Friday Tidbits

Gliebers Dresses: If you're looking for older articles, just click this link, and you'll get every article.

Eddie Bauer Bankruptcy: Some of you have sent me e-mails about this. One of the biggest challenges of the bricks/clicks multichannel model is debt. Now granted, Eddie Bauer's debt came from the Spiegel meltdown earlier in the decade, but the concept still holds --- you take a largely variable cost model (catalog or e-commerce) and build out a fixed cost channel financed with debt. Yuk. E-commerce is going through multichannel evolution as we speak, as customers migrate from e-mail to social media, static websites to mobile websites, etc. Let the lesson of retail/debt be heard. E-commerce will have very different dynamics without as much debt/fixed-costs as newer online channels invade, but the shift between channels, in my opinion, will happen faster and with very different and potentially unstable consequences --- in social media, take MySpace as an example.

Internet Retailer Conference: Thanks to Internet Retailer for inviting me to speak, I'm always grateful for these opportunities. If you want to see what folks thought of the conference, as it was happening, give this a read.

Credit Customers, Lifetime Value, Eddie Bauer

Some of you might have noticed talk in the media recently about our failing financial industry.

So it might be instructive to consider the role of credit within a retail brand.

Back in the day, in the late 1990s, I worked at Eddie Bauer. In the late 1990s, Eddie Bauer was a $1.6 billion dollar multichannel brand that routinely churned out ninety million dollars in pre-tax profit --- not outstanding performance, but not too shabby.

Eddie Bauer was owned by Spiegel, the century-old catalog brand out of suburban Chicago. Spiegel owned a bank, FCNB. That bank provided credit to credit-worthy consumers.

Retailers adore proprietary credit. There's no better way for a retail brand to extract an extra ten percent out of a $100 order than to encourage the customer to make $10 payments for a year at 24% interest.

The theory, then, is that after administrative expenses, proprietary credit can be responsible for nearly doubling the profitability of a customer, as long as the customer fails to pay down their debt in a timely manner.

	No Credit	With Credit
Demand	$100.00	$100.00
Net Sales	$70.00	$70.00
Gross Margin	$38.50	$38.50
Less Marketing Expense	$20.00	$20.00
Less Pick/Pack/Ship Expense	$7.70	$7.70
Variable Profit	$12.30	$12.30
Add: Interest Revenue	$0.00	$10.00
Less: Banking Expense	$0.00	$1.50
Net Contribution	$12.30	$20.80

On paper, the profitability of a proprietary credit customer looks too good to be true. The fairy tale drives a brand in a new direction.

If we know that the proprietary credit customer is this profitable, then we want to aggressively market credit to the customer, right? And we especially want to market credit to new customers. If credit customers are worth more, then we can prospect much deeper, increase sales, and on the surface, significantly increase profit. In the short term, this is all good.

At Eddie Bauer, we closely monitored the percentage of sales that were generated via proprietary credit. And we were strongly encouraged by Spiegel to amp that percentage, because a higher percentage of sales on proprietary credit resulted in more interest revenue, and theoretically, more profit.

So we amped-up our credit push. New customers were strongly encouraged to sign up for credit. Existing customers were given in-store, catalog, and e-commerce incentives to sign up for credit. Credit customers were offered promotions to take advantage of credit.

A funny thing happens when you focus on credit. You attract a customer who needs credit.

Not surprisingly, this customer is fundamentally different than bank card customers. The proprietary credit customer buys a slightly different merchandise assortment than does the bank card customer. This causes the merchandising division to chase merchandise preferred by the proprietary credit customer, not to chase merchandise preferred by quality customers.

Within two or three years of a consistent, relentless credit push, the brand has been fundamentally changed. Well, the brand has not been fundamentally changed --- the brand is the brand. But the customer file has been fundamentally changed, and the core of the brand, merchandise and customer service, has taken a back seat to proprietary credit.

Ultimately, the brand reverses direction. Instead of selling merchandise to the customer, the brand uses merchandise as a teaser to sell credit to the customer. Eventually, customers max their credit limits. Our analysis suggested that when a customer got within $100 of their credit limit, the customer stopped purchasing. Some customers failed to pay their debts.

When the credit "channel" begins to fail, the whole house of cards crumbles, bringing down everything.

The lessons are clear. By focusing on merchandise, by focusing on serving the needs of a customer, one can build a healthy business. By focusing on selling money to a customer, we don't sell anything of long-term value. Admittedly, we boost short-term performance. Essentially, we push long-term profit into a short-term window, paying a long-term price for the benefit of goosing short-term numbers.

At Nordstrom, credit was viewed in a different light. During my time at Nordstrom, credit was never the primary mechanism for a customer relationship. Strong credit leadership (Kevin Knight), and strong executive leadership (i.e. the Nordstrom family), prevented the business from going down the path that Eddie Bauer took.

Eddie Bauer is still trying to dig out of this problem, nearly a decade later.

And now our nation will attempt to dig out of a period of time when we gorged ourselves on credit.

Great Moments In Database Marketing #6: Long-Term Impact of Promotions at Eddie Bauer

We go back to 1998 for this Great Moment in Database Marketing.

