at a few employee comments.


Customer Service --- Click Here For More: @Zappos_Service

• @jefframone Thank you for shopping with us! I hope you enjoy your shoes =)
• @hevipetter Did you know that we also carry handbags to go with your cute boots? http://www.zappos.com/bags
• @trappedinabay Please let us know if you need any assistance! We are here for you 24/7 by calling 1-800-927-7671.
• @kooskoos Did you know that we also sell clothing to go along with your shoes? http://www.zappos.com/clothing
• @Delirium7 I'm sorry the heels didn't work out for you. Please give us a call at 1-800-927-7671 if you need further assistance.
• @kastner We apologize for any inconvenience. That site was just a test and we decided not to go forward with it at this time.
• @drudy We love you too! Thanks for shopping with us!
• @_cyndi I love these shoes! I have the same ones in the White/Carbon/Orchid. Enjoy!
• @denimmafia Actually here is the real link to our sale section :-) http://www.zappos.com/sale
• @marysam I'm sorry that we are currently out of stock in your size. Please DM (direct message) me your email address and I will be happy to help!
• @tenaciouscb We apologize for any inconvenience. Please DM me if you are still experiencing any problems with your account or the site.
• This is Josh signing off and wishing you all a good night! We'll be back here to WoW tomorrow morning!
• Goodmorning Everyone! Tasha here, ready to WoW you this am!

Learn anything from the thirteen tweets outlined here?

Honestly, read the comments. There is nothing magical here. This isn't about Twitter. This isn't about Social Media. This is 100% about human beings offering customer service, about human beings being humble, about human beings selling merchandise. Remember selling? That's our job, as marketers. We are supposed to sell stuff.

And yet, it is the human element of this, it's the service element that may be judged by some to be magical --- not the social media marketing channel. How many of the businesses we work for would be willing to publicly apologize for being out of stock on an item? How many of the businesses we work for would be willing to publicly apologize for testing a new site out and disappointing a customer in the process?

The human element will cause some problems, too. Read a few of the tweets from Zappos employees, tweets that take on a different tone:

• @bassred says "Hey T-Mobile. Now on day five without data service. your live chat is unavailable. thinking customer service is not very important to you."
• @seanyboysp says "At tropical smoothie cafe with the wifey and baby boy.. maverick just loves smoothies haha"
• @graves says "Note to self... don't try to buy Rolo's again from the vending machine"

Oh, you'll read about politics and boyfriends and kids soccer photos and Brett Favre and wars while going through employee tweets. Maybe you are more than happy to allow your employees to share their lives with your customers. Maybe this is shocking to you, and represents the absolute last thing you'd ever do, maybe you think this represents a branding catastrophe.

Remember what we talked about on Monday? When I run Multichannel Forensics and OMS analyses for clients, I continually see that interaction with humans leads to customers with increased long-term value.

Clearly, we focus on channels, like Twitter. But this has nothing to do with Twitter or Social Media or marketing channels. It has everything to do with human beings pleasing customers. What can we learn from their style of human interaction that we might be able to leverage?

Zappos Profit And Loss Statement: 2007 - 2008

Thanks to a tweet from @manross on Twitter, I found the Zappos 2007-2008 profit and loss statement buried deep within documentation from Amazon.com.


Highlights:

Net Sales of $635 million in 2008. If quoted gross sales of a billion are accurate, then the return rate is more than thirty percent, pretty typical for footwear, but crippling to a profit and loss statement.

Gross Profit percentage is about 35%.

Advertising Expense was $72 million in 2008, about 11.4% of net sales. For my catalog audience, pay close attention to this number --- it is far greater than your typical online marketing / advertising percentage, but is far less than the percentage of sales you're spending on catalog marketing. Long-term, the catalog industry will have to become significantly more efficient.

Profit Flow-Through, after backing out advertising and G&A expense is 19%. You can run a profitable business with a 10% or 15% flow-through, but you need tremendous volume and a high level of operational efficiency. Conversely, most businesses I work with (many selling the same product that Zappos sells) generate 25% to 40% flow-through rates. Because Zappos has a comparatively low gross margin rate, they must generate significant sales volume without the aid of any advertising in order to cover this very low flow-through rate. To me, this one metric is the most disappointing thing I've seen in the Zappos business model.

Pre-Tax Profit is 4%, and was 3% the year prior, far lower than what would be posted by a healthy shoe and/or apparel business. Granted, Zappos is early in the life of their business. The low flow-through rate destines Zappos to have mediocre pre-tax profit rates.

All that being said, Zappos is still clearly a success. Because of Amazon's purchase, we finally get to see the warts, and all of our businesses have warts, don't they?

Time for your thoughts. How does the Zappos p&l stack up against your business?

Zappos: Hybrid Mode

Please view slide #14 of the presentation below. Allow me to repeat the message. Please view slide #14 of the presentation below.

Now granted, the data is three years old, but the data represents a CLASSIC DIRECT MARKETING RELATIONSHIP. (assuming they calculate repeat purchase rate the same way most of us calculate repeat purchase rate). Remember, Acquisition Mode happens when your annual retention rate is 1% to 39%, Hybrid Mode happens when your annual retention rate is 40% to 60%, Retention Mode happens when your annual retention rate is 61% or greater. Any business can be run profitably in any mode. Zappos is in Hybrid Mode, just like so many of the businesses we manage.

