July 27, 2008

How Nordstrom Profitably Ended A Catalog Marketing Program, By Kevin Hillstrom

Something is going on in catalog marketing when I receive repeated inquiries asking how Nordstrom ended a traditional catalog marketing program and increased direct-to-consumer sales. An increasing number of catalog marketers are starting to re-think marketing strategy.

As a result of numerous recent queries from catalog and retail brands across the United States and Europe, I am going to write this essay explaining the decision-making process, and the high-level results. The goal is to help our industry. Please feel free to forward this article to your colleagues --- the hyperlink is embedded here.

If you have questions that I failed to answer here, please ask your question in the comments section of this post, so that all members of our industry may benefit from the answer.


How Nordstrom Profitably Ended A Catalog Marketing Program, By Kevin Hillstrom.

The year was 2004, and the world was a different place. Gas cost less than $2.00 per gallon. President Bush was re-elected for a second term as President of the United States. Finding Nemo won the Oscar for the best Animated Picture. Brett Favre pondered retirement from the Green Bay Packers. Barack Obama, an obscure Jr. Senator from Illinois, gave a stirring seventeen minute speech at the Democratic National Convention.

The catalog marketing world was buzzing over a term called "multichannel". Most brands were between five and nine years into their foray into e-commerce. During this time, telephone sales generally declined, while e-commerce sales dramatically increased. The accepted best practice was to mail catalogs to customers, causing the customer to purchase merchandise over the telephone, online, or in stores. The customer chose the channel she wanted to purchase in. The brand needed to be "multichannel", needed to be present in each channel to accommodate this savvy shopper. The catalog, based on an analytics tool called "matchback analytics", was at the core of this new marketing strategy.

The entire catalog marketing ecosystem liked this view of the world. Printers continued processing catalogs, makin' bacon in the process. Paper reps benefited from the strategy. Co-op marketers provided the analytics that proved this strategy worked, then benefited from the strategy as catalogers leased households from a half-dozen co-op databases. List rental and management organizations protected their future as well. List processing vendors enjoyed the benefits of continued merge/purge processing. E-commerce vendors enjoyed increased website traffic, causing demand for online software. Even e-mail vendors benefited, because catalog customers volunteered an e-mail address at the time of a phone or online purchase, fueling the growth of the e-mail marketing industry. Paid search vendors benefited, because the catalog customer went to Google to research products viewed in a catalog. Google benefited!

The marketing world agreed that mailing catalogs was the "right" thing to do.

In 2004, Nordstrom finally had a highly profitable direct marketing division. A division that lost 10% of net sales in 1999 and 2000 broke even in 2002, and came off of a profitable year in 2003. In 2004, sales and profit were and increasing.

The catalog strategy included marketing of a subset of merchandise, with many items not available in stores. The merchandise included items that sold well in the telephone channel, and did not include the vast majority of items that sold well in stores, did not include many items that sold well online.

By all accounts, this was a successful division.

And then management asked a simple question.

"What would happen if we integrated our channels, offering largely the same merchandise in all channels, without implementing a traditional catalog marketing program?"

Imagine if you are part of the management team of the direct-to-consumer channel, and you are asked this question. You are responsible for putting catalogs in the mail. And somebody is now questioning whether you should do this anymore.

As Vice President of Database Marketing, I built an entire team responsible for putting catalogs in the mail and measuring the effectiveness of these catalogs. What do you think I thought of this question? How would you respond to the question?

A task force of sixteen leaders was assembled. The leaders included Regional Managers, responsible for store performance in their region, Information Technology leaders, the Chief Marketing Officer, many members of the direct-to-consumer management team, and yes, even me.

If you are Vice President of Database Marketing, and you are asked to participate on this team, you are going to be asked questions by members of this team. Your direct-to-consumer team are going to ask you to demonstrate the importance of a traditional catalog marketing program. Your Chief Marketing Officer is going to ask you to present unbiased facts about customer performance.


What were some of the questions leadership wanted answered?

Question: Will catalog customers just switch their behavior, and shop online if catalogs are no longer mailed to them?

Answer: Some customers will switch. Many customers will simply stop purchasing. We tested not mailing customers catalogs in 2001, 2002, 2003, and 2004. We knew exactly what would happen. Without a reinvestment of advertising dollars, sales would decrease.


Question: If catalogs aren't mailed, won't customers just switch to e-mail marketing?

Answer: No. This strategy had also been tested. If a customer receives a catalog, she spends maybe $X across the phone, online, and retail channels. If a customer receives an e-mail marketing campaign, she spends maybe (0.12)*$X across the phone, online, and retail channels. When we tested not mailing catalogs to an e-mail customer, e-mail performance increased slightly. Almost all of the $X would be lost, not recouped by e-mail marketing. And we all know this, we measure e-mail marketing and compare it to catalog marketing and paid search.


