November 30, 2008

Profit

Here's a quiz question to offer to your staff on this first Monday of December:

"You spend $1,000 on a paid search campaign. 3,000 users click through to your site, with 1% converting to a purchase. Customers spend a total of $3,000. 30% of the sales flow-through to profit. Was the paid search campaign profitable?"

Profit is missing from the language of marketing.

I reviewed the language of the twenty-five most popular marketing bloggers. During the life of the blogs on the list, the average marketing leader mentioned the word "profitable" in a median of just six blog posts ever, "profit" in a median of just thirty blog posts ever (and that includes the phrase "non-profit", and includes press releases about corporate profit). In fact, fifteen of the twenty-five bloggers used the phrase "profitable" three or fewer times ever --- and that's across an average of 250 to 1,000 posts.

These are your favorite marketing experts. The majority seldom if ever talk about profit.

Profit becomes part of the DNA of a business. It has been my experience that profit knowledge is kept in small tribes.
  • Business Intelligence. BI employees are great at creating and querying cubes. Too often, the components of profit are not contained in the cubes.
  • SAS Programmers. A completely different family of employees than BI experts. These crafty workers revel in writing neat code more than they focus on measuring profit. Of all employees, this is the one place where everything could be brought together.
  • Web Analytics. This KPI-enamored throng of earnest employees use software that can, but frequently doesn't integrate profit components. So we've created an entire generation of good analysts who do not have profit as part of their DNA.
  • E-Mail Analytics. Our e-mail community thinks about return on investment, and that is good! Because e-mail is almost free on a variable cost basis, there hasn't ever been a need to teach profitability. E-mail is always profitable.
  • Catalog Circulation. These folks measure profit down to the penny, and for good reason. When you spend $0.75 sending out catalogs, your finance team requires that you become excellent at calculating profit.
  • Paid Search. Another group that is really good at measuring profit, and for good reason. When you spend $0.75 per click, your finance team requires that you become excellent at calculating profit.
  • Portal Advertising. This group can measure profit, but requires really good systems in order to build this discipline.
  • Affiliate Marketing. Since you pay a commission, this style of marketing is generally profitable, and as a result, profit isn't always measured.
  • Social Media. By and large, these folks do want to measure influence.
  • Brand Marketing. By and large, these folks do want to measure influence.
More than anything, a profit culture requires a leader, somebody who wants to understand how everything fits together. The problem isn't solved by combining silos, it is solved by a passionate leader. The emergence of e-commerce and then social media have only served to further fragment the ability of a company to create a profit culture.

So why couldn't you be the profit expert? Sit down with your finance team, learn each piece of the profit and loss statement, and start measuring profit!

November 29, 2008

November 28, 2008

How About A Few More B2B Volunteers For Zip Code Forensics?!

We're still looking for a few more volunteers for the B2B version of Zip Code Forensics.

Thanks to all of you who volunteered data during the past week, I hope you enjoy using your own custom-built model in the weeks prior to the development of the official B2B model.

We also received word from one of our volunteers that the model performed 20% better than a control group, in actual testing --- and performed essentially the same as co-op models (better in terms of profit due to the fact that Zip Code Forensics is free).

For your viewing pleasure, I present you with the B2C version of Zip Code Forensics, illustrating the Charlotte, NC area. This is an e-commerce dominated area, with significant pockets of high-potential customers in the Lake Norman / I-77 corridor, and south of the city. Unlike most cities, Charlotte has good performing e-commerce zips in the central city area.

Wal-Mart Black Friday Opening Turns Fatal

We encourage this behavior with our discounts, promotions, and advertising featuring "doorbusters". Then folks actually bust down the door, ending a life. In some ways, we marketers need to consider our level of accountability here.

Look at some of the behavior we encourage, all so that we can make a few extra dollars of profit. And what if we're losing money on these promotions?

November 27, 2008

Measuring Paid Search, E-Mail, And Social Media Influence Via Matchbacks

Ted asks "how do you measure influence rather than direct sales"?

Direct marketers use Matchback Analytics to attribute sales to the activity that theoretically caused the purchase to happen. Matchbacks were originally designed to prove that catalog mailings were responsible for web sales. Now, matchbacks are well suited to measure influence.

Let's look at a few customer orders.

Order #1: Customer received catalog on November 1. Customer purchased online on November 10, using the keycode from the back of the catalog. This one is easy, the catalog gets credit for the order.

