Part 4: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

For a recap of this series, please read part one, part two, and part three. For a view of the simulation tool used to create the scenarios in this series, click on the Multichannel Forensics Two Channel Simulation Link.

This exercise was created to give everybody, catalogers, vendors, customers, blog participants and third parties, an opportunity to understand how actual customers behave based on a simulation of actual customer behavior. The simulation ends speculation and opinions. The simulation simply illustrates how customers behave, and the business consequences that management may eventually have to deal with.

There is no getting around the fact that phone and mail volume are crippled when catalogs are not mailed. Many jobs would be lost if catalog mailings were limited only to loyal customers. Good, hard working call center staff, distribution center staff, and folks who make a living working in the catalog ecosystem (printers, co-ops, list brokers and managers, paper reps, USPS, merge/purge vendors, contact management software vendors), will have their lives interrupted if things ever get to this point. In many ways, this four part series should encourage the cataloger to partner with third party opt-out services in an effort to stem an outcome that is this bleak.

Remember, there is light at the end of the tunnel. Notice that at the end of the simulation, in years four and five, sales rebound, and profit increases. There is hope! Catalog management can follow a prescription to make sure that if things ever get bleak, the business is insulated from the dire situation illustrated in this series.


Catalog Management Prescription To Avoid A Dire Outcome

It is better to partner with third party opt-out services now than to deal with the dire consequences of this simulation later.

Test significant increases in online marketing NOW! See how far you can push the envelope in e-mail marketing, affiliate marketing, shopping comparison sites, portal advertising, banner/ppc advertising, paid search.

Do everything possible to make your site natural/organic search friendly. Contact our friend Alan now, and have his organization help you with natural/paid search strategies that insulate you from tough choices associated with the long-term prognosis of catalog marketing. His catalog marketing experience is very beneficial for making the transition from catalog to online marketing.

Test not mailing catalogs for a quarter to various segments of your customer file. At the end of the quarter, run matchback analytics on the mailed group, and the holdout group. Truly learn what will happen to your business if you were not allowed to mail catalogs.

Run Multichannel Forensics simulations (there are free links on the homepage of the blog), so that you know the long-term trajectory of your business. You may find that your phone/mail customers are very willing to shop online if not mailed catalogs, which would be highly beneficial to you!

Cultivate organic business. This is easier said than done, but is means EVERYTHING to your business. Organic business happens when customers purchase from your brand because they love you, not because you advertise to the customer. Organic e-commerce sales protect you from any catalog or online advertising issues. Organic e-commerce sales are highly profitable. In this simulation, had the catalog brand had significant and growing organic e-commerce sales, the outcome wouldn't have been as dire.

Be proactive! Test everything now! There is hope!

Free Tip: Customer Habits

It probably won't surprise you to learn that you interact with posts that have the word "free" in the title at least three times as much as you interact with ordinary posts, ordinary posts that also offer free information.

We are conditioned to respond to certain words, perceiving that some words are more valuable than others.

Our customers are conditioned to certain behaviors as well. Once the customer gets in a habit, the customer tends to maintain the habit.

Let's look at two examples of customer habits.


Catalog vs. Internet Buyers

I am most often asked by catalog marketers how they can minimize catalog expense while maintaining sales. One way is to simply look at customer habits.

Step 1: Retrieve the channel of the last four purchases placed by your customers. Categorize each purchase by channel.

Step 2: Measure the percentage of customers who purchased via the internet or catalog channel in their most recent purchase as a function of the channel used in the past three purchases. You are likely to see several patterns:

• Customers who placed their last three purchases via the phone/mail channel probably have a 90% chance of placing their next order via the phone/mail channel. Guess what? These customers need catalogs. This works for both you and your customer. You love mailing catalogs, it is a habit of yours. Your customers love buying from catalogs, it is their habit.
  

• Customers who placed their last three purchases via the online channel probably have a 90% chance of placing their next order via the online channel. Guess what? These customers probably don't need as many catalogs (if any). Free Tip: Aggressively test contact frequency within this audience. Save yourself considerable expense and increase profit. Sound good?!
  

• All other customers are in a state of transition. Pay attention to the customers who placed their past two orders within the same channel. These customers are about to form a habit.

E-Mail Responders vs. Internet Visitors

If we believe that e-mail marketing is relevant, then we should participate in the identification of customers who visit our websites because of e-mail marketing.

