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Archived Nuggets

The Corporate Blogging Book

August 3, 2006:  For whatever reason, I follow the blogging efforts of Debbie Weil.  This individual spent about one year writing a blog, always talking about concepts congruent with her book.  Next thing you know, she has somewhere between 500 and 1,000 visitors a day, based on traffic data from Alexa and my estimates of their reach per million visitors.

So after a year of faithful blogging, her book debuts highly ranked on Amazon.

This example illustrates how marketing has changed.  Via hard work, authenticity, creativity, dedication, reputation, and talent, she was able to build an audience that was very ready to buy her book the day the book was available.

Imagine the two-way conversation companies can have with their most loyal customers, and the benefits derived from such a conversation.  Obviously, there are risks involved.  But companies have a huge opportunity to obtain information about their best customer's interests and preferences, all for free.  At minimum, the database marketer could capture the fact that avid customers are willing to comment, and figure out how best to use this information to better serve the customer.

Over the next five years, companies are going to figure out how to replicate this blogger's success in their business model.  It should be interesting to see how this develops.

Shipping Expense At Amazon.com

July 31, 2006:  Database Marketers frequently analyze the impact of shipping and handling rates on top-line sales and bottom-line profit.  Amazon.com released second quarter results last week.  Their 10-Q filing illustrates shipping and handling revenue.  For the first six months of 2006, Amazon received $257 million in shipping revenue, 5.8% of net sales.  During the same time period, Amazon incurred $385 million in shipping expense, 8.7% of net sales.  In total, Amazon lost $128 million dollars shipping merchandise, or 2.9% of net sales.  Amazon accounts for shipping revenue in their net sales line, and accounts for shipping expense in their cost of sales line.

As you may know, most direct marketers at least break-even on shipping expense, with many direct marketers realizing a profit on the shipping of merchandise.  Amazon cannot possibly drive enough sales to offset the loss in shipping revenue.  A ten percent increase in sales due to free shipping only results in an ever-increasing disparity in shipping revenue and expense.

There are instances in the document where Amazon states that their goal is to drive down expenses.  And this is where the strategy becomes plausible.  Without shipping and handling expense, gross profit was 28.5% of net sales.  After accounting for shipping and handling expense, gross profit was 23.9% of net sales.  In other words, free shipping significantly decreases gross profit.

Therefore, if Amazon can reduce cost of goods sold, they can offset free shipping, and maintain profitability.  By applying the hammer to their suppliers, they reduce the cost of goods sold, thereby covering shipping expense, theoretically passing the savings along to the customer.

There is a flip side to this.  Take my book, as an example.  After accounting for shipping and handling expense, Amazon earns between seven and eight times as much profit as I earn from the sale of one of my books.  By completely hammering the supplier (my publisher), they pass along free shipping to you.

So enjoy your free shipping next time you order from Amazon!  Somebody is paying for it.  It isn't Amazon, and it isn't you.

Database Marketers and Belief

July 29, 2006:  Seth Godin has a brief post on belief.  Database Marketers, especially those who work in the field of Business Intelligence, struggle with belief.  Anytime a BI person has to share facts with people, beliefs are likely to override facts.  If I had a dollar for every person who believed their opinions over my facts, I wouldn't have to work anymore.

The best you can do is work with honesty, integrity and humility.  If people choose to disagree with your facts, let 'em.  Show that you consistently act with honesty and integrity, and over time, people will be more likely to agree with your information.  Database Marketing and Business Intelligence are about the long-haul, not about making a short-term splash.

MineThatData Is Now The Second Highest Ranked Database Marketing Blog In The World

July 29, 2006:  Only you, the loyal reader, stand between MineThatData and the coveted #1 spot among Database Marketing blogs, according to Technorati.  Look out www.neomarketing.tv, MineThatData is on the prowl!  Kudos to Acxiom Direct for moving into 4th place.

Velocity Marketing

July 28, 2006:  Dr. Mark Klein, Arthur Einstein and Amy Grainger at Loyalty Builders wrote this article, found on the Catalog Success website, titled 'The Five Laws of Velocity Marketing'.

The way that Klein, Einstein and Grainger outline this concept is relatively new, interesting, and can provide insights into your business.  In a nutshell, the authors advocate segmenting your customer file into those who are increasing in loyalty, and those who are decreasing in loyalty.

Database Marketers can use these concepts to modify contact strategies.  In this manner, the information is actionable.  And in today's marketing world, actionable strategies can be few and far between.

In my book, I spend a fair amount of time talking about forecasting the effects of increased and decreased loyalty on the future of a business.  The authors of this article focus on using this data in combination with marketing campaigns to increase sales and profit.  I argue that the information can also be used for strategic purposes. 

By understanding if customer loyalty is increasing or decreasing, and by correctly measuring the long-term impact of loyalty changes on the business, the Database Marketer provides strategic leadership within a catalog or online organization.  The Database Marketer becomes the sage who has the crystal ball that forecasts the future of the business.  Business leaders love to know where their business is headed, so why not become the invaluable asset responsible for guiding their strategies.

Has E-Mail Peaked?

July 25, 2006:  The good folks at Acxiom Direct (and let's give Acxiom management two points for giving a team of consulting experts the opportunity to blog with users --- a bold move for a big company) recently posted an article about E-mail already being labeled as 'old school'.  The author, Dirk Plantinga, suggests that Database Marketers segment their customers by behaviors like text messaging.

They offer good advice for Database Marketers.  In particular, those who got left behind by the internet and e-mail have a golden opportunity to get out in front of future changes in direct marketing by following Web 2.0 and text messaging and other social networking outlets.  I suggest that Database Marketers actively participate in these technologies, so that they can become adept at figuring out how to use the information within their own companies, and be ready to lead the pack when your company is ready to enter these marketing channels.

Direct Mail and Web 2.0

July 24, 2006:  It is interesting to watch people take concepts from different fields, and morph them together into something you hadn't previously considered.

The blog at Marigold Technologies illustrates this point.  This post talks about utilizing direct mail to complement Web 2.0.

I don't think I've read or heard about anybody leveraging direct mail to complement Web 2.0-style relationships with customers.  And I have no idea if the concepts they discuss would work.  But I applaud the innovation they suggest.  Instead of letting the online channel run all over print, they are at least seeking ways to integrate the two.  Kudos to Marigold Technologies!

Four Questions

July 23, 2006:  I am frequently asked questions about database marketing and multi-channel marketing.  Let's review four frequently asked questions.

Question #1:  Kevin, what is your grudge against multi-channel marketing?

To be honest, I don't have a grudge against multi-channel marketing.  Multi-channel marketing is loosely defined as the integration of catalog, online and retail channels and associated advertising channels to provide a seamless shopping experience for the customer.  However, I do take umbrage with the veritable plethora of pundits who are trying to sell products and services that facilitate multi-channel marketing.  Sears and Montgomery Wards were practicing multi-channel marketing before the depression.  Pundits suggest that the concept of multi-channel marketing was invented with the advent of the internet.

Question #2:  Kevin, do you believe in multi-channel marketing?

By all means, I believe that execution of an industry-leading multi-channel marketing program is important.  However, pundits will tell you that multi-channel marketing means everything to your success.  Multi-channel marketing has very little relevance if you fail to execute your merchandising strategy.  Ask Circuit City, who has been lauded for their 'order online, pickup in store' program.  Circuit City hemorrhaged money in 2005, in spite of executing a good multi-channel strategy.  In 2006, Circuit City increased comp store sales by 14%, as they identify merchandise that customers wanted to purchase.  The minute they executed their merchandising strategy in an acceptable manner, Circuit City became profitable.  Merchandise and operational excellence fuel the profitability of a business.  The increased profitability pays for the multi-channel strategies that pundits suggest you purchase.

Question #3:  Are multi-channel customers more valuable than single-channel customers?

Yes and no.  Pundits will tell you that multi-channel customers, those customers who purchase from your online channel and your catalog or retail channel, are worth "x" times more than a single channel customer.  This metric is highly flawed for a number of reasons.  First, multi-channel customers are likely to have been existing customers for many years, whereas single channel customers are more likely to be new to the business.  As a result, multi-channel customers are loyal customers because the like the brand, not because they are multi-channel customers.  The multi-channel status is a by-product of a customer being loyal to the brand.  Second, multi-channel customers, by definition, must have purchased at least two times, at least once from each channel.  Single-channel customers, by definition, have purchased at least one time.  A fair comparison is to compare a tri-channel customer against a single channel customer that has approximately the same characteristics as the tri-channel customer.  An even better comparison, one we used to run at Eddie Bauer, is to compare equal customer segments at a point in time, then measure twelve month future value of equal customer segments.  For instance, a tri-channel customer (catalog, online, retail) with three purchases is compared against a one-channel customer (online) with three purchases.  The twelve month future value comparison of these two segments is very enlightening.