Project the data out, and you're looking at a direct marketer with an annual retention rate in the mid or maybe upper 50s, with customers ordering between 2-3 times per year. That's the kind of loyalty many of our direct B2C and B2B companies have, businesses that are stuck at $50,000,000 or $125,000,000 a year.

This tells you that, while loyalty and repeat business are important, new customer acquisition is critical. If there were no new customers, you'd see this business erode, dramatically and rapidly.

So, if you want to be like Zappos, and some of you send me e-mails asking me for the secret sauce that allows you to be the next Zappos, go do what they do --- offer a huge # of skus with rapid delivery (and that's key --- get the customer the item tomorrow or Wednesday) for $3 an item and free returns and great customer service and a "Hybrid Mode" annual retention rate and high volume customer acquisition via tens of millions of dollars of annual search marketing spend and social media. This doesn't guarantee profitability, of course. But you'd be like Zappos.

Zappos -- Underground 4 Presentation -- Getting to $1 billion

View more OpenOffice presentations from zappos.

Zappos Map: Actionable Data?

By now many of you have become enthralled with Zappos Map, a real-time image of product sales across North America (tip of hat to The Snow Patrol). The Twitterati are certainly enjoying it, aren't they?

This is one of those projects that gets killed in 99 of 100 companies. How many times have you had an idea like this, only to have the VP of Intergalactic Strategies tell you that the data isn't "actionable"? The leader will badger you ... "who cares that somebody bought the New Balance MX840 in Tuscaloosa in the last thirty seconds ... how is that actionable?" The VP of Intergalactic Strategies strides away from your cube, heading to the all-important "Multichannel Inventory Alignment Task Force Daily Brief" in conference room 6K while you're left to watch Zappos innovate in real time on your 15" CRT monitor built in 1999.

Well, it is actionable. About thirty members of the Twitterati are mentioning the tool to their loyal following of 165 individuals ... each hour. So that's a bunch of free advertising, isn't it? And when you watch the map, you notice that Zappos is featuring seven different items ... and the items are always changing. Zappos found a way to feature merchandise, just like you find a way to feature items in your e-mail marketing campaigns.

Zappos found a way to get content on to your computer screen, they found a way to market directly to you without executing traditional direct marketing. And Zappos, courtesy of a lot of hard work in the world of social media, found an audience willing to share the content --- doing the advertising for them.

Let's consider the opportunities in front of us, before the VP of Intergalactic Strategies asks us to develop a dashboard filled with inventory KPIs.

Zappos: End Of The Innocence

When you finally become profitable (profit built on the backs of people) and can choose between money and people, choose people.

Zappos to reduce workforce by 8%.

In my last post, about Nordstrom, I asked how online marketers would respond to the first downturn they've experienced. Do you innovate, or do you listen to VCs or Wall St., folks who want to protect money more than the people who create money for them?

Maybe folks won't have access to credit, and have no choice but to dump employees to maintain positive cash flow. Regardless, the way businesses (brands) treat human beings is gross.

Zappos Sells Computers

Zappos now sells computers. Is this a smart move, in the spirit of Amazon.com, or something else?

Thanks to the Crave blog for the article, and to Aaron for referencing it.

More On Micro-Channels And Zappos

Zappos, the e-commerce purveyor of shoes, utilizes micro-channels as part of their marketing strategy.

Here's how Zappos leverages Twitter.

And here, Zappos embraces a YouTube channel.

There's the little things they do, as illustrated on Flickr.

Maybe you've seen their ads in shoe trays at the airport?

Zappos will circulate a magalog to 1,000,000 folks in the near future.

They experimented with television ads.

Employees get to share the culture with customers.

Upgrades to the site are tested publicly --- would your IT staff try out a beta site with the public before launching it?

You can look through the comments of this blog post to see what a customer said about Zappos.

And then there's the things they don't brag about, like the kind gesture they gave to this woman.

Our future increasingly suggests that we'll apply several hundred advertising micro-channels to acquire the same number of customers we used to acquire with two or three customer acquisition strategies. These are tactics that we're not entirely comfortable with, tactics that don't have an immediate ROI, but many are measurable. Many of these activities will fail, some will succeed.

We owe it to ourselves to experiment, to try new stuff --- especially now.

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?

Zappos Sales Trajectory And Customer Metrics: 2000 - 2012

Copy this hyperlink if you wish to forward this post about Zappos to your colleagues.

When Jim Novo e-mailed me a link to a Catalog Success article outlining facts provided by Alfred Lin, Chairman/CFO/COO of Zappos, I felt compelled to fit the data into the Multichannel Forensics framework! I love analyzing Zappos. They went from zero to almost a billion in sales in less than a decade, during a time when catalogers openly wonder if they would still be in business without paper-based advertising.

Please click on the image to enlarge it.

Here's the data Mr. Lin volunteered to the attendees of the NCOF conference last week.