At the time, I was Director of Circulation at Eddie Bauer, a brand that was punch-drunk on promotions. Anytime a customer failed to purchase in six months, the "CRM/Circulation" process offered the customer a "20% off $100" promotion ... twenty percent off your next order of one-hundred dollars or more".

We tested these promotions until we were blue in the face. Continually, they showed that the customer spent about twenty percent more if offered this promotion.

So, the promotions became part of "what we did". And then my team decided to execute a long-term test. For the next six months, we would not offer a segment of lapsed customers a single promotion.

What do you think happened?

Take a look at the following table, a table that approximates the actual results of the test.

Eddie Bauer Six Month Promotion Test: 1998
	Receive	No	Incr-
	Promos	Promos	ement
Month 1	$10.80	$9.00	$1.80
Month 2	$9.00	$9.30	($0.30)
Month 3	$10.80	$9.60	$1.20
Month 4	$9.00	$9.90	($0.90)
Month 5	$10.80	$10.20	$0.60
Month 6	$9.00	$10.50	($1.50)
Demand	$59.40	$58.50	$0.90
Net Sales	$41.58	$40.95	$0.63
Gross Margin	$22.87	$22.52	$0.35
Marketing	$9.00	$9.00	$0.00
Promos	$4.07	$0.00	$4.07
Pick/Pack/Ship	$4.99	$4.91	$0.08
Profit	$4.80	$8.61	($3.80)
% of Sales	11.6%	21.0%	-9.5%

Oh oh.

Here's the 411 folks. When customers are continually promoted to, they delay purchases until the promotion is offered to them.

In our test, if customers were not offered promotions, they slowly began to "build momentum". Instead of the every-other-month cadence of promotions to this audience (the actual test had a different rhythm than illustrated above), the customer waited for promotions, did not receive them, then started spending more.

After six months, we noticed that customer spend in the two groups was nearly identical!

Now look at profit. Sure, the group that received promotions appeared profitable --- they appeared profitable via every system we had in the company, via every A/B test we executed.

But when viewed via a long-term A/B test, the results were significantly different. We were losing a boatload of money promoting to customers who would ultimately spend the same amount of money if we didn't execute the promotion.

In 1999, we dramatically pulled back on promotions. Total Net Sales decreased by maybe five or six percent. Total profit hit an all-time record high.

The core fundamentals of direct marketing are often violated in the world of "instant metrics" we've created. Our e-mail marketing friends read open rates and conversion rates from a "Free Shipping" e-mail within an hour of blasting the campaign. The adrenaline rush felt from obtaining instant access to customer behavior fuels strategy.

My challenge to the e-mail marketing and web analytics community, two communities that live and die by a steady diet of exhilarating and instantaneous metrics, is this ... do your metrics allow you to understand if what we observed at Eddie Bauer in 1998 is happening in your business? And if your visit-specific metrics don't allow you to observe a trend like this, what kind of systems/software/human investment is needed to allow for this style of measurement?


Hillstrom's Multichannel Secrets: Fifty-Nine Facts For CEOs!

The Seattle Sonics Are Moving Their Multichannel Brand To Oklahoma City

NBA owners voted 28-2 to allow the Sonics to move to Oklahoma City. Only Paul Allen of the Portland Trail Blazers (obvious Seattle ties) and Mark Cuban of the Dallas Mavericks felt that forty-one years of fan loyalty mattered a little bit.

Ultimately, a sports team leaving a city is no different than Sears electing to close down an unprofitable store, though a Sears store doesn't bring together a community like a sports team does.


"Back in the day" at Eddie Bauer, President and CEO Rick Fersch footed the bill for a suite at Key Arena. Mr. Fersch allowed garden variety employees (like me) the opportunity to enjoy a smattering of games in the suite. If you were lucky enough to attend, Mr. Fersch was democratic about seating in the suite. He required attendees to switch seats at the end of every quarter so that all employees could enjoy each other's company, and enjoy the perspective of different areas of the suite. This is one of many reasons I fondly remember the leadership of Mr. Fersch.

I was lucky enough to attend two Sonics games in my four years at Eddie Bauer. One was a playoff game in 1998 against the Los Angeles Lakers, an elimination game won by Los Angeles. Actor Leonardo DiCaprio, donning a Lakers jersey, was sitting about ten rows below the Eddie Bauer suite. He had just starred in a movie (maybe you heard of it) called "Titanic".

During a timeout in the second half, when it appeared that the Sonics were going to lose, the crowd became depressed and quiet. Suddenly, one of Mr. Fersch's teenage daughters uttered a high-pitched, ear-piercing scream heard as far away as Bellingham ... "LEONARDO ... I LOVE YOU!". Mr. DiCaprio turned around, identified the young lady who seconds ago joined Mariah Carey as one of only two females to ever reach that octave, and politely nodded his approval.


We were told that if every seat for every game were sold, the Sonics would still lose money.