Question #4:  What is the state of catalog marketing in 2006?

Catalog marketing's time has come and gone.  There will always be a catalog, and marketers will always find ways to use print to drive their business.  But it is not the primary driver of a direct business anymore.  In some businesses, it has maintained relevance, especially among some B2B direct marketers.  In B2C, the online channel has gobbled up 'customer mindshare'.  The customer first looks online when considering a purchase.  She compares the price of an item across many brands, and frequently buys the item online.  Catalog does have a role in the future of direct marketing.  I liken the evolution of the Catalog channel to what happened in radio.  Catalog is to direct marketing as AM is to radio.  In the 1970s, AM ruled radio.  But eventually, AM was trumped by FM, then FM was trumped by MP3s and Satellite radio.  AM radio had to evolve, in order to survive.  It found its niche, talk radio, and then AM flourished again.  Catalog will eventually find its niche, too.

Do you have an interest in participating in a future segment of "four questions"?  If so, please e-mail me with your proposed subject.  My only requirement is that the subject must fit into the world of Database Marketing, Multi-Channel Marketing or Business Intelligence.

Business Review:  Circuit City

July 23, 2006:  Visit the business review page for a summary of Circuit City performance.  See how their comp store sales are largely influenced by an 85% increase in online sales, year-over-year.

IBM And Multi-Channel Marketing

July 20, 2006:  I was researching the evolution of multichannel marketing, when I ran across a pair of interesting articles.  The first article was found on DMNews (which has a veritable plethora of articles about multichannel marketing, allowing one to observe the evolution of the concept).  It describes a $110,000,000 multichannel advertising campaign by IBM, announced on March 23, 2001.  The second article, written thirteen months later, talks about a new, multichannel advertising campaign totaling $350,000,000.  Take a moment to read each article, then return back here for my commentary!

There are many interesting things about these two multichannel marketing campaigns.  Of particular interest are quotes from Mark Rosen, who in 2001 was VP for Integrated Marketing Communications. 

"We are going to create something that will have legs.  It is going to be able to last beyond the normal year and a half that most campaigns in this category run for", boasted Rosen.  Yet just thirteen months later, IBM was on to another multichannel campaign.

Just as interesting were the comments about why IBM ran the multichannel campaign.  "We wanted to create synergy between the four products, DB2, Lotus, Tivoli and WebSphere --- within the same campaign for the first time.  Bringing the four together saves us money on people, creative, preparation and delivery time."

Both campaigns, totaling $450,000,000, were handled from a creative standpoint by Ogilvy & Mather Worldwide.

People wonder why I am sour on multichannel marketing and advertising.  This situation helps explain why.  Undoubtedly, Mark Rosen is a bright, talented individual.  But read his quotes.  Where do you read anything about how the IBM customer will benefit from this campaign?  We read about creating synergies, saving expenses, and minimizing creative and preparation time.  We read about how the campaign will have "legs".  We don't read about how pleased the customer will be, or how the customer will benefit, or how the customer's customers will benefit.

In just a little over a year, a $100,000,000 multichannel campaign was shelved in favor of another multichannel campaign costing $350,000,000.  An awful lot of children in Africa could have been fed for that amount of multichannel advertising!

My personal belief is that multichannel activities must directly benefit the customer.  Considering that IBM generates profit at about 40% of net sales, before general and administrative expenses, IBM had to generate about $1.2 billion dollars of sales from these ads, in order to make a profit on the advertising.  Implementing strategies because they have legs, or because they create synergies, or because the campaigns may win awards, can be an expensive exercise in vanity.

How Multi-Channel Marketing Is A Lot Like The County Fair

July 18, 2006:  Check out the multi-channel myth page for an intriguing comparison of multichannel marketing and your local county fair.  I know what you are thinking ... of course the article is intriguing, I wrote it!

Daimler / Chrysler to Outsource Accounting Jobs?

July 17, 2006:  This article at www.accountingweb.com discusses a possible plan by Daimler to outsource accounting, personnel and strategic planning staff to the Czech Republic and India.

I recently received a piece of direct mail from a large provider of marketing services.  The flyer recommended that companies outsource their Database Marketing functions to this organization.

I think about how I started my career, working in Database Marketing at three US-based companies over the course of twelve years.  Then I think about the future of Database Marketing, and how a twenty-two year old Database Marketer might have to think about crafting her career, in order to compete against a lower-paid Database Marketer from India.

The catalog business has been clobbered by the online channel, causing career changes among many talented catalog individuals.  Globalization and cheap labor are getting ready to nibble at the careers of professionals in the catalog, online and direct marketing industry.  It is time for Database Marketers to have a career plan that prepares one's self for this inevitability.  What do you have to offer our industry?  What can you offer your company that justifies the comparatively expensive price tag you charge verses somebody in India?  It is time to think about your personal value proposition.

BusinessWeek Online Article About Failure Breeding Success

July 16, 2006:  I read this article, in print, at the dentist office last week, about how failures can breed success in corporations.

What is the culture like at the company you work for?  Are you allowed to make mistakes?  Are you encouraged to make mistakes?  Is the environment you work in punitive, or supportive, when a mistake happens?

There are some mistakes at a company that simply must be minimized.  At catalog and online companies, you simply must be perfect in delivering the merchandise a customer ordered to their home.  You must have merchandise available when the catalog is in-home, or when the website has a homepage refresh.  Finance and accounting folks simply cannot make mistakes, for obvious reasons.  Your IT team must have perfect, bug-free code that allows the website to run correctly, and be up 24/7/365.

But there are areas within your company where mistakes are almost mandatory.  Merchandising folks cannot insure the future of the company without making many mistakes testing new products.  Marketing cannot learn how a customer will respond to various forms of advertising without making many mistakes.

I have always struggled with merchandising mistakes and creative risks in a catalog environment.  Because it costs between seven and ten dollars to send a thousand pages of paper out into the world, catalog represents very expensive real estate, and a failure can have negative consequences.  In an online environment, failure can be more easily tolerated, due to significantly lower costs.  An e-mail costs less than a penny to deliver, and can be so easily targeted to a prospect or purchaser, so why not try new things with this channel?

Online and catalog companies seem to have opportunities to make mistakes when the consequences of failure aren't great.  When marketing costs become expensive, or the amount of volume (holiday season) is so great that the volume pays the bills for much of the year, risk taking probably should be minimized.

How about your work environment?  How are mistakes viewed where you work?

Does It Really Cost More To Acquire A New Customer Than To Retain An Existing Customer?

July 15, 2006:  Industry pundits frequently tout the fact that it costs "x" times more to acquire a customer than to retain an existing customer.  Occasionally, pundits say this in order to encourage companies to purchase various products and services designed to retain customers.

In my opinion, it is far more important for a company to understand if it has optimized its retention and acquisition spend.  On the metrics page, I have an article and attached spreadsheet that helps one understand retention and acquisition tradeoffs.

New York Times Article On Search Terms, Customer Intent, And Database Marketing

July 11, 2006:  Read this article by David Leonhardt of the New York Times about users announcing their intentions when they enter search terms into Google or Yahoo.  I think this is one of the best written articles about how smart marketers can use database marketing to better understand customer behavior.  The applications of this article to your everyday job are just about endless.  Be it e-mail strategy, configuring or merchandising your website, or tailoring other marketing activities, the article does a great job of explaining how marketers might utilize search terms volunteered by customers.  Be sure to give this article a thorough study.

Fellow Online, Multichannel And Direct Mail Blogger

July 11, 2006:  I did a search yesterday on multichannel marketing, and came across this website, called www.MarketingHeadhunter.com.  Please take a peek, and subscribe to his RSS feed if it interests you.

Pier 1 Financial Struggles, and Brand Repositioning

July 8, 2006:  This week, information about Pier 1 and their first quarter performance was released via their 10-Q statement.  The company lost $34 million dollars in the first quarter, on net sales of $376 million dollars.

On page 21 of their 10-Q statement, management describes some of their challenges.  Pier 1 is trying to reposition itself to compete with higher-end home furnishing retailers, according to the statement.  Via merchandising and advertising strategies, the company hopes to educate the consumer as to the changes at Pier 1.

It seems to me that there are two very difficult challenges that face brands that wish to reposition or reinvent themselves.