Take the concepts outlined for catalog and online buyers, and apply them to those who visit your website. If the past three visits happened because of e-mail marketing, you have an engaged customers who is in the habit of using e-mail marketing to interact with your website. Imagine the potential that exists in this relationship.

If your e-mail marketing falls upon deaf ears, then you have a customer that gave you an e-mail address for unspecified reasons, but is not in the habit of visiting your website due to e-mail marketing.

When this happens, what is our response? We try to FORCE A HABIT upon this customer, don't we? We demand that the customer respond to our own marketing habits, we go to great lengths to change the habits of the customer. Will you change your habits in exchange for free shipping on orders over $175? No? Ok, will you change your habits in exchange for free shipping on all orders? No? Ok, will you change your habits in exchange for free shipping on items that have been discounted by twenty percent? And on and on we go.

And then we get frustrated with the fact that our customer base will only respond to discounts and promotions in the subject line of an e-mail.


The Secret Sauce, Your Free Tip:

We marketers experience success when we work within the naturally occurring habits our customers already exhibit. All too often, we seek to change habits, and impose behavior upon customers. Segment your customer base by customers who exhibit consistent habits, and market to the strengths of your customer base.

E-Commerce And Catalog Management Case Study: Managing Details

Please click on the image to enlarge it.

Yesterday, we demonstrated how the little details make a big difference in the profitability of an e-commerce or catalog brand.

Unfortunately, few of us get to be a CEO, few of us get to learn this valuable lesson.

In our example, there are four metrics that require significant attention. Let's review each metric.


Merchandise Fulfillment Rate

This rate represents the percentage of merchandise a customer asked for that the merchant was able to deliver to a customer. Take a customer who orders over the telephone. She asks for three items, but only two are available, one item is sold out. The merchandise fulfillment rate is 2/3 = 67%.

The CEO uses this metric to understand how effective the inventory management team is at satisfying customer demand. If an item sells out, and the inventory manager is somehow able to procure additional merchandise, then everybody benefits.

There are problems with this metric. When business is bad, merchandise is always available. When business is great, merchandise is never available! So to some extent, the metric has an inverse relationship with brand success.

Online brands often fail to understand the importance of this metric. Customer advocates preach that online brands should "pull down" items that are sold out, so that the customer is not disappointed. It's great that a customer should not be disappointed, but it is terrible for next year's customer, because the inventory manager doesn't learn how much s/he "could have" sold.


Return Rate

Return rate measures how much merchandise is returned to the brand by the customer. This metric plays a disproportionate level of influence in the profitability of an e-commerce or catalog brand. A new CEO will look into different ways that return rates can be lowered. Are there indirect reasons why the rate increased, like merchandise preference skewing from low-returns items to high-returns items? Or are there direct reasons why the rate increased, like quality being lowered in order to improve gross margin?

Each brand has a return rate that is typical for the business model the brand manages. Within this range, brands can succeed or fail. The new CEO will try to eliminate the failures in returns, since every item that is not returned drives increased profit.


Gross Margin

Gross margin represents the difference between what a customer paid for an item, and the cost the brand paid for the item. Take a $100 item that the brand paid $40 to acquire. The gross margin is (100 - 40) / (100) = 60.0%. Now, take a $100 item that is on sale for $60. The gross margin is (60 - 40) / 60 = 33.0%.

Gross margin has a disproportionate influence on the profit and loss statement. When a business is failing, the CEO is required to liquidate or discount merchandise, in order to get rid of it. Consequently, gross margin will be low. When a business is succeeding, it can charge a premium for merchandise, driving up the gross margin.

Gross margin is also a reflection of the ability of the inventory management team to accurately forecast sales trends. When the inventory management team buys too much merchandise, regardless of business trends, merchandise must be liquidated, lowering the gross margin rate.


Pick / Pack / Ship Expense

This metric does not receive enough attention, yet is also important to the profitability of a brand.

This metric is defined as the cost to pick, pack and ship merchandise to a customer as a percentage of net sales. For instance, if a brand spends $10,000,000 delivering merchandise to your home, and generates $80,000,000 net sales, the rate is (10,000,000 / 80,000,000) = 12.5%.

