March 31, 2008

Macy's Bans Some E-Commerce Shoppers From Viewing Their Website

April 1, 2008 (Reuters): In a bold move designed to encourage multichannel shopping, Macy's announced today that it will ban prior e-commerce shoppers from purchasing merchandise online for an unspecified period of time.

"Findings from data mining projects made this decision an easy one for us." proclaimed Stacy Miller, Divisional Vice President of Customer Relationship Marketing at Macy's. "Multichannel customers are five times more valuable than single channel customers. From a marketing standpoint, it is critical that we encourage our e-commerce patrons to enjoy all that our stores have to offer."

Using a proprietary set of business rules developed by industry gurus James Taylor and Jim Novo, Macy's CRM division identified web visitors who only shop via the e-commerce channel and live within twenty-five miles of a Macy's store. These visitors are served a blank, white screen, commanding them to shop at a Macy's store. Visitors are automatically entered into a drawing to participate in a special meet and greet with Jessica Simpson, Martha Stewart, and Donald Trump at a Macy's store in Spokane, WA on April 22.

Industry experts appear to be almost universally against this strategy.

Diane Dilsworth, columnist at DMNews, noted that "... the strategy is a desperate attempt to prop up comp store sales in a difficult economic environment." Tim Parry at Multichannel Merchant suggested that Macy's "... focus on their core economic proposition of offering a wide array of brands coupled with enthusiastic and generous discounts and markdowns." Scott Silverman of Shop.org stated that the strategy "... flies in the face of all that is known about providing a true multichannel shopping experience.", theorizing that "... it is possible that Macy's is experiencing challenges serving millions of daily online visitors, using the marketing ploy as a tool to divert traffic away from a struggling website."

Consumers appear to be enthusiastic about the strategy.

Elle Parks, 29, of La Jolla, CA, thought nothing of getting in her car and sitting on a crowded freeway for ninety minutes just to purchase her favorite cosmetics products. "E-commerce is all about convenience, but there is something romantic about battling the crowds to get the best brands at the cheapest prices, followed by an enjoyable smoothie at Jamba Juice"

Felicity Crawford, 44, of White Plains, NY, was drawn to her nearest Macy's store because of the recent television advertising campaign. "Why shop online when it seems like Diddy likes to be in a Macy's store? I want to be where the stars are."

Though Macy's CEO Terry Lundgren would not comment on the record about the promotion, he did express satisfaction with the concept of increasing the value of individual consumers by forcing them to shop in the channel that the brand wanted the customer to shop in.

The marketing blogosphere expressed deep regret over this strategy.

Mack Collier of The Viral Garden Blog, a popular social media website, suggested that "... Macy's stop forcing customers to behave the way the brand wants the customer to behave." Collier believes that engaging in a conversation with consumers is a long-term approach to increased profitability. Jackie Huba at Church Of The Customer mentioned in a twit on Twitter that "... all of Macy's strategies are brand-oriented, seeking to benefit the brand and not the consumer. Consumers should be allowed to shop how they want, where they want, when they want. Nobody should force the consumer to do something that only serves the purpose of increasing shareholder value."

Still, Stacy Miller, DVP of CRM at Macy's, is undaunted in her approach. "We're told that multichannel customers are the best customers. We want as many best customers as possible. Shutting down a website is the easiest way to achieve our objectives while at the same time harvesting satisfied customers. You'd be a fool in April not to believe in such a simple yet elegant strategy."


Note: This post is a work of fiction, written in the spirit of April Fool's Day.


March 30, 2008

Part 4: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

For a recap of this series, please read part one, part two, and part three. For a view of the simulation tool used to create the scenarios in this series, click on the Multichannel Forensics Two Channel Simulation Link.

This exercise was created to give everybody, catalogers, vendors, customers, blog participants and third parties, an opportunity to understand how actual customers behave based on a simulation of actual customer behavior. The simulation ends speculation and opinions. The simulation simply illustrates how customers behave, and the business consequences that management may eventually have to deal with.

There is no getting around the fact that phone and mail volume are crippled when catalogs are not mailed. Many jobs would be lost if catalog mailings were limited only to loyal customers. Good, hard working call center staff, distribution center staff, and folks who make a living working in the catalog ecosystem (printers, co-ops, list brokers and managers, paper reps, USPS, merge/purge vendors, contact management software vendors), will have their lives interrupted if things ever get to this point. In many ways, this four part series should encourage the cataloger to partner with third party opt-out services in an effort to stem an outcome that is this bleak.

Remember, there is light at the end of the tunnel. Notice that at the end of the simulation, in years four and five, sales rebound, and profit increases. There is hope! Catalog management can follow a prescription to make sure that if things ever get bleak, the business is insulated from the dire situation illustrated in this series.


Catalog Management Prescription To Avoid A Dire Outcome

It is better to partner with third party opt-out services now than to deal with the dire consequences of this simulation later.

Test significant increases in online marketing NOW! See how far you can push the envelope in e-mail marketing, affiliate marketing, shopping comparison sites, portal advertising, banner/ppc advertising, paid search.

Do everything possible to make your site natural/organic search friendly. Contact our friend Alan now, and have his organization help you with natural/paid search strategies that insulate you from tough choices associated with the long-term prognosis of catalog marketing. His catalog marketing experience is very beneficial for making the transition from catalog to online marketing.

Test not mailing catalogs for a quarter to various segments of your customer file. At the end of the quarter, run matchback analytics on the mailed group, and the holdout group. Truly learn what will happen to your business if you were not allowed to mail catalogs.

Run Multichannel Forensics simulations (there are free links on the homepage of the blog), so that you know the long-term trajectory of your business. You may find that your phone/mail customers are very willing to shop online if not mailed catalogs, which would be highly beneficial to you!