First, how do you communicate your new brand strategy with the customer?  Management talks about monitoring direct mail and a new magazine advertising strategy, as two steps they plan to take in this education process.  Direct mail is a tough place to educate a customer about brand repositioning, and the tradeoff between education about new products and productivity of existing merchandise is a tough one to manage.  Management states that this education process will take time, and believes that the they will be able to persuade customers to return to their stores.  It can be tough (and expensive) to use direct mail, and advertising in general, to encourage a customer who has become disenchanted with a brand to get in a car and visit a store.  Think about it.  Imagine that you had a friend that changed, and disenchanted you.  After the friend broke several promises, and disappointed you several times until you decided you did not want to be friends with this person anymore, how long would the friend's behavior have to change before you trusted the friend again, and wanted to continue the relationship?  Now imagine that a company wants to prove to you that it has changed.  The company tries to communicate this to you via  catalogs, magazines, television advertising, and merchandise changes.  How many catalogs, magazines, and television commercials will it take before you trust the company?

Second, imagine the changes that have to happen within a company, in order for brand repositioning to happen.  In my opinion, there are at least four issues that have to all come together, for success to happen.

1. The expertise of managers leading the change.  Managers with experience leading an organization through a big change initiative, or with the leadership skills necessary to cause people to change, are very important.

2. Intimate knowledge of the customer.  Management must know the customer inside and out, and understand if new and existing customers are willing to accept brand repositioning.

3. Understanding of brand heritage.  Repositioning can be very successful when tied to the heritage of the company.  Management probably has a good understanding of why Pier 1 has been successful in the past, and why customers trust Pier 1 going forward.  Repositioning can be risky when there are significant departures from the brand's heritage.

4. Management ego.  If management wishes to first serve the customer, brand repositioning has a chance.  If management wishes to enact change to benefit their career, or increase share price, then brand repositioning is riskier.

Hopefully, Pier 1 will be able to break out of the funk it is currently in.

Branding and Return On Investment

July 1, 2006:  Jim Lenskold at Marketing Profs wrote this post about branding verses return on investment.

One of the comments that caught my eye is the comment about creating an alternate measure to ROI.

Brand marketers are handicapped by having to prove that their work drives a short-term return on investment.  There are many projects that marketers work on that the finance department does not require a return on investment for.  Take the copy used to describe a product on your website.  How often are copywriters held accountable for the return on investment of their copy?  If the copywriter is responsible for the message on a postcard promotion, yea, there is an implied return on investment required of the copy.  But what about the copy describing a product on a website?

For instance, on www.bestbuy.com, the following text appears on the homepage today:  "Inside select Best Buy stores, Magnolia Home Theater offers premier brands, expert consultants and state-of-the art demo rooms for an experience that exceeds your every expectation. Magnolia's in-home design and installation services make dreams real."

The use of copy shapes ones opinion of the brand.  The imagery Best Buy uses communicates who Best Buy wants to represent themselves as.  By using this copy, Best Buy is communicating to me that they have an upscale service that I may not have considered Best Buy for in the past.  And I doubt that anybody is holding the copywriter accountable for a return on investment for the thirty-eight words s/he wrote about Magnolia Home Theater.

Sometimes, arguments about branding come down to a perceived wasteful use of money.  Few people have a problem with the $75,000 in salary, benefits and bonus paid to the employee who writes copy at Best Buy.  And when sales decline, the company eliminates her position, so ultimately, she is indirectly held accountable for driving sales.  ROI pundits struggle with a million dollar expenditure on television commercials that are not directly tied to short-term or long-term sales increases.  It is here that I agree with Mr. Lenskold that a new metric needs to be created to measure the effectiveness of brand advertising, one different than awareness or impressions.  Without the metric, brand advertising folks will continually be criticized for failing to deliver a return on investment.

If you think of the value of a brand, at a public company, as the incremental market valuation above and beyond competitors with similar fundamentals (sales, profit, cash-flow, debt, etc. --- this is something Don Libey wrote about a few years ago), then brand marketers have a potential metric to evaluate the performance of their work.  If brand advertising truly contributes to an improvement in market valuation, then the brand marketing folks have done their job.

How would you define a metric to measure the effectiveness of brand advertising?

J. Crew Profit/Loss and IPO

June 27, 2006:  Multichannel merchant J. Crew (NYSE:  JCG) will issue an initial public offering this week.  The retailer has posted an impressive turnaround in an apparel environment filled with chaos.

Take a look at the improvements made over the past three years.  All data are freely available on the investor relations tab at www.jcrew.com.

                                                     2004        2005        2006

Net Sales (Millions)                       $660.6     $778.2     $924.1

Gross Profit (Millions)                    $249.7     $325.4     $398.0

SG&A (Millions)                            $280.4     $287.7     $317.7

Income (Loss) From Operations      ($30.7)     $37.7       $80.3

Pre-Tax Income (After Debt etc.)    ($47.4)     $12.0       $50.5

As you can see, after the IPO, debt retirement should significantly help this organization generate pre-tax profit that could exceed ten percent of net sales.  This would signal great performance in a less-than-stellar retail apparel environment.

J. Crew states that it spent $44 million mailing catalogs in 2004, $41 million in 2005, and $44 million in 2006.

In its most recent 10-Q statement, J. Crew announced a continued improvement in performance, with net sales of $233.3 million verses $204.6 million last year.  Pre-tax profit was $9.1 million this year, verses $5.5 million last year.  Again, interest expense consumed profitability.  Interest expense in Q1 was $19.2 million this year, verses $17.5 million last year.  The IPO is absolutely essential for J. Crew to improve overall profitability, and to retire some of the company's massive debt load.

In Q1, store sales increased from $145.2 million last year to $167.1 million this year.  Direct sales increased from $59.4 million last year to $66.2 million this year.  Catalog pages circulated increased by 1% this year, over last year.

J. Crew stated that in Q1, 68% of its sales were in Womens Apparel, 18% in Mens Apparel, and 14% in Accessories.

This should be an interesting company to follow.  Can they continue to improve merchandise productivity?

Multichannel Pricing Strategies

June 26, 2006:  Multichannel Merchant has a story from Curt Barry about multichannel pricing strategies.  The article features implied criticism of brands that do not have price parity across all channels (catalog, online, retail).  To be fair, Curt Barry has a vested interest in discussing these problems.  His  consultancy specializes in linking merchandising systems across channels.  The research he outlines is interesting, and is worth reading.

I have yet to find an article that links multichannel execution to greater customer loyalty, or improved lifetime value.  If this is such a big problem (and it certainly may be), then the solution of price parity across channels should yield more loyal customers --- especially more loyal multichannel customers.  Is this the case?

Multichannel pundits have a laundry list of things that companies should do, in order to fulfill the pundit's vision of multichannel marketing excellence.  Instead of exposing companies who fail to measure up to an arbitrary multichannel standard, it would first make sense to measure the living daylights out of what happens when multichannel execution is flawed, verses what happens to customer loyalty and lifetime value when multichannel execution is optimized.  If a direct link can be made between sales increases and profit maximization among retailers who execute outstanding multichannel strategies, then by all means, it is time to shout about multichannel opportunities.

Are you aware of any instances where the financial benefits of multichannel excellence have been documented, and measured in terms of improved customer lifetime value?  E-mail me (the link to my e-mail address is listed at the top of this page) your findings.  If good findings exist, I will post them here.

Online Marketing and Direct Marketing

June 21, 2006:  Back in the day, catalog marketers were able to easily separate prospecting efforts from retention efforts.  The beauty of merge-purge techniques allowed catalog marketers to easily identify customers who already existed on their housefile.  In large part, catalog marketers were able to allocate budget amounts to prospecting, and allocate marketing dollars to retention efforts.  The catalog marketer had control over his business.

Today, the direct marketer does not have control over acquisition and retention activities.  So much of online marketing relies upon identifying customers who are in a "need state".  The customer or prospect needs to purchase a camcorder.  She uses search engines like Google or Yahoo to research product.  She visits the website of the brand name she is interested in, to obtain more information about the product.  She checks message boards for user feedback about the product.  She visits shopping comparison sites, to identify the lowest price and best shipping policy.  Lastly, she visits the website of the company she identifies on the shopping comparison site, and purchases her camcorder.

Online marketers have very little control over this shopping experience.  This lack of control makes managing growth very difficult for today's online marketer.  The catalog marketer was a partner with merchandising, in helping grow the business.  The online marketer is forced to play a very subtle role.  The online marketer will find it challenging to fuel growth without dollars.  The catalog marketer had it really, really good, back in the day.

J. Jill And Multi-Channel Management

June 14, 2006:  J. Jill was recently purchased by Talbots.  Over the past ten years, J. Jill experienced rapid growth, retail expansion, and wildly oscillating profits.

Based on 10-K statements from when J. Jill was a publicly traded company, we can clearly see how retail, catalog and online channels interacted with each other, during J. Jill's period of rapid retail expansion.

