November 29, 2009

Dear Catalog CEOs: Co-Ops

Dear Catalog CEOs:

During the past six weeks, I've been asked more questions about co-ops than any other topic in catalog marketing.

You know what co-ops are, right? These are the companies that your marketing team sends the name and address of your best customers to. The co-op compiles the information, models it based on purchase habits across companies, then resells the information, at +/- $0.04 to $0.07 per name to your competitors. In kind, you get access to the names and addresses of customers who shop your competitors, for +/- $0.04 to $0.07 per name.

Your marketing team felt like the co-op relationship was nothing short of "dreamy", back in 2004. They sent files with important purchase information about each customer to the co-ops, and then they got access to names at what seemed like an inexpensive cost. They funneled your campaign performance through tools like ChannelView. The tools suggested that paper drove business to all channels, preserving a historical business model (catalogs drive sales) that your staff felt comfortable with.

A combination of "cheap names", matchback analytics like "ChannelView", and hosted database solutions meant that catalog marketing became "easy" for your marketing team. They no longer had to worry about updating a customer database (the second most important asset you have after merchandise), they no longer had to do the hard work associated with matching orders back to catalogs, and they no longer had to do the hard work of knowing which lists worked.

In fact, they no longer had to know much of anything. Co-ops did all of the important stuff for them, even housefile modeling and merge/purge assistance. Co-op list performance was better than typical outside list performance, and housefile performance improved.

Fast forward to 2009. The economy is in shambles. Customers are performing much worse than they performed in the past, and customer acquisition performance is even worse than housefile performance.

Who is to blame for poor customer performance?

Your marketing team might blame the co-ops, the very organizations they blessed with the keys to the business in the past decade.

As business leaders, if we could go back to 2004 (or earlier), and re-think the concept of outsourcing customer acquisition, database analysis, merge/purge, housefile modeling, and database maintenance to other companies, would we have outsourced all of our intelligence to a third party?

Would you allow this to happen with Google today? Heck no!

In the past five years, we forfeited critical business intelligence in four key areas:

  1. We forfeited the intelligence associated with knowing which "lists" worked for the ease associated with having an algorithm that we don't understand choosing random names for us.
  2. We forfeited the intelligence associated with having to know how every part of our business performed when we do the hard work yourself, instead opting to have the co-op matchback tool do the work for us, even if it meant that the matchback tool grossly over-stated actual performance, causing us to seriously over-mail housefile customers.
  3. We forfeited the intelligence associated with managing our own database, instead opting to have the co-op do the work for us and then feed their database (which used to be our database) into their matchback algorithm (a conflict of interest).
  4. We forfeited the intelligence associated with our online customers, instead opting to have Google do the work for us, then having Google use our own information against us to help our competitors.

If your marketing team walked into your office today and said they were going to do this, you would likely ask them what your business gets in return for a business intelligence bloodletting of this manner, right? And you'd be looking for an answer that was better than "... an annual cost savings of $439,000."

The great tragedy of catalog marketing isn't rising postage costs or economic challenges or third-party opt-out services.

No, the great tragedy is that we, as business leaders, outsourced all of our customer knowledge to the co-ops. And in return, we achieved marginal cost savings and a 10% increase in new customers.

I'd rather have the consumer intelligence we used to have.

Do you realize that, for many catalogers, 40% to 80% of the 36 month customer file is now comprised of co-op names? By default, our businesses succeed or fail largely because of the choices made by analysts at co-ops over the past four years. Does everybody in your business understand that? Does your CFO understand that? Does your Chief Merchandising Officer understand that?

What do you know about the customers the co-ops selected for you? What are their preferences? Are these Baby Boomers, Gen-Xers, or youthful Gen-Y individuals? Do they prefer full-price merchandise, or are they only buying from you because they love the promotions they receive? Are they rural customers, suburban customers, or urban customers? Do they buy over the telephone because they need help with their purchase, or because they are afraid of the internet? Do they crave new merchandise from your brand, or do they continually buy the same merchandise, over and over? Are they evolving to online purchases, or will they stay loyal to purchases driven by catalog mailings? What is the right contact strategy for these customers? Can these customers support a reduction in catalog mailings, instead buying from e-mail campaigns? Do they respond to dense catalog offerings, or branding presentations? Do they see items in catalogs, then go online and buy other merchandise instead? Will they spend just as much on 48 pages as they will spend on 148 pages?

When your marketing team outsourced the business intelligence you used to own, you lost the ability to answer many of these questions. Sure, you now know that customers in the "synergy model" respond to free shipping promotions. Now tell me what you do with that information?

An Executive at a co-op recently told me that "... co-op employees aren't responsible for knowing your business, you are responsible for knowing your business, co-ops only provide you with cheap names."

If you knew that fact five years ago, would you have allowed your marketing team to outsource all of the customer intelligence they used to own?

Your marketing team will probably agree with you that it is time to truly understand customer behavior. Should your hosted database solution and matchback analytics strategy not provide you with what you are looking for, I am available to help you, right now ... contact me now for assistance.

As always, I am here to help you through this transition.

Thanks, Kevin

2 comments:

  1. Kevin, I aggree with your warning against outsourcing core-competencies. However co-ops are important sources of "cheap" names. We (and many others in Germany) decided to take these names and measure them like another list. We look at them in terms of performance, re-purchasing behaviour etc. We take those names and compare their response-rates in other channels and against other lists.

    Yet we do not know the "models" co-ops apply to sort out the best names. We always thought we are in a "what"-business, not a "why"-business. After all, if the model works, they get a higher priority in the merge/purge. So we add more customers whom we do not know in terms of their "other" behaviour.

    Do you think this is harmful? We continue to rent other lists and test and test and test and test ... and measure and measure and measure and measure. We try to keep the intelligence inhouse. Isn't this a way to overcome the "threat" of the co-ops?

    More oftenly, I see catalogers work with consultants doing all the list selection. This is another way of outsourcing BI.

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  2. Co-ops certainly aren't harmful ... but the CEO must have reporting that demonstrates that the merchandise that the co-op customer purchases is distributed similarly to other channels. At times, this is not the case, and when it isn't the case, the co-op puts the merchandising team in a very difficult position.

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