Outstanding catalog and e-commerce brands drive this rate down relentlessly, via automation and efficiency. Other brands look for low-cost solutions, or look for shipping and handling revenue to offset delivery costs. Ultimately, automation and efficiency result in lower rates, and increased profit.


The new CEO will focus on these four metrics, seeking to drive all of these metrics toward historical best performance. The best leaders realize that as much as half the reason a catalog or e-commerce brand fails is due to mismanagement of these four simple metrics.

E-Commerce And Catalog Management Case Study: Does Operational Management Matter?

Please click on the image to enlarge it.

The purpose of this series is to view a broken e-commerce/catalog business from the viewpoint of a new CEO.

Recall that this business has largely been mediocre or unprofitable during the past five years, resulting in the overhaul of the management team.

A new CEO needs to quickly assess several factors, many of which we'll discuss in this series. An easy first step is to look at the metrics associated with operational management of the brand.

In the attached profit and loss statement, we notice that the operational management of the business hasn't been optimal.

• Notice that merchandise fulfillment rate hit a high of 94.5%, but was only 90.9% last year.

• Return rates were as low as 25.0%, but were 27.4% last year.

• Gross Margin improved some (48.8%), but has been as high as 50.0% in the past.

• Pick/Pack/Ship expense has been as low as 11.5%, finishing last year at 11.8%.

A new CEO will ask the CFO to run a version of last year's profit and loss statement with historical best operational metrics plugged into the profit and loss statement.

So take a look at the attached image. With historical bests plugged into the profit and loss statement, we turn a loss of $258,000 into a profit of $327,000.

Now obviously all of these factors are interconnected (gross margin decreases when sales decrease, due to clearance-related needs). But the exercise is important to the new CEO. In this case, the CEO realizes that if s/he can "run the operations" of this business at historical high levels, profitability significantly improves.

In reality, the CEO wants for this business to operate at a 10% EBT rate, meaning that ten percent of sales are converted to profit. The business was twelve points away from this level (-1.9% EBT). Fixing the operational management of this business makes up at least four of the twelve point shortfall.

In other words, the CEO will make operational excellence one of his/her top objectives for the upcoming year.

Your Homework Assignment: Operations play a key role in getting a brand to high levels of profitability. What is the next thing you would look at in this profit and loss statement, when diagnosing what is wrong with this business?

E-Commerce And Catalog Management Case Study: A Failing Business

Please click on the image to enlarge it.

When we read about improving the performance of a catalog / e-commerce brand, we frequently read about "extremes".

On one hand, we focus extensively on the "tactics" that improve the performance of marketing campaigns. E-Mail subject lines, call-to-action, catalog page counts, branded vs. non-branded keywords, prospect mailings, there's a veritable plethora of tactics that folks can improve upon. Better yet, there's no shortage of folks who can help drive tactical solutions.

On the other hand, we focus on "brand management". Boy, do we love to focus on brand management. Everybody is an expert at what Starbucks should do to grow same-store sales. Folks have no problem telling brands that they have to become "multichannel", or that implementing a transparent, authentic blog will cause a brand to grow in a "viral" manner.

Unfortunately, neither end of the spectrum meets the needs of the newly appointed CEO of a multichannel e-commerce/catalog brand that experienced several years of sour performance. More often than not, the newly appointed CEO needs to implement a "meat and potatoes" approach to fixing the profit and loss statement.

The brand we'll study in this series (click on the image please) achieved "best" performance five years ago. Since then, the brand wobbled between mediocre and awful performance, resulting in the firing of the management team.

Let's review net sales and earnings before taxes performance.

Net Sales Performance (Year 5 = most recent year)

• Year 1 = $12,600,000.
• Year 2 = $12,400,000.
• Year 3 = $10,700,000.
• Year 4 = $11,200,000.
• Year 5 = $13,500,000.

Earnings Before Taxes Performance

• Year 1 = $661,000 (5.2% of Net Sales).
• Year 2 = ($315,000) (-2.5% of Net Sales).
• Year 3 = $63,000 (0.6% of Net Sales).
• Year 4 = $550,000 (4.9% of Net Sales).
• Year 5 = ($258,000) (-1.9% of Net Sales).

Clearly, this business is in need of fixing.

Over the course of the next several posts, we'll talk about the ways that a newly appointed CEO uses "meat and potatoes" and "multichannel forensics" to address the performance of a floundering brand.