Order #2: Customer received catalog on November 1. Customer received marketing e-mails on November 3 and November 5. Customer purchased online on November 10, and did not use a keycode. The catalog brand would probably allocate this order to the catalog, ignoring any role that e-mail marketing played in the purchase.

Order #3: Customer received catalog on November 1. Customer received marketing e-mails on November 3 and November 5. Customer clicks through to the website from a paid search term on November 10, purchases online, and does not use a catalog keycode. Catalogers would like to allocate this order to the catalog, paid search mavens might want to allocate this order to paid search, e-mail marketers probably lose out in this instance.

Order #4: Customer received catalog on November 1. Customer clicks through to the website from a blog featuring merchandise offered in the catalog. Customer purchases online on November 10. Catalogers would immediately allocate this order to the catalog.

In the last three instances, the marketer "assumes" that one form of media drove the order, and creates business rules to proceed with allocation of sales. And, of course, in the last three instances, the catalog marketer makes incorrect assumptions. The assumptions are better than the assumptions made in 1999, but the assumptions are flat-out wrong.

When a catalog brand measures influence, there are two different allocations.

There is direct allocation, as illustrated above.

Then we have influence allocation.

In Order #2, the catalog gets credit (if that is how matchback business rules are written), while each e-mail campaign gets half-credit for influence.

In Order #3, the catalog gets credit, while two e-mail campaigns and paid search receive one-third credit for influence.

In Order #4, the catalog gets credit, while social media receives 100% influence credit.

Each quarter, we produce a table that illustrates, for each channel, direct attributed sales, and influenced sales.


Direct Sales Influenced Sales Index
Catalog Marketing $10,000,000 $1,200,000 0.12
E-Mail Marketing $1,000,000 $4,000,000 4.00
Paid Search $2,000,000 $4,000,000 2.00
Other Online Marketing $1,000,000 $1,000,000 1.00
Social Media $100,000 $3,000,000 30.00
Mobile Marketing $100,000 $1,000,000 10.00

What you are likely to see is that emerging channels have a high "influence index". In other words, we don't attribute orders to the emerging channels --- we simply don't have business rules to do this, so we attribute orders to the most established channels. But if we focus on influenced sales, we notice that channels like e-mail and paid search and social media play a bigger role, helping cause an order to happen.

Influenced sales make a huge difference in viewing a "mutlichannel strategy". In the illustration above, e-mail, paid search and social media are key influencers. They do not get direct ROI attribution, but are clearly used by the customer as part of the purchase process. From a strategic standpoint, these channels should receive strategic attention. Or maybe catalog marketing should not receive direct credit for all orders!

Either way, the marketer views the world differently when focusing on both ROI and influenced orders.

A final note: In a perfect world, the marketer executes catalog and e-mail test/holdout groups, then measures influence in mailed/holdout groups, subtracting the differences to measure true ROI and true influence.

November 26, 2008

Charming Shoppes Shuts Down The Lane Bryant Catalog

One of our loyal subscribers forwards us this press release from Charming Shoppes.

The press release speaks of the end of the Lane Bryant Catalog and associated severance charges.

But keep on reading! The press release gives an assessment of the cash situation at Charming Shoppes, assuming different levels of 2009 (fiscal 2010) comp store sales performance. The press release also talks about a strategy change in merchandising, to private-label merchandise that delivers a better gross margin.

Critics might chastise this business, focusing on prior mis-steps. Until you've sat at an Executive table at a business that is trying to dig out out trouble during less-than-optimal times, you might not be able to appreciate the tension that exists. The press release talks about the sensitivity analysis they ran. Each day you look at your "flash sales report". A minus eighteen comp gives you an ulcer. A minus three percent comp gives you hope. You go through that kind of stress every day at 7:00am.

I'm sure there will be those who are critical of yet another retailer dumping the catalog marketing channel. Maybe, just maybe, the critics should take notice of what is becoming more than a trend. We know from Zip Code Forensics that retail is an urban/suburban channel. We know that cataloging is a exurban/rural channel. It shouldn't be a surprise that retailers are abandoning catalog marketing, that they are finding it unprofitable in an age where all the information exists online.

November 25, 2008

Lands' End E-Mail Marketing Contact Strategy

I am frequently asked what the "right" level of e-mail integration coupled with contact strategy should be. Maybe you can take a peek Lands' End and their actual e-mail strategy into my e-mail inbox (I'm guessing they have multiple versions of e-mail campaigns, and even send them to different customers on different days), and decide for yourself. Is this good strategy? Or would you do something different?


October 15 =
Free Shipping ends today - shop the latest for Men

October 16 = $10 off Men's Sport Shirts: flannel, denim & more.

