March 08, 2008

My Keynote Address At The Catalog Conference

If I were invited to give the keynote address at the Catalog Conference, now called the ACCM, you would hear a presentation that sounded something like this:

Good morning, everybody! Thank you for inviting me to share my views on the multichannel marketing industry with you.

Let's start the discussion with a show of hands. How many of you enjoyed receiving the old Sears catalog, or J.C. Penney catalog, back in the 1970s and 1980s?

Me too. My Mom shared the J.C. Penney catalog with my siblings. I'd thumb through the catalog, looking for a computerized chess game. Somewhere around page 594, I'd find the game. I'd ask my parents to give this game to me as a Christmas gift.

Even though we had a J.C. Penney store in my home town, the catalog represented "the store" to me. I felt lucky to receive a catalog, as if I were part of a secret club of people that got access to unique merchandise, delivered to my home within four to six weeks. I mean, where else was I going to find a computerized chess game in 1980?

My love for computerized games continued into the 1990s. I purchased a computerized backgammon game from J&R Music World in 1993. Of course, the world changed over the twelve years that passed. The J&R Music World catalog was a lot smaller, with a "targeted" merchandise assortment. This targeted catalog merchandise strategy drove the "big book" strategy of Sears and Montgomery Wards into history.

What would you do today if you wanted to purchase a computerized chess game? Google? The world is changing, isn't it?

1993 might have represented the final "Golden Age" of catalog marketing. Computers allowed professionals to practice database marketing, a craft where customers were matched-up with targeted merchandise offerings, greatly increasing the productivity of each page circulated. Catalog marketers enjoyed a near monopoly over the customer mailbox.

We decided how many catalogs the customer would receive. We rented names from other catalog brands, we exchanged names with our closest competitors. Would Zappos give away their most precious asset, their customer file, to competing online shoe brands in exchange for access to the names and addresses of customers shopping from the competition?

We practiced this strategy, in fact, we built our industry on the basis of this strategy. This whole thing called "the catalog conference" was a convenient excuse for all of us to get together to talk about our practices in renting and exchanging outside lists. We'd have sixteen of us representing two companies and four vendors in a cramped hotel room, sitting on beds and folding chairs, talking about exchange balances. And at the end of the day, Direct Tech hosted a killer party. All of that on the shoulders of the profit generated by the customers we shared with each other.

We controlled everything, the customer had almost no control. If we wanted to get a Lands' End catalog in the hands of a customer, we figured out how to do that. And as long as one or two percent of the customers cared enough to purchase from this intrusion, we could continue practicing our craft.

We didn't realize it, but we enjoyed a unique moment in time. Collectively, we identified a universe of maybe 20,000,000 households who were willing to shop via distance. The big companies did the hard work, the smaller catalog startups leveraged all that hard work to grow themselves while adding incremental names to the pool. Ultimately, we all shared the same 20,000,000 households. We thought we were independent brands competing against each other. Instead, we were a loose federation of collaborators, working together for the benefit of all of us.

Today, Google manages the households that matter.

While many prior generations made catalog marketing possible, it was the Baby Boomer generation who injected steroids into the concept. Baby Boomers managed the businesses, Baby Boomers got the catalogs into our mailboxes, and Baby Boomers purchased from these businesses.

Life was good.

And then this thing called the "internet" appeared.

At first, the internet was this funky thing we played with on a 9,600 baud rate modem. We could send and receive e-mail, we could visit static web pages.

I worked at Eddie Bauer in 1996. Our website, http://www.ebauer.com, was in the embryonic stages of development. My Vice President would stop by the office of our online marketing analyst, and rib him about whether we hit our forecast of seven orders for the day.

Nobody mocked the online marketing analyst in 1999, when fifteen percent of direct-to-consumer orders at Eddie Bauer came through the internet. Still, catalogers felt that online marketers were "cannibalizing" the catalog business. "If the catalog didn't exist, you wouldn't have a business" was a statement you frequently heard. The internet staff benefited by having an existing order-entry system, an existing call center, an existing distribution center, catalogs that drove website orders, and existing in-house systems to manage the business.

For the next eight years, a battle ensued over who truly generated sales and profit. The battle appeared to be meaningful. In reality, we made a mistake. We took our eyes off of the customer for a decade, spending our time arguing whether old-school marketing methods still worked or not.

Instead of learning how customer behavior was changing, we focused on attributing orders back to the paper that theoretically drove the order. Our industry invented a term, called "multichannel", to define the relationship between advertising, customers, and channels. We focused on the attribution side of the term "multichannel", instead of the ramifications of multichannel customer behavior.

During the decade of multichannel attribution illustrated via matchback algorithms, we lost our customer. The Baby Boomer responsible for the rampant growth of the catalog industry in the 1980s and 1990s aged. This customer is slowly being replaced with Gen-X individuals, customers who have different needs and different shopping patterns. This generation uses technology in a different way than do Baby Boomers. Even more profound are the differences in customer behavior among Gen-Y, the children of Baby Boomers. If Gen-X embraced e-commerce, then Gen-Y embraces social networking.

Both generations view the catalog in a different light than do the Baby Boomer generation. A Baby Boomer might read a catalog at night, ordering online after thumbing through the wares of a leading catalog brand. A Gen-Xer might use the catalog for inspiration, or might throw the catalog away, opting for the assistance of Google, searching for whatever pleases the customer. A Gen-Y consumer might purchase merchandise on the basis of a good review from a peer on Facebook. Of course, these are gross over-generalizations, meant to inspire thought.

The cataloger ultimately markets to the Baby Boomer generation, noticing that customer acquisition becomes more challenging as the Baby Boomer moves out of her prime shopping years.