Cultivate organic business. This is easier said than done, but is means EVERYTHING to your business. Organic business happens when customers purchase from your brand because they love you, not because you advertise to the customer. Organic e-commerce sales protect you from any catalog or online advertising issues. Organic e-commerce sales are highly profitable. In this simulation, had the catalog brand had significant and growing organic e-commerce sales, the outcome wouldn't have been as dire.

Be proactive! Test everything now! There is hope!

Part 3: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

In part one of this series, we explored how rapidly a catalog brand implodes when prospecting is discontinued. In part two of this series, we got to see the bottom of the pit, with the majority of employees being laid off from a crippled catalog business.


Light At The End Of The Tunnel

Most catalogers shudder at the thought of third parties telling them how to run their business. In reality, the third parties wouldn't exist if customers weren't frustrated. Do not mail legislation wouldn't be a possibility unless customers were tired of their mailbox being stuffed with advertising they weren't interested in. So this is a reality that we helped create via our actions.

But there is light at the end of the tunnel! The reality is that there is an online channel, a channel that allows customers to purchase from catalog brands, regardless whether catalog advertising exists or not.

Take a look at the profit and loss statement from years four and five of the simulation. Please click on the image to enlarge it.



Notice that the business is finally growing. Yeah!!

What happens is that the catalog side of the business hits rock bottom. Customers who are no longer mailed catalogs trickle over to the online side of the business, purchasing small amounts without advertising. The end result is a business that is beginning to become profitable again.

Of course, the business is sixty percent of the size it was five years ago. But that's the consequence of not prospecting via paper for a long period of time.

From this point forward, this is an online brand. In reality, the brand could quit mailing catalogs, as the entire exercise of mailing catalogs to loyal phone customers only breaks even.

In part four of the series, we'll talk a bit about the strategic implications of this simulation.

Part 2: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

We explored what happens in year one when catalog prospecting (and reactivation) is discontinued due to do not mail legislation. Now let's take a peek at years two and three in our simulation.



Please click on the image to enlarge it.

Recall that we were managing a $32 million dollar business that was generating $3 million in profit. This business would have still been growing in sales and profit, in all likelihood.

However, without a steady diet of new customers, this business is starving. The business is now half the size it used to be, generating about $16 million in sales, and around a half million in profit. Take a look at the catalog-driven component of this business. Catalog used to drive $13 million to the call center, and $12 million to the internet. Without catalog prospecting, only loyal customers are left, and these customers drop off at a rate of about fifty percent a year. By year three, catalogs are only driving $4 million a year. A few million dollars are made up via the online/organic channel, as a few catalog customers decide to buy online in spite of the fact that they no longer are advertised to.


Key Issues, After Three Years:

Seventy five percent of the remaining call center staff must be laid off, as there isn't enough volume to provide jobs for these individuals.

Twenty five percent of the remaining distribution center staff must be laid off, as there isn't enough volume to provide jobs for these individuals. Management must also consider what to do with a distribution center that is half empty, compared with three years ago.

Given the severe decrease in profitability, management would have to seriously consider mass layoffs among salaried staff.

The reduction in profitability severely limits the ability of the catalog brand to invest in anything.


Light At The End Of The Tunnel

In part three of this series, we'll show how the cataloger becomes an online brand, and begins to grow once again. Hope isn't lost. As leaders, we'll need to consider what we can do today to grow the business in a way that insulates us from the headaches associated with discontinuity in catalog marketing.

Part 1: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

Alan talks about third party opt-out services in the catalog industry, wondering what would happen if catalog prospecting were illegal?

So let's run a simulation and find out! Because I was part of the elimination of a catalog division at Nordstrom, I've experienced what happens when you aren't allowed to do catalog prospecting anymore. I took the metrics and customer behavior obtained in that painful multi-year experience, and plugged them into a simulation model that analyzes a $30,000,000 multichannel cataloger.

We know that when do-
not-call legislation was enacted, marketers could not market to folks if their last purchase was more than eighteen months ago, or if the household had not purchased previously. We'll go with that assumption for catalog marketing in this simulation.

Here's the profit and loss statement of a multichannel cataloger, assuming catalog prospecting is allowed, and assuming that catalog prospecting is not allowed.



Click on the image to enlarge it.

As catalogers know, there are four primary sources of revenue generation. Demand is generated from catalogs, over the phone or mailed to the brand by the consumer. Demand is generated from catalogs over the internet. Demand is generated from online marketing. Finally, demand is organically generated online (the least well understood aspect of demand generation for catalogers).

If catalog prospecting were stopped, the cataloger is starved of a significant source of future revenue. A considerable amount of unprofitable prospecting is offset by future profitable sales generated by the new customers. In total, this brand sees demand from catalog marketing decrease by about fifty percent. Variable catalog marketing expense decreases by seventy percent, because catalogs are no longer mailed to 13+ month recency buyers and prospects. However, the fixed costs associated with producing catalogs remains constant, eating up any profit increase.

A very small amount of phone business transfers to the online/organic channel. But for the most part, these customers buy because catalogs are mailed to them, so they stop buying when catalogs are no longer mailed.


Key Issues, Year One:

Phone demand decreases by fifty percent. This means half of the call center staff must be laid off.

Total demand decreases by one-third. This means one third of the fulfillment center staff must be laid off.

The online marketing budget is doubled, in an attempt to grow the brand. With luck, this investment is at break-even. In many cases, this will accelerate losses. We assume break-even in this case.

Total profit decreases by one-third, restricting the ability of the cataloger to make capital investments or make any kind of investment.

The fixed costs associated with producing catalogs (about $1,000,000 per year in this simulation) are about to play a major role in squelching the profitability of this brand. Catalog prospecting allows the catalog to spread out fixed costs across a much larger customer base.