October 18 = Lands' End Shop @ Sears: ready for cold & snow head to toe.

October 20 = Boo who? Whoever misses the Free Shipping deadline.

October 23 = FREE SHIPPING (hurry) - Warm up & save on fleece blankets.

October 25 = Free Shipping, 2 days left & mix-match-men's savings.

October 27 = Free Shipping, last chance, all orders - click or treat!

October 30 = $10 off select outerwear - like these four favorites.

November 3 = Last day of Free Shipping! Plus, save on Kids' Squalls

November 7 = Free Shipping kicks off holiday shopping.

November 8 = Men's fall savings - subscribers get first click.

November 11 = Last day: Free Shipping to kick off holiday shopping

November 13 = Free Shipping ends soon. Men's No Iron Chinos, $29.50

November 15 = Hurry for Free Shipping & Men's in-season Overstocks

November 17 = Free Shipping ends today! Plus $50 off Lighthouse Luggage

November 19 = Free Shipping now - Outerwear Headquarters & more

November 22 = Hurry for Free Shipping! Save on Turtlenecks.

November 24 = What did St. Nick Pick? Shop today's amazing value

November 25 = Last day! Free Shipping sitewide

November 26 = FREE SHIPPING: Extra gravy for Thanksgiving Weekend (added 11/26 7:24am PST).

November 26 = Happy Thanksgiving - help us say thanks to military families. (added 11/27 5:27pm PST).

November 27 = FREE SHIPPING + 25% off Sherpa Fleece today only (added 11/27 5:28pm PST).

November 28 = Free Shipping + 25% off No Iron Dress Shirts; $10 off, just $29.50 - St. Nick Pick (added 11/28 12:14pm).

November 29 = Free Shipping + 25% off Kids' Squall Parkas - save $20 today, now $49.50. (added 11/29 9:45am).

November 30 = FREE SHIPPING + Up to 30% off Windfall Squall jackets: save $20 - $40. St. Nick's Pick! (added 11/30 9:40am).

December 1 = WOW! FREE SHIPPING + 35% off our famous Down Vest. $19 today only!

December 2 = FREE SHIPPING + 30% off Weatherly Jackets: $39.50 today only

December 3 = Last Day for Free Shipping! Any size order.

November 24, 2008

Executive Comments From Macy's, Urban Outfitters

Karen M. Hoguet, Macy's, on Internet Sales: "The truth is the dot-com business continues to grow faster than the comp store sales and do well. We are also moving towards more of a multi-channel strategy. Remember, when you buy on the Internet you can return to our stores. That negative gets deducted from store sales, not from the Internet sales. Hence it's getting very murky between the two definitions. Also we currently are testing, in Florida, the ability of being in the store and having the sales associate say, 'We don't have that in stock, let me go get it for you on macys.com', which so far seems to be working very well. We are encouraged by not only what dot-com can do on its own, but more importantly how it is being integrated into the marketing and merchandising for the stores as well.

Urban Outfitters achieves record sales and profit --- and runs opposite of vendor-suggested multichannel best practices by increasing direct sales by 41% on a circulation decrease of 9%.
  • From Glen T. Senk, about circulation decreases: "We have not finalized the circulation plans for next year. However, the brands have done a spectacular job marketing the websites and there's a paradigm shift and this is a major shift in the way people are buying particularly for Urban Outfitters and Anthropologie where we have a very developed brick and mortar business. The customer shops between the catalog, brick and mortar and the web absolutely seamlessly. In fact, we've had a lot of internal discussion about combining our direct sales and our retail comp sales going forward. We're thinking now about starting to report two ways because really the two businesses have become interchangeable. If you look at the third quarter for example, our comp increase would have gone up by a whole four points as a company. Instead of being 10 comp we would have been 14 comp and of course the biggest increase would be at Free People where if you combine the direct business and the comp base we actually would have been 28 comp. We're able to do this because of the way we're marketing the website and we have a myriad of initiatives. All of the brands have new sites; we launched the new web platform about a year and a half ago. The blog activity is tremendous. The viral marketing is tremendous. The penetration of direct-to-consumer business in total is up roughly 150 basis points and we don't know how high that is but we believe it can be significantly higher and we're more profitable in our direct-to-consumer business than we are in our brick and mortar business."
  • And this from Mr. Senk, about the percentage of the total business coming from the direct channel: "We're going to let the customer decide. We wouldn't be surprised if it ended up long term in the 20% to 30% range in terms of total penetration. It's so exciting to be part of this and when you look at the changes, the speed with which things are happening is exponential. The speed of information, the functionality on websites, people's ability to deliver merchandise quickly, access to information, networking, product review, shopping with friends, getting the sites more tacked up; this is all happening so quickly it is fantastic."