Question: What role does catalog marketing play in acquiring new customers?

Answer: Catalog marketing played an important role in the acquisition of new customers. Like all catalogers, Nordstrom rented customers from competing organizations, and exchanged names with competing organizations. Privacy advocates and the Chief Marketing Officer strongly believed that the renting/exchange of names was not in the best interest of Nordstrom or the Nordstrom customer, and if a traditional catalog marketing strategy didn't exist, the rental/exchange strategy would disappear.


Question: Are Nordstrom customers truly "multichannel"?

Answer: Sometimes. Customers did purchase in multiple channels, in fact, a significant minority of total sales came from customers buying from multiple channels. The reality, however, was that customers were migrating from one channel to another, eventually landing in the store channel. Kind of a "duh", when you think about it, huh? The customer acquired over the telephone via a catalog eventually purchased online without the aid of catalog marketing, then shifted spend into the store channel, using the website to research merchandise. This evolution of customer behavior, identified via Multichannel Forensics, suggested that another marketing strategy could be employed, one that would be at least as effective as the traditional catalog marketing strategy.


Question: Do customers purchase from all merchandise divisions?

Answer: No. And this is an important point. The traditional catalog marketing strategy offered a subset of merchandise. If that subset of merchandise were no longer offered, those customers were likely to simply go away, and not cross-shop the rest of the offering, placing any potential new strategy at risk.


Question: Should a multichannel strategy include integration of silos across the organization?

Answer: In this case, it was decided that with a new multichannel strategy, without a true catalog program, that functions should be integrated across the company. This would prove to be a painful process. Pundits underestimate the human challenges associated with integrating people. Time would prove that people would lose their jobs trying to make this integration happen. It is hard, financially, to integrate systems and technology. It is hard, emotionally, to integrate people ... or to let a lot of people go.


Ultimately, it was decided that the traditional catalog marketing strategy would be terminated, effective June 30, 2005.

Here are some of the tactics that were employed.
  • Traditional catalog customer acquisition programs were terminated in early 2005, to prevent the acquisition of customers who would later be disappointed.
  • No announcements were made of the elimination of the catalog marketing strategy to loyal catalog customers.
  • A new catalog marketing strategy would be employed, one where the vendors of the merchandise paid the cost of a page of catalog marketing to advertise their product.
  • The privacy policy would be changed. Nordstrom would not rent or exchange any customer information with any competing or non-competing brands.
  • E-mail marketing frequency would increase from one contact a week to two contacts per week.
  • The online marketing budget would be increased, in an effort to acquire customers lost via the termination of the catalog marketing strategy.
  • Systems and people would be integrated, across the company.
The Results:
  • Long-time, loyal catalog-only customers did not take kindly to the new strategy, by and large choosing to not purchase again. "Dual-Channel" customers (phone + website) maintained their online spend, but stopped the spend they used to place over the telephone, for obvious reasons.
  • The investment in online customer acquisition offset the losses from the traditional catalog customer acquisition strategy.
  • The increase in e-mail contact strategy helped offset some of the loss of demand from long-time catalog customers.
  • A subset of catalog customers shifted their spend online.
  • The combination of online customer acquisition and catalog customer shift resulted in a net increase in net sales in the direct-to consumer channel. Yes, I said an increase! You can read through the 10-K statements and discover that fact for yourself.
  • Many leaders in the direct-to-consumer channel chose to leave the company.
  • Many positions were eliminated, positions associated with our call center, positions associated with catalog production and circulation expertise. Integration of creative teams (direct-to-consumer and retail) was a challenge.
  • The new catalog marketing strategy did not perform as well, in fact, I had not previously worked with a program as unproductive as this one. When you let your vendors determine the merchandise that is advertised to customers, you set yourself up for sales decreases.
  • The new catalog marketing strategy was, from a profit standpoint, wildly profitable. When you let your vendors pay for the cost of a page of advertising, you are, by default, guaranteeing profit.
  • Many online marketing metrics improved without a catalog marketing program in place. In other words, in the past, we'd mail a catalog, causing a customer to use Google to do a search. In theory, the order would be shared between catalogs and paid search. Now, paid search got full credit.
Impact On The Database Marketing Department
  • I ultimately eliminated eight of twenty-four positions in the department.
  • The most seasoned catalog marketing staff left the company, or chose to work in the online marketing division.
  • Eight positions were re-trained for work in Social Media, E-Mail Marketing, Online Marketing Analysis, Web Analytics (stuff that Coremetrics couldn't do for us). We integrated Coremetrics data with retail and telephone purchase data, creating a whole new area of emphasis.
  • Eight positions went essentially unchanged (from a job requirements standpoint), though the focus of their work was on driving multichannel sales, not channel-specific sales.
  • My role as Vice President of Database Marketing was ultimately de-emphasized, resulting in me starting my own consultancy.
Describe Some Of The Pitfalls:
  • I must re-emphasize how difficult it is to integrate people. Catalog Marketers, Online Marketers, and Store Marketers think about things differently. As you de-emphasize one area, you make some employees feel bad, while others feel more powerful. That's a dangerous cocktail.
  • Have a customer acquisition plan. You cannot kill a catalog marketing program without risking the future of the business. You can successfully migrate online by having a plan that fuels customer acquisition online.
  • Geography Matters! A customer in rural North Dakota or Vermont is not going to be a multichannel customer. Take away her catalog, you take away her sales potential. A customer in suburban Chicago will shop all channels. A customer in Silicon Valley will buy online. Have a strategy for each customer segment, based on geography. Your results will vary.
  • Product Matters! Know exactly what your catalog customer loves to purchase, your online (Google) customer loves to purchase, and if you have a store customer, what your store customer loves to purchase. Product differences dictate differences in advertising strategy (e-mail, paid search, catalog marketing, traditional advertising). Your multichannel efforts will be much more successful if you know what specific customers with specific channel preferences like to buy.