Your homework assignment: Study the image at the top of this post. What areas of the profit and loss statement suggest mismanagement of this brand?

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!

The Day E-Commerce As We Knew It Died

Of course, e-commerce didn't die today.

But symbolically, e-commerce changed today, with the ousting of Yahoo! CEO Terry Semel and a New York Times piece about the end of rampant e-commerce sales growth.

Both stories point to the maturation of the online channel.

To me, the New York Times article is particularly delicious, drawing the ire of Shop.org and various e-commerce bloggers (here, here and here), all quick to defend their channel at the first hint of criticism or sales slowdown. To be fair, the criticisms are valid and even enlightening --- but it was fascinating to see how defensive some of the responses have been.

Those articles and comments look an awful lot like the musings of catalog executives between 1999-2003. Catalog folks were defensive, quick to defend the catalog channel when e-commerce pundits predicted doom for anything not associated with the online experience.

In reality, the data used in the study has been readily available from Forrester Research for years, and publicly traded companies have repeatedly talked about this slowdown over the past year, so this news isn't news.

Over the next three years, our profession will see a separation in talent. As e-commerce growth becomes harder and harder to achieve, management is going to need e-commerce folks who are skilled, maybe "gifted" at driving sales.

For the past decade-plus, multichannel e-commerce executives benefited from the efforts of their catalog and retail leaders. The catalog executive mailed catalogs, the customer shopped on the internet. The online executive received hefty bonuses, the catalog executive was fired.

The retail executive spent decades building a brand, the online executive received credit for sales cultivated through years of positive retail experiences. With e-commerce maturing, it will be up to the e-commerce executive to stand alone, to drive incremental sales increases without the benefit of seasoned leaders in other channels pushing free, incremental sales to the online channel.

There are hundreds of really good, really talented online executives at multichannel companies. These folks honed their craft, while learning how to get things done politically, while learning offline marketing skills that transfer to the online world.

These online executives will have a tremendous advantage. These are the folks who will continue to drive true incremental sales increases over the next three years, while other online businesses flatten-out, or flounder.

June 18, 2007. The day e-commerce as we knew it died.

The Role Of A Website In A Multichannel Catalog Business

Yesterday, we talked about the way a website provides information for the retail customer in a multichannel retail business.

Today, the focus shifts to the role of the website in a multichannel catalog business. How can Multichannel Forensics help us understand how a website serves a catalog customer?

Catalog customers are different than retail customers. In retail, the customer goes to the store. In catalog, marketing comes to the customer.

This results in significant differences in the way a website serves a customer. In retail, the customer uses the website to obtain information, information that is ultimately used to purchase merchandise in a physical store. In theory, the website should be designed to take e-commerce orders, but is primarily designed to drive retail sales. The website reflects "the brand", if you will.

The traditional catalog business faces very different challenges. Historically, the catalog was used to drive sales to a telephone channel. Today, the catalog is driving more sales online than through the catalog channel. This is where complexity occurs.

Multichannel Forensics can be used to help the marketer understand how the telephone and online channels work together.

Frequently, catalog marketers have a telephone channel in "Hybrid/Equilibrium" mode. This means telephone customers have an approximate 50/50 chance of purchasing via the telephone channel next year. In addition, telephone channel customers are slowly moving online (hence, the designation of "Equilibrium").

The challenge for catalog marketers occurs when analyzing the online channel. Online customers frequently operate in "Acquisition/Isolation" or "Hybrid/Isolation" mode. This means online customers are unlikely to use the telephone channel.

Worse, catalog marketers often observe that the online channel has a lower annual repurchase rate than the telephone channel. This means that traditional catalog marketers are slowly "losing control" over the customer relationship. In the past, catalog marketing drove high corporate repurchase rates. Today, catalog marketing frequently drives average corporate repurchase rates, and lower-than-average online repurchase rates.

In other words, the catalog inspires the customer to "think" about buying something. The customer may choose to order over the telephone, may choose to go online, or may choose to put that online visit on hold. The longer the customer chooses to not go online, the less likely it is that the purchase will take place.

Long-term, the catalog marketer must use a combination of catalog marketing, e-mail marketing, search marketing, affiliate marketing, portal marketing, and word of mouth marketing to achieve the same corporate repurchase rate (and spend per repurchaser) that was achieved in the old days of catalog marketing in the telephone channel.