                                                 2004       2002       2000       CAGR

Annual Net Sales (Millions)        $434.9    $347.6     $244.3    +15.5%

Pre-Tax Profit (Millions)              $15.0      $31.2       $21.3      -8.4%

Stores (End of Fiscal Year)            150          88            22    +61.6%

Catalog Circulation (Millions)         71.5       77.8         65.0      +2.4%

Catalog Square Inches (Billions)  426.8      497.2       424.6      +0.1%

Retail Net Sales (Millions)         $238.7     $127.8       $28.3    +70.4%

Direct Net Sales (Millions)         $191.1    $215.4     $219.4       -3.4%

Catalog Sales (Millions)            $110.5     $149.3     $184.3     -12.0%

Online Sales (Millions)               $80.6       $66.1       $35.1     +23.1%

The financials tell a very interesting tale.  Annual net sales increased by an average of almost sixteen percent per year.  However, pre-tax profit faltered, cut in half from a peak of $31.2 million in 2002.

While store sales increased by seventy percent, on a sixty-two percent average annual increase in the number of stores, the direct channel really struggled during retail expansion.  On flat circulation, direct net sales decreased by an average of three percent per year.  Even more disappointing is the twenty-three percent annual increase in online sales, during a period of time when competitors were posting far healthier gains.

Catalog net sales were nearly cut in-half during the four year period.  Some of the decrease had to be because of the transfer in business from the catalog to the online channel, some due to the transfer in business from the direct to store channel.

I frequently talk about the concepts of isolation, equilibrium, transfer and oscillation.  These are vitally important customer file dynamics to understand when evaluating multiple channels.  Had management run scenarios in 2000 and 2001, when the store channel was beginning to capture sales, would store expansion have happened so rapidly?  It seems entirely plausible that the catalog channel transferred customers to the online and store channels, while the online channel also transferred customers to the store channel.  Meanwhile, the store channel likely remained in isolation, keeping customers, not feeding customers to the catalog or online channels.

Database Marketers, you really need to measure the living daylights out of issues like this.  You can clearly see the impact that transfer of customers from the direct to store channel had on total profitability.  It is clearly possible that merchandise productivity played a key role in the decrease in profitability.  The impact of merchandise productivity can be measured in combination with multi-channel customer file dynamics.

Is Marketing Dead?

June 13, 2006:  I ran across this post from Stephen Denny, about marketing being dead.  His writing is interesting, check it out. 

If you are like me (and you probably aren't), you spent an awful lot of your career in the catalog industry.  And today, you watch the channel that you grew to know and love be reduced in relevance like AM radio was reduced in relevance by FM radio.  Or like FM radio is being reduced in relevance today by mp3 players and satellite radio.  And in ten years, we will talk about how online marketing is being reduced in relevance by whatever replaces the internet.

Marketing isn't dead.  But it is changing rapidly.  If you are in the Database Marketing field, measure the living daylights out of this evolution.  Quantify what is happening, and explain it in plain language to all who will listen.

Google, Microsoft, and Customer File Dynamics

June 6, 2006:  E-Commerce Times reports that Google is working on a bare-bones, web-based spreadsheet for its users.  Obviously, this product will compete with Microsoft Excel, and to a much lesser extent, the tool I use (OpenOffice.org's Spreadsheet tool).

When this happens, we have a great application of the concepts of Isolation, Equilibrium, Transfer and Oscillation.  Within Google, customers/users should, in theory, move back and forth between applications like this, and search.  This is equilibrium.  It is very unlikely that the user would use the spreadsheet application, and not use search (this is isolation).

Across companies, transfer is very likely to occur, as users choose not to spend money on a spreadsheet tool from Microsoft, instead using a free application at Google.  The very dynamic that helped Microsoft in the 1990s comes back to haunt Microsoft just a decade later.  And we move one step closer to having Google run our lives.

These same dynamics occur at the business you work at.  Your company might introduce a new product, a product which indirectly competes for share-of-wallet with existing products your company previously created.  Are you measuring and understanding these dynamics?

A Multi-Channel History Lesson

June 5, 2006:  DMNews recently opened up their archive of articles, going back to 1995.  You can search by author or by content.

This provides opportunities to see how we saw the world in the past.  For instance, Bill Dean wrote the following article back in 1999, "Moving Toward A Multi-Channel World".  Sometimes we forget just how much the world has changed in seven years.  What in the heck are we going to be dealing with in 2013?

The Warren Buffet Acid Test

June 4, 2006:  From Marketing Profs, this comment attributed to Warren Buffet:

"From which employee would I want to collect ten percent of her earnings, in perpetuity?"

Have you considered asking those who consume the information your team creates this question?  In Database Marketing, the quality of the work we do is very important.  It is just as important that we have assets (employees) whom our "customers" wish to "invest" in.  I think it is critical that employees outside of Database Marketing view us as being people they wish to invest in.  All too often, we Database Marketers focus on the data and mathematics.  We don't spend enough time marketing ourselves like a strategic asset.  Let's change that!

Are We All At The Mercy Of Google?

May 30, 2006:  My May 23 post about a new radio station called Movin 92.5 resulted in a valuable lesson for future posts.

Google picked up the fact that my heading said 'Movin 92.5'.  And since that day, I get a steady stream of visitors who search Google for information about this new radio station.

In a perfect world, I would like for search engines to refer readers interested in my commentary.  By being sloppy, and using a generic heading, Google facilitated an unusual mix of traffic.  Many individuals arrive her by doing a search on 'lifetime value', and hopefully leave happy.  The high number of visitors arriving here for sage wisdom on 'Movin 92.5' are undoubtedly disappointed, and worse yet, probably find me a bit geeky.

Organic traffic is important to anybody hosting a website.  This little exercise illustrated two important facts.  First, I will be very careful about the content I feature in my headings and RSS feeds.  Just as important, I continue to learn how we are all at the mercy of Google. 

Whether we want to admit it or not, we rely upon Google and other search engines in our daily lives.  Those of us hosting websites are at the mercy of Google to drive organic traffic to our sites.  Our ability to effectively market ourselves is as influenced by our actions as by the actions of algorithms at Google. 

We continue to lose control over the direction of our marketing activities, as machines and algorithms play a key role in the traffic-generation process.  My content must be written in a manner that is 'Google-friendly'.  And if my content ends up being 'Google-friendly', but does not catch the attention of my readers, what is the point of my content?  We are increasingly at the mercy of Google.

Dell To Open Two Stores, Is This Multi-Channel Marketing?

May 29, 2006:  Multi-Channel pundits will be the first to tell you that your multi-channel customer wants the same experience across all channels.  If that is the case, then Dell is going down an interesting path with last week's announcement that it is opening two stores, one in Dallas, one in New York City (story and commentary courtesy of digg.com).  Customers will not be able to purchase product in either of the 3,000 square foot stores, according to an article on www.statesman.com.

How do you feel about Dell's plunge into 'multi-channel' marketing?  Each of these stores will undoubtedly cost Dell several million dollars.  Is this money well-spent?  Is it foolish to not offer customers the opportunity to walk out of the store with merchandise?  Is this 'channel' of marketing more effective than television or radio advertising?

I believe the objective of any kind of marketing or advertising has to be to get customers to purchase something.  Maybe this strategy will be instrumental in bringing new customers to Dell.

Over ninety percent of all merchandise is sold through the retail channel.  A direct merchant, like Dell, is destined to struggle once it becomes so big that it has acquired the majority of the customers likely to purchase via the direct channel.  At the point of saturation, market share is likely to decrease, as competitors who participate in retail have access to far more potential customers than Dell has.  Apple makes more than $20 million in net sales across 133 retail stores, accounting for $2.6 billion in total sales.  In order to maintain or increase market share, Dell may have no choice but to move into retail.

Eddie Bauer And Marketing

May 27, 2006:  I increasingly read commentary from the Marketing Profs Blog, including this recent post about marketing from prominent Microsoft blogger Robert Scoble.  The article briefly discusses the fact that if customers don't want your product, there is very little that marketing can do.

And yesterday, we learn of the sad story of my former company, Eddie Bauer, losing $22 million on sales of just under $600 million, during the past six months, and announcing that it is for sale to 'increase shareholder value'.  Notice in the commentary that customers did not respond a merchandising direction that included younger styles, bright colors and tighter fits.

There is nothing that a Database Marketer can do to save a strategic direction that is failing.  Targeting catalogs, online marketing, and e-mails to customers who will like this product will only cause a marginal increase in productivity.  Ultimately, customers must love and crave the product.  No amount of Database Marketing, CRM, Multi-Channel Marketing, Online Marketing, Target Marketing, Statistical Marketing, or any other fad being promoted by vendors will turn around Merchandising and Creative mis-steps, and Operational failures.  Focus on what matters.

Mokrynskidirect Sold To infoUSA

May 24, 2006:  DMNews reported the sale of Mokrynskidirect to infoUSA.  This sale continues to signal the evolution of the direct marketing industry.  Our industry moves further and further away from catalog, and moves closer and closer to an online-dominated channel. 