2007 Customer Metrics:

• 3.4 million twelve-month buyers.
• 7.6 million buyers, ever.
• $247.06 spend per customer in 2007.
• 75% of sales come from existing customers.
  

Historical Financials:

• 2000 Sales = $1.6 million.
• 2001 Sales = $8.6 million.
• 2002 Sales = $31.9 million.
• 2003 Sales = $70.1 million.
• 2004 Sales = $181 million.
• 2005 Sales = $370 million.
• 2006 Sales = $597 million.
• 2007 Sales = $840 million.
• 2008 Sales = $1 billion (projected).

Given this data, can Multichannel Forensics be used to guesstimate the evolution of the customer file at Zappos? Can we use the guesstimate to forecast future sales at Zappos? Let's try!

Mind you, this exercise is for entertainment and illustrative purposes only.

Key guesstimates:

• 55.5% of last year's buyers will purchase again this year (placing Zappos in "Hybrid Mode").
  
• If one of last year's buyers buys again this year, s/he will spend $365.
• Each new customer will spend about $115 in the year the customer is acquired.
• Lapsed customers have significantly lower purchase rates.

Given these assumptions, and the metrics kindly offered by Mr. Lin, we have a series of customer metrics that have been estimated from this exercise.

• 2000 New Customers = 13,913.
• 2001 New Customers = 50,274.
• 2002 New Customers = 169,013.
• 2003 New Customers = 223,212.
• 2004 New Customers = 863,522.
• 2005 New Customers = 1,104,294.
• 2006 New Customers = 1,501,606.
• 2007 New Customers = 1,575,553.
• 2008 New Customers = 1,620,025 (Kevin's Forecast).

New customers fuel future loyal customers. Watch how the estimate of twelve-month buyers grows by year.

• 2000 12-Month Buyers = 13,913.
• 2001 12-Month Buyers = 57,966.
  
• 2002 12-Month Buyers = 203,263.
  
• 2003 12-Month Buyers = 345,442.
  
• 2004 12-Month Buyers = 1,089,198.
  
• 2005 12-Month Buyers = 1,773,903.
• 2006 12-Month Buyers = 2,674,787.
• 2007 12-Month Buyers = 3,400,963 (total buyers, ever, = 7.3 million, I got within 4%, sorry).
  
• 2008 12-Month Buyers = 4,047,348.

Of course, new customers drive file growth. Here is the number of last year's buyers who purchase again this year.

• 2001 Repurchasers = 7,722.
• 2002 Repurchasers = 32,188.
• 2003 Repurchasers = 112,811.
• 2004 Repurchasers = 191,720.
• 2005 Repurchasers = 604,505.
• 2006 Repurchasers = 984,516.
• 2007 Repurchasers = 1,484,507.
• 2008 Repurchasers = 1,887,534.

And then we have customers who did not repurchase a year later. These customers might purchase in future years. Here's how this segment of customers contributes to the customer file.

• 2002 Lapsed Buyers Electing To Purchase Again = 2,062.
• 2003 Lapsed Buyers Electing To Purchase Again = 9,419.
• 2004 Lapsed Buyers Electing To Purchase Again = 33,956.
• 2005 Lapsed Buyers Electing To Purchase Again = 65,104.
• 2006 Lapsed Buyers Electing To Purchase Again = 188,665.
• 2007 Lapsed Buyers Electing To Purchase Again = 340,904.
• 2008 Lapsed Buyers Electing To Purchase Again = 539,788.

These dynamics yield a percentage of sales coming from existing customers. Here's how this metric evolved:

• 2000 = 0% From Existing Customers.
• 2001 = 33% From Existing Customers.
• 2002 = 39% From Existing Customers.
• 2003 = 63% From Existing Customers.
• 2004 = 45% From Existing Customers.
• 2005 = 66% From Existing Customers.
• 2006 = 71% From Existing Customers.
• 2007 = 78% From Existing Customers.
• 2008 = 82% From Existing Customers.

Clearly, I missed this metric by three points. Given how little data Zappos offered, it wasn't easy to get this close!

Here's an estimate for sales per customer, probably not terribly accurate historically, but close in 2007.

• 2000 Sales Per Customer = $115.
• 2001 Sales Per Customer = $148.
• 2002 Sales Per Customer = $157.
• 2003 Sales Per Customer = $203.
• 2004 Sales Per Customer = $166.
• 2005 Sales Per Customer = $209.
• 2006 Sales Per Customer = $223.
• 2007 Sales Per Customer = $247.
• 2008 Sales Per Customer = $262.
  

Basically, the data suggest that Zappos had a massive customer acquisition effort from 2004 - 2006, and that effort is paying off in 2007 and 2008. The data suggest that sales growth was fueled by new customers from 2000 - 2004, and has been fueled by loyal customers since.

The data also suggest that Zappos might be reigning in increases in customer acquisition spend, or has hit a wall at how many new customers can be profitably acquired. This stalls future growth, with the brand forecast to grow by a one-hundred-fifty million to two-hundred-million a year, per year, over the next four years.

The framework allows me to guesstimate future value of each newly acquired customer.