If this potpourri of marketing channels cannot achieve the same repurchase rate, order frequency, items per order, and price per item that the old-school catalog techniques produced, the catalog marketer faces long-term challenges.

For the catalog marketer, the role of the website is changing. The website becomes the primary order taker for the catalog marketer. But more importantly, online marketing techniques must become effective enough to replace the ever-decreasing effectiveness of catalog marketing. The website must evolve as well, providing the information, entertainment, and additional product assortment necessary for the brand to maintain historical corporate repurchase rates (and spend per repurchaser).

For the catalog marketer, the website plays a very different role than the website plays for the retail marketer. This is not a dynamic that is well understood by multichannel pundits.

The Role Of A Website In A Multichannel Retail Business

Ultimately, our customers will decide the role of a website in a multichannel retail business.

Catalogers are experiencing a very different set of dynamics when strategically considering the role of a website. There is an odd interplay between catalog advertising and online purchasing that causes catalogers consternation.

For retailers, the relationship is much easier to understand.

Multichannel Forensics suggest that when two channels are involved, one channel frequently benefits from the efforts of the other. In the case of the online channel and the retail channel, retail is ultimately the "order taker". The online channel frequently acts as the "information channel".

As an example, I purchased a television at Circuit City last week. I did all of my research online, comparing Circuit City to Best Buy and other retailers. I chose Circuit City because they had a better price on the television I wanted, and installation was one hundred dollars cheaper than it was at Best Buy.

In this case, the internet provided the forum for my shopping experience. Circuit City's website did a reasonable job of presenting information to me. I even put my television in the shopping cart, so I could see the price. But the website did not "convert me", from a traditional web analytics standpoint. Some pundit will clobber Circuit City for having a paltry online conversion rate, for failing to convert my shopping cart.

The website did exactly what is was supposed to do --- and receives no credit for the work it did.

The retail channel took my order. An installer (another channel???) will hook me up next week.

If this relationship exists, you'll easily see it in your Multichannel Forensics analysis. The online channel will be in "Acquisition/Transfer" mode. This means that, for online purchasers, fewer than forty percent of them will purchase again online next year. Furthermore, those customers are likely to switch their allegiance to the retail channel. The retail channel operates in "Retention/Isolation" mode. This means that at least sixty percent of last year's retail channel customers will purchase in retail again next year --- and these customers are unlikely to purchase online next year.

In this example, the website plays maybe the most important role in connecting the customer to the retailer.

Internet Research -----> Website Visit -----> Retail Or E-Commerce Purchase -----> Installer Visit
The internet is a gigantic ecosystem where customers research merchandise opportunities. The website is the retailer's best chance to provide a customer the information necessary to chose the retailer's brand over another retailer. The website is a much smaller, more controlled ecosystem, playing a critical role in the purchase process.

E-commerce should be viewed separately from the role of the website. E-commerce is only about taking an order that is to be delivered to a customer.

When we separate E-commerce from the website experience, we immediately open ourselves to an endless array of multichannel opportunities.

Retail, because of its three-dimensional, human, warm, hopefully inviting nature, will garner the vast majority of purchases.

The website, not E-commerce, becomes the critical link between customer and brand in multichannel retail. A Multichannel Forensics analysis should illustrate this fact --- one should see that E-commerce customers transfer back to retail, while retail customers generally maintain their channel loyalty in stores.

Conversion Rate Is No Longer An Appropriate Measure Of Website Effectiveness

It might be a good time for our friends, the web analytics folks, to help us evolve the concept of conversion rate.

I recently saw a report where a business categorized good customers as of February 1, and measured website visitation activity during the month of February. Here's what this business saw (numbers are altered, the point is still easily made).

• There are 125,993 good customers as of February 1, 2007.
• Of the 125,993 good customers, 87,327 visited the site during February (69.3%).
• On average, the visitors had an average of 3.41 visits during February.
• Of the 87,327 visitors, 15,719 purchased merchandise on the website in February, purchasing an average of 1.10 times, yielding 17,291 orders.

We typically report an overall conversion rate --- something paltry like 3.29%. Then industry pundits and vendors jump all over us, telling us how ignorant we are regarding website design, failure to convert shopping carts, you name it.


If we look at actual customer behavior, we see a different story.