After one year, the cataloger has been hobbled. Management will part ways with at least a third of the employees. Sales and profit decrease by a third.

In Part 2 of this series, we'll see what happens to the cataloger in year two and year three. I'm sorry to say that the story doesn't improve for a little while. But there is hope as we look to years four and five.

March 29, 2008

Proof

You are the web analytics expert at your company. On any given day, you expect 4% of your visitors to purchase merchandise.

Yesterday, your reporting suggests that the conversion rate was 6%. You wouldn't expect that to happen, the outcome is not what is normally observed.

If you shared this finding with leadership, what would their response be?
  • Something is wrong. Did you screw up? Is something wrong with our reporting system? Go find out what went wrong and fix the problem.
  • This is great! I accept the results.
  • This is great! No go find out why this happened, can we do it again?
Of course, some context is required. If the employee routinely makes mistakes, if reporting is frequently wrong, or if the employee has an agenda to hype, the response from leadership is predictable.

But if the employee is trustworthy, and the source of the data is trustworthy, what response would you typically hear from your leadership team?

I am continually surprised that we, as honest, hard working individuals, error on the side of something being wrong. If findings don't match our worldview, or don't fall into a pre-defined set of best practices established by industry veterans, we humans are often more likely to reject the findings than to accept them.

We look for all the reasons the findings could be wrong. When we exhaust those reasons, we demand that the findings be replicated via controlled tests. We advise folks not to listen to the individual who produced the unusual findings until the results can be validated. If the results are threatening to an industry, we'll discredit the individual who announced the findings, or block the access that individual might have to audiences who might want to hear about the findings.

The older the industry is, the more likely we are to hold on to what we knew to be true. Maybe we need to do the opposite, to openly consider other options. Maybe we can act before we have proof.

March 27, 2008

MineThatData Classics

Maybe you didn't have a chance to read some of popular content on this blog, though I find that hard to believe. Here's a second chance to enjoy the most popular content on this blog.

The MineThatData E-Mail Analytics And Data Mining Challenge.
Profit Week: Using Zip Codes To Increase Profit.
Multichannel Forensics Interview Hosted By Alan Rimm-Kaufman.
Four Questions With Jim Fulton, President of Customer Metrics.

My Keynote Address At The Catalog Conference.
The Direct Marketing Customer Continuum.
Multichannel Forensics: Calculating Migration Mode.
Multichannel Forensics: The Building Blocks.

Williams Sonoma And Multichannel Sales Growth.
Abacusification And The Merchandise Curse.
What Would Happen If Each E-Mail Cost $0.05 To Deliver?
When Is The Best Time To Send A Catalog To Support A Retail Event?

53 Vital Multichannel Website / Online Marketing Tips
.
Contact Strategy Evolution.
73 Vital Multichannel Catalog Marketing Tips.
Netflix: 2001 To 2012 Sales Trajectory.

What Happened? What Will Happen? (About Catalogers And Catalog Choice).
Free Spreadsheet: Diminishing Returns By Page Count And Circulation Depth.
Any Article About The Square Root Rule.
Modified RFM For E-Mail Targeting.

Free Spreadsheet: Three Channel Multichannel Forensics Simulation.
Free Spreadsheet: Two Channel Multichannel Forensics Simulation.
Nine Ways Catalogs Interact With Websites.
Abacusification.

Praise To Infrequent Customers!
Multichannel Business Models.
Explaining The Matchback Mistake.
When Capture Rate Bites You In The Belly.

Ten Ways We Will Save Multichannel Marketing.
Ten Ways We Ruined Multichannel Marketing.
Sharper Image And File Momentum.
Conversion Rate Is No Longer An Appropriate Measure Of Website Effectiveness.

The 1/3, 1/3, 1/3 Rule.
Jim Fulton, President of Customer Metrics: Mr. Krabs Is A Database Marketer.
Jim Fulton, President of Customer Metrics: On Lands' End Founder Gary Comer.
Does Home Page Design Influence Net Sales?

March 26, 2008

Oprah, Pottery Barn, And The Curse Of Multiple Channels

Two different meetings yesterday, two different topics, same basic issue.

Oprah: In a meeting yesterday, a woman mentioned that there's "too much Oprah" these days. She used to watch Oprah's daily show, and used to subscribe to her magazine. Then new channels were offered --- Oprah's XM channel, Oprah's "Big Give" on ABC, and Oprah's weekly book discussion of Eckhart Tolle's "A New Earth". This individual mentioned that she is "migrating" toward the spiritual content on XM and the weekly webcast, finding the old content less relevant, too "Hollywoodish".

Pottery Barn: In a separate meeting, a young lady mentioned that she recently purchased from Pottery Barn's website, only to receive a catalog a few weeks later. She asked me this question ... "Why do they do this? I sure don't want the catalog, that's why I ordered online."

Both issues highlight the curse of multiple channels.

Oprah starts a channel on XM, and between subscribers and DirecTV listeners, she maybe has a million listeners. That sounds good! Oprah creates an online television channel to discuss spiritual issues, and another two million folks leap to the new channel. Good! ABC broadcasts a new show from Oprah, and another fifteen million viewers give it a try. Good!

Underneath the rampant success of multiple channels is the issue of "channel shift". Individual customers, best customers, for a period of time consume all channels. Eventually, the customer identifies the channels most relevant to her, and drops her patronage of channels she identifies as "less relevant".

That's the challenge retailers like Pottery Barn face. Back in the stone ages of e-commerce (aka 2001), e-commerce customers were catalog customers. The best thing you could do was mail a catalog to the e-commerce customer! We knew this, because we measured the effectiveness of this strategy, and it worked! This strategy was still reasonable in 2005. And then, all of a sudden, the world changed. Customers believe they now have control. The catalog, a welcome addition in 2005, is viewed by some as an intrusion.