• Sales In Acquisition Year = $115.
• Sales In First Full Year = $203.
• Sales In Second Full Year = $164.
• Sales In Third Full Year = $141.
• Sales In Fourth Full Year = $124.
• Sales In Fifth Full Year = $110.
• Sales In Sixth Full Year = $98.
• Sales In Seventh Full Year = $88.
• Sales In Eighth Full Year = $78.
• Sales In Ninth Full Year = $70.
• Sales In Tenth Full Year = $63.

The estimated $1,138 of future sales (over ten years) provides Zappos with an enormous opportunity to lose a ton of money per customer they acquire, because the customer will pay back so much in the future. This simulation suggests Zappos may have done a comparable analysis at some point in the past, dramatically ramping-up customer acquisition spend.

Again, this exercise is for entertainment and illustrative purposes only. I plugged very general assumptions into the Multichannel Forensics framework, yielding a profile of the brand that directionally illustrates future trajectory (assuming a 2% CAGR in new customers).

• Projected 2008 Sales = $1,060,000.
• Projected 2009 Sales = $1,262,831.
• Projected 2010 Sales = $1,451,895.
• Projected 2011 Sales = $1,626,714.
• Projected 2012 Sales = $1,787,229.
  

You, too, can use the Multichannel Forensics framework to build simulations like this!

Zappos CEO Blog And Other Zappos Micro-Channels

In case you're wondering how the CEO of a brand that grew from $0 to $800 million in a decade views the world (without the use of catalog marketing, folks), give the Zappos CEO Blog a try, written by Zappos CEO Tony Hsieh.

URL: http://blogs.zappos.com/blogs/ceo-blog.

Zappos hosts a series of blogs / micro-channels:

• Inside Zappos.
• The Zappos Running Blog.
• Couture Blog.

As you probably already know, micro-channels help you in Google natural search results, driving visitors to your site, resulting in increased organic demand. Hint: Organic demand, demand generated without marketing expense, is a REALLY GOOD thing!!

Retailers Using Social Technology, Community, And RSS

In addition to the Saks Video Catalog, many retailers are using social technology, community, and RSS feeds in interesting ways. Many in our catalog audience are looking for new ways to have a relationship with customers. Let's review a small sample of brands using social technology in one way or another.

Urban Outfitters has an interesting site that features articles, videos, an RSS feed and a MySpace page.

Neiman Marcus communicates fashion via their InSite Blog.

Ice.com's Just Ask Leslie Blog combines customer questions and short features.

eBags uses bookmarks to tag items you are interested in.

Mac Cosmetics, a $274 million division of Estee Lauder, has customers who are literally inventing products for the brand, sharing the ideas on YouTube. Their product development folks should take a peek at this! My wife found the video when searching for ideas on how to store Mac products. Take a peek at YouTube to see how other folks are doing marketing and product demonstrations for you ... heck, this young lady has almost 14,000 views.

Nordstrom has a MySpace page for their BP division.

Paperspine, an online book rental brand, hosts a blog about books.

Zappos is using Twitter to allow folks to communicate about the venerable online shoe brand.

Patagonia hosts The Cleanest Line, a blog for employees, friends, and customers.

Overstock.com offers a diverse array of community-based options.

Crutchfield has a community section on their website.

Burpee Seeds features their RSS feed on the homepage.

Hallmark has an interesting blog for their Shoebox division.

Here's the Shutterfly community.

Use the comments section to share other ways that retailers are using social technology, community and RSS feeds to partner with consumers.

Profit Week: Do You Do The Marketing For Your Competitor's Brand?

This quote comes to us from a seasoned Chief Merchandising Officer:

"This is what bothers me. I send a catalog to my loyal customers. One of my customers receives the catalog, sees something she likes, then gets on the internet and visits www.google.com. She keys in the description of the items she's looking for, compares prices across a half-dozen competitors, then buys a comparable item at a lower cost from a competitor. All of a sudden it hit me. My catalog response rates continue to decrease, and they decrease because I am out there doing advertising for my competitors. I send a catalog, and my competitors benefit from it. How the heck do I fix that problem? I don't offer the lowest cost or fastest and most inexpensive delivery options."

In 1995, a direct marketer had a moat around their brand. The cataloger delivered a catalog to your home. If you didn't receive catalogs from competitors, you couldn't compare similar items across competitors. You didn't truly know if you were "getting the best deal".

Every week, a catalog executive tells me that s/he is experiencing lower response rates, coupled with increased average order values. In other words, a catalog used to deliver a 4% response rate and a $100 average order value. Today, the same catalog (measured across all channels) delivers a 2.5% response rate, and a $130 average order value.

The price-sensitive customer is choosing to shop elsewhere, lowering the overall response rate.

The price-sensitive customer spends less per order. In other words, you're losing a quarter or more of your orders, orders that averaged $60 each. This appears to drive up your average order value.

And here's the danger. You analyze what is selling, and notice that bigger ticket items are selling best. So you shift your merchandise assortment toward the bigger ticket items in a Darwinian manner. This further drives down future response rate.

We're told we have to be "multichannel". But being multichannel can have dire consequences. For many catalogers, catalog advertising is driving sales away from the brand, to lower-cost competitors.

What follows is my opinion.