I am happy for the management team at Mokrynski, who build a company through years of hard work and client loyalty.  These folks deserve to be rewarded for their contribution to direct marketing.

I can't help but think that our industry is slowly moving away from the core principals that made it successful.  Merchandising strategy, creative excellence, operational efficiency, customer insight and strategy, and financial discipline drive a successful direct business.  Our industry's mad rush to embrace multi-channel and search marketing has the potential to leave a lot of intellectual capital on the shelf. 

Movin' 92.5

May 23, 2006:  On my way home from work this afternoon, I was listening to a new radio station called "Movin' 92.5".  They were playing a song called 'PYT' by Michael Jackson.  I had the window down, and was singing the lyrics loudly ... 'pretty young things, repeat after me, say nah nah nah nah'.  As I looked up, I saw a pedestrian crossing the street, looking at me like I should get gonged on the old 'Gong Show'.

But enough about me.  This new radio station provides an excellent example of the concepts of 'equilibrium' and 'transfer'.  At the start of 2005, I primarily listened to 101.5 and 103.7.  In the middle of 2005, 96.5 became 'Jack FM'.  Instantly, my loyalty transferred from 103.7 to 96.5.  At this time, 101.5 and 96.5 are in equilibrium, since I listened to both stations equally.

And then a few weeks ago, 92.5 became "Movin' 92.5".  I transferred my loyalty from 101.5 to 92.5.  Now, 92.5 and 96.5 are in equilibrium, as I listen to each station equally.

Radio provides a fertile ground for studying the concepts of Isolation, Equilibrium, Transfer and Oscillation.  Listeners are constantly changing loyalties.  In addition, listeners transfer loyalty from radio to satellite radio, as well as from radio to MP3 players.

The radio industry responds to this transfer of listeners by offering HD-Radio (improving the quality of their product), as well as having MP3-style formats (Jack FM).  They manage expenses by eliminating disc jockeys.  The 'Jack FM' and "Movin'" formats do not have disc jockeys.  When listeners are transferring out of your business model, expenses must be reduced, or new listeners must be found.  Each radio station fights for market share among an ever-decreasing base of listeners.

The business you work in is filled with examples similar to what I describe above.  How do you strategically manage these dynamics?  Do you measure these dynamics?  Do you look at the these dynamics within your organization, as well as across your competitive landscape?

The 'Multi-Channel' Myth

May 20, 2006:  I have come to the realization that the Direct Marketing industry is in the process of strategic collapse.

This does not mean that Direct Marketing industry itself is collapsing.  Rather, the strategic vision of our industry is being clouded by a veritable plethora of in-fighting over the tools and techniques that will lead this industry in the next decade.

Consider this article in Multichannel Merchant.  Dave Smith discusses utilizing insert media, television and radio for prospecting for new customers.  For instance, he proposes utilizing catalog blow-ins as a cost-effective prospecting tool, and recommends radio spots to promote products that do not require significant visualization to get a sale.  Are these techniques congruent with how a customer behaves in 2006?  Maybe, maybe not.

Another article in Multichannel Merchant talks about using branding as a tool to increase sales.

Direct Marketers are rapidly moving down the evolutionary path of Search Engine Marketing.  This article in iMedia Connection talks about using search for targeting audiences.  Notice the 'marketing channels' tab on the left side of the page.  Click on it.  Do you see a print channel listed there?

And then we have DMNews, who so strongly believes in print as a key driver in multi-channel sales that it rushed to publish comments defending print campaigns without adequately illustrating that the comments were not an actual contributed article.

For the purpose of this post, I define strategic collapse as 'the fragmentation of strategic alternatives into isolated positions that are in opposition of each other'.  As we approach the summer of 2006, the Direct Marketing industry is fully immersed in strategic collapse.

I observe factions who dig their heels in, and promote the many benefits of catalog.  They romanticize the image of a customer sitting on her couch, with the fireplace on, thumbing through wonderful merchandise and beautiful creative that accurately communicates the brand.  They envision the customer picking up the telephone, and communicating her purchase wishes to a caring customer service representative.

I also observe factions who have moved in the exact opposite direction.  These factions are all about online marketing, are all about search.  They care deeply about the bidding process on Google.  They run mathematical algorithms to determine how much to pay online search organizations.  This version of direct marketing is colder, more analytic, more process driven, and ultimately, less strategic.

The brand marketers truly struggle today.  Who doesn't want to create the next Starbucks?  Who doesn't want to replicate the success of Nike?  Marketing has become so much more accountable, and as a result, brand marketing activities can be measured today.  And so often, the return on investment is very poor.  For every Starbucks or Nike, there are thousands of failures.  Accountability is slowly killing brand marketing.  The allure of the success of a properly managed brand campaign drives so many failed brand marketing campaigns.  Brand marketers are further hamstrung by the dwindling television and radio audience.  The channels that brand marketers used are being marginalized by a reduced audience.

And then we have the CRM industry, promoting software that allows marketers to directly communicate with customers.  Frequently, the problem with CRM is that we, as customers, do not want to be marketed to in the way that CRM vendors promote their tools.  Who among us enjoys being up-sold or cross-sold?  Who among us enjoys hearing about the next great thing that we are being offered for a discount, at the end of a purchase transaction?  There has to be a better way to convey the benefits of CRM software.

Direct Marketers get pulled in all sorts of directions.  The 'multi-channel myth' argues that you have to have consistency across catalog, online and retail.  It argues that you have to have the catalog to drive sales at online and retail.  It argues that you have to have a powerful brand message that creates an emotional bond between the customer and the brand.  It argues you must have the CRM infrastructure to capitalize on the customer opportunity at every 'touch-point'.  It argues that merchandise must be available across all channels, and that the customer must be able to dictate where they want to receive it.

In my opinion, these messages are causing strategic collapse within Direct Marketing.  When the focus of a Direct Marketer is on these tactics, and which of these tactics 'is right', the direct marketer is bound to fail.  The focus of the Direct Marketer must be on the merchandise.  Without focusing on the merchandise that the customer wants, the customer won't purchase from you.  When the customer won't purchase from you, none of the tactics described in this post matter, and we lose our jobs.

The Direct Marketer must focus on operational excellence.  Without operational excellence, the Direct Marketer will not be profitable, and cannot stay in business.  The Direct Marketer must focus on what the customer wants.  If the customer communicates that she wants a CRM system that recognizes her everywhere and offers her discounts and up-sell opportunities, then it should be implemented.  The Direct Marketer must focus on acquiring new customers, and ignore the commentary of vendors who state that it costs "x" times more to acquire a new customer than to retain an existing customer.  Anybody who has run long-term planning simulations of a direct business clearly understands the importance of customer acquisition.

Strategically, the Direct Marketer must focus on integrating all of the concepts mentioned in this post.  Too often, the Direct Marketer picks sides.  The catalog executive is chosen to run the Direct division, and brings a bias toward old-school techniques.  Maybe the online executive is chosen to run the Direct division, due to the shift in customer behavior to the online channel.  This can cause all of the old tools and tricks to be forgotten, in favor of great online marketing.  Maybe the brand marketer is chosen to run the Direct division, to promote one consistent advertising message across all channels, at the expense of operational excellence.

It is time for Direct Marketers to stand up for ourselves.  We need to not buckle to the fear we feel when we are told that we must have various marketing tools and techniques in order to be successful.  We need to lead our industry into the next decade. 

I strongly believe we will do this when we focus on offering merchandise that exceeds our customer's expectations.  We will do this when we achieve operational excellence that guarantees future profitability.  We will do this when we accurately measure how our customers interact across channels, brands, and product classifications.  Accurate measurement of customer interactions should strongly influence the direction of our marketing strategy.  When my industry finally does these things, I will be ready to sign-up for the reality of 'multi-channel' marketing.  Until then, everything I read and hear is still a myth.

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Red Envelope Reports Fiscal Year-End Loss

May 17, 2006:  Yesterday, online and catalog gift purveyor Red Envelope (NASDAQ:  REDE) reported an annual loss of $5.6 million dollars, on net sales of $113.2 million.

I listened to their investor conference call.  They plan on achieving profitability by focusing on a 30-50 year old female core customer who purchases jewelry and accessory gifts, and by focusing on organizational effectiveness.

Let's take a look at their profit and loss statement:

Let's assume that the business is being run as efficiently as possible.  What type of increase is needed to bring this business to break-even?  This P&L illustrates what happens, when Gross Profit percentage remains constant, Fulfillment Cost percentage remains constant, Marketing Costs are flat, and G&A does not change.

To break-even, a fourteen percent increase in merchandise productivity is required.  Similarly, to achieve a five percent profit as a percentage of sales level, net sales need to increase to $149.0 million, an increase of thirty-two percent.

Obviously, a thirty-two percent increase in merchandise productivity is not going to happen over-night.

