"This is what bothers me. I send a catalog to my loyal customers. One of my customers receives the catalog, sees something she likes, then gets on the internet and visits www.google.com. She keys in the description of the items she's looking for, compares prices across a half-dozen competitors, then buys a comparable item at a lower cost from a competitor. All of a sudden it hit me. My catalog response rates continue to decrease, and they decrease because I am out there doing advertising for my competitors. I send a catalog, and my competitors benefit from it. How the heck do I fix that problem? I don't offer the lowest cost or fastest and most inexpensive delivery options."
In 1995, a direct marketer had a moat around their brand. The cataloger delivered a catalog to your home. If you didn't receive catalogs from competitors, you couldn't compare similar items across competitors. You didn't truly know if you were "getting the best deal".
Every week, a catalog executive tells me that s/he is experiencing lower response rates, coupled with increased average order values. In other words, a catalog used to deliver a 4% response rate and a $100 average order value. Today, the same catalog (measured across all channels) delivers a 2.5% response rate, and a $130 average order value.
The price-sensitive customer is choosing to shop elsewhere, lowering the overall response rate.
The price-sensitive customer spends less per order. In other words, you're losing a quarter or more of your orders, orders that averaged $60 each. This appears to drive up your average order value.
And here's the danger. You analyze what is selling, and notice that bigger ticket items are selling best. So you shift your merchandise assortment toward the bigger ticket items in a Darwinian manner. This further drives down future response rate.
We're told we have to be "multichannel". But being multichannel can have dire consequences. For many catalogers, catalog advertising is driving sales away from the brand, to lower-cost competitors.
What follows is my opinion.
A great re-shuffling of brands is happening in the wild west known as the internet. The "middle ground" that was so beneficial to catalogers in the 1980s and 1990s is being eliminated. Customers are moving in one of two directions. The majority are migrating toward the lowest-cost competitor. In other words, you mail a catalog, your customer sees something she likes, then uses the internet to find the company that offers a comparable item for the lowest cost and fastest delivery. The low-cost, fast-delivery brand remains profitable by transacting numerous small-profit orders.
A minority of customers are moving in the exact opposite direction. They want unique merchandise, something that can't be easily found elsewhere. These customers are willing to pay a premium to have something that few have, or want something from a highly targeted niche. Catalogers and e-commerce pureplays in this space enjoy fat gross margins, and can remain profitable.
In other words, being "multichannel" is good if you are at the low-cost, fast-delivery side of the spectrum, or is good if you are at the exclusive-merchandise, high-gross-margin side of the spectrum.
Those of us who are stuck in the middle are doing free advertising for the low-cost, fast-delivery brands. A brand like Footsmart sends a catalog, offering shoes at fair prices. Then the customer compares prices plus shipping plus handling:
- A Footsmart $100 pair of shoes will cost $114.99 for 6-10 day delivery, or $134.98 for next day delivery.
- The same item at Zappos will cost $103 and will arrive tomorrow.
Profit Week Tip: Long-term, the catalog or multichannel brand must decide what it wants to be. Does it want to be the low-cost, fast-delivery option? Or does it want to be the purveyor of exclusive products that cannot be found elsewhere? In my opinion, the cataloger or multichannel brand cannot survive being somewhere in-between. What we are seeing today is the slow and painful death of brands stuck in the middle of this spectrum. If you feel you're stuck in this powerplay, run a Multichannel Forensics analysis across low spend, average spend, and high spend customers. See if you're losing the bottom of your customer file, a symptom of losing customers to low-cost, fast-delivery brands.
Kevin,
ReplyDeleteThought I might add that many of our clients, and yours I am sure too, do not track their customers and prospects behavior that well too. This means that if they track response rate of catalogs through direct trackable URL from their catalog, and 1-800 responses, they are probably missing the folks that find their products interesting, do some comparison shopping, yet come back through their delicious account, searched a few times on Google/Yahoo/MSN and click on their paid search ads.
That's where the power of multi-channel analytics could determine whether their response rate is indeed going down or not.
Sure, that works!
ReplyDeleteKevin -
ReplyDeleteVery interesting post. A few years back, IBM published a study (and I wish that I could find it today) that discussed this phenomenon. What it stated was that each person will actually spend more on 7-11 items (depending on personal income). In these cases, customers rely less on internet searches and more on brands that they trust. For all other items, they sought the lowest priced vendor out there.
The lesson here is the same as yours. The middle ground is eroding very quickly and multi-channel retailers need to work to stake a claim at either the top or the bottom of the spectrum.
I may not have done this justice in a short post, but this is a very interesting phenomenon going on with the Internet today.