A great re-shuffling of brands is happening in the wild west known as the internet. The "middle ground" that was so beneficial to catalogers in the 1980s and 1990s is being eliminated. Customers are moving in one of two directions. The majority are migrating toward the lowest-cost competitor. In other words, you mail a catalog, your customer sees something she likes, then uses the internet to find the company that offers a comparable item for the lowest cost and fastest delivery. The low-cost, fast-delivery brand remains profitable by transacting numerous small-profit orders.

A minority of customers are moving in the exact opposite direction. They want unique merchandise, something that can't be easily found elsewhere. These customers are willing to pay a premium to have something that few have, or want something from a highly targeted niche. Catalogers and e-commerce pureplays in this space enjoy fat gross margins, and can remain profitable.

In other words, being "multichannel" is good if you are at the low-cost, fast-delivery side of the spectrum, or is good if you are at the exclusive-merchandise, high-gross-margin side of the spectrum.

Those of us who are stuck in the middle are doing free advertising for the low-cost, fast-delivery brands. A brand like Footsmart sends a catalog, offering shoes at fair prices. Then the customer compares prices plus shipping plus handling:

• A Footsmart $100 pair of shoes will cost $114.99 for 6-10 day delivery, or $134.98 for next day delivery.

• The same item at Zappos will cost $103 and will arrive tomorrow.

Long-term, Footsmart cannot possibly compete online against Zappos. The harder Footsmart tries to produce spectacular catalogs, the more business they drive to Zappos as customers use the internet to search for comparable merchandise.


Profit Week Tip: Long-term, the catalog or multichannel brand must decide what it wants to be. Does it want to be the low-cost, fast-delivery option? Or does it want to be the purveyor of exclusive products that cannot be found elsewhere? In my opinion, the cataloger or multichannel brand cannot survive being somewhere in-between. What we are seeing today is the slow and painful death of brands stuck in the middle of this spectrum. If you feel you're stuck in this powerplay, run a Multichannel Forensics analysis across low spend, average spend, and high spend customers. See if you're losing the bottom of your customer file, a symptom of losing customers to low-cost, fast-delivery brands.

Zappos: The Legend Continues

At 8:40pm Wednesday evening, I ordered a pair of shoes from Zappos.

At 5:00pm Thursday afternoon, my pair of shoes arrived at my front door. Free shipping, free returns (although we know they embed a $3 shipping charge in the price of the shoe, and we willingly accept that for this kind of customer service).

In three years, when we in the "multi-channel" (aka catalog) industry are no longer able to send catalogs on a mass-scale to potential (and many existing) customers, we'll need to consider a new business model.

We'll take the fifty percent of our catalog budget that we're no longer allowed to use on prospecting and online customer mailings, and we'll split it two ways.

First, we'll use half of that money on online marketing strategies.

Second, we'll upgrade our distribution center capabilities, and we'll eat the $14.95 we charge for shipping today, instead moving much closer to a business model that Zappos utilizes.

We should play out these scenarios in 2008, using Multichannel Forensics to understand what our future might look like. We have an opportunity to be proactive.

We should pay close attention to Zappos. They built a half-billion-dollar-plus business in less than a decade, without catalogs. They did it by treating the customer extremely well.

Zappos And Repeat Customers

A quote from Tony Hsieh of Zappos, cited in Catalog Success:

"When we first started, we did what ever other dot-com did: Spent a lot of money on ad campaigns to acquire as many customers as possible. This is a good idea if your goal is to lose as much money as possible. Instead, we started focusing on repeat customer behavior." Zappos.com increased the percentage of customers who buy again within the next 12 months from 20.5 percent in 2001 to 51.3 percent in 2006.

Recall that in the Multichannel Forensics framework, a 51.3 percent annual repurchase rate places Zappos in "Hybrid Mode". This means that Zappos has to balance customer retention and customer acquisition activities, in order to be successful.

It is easy to move the annual repurchase rate from 20 percent to 50 percent in a new business. Once the business model is established, the annual repurchase rate is unlikely to ever move more than +/- 10 percentage points in a year.

Which means that, in order for Zappos to grow, the strategic focus swings back to ... customer acquisition!

Free Shipping

Every once in awhile, marketing experts point out the problems with shipping and handling costs. Granted, it might not be fair to charge $8.00 shipping on a $2.00 item. Now, let's review some facts.

Fact: It costs money to ship merchandise to a customer. Think about the last time you sent Christmas gifts to your family in Florida, or Oregon. Did you get to do that for free, or did the USPS, UPS or FedEx demand to cover their costs and earn a profit to ship your gifts to your family?

Fact: Many companies profit from shipping and handling. Obscene profit from shipping and handling probably is wrong, we can all agree on that. Let me ask you a question ... is it wrong for Apple to markup the iPhone at levels far greater than competitors markup their phones? Brand experts seem to love the fact that Apple really hammers the customer because they have 'brand equity'. Every company picks and chooses how it prices items. Some companies make their money on gross margin, others on shipping and handling, others on volume. The customer ultimately decides 'what is right', she votes with her pocketbook.

Fact: Customer loyalty is fickle. Really, really fickle. Pundits and bloggers proudly proclaim how they will change their own behavior and no longer support these awful companies that charge for shipping and handling. Customers sometimes act differently.