Let's assume that Red Envelope could have improved their Gross Margin to fifty-four percent, that they could reduce Fulfillment Costs to twelve percent of net sales, that they keep Marketing Cost flat, and that they keep their G&A flat.  Here is what the P&L looks like:

This is easier said than done.  By improving inventory management, which reduces liquidations and improves gross profit, and by improving the process to pick, pack and ship items, Red Envelope can get close to break-even.

Lastly, what happens if Red Envelope achieves these efficiencies, and achieves a ten percent improvement in merchandise productivity?

I think this helps illustrate the challenges that Red Envelope faces.  There must be significant improvements in operational efficiency, coupled with a significant improvement in merchandise productivity, in order to achieve a marginal rate of profitability.

This may explain why Management at Red Envelope announced that they are exploring strategic alternatives.  Long-lasting profit appears hard to achieve.

3-D Online Shopping

May 15, 2006:  On a day when DMNews features two editorials about the continued need for catalogs to drive sales (http://www.dmnews.com/cgi-bin/artprevbot.cgi?article_id=36881) (http://www.dmnews.com/cgi-bin/artprevbot.cgi?article_id=36880), this article talks about the future of online shopping in a three-dimensional environment (http://news.com.com/Mapping+a+path+for+the+3D+Web/2100-1025_3-6069459.html).

We market in unusual times.  Old school techniques like catalog continue to have marginal relevance in a world where the channel that replaced it (online) is about to be cannibalized by something we can barely even conceive (3D Online Shopping).  Catalog marketers enjoyed decades of importance.  The life-span of an online marketing expert could be much shorter, should new technologies render online shopping, as we know it, obsolete.

Imagine a day in the not-so-distant future when Shop.Org touts itself as a multi-channel conference for old-school online marketers and the hip newbies from the three-dimensional web.  Imagine Google and Yahoo touting the continued importance of two-dimensional search in a three-dimensional world dominated by new companies we cannot yet conceive.

The future is coming.  In five years, will anybody even care that J.C. Penney cut circulation back in 2006?

Return on Customer Discussion

May 10, 2006:  In researching this evening's commentary, I stumbled across a series of articles from 2005, pitting folks like Ray Schultz, Jim Wheaton and Leo G. Sterk against 1to1 pundits Peppers and Rogers.

Shultz writes this, in response to the publishing of Peppers and Rogers book on "Return on Customer":  http://chiefmarketer.com/crm_loop/crm-cynic-072805/index.html.

Peppers and Rogers respond in this article:  http://chiefmarketer.com/crm_loop/peppers-rogers-092205/index.html.

Jim Wheaton and Leo G. Sterk then jump into the discussion: http://www.directmag.com/mag/marketing_don_martha_deserve/.

To me, the real issue that is being discussed is one of credit.  To be fair, few concepts in database marketing are really new.  Most concepts are adaptations of work previously done by gifted people working in a different time, under different conditions, while working on different problems.

Peppers and Rogers take database marketing concepts, and re-formulate them in a way that many people can understand.  There is power in translating concepts that few understand into topics that many understand.  On paper, their translation of the concept of lifetime value seems easily implemented.  However, companies struggle with a transition to "return on customer".  Customers are scarce.  They are even more scarce when there isn't any product for customers to purchase.  Peppers and Rogers should at least get credit for trying to elevate and evangelize the database marketing profession.

In reading Jim Wheaton's response, I was reminded of the greatness of Robert 'Bob' Kestnbaum.  I only spoke with Bob once, in the Fall of 2001.  I e-mailed Bob a few questions about how one might implement a longitudinal catalog contact strategy.  Shortly thereafter, Bob called me.  We enjoyed a twenty minute discussion.  In instances where I was heading down a customer rat-hole, he directed me back to the importance of product analysis and customer purchase life-cycle analysis.

The neat thing that I remember about the discussion was that there were no discussions about complex mathematical techniques, and arguments about who owned various methodologies.  There was simply an open dialogue about how best to tackle a problem.  Bob had no expectation that he would be compensated, yet he freely gave of himself.

I read that Bob spent his formative years at Montgomery Wards.  Given the history of that company, I am confident that Bob learned a great deal from leaders at Montgomery Wards, leaders who developed concepts and ideas without the benefit of a computerized database.  I'm willing to be those people were gifted pioneers who wished they could analyze their data in a more thorough manner.  Undoubtedly, Bob borrowed from those leaders.

Before somebody attacks my book, I want to make it clear that I have heavily borrowed from many people in the writing of my book.  I borrowed techniques from demographers and actuaries, techniques they have used for nearly a century.  I borrowed testing methodologies from agricultural statisticians who wrote about the concepts in the 1940s.  I borrowed long-term customer planning techniques from a gifted database marketing consultant named Jim Fulton, whom I worked with in the early 1990s at Lands' End.  I borrowed from countless people when I used a spreadsheet model to calculate lifetime value.  I borrowed rolling twelve-month file analytical techniques from people who worked at Fingerhut in the late 1980s.  I borrowed the concepts of Isolation, Equilibrium, Transfer and Oscillation from the field of Population Biology.

I will say that I repackaged all of these concepts in a way that is unique to me.  The book describes my style, my approach to cobbling together all these borrowed ideas.  I hope you find that my approach is a little different than others you have read.  Be fair when you argue about the materials discussed in the book!

Speaking Opportunities

May 9, 2006:  I recently sent an e-mail to folks I've worked with for decades, and other acquaintances, letting them know that my book is being released next week.

A colleague of mine wanted to talk about a speaking opportunity.  Part of the reason I was able to write this book is because I promised not to mention the company I currently work for, in the book, or in any marketing of the book.

This disclosure of information changed the nature of a potential speaking opportunity.  My colleague's audience were drawn to speakers from large, reputable companies.

I don't place any blame on my colleague and this person's audience.  I'm confident that, over the course of my career, I have eschewed opportunities to listen to knowledgeable people from small companies in order to listen to average individuals representing reputable companies.

The lesson I have learned is that it is important to value content from a bright, knowledgeable person, regardless of the organization the person represents.  Think about how much we Database Marketers miss-out on, because we apply filters to those we want to interact with.

Abacus Re-Branding

May 8, 2006:  You may have received an e-mail from the President of Abacus, talking about their re-branding efforts.  An article from their website discusses the re-branding effort (http://www.abacus-us.com/News_and_Events/Press_Releases/default.asp?p=105).

The world has really changed over the past decade.  Ten years ago, a cataloger would have dumped all of their names into the Abacus database, and would have spent $0.07 per prospect to mail a catalog to names in the Abacus database that the catalog did not already own.

Today, customers go to Google and search for a product with the cheapest cost and free shipping.  The need for Abacus is greatly reduced, and the marketing dollars flow from Abacus to Google or Yahoo or MSN or Amazon.com.

I like a lot of the people I've worked with at Abacus.  They are hard-working, earnest individuals.  I'm not sure that a re-branding effort with a new logo and clear mission statement can combat the transfer of customers from the catalog business model to the online business model.  This transfer of behavior, marketed as 'multi-channel', is what needs to be understood.  Hopefully, Abacus can use the data they have to thoroughly explain this change in customer behavior.  Since Abacus doesn't have the data that Google or Yahoo or MSN has, I don't know how they can possibly compete.

DirecTV and CRM Inspire a Database Marketing Rant

May 7, 2006:  An article via an RSS feed from E-Commerce Times (http://www.ecommercetimes.com/rsstory/50370.html) reminded me of the problems with CRM systems.

In a recent experience with DirecTV, I was trying to disconnect a receiver.  Usually, I can do this on their website.  However, something was amiss with the website.  My receiver did not appear.  As a result, I could not disconnect it.

The helpful person I spoke with reminded me that this is something I can do on the DirecTV website.  Obviously, this prompt was not her fault.  Senior management tells her to offer this suggestion to the customer.  Maybe she could have assumed that I had a problem with the website.  In this case, DirecTV's CRM solution failed to even provide the base functionality I needed.

This situation with DirecTV, and the article I mentioned above, got me to think about how Database Marketers are perceived, and the real role we play in our organizations.

Database Marketers often get lumped together with CRM folks, and unfortunately, CRM does not have a great reputation in the direct-to-consumer and retail industry.

 A CRM solution should allow employees and customers to have a mutually beneficial dialogue.  Because of this, CRM solutions should be implemented by the technology folks, those good people in IT departments.  Database Marketers cannot win in the CRM implementation game.  Software vendors succeed by being paid large sums of money.  IT-related staff gain by implementing complex systems.  Database Marketers cannot compete with either of these audiences.

