June 24, 2007

Multichannel Business Models

Fifteen weeks as an independent multichannel strategist provide me with a new perspective on multichannel business models. I can see that there are at least six ways that retailers/catalogers are leveraging the online channel, the channel responsible for the "multichannel" moniker. Each business model has unique advantages, and unique challenges.

Model #1 = Simple Online Presence
  • These businesses generate the vast majority of their sales by customers who send orders via the mail, or by calling a sales representative in a contact center. The order was stimulated by the mailing of a catalog. The online channel is not a significant driver of sales for businesses in this situation. The customer does not utilize the online channel as a shopping vehicle. At least eighty percent of the net sales happen via the mail, or via telephone. The average customer is at least fifty-five years old.
Model #2 = Online Order Form
  • These are catalog businesses that use cataloging as the primary marketing vehicle, but provide a robust online experience that causes customers to place their orders online. These businesses struggle with the concept of being "multichannel", because all analytical work indicates that the catalog drives eighty percent or more of online sales. In reality, these businesses are not "multichannel", they are really catalog businesses that take orders online. Still, it is not uncommon for these businesses to generate half of all orders online.
Model #3 = True Catalog Multichannel Model
  • It has been my experience that this is the least understood of all business models. These are catalogers that generate at least half of their annual net sales online. However, these catalogers typically believe that the catalog is responsible for driving the online sales. In reality, the online channel developed a foothold in these business models. If catalogs were not mailed to customers, online orders would happen anyway. This is very hard for catalog executives to understand, to digest, to develop strategies against. Company reporting and matchback reporting indicate that the catalog drives online sales. Mail/Holdout testing indicate that at least half of the online sales would happen regardless whether catalogs were mailed or not. These businesses have robust e-mail, paid search, natural search, affiliate, portal and online marketing programs that generate incremental sales. It is this business model that many industry experts and consultants target when they talk about "multichannel marketing".
Model #4 = Retail Business, Catalog Heritage
  • These are interesting business models. Be it Coldwater Creek, Williams Sonoma, Lands' End or now Dell, these businesses practice true multichannel marketing, but with a strong focus on ROI. The catalog heritage drives measurement of all advertising activities across all channels. If an aspiring individual wanted the best multichannel lab to build multichannel skills in, I believe these environments provide the best place to gain valuable, portable experience.
Model #5 = Online Business, Retail Heritage
  • A Neiman Marcus, Saks or Macy's fit into this business model. The online channel is strictly complementary to the store experience, as the stores are responsible for the lion's share of sales and profit. Management says the right things about multichannel marketing, and do invest in the online experience. That being said, the purpose of being multichannel is to do everything possible to please a store customer. This strategy leads to sub-optimization of the direct channel. Over time, these businesses will lead the online industry in "entertainment". The online channel (and supporting catalog channel) will likely become the entertainment and informational arm of the brand. Of course, a giant retail presence will cause a ton of traffic to migrate online, driving a huge volume of online sales. But the online sales will not be driven by brilliant online marketing or catalog marketing strategies. The online sales will happen because the online channel acts as the entertainment/informational arm of the retail brand experience. There's nothing wrong with this. But it does require a very different set of marketing skills --- traditional online and catalog marketers may be frustrated by this business model. Traditional analytics individuals may not be pleased with the depth of analytical insight required to run these businesses (i.e. the business is run by "brand instinct", not by analytical findings and ROI).
Model #6 = Online Pureplay
  • These businesses are fundamentally different than the five models described above. These businesses were born online, and utilize a marketing strategy fundamentally different than other businesses. Traffic is driven by online marketing strategies. To compensate for what I call "channel disadvantage" --- not having catalogs or stores, these businesses utilize free-shipping, free-returns, and rock-bottom pricing to gain a competitive advantage. These businesses need to grow to a size large enough to overcome margin and shipping revenue shortfalls. Zappos is probably the best example of a business in this category. The online marketing departments in these companies offer spectacular laboratories for learning online marketing strategies. If I were a college student today, this would be one of my primary industries to target for employment.
Strategically, it is very important to understand where your business model falls on this continuum. The way you utilize multichannel marketing and advertising strategies is highly dependent upon the customer base you have, coupled with your heritage and objectives.

Cataloging makes less sense for business models five and six. Traditional cataloging strategies are frequently not congruent with brand-based retail models and online pureplays.

Online marketing makes less sense in the short term for business models one and two. These business models are supported by customers who are not willing to shop on the web without the benefit of catalog merchandise presentation.

Matchback and analytical expertise are probably most critical in business models three and four. Catalog businesses that migrated from model one to model two to model three have the best opportunity to overcome postal increases, because the customers shopping these businesses will purchase online if catalog frequency is reduced.

Your turn, my loyal reader! What e-commerce business models are missing from this list? How might you change these categorizations to make more sense?

11 comments:

  1. Hi
    Well, number 7 for me would be a future prediction of some pureplay retailers' strategy to gain some highstreet/mall presence.
    If you look at the electronic goods market in the UK, our main retailers have realised (like CircuitCity in the US) that pureplay retail will only drive a certain amount of business. Smart heritage electronic retailers have realised an ace up their sleeve is to offer the best of both worlds with an "order online, pick-up in store" service.
    Two of the main barriers to success (see Forrester et al research) are payment and delivery. With this offering heritage retailers can beat online retailers at their own game. They can match the price online, and crucially beat them on SPEED - see CircuitCity's 24min pledge!
    Ironically, I see successful pureplay retailers looking for high street partners to provide a physical presence for their business (Think non-specialist retailers who would be happy to out-source their electrical department for a win-win situation)
    What do others think?

    Tony
    pradadarling{@gmail.com

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  2. Thanks for forwarding your comments, Tony. Hopefully, your insights will inspire additional comments.

    If only Circuit City and Forrester were right ... Forrester tells us to go down the path that Circuit City has gone down, yet Circuit City is really struggling from a profitability standpoint. Competitors that don't have multiple channels, or competitors that don't execute nearly as well as Circuit City are more profitable in the US, throwing a real chink in the armour of multichannel pundits.

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  3. What about multi channeling in a business-2-business environment? Do you think it's the same or do you think there's a distinction?

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  4. I think that two-channel situations fall into the first three categorizations, at minimum.

    I've refined my thoughts on this topic, over the past nine months. Here is a link to a more-refined viewpoint:

    http://bp1.blogger.com/_X6thYhUL5Ug/R91aSY3N4II/AAAAAAAAATA/OyDAD1U-yCs/s1600-h/mtd_20080301.jpg

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  5. Tim, try this link, and click on the image:

    http://minethatdata.blogspot.com/2008/03/profit-week-three-customer-segments.html

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  6. stefano6:11 PM

    Multi-channel business models is ideal and very applicable to various affiliate marketing sites. It is easy to broaden.
    seo reseller

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  7. I agree, I have seen many others using these multi-channel business models on their affiliate marketing websites.

    Local SEO

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  8. Marketing specifically online marketing can really benefit to these various multichannel business models. Affiliate marketing sites are the ones the usually use them.

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  9. These multichannel business models can be very effective only if combined with other marketing strategies.

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  10. Congratulations on this very great article. I think you should add the idea of getting into the game of social media. You'll be impressed on how much it can help you in your business.
    You can also use free SEO tools online.

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