The retailer (or media mogul) gets this information "after the fact". In other words, it is really hard (ahead of time) to identify the point where Oprah's fan base is frustrated with so many channels.

In retail, we have tools that help us understand when audiences are embracing multiple channels, or are sick and tired of incessant marketing of multiple channels. Most of the time, our customers are secretly telling us when they no longer find various channels to be relevant. We just need to measure it better.

March 25, 2008

Retailers Using Social Technology, Community, And RSS

In addition to the Saks Video Catalog, many retailers are using social technology, community, and RSS feeds in interesting ways. Many in our catalog audience are looking for new ways to have a relationship with customers. Let's review a small sample of brands using social technology in one way or another.

Urban Outfitters has an interesting site that features articles, videos, an RSS feed and a MySpace page.

Neiman Marcus communicates fashion via their InSite Blog.

Ice.com's Just Ask Leslie Blog combines customer questions and short features.

eBags uses bookmarks to tag items you are interested in.

Mac Cosmetics, a $274 million division of Estee Lauder, has customers who are literally inventing products for the brand, sharing the ideas on YouTube. Their product development folks should take a peek at this! My wife found the video when searching for ideas on how to store Mac products. Take a peek at YouTube to see how other folks are doing marketing and product demonstrations for you ... heck, this young lady has almost 14,000 views.

Nordstrom has a MySpace page for their BP division.

Paperspine, an online book rental brand, hosts a blog about books.

Zappos is using Twitter to allow folks to communicate about the venerable online shoe brand.

Patagonia hosts The Cleanest Line, a blog for employees, friends, and customers.

Overstock.com offers a diverse array of community-based options.

Crutchfield has a community section on their website.

Burpee Seeds features their RSS feed on the homepage.

Hallmark has an interesting blog for their Shoebox division.

Here's the Shutterfly community.

Use the comments section to share other ways that retailers are using social technology, community and RSS feeds to partner with consumers.

Saks Fifth Avenue Video Catalog: Fashion In Action

Some retailers see the internet as a modern version of television. Saks Fifth Avenue debuted a video catalog, called "Fashion in Action".

One might envision how Saks or other retailers will morph their websites into entertainment/media divisions. For retailers, e-commerce may not represent the future of the internet.

Catalogers: Third parties and the USPS are crimping our ability to market via paper. Nobody is stopping the catalog industry from experimenting in this fashion.

March 24, 2008

Multichannel Customers And Advertising

Please click on the image to enlarge it.

The most popular question asked of me is "When can I stop advertising to or reduce advertising to a segment of customers?"

Often, catalogers and retailers are unwilling to execute tests that will answer this question, opting instead to maximize short-term sales.

If you fall into that camp, try this:
  • Identify any customer who purchased from your brand in the past twelve months, and purchased at least ten times (since the first purchase).
  • Sum how many of the ten most recent purchases occurred, by channel.
  • Graph the frequency of occurrence, using one channel as the x-axis.
In the image at the start of this post, there are three distributions.
  • The U-Shaped Distribution occurs when your customer prefers shopping from one channel. Almost all customers buy from, say, the online channel, or the catalog channel, and tend to purchase in equal rates. When this happens, nearly half of your audience is eligible for a reduction in advertising, as nearly half of the audience buys online, and may be in the habit of shopping online without the need for catalogs.
  • The Bell-Shaped Distribution occurs when customers swap back and forth, between channels, not exhibiting a preference for any one channel. In this case, you probably need to continue catalog advertising.
  • The Skewed-Shape Distribution happens when customers generally shop in just one channel, and show a clear preference for just one channel. This frequently happens in online/retail situations, where customers inevitably shift their preference to the retail channel.
If you want to reduce advertising (catalog advertising in particular), you don't want to see the bell-shaped distribution. When customers switch back and forth between channels, they are likely to be semi-dependent upon catalog advertising. Instead, you want to see a lot of customers who are 100% or nearly 100% loyal to the online channel. This is the audience that could stomach a reduction in advertising, without adversely impacting the top line.

Cross-Marketing E-Mail (And Catalog) Lists

Last fall, I requested information about a Recreational Vehicle.

Within two weeks, I started to receive numerous e-mail campaigns from various organizations loosely aligned with the Recreational Vehicle industry. A campground in New Mexico offered a discount if I stayed with them during a regional festival. A finance organization offered a low introductory rate if I purchased a vehicle in the next thirty days.

As a consumer, this was frustrating. I didn't appreciate appearing on a veritable plethora of e-mail lists, lists that I lhad to unsubscribe to on an individual, case-by-case basis.

It is easy to empathize with the bloggers, vendors, third parties, and customers who continually ask brands to discontinue the practice of cross-marketing e-mail and catalog marketing lists, a practice that results in a ton of ill will and marketing waste.

Now sit in the shoes of the e-mail marketing manager for a moment. Pretend that the e-mail marketing manager at J. Jill wants to use the "sister file" at Talbots (Talbots owns J. Jill) to promote J. Jill merchandise. The e-mail marketing manager blasts a campaign to 100,000 Talbots customers who have never purchased from J. Jill. A week later, the results are tabulated, and are illustrated below:

E-Mail List Size 100000
Opt-Out Rate 20.0%
Remaining Candidates 80000
Open Rate 18.0%
Engaged Candidates 14400
Click-Through Rate 6.0%
Potential Purchasers 864
Conversion Rate 5.0%
Number of Purchasers 43
Average Order Value $137
Total Demand $5,918
Flow-Through To Profit Rate 38.0%
Marketing Contribution $2,249
Advertising Cost $250
Variable Operating Profit $1,999
Demand Per E-Mail Delivered $0.06