The Sonics had multiple channels to generate revenue. Corporations could purchase expensive seats. Corporations could purchase sponsorships. Wealthy fans could purchase season tickets. Garden variety fans could purchase individual game tickets. Any fan could purchase concessions, or souvenirs. Revenue came in via a local radio contract. Revenue came in via a local cable television contract. Revenue came in from at least two national cable broadcast stations and one national television network. Taxpayers funded a renovation of Key Arena in the mid 90s to improve the revenue generated from the stadium. I'm sure I'm missing another dozen channels that the Sonics harvested for revenue.

We're told that "multichannel customers are the best customers". In Seattle, multichannel customers (radio, television, in-game attendees, concession stand shoppers, etc.) couldn't generate enough revenue to keep the team here.

This will someday become a problem for our humble little multichannel brands. As we expand our online presence, as we build stores, execute direct mail and e-mail campaigns, manage paid search programs, participate in social media, treat our sites like entertainment brands, we will demand that our customers return the favor by providing us with more and more cash. In the NBA, player costs increase. In multichannel cataloging, the USPS increased costs, and may make life more challenging in 2009. Importing goods from China will cost more. Fuel will cost more. We'll demand that our customers pay the freight, just like an NBA owner demands that the residents of his geography foot the bill.

We're likely to learn, like the NBA in Seattle learned, that no matter how many channels we offer our customers, customers only have so much they can spend. We'll need to be very thoughtful about how we approach using incremental channels to generate sales and profit.

Sally McKenzie at the E-Commerce Consulting Blog

I worked with Sally "back in the day" when Eddie Bauer had an online channel that generated $15,000,000 of business a year. Sally shepherded the growth of the online channel at Eddie Bauer during those unique times.

Today, she contributes content at the E-Commerce Consulting Blog. Give her content a peek!

Retail Is Struggling

J.C. Penney merges marketing and merchandising functions across online/retail channels, then cuts 100 - 200 jobs. I'll bet that the 100 - 200 people who lost their jobs aren't big fans of multichannel integration.

Ann Taylor lets go of 13% of their corporate staff, 180 jobs amid a tepid retail environment. In addition, 117 stores will be closed.

Talbots to shut down 78 kids and mens stores. Sure this is old news, but it is reflective of what could be a widespread problem in 2008. This economic downturn could weed-out a lot of over-assorted retail square footage.

Eddie Bauer cuts 16% of its corporate staff, even as sales improved in Q4.

Home Depot cuts 500 corporate jobs, 10% of the corporate staff. Assume these are $75,000 a year jobs (including benefits). Take the $210,000,000 that former CEO Robert Nardelli garnered as part of his golden parachute, divide it by $75,000, and you are able to keep these 500 folks gainfully employed for another five years.

Dell plans to close 140 shopping mall kiosks.

Starbucks will close 100 underperforming stores.

If you are a retail real estate executive, you have to be wondering who the retailers are that will line up for the store locations made available by the great recession of 2008?

Old Navy updates their logo, and elects to move away from families, now focusing on a fashion-based twenty-something target audience.

Trees rejoice as USPS volume drops by 3% in Q1-2008.

Talent

Please click on the image to enlarge it.

Yesterday, we talked about individuals who have "it".

Today, we take a brief look at the subject of talent.

The vast majority of folks who have talent don't have "it". To be successful, talented folks have to navigate at least two interesting dimensions within any company.

First is the style of the folks who "truly run the company". I'm not talking about the CEO or President or that ilk, though those could be the folks who truly run the company. Rather, I'm talking about the individuals who, by experience or talent or ego or ruthless power trips gained control of the organization. You know exactly who these individuals are. Minutes after making your first decision as a leader, somebody asks you if you "ran your idea past Janet", and you say "who's Janet?" You just learned who truly runs your company.

What is important about these individuals is their style. Do they "control" the agenda, or do they delegate "control" to others? For instance, maybe you work for an online retailer that is really run by the information technology department. Regardless what the CEO says, the information technology department really determines what happens, and what doesn't happen. Does this team determine strategy? If they do, then your organization has a "Leadership Controls" style. Does this team do what the business wants them to do? If that is the case, then your organization has a "Leadership Delegates" style. Either way, this team is the unofficial leadership team in your business.

The second dimension focuses on the company culture. Does your culture support "individuals" making independent decisions, or does your culture require "teams" to make decisions?

Combined, there are four different cells that an organization can be classified into.

I previously worked at three large apparel companies. Let's see how they fit into this framework.

From 1990 - 1995, I felt that Lands' End fell into the "Delegates / Independent Actions" quadrant. The leaders generally allowed each area to make decisions that were in the best interest of each area. In fact, much of the consternation between people occurred when divisions did not get along, or needed to work well together. Independent actions were generally preferred. While there were teams, teams generally didn't make big decisions. Overall, the culture supported smart people doing what they felt was best for the portion of the business they were accountable for.

From 1995 - 2000, I felt that Eddie Bauer fell into the "Controls / Teams" quadrant. I can specifically remember our CEO entering my office, telling me that I could no longer publicly share consumer insights, and that going forward, all information would flow through him, allowing him to shape the message that employees heard. There's nothing inherently bad with that --- but it is a form of leadership "control" --- leadership isn't delegating my area of expertise to me. Furthermore, the culture loved "teams". In 1997, Eddie Bauer relieved the Catalog Executive of his duties. His role was replaced by the "Catalog Business Team", a group of individuals who jointly determined where the catalog/online business would head. This team worked ... we had the most profitable year in the direct division's history in 1999. Team cultures can also have a hard time making significant changes, when necessary.