• In 1999 at Eddie Bauer, we tacked on a $3.00 'handling' fee, on top of wildly expensive shipping fees. Customers never flinched. A few complained. Annual online/catalog retention rates did not change. Customers did not change their behavior.
  

• In 2005 at Nordstrom, we reduced shipping and handling from an average of $10 to $17 per order, down to a flat fee of $5.00 per order. That seems reasonable, doesn't it? Go ask somebody at Nordstrom if annual online/catalog retention rates increased, stayed the same, or decreased.
  

Fact: Zappos has free shipping, but Zappos prices items at a more expensive level than competitors. We love to tell the story that Zappos has free shipping. Yet, the items they sell cost about $3.00 more than at comparable online retailers. Buy five pair of shoes, and you're paying $15.00 more than you are at Macy's. We can probably all agree that a $3.00 fee per item is a fair cost to ship an item, but it isn't truly "free shipping", is it?

Free shipping is a shell game. A brand that truly leverages free shipping is hoping that the increased brand loyalty offsets the loss in shipping/handling revenue. As customers, we get to vote for our favorite scheme with our pocketbooks.

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?

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.

The Marketing Digital Divide And The Catalog Industry

In the first quarter of 2007, sales of music compact disks declined by twenty percent verses last year, as consumers continue to abandon album-based compact disks in favor of ala-carte purchases/sharing of digital music files.

The music industry strongly believes that free file sharing is responsible for the decline in CD sales. The labels are flexing their muscles where they can, to maintain their system of monetizing music even if it means heavily penalizing a new channel where music fans are enjoying music.

The crash of television and radio, the ascension of the internet, and the convenience of the iPod changed the music industry forever. Multichannel Forensics suggest that consumers "transfered" their behavior from CDs to MP3s during the late 1990s through the past few years.

Once consumers landed in a new world of music, they stayed there. In Multichannel Forensics, we call this "isolation". No matter how hard the music industry tries to bring consumers back to the old method of monetized music, the effort is futile. Consumers have moved on.

As consumers, we have a unique, God-given ability to identify trends in the marketplace. We can literally see the future, and react accordingly.

As business leaders, we have a unique, God-given ability to identify trends in the marketplace. We can literally see the future. However, we don't react accordingly. Instead, we dig in our heels, and demand that consumers and business partners come back to our way of thinking.

My beloved catalog industry falls into this category. Our customers can see the future, and are anywhere between 20% and 80% of the way toward evolving their behavior. At this time, customers are generally in "equilibrium" --- the state where they go back and forth between channels. They use catalogs and purchase over the telephone. They use catalogs and purchase on our websites. They ignore our marketing activities, use Google, and purchase on our sites. The combine our marketing activities with Google, and purchase on our sites.

Google recognizes this, and gobbles up properties that allow them to have an end-to-end marketing relationship with our future customers. Their version of an end-to-end marketing relationship does not include paper.

Over the next five years, our catalog customers will leave "equilibrium" mode, shifting to "transfer" mode. They will define a new way of interacting with brands, a new way of shopping. When that happens, what will become of what has been known for more than a hundred years as "the catalog industry"?

We can dig our heels in, and continue lauding the importance of sending paper to our customers as a way of generating sales. In this process, we must fight postal reform.

We can also give up. We can sell our businesses, getting out before big changes happen.

Or we can build a five-year plan for the future of our industry. We can be like a pilot, who takes an airplane down from 30,000 feet to a gentle landing. We can work with our customers as we reduce our dependence upon catalogs, building an infrastructure that allows customers to pull information from us.

We must thoroughly evaluate how Zappos, Endless, Piperlime, Blue Nile, and Amazon drive sales without paper. We need to emulate what they do well. We need to use our experience to capitalize on what they don't do well. We must chart a path to the future.

Folks in the music industry are actively talking about a path to the future. It's our turn to do the same. It will require a leap of faith, right over that pesky Marketing Digital Divide.

L.L. Bean

Let's fast forward to January 1, 2009. Mailing catalogs is now cost-prohibitive, due to a 300% increase in postage brought on by another round of postal reform.

You're an executive at L.L. Bean, the venerable catalog giant located in beautiful New England. You just completed fiscal 2008, a year in which you drove $900,000,000 in net sales via your website, and $600,000,000 via the telephone. Maybe you spent $250,000,000 marketing catalogs to your customers.

Take away the catalogs, and the expense associated with them.

Here's a series of questions for you:

• Could you re-allocate $250,000,000 via online marketing? Where would you spend it?
• Do you have any confidence that e-mail could replace catalog as the primary sales driver? How would you change your e-mail strategy?
• Your website generated $900,000,000 in net sales in 2008. What is your forecast for web sales in 2009, sans catalog?
• You generated $600,000,000 in net sales in 2008 via the telephone --- folks who read the catalog, and called a sales associate to place an order. Without a catalog, what is your sales forecast for 2009, over the telephone?
• You had 115,000,000 website visits in 2008. How would you change your marketing strategy to capitalize on this enormous informational resource known as www.llbean.com? How much would your traffic change if your catalogs didn't exist?