The pundits had a lot to say about this strategy. The usual suspects in the co-op and list world blasted my team and I in 2005. I recall reading the quotes in trade journals ... stuff like "Lands' End tried this in 1999 and it didn't work". I recall receiving phone calls from the catalog vendor community, folks blaming me for "letting this happen".

Then the strategy worked well. REALLY WELL. Much better than I ever expected it to work.

And then the pundits criticized me again. This time, the blather was all about "the only reason this worked is because of your brick and mortar presence ... the strategy will never work for a traditional cataloger". Hey pundits, why did the strategy work in Birmingham, or Madison, or Tucson, or Des Moines, or Boise, or New Orleans, or Evansville, or Omaha, or Topeka, or Oklahoma City, cities where Nordstrom didn't have a retail presence? When I speak at conferences, the audience loves to blast me on this topic. I am continually amazed how the opinions of many carry more weight than the experiences of the few who actually went through the process and have the scars to prove it.

The reason the strategy worked had nothing to do with the fact that we had a store presence. The reason the strategy worked was because we did two things well.
  1. We knew, from our Multichannel Forensics work, how customers shopped across channels. We ran five-year simulations of the new plan, and knew directionally what to expect.
  2. Leadership had a plan! They didn't just kill a program and not significantly re-invest elsewhere. They invested in systems, people, online marketing, and cross-channel merchandising strategy. We increased e-mail frequency.

Remember, the change in strategy resulted in an increase in net sales in the direct-to-consumer division, and did not fundamentally impact retail comp store sales. I was surprised by the results.

This can work for you if you do your homework. Have you tested what happens if you do not mail a customer a catalog for a year? Six months? Have you ever doubled your online marketing budget for a month, testing what happens to all channels when you dramatically change your marketing strategy? Have you tested altering your merchandising assortment in print and e-mail marketing? Have you figured out how to acquire new customers without paper in the mail? Have you ever tested raising prices as an instrument to potentially increase demand? Have you studied customer behavior by geography?

Maybe the right strategy is to have six mailings a year instead of sixteen. Maybe the right strategy is to have thirty mailings a year instead of sixteen. Maybe the right strategy is to have your vendors fund your catalog program. Maybe the right strategy is to stop mailing catalogs altogether. The answer is different for every company. There are no right or wrong answers. Your situation is unique. But your situation isn't one that should be executed on the basis of opinions, or gut feel, or guesses, or the collective opinion of an industry or vendor ecosystem.

Without a doubt, the right thing to do is to start testing different strategies.

Ok, your turn. What questions do you have that I failed to answer? Please do not e-mail your questions, please ask them (anonymously if you wish) in the comments section, so that all of our readers can benefit from the discussion.


Hillstrom's Multichannel Secrets, 59 Tips Every CEO Should Know, Now Available At Lulu.com
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5 comments:

  1. Kevin,

    I don't have a question but just wanted to say how much I enjoyed reading this post. Thank you.

    Matt

    ReplyDelete
  2. Kevin --

    To clarify,

    what fraction of sales were catalog-attributed, say, the prior FY to the shutdown?

    Is Nordstrom an example of a big store chain with a small catalog division (before it shut down), rather than prototype of a more typical more-direct-than-retail cataloger?

    Cheers

    Alan

    rimmkaufman.com/rkgblog

    ReplyDelete
  3. Bhmatt --- thank you!

    Alan, Nordstrom is more of an example of a big store chain with a small catalog division. The direct-to-consumer division is anywhere between five and ten percent of total sales (with catalog driving close to half of that total), based on 10-K statements ... but at such a small percentage, the division still generated more than $500,000,000 in annual sales, making it one of the larger direct-to-consumer brands anywhere.

    ReplyDelete
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