From 2001 - 2007, I felt that the Nordstrom culture was in the "Controls / Independent Actions" quadrant. This is one quirky quadrant. At Nordstrom, there were a group of individuals who were the true leaders, the folks who truly made decisions. These folks generally complemented the strategy suggested by a half-dozen Sr. Leaders. Combined, these fifteen or twenty folks "controlled" what was done. Try something outside of the framework of these twenty individuals, and you would struggle. Conversely, the culture loved independent decision making, advocating a "use your best judgment" approach to decision making. The lowest paid employee in a store had the authority to make decisions that nobody at Eddie Bauer would ever allow somebody to make --- several cross-functional teams would need to collaborate at Eddie Bauer to allow store employees to have wide-ranging decision making authority.

Talent must either fit into the appropriate quadrant, or must be able to successfully change the organization.

At Lands' End, a talented Eddie Bauer person would be criticized for wanting to have too many meetings, for trying to build too much consensus, for never getting anything done.

At Eddie Bauer, a talented Nordstrom person would be criticized for "being a cowboy", for making too many decisions without the proper study and consideration required of a disciplined company.

And at Nordstrom, a talented Lands' End person would be chewed-up and spit-out for not "following the rules" set forth by the true leaders of the company (I watched several former Lands' End employees get bounced based just on this criteria alone). Nordstrom would genuinely appreciate the entrepreneurial spirit exhibited by these folks, but would detest how these folks were not pointed in the direction that leadership was pointed in.

There are many challenges associated with being "talented". For talented employees seeking employment opportunities, quadrant identification is very important. The prospective employee must determine if the quadrant the business falls into is congruent with his/her skills. If the quadrant is different, the employee has to determine whether s/he can fit into another quadrant, or whether the employee can "change" the quadrant.

All too often, the employee tries to make everybody else change to his/her style, without considering what the organization "wants" to do. Maybe the employee was hired to cause change outside of the natural quadrant the brand fits into, in which case, the employee might have to create stressful situations.

It is my opinion that truly talented leaders adapt their style to the quadrant their brand belongs to.

Your thoughts?

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.

27C

Database Marketing thoughts from eight flights in eight days:

In an amazing display of "co-branding", I observed a program on the United Television Network with a feature from NBC/Universal showing Larry King of CNN interviewing Kathy Griffin of Bravo.

If you had ninety seconds to convey a concise and helpful message for new Eddie Bauer CEO Neil Filske on how to turn around the beleaguered brand, what would your message be? By the way, check out the analysis of CEO compensation at Eddie Bauer verses Nordstrom mentioned in this article.

Speaking of marketing, I'm coming around to the thought that the iPod was invented to project us from the world of marketing, blocking out the audible half of marketing.

Good things happen to good people! Avinash hits the jackpot, getting his web analytics book mentioned on Seth's Blog.

My lost luggage was deemed a "baggage irregularity".

You can't hit an FM scan button these days without running into "Jack FM", "Bob FM" or "Mike FM". I'll tune in when I hear "Avinash FM".

I actually heard a pilot come over the audio system and offer a "co-branded opportunity presented by trusted business partners USAir and Bank of America". Yes, the pilot used the phrase "co-branded opportunity".

Four flight attendants did a spectacular job of helping a woman who was having a panic attack, fearful that the plane was about to crash while in heavy turbulence.

Quick quiz: If you aren't in the Database Marketing or analytics community, tell me what the following acronyms stand for, and how they relate to your job?

• BI
• KPI
• LTV
• BPM
• CPM
• CPC
• AOV
• DMPC
  

Are Relationships Changing?

My first two jobs were at intensely competitive companies.

At the Garst Seed Company, we were fourth in market share, losing money, fighting for our existence. We were fighting against the big boys at Pioneer.

We were downright competitive at Lands' End, too. Stuck in the middle of the country, with L.L. Bean to the east and Eddie Bauer to the west, we wanted to win in the early 1990s.

Two of my favorite experiences were part of cross-functional teams. Getting Eddie Bauer Direct to go from break-even to an at-the-time record $26,000,000 EBIT was fun, and it was especially neat to see merchants, brand marketers, finance, information technology, online marketing, contact center operations, creative and circulation all work together to make it happen. We openly talked about and shared ideas. And for a brief period of time, we were a well-functioning team.

The other really enjoyable experience was in 2003-2004, when Jim Bromley unified a similar team, a team that turned Nordstrom Direct from an epic failure to a money-printing machine.

Since then, the internet and blogosphere seem to have changed things.

Our allegiance to cross-functional teams within a company is being transformed by cross-company teams within an industry.

I see this happening every day. I follow an e-mail discussion group that talks about various topics within the e-mail industry. There are blogs for just about every possible discipline. Fans of any discipline can readily exchange ideas and thoughts with each other, across industries, within industries. You'll see folks from one competitor share ideas with folks from another competitor.