November 23, 2008

How We Got Into This, How We Will Get Out

How We Got Into This Mess?
  • Trusted others to keep USPS costs down.
  • Didn't see the significance of CAN-SPAM and do-not-call, didn't understand that these movements empowered customers to choose, and they would begin to choose control over the mailbox too.
  • Considered social networking as something that kids do, looked to monetize conversations instead of participating in conversations.
  • We templatized e-mail into a stale creative offering of vapid off-price promos and free shipping.
  • Didn't understand that online customer acquisition requires a veritable plethora of micro-channels to scale in a manner like catalog customer acquisition scales.
  • Focused on offers, not merchandise.
  • Focused on customer retention, a metric that is too hard to move.
  • Failed to acquire enough customers to get us through tough times.
  • Failing to recognize that customers need new information on a constant basis, instead we employed remail strategies to minimize expense.
  • We trusted algorithms first, people second.
  • Spent nearly a decade trying to prove, via matchbacks, that direct marketing drives sales to other channels. Should have spent a decade trying to drive sales to any channel using new micro-channels.

How We Will Dig Ourselves Out Of This Mess?



Understand That There Are Five Kinds Of Customers (Hint, Those At The Top Are Best).
  • Organic: These customers buy because the love us, and are most profitable. These customers continue to purchase without any advertising.
  • Social: These customers buy for social reasons, and are highly profitable.
  • Algorithm: These customers buy because an algorithm (Google) drove them to our business. We give control of our business to the algorithm, a good thing for small brands.
  • Advertising: The realm of the marketer. Traditional advertising is dying, including catalog and e-mail marketing.
  • Begging: The realm of the marketer in 2008. The customer buys because of free shipping, discounts, and promotions. This is the worst form of marketing, yet marketers are increasingly addicted to the combination of advertising and begging, while customers are increasingly migrating to Social/Algorithm solutions.
Realize That Geography Dictates Multichannel Marketing Strategy
  • Urban Customers are saturated with retail opportunities. Your website is a research-based tool, not necessarily used for e-commerce. Mobile marketing and social media need to be retail focused among these customers.
  • Suburban Customers represent the traditional "multichannel customer" that marketing experts love to talk about. This is where mobile marketing and social media have potential, where catalog and e-mail marketing truly drive business across all channels. This is the home of the matchback analysis.
  • Exurban Customers are direct marketing customers. Retail is too far away to be convenient. E-commerce rules here, and catalog marketing can be used to drive e-commerce.
  • Rural Customers represent the future potential of catalog marketing. In the land of dial-up internet access and a lack of cell phone coverage, traditional direct marketing is still relevant.
  • Zip Code Forensics prove that there are geographical locations that are highly responsive to catalog marketing --- specifically, rural New England and the Rocky Mountain states.
We Operate In A Giant, Connected, Non-Linear Ecosystem. We Measure Too Many Things In An Isolated, Linear Manner
  • Web Analytics experts must integrate their tools and data with all company data, or risk becoming irrelevant as the Business Intelligence community integrates data for them.
  • E-Mail Analytics must move beyond open rates and click-through rates and conversion rates. What is the long-term value of e-mail marketing? How does e-mail marketing influence behavior across micro-channels?
  • Social Media influences activities, it usually doesn't directly cause sales to happen. We need to measure influence, not cause.
  • Mobile Marketing may be the "next big thing". Until then, we need to experiment and measure influence, focusing less on direct sales.
  • Video Marketing may be the "next big thing". Until then, we need to experiment and measure influence, focusing less on direct sales.
  • Business Intelligence needs to move beyond drill-down queries and fancy software interfaces. Measure how customers interact with products, brands and channels.
  • Multichannel Forensics offer a framework for understanding the behavior of customers in a giant ecosystem.
The Future Of Our Business Is Tied To Micro-Channels
  • Mass audiences no longer exist.
  • Catalog customer acquisition no longer scales in a sustainable manner.
  • And no single online channel offers the size of audience that catalog customer acquisition currently offers.
  • Therefore, the future of direct marketing leverages hundreds or even thousands of micro-channels.
  • Today, there aren't enough micro-channels to "switch to". So we're in limbo for awhile.
  • This is the time to experiment, to test hundreds of micro-channels, to use Multichannel Forensics to understand how customers flow between micro-channels.
And There Are Two Things We Must Measure, To Be Successful
  • The Organic Percentage tells us what happens if we don't market to customers. It is the most important metric for a direct marketer to track. Catalogers who know this percentage do not over-mail, do not saturate the majority of the customer base. They save a lot of money that can be re-invested in online micro-channel development.
  • The Net Google Score is critical for understanding whether Google is helping or hurting your brand. It is my belief that catalog brands are posting very negative net Google scores, caused by advertising that drives catalog customers online, resulting in those customers buying from brands that shine online.
The Future Is So Bright, I've Got To Wear Shades!
  • The next two years are not likely to be a lot of fun.
  • But after that, there is a lot of potential!
  • Potential will be realized once the innovation of 2009-2010 bear fruit.
  • Expect catalog marketing to evolve to an opt-in customer retention vehicle for customers in Exurban and Rural areas.
  • Expect that some retailers will completely re-invent e-mail marketing, fusing the best of e-mail selling with social media warmth and humanity.
  • Expect consolidation among co-ops as customer acquisition performance implodes. Co-ops that survive will focus on consumer intelligence, delivering brilliant insights that fuel understanding of customer interactions with products, brands and channels.
  • Expect to see the Business Intelligence community integrate Web Analytics, providing a more complete view of customer behavior than illustrated by Web Analytics tools.
  • Expect to see Business Intelligence analysts fail to explain customer interactions with products, brands and channels at a level needed by Management.
  • Expect a shift away from marketing to lists.
  • Renting and exchanging names is a dying practice (see here). Third party opt-out services will exert influence, severely harming the business model of the co-op database. This battle could get testy, folks.
  • Printers will try to help direct marketers migrate from "campaign-based" mailers to personalized mailings with product tailored to the interests of the customer.
  • Expect a shift to participation with communities. Hundreds or thousands of communities.
  • Traditional multichannel marketing is suffering from vendor-itis.
  • Micro-channel marketing is about to take off.
  • Marketers will continue to saturate the same customers with the same message across channels. Smart marketers will realize that each micro-channel offers an opportunity to reach new audiences, increasing total sales.
  • Hologram Marketing is only ten years away, and when it comes, expect major disruption among the current online leaders (Google, Amazon, etc.).