So let's review the challenge, through the eyes of the e-mail marketing manager.
  • Her practice of cross-marketing e-mail lists is acceptable, as outlined in the small print, the legal-speak, of the privacy policy of her brand.
  • The e-mail marketing manager gets to keep her job if she grows the sales of the brand she manages. In fact, she earns a nice bonus, maybe 15% of her annual salary, if she adds "x" new customers, above and beyond the number of new customers from the prior year.
  • Given her incentive structure, the e-mail marketing manager executes an easy strategy. Instead of doing the hard work of finding customers truly interested in her brand, she cross-markets her brand to a "sister file".
  • She angers 20% of the folks who receive the message, a shocking percentage by any account. These folks opt-out of further e-mail marketing of her brand.
  • Yet, 43 customers out of the original 100,000 choose to purchase merchandise, spending a total of $5,918, generating $1,999 profit.
Any rational individual would consider this marketing campaign a colossal failure. Only 43 out of 100,000 customers chose to purchase something, while 20,000 customers were so angry that they opted-out of future campaigns.

Yet from the standpoint of "the brand", this campaign could be viewed as a marginal success. From the perspective of the brand, there aren't a veritable plethora of profitable ideas out there ... if there were, the brand would already be executing them!

This campaign generated profit. This campaign gets our e-mail marketing manager one step closer to earning a fifteen percent bonus that she will use as a down payment on the purchase of her first home.

Third parties have become increasingly critical of the practices of marketers, and for good reason. Third parties can easily see issues from the standpoint of the customer, and can empathize with the customer.

It isn't as easy to see the world through the eyes of the e-mail marketing manager or catalog marketing manager. Would you be willing to execute politically correct strategies that are likely to be money losers (in the short term), costing you the bonus payout that funds the down payment on your first home purchase?

Until you sit in the seat of the individual executing these strategies, it is easy to criticize cross-marketing strategies.

In an ideal world, leadership provides an incentive plan that encourages the e-mail marketing manager or catalog marketing manager to create and execute marketing strategies that are consumer friendly.

In this example, if you were the executive in charge of e-mail marketing, what type of incentive (bonus) plan would you create for the e-mail marketing manager, to encourage her to execute customer friendly strategies that may actually cause a decrease in sales (in the short term)? As an executive, would you be willing to lose your job because you "appeared to side with your customer" by discontinuing cross-marketing practices?

March 23, 2008

Free Tip: Customer Habits

It probably won't surprise you to learn that you interact with posts that have the word "free" in the title at least three times as much as you interact with ordinary posts, ordinary posts that also offer free information.

We are conditioned to respond to certain words, perceiving that some words are more valuable than others.

Our customers are conditioned to certain behaviors as well. Once the customer gets in a habit, the customer tends to maintain the habit.

Let's look at two examples of customer habits.


Catalog vs. Internet Buyers

I am most often asked by catalog marketers how they can minimize catalog expense while maintaining sales. One way is to simply look at customer habits.

Step 1: Retrieve the channel of the last four purchases placed by your customers. Categorize each purchase by channel.

Step 2: Measure the percentage of customers who purchased via the internet or catalog channel in their most recent purchase as a function of the channel used in the past three purchases. You are likely to see several patterns:
  • Customers who placed their last three purchases via the phone/mail channel probably have a 90% chance of placing their next order via the phone/mail channel. Guess what? These customers need catalogs. This works for both you and your customer. You love mailing catalogs, it is a habit of yours. Your customers love buying from catalogs, it is their habit.
  • Customers who placed their last three purchases via the online channel probably have a 90% chance of placing their next order via the online channel. Guess what? These customers probably don't need as many catalogs (if any). Free Tip: Aggressively test contact frequency within this audience. Save yourself considerable expense and increase profit. Sound good?!
  • All other customers are in a state of transition. Pay attention to the customers who placed their past two orders within the same channel. These customers are about to form a habit.

E-Mail Responders vs. Internet Visitors

If we believe that e-mail marketing is relevant, then we should participate in the identification of customers who visit our websites because of e-mail marketing.

Take the concepts outlined for catalog and online buyers, and apply them to those who visit your website. If the past three visits happened because of e-mail marketing, you have an engaged customers who is in the habit of using e-mail marketing to interact with your website. Imagine the potential that exists in this relationship.

If your e-mail marketing falls upon deaf ears, then you have a customer that gave you an e-mail address for unspecified reasons, but is not in the habit of visiting your website due to e-mail marketing.

When this happens, what is our response? We try to FORCE A HABIT upon this customer, don't we? We demand that the customer respond to our own marketing habits, we go to great lengths to change the habits of the customer. Will you change your habits in exchange for free shipping on orders over $175? No? Ok, will you change your habits in exchange for free shipping on all orders? No? Ok, will you change your habits in exchange for free shipping on items that have been discounted by twenty percent? And on and on we go.

And then we get frustrated with the fact that our customer base will only respond to discounts and promotions in the subject line of an e-mail.


The Secret Sauce, Your Free Tip:

We marketers experience success when we work within the naturally occurring habits our customers already exhibit. All too often, we seek to change habits, and impose behavior upon customers. Segment your customer base by customers who exhibit consistent habits, and market to the strengths of your customer base.

March 22, 2008

Customer Modeling

Sometimes you wonder what your department should be named.

Back in 1994, after spending my entire career (6 years) scratching and clawing my way to the title of "Manager", I was offered the opportunity to name my new department. Our job was to build statistical models that determined the customers that received Lands' End catalogs.

Given my extensive management experience, I opted for a no-nonsense name ... "Customer Modeling". After all, that's what we did, we modeled customer behavior!

We printed business cards. We changed the department name in our internal business systems. I was one happy manager.

About a week later, the phone rang. The conversation went something like this:


Phone: "Hi, may I speak with the manager in charge of modeling?"