The changing face of relationships was illustrated to me earlier today. In the e-mail forum I follow, an individual asked if anybody leveraged partnerships with the web analytics folks to complement the metrics used to analyze e-mail campaigns.

This question was almost unfathomable to me. Fifteen years ago, you would simply walk down the hall and ask somebody to help you.

Today, you float your idea into the ether, to see if others in your field are already implementing your suggestion.

I'm not sure whether this is good or bad. In the old days, you'd develop your ideas internally. Some companies would win, some would lose. You learned things when you left your company, and went to work somewhere else.

Today, the ideas are homogenized. How many clever e-mail, web analytics, marketing, creative or merchandising ideas can there be if they can all be readily shared in nano-seconds on a blog or message board?

Ok, your turn. Do you notice that relationships are changing? Is this good or bad for an individual person's career? Is this good or bad for the profession we work in? Is this good or bad for the companies we work for?

How Much Do I Spend On Online/Catalog Advertising?

Lands' End was a fun place to work in the early 1990s. There were a lot of interesting minds, tossing around interesting ideas.

One of our debates was about the optimal level of advertising spend. One camp, led by our Circulation Director, believed that you circulate to an incremental 7% pre-tax level (prior to subtracting fixed costs). The theory was that the return on investment had to be sufficient to cover fixed costs ... that if you actually subtracted fixed costs from the equation, you were circulating to about break-even.

Another camp believed that you circulated to -5% pre-tax levels, because this way, you were capturing long-term profit that you were losing in the short term. At the end of five or ten years, your business was much bigger, because you acquired/reactivated a lot more customers than in the situation where you maximized short-term profit.

At Eddie Bauer, we circulated to break-even (prior to subtracting fixed costs), then shifted our strategy to invest to below break-even, in order to maximize the long term health of the business.

At Nordstrom, we tried our hardest to convince folks to invest in online marketing activities that maximized the long term health of the total business. We probably under-invested in the online channel, though we had the data to tell us what the 'right' thing was to do. The process of assigning a marketing budget did not provide us the flexibility to maximize the online channel (and ultimately, to grow store sales). This is a good lesson --- it doesn't matter what data you have, there are internal processes and existing cultures that simply cannot be changed.

In the past, we didn't have the right tools to understand the long-term impact of short-term advertising decisions. With Multichannel Forensics readily available these days, we can simulate different strategies, and identify the best long-term strategy.

I crafted an online/catalog business simulation, and ran three scenarios.

• Scenario #1 = Maximize profit each year.
• Scenario #2 = Maximize total profit over the course of five years.
• Scenario #3 = Maximize profit five years from now --- make that year as profitable as possible.

The table below show the results of the three simulations. All numbers are listed in millions:

Maximize Short-Term Profit
	Demand	Ad Spend	Profit
Year 1	$44.6	$5.6	$2.1
Year 2	$42.0	$5.2	$1.7
Year 3	$40.9	$5.1	$1.4
Year 4	$40.4	$5.0	$1.2
Year 5	$40.1	$4.8	$1.1
Totals	$208.0	$25.8	$7.4
Maximize Long-Term Profit
	Demand	Ad Spend	Profit
Year 1	$59.2	$9.9	$1.5
Year 2	$66.6	$11.0	$2.0
Year 3	$70.6	$11.6	$2.3
Year 4	$72.8	$12.0	$2.4
Year 5	$74.0	$12.2	$2.4
Totals	$343.2	$56.7	$10.6
Maximize Only 5th Year Profit
	Demand	Ad Spend	Profit
Year 1	$66.4	$12.5	$0.6
Year 2	$80.3	$14.9	$1.6
Year 3	$88.6	$16.3	$2.2
Year 4	$93.4	$17.1	$2.5
Year 5	$96.3	$17.6	$2.6
Totals	$425.0	$78.4	$9.5

Let's review each simulation.

In the first run, profit is maximized by year. Therefore, profit in the first year is $2.1 million. However, a much smaller business exists going into year two, with too few customers to generate large volumes of profit. Still, the management team tries to maximize profit in year two, then year three, year four, and year five. As a result, this business actually contracts. If we followed the rules of Wall St. (maximize short term profit), we may not protect the long term health of our business.

In the second case, online/catalog advertising spend is more than twice as much as in the first simulation. This means the business is more profitable in the long-term, and grows at a much faster rate.

In the third case, online/catalog advertising is fifty percent more than in the second case. This yields a marginally profitable business in year one, but in year five, the business is much larger, and more profitable.

For every online/catalog business, these scenarios can be easily created. The multichannel analyst provides management with three or more scenarios (as outlined above), and lets management determine the future trajectory of the business.

This is an important point --- abstract and geeky topics like lifetime value have little or no meaning to executives. Picking from one of three possible strategies is easy to do if you're an executive, and accomplishes the exact same thing as a geeky, technical lifetime value analysis.

Multichannel CEOs and CMOs: Simulations indicate that it is important to invest in unprofitable customer activities in the short term, in order to protect the long term health of your business. It is important not to focus on "this year". Where possible, invest in the short term, to protect the long term health of your business.

Personas and Pressure

Personas are becoming a popular way to bring data to life, to make data actionable.