November 22, 2008

B2B Brands: A Customized Zip Code Forensics File Just For You!

The research strongly suggests that B2B brands have a different geographic customer profile than do B2C brands.

Therefore, it makes sense to have separate models --- one segmentation strategy for B2C, one for B2B.

So, I'm looking for a half-dozen B2B volunteers who wish to contribute data. You send data with one row per zip code, columns including zip code, 12-month phone sales, 12-month online sales, 12-month retail sales for that zip code.

I build a custom model for B2B brands, and everybody benefits.

Of course, there's no cost to you. E-Mail me your questions, I look forward to hearing from you.

B2C brands --- Zip Code Forensics
is free for those who contribute data, $5,000 a year for everybody else.

November 21, 2008

E-Mail Priority And Catalog Covers

Matthew has a few questions that he'd like to see if you might be willing to answer. Here are his questions, as e-mailed to me. Please discuss, and leave your answers in the comments section of this post.


What is the importance of catalog cover testing when your company is in Retention mode? I believe that it is necessary to prevent a cover that would bomb from slipping through and going full-scale. But at this point the brand should be established and major changes to covers would/should be unlikely. My point here is that I believe it is often the flagship test of a catalog and receives the most attention. A cover test is not a viable method for generating incremental revenue.

Where would Multi-Channel marketing be if Email came before Direct Mail? Emails win in ROI and Catalogs win in Sales per Mailing so what would be different? Would we be excellent at segmenting our email audience and only blasting to our most profitable customers? Would Catalogs get sent to everyone because of their tremendous Sales per Mailing and Response?


Please use the comments section of this post to offer Matthew your thoughts.

Multichannel Stocks: OMG

On March 16, 2007, I started tracking a set of online/catalog brands, comparing stock performance against the fabled "bricks and clicks" brands that the punditocracy told us we had to be like.

The online/catalog brands included Amazon, Blue Nile, CDW, Dell, Drugstore.com, eBay, Overstock.com, and PC Connection.

The retailers included Best Buy, Cabelas, Circuit City, Coldwater Creek, Eddie Bauer, J. Crew, J.C. Penney, Nordstrom, Office Depot, Office Max, Talbots, and Williams Sonoma.

Since 3/16/2007, online/catalog stocks in my list are down 53%.

