March 16, 2009

The Business Model

Here's the kind of question a catalog CEO is likely to ask me via e-mail in 2009:
  • "Hi Kevin, I'm the CEO of 'BRAND-X' and am a big fan of the blog, keep up the good work! I have a few questions for you. We've always believed that our catalog is our business. We generate 75% of our online business because a catalog was mailed to a customer in the three weeks prior to an online order. We believe that we've maxed-out our paid search opportunity. We don't believe that display ads are the answer. In fact, we're not convinced online marketing is the answer, the genre doesn't scale, and the customers we acquire online are worth just half of what offline customers are worth. We e-mail our customer file six times a month, and yield a paltry $0.14 per e-mail --- great ROI, but no opportunity to drive real sales growth ... and if we do a highly targeted and trigger-based program we get, what, $0.22 per e-mail? It doesn't scale. We think social media is nothing more than hype --- we have a Twitter presence and Facebook presence and MySpace presence and we have a Blog, all of which generate maybe $2,000 of sales a year ... lots of buzz and word of mouth and employees spending time Twittering when they could be generating business for me ... it simply isn't scalable today. We have a mobile website that is lucky to garner 1,500 visitors a month at a 3% conversion rate. Kevin, we see the writing on the wall ... the productivity of our catalog customer acquisition activities via list rental and co-op participation are down 40% from where they were back in 2004. So if none of the other stuff "works", if you will, and we cannot drive new customer acquisition with catalogs, how do you propose we map out a route to the future? Even more important, how do we create demand if the primary vehicle for creating demand is being marginalized? I mean, you say you killed a catalog program at Nordstrom and grew sales, but Nordstrom can get away with that because they have a retail presence ... we don't, so their strategy just won't work for us. Thanks, and I look forward to reviewing your comments."
Notice that this is a leading question, logical, but leading. The individual asking the question is leading the reader to a pre-destined conclusion --- that nothing new is going to work so therefore the answer lies in improving how traditional catalog marketing is executed --- we just have to work harder, right? Now give me the five easy steps for making that happen!

If you continue to have a discussion with this individual, you'll spend time talking about how to maximize page counts, how to rearrange in-home dates, how to get Abacus to produce a better model for free, how to front-load the catalog with "winners", how to get the circulation director to target only the best customers, how to co-mail catalogs with indirect competitors, a discussion about whether to have $12.95 shipping or $14.95 shipping, how to get better printing efficiencies that result in cost savings, how to spend less with merge/purge vendors, how to continue to achieve improvements in paper cost, a discussion about dots on the cover of the catalog calling out new products ... in other words, you'll have a discussion about tactics, not a strategic discussion about the business model.

The real question is about "the business model". What is the business model that replaces the business model I've managed for the past twenty or thirty years?

Business leaders are disappointed when I tell them that the answer to their question is " ... there is no business model that replaces the business model you've worked in for the past twenty or thirty years." If you disagree with that answer, give Clay Shirky's essay about the newspaper industry a read.

Seriously, if a replacement business model existed, wouldn't everybody be doing it right now? Wouldn't it be so obvious that the transition to the future would be easy and self-evident?

Now to be fair, there are companies that use a direct-to-consumer business model that is very different than cataloging, and they are growing sales. You're already familiar with the stars ... Amazon and Zappos, for instance. The fact that Zappos will sell more shoes online in five years than Nordstrom sells across all channels should make any business leader sit up and take notice.

Those businesses, however, had the luxury of building a path to the future from scratch. Your catalog business is different --- for you, it is like a NASCAR team executing a pit stop for four tires and fuel and a spring adjustment while still racing around the track at 190mph.

The danger for a NASCAR team is that if a pit stop happens under green flag conditions, the team will likely lose a lap to the competition, and will not be able to gain the lap back.

The danger for the catalog brand is that if a serious effort at re-inventing the business happens, the business may see a 50% sales decline, and may not be able to gain the business back once the new business model is in place (should Multichannel Forensics work suggest this is the outcome).

The real question, then, is the sustainability of the business model. At what point does catalog customer acquisition become so bad that we are forced to experiment, forced to try two-hundred micro-channels hoping that seven will lead us to the future? At what point do we decide to find three online customers with a lifetime value of $10 each instead of one catalog customer with a lifetime value of $30? At what point is it worth investing the time and money to figure out how to create demand online?

2003 - 2007 was the time, because we had the luxury to test back then, given the comparatively healthy nature of the economy.

2009 - 2010 is a good time, too, simply because of the economics of our current environment.

I wouldn't wait much longer.

Your thoughts? Do you empathize with the CEO mentioned eariler? What do you think is the path to the future? Or is catalog marketing simply in a slump that will go away when the economy improves and customers again trust catalogs in mailboxes from companies they've never purchased from?

2 comments:

  1. Great job Kevin! (And well written).

    I remember some years back when an executive hit me with that same type of question. What you said was basically how I responded. But my response engendered unexpected anger.

    My response:
    "You asked me what could be done to fix X problem that‘s been developing for number of years. That's a great question.

    So allow me to answer your question starting a new one.

    Should we look at this older success model or could we ask your question another way? What other possible success scenarios might we consider instead of tweaking what we have done for years?"

    The executive knew that my answer hit a deep nerve and would not let me proceed beyond that point in the discussion.

    She was wed to her tactical model thinking that somehow the fix lay hidden even after spending millions of dollars trying to solve it.

    She was trying to fix a big problem by continually massaging her existing business model.

    What she needed was a completely different selling strategy.

    The net result: that company sold the business to a competitor under duress for dimes on the dollar.

    90% of the solution lies in correctly defining the problem. Without it, any answer is wrong.

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  2. All good points!

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