Kevin: "Yes, you're speaking with that person. My name is Kevin, how may I help you?"

Phone: "Yea, my name is Chick Mather, I'm a partner at Pyramid Agency. Listen, I represent a model, Therese Jones. You might be familiar with her work. She's a long-time model in the Garnet Hill catalog, and recently did a photo shoot with The Territory Ahead catalog. I'm hoping I can send her portfolio to you, as I think she'd be a wonderful addition to the Lands' End brand. Please provide me with your name and address, and I will expedite her portfolio to you."

Kevin: "Huh?"

It only took a dozen calls, over a two week period of time, to realize I'd made my first mistake as a manager.

Customer Modeling became Analytical Services, until I realized that people focused more on the word "service" than the word "analytical". All too often, we were asked to tell folks how many people used the code "XG143" to purchase chinos. We wanted folks to ask us meaningful questions, strategic questions. By being a "service", you set yourself up for a role where you provide counts.

So in 2001, I went with the term "Business Intelligence".

Years later, I remember a finance person telling a roomful of my peers that the term was an oxymoron. A year later, that term was trumped by a new leader offering the name "Consumer Insights".

In the past fifteen years, we've stripped modeling, analytics, services, business, and intelligence from what we do. Now we simply provide insight.

For most of the folks we work with, that's what they really want ... insight. If they only had the facts, they could make great decisions.

It's a shame we did such a poor job that nobody cared about the modeling, analytics, services, business, and intelligence we can provide.

March 20, 2008

The MineThatData E-Mail Analytics And Data Mining Challenge

It is time to find a few smart individuals in the world of e-mail analytics and data mining! And honestly, what follows is a dataset that you can manipulate using Excel pivot tables, so you don't have to be a data mining wizard, just be clever!

Here is a link to the MineThatData E-Mail Analytics And Data Mining Challenge dataset: The dataset is in .csv format, and is about the size of a typical mp3 file. I recommend saving the file to disk, then open the file (read only) in the software tool of your choice.

This dataset contains 64,000 customers who last purchased within twelve months. The customers were involved in an e-mail test.
  • 1/3 were randomly chosen to receive an e-mail campaign featuring Mens merchandise.
  • 1/3 were randomly chosen to receive an e-mail campaign featuring Womens merchandise.
  • 1/3 were randomly chosen to not receive an e-mail campaign.
During a period of two weeks following the e-mail campaign, results were tracked. Your job is to tell the world if the Mens or Womens e-mail campaign was successful.

Historical customer attributes at your disposal include:
  • Recency: Months since last purchase.
  • History_Segment: Categorization of dollars spent in the past year.
  • History: Actual dollar value spent in the past year.
  • Mens: 1/0 indicator, 1 = customer purchased Mens merchandise in the past year.
  • Womens: 1/0 indicator, 1 = customer purchased Womens merchandise in the past year.
  • Zip_Code: Classifies zip code as Urban, Suburban, or Rural.
  • Newbie: 1/0 indicator, 1 = New customer in the past twelve months.
  • Channel: Describes the channels the customer purchased from in the past year.
Another variable describes the e-mail campaign the customer received:
  • Segment
    • Mens E-Mail
    • Womens E-Mail
    • No E-Mail
Finally, we have a series of variables describing activity in the two weeks following delivery of the e-mail campaign:
  • Visit: 1/0 indicator, 1 = Customer visited website in the following two weeks.
  • Conversion: 1/0 indicator, 1 = Customer purchased merchandise in the following two weeks.
  • Spend: Actual dollars spent in the following two weeks.
Ok, that represents the basics.

By April 30, you are encouraged to write a paper that answers the following questions. Winning submissions will receive a copy of my book, Hillstrom's Multichannel Forensics, currently available at ForBetterBooks and Amazon.com. There's nothing wrong with winning a book valued at $95, is there??

I will give away at least one book, and as many as three books, depending upon entries within the following categories:
  • The E-Mail Blogosphere: If we get enough entries, I will give away one book to the e-mail blogger who provides the most insightful answer.
  • The Direct Marketing Industry: The best answer among direct marketing and e-mail marketing professionals and e-mail marketing vendors will receive a book. In addition, I'll publish well-written and insightful answers received from any qualified e-mail marketing vendor. In other words, you'll earn an opportunity to advertise for free to the MineThatData community, a community of more than 1,200 subscribers and daily visitors.
  • The Data Mining Community: Data Mining professionals and University students are encouraged to send in entries, with the best-written and most insightful response receiving a free book.
Here are the questions you are encouraged to answer.
  • Which e-mail campaign performed the best, the Mens version, or the Womens version?
  • How much incremental sales per customer did the Mens version of the e-mail campaign drive? How much incremental sales per customer did the Womens version of the e-mail campaign drive?
  • If you could only send an e-mail campaign to the best 10,000 customers, which customers would receive the e-mail campaign? Why?
  • If you had to eliminate 10,000 customers from receiving an e-mail campaign, which customers would you suppress from the campaign? Why?
  • Did the Mens version of the e-mail campaign perform different than the Womens version of the e-mail campaign, across various customer segments?
  • Did the campaigns perform different when measured across different metrics, like Visitors, Conversion, and Total Spend?
  • Did you observe any anomalies, or odd findings?
  • Which audience would you target the Mens version to, and the Womens version to, given the results of the test? What data do you have to support your recommendation?
E-mail your responses to me by 11:59pm on Wednesday, April 30, 2008. Good luck, and have fun analyzing the information! Dazzle our readers with your insights --- feel free to share your findings in the comments section of this post.

March 19, 2008

Profit Week: Prospect Catalogs And Page Counts

Since the great postage increase of 2007, much has been made about prospect catalogs and page counts.