Since 3/16/2007, retail stocks in my list are down 87%.

Now granted, the stock price of a company is not always correlated with the operating performance of a company.

I'd simply ask you to question the best practice advice of the marketing punditocracy. Research, measure, ask questions, and develop your own point of view. Bricks and Clicks is not benefiting many multichannel retailers at this time.

November 20, 2008

Catalog And E-Mail Drive Retail Sales Via Matchback Analytics In Some Instances

Jim Wheaton brings us an article that those of us who've analyzed the data firmly believe in --- that after controlling for prior customer frequency, multichannel customers are not fundamentally better than single-channel customers. The article explores how analysis of customer behavior can trump established marketing beliefs.

I am reminded of a meeting in 2003 at Nordstrom. Our sales rep from Abacus visited, suggesting that matchback analytics would prove that our catalog marketing efforts drove a billion dollars or more of retail volume (our retail business was maybe $5 - $6 billion at that time). Abacus clients were using matchbacks, learning that retail customers who received catalogs were likely to buy in stores in the days after receiving a catalog. Our Abacus rep took a leap of faith --- the mailing of catalogs caused a billion dollars in retail sales --- the catalog caused the sales to happen.

And Abacus was right, based on the analytics available to them. You run a matchback analysis, and you see that retail customers buy in the days following the mailing of a catalog.

Multichannel Forensics, however, suggest a subtle distinction that we must keep in mind.
  • Matchback algorithms are reasonably accurate when the retail channel is in Acquisition Mode.
  • Matchback algorithms are somewhat accurate when the retail channel is in Hybrid Mode.
  • Matchback algorithms are highly inaccurate when the retail channel is in Retention Mode.
If you don't have the bandwidth to run a Multichannel Forensics analysis, at least run mail/holdout groups through your matchback algorithm, subtracting the difference in matches.

There is a faction of the marketing community that sees matchbacks as a religion, and this is ok, because it is sometimes better to do matchbacks than to do nothing. That being said, subtle performance differences and profit increases happen when we combine Multichannel Forensics, Test/Holdout Groups, and Matchback Algorithms --- for catalog mailings and especially e-mail campaigns.

Back to Nordstrom. We did the testing, we did the Multichannel Forensics analysis, and we did Matchback Analytics. Our findings ran contrary to the best practices suggested by the marketing establishment.

We killed our catalog program in June 2005. From July 2005 - June 2006, comp store sales were positive. In other words, without $36,000,000 of catalog advertising that matchback algorithms suggested were driving maybe a billion dollars of retail sales, we were able to increase retail sales. Multichannel Forensics and Test/Holdout groups told us that a retail brand in Retention Mode yielded highly misleading Matchback results.

So this is the deal. The vast majority of the marketing establishment believes that catalog and e-mail marketing drive sales to other channels, as evidenced by matchback analytics. And these folks may be correct, especially if channels operate in Acquisition Mode. When channels operate in Hybrid Mode or Retention Mode, the rules change --- the organic percentage overrides matchback analytics.

Forest Ethics E-Mail Message

Forest Ethics sent me this e-mail message today (click on the image to read the message --- I crossed out the name of the author to protect the individual who sent the message).

I did not previously opt-in to receive messages from Forest Ethics.

I have two questions for you.

Question #1: If a cataloger sends a catalog (a message crafted on paper harvested from trees, a practice that probably damages the planet) to a customer who shopped on the website of the catalog brand, and the customer did not opt-in to receive catalog marketing and doesn't want to receive catalog marketing, would Forest Ethics feel that this practice is harmful and should be stopped?

Question #2: If Forest Ethics sends an e-mail message (a message sent by servers that run off of electricity largely fueled by coal via practices that probably damage the planet) to an individual who previously interacted with Forest Ethics in some manner, and the individual did not opt-in to receive e-mail messages from Forest Ethics and doesn't want to receive messages from Forest Ethics, would Forest Ethics be practicing a tactic similar to that of the cataloger in Question #1?

I'm quite confident that Forest Ethics did not intend to spam me or to annoy me. They simply wanted to share an interesting story with me.

Maybe in the future, all of us can try to see things from the point of view of another individual or organization, realizing that the vast majority of folks are not evil ... that many of us send things that somebody else doesn't want to receive.

November 19, 2008

The Free Shipping Death Spiral

I will preface this by saying that I don't have a problem with free shipping --- in fact, if you want to run you business model by offering free shipping 24/7/365, have at it!

It is the promotional nature of free shipping that sets the customer file into a free shipping death spiral, especially when our businesses need shipping/handling revenue to maintain profitability.

