October 05, 2008

The Most Important Catalog Marketing Metric: Organic Percentage

The most important metric in catalog marketing is called the "organic percentage".

The metric is defined as the percentage of demand, at a segment level, that would occur if no catalog mailings were delivered to a customer.

Most of the catalogers I speak with assume that the organic percentage is zero --- in other words, if catalogs were not mailed to a customer segment, the segment would not spend any money.

Of course, this assumption is false, perpetrated by biased matchback algorithms that incorrectly assign online orders to catalogs mailed to the customer, when in reality, the catalog had nothing to do with the generation of the order in question. You'll know that your matchback results are biased if the percentage of demand you add on to your acquisition segments (after matchback) is significantly lower than it is for housefile customers.

Catalogers who attempt contact strategy tests, say over a three month period of time, find relationships like this.
  • Telephone - Only customers have an organic percentage around 10%.
  • Telephone + Online customers have an organic percentage around 25%.
  • Online - Only customers have an organic percentage around 40%.
In other words, if no catalogs are mailed to an online-only customer, the online customer will still spend 40% of the demand they would spend if they are mailed all of the catalogs during the quarter.

The organic percentage metric is critical, because it dramatically impacts your calculation of profit and loss. If you have a high organic percentage, then you are significantly overmailing customers, regardless of what your matchback analytics vendor tells you. If you have a low organic percentage, then you have no choice but to mail catalogs in order to generate demand.

The image at the beginning of this post shows the difference in profitability for the same segment of customers, comparing a 10% organic percentage to a 40% organic percentage. The ten percent level requires four mailings per quarter. The forty percent level maximizes profit at just one mailing per quarter. Think about what you could do with the expense from the three additional mailings?

If there were just one metric I'd ask catalogers to track at a segment level, during 2009, it would be the "organic percentage" metric. Knowing this metric fundamentally changes how you decide to contact different customer segments.

How important is this percentage? Take a brand like Nordstrom. This is an $8.5 billion dollar business that is luck to generate ten percent of that total from marketing activities. Therefore, the organic percentage is ninety percent. This brand generates ninety percent of sales without the aid of traditional marketing activities. That's a strong brand.

Think about Zappos. There's the volume they generate due to online marketing and search marketing, and then there's the volume they generate via word of mouth. I'd guess that half of their volume happens without the aid of marketing, plus or minus twenty percent.

And then think about a traditional cataloger. The traditional cataloger believes that the vast majority of demand happens becaue of catalog mailings. If mail/holdout tests validate this, then the cataloger is at the mercy of catalog marketing --- if customers are no longer responsive to this form of marketing, demand dries up.

The goal, of course, is to build a brand that has a high organic percentage, not needing advertising to drive sales and profit.

We can learn how much of customer demand is generated by advertising by executing thorough mail / holdout tests, in both catalog marketing and e-mail marketing.