• The website converted 15,719 of 87,327 visitors during the month of February.
• 15,719 / 87,327 = 18.0% of the customers who visited at least one time purchased something during February. This is what matters!! Track this metric, year-over-year, and see if this metric is improving.
  
• In terms of visits, 17,291 / 297,785 = 5.8% actual conversion rate for this segment of good customers.

Conversion rate is rapidly becoming an unimportant metric, when viewed within the context of actual customer behavior. Conversion rate is dictated by software. We want to let our customers dictate how they want to use our websites.

If a customer wants to visit your site eight times before making a purchase, then let the customer visit eight times. Don't agonize over conversion rate because the customer wants to visit your site often. Measure monthly conversion rate instead!

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?

Virtual CEO: Grow E-Commerce Sales By An Additional 25%

Following up on a point from yesterday, I want to re-phrase a question that resulted in a lot of chatter today.

Assume you are an E-Commerce executive at a multichannel retailer. Your channel (online) is forecast to grow by 25% in 2007.

Let's assume that your Board of Directors is not happy with projected E-Commerce growth rates, and demands you grow the online channel by 50% in 2007. Your Board will not give you any money to spend on catalog marketing, television, radio, magazines, etc. Your Board will not allow you to source new merchandise. You are required to use marketing within only the online channel to grow your online business an additional twenty-five percentage points.

In the heyday of catalog marketing, you would increase pages circulated by roughly fifty percent, in order to grow your sales by twenty-five percent. You would prospect to inactive and new customers, add contacts/mail-dates to your best customers, and possibly add pages to your best catalogs. Given the money, you could achieve this unreasonable request --- albeit unprofitably. This was the magic of the old direct-to-consumer business model. You and your customers were a team that jointly determined sales and profit levels.

In retail, we know this request is not achievable within existing square footage allocations. A business leader would ask for capital to add new stores, renovate old stores, or acquire other businesses.

Now let's focus solely on the online channel. Could you grow E-Commerce sales an additional twenty-five percentage points? Is it possible? What marketing tactics would you use? Could you get there via paid search? Portal advertising? Affiliates? E-Mail marketing? Natural search? Blogging? How much would it cost you to get the increase, if you think this type of increase is possible? Would there be any long-term benefit to this short-term growth strategy?


Multichannel CEOs and CMOs: Today is as good a time as any to begin testing online growth strategies that don't include paper. If you have to go well beyond organic growth rates, how would you do it? Learn today, so that you can answer this question tomorrow.

What Does Your Website Look Like In 2017?

Doug Mack at Shop.org talks about the future of multichannel websites. In the article, notice that an individual at Gartner talks about everybody being held hostage by "Googazon". Remind your multichannel retailing co-workers that you heard that concept first on The MineThatData Blog!

The online channel is likely to evolve very differently, depending upon the business model employed by the retailer. Let's review three business models, and the likely evolution of the websites these business models manage.

Catalog + Online Retailer: Multichannel Forensics dictates that catalog customers are transferring loyalty to the online channel. Businesses with an older customer base are experiencing this transition much slower than businesses with a younger customer base. Over the next ten years, this evolution will drive a dramatic transformation of the catalog advertising channel. The catalog becomes a "brand advertising" tactic that drives business to the website, or communicates the general attributes of "the brand". The website must sell merchandise. This will drive website design toward the most efficient layout, one that easily facilitates a customer purchase during any one specific visit.

Direct + Retail Channels: As retailing splits into two niches (low-cost and high-end), websites will evolve accordingly. High-end retailers will see less and less value in e-commerce, and will see more and more value in using the website as the primary tool for customers to interact with a brand. For instance, L.L. Bean reported 73 million annual online visitors during 2006. I imagine that Neiman Marcus had more than 100 million annual online visitors during 2006. What the heck do you think will happen to these websites when brand marketers wrestle control of the website from the clutches of the technology folks? No other marketing activity replaces the experience of a hundred million individuals who volunteer their personal time to spend time on your website. If 100 million customers and prospects volunteer to spend their free time on your website, you have a responsibility to configure the website to facilitate any and all possible retail transactions. The Direct + Retail website will become the entertainment and information arm of a retailer --- e-commerce will be, at best, a secondary function that serves the purpose of meeting a specific customer need at a specific point in time. These businesses, in my opinion, are the most likely to use Social Media in the future --- integrating Social Media with the retail purchasing experience. Maybe most interesting will be the evolution of virtual-reality sites, as either competition to today's websites, or as the logical evolution of today's websites. The experience will be what matters, not e-commerce.