Run a unique Multichannel Forensics analysis, creating six segments.
  1. Pays For Expedited Shipping, January - October.
  2. Pays For Regular Shipping, January - October.
  3. Takes Advantage Of Free Shipping Promo, January - October.
  4. Pays For Expedited Shipping, November - December.
  5. Pays For Regular Shipping, November - December.
  6. Takes Advantage Of Free Shipping Promo, November - December.
The free shipping death spiral happens when customers in segment (6) are in isolation with segments (1) (2) (3) (4) (5).

The free shipping death spiral happens when customers in segment (3) are in isolation with segments (1) (2) (4) (5), but are in equilibrium with (6).

The free shipping death spiral happens when the conditions above exist, combined with customers in segments (1) (2) (4) (5) being in equilibrium/transfer with customers in segments (3) and (6).

The free shipping death spiral happens when newly acquired customers enter via (3) and (6), then follow the conditions above.

Under these conditions, those who shop via free shipping will only shop via free shipping, and those who shop via free shipping during the holidays will only shop in the future via free shipping during the holidays. Even worse, customers who used to pay for shipping are leaking into free shipping, then not paying for shipping again.

If your business can be highly profitable under these conditions, no worries --- though I'd ask why not go to a free shipping 24/7/365 business model?

Even if we're locked into the free shipping death spiral, we can mitigate impact in segments (3) and (6) by minimizing January - October marketing activities that offer regular shipping charges, and in segment (6), by simply minimizing all marketing activities from January - October.

November 18, 2008

Multichannel Cannibalization: Here's How It Happens

We don't like to talk about cannibalization. It's a bad word. I once had a CEO tell me "Don't ever mention that term again. Cannibalization suggests we're eating our young, and that's not what we do in marketing, is it?"

So in Multichannel Forensics, we almost never mention the term "cannibalization", using "Equilibrium" and "Transfer" to suggest that the analyst look into the topic of cannibalization.

Here's how channels inspire cannibalization.

Let's take a look at a catalog brand, back in 1990. This brand mailed a dozen catalogs a year. Here is a demand and expense profile for an average customer segment.


Ad Spend Demand Profit
Base Catalogs $12.00 $72.00 $13.20
Targeted Catalogs


Organic Online Demand


E-Mail Marketing


Search Marketing


Online Marketing


Social Media


Mobile Marketing


Grand Totals $12.00 $72.00 $13.20

Catalog brands expanded in the early 1990s. They increased targeted mailings and remails and any other mailing strategy to increase demand. The profit and loss statement changed as a result.


Ad Spend Demand Profit
Base Catalogs $12.00 $63.00 $10.05
Targeted Catalogs $6.00 $30.00 $4.50
Organic Online Demand


E-Mail Marketing


Search Marketing


Online Marketing


Social Media


Mobile Marketing


Grand Totals $18.00 $93.00 $14.55

The new mailings cannibalized the old mailings. However, total demand and total profit increased. Sure, the customer was contacted fifty percent more often, but as long as profit increased, nobody complained.

Then folks invented this internet thing, and the world changed forever. Now customers generated organic demand --- they no longer needed to be marketed to, but would spend money anyway. Though matchback algorithms allocated demand back to catalogs, those who executed mail/holdout tests knew better --- they knew that demand was cannibalized from catalog advertising to e-commerce (and we surmised that demand was cannibalized from retail to e-commerce).


Ad Spend Demand Profit
Base Catalogs $12.00 $51.00 $5.85
Targeted Catalogs $6.00 $24.00 $2.40
Organic Online Demand $0.00 $35.00 $12.25
E-Mail Marketing


Search Marketing


Online Marketing


Social Media


Mobile Marketing


Grand Totals $18.00 $110.00 $20.50

Notice how the base catalogs are being marginalized as customers shift behavior.

As marketers, we capitalize on this behavior. We add e-mail marketing, tossing 52 e-mail messages at a customer.


Ad Spend Demand Profit
Base Catalogs $12.00 $49.00 $5.15
Targeted Catalogs $6.00 $22.25 $1.79
Organic Online Demand $0.00 $35.00 $12.25
E-Mail Marketing $0.16 $7.50 $2.47
Search Marketing


Online Marketing


Social Media


Mobile Marketing


Grand Totals $18.16 $113.75 $21.66

From a profit standpoint, this is sort of the peak --- right around the turn of the century we maximized profit.

And then we really started diving into online marketing, thinking we could take full advantage of search/Google.