Of course, the USPS isn't going to make catalog marketing impractical in 2009.

That being said, if you went through this exercise, could you recover your sales via the marketing techniques that Amazon or Zappos or Blue Nile uses --- companies on the other side of the Marketing Digital Divide?

At minimum, your executive team should have answers to these questions.

The Role Of A Website In A Website-Only Business

Business is fun when all sorts of different strategies have a chance to succeed.

In the last month, I've probably heard at least a dozen highly-qualified, experienced and bright leaders suggest that catalogs are responsible for driving at least 75% of all the sales that a website receives.

If we listened to all of our industry leaders and vendors, we'd believe that a web-only business strategy could not possibly work.

I really enjoy looking at the business model being managed by the folks at Zappos. This web-only strategy is responsible for close to a half-billion dollars of gross shoe sales, during 2006.

Does that number resonate with you? This company is less than ten years old, does virtually no traditional marketing, no catalog marketing, and generates in the neighborhood of a half-billion dollars of gross sales. Half-billion.

If you are a catalog industry leader or vendor, how do you explain this? How do you defend the catalog model of advertising in light of these results? Please leave your comments below.

Some folks will tell you that Zappos has yet to deliver a profit, and suggest that is proof that a web-only marketing strategy cannot work.

If a web-only marketing strategy did not work, Zappos would not generate close to a half billion dollars of gross sales. Customers are clearly endorsing a web-only business strategy. Management needs to figure out how to make money from a half billion in gross sales.

With just one channel, management needs to determine whether they are in Retention, Hybrid or Acquisition Mode. But more importantly, management decided that regardless of the mode, they need to GROW. You can only grow that fast by rapidly acquiring new customers. Zappos is spending a lot of money to acquire as many customers as possible. They succeed in doing this by offering free shipping, and now, by offering free overnight shipping. They lure customers via online advertising.

Zappos uses every square inch of the homepage. In fact, I counted more than 160 hyperlinks on the homepage alone. This is not a clean, easy to read, brand-friendly presentation. Obviously, the customer likes it. Think of the hundred years of brand heritage my former employer, Nordstrom, has in selling shoes. How does that stack up online, verses Zappos, with no brand heritage?

Multichannel Forensics come into play in a web-only business when evaluating merchandise. Zappos has eight merchandise divisions featured on the bottom of the page. It is highly likely that one of those divisions drive the lion's share of customer acquisition --- fueling future sales in all other merchandise divisions.

It would also be interesting to see how much demand is generated by the top ten percent of the 151,000+ styles they maintain on their website.

In a web-only business, the website is everything --- getting people to visit the website also means everything. I've observed comments in blogs where it appears Zappos employees leave hyperlinks to various products. Marketing an online-only business requires a completely different mindset than the mindset catalog/retail leaders have. It requires a different version of marketing DNA. I'm not convinced a lot of prior catalog/retail leaders have what it takes to run an online-only business strategy.

The online-only business model requires a fierce focus on new customer acquisition, and a shift in Multichannel Forensics from how channels interact with each other to how merchandise divisions interact with each other. Once the leader understands how merchandise divisions interact with each other, keyword/search strategies can be employed that maximize customer acquisition opportunities.

Your turn ... why is Zappos successful? If pundits continue to harp on multichannel strategies, why do customers flock to Zappos, a single-channel brand?

E-Commerce: Order Taker, Or Demand Generator?

I've read through three presentations in the past week, all written by folks with a strong catalog heritage.

Each presentation stated that websites are not capable of generating demand on their own. Instead, some sort of marketing must happen to drive the customer to a website.

What do you think of this hypothesis? Do websites generate their own demand? Or, are websites helpless tools that require marketing to get the customer to visit the website?

Or, do you fall somewhere in-between, rooting for a business model like Zappos?

Victoria's Secret --- Free Shipping And Free Returns On Pants

Varien.com talks about Victoria's Secret, and their free shipping and free returns promotion on pants. Kudos to Victoria's Secret for trying an interesting promotion that can benefit customers. It takes courage to incur an average expense of around $10 per order, without $13.95 from the customer to offset the expected expense.

Many multichannel retailers make money on shipping and handling. Zappos, Endless.com and Piperlime are essentially applying enormous price pressure on all multichannel businesses.

This long-term pricing pressure will cause multichannel retailers to reduce expenses elsewhere.

The very same vendor community that is unified in its fight against the USPS will fall victim to the eventual cost-cutting that free-shipping/free-returns is guaranteed to bring to multichannel retailing.

J.C. Penney CEO, Web 2.0, And Multichannel Forensics

DMNews reports that "multichannel" is the key theme at Shop.org's FirstLook show.

Of interest is the comment from J.C. Penney Chairman/CEO Mike Ullman, who says of direct marketing, "We see the three channels getting more and more blurred. The big book is becoming less important, because the big book is online."

Small businesses and growing businesses need catalogs, because the print version of advertising is still the most cost-effective way to grow a direct-to-consumer business.

However, large businesses like J.C. Penney are going through two dramatic transformations that we all need to keep an eye on.