Both concepts are similar ... can one generate the same level of phone and web sales with a 64 page catalog as in a 124 page catalog?

Ultimately, the smaller catalog needs to be merchandised with the best product you have. If this is done, the concept has potential. This is no place for experimentation. Go with the best merchandise you have!

Performance estimates by page count can be determined, in lieu of actual test results, via the magic of the square root rule. When the prospect catalog is merchandised really well, folks observe 90% of the demand on half the pages ... not too shabby at all!

Here's a profit and loss statement for best customers, comparing a 64 page catalog to a 124 page catalog.


124 Pages 64 Pages Increment
Demand $5.00 $3.59 $1.41
Net Sales $4.00 $2.87 $1.13
Gross Margin $2.20 $1.58 $0.62
Less Book Cost $0.80 $0.50 $0.30
Less Pick/Pack/Ship $0.46 $0.33 $0.13
Variable Profit $0.94 $0.75 $0.19

Notice that, for best customers, a 124 page catalog is better than 64 pages.

How about for average customers?


124 Pages 64 Pages Increment
Demand $3.25 $2.33 $0.92
Net Sales $2.60 $1.87 $0.73
Gross Margin $1.43 $1.03 $0.40
Less Book Cost $0.80 $0.50 $0.30
Less Pick/Pack/Ship $0.30 $0.21 $0.08
Variable Profit $0.33 $0.31 $0.02

Here, the larger catalog is only marginally better than the smaller catalog. Let's take a peek at marginal customers, those who shop infrequently or have not ever purchased.


124 Pages 64 Pages Increment
Demand $2.15 $1.54 $0.61
Net Sales $1.72 $1.24 $0.48
Gross Margin $0.95 $0.68 $0.27
Less Book Cost $0.80 $0.50 $0.30
Less Pick/Pack/Ship $0.20 $0.14 $0.06
Variable Profit ($0.05) $0.04 ($0.09)

Ok, now the smaller book works!!

Smaller page counts typically work best among customers who purchase infrequently. For the cataloger feeling the pressure of postage increases and a recessionary environment, the prospect catalog, with fewer pages, offers opportunities to increase total profit.

March 18, 2008

Profit Week: Using Zip Codes To Improve Profit

I was introduced to zip code models in 1992. Since then, I noticed that fewer than ten percent of the companies I work with use this free technology.

Yes, free. It doesn't cost anything to create a zip code model. And the methodology generates profit for you. What could be better than that?

Step 1: Sum total sales by zip code for your business in the past twelve months.

Step 2: Identify the population in each zip code. There are many internet resources available to obtain population by zip code, or if you have a few dollars to spend, obtain the data from the Census Bureau, or get it as part of a mapping tool like Microsoft MapPoint.

Step 3: Divide total sales by total population. This yields sales per person. This is the most important metric.

Step 4: Sort your file by sales per person (descending order). Place your zip codes into grades ... best = 'A', next best = 'B', worst = 'F'.

That's it. Yup, it is that easy to create a zip model. Now if you have a statistician on-board, this person will want to jazz-up the model. Let her do that. But for the 97% of us who don't have access to a statistician, just follow steps one through four.

There are many uses for zip models. Let's review a few.


Enhanced Segmentation: Take any segment or list that does not meet your profit criteria, and mail only the individuals in the best zip codes.


Entire List Best 40%






Demand $2.00 $2.25
Net Sales $1.60 $1.80
Gross Margin $0.88 $0.99
Less Marketing Cost $0.75 $0.75
Less Pick/Pack/Ship $0.18 $0.20
Variable Profit ($0.05) $0.04

When business is as bad as it is for many multichannel marketers, this is a tool that opens up numerous lists and segments ... and did I mention that the tool is free?


Zip codes offer uses that go beyond traditional cataloging.
  • E-Mail Marketing: Identify the zip codes that are in urban, suburban, and rural areas. Folks in rural areas receive free shipping offers, folks in urban areas receive free sales tax on in-store purchases.
  • Retail Trade Areas: Few things are more fun than using zip codes to outline retail trade areas, especially pre/post store opening. If you want to see how your online sales are impacted by a store opening, this is a great way to do that.
  • Merchandise Analysis: At Lands' End, we followed swimsuit purchases by month by zip code. Northern zips performed well in February and March (vacations), southern zips performed well in April and May (warm weather), northern zips performed well in June and July (summer!).
It won't cost you anything but time to run a query that aggregates sales by zip code. Why don't you give it a try?

March 17, 2008

Profit Week: Do You Do The Marketing For Your Competitor's Brand?

This quote comes to us from a seasoned Chief Merchandising Officer:

"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.
Long-term, Footsmart cannot possibly compete online against Zappos. The harder Footsmart tries to produce spectacular catalogs, the more business they drive to Zappos as customers use the internet to search for comparable merchandise.


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.


Profit Week: Cross-Marketing Brands And Sister Files

Six weeks ago, I purchased my dog a car seat using the website of a catalog brand.

Today, I received a catalog with an unusual merchandise offering that I have no interest in, and will never be interested in.

I noticed that this catalog had the same style of ink-jet messaging, key codes, and had the same mailing address as the catalog brand that offered me the car seat for my dog. I called the 1-800 number, and learned that both catalog brands were owned by the same parent company. I asked to be removed from the mailing list of the catalog I received today.

What happened here is the concept of "cross-marketing".

Catalog brands (and pay attention e-commerce pureplays, you'll be impacted by this someday as well) occasionally fail to generate profit. From time to time, an umbrella company will purchase the struggling catalog brand.