Online Pureplays: Expect online pureplays to compete with catalogers and retailers by hyper-innovation and hyper-price-based competition. These businesses will have to make their sites a destination, a place where people want to spend time. This strategy will be at direct odds with the intense pressure associated with the need to sell merchandise to survive. Darwinian evolution drives these businesses toward the lowest price, fastest shipping, and best merchandise selection. Expect these businesses to develop partnerships with Google and a likely family of search successors, so that traffic is diverted away from multichannel retail sites.

Ok folks, time for you to chime in. How do you think websites will evolve over the next ten years? What trends do you expect to come to the forefront for each business model?

Multichannel Forensics And Information Value

Friend of MineThatData Alan Rimm-Kaufman shares that Google will retain about eighteen months of clickstream data, going forward.

Multichannel Retail faces similar challenges, when looking at the value of customer information within the context of multichannel forensics.

Customer information ages differently in multichannel retail. While the relationships are different for each business, the following example helps illustrate the point.

• Catalog: A purchase twelve months ago is worth about 1/2 of what a purchase that occurred today is worth.
  
• E-Commerce: A purchase twelve months ago is worth about 1/4th of what a purchase that occurred today is worth.
• Retail: A purchase twelve months ago is worth about 1/8th of what a purchase that occurred today is worth.
• Clickstream: A visit twelve months ago is worth about 1/32nd of what a visit that occurred today is worth.

This topic becomes important when evaluating actual customer behavior. Most multichannel retailers would consider a customer who purchased via catalog twenty-four months ago, and purchased online today, to be a "multichannel" customer.

The reality is that this customer is heavily skewed toward the online channel.

Multichannel marketers have an opportunity to run a regression-style analysis, to determine the appropriate weight to use with older purchase information. The weights determine how customers are segmented, and consequently, determine how the multichannel retailer markets to the customer.

Multichannel CEOs and CMOs: On Friday morning, talk to your analytics staff about segmenting customers on the basis of the value of older purchase information. Have your staff apply a new technique that ultimately mimics the time-honored system of "RFM --- Recency, Frequency and Monetary".

E-Commerce "Power" And Web Analytics

How 'powerful' is your e-commerce website?

In other words, does your website have enough recent visitors and purchasers to fuel the growth of your business?

'Power' is an area that web analytics tools and web analysts usually fail to consider when performing their valuable job function.

'Power' is simply an expectation of how productive your e-commerce website will be this year, based on last year's performance and this year's visitor counts.

Let's review a very simple example of E-Commerce 'Power'.

Step 1: Segment your January 2006 website visitors as follows:
*** Segment 1 = Any customer who purchased online in January 2006.
*** Segment 2 = Any visitor who did not purchase, but visited 3+ times in January 2006.
*** Segment 3 = Any visitor who did not purchase, but visited 2 times in January 2006.
*** Segment 4 = Any visitor who did not purchase, but visited 1 time in January 2006.
*** Segment 5 = Any visitor who did not visit in 1/2006, did visit 1+ time from 2/2005 - 12/2005.

Step 2: Once you have segmented your file, take the mean of online spend in February 2006 for each visitor/cookie in Segments 1-5.

Your analysis should look something like this:

Segment 1 = 15,000 January 2006 Buyers, Spending An Average Of $25.00 in February 2006.
Segment 2 = 50,000 January 2006 3+ Visits / No Purchase, Spending $9.00 in February 2006.
Segment 3 = 125,000 Jan-06 2 Visits / No Purchase, Spending $5.00 in February 2006.
Segment 4 = 1,000,000 Jan-06 1 Visit / No Purchase, Spending $2.00 in February 2006.
Segment 5 = 10,000,000 Feb-05 to Dec-05 1+ Visit, No Purchase, Spending $0.50 in Feb 2006.

Multiplying customers by average spend, then summing across five segments, yields $8,450,000 of demand generated on the website, during February 2006.

You are now ready to calculate your E-Commerce website's 'Power'. You need just one more step to complete the analysis.

Step 3 = Replicate Step 1, but instead of using January 2006 as your timeframe for segmentation purposes, advance your timeframe by one year for each segment. This reflects your website customer file, as it exists today.