In the late 1990s, we were looking for ways to reinvigorate the Eddie Bauer "brand". One way management chose to do this was to hire a team of brand marketing experts. There's no better way to generate new ideas than to hire a dozen brand marketing experts.

This team created personas of the Eddie Bauer customer --- Ken and Karen, if I remember correctly. These folks were mid 40s but felt like they were in their mid 30s, $75,000+ annual household salary, sitting in the ski lodge next to a fire watching folks ski, after arriving in an Eddie Bauer Ford Explorer.

Because these folks felt like they were younger than their mid 40s age, the brand marketing team felt our creative should skew younger, to reflect how these personas felt about themselves.

Within a few months, a new creative approach appeared in our catalogs. The 46 year old graying male wearing jeans while walking along a raging river in Alberta was replaced with a 31 year old, muscle-bound set of men carrying a canoe over their heads.

Instantly, mens pages in catalogs that were missing expectations by 10% became mens pages in catalogs that were missing expectations by 20%.

In other words, the new way of presenting men in the catalog, based on the personas created by our brand marketing team, caused a ten percent reduction in demand of mens merchandise.

There's nothing that strikes terror in the hearts of an Executive team than a ten percent decrease in sales volume, a decrease that is quite possibly self-inflicted.

The brand marketing folks fought back, suggesting that it would take Eddie Bauer customers six months, a year, or two years to get used to the new creative. They were probably correct in their assessment of the situation.

Meanwhile, inventory managers were frustrated, because they had to liquidate merchandise that used to sell better. Merchants were frustrated, because merchandise they believed in was not selling as well due to the implementation of a vision endorsed by the brand marketing experts.

I recall sitting in a conference room on a Friday afternoon, watching this brand marketing team get chewed out like you wouldn't believe. Folks left the room crying. Within a year, most of the brand marketing team either lost their jobs, or chose to leave the company. The brand marketing experiment of 1998-1999 was over.

Pressure causes leaders to make decisions that may not be in the best interest of the long-term health of the business. It is entirely possible that the brand marketing folks were doing the exact right thing for the "brand". It is also possible they unintentionally damaged the "brand".

We still have to meet short-term sales expectations, regardless of the long-term vision of brand marketing experts. This conflict causes pressure.

Personas may be the right thing for your business. It is how personas are implemented within your culture, how that implementation impacts short-term sales, and how short-term expectations are communicated to all employees, that determines how successful the business strategy will be.

Annual Report Update: Eddie Bauer

A few tidbits from Eddie Bauer's Annual Report:

• Management believes that recent changes in merchandising strategy are responsible for Q4 comp store sales increases of 4.6%, Q1 comp store sales increases of 9.5%, and Q1 direct sales increases of 12.9%. We learn over and over again the importance of merchandising and merchandise presentation, not marketing, in driving customer response.

• Target customer = 30-54 years old women and men, income of $75,000 per year.

• Comp store sales have decreased in 23 of 28 quarters since 2000.

• Following a "relaunch of the brand" in Fall 2005 (which came after hiring new management in merchandising, creative and marketing), with new merchandise and creative presentation, comps by quarter were -4.3%, -7.1%, -10.0%, -5.0% and -1.9%.

• In the tradition of Otto Versand (former parent company of Spiegel, which was the former parent of Eddie Bauer), Bauer leverages preview catalogs to determine sales potential of items at the start of a season, and then adjusts inventory buys as a result of what is learned in the preview catalogs. Preview catalogs are mailed nearly three months prior to the start of a season. 70% to 75% of the buy is placed, then adjusted following performance of the preview catalog.
  

• 3.1 million twelve-month buyers, 1.8 million e-mail addresses.

• 28 catalog editions with total circulation of 80.8 million.

It will be fun to see if the turnaround can continue for this beleaguered brand.

Making Decisions In The Catalog/Online Business

One of the best comments I've received on this blog came yesterday from Graham Hill. Here is his comment about my rejection of the hypothesis that marketing bloggers are largely negative:

"But, as one statistician to another. Are you not in danger of making unfounded generalisations about blogging based upon a hugely inadequate number of observations."

The answer to Graham's question is "YES"! I'm absolutely in danger of doing this! Graham's comment is insightful and correct.


Early in my career, when it was my job to be a statistician, it was my job to be "right". I made sure that my work was perfect, that my conclusions were rock-solid and air-tight. I was given months to complete a project. Those were good times.

In 1998, I became Director of Circulation at Eddie Bauer. I was member of the "Catalog Business Team", a group of Directors and VPs responsible for meeting or exceeding budgeted sales and profit goals for the Catalog/Online division at Eddie Bauer.

We met as a team every Wednesday morning.

Questions would come up, questions that required rapid answers. For instance, the Merchandise executive might say "We're killing this business by running Mens merchandise in the first twenty pages of the catalog. Let's stop this practice, and run best-selling Womens merchandise in the first twenty pages."

Maybe we ran Mens merchandise in the front of the past two catalogs, and maybe those two catalogs were ten percent below our expectations, whereas the prior five or six catalogs met expectations. On the surface, the merchandising executive seemed to have a point.