Ad Spend Demand Profit
Base Catalogs $12.00 $46.75 $4.36
Targeted Catalogs $6.00 $20.75 $1.26
Organic Online Demand $0.00 $35.00 $12.25
E-Mail Marketing $0.16 $6.50 $2.12
Search Marketing $3.00 $10.00 $0.50
Online Marketing


Social Media


Mobile Marketing


Grand Totals $21.16 $119.00 $20.49

We continue to cannibalize other channels, still increasing demand (and this can be argued, too, based on the mail/holdout tests I've seen across the industry, but let's assume here that there are increases).

We still need to grow, so we add portal advertising and affiliates and shopping comparisons. We keep pushing the envelope.


Ad Spend Demand Profit
Base Catalogs $12.00 $42.00 $2.70
Targeted Catalogs $6.00 $19.50 $0.82
Organic Online Demand $0.00 $35.00 $12.25
E-Mail Marketing $0.16 $5.00 $1.59
Search Marketing $3.00 $10.00 $0.50
Online Marketing $3.00 $10.00 $0.50
Social Media


Mobile Marketing


Grand Totals $24.16 $121.50 $18.37

Demand continues to increase (again, verify via mail/holdout groups in catalog and e-mail), but we are so heavily cannibalizing total demand that profit is decreasing. We're wobbling now. The traditional channels (catalogs and to a lesser extent, e-mail) are seriously cannibalized as demand flows out of those channels, into the new channels. Also notice that the new channels just aren't able to generate a lot of volume. All of the channels need to be there to keep demand growing.

Now we add social media into the picture, with customers trusting other customers more than they trust marketers, further cannibalizing marketing channels.


Ad Spend Demand Profit
Base Catalogs $12.00 $41.00 $2.35
Targeted Catalogs $6.00 $18.50 $0.48
Organic Online Demand $0.00 $35.00 $12.25
E-Mail Marketing $0.16 $5.00 $1.59
Search Marketing $3.00 $9.00 $0.15
Online Marketing $3.00 $9.00 $0.15
Social Media $0.00 $4.50 $1.58
Mobile Marketing


Grand Totals $24.16 $122.00 $18.54

And now we're adding mobile marketing to the mix, being told that it is the "next big thing". For now, however, it isn't big --- and the business we get is frequently generated by our best customers, causing more cannibalization among existing advertising channels.


Ad Spend Demand Profit
Base Catalogs $12.00 $38.00 $1.30
Targeted Catalogs $6.00 $17.50 $0.13
Organic Online Demand $0.00 $35.00 $12.25
E-Mail Marketing $0.16 $5.00 $1.59
Search Marketing $3.00 $8.75 $0.06
Online Marketing $3.00 $8.75 $0.06
Social Media $0.00 $4.50 $1.58
Mobile Marketing $0.50 $4.50 $1.08
Grand Totals $24.66 $122.00 $18.04

After adding a ton of channels to the marketing mix, we find that the traditional channels are no longer very productive. Base catalogs, once responsible for driving $72 of volume, now drive just over half that total. And targeted catalogs are basically a break-even proposition.

Good leaders can trim expense, so we kill the targeted catalogs we used to mail. Now, demand flows out of those catalogs, back into the base catalogs, improving the profit and loss statement.


Ad Spend Demand Profit
Base Catalogs $12.00 $47.00 $4.45
Targeted Catalogs $0.00 $0.00 $0.00
Organic Online Demand $0.00 $35.00 $12.25
E-Mail Marketing $0.16 $5.00 $1.59
Search Marketing $3.00 $8.75 $0.06
Online Marketing $3.00 $8.75 $0.06
Social Media $0.00 $4.50 $1.58
Mobile Marketing $0.50 $4.50 $1.08
Grand Totals $18.66 $113.50 $21.07

This is how multichannel marketing works. We add channels at faster rate than we reduce spending in traditional channels --- cannibalizing old channels and sub-optimizing profitability.

Our job is to react much faster to micro-channel and multichannel cannibalization. But that's hard to do, isn't it? Instead, it is easier to focus on the fact that customers use all of these channels, and use of all channels is a good thing, which it is.

Another element of this deal is that very few customers use all channels. Most Multichannel Forensics projects suggest that customers are very loyal to one, and at most, two advertising channels. It's just really hard for us to isolate individual customer behavior --- so instead we watch large groups of customers, segments, and notice that segments seem to use a lot of channels.

When we get good at segmenting customers based on predicted future channel activity, we help generate a lot of profit for the companies we work for.