Step 4 = Multiply this year's customer counts by last year's average spend. This gives you an expectation for how much existing customers and visitors will spend this year, if all other conditions are the same. Here is an example of the resulting analysis:

Segment 1 = 22,000 January 2007 Buyers, Spending An Average Of $25.00.
Segment 2 = 55,000 January 2007 3+ Visits / No Purchase, Spending $9.00.
Segment 3 = 135,000 Jan-07 2 Visits / No Purchase, Spending $5.00.
Segment 4 = 1,100,000 Jan-07 1 Visit / No Purchase, Spending $2.00.
Segment 5 = 14,000,000 Feb-06 to Dec-06 1+ Visit, No Purchase, Spending $0.50.

Multiplying customers by average spend, then summing across five segments, yields $10,920,000 of expected online demand during February 2007.

We've finally made it to the 'Power' calculation.

Power = This Year's Expected Demand / Last Year's Actual Demand.

Power = $10,920,000 / $8,450,000 = 1.292.

We did it!! Your portfolio of online purchasers and visitors are 29.2% stronger than last year. You should expect existing buyers and visitors to spend 29.2% more this year than last year, all things being equal.

In an ideal online environment, the web analytics folks will run this analysis for you at the start of the month, and communicate E-Commerce 'Power' to the executive team in the early stages of each month.

Multichannel CEO/CMO Takeaway: It is time to expect much more out of your web analytics team. Standard web analytics tools do a great job of telling you what happened during an individual session. Standard web analytics tools do a poor job of predicting the future. Leaders need to know what will happen in the future. Partner with your web analytics team on this simple segmentation exercise. You and your analytics folks will be able to forecast business problems before they happen.

During the next few years, we will hit a point where the online channel stops growing rapidly. Leaders need to be the first people to know that a demand shortfall is coming. Beat your competition to the punch by reacting to your E-Commerce 'Power' Analysis.

An Example Of An E-Commerce Site That Has A Human Feel

Earlier this week, I asked "What Is Wrong With E-Commerce". A nice person named Thomas Holmes (check out his site) had a thoughtful response to my discussion, and better yet, forwarded a site that has more of a "human" feel to it. Check out Little Paper Planes.

This site is neat! Really neat! It isn't a cookie-cutter site. On the top of the page, there's a discussion about holiday orders, with an actual e-mail address that the visitor can contact.

Notice on the left side of the page there's an actual blog-style discussion from an actual human being. The site offers e-mail signup and access to their RSS feed (which I just subscribed to).

In spite of these little innovations that give a human feel to the site, the proprietor still does a lot of selling on the homepage. I would classify this site as a "hybrid website".

Now it's your turn. Let's use this forum to share with each other examples of e-commerce websites that do a great job of balancing selling with offering a "human" feeling to the cold process of online shopping. Are there sites you visit that meet this criteria?

Who Manages Your Online Strategy?

Jeremiah Owyang talks about folks who lead web strategy in media businesses. In your multichannel organization, who leads your web strategy?

• An Online Expert?
• Your Chief Marketing Officer?
• A Catalog Marketing Expert?
• A Retail Marketing Expert?
• A Merchandising Expert?
• Somebody Else?

Who should lead your web strategy? Offer your comments, please.

The End of E-Commerce / Dell

Dell's announcement (see update at the bottom of this link) that they will have a virtual store in Second Life (a virtual reality environment) has far-reaching ramifications for all of us in the catalog/online space.

It was just a decade ago that various catalogers began dipping their toes in e-commerce. I recall being at Eddie Bauer, in 1996, listening to my Vice President joke with our Online Marketing Manager about generating maybe $750 of sales a day, while the catalog channel drove a million dollars a day, and our stores sold four million dollars of merchandise a day. Ten years ago, it was hard to fathom what e-commerce would become.

In much the same way, this announcement begins the shift away from e-commerce, to "v-commerce", or virtual reality commerce. The fact that somebody can configure their own PC in a virtual reality environment, and then have it shipped to one's home, changes online retailing.

This has ramifications for the online marketing folks working in companies today. You are the direct-to-consumer arm of your business now, you have taken that responsibility from catalog folks. Be certain to watch the developments of "v-commerce", and make sure your skills are sharp in this arena, so that you don't become "old school" in five to ten years. Don't repeat the mistakes that so many catalog marketers made in the past decade.