As a statistician, you'd like to run a series of experiments, and prove that Mens merchandise was killing the performance of the book. However, these experiments required many folks in print production and creative to create various versions of the catalog. Once created, it would be close to two months before the print production process was completed, resulting in catalogs being mailed to customers. Another month needed to go by before a proper statistical analysis was completed.

So, sitting in this meeting, my choices were to recommend a three month process to test the hypothesis in just one catalog, or to quickly review as a team the past eight catalogs in an ad-hoc, unscientific manner, and make a decision as a team before leaving the room.

It requires a lot of patience to learn the balance between making ad-hoc, gut-feel decisions and doing a thorough, accurate statistical analysis. You never really perfect the balance, you make mistakes, and you make the right decisions.

The key factor in this is that you "make decisions". Decisions, positive or negative, move a business forward, increase accountability, and reduce red-tape.

I once met with my marketing Vice President, when I was a statistician. I wanted a lot of time to do an analysis "the right way". He told me that he'd rather make five decisions with 80% accuracy than make one decision with 100% accuracy, because at the end of the day, you'd make four correct and one incorrect decision, whereas the "right" approach yielded only one correct decision. He preferred to make four right and one wrong decision each day than making one right decision.

I've tried to balance his viewpoint with my statistical heritage of "being right". I've always admired the leader who is decisive, makes four right and one wrong decision, and takes accountability for the wrong decision.

Top Four Articles, March

An odd month for the top-rated articles.

Number Four was "Nordstrom Integrates RSS Feeds and Search".

Number Three was an essay titled "Leaving Eddie Bauer".

Number Two was an article about "Free Shipping And Free Returns At Victoria's Secret".

Number One was an essay titled "Leaving Nordstrom".

Leaving Eddie Bauer

Last week, I talked about the last days of my tenure at Lands' End. Things ended differently at Eddie Bauer.

Eddie Bauer was a profitable business in the late 1990s. Following a bad year in 1998, our catalog team was able to drive all-time record levels of profit in 1999.

By the end of 1999, the online channel had captured the imagination of Eddie Bauer customers, and the imagination of employees all across the Seattle metropolitan area. New online businesses were springing up right and left, offering employees stock options loaded with potential for significant wealth.

At Eddie Bauer, I was willing to settle for a new computer. My personal computer could not handle the volume of data I wished to analyze. It worked, but not to the level of performance I desired.

Acquisition of a new personal computer (if you already had a working personal computer) required the signed authorization of your Divisional Vice President, as well as a Finance Director and an Information Technology Director.

For whatever the reason, my personal computer request was denied. Repeatedly. Big Company + Red Tape = One Frustrated Employee!

Meanwhile, all around me, people were becoming paper millionaires. I couldn't order a new personal computer, while paper millionaires were playing Foosball at internet startups. It was time for a change.

A former Eddie Bauer employee worked at an internet startup called 'Avenue A', and recommended I speak to the founder about an analytics leadership position. I interviewed for a position, and ultimately accepted an offer that included stock options, an office, a high-speed personal computer, and budget for research and hardware as needed. Sign me up!!!

I resigned from Eddie Bauer. In my final week at the heralded multichannel retailer, Avenue A celebrated its IPO. My shares, granted to me at $8, were valued at nearly $79 on Day One!

With great excitement, I embraced my employment opportunity at Avenue A. My first day was an orientation day.

I showed up early for the start of day two, arriving at 7:50am. At 7:55am, my boss (not one of the founders, whom I am very fond of) informed me that I would not have an office. I would share my office space with at least three individuals. I would not have budget for research and hardware. In fact, the job I accepted did not exist. I would be assigned to large clients, responsible for helping them with their online analytical needs. I would be responsible for developing analytical products and services.

I reminded my boss that this is not what I signed up for. My boss reminded me that this was an internet startup, and that it was important to be flexible.

Five minutes into my sceond day at my new job, I realized I was in for an interesting ride.

Over the next ten months, the value of a share of Avenue A stock would decrease from nearly $79, to around $1 a share.

If there is anything I learned from that experience, it is the importance of running "to" something, as opposed to running "from" something. Because I became frustrated by the red-tape at a large, established retailer, I chose to run from it. Having something great to run to may have benefited my career.

Next week represents seven years since I left Eddie Bauer. Eddie Bauer has struggled since 2000. Avenue A became aQuantive, and became one of the most successful of the internet startups of the late 1990s, generating profit since 2002.

Working At Very Large Corporations

How many of you work for large corporations?

I spent seventeen of my nineteen professional years working for companies that sold at least a billion dollars of merchandise on an annual basis. As a result, I am probably a 'big company guy'.

Back in 2000, I spent ten months working at an internet advertising startup called 'Avenue A' (now called aQuantive). Within two week of being hired, I worked on a small team of four people. We created a product that we took to market just six weeks later. No red tape, no approvals, just a small company allowing a small group of individuals to use their experience and best judgement.

Compare that experience to things that happen in large companies.

During my time at Eddie Bauer, I was Director of Circulation. This meant I was theoretically responsible for determining the best way to determine how to mail customers catalogs. My job was to maximize sales and profit by determining an optimal catalog contact strategy.