Database Marketers need to focus on providing insights and information that strategically drive a business.  We often focus our expertise on target marketing (assigning the right offer to the right customer at the right time --- a twist on CRM).  In these situations, we frequently make our companies a lot of money, but get very little recognition for it.  It is very difficult for the companies that we work for to understand that 'a neural network identified a pocket of high responders that drove a twenty-four percent increase in response among marginal housefile names'.  At this point, we become too geeky to be relevant, even though we may significantly contribute to the profitability of our organization.

It is important for Database Marketers to focus on projects that help determine the strategic path a company should take, while continually working on all the other projects we do.  We can help with CRM projects.  We should focus considerable time on target marketing, especially when it comes to e-mail.  However, we need to change how we prioritize our work, and focus on projects that directly benefit the executives we work for.

We need to utilize long-term simulations to clearly illustrate where our businesses are heading.  We need to communicate in plain, everyday language that executives understand.  We need to make our executives look good.  We need to not step on the feet of merchants, or creative individuals, by trying to dictate to them how to run their business simply because we can measure the results of their actions at a customer level.

Many industry pundits talk about how Database Marketers need a seat at the 'C-Level' executive table.  Quite honestly, I don't think we've earned a seat at that table. When we become more relevant, and provide value to executives, we will earn a seat at that table.  Until then, we are stuck in limbo.  We're not good enough to be in IT.  We're too geeky to be in marketing.  We talk too much about odd terms like 'RFM', 'Segmentation', 'Neural-Networks', 'Merge-Purge', 'List Rental', 'Exchange Balance', 'Cost per Click', 'Click-Thru-Rate', use of calculus (http://www.1to1media.com/view.aspx?DocID=29509), and a veritable plethora of geeky jargon that lacks relevance among our merchandising, creative, or the C-Level executive co-workers.

How are you going to work to change the perception of Database Marketers?  What do you think needs to be done to change our perception? Let me know your ideas (kevinh@minethatdata.com), or let me know if you completely disagree with me.  I will post interesting commentary and suggestions..

AOL And Lifetime Value

DMNews reported AOL's significant decrease in subscribers (http://www.dmnews.com/cgi-bin/artprevbot.cgi?article_id=36708&dest=article).

Lifetime Value is a dynamic metric.  Imagine what the lifetime value of AOL's customer base looked like in 1999, or 2000?  High retention rates and continued increases in new customers had to have yielded great LTV metrics.  Contrast that with LTV metrics that AOL would publish internally today, where low retention rates drive down LTV.

Database Marketers need to move beyond Lifetime Value.  It doesn't take a rocket scientist to calculate that LTV is decreasing at AOL, nor does an executive want to hear from a Database Marketer that LTV has decreased from $300 profit to $125 profit during the past five years.  Outside of balancing retention and acquisition spend, the metric has limited strategic value.

Database Marketers should marry the concepts of Isolation, Equilibrium, Transfer and Oscillation with Lifetime Value.  The marriage of these concepts yields actionable strategies. 

For instance, knowing that 'x' percent of dial-up customers transfer their business to broadband is valuable.  A simulation can be run to demonstrate the long-term value of customers who transfer their business from one product to another.  Furthermore, pricing tests and incentives can be executed, to understand how best to maximize the long-term value of a customer.

Increase In Postal Rates

A recent article in DMNews (http://www.dmnews.com/cgi-bin/artprevbot.cgi?article_id=36704) outlines potential increases in postal rates for mailers.

It is unlikely that a company will pass these increased costs to the customer.  As a result, a circulation manager may reduce circulation, in order to maintain overall company profitability.

For instance, a mailer sends an average of 500,000 catalogs in each drop, generating $2,000,000 in net sales, $300,000 profit, and 25,000 orders.

Then, postal rates increase, causing the overall cost of sending a catalog to increase by about two percent.

The circulation manager reduces planned circulation to 449,000, by cutting back on marginal housefile names and prospect names, in order to keep profit around $300,000.

This decision yields $1,895,257 net sales, $300,123 profit, and 23,691 orders.

In Chapter Four of my book, I outline how to run a multi-year simulation.  In this case, a five percent reduction in orders has a long-term impact on the business.  Fewer new names and fewer reactivated households result in a smaller active housefile over time.  The long-term simulation will illustrate whether short-term profit improvements are worth it, in the long-haul.

Williams Sonoma

A recent article from Shop.Org (www.shop.org --- login required) indicates that sixty percent of Williams Sonoma's online sales are driven by customers who are mailed catalogs.

This statistic can be challenging to interpret correctly.  Does the statistic mean that the online channel will lose sixty percent of it's volume if catalogs are not mailed?  Probably not.  The article does not mention what percent of online volume is truly generated because catalogs are mailed.  The real number is somewhere between zero percent and sixty percent.  I surmise that the folks at Williams Sonoma have measured this.  I would guess that they do know the real percentage, and are actively planning strategies to capitalize on the real percentage.

Fortunately, Williams Sonoma is a publicly traded company.  Just read their quarterly or annual SEC filings, to understand how they are acting upon what they have learned.

Internet Explorer and Mozilla Firefox

I downloaded the beta version of Microsoft Internet Explorer Version 7.  It is a little buggy, but it does really neat things to make RSS feeds easy to manage.

I am really enjoying Mozilla's Firefox, a free browser.  It's management of RSS feeds is fantastic.  You can subscribe to my RSS feed (the big orange XML button under Kevin's Links), and receive automatic updates whenever I update this page.  I scroll my RSS feeds on the bottom of the browser, so that the latest news is always running, sort of like a news ticker on CNN.

The relationship between these two browsers is a great example of transfer.  Microsoft has a monopoly on the browser market.  Their product is embedded into Windows, meaning it is pre-loaded on the vast majority of personal computers sold in the United States.

Yet Mozilla's Firefox (and Thunderbird e-mail client, which I also use) is stealing customers from Microsoft.  In my opinion, these products are competitive, if not superior, to Microsoft's products.  Add in Sun Microsystems "Open Office" word processors, spreadsheets and presentation tools, all free, and you end up seeing the future --- free products that emulate or improve upon what Microsoft does.

Oscillation and HP Printers

We have an HP printer in our home.  The printer business is based on the concept of 'oscillation'.

'Oscillation' is a dynamic where customers switch back and forth between products, channels, or brands.  With HP printers, the customer purchases the printer.  After a few months, the toner cartridges run out of ink.  The customer changes behavior at this point.  For the life of the printer, or until the customer has different needs, the customer purchases toner cartridges.

When the customer no longer wishes to use this printer, or has different needs, the customer changes behavior, and goes on the market for a new printer.

This behavior is 'oscillation'.  And the sad thing about this behavior is that HP never gets an opportunity to fully measure or understand it.

Businesses that can record each transaction have a huge advantage over HP.  With the appropriate data, HP could measure the exact number of cartridges sold before the customer buys a new printer.  At that point, HP could measure the profitability of the customer relationship.  The profitability analysis could determine an optimal pricing strategy.

Similarly, if the customer stopped buying cartridges, HP could infer that the customer has switched brands.  Retention rates could be measured by printer model number.

Clearly, businesses that are able to record all aspects of the customer relationship have a significant advantage over a company like HP.  It is the responsibility of Database Marketers to take advantage of the data they have, to benefit the businesses they work for.

Norton Anti-Virus

I like Norton Anti-Virus.  The software has protected my computer for the past seven years.

In April, it is time to renew my subscription.  Norton does not make this as seamless as they could.  I went out to their website, where I was offered the opportunity to purchase Norton 2005 for $34.99, or purchase Norton 2006 for $39.99 (or even a more comprehensive version of the software for a higher price).

I opted for the $39.99 version.  I added the software to my shopping cart.  At checkout, Norton put an $8 add-on service into my cart.  I had to type in a zero, then click a small hyperlink to go back to what I originally wanted.  Now how would you feel if you were shopping at your local Target store, and while pushing your shopping cart, a Target employee followed you throughout your shopping experience, randomly dropping items into your shopping cart as you navigated the store?

At checkout, Norton offered me a second year of service at just $19.99 if I lock-in for another year.  I've been a loyal customer for seven years.  It seems plausible that I should get a reward just for signing up for year eight, as opposed to receiving an offer to lock me in for yet another year.

Norton basically has my business, because the switching costs to a competitor are simply not worth it to me.  However, forced service add-ons in the shopping cart and no recognition of my loyalty indicate to me that Norton is being too clinical in it's cross-sell and up-sell program.  Norton needs to remember how it feels to purchase products elsewhere, and then apply those personal feelings to the marketing of their own products.

Oil Prices

Gas prices are surging over $3.00 per gallon?  Are you upset?  Certainly.  Are you going to change your habits?  Probably not too much.  I don't change my habits too much, either.  And that is a prime reason why gas prices can keep on spiraling.