The first transformation is the death of the telephone/paper relationship, being replaced by e-commerce. This has been happening in earnest since about 1999. J.C. Penney's direct business transitioned this year to more than fifty percent online. Once the online channel is more than fifty percent of the direct business, CFO's become very curious about all those dollars being spent on paper.

The first transformation (telephone/paper to e-commerce) impacted catalogers the most.

The second transformation is just beginning to happen, and may change our businesses far more than e-commerce. The second transformation is the shift in the online channel from e-commerce to experience.

The second transformation (e-commerce to experience) will impact retailers and online pureplays the most. Just because we can purchase merchandise online doesn't mean we want to purchase merchandise online. Retailers who can, in some way, re-create the in-store experience, or significantly complement the in-store experience in a virtual world, will have a huge advantage over online pureplays and online/catalog businesses, who do not have an experience-based channel to please customers with.

The recent bare-knuckled, bloody fist fight between Endless.com and Zappos.com illustrates the desperation online pureplays are feeling. As the second transformation (e-commerce to experience) integrates with the retail experience, businesses like Zappos compete the only logical way they can --- by offering free shipping. Endless trumps Zappos by offering free next-day shipping. Zappos matches Endless, then, Endless trumps Zappos by offering free next-day shipping along with a five dollar rebate.

Websites were constructed to be static, read-only experiences. We built a ton of infrastructure to make e-commerce possible. Over the next decade, this read-only experience will likely be replaced by an experience-based channel. Web 2.0, blogs, wikis, YouTube et.al are the embryonic representation of this transformation.

This is really going to be fun to watch!

This transformation really requires the implementation of multichannel forensics. All businesses with a website must have intimate knowledge of how their customers interact with products, brands and channels.

Endless: A Shoe And Handbag Business Courtesy Of Amazon.com

Amazon recently unvieled a new e-commerce business called Endless. Featuring fashionable handbags and shoes, Endless uses a new hook to compete against multichannel retailers like Macy's and online pureplays like Zappos. The hook: Free Next Day Shipping!! Order an item at 1:00pm on a Tuesday afternoon, and you'll have it on Wednesday.

In case you haven't walked into your local UPS store, attempting to ship a product cross-country via next day air, the proposition is not inexpensive. How can this business compete? The following numbers are for illustrative purposes only --- the numbers are not intended to reflect absolute reality at any of the retailers in the example. However, the numbers should be adequate for a directional argument.

Let's assume you are an aspiring woman hoping to purchase the Jessica Simpson Dawson Satchel via an online business. You narrow your choices down to Endless, Zappos and Macy's.

Assuming you live in a state that has a six percent sales tax, the total price for the same item, including tax and shipping, is $248 at Endless, $251.95 at Zappos, and a whopping $281.91 at Macy's. The item will arrive tomorrow from Endless, in three to five days from Zappos, and in five to eleven days from Macy's.

Given these choices, the logical choice is for the customer to purchase the item at Endless.

Can Endless make money doing this? It is possible. At the end of this post, I include a sample profit and loss statement for each company.

The punchline is this: In order for each company to generate the same level of profit from this item, Endless needs to sell 1,000 units, Zappos needs to sell 741 units, and Macy's needs to sell 491 units. If Amazon has efficiencies that make their expense structure cheaper than Zappos or Macy's, the number of units decrease.

Amazon is betting that the Endless business model will cause customers to be 30% more productive than Zappos, and 100% more productive than Macy's, using these assumptions. This gets Endless to a break-even scenario, most likely, on a fixed-cost basis, and generates the same number of dollars of variable profit as Zappos and Macy's.

What do you think? Do you think customers will flock to Endless to take advantage of free next day shipping? Who will be hurt more by this strategy, Zappos, who is directly competing on total price, or Macy's, who has a retail channel that essentially provide "free shipping same day"??


Sample Profit And Loss Statement

Jessica Simpson Dawson Satchel Price Elasticity And Profitability
	Endless.com	Zappos.com	Macys.com
Item Price	$248.00	$251.95	$248.00
Shipping/Handling	$0.00	$0.00	$17.95
Salex Tax (6%)	$0.00	$0.00	$15.96
Total Cost	$248.00	$251.95	$281.91
Delivery Time	1 Day	3 - 5 Days	5 - 11 Days
Estimated Units	1,000	741	491
Demand	$248,000	$186,695	$121,768
Net Fulfilled (90% of Demand)	$223,200	$168,025	$109,591
Less Returns (30% of Demand)	($66,960)	($50,408)	($32,877)
Net Sales	$156,240	$117,618	$76,714
Gross Margin (50% of NS)	$78,120	$58,809	$38,357
Less Marketing	($18,000)	($18,000)	($18,000)
Less Picking & Packing (20% of NS)	($31,248)	($23,524)	($15,343)
Shipping Expense/Item	$17.50	$8.00	$5.00
Less Shipping Expense	($17,500)	($5,928)	($2,455)
Plus Shipping Income	$0	$0	$8,813
Variable Operating Profit	$11,372	$11,357	$11,373
Profit as a % of Net Sales	7.3%	9.7%	14.8%
Profit per Item Sold	$11.37	$15.33	$23.16
Ad to Sales Ratio	11.5%	15.3%	23.5%