Two other issues are shaping customer behavior. In the past decade, customers took control of the telephone via the "do-not-call" list. Customers are taking control of the e-mail in-box via spam filters and e-mail opt-in practices. In the next five years, customers will take control of the mailbox. Catalog Choice simply represents the embryonic stage of this movement. Eventually, our customer will tell us how often we get to market to her via catalogs, if at all. We are not prepared for this fundamental shift in customer behavior. All throughout history, we determined when the customer received something from us. In the future, the customer will determine when she receives something from us, if at all.

The final issue that is transforming cataloging is storytelling. Catalogs have always been about telling stories. Think about the fanciful tales told in the old J. Peterman catalog. When a cataloger has control over the customer relationship, the cataloger is able to tell the story that the cataloger wants to communicate.

A combination of e-commerce, e-mail, and search marketing ruined the ability of the cataloger to tell a cohesive story. When a customer goes to your website, you have no control over what the customer does. She can arrive via the home page, she can arrive via a landing page. She can use the search function of your site to shop. She can simultaneously use Google to compare prices on a similar item across multiple brands. The cataloger is no longer the primary factor in a purchase relationship with a customer. The cataloger is a spoke on a giant ecosystem-based tire.

This hurts the cataloger in many ways. Stories are like a moat that protects a catalog brand, causing the customer to cross-shop other items. When the customer makes up her own story, a "mashup" of other brands found via search, marketing, and word-of-mouth, she realizes that the cataloger may not offer the lowest cost, the fastest or most inexpensive shipping, or the best quality.

The same forces damage the merchandising strategy of the cataloger. Any brand can see what the cataloger offers, copy/improve it, source it in China for a lower cost-per-unit, offer free shipping, and outperform the cataloger in paid or natural search, stealing business from the cataloger. The online ecosystem ultimately drives our merchandising strategy. If one item achieves good standing in natural search, while another item fails to make an impact, then technology is driving the performance of items offered. Regardless, our catalogs and the cohesive stories told in our catalogs are not as relevant in the future unless the internet/Google decides that we are relevant. We will be forced out of business by low-cost competition, or we will achieve success by offering high-gross-margin niche product that Google determines is highly relevant in the niche it participates in.

What is also interesting is the fact that by avoiding these challenges, the cataloger indirectly moves the customer base older and older. Numerous CEOs confided in me that the average age of the customer purchasing from catalogs is advancing at twice the rate of time. In other words, an average customer of 50 years old in 2003 is now an average customer of 60 years old in 2008. This is an odd side-effect of technology. By avoiding the dynamics that are shaping the internet, the cataloger partners with co-ops to find customers most likely to respond to catalog marketing. The audience that remains loyal to catalog marketing is the audience least likely to embrace technology. Co-op technology helps in the short-term, but has the potential to move the catalog brand toward a customer base that is unsustainable.

By now, what should be clear to you is that the catalog business model we managed in 1993 no longer exists. The competitive advantages we enjoyed fifteen years ago are gone. This doesn't mean we can't be successful. We can be very successful. However, we will have to apply modern technology, a thorough understanding of customer behavior, and an absolute attention to detail across all online marketing strategies.

The cataloger of the future will gracefully manage catalog mailings, providing twenty contacts a year for the customer who wants twenty contacts a year, a universe that will continue to decrease in quantity. Over time, the majority of customers will demand that they determine how many catalogs they want to receive, if any. This will end the practice of using lists and co-ops to manage customer acquisition. New customer acquisition will happen online. This concept is a terrifying one for catalogers, one that cannot be avoided.

The cataloger of the future will reduce catalog advertising expense, but won't pocket the savings. Instead, the money will be reinvested in faster delivery options at a lower cost. Customers will demand that all direct-to-consumer brands follow the lead of Zappos.

The cataloger of the future will be required to become very, very savvy at online marketing. I'm not talking about executing paid search campaigns. I'm talking about every aspect of online marketing, paid search, natural search, affiliates, shopping comparison marketing, portal advertising and pay-per-click, social networking, and techniques we cannot envision today. Countless brands never mail a single catalog, yet run profitable direct-to-consumer businesses using these techniques. Do a search for any product and see what I mean.

The cataloger of the future will manage a heterogeneous customer base, one resistant to mass-mailings of catalogs or e-mail blasts. This will require an attention to detail in online marketing expertise that does not exist today.

Vendors who rely upon the catalog ecosystem will need to adapt as well.

The biggest potential winner is the traditional list organization, somebody like Millard or ALC. The future of cataloging won't be in renting or exchanging lists. The future could be in identifying groups of individuals with common interests. We might work with Millard to build/find a group on Facebook that likes mens tools or rugs or scrapbooking, whatever is relevant to our business model. The traditional list organization competes against algorithm-based organizations like Abacus by
adding the "human" element --- linking people who have interests together for the betterment of people, not brands. Catalog brands succeed as a side-benefit. For those brands who want catalog-focused customers, co-ops will be there to serve them.

If I were to poll the folks in this room about the biggest issues in cataloging in 2008, three themes would emerge.
  1. The crippling effects of the 2007 USPS postage increase.
  2. The recession of 2008.
  3. The approach Catalog Choice uses to encourage catalogers to accept unverified opt-out consumers.
Catalogers that survive the first two issues will face interesting long-term issues, as outlined in this discussion. We survived the transition from big-book to targeted catalogs. We survived the transition from targeted catalogs to multichannel mailings that drive e-commerce sales. Our industry will survive the transition to a self-service customer who calls upon us when s/he has a need, a transition that is opposite of our established practice of calling upon a customer when we have a need. Market forces require that we make this transition.