Assume that as prices increase, consumption only marginally decreases.  Taxes on a gallon of gas are often expressed, for the most part, as a fixed amount per gallon.  The gas station you buy your gas from only makes a few cents per gallon.  Let's assume the amount is about twelve cents per gallon.

The rest of the cost of a gallon of gas is for crude oil (often around half the price of a gallon of gas), refinement, distribution and marketing.

Let's apply these factors to a scenario.  As the price of gas increases, gallons sold decrease marginally.  Look what happens to profit:

As long as consumption does not significantly decrease, profit for crude oil and refinement consistently increase.  This means a lot of very large companies make a very large amount of profit.  In fact, at $4.00 per gallon, in this simulation, consumption would have to be cut in half, in order for profits to be equal to $2.00 per gallon.

This probably isn't quite how the financial dynamics of a price of gasoline work.  However, it provides a great illustration of how to use scenario planning to explain why gas prices can increase unabated.  Unless consumption significantly decreases, the price of gas can continue to rise.

Scenario Planning

Imagine being a real estate developer.  There is a lot of uncertainty in the future.  Interest rates could go up, which may drive housing prices down.  Labor and supplies might cost more, due to Katrina, Rita and Wilma reconstruction.  The cost of land might become more expensive.

A developer identifies the relative change in profitability, based on changes in interest rates, supplies and cost of land.  The developer believes that each outcome below is equally likely.

     A third of the time, interest rates will decrease profit by 15%.

     A third of the time, interest rates will decrease profit by 5%.

     A third of the time, interest rates will increase profit by 5%.

     A third of the time, labor/supplies will decrease profit by 5%.

     A third of the time, labor/supplies will increase profit by 2%.

     A third of the time, labor/supplies will increase profit by 9%.

     A third of the time, cost of land will decrease profits by 10%.

     A third of the time, cost of land will not impact profit.

     A third of the time, cost of land will increase profit by 20%.

Each of these possibilities, when multiplied by each other, yield twenty-seven different theoretical outcomes.  Let's assume that the developer has a ten percent cushion built in, meaning that any outcome where profit is reduced by up to ten percent results in the developer continuing the project.  Should this project continue?

     44% of the time, profits will actually increase.

     59% of the time, profit will either increase, or decrease by up to 5%.

     70% of the time, profit will either increase, or decrease by up to 10%.

The developer uses scenario planning to identify the probability of a favorable outcome.  In this case, 7 in 10 scenarios meet the minimum expectations of the developer.

As a business leader, would you move forward with a project that had a 7 in 10 chance of exceeding your expectations?

The Newspaper Industry

A lot has been made about the plight of the newspaper industry.  This is one tough industry to work in.  Worse yet, how do you grow revenues in this industry?

An incredible wave of 'transfer' is happening in this industry, coupled with a decline in customer acquisition, and a reduction in retention.  This combination, this 'trifecta of trouble', is very difficult to reverse.

The newspaper industry had a monopoly on information.  It was the conduit, the middle-man, between talented journalists, news, advertisers, and readers.  The internet changed this relationship.  Today, anybody can be a journalist (look at me), writing about facts and opinions.  Anybody can create an RSS-feed, which instantly informs the entire world about 'news'.  There simply is no way that a newspaper can keep up, and there is no way it can compete without compensation.

When the 'trifecta of trouble' doom your business model, it is important to find creative ways to fight back, and change the 'transfer' relationship to an 'equilibrium' relationship.  For instance, why don't newspapers have an eight or sixteen page 'Opinion' section, a section filled with the best blog postings that the newspaper staff were able to comb through?  This could work well for bloggers and newspapers.  Bloggers do their thing because they want people to read their commentary.  Newspapers do their thing because they want to attract subscribers and advertisers.  A partnership between bloggers and newspapers creates equilibrium.  Equilibrium boosts retention, and customer acquisition, for both parties.

Pop Superstars

Life Tables, and Conditional Probabilities, can be used to measure the long road customers travel to loyalty.

As an example, let's look at all artists who have a last name beginning with the letters 'A', 'B' or 'C', and who first hit Billboard's Hot 100 Chart during the 1980s.  I counted 174 artists who met this criteria.

Next, I counted how many of these artists recorded at least two hit singles, or three hit singles, or four, etc.

The relationship is depicted in this table:

The 'Probability of One More Hit' column is of interest.  Half of the artists in my study had at least two hit singles, whereas about half were one-hit wonders.

Notice what happens once an artist gets to four hit singles.  The probability of that artist having another hit single generally stays between eighty-five and ninety percent.  In other words, once the artist achieves at least four hit singles, the likelihood of having more hit singles stays very high.

However, the probability of any artist having at least four hit singles is only twenty-three percent.  In other words, it is very difficult for an artist to get to four hit singles, with most artists not making it to this level.

Life Tables and Conditional Probabilities can be used in a similar manner to explain how customers interact with brands, channels and product classifications.  As this example illustrates, it is difficult for an artist to achieve a point where the likelihood of another hit single is great.  Similarly, it must be hard for brands to cultivate customers who are loyal.

Taco Bell and KFC

I recently drove past a Taco Bell and KFC that were both in the same building.  You see a lot of instances where Taco Bell, KFC and Pizza Hut are in the same small building.

I would enjoy measuring the customer file dynamics of these stores.  If these brands operated under isolation mode (a situation where customers who shop at one brand do not shop the other, and vice versa), and were able to maintain the same amount of traffic as they could in a store of their own, then the decision to co-brand could be very profitable, because you get twice the traffic for the same set of fixed costs.

If equilibrium happens (customers freely cross-shop each brand), but traffic does not increase, the stores can potentially be profitable.  If traffic increases and equilibrium happens, the stores should be very profitable.  If the average transaction size increases, the stores can be profitable.

Malls were built on the concepts of equilibrium and transfer.  Large, desirable brands anchor the mall.  Customers loyal to those brands visit the mall --- each brand sharing customers (equilibrium).  The large brands transfer customers to the smaller brands.  Customers go to the mall to shop an anchor.  They generally don't go to the mall because there is an Orange Julius.  Orange Julius generally benefits because anchors transfer their customers to the small brands.

Transfer and Oscillation in Health Care

The health care industry provides a great example of the concepts of isolation, equilibrium, transfer and oscillation.  Especially oscillation.

A patient sees their general practitioner.  She is referred (transferred) to a specialist, who refers (transfers) her to a surgeon.  After surgery, the patient is referred back to the specialist.  The specialist orders blood tests.  The lab refers the patient back to the specialist, who orders more blood tests, causing the patient to go back to the lab.  The patient is oscillating back and forth, between the specialist and the lab.

With luck, the patient is cured, and is transferred back to the general practitioner.

It must be hard for the health care industry to provide good outcomes.  The dynamics of transfer and oscillation mean there are many interactions the patient must be involved in.  Executing every interaction flawlessly is hard.  Businesses that minimize and simplify interactions have a better chance of providing a positive customer experience.

Has Disney Lost It's Multi-Channel Perspective?

A recent response to an editorial in DM News (http://www.dmnews.com/cgi-bin/artprevbot.cgi?article_id=36035) questioned Disney's decision to abandon their catalog strategy.

There couldn't be a better application of the concepts of isolation, equilibrium, transfer and oscillation (as discussed in chapter eight of my book) than this case study.

In the original article, Disney leaders described their observation of customer behavior.  They illustrated how customers migrated online, and then stayed online.  This is a classic example of transfer.  One channel is transferring customers to another channel.

If Disney's leaders correctly measured the incremental return on investment of one channel transferring customers to another channel, then they have made the right decision.  The issue isn't whether they have lost their multi-channel perspective or not.  Rather, the issue is the incremental return on investment obtained by one channel transferring customers to another channel.

Sharper Image Announces Changes

A recent article in Multi-Channel Merchant talks about problems, and changes at Sharper Image (http://multichannelmerchant.com/news/dull_Sharper_Image_03282006/).

In my book, I talk about using life-tables as a way to understand customer behavior.  A life-table analysis is appropriate at a company like Sharper Image.  Several years ago, this business was doing very well, but has run into troubles in the recent past.  A life-table analysis of customers would clearly indicate if repurchase patterns have changed, and if they have changed, would indicate how long after a previous purchase customer attrition is occurring.

Hillstrom's Database Marketing

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Who Is Kevin Hillstrom?

Kevin is one of America's leading expert in Database Marketing, Multi-Channel Marketing and Business Intelligence.  He is recognized for his  analysis and understanding of complex customer behavior across channels, brands or products.  

After earning a Bachelor's Degree in Statistics from the University of Wisconsin, Kevin has worked in the hybrid seed, catalog, specialty apparel, online advertising and retail industries, including stints at companies like Lands' End and Eddie Bauer.  Kevin is currently a database marketing executive.  Kevin and his wife reside in the suburban Seattle area.

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