In 1998, I wanted to add a catalog to our contact strategy. I determined who the target audience would be in this additional catalog mailing. I determined how many pages should be in the catalog. I determined the merchandise composition of the catalog. I determined the in-home date for the catalog. I calculated the expected net sales, profit, and ROI of this endeavor.

To get this decision approved, I had to do the following:

• My boss, the Divisional Vice President of Marketing, had to approve of my idea. He could alter the page count, merchandise composition, or in-home date. He could approve, alter or kill the idea.
  
• If approved, the Sr. Vice President of Marketing had to approve of my idea. He could alter the page count, merchandise composition, or in-home date. He could approve, alter or kill the idea.
  
• If approved, the Executive Vice President of Global Brand Direction had to approve of my idea. He could alter page count, merchandise composition, in-home date, and suggested creative presentation. He could approve, alter or kill the idea.
  
• If approved, I had to pass the idea past the Director of Inventory Management. She had to support the sales plan by making sure that merchandise would be available. She could alter page count, merchandise composition and page count. She could alter or kill the idea.
  
• If approved, I had to pass the idea past a team that I participated on, a team that focused on maximizing the catalog strategy. Our internet marketing leader, finance leader, operations leader, creative leader, and inventory leader could all alter the page count, merchandise composition, page count, in-home date, or creative execution. This team could approve, alter or kill the idea.
  
• If approved, I had to pass the idea past the Executive Management team --- a team of Executive Vice Presidents, and our President/CEO. This team could alter page count, merchandise composition, in-home date, and suggested creative presentation. This team could approve, alter or kill the idea.
  

Assuming that I didn't have to go back to the drawing board and re-work my numbers, the idea, altered and morphed based on the feedback of numerous leaders, became policy.

Policy meant that many employees learned this idea was likely to happen. If powerful employees were opposed to the idea, they could lob the project back to any of a number of executives, who could begin the approval discussion process anew.

This process of iteration either resulted in a final decision, or resulted in the death of the project. Occasionally, there was not enough time to implement the idea, resulting in the death of the project.

Many big companies have better decision making processes than this. Many big companies have sub-standard decision making processes.

We wonder how big companies like JetBlue can completely ruin seven spotless years of brand equity with one day of bad mistakes. We wonder how Microsoft fails to compete with Google, or Apple, or a myriad of competitors. We wonder how Ford and Chevy implode when faced with foreign competition. We question why Dell plunders its brand heritage at a time when it needs to consider a viable online strategy amid significant competition. We wonder why record labels are busy destroying the music industry.

I have yet to work for a company led by 'dumb people'. It seems that problems occur when a bunch of smart, strong business leaders experience conflict, and are required to maintain sales and profit growth.

The self-organizing processes that occur when decisions need to be made become part of the culture of a large organization. Eventually, the culture becomes inflexible. The business struggles to be able to right itself, and focus on the change needed to survive.

I cringe when a pundit suggests that companies don't have the guts to ask questions. I have yet to work for a business that didn't have the guts to ask tough questions, or to make changes. That being said, every big company struggles to overcome a culture that formed over a long series of good decisions that led to successful business results.

Do you work at a large company, or a small company? Have you experienced the challenges I described in this article? What have you done to overcome these challenges?

Eddie Bauer CEO To Receive $10,000,000 After Sale Closes

I'm not sure why these announcements continue to surprise and disappoint me. Think about all of the employees who dealt with incredible stress trying to keep the Eddie Bauer brand afloat, earning next to nothing in the process. Then think about this: Eddie Bauer's Loss Is CEO's Gain.

J. Jill, Coldwater Creek, or an Eddie Bauer Catalog?

Today, this sale catalog came in the mail. Go ahead and click on the image. Do you see the company/brand name anywhere on the cover of this catalog?

I asked my wife who's catalog this was. She guessed it correctly after glancing at the cover for about one second. I asked her how she knew which brand published this catalog. Here is her response:

"It was either a J. Jill catalog because of the font, a Coldwater Creek catalog because of the merchandise, or an Eddie Bauer catalog because of the word 'sale'".

Your turn to participate. Is this a J. Jill catalog, a Coldwater Creek catalog, or an Eddie Bauer catalog?

Here's a more important question that you can answer, on your own, or in the comment section of this post. Is it wise for a company to not mention their brand name on the cover of a catalog? Is this brilliant marketing, or completely bone-headed marketing? What do you think?

Google Search and Eddie Bauer Merchandise

We marketers continue to give Google ownership of our business. Are we getting the results we deserve? This example shows how far search engines have to go before they are doing an adequate job.

Try this Google search: eddie bauer jeans style # 5318. Which site shows up #1 out of 741 on November 12? Oh, it is The MineThatData Blog. And the person doing the search clicked-thru to my website.

Do you think the customer had my site in mind when s/he searched this phrase?

Eddie Bauer does win the paid search battle. Thing is, I've trained myself to not even look at the paid search results, so I didn't notice this fact until the third time I looked at the results.

As we continue to hand over a portion of our businesses to the folks at Google, Yahoo! and MSN, we need to hold them accountable for producing accurate search results. Or, we need to figure out how to make our website pages search friendly, so that this doesn't happen.