The umbrella company seeks to capitalize on various efficiencies.
  • Distribution Centers and Call Centers can be merged, allowing multiple catalog titles to leverage the same assets.
  • Information Technology infrastructures can be combined.
  • Customer databases can be merged. This allows each catalog title to market to customers from each "sister file", for free. By doing so, each catalog title can prospect for new customers without dealing with the fee that has to be paid to Abacus or Millard or their competitors.
In this case, I purchased my dog a car seat, allowing the "sister file" to send a catalog to what is called a "hotline customer" (me), a customer who just purchased. Hotline customers are important to brands trying to prospect.

On the surface, these are profitable strategies for catalog brands that are struggling. And in the past decade, there has been a lot of industry consolidation, yielding more of these "synergies". From a customer standpoint, there's a disconnect ... the kind of disconnect that has third parties interested in discontinuing junk mail. In part, this is why customers are getting more and more "untargeted" catalogs.


Profit Week Tip: When cross-marketing to "sister files", conduct an analysis of merchandise synergies. Identify the customers who buy product "x" from one title that are likely to buy product "y" from a sister title. This saves expense, and minimizes customer frustration.

March 16, 2008

Profit Week: E-Mail Marketing

Might it be time to completely rethink the concept of e-mail marketing?

Think about this medium for a moment. We celebrate the outstanding ROI of a marketing medium that inspires one out of every seven hundred recipients to purchase something.

Seriously. We celebrate a 0.15% response rate. We celebrate a medium that only one in five individuals bother to even open. We celebrate best practices that improve e-mail response rates to 0.20%.

Maybe we should judge e-mail marketing on its ability to get a customer to visit a website, to "engage". Maybe the goal of e-mail marketing is to train customers to regularly visit our website.

If the purpose of e-mail marketing is to train a customer to interact with us, we would re-think e-mail marketing, wouldn't we? We wouldn't gouge our customer when the economy was good, then offer free shipping when we were desperate to generate sales, would we?

E-mail marketers might market the company blog, encouraging the loyal customer to interact with the brand.

E-mail marketers might educate a customer about how to use the products and services the brand offers, offering planting tips for the seed marketer as an example. The goal isn't to sell seeds ... the goal is to tell somebody how to be successful with the seeds they purchase.

E-mail marketers might share stories about the loyal employees who serve loyal customers.

E-mail marketers might share stories about loyal customers, helping loyal customers feel special. Instead of selling product, sell the loyal customers who buy merchandise.

The goal of e-mail marketing could be about making people feel special. This could generate word of mouth, generating sales with minimal incremental cost. This could also generate reasons for customers to visit your website.

Of course, all of these ideas could be worth garbage.

Conversely, one in seven hundred customers are buying what we have to sell today. What do we have to lose?

Profit Week: Three Customer Segments

This week, the topic is profit.

Enough talk about the economy being lousy (ask the folks at Urban Outfitters if they think the economy is lousy! Heck, check out the Urban Outfitters blog if you want to see innovation from a retailer).

Enough talk about postage increases. It happened a year ago, it was damaging. Time to move on.

Enough talk about third parties and their contempt for various forms of direct marketing.

The only way to stay in business is to generate profit. Lots of profit.

Direct Marketers are transitioning to a new reality, one that views the customer in three different, unique ways:
  1. Customers who do not purchase unless they are advertised to.
  2. Customers who are advertised to, then research product, then purchase product.
  3. Customers who are self-sufficient, purchasing without the need for advertising.
Guess which customer segment is most profitable?

Guess which segment of customers we focus our efforts on?

We do everything in our power to identify customers who require advertising, then invest all of our energy in deciding how to advertise as efficiently as possible to this audience.

We spend almost no energy thinking how to move customers along the direct marketing customer continuum. We need to figure out how to facilitate the process whereby customers simply love us, trust us, and support us.

Here is a typical profit and loss statement for a segment that is dependent upon advertising.

Demand
$100,000
Net Sales 80.0% $80,000
Gross Margin 55.0% $44,000
Less Adv. Expense
$16,000
Less Pick/Pack/Ship 11.5% $9,200
Variable Op. Profit
$18,800
% of Net Sales
23.5%

Now let's take a look at the same segment of customers, a segment not dependent upon advertising.

Demand
$100,000
Net Sales 80.0% $80,000
Gross Margin 55.0% $44,000
Less Adv. Expense
$0
Less Pick/Pack/Ship 11.5% $9,200
Variable Op. Profit
$34,800
% of Net Sales
43.5%

Now the critic will use the traditional phrase "yabut" to express the fact that historically, a direct marketer had to market to the customer to get the customer to purchase something.

The world is different today. Your e-commerce site is more like a retail store than a traditional direct marketing piece. Think of your own behavior. You don't need a lot of direct marketing to shop at Home Depot. You need something to kill weeds in your lawn, you go to the Home Depot. Websites serve a similar function. You need shoes, you go to Zappos.com. Sure, Zappos uses online advertising. But they get a ton of volume from word of mouth, a ton of volume just because "they are Zappos".

In the chart at the top of this post, Zappos has a customer base that is split between the middle box, and the box at the far right.

Most catalogers cultivate a customer base that requires advertising in order to purchase something. Catalogers spent the past decade proving (via matchbacks) that customers needed advertising. Via this self-fulfilling prophesy, catalogers are now at a significant disadvantage, because all of the costs associated with advertising are increasing. Simultaneously, customers are moving from the left to the right side of the direct marketing customer continuum slide.

In the short term, direct marketers need to cope with recessionary issues and expense inflation.

In the long term, direct marketers must migrate their customer base from an "advertising-needs" customer to a "self-serving customer", one that doesn't require advertising. This is where a boatload of profit exists --- profit that can be pocketed, or reinvested in free next-day shipping or other customer-friendly strategies.

For those of you about to say "yabut", this can be done. Pay attention to Zappos, Blue Nile, Amazon. Use Multichannel Forensics to see if your current customer is willing to make this transition with you.