March 16, 2010

Catalog Matchbacks: FAQs About Why They Cost You Profit

You had questions about my thesis that catalog matchbacks are costing you profit. Let's answer your questions.

Question: "What do you have against the vendor community? How can you criticize folks who've helped us through tough economic times, and are always there for us?"

Let me be clear. I am not being critical of members of the vendor community who have your best interests at heart. Plenty of folks in the list industry and the co-ops make the right decisions for you every single day. In fact, I recommend many folks from Millard or ALC or Abacus to you (as examples), when asked.

Always remember, however, that most in the catalog vendor community make more money when you mail more catalogs. There is a disincentive for the vendor community to share best practices in housefile contact strategy testing, because doing so is detrimental to their business, and could result in the vendor employee losing his/her job. I've witnessed this conflict first hand, where the vendor gives you an answer that ultimately benefits the vendor more than you. So do the right thing for your business, ask valid questions of your vendor reps, and closely monitor their response.

Question: How can you mail catalogs and get negative demand, I don't understand?

One of the myths of the "multichannel era" is that everything fits together, is additive or even multiplicative! This simply isn't true, and is clearly illustrated every time you execute a catalog housefile mail/holdout test. Advertising doesn't necessarily cause customers to spend more. Sometimes (often), advertising causes customers to change behavior. Some catalogers find that when you don't mail catalogs, demand from e-mail marketing doubles ... in essence, the lack of a catalog causes the customer to switch loyalty to e-mail marketing. You can't see that outcome unless you execute the test. That is an example of "negative demand". In other cases, mailing the catalog causes customers to spend more on e-mail marketing, this is the classic "multichannel era" outcome of 1+1=3. It does happen. But you cannot know it until you execute mail/holdout tests.

Question: If I execute a mail/holdout test, I'll lose demand, and I can't afford to do that when the economy is so bad. Why are you constantly recommending that I do something that hurts my business?

I wouldn't recommend that you do something that hurts your business. I am asking you to execute the test so that you can identify the most profitable catalog mailing strategy. Take a look at the image at the start of this post. On the left-hand side of the table, you see what happens when you follow your matchback results. You'll mail 12 catalogs to this customer segment. On the right-hand side of this table, you see what happens when you test different numbers of catalog mailings to a customer. You see that demand happens whether you mail catalogs or not to a customer. You see that 8 catalogs is the optimal strategy. You see that if you mail 8 catalogs, you increase profit by +/- 20%, per customer. Show me what other strategy you have in your toolkit to immediately increase customer profitability by 20% today?? If you want help executing/analyzing/implementing a contact strategy view of catalog customers, contact me!

Question: Are matchbacks invalid for outside lists?

No, go ahead an use matchbacks for outside lists, that's a good way to evaluate prospects.

Question: We go to great lengths to capture key codes on online orders. Why do we need to execute mail/holdout tests when we ask the customer to enter a key code?

Here's a neat finding from mail/holdout tests ... if you don't mail a catalog, a customer is likely to use an older catalog and will enter an older catalog key code. Or other times, the customer will just visit your website because she loves your brand. Imagine that? She'll simply come to your website unprompted by a catalog mailing, and will place an order, sans key code. That's the best measure of customer loyalty ... a customer willing to shop without advertising. How will you ever be able to accurately measure customer loyalty unless you execute the mail/holdout test?

Question: We know that 80% of our online orders are matched back to a catalog, so we know that matchback analytics are right for our business. Why would you ever recommend abandoning a methodology that is so useful?

There are two issues with your comment. First, when a catalog brand gets 80% of online orders from catalog mailings, the catalog brand is not doing a good job of online marketing. Second, the matchback algorithm is incorrectly allocating orders to catalogs. As stated earlier, your most loyal customers will always shop from you, regardless whether you mail catalogs or not. In other words, you don't need to advertise as often to your best customers ... they already love you!! How can it possibly hurt to execute a mail/holdout test and learn the optimal number of catalogs to mail to a customer?

Question: In your examples, if you don't mail catalogs, catalog demand decreases. We cannot support top-line sales declines. Why would you advocate hurting our business?

I'm advocating a strategy that makes you more profit. Profit dollars matter. My strategy means you end up spending less on catalog marketing, generating a decrease in top-line sales. I recommend re-investing that money in customer acquisition, online marketing/search, mobile, and in some cases social media strategies, in order to grow your business. If done right, top-line sales won't decrease, and you'll be more profitable.


Ok, it's time for your questions. What do you want to learn?

10 comments:

  1. Hi Kevin,

    I've seen that customers touched by multiple forms of marketing (catalog, email, affiliate links, search engine results) are more likely to buy than customers who have only seen one form of marketing.

    According to this, Catalogs should be even less profitable than shown by holdout test results, since other forms of marketing are still contributing. Have you ever tried incorporating this idea into tests-reducing catalogs and increasing other forms of marketing to a customer segment? If so, what sorts of results did you see?

    -Satvik

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  2. Satvik - yes, I've been part of this process. Each company is different, of course. The results are highly dependent upon customer demographics (i.e. customers age 55+ behave differently than do customers age 18-39).

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  3. Kevin...
    Am I crazy or does the NRF/Shop.org also not understand these fundamental concepts -- let alone proper measurement techniques?

    Case in point (among many):

    "How two retailers used SMS to increase sales"
    http://budurl.com/3ldx

    Where Ashley Furniture HomeStores used a give away to build a SMS list -- of 6k customers willing to receive offers via SMS. Says NRF, "From there, the company leveraged that group and sent those people a text message inviting them to a secret sale. After four days, and $85,000 in sales, the company saw an ROI of $122 for every dollar spent."

    Are we not seeing the same, fundamental disconnect from reality in the mobile and social media space?! If so where are we today -- as retailers -- if the NRF and Shop.org (our industry associations) are so busy celebrating these "faux victories"? (rather than preaching and teaching the fundamentals)

    Thanks for your thoughts.

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  4. Hi Jeff.

    I don't think Shop.org/NRF are purposely trying to incorrectly measure ROI. They have a responsibility to promote innovation.

    What trade organizations do, however, is "filter results". In other words, if 100 companies execute a text marketing campaign, and 97 get no incremental sales at all while 3 get incremental sales, the one in three that gets the most incremental sales ends up in a case study. We read the case study, and think that the likelihood of a strategy working is far greater than it really is.

    Nobody does case studies of the 97 companies that try different strategies and fail.

    And finally, very few people analyze the concept of incremental sales (i.e. how much would the customers have spent if they weren't part of the text marketing program).

    I'm guessing the customers did spend $85,000. If the campaign had not been executed, then customers might have spent $0 (that's what is implied in the article), or the customers might have spent $82,000, in which case the text campaign drove $3,000 of incremental volume, not $85,000.

    It is the latter part that almost everybody misses.

    We keep reading about all of these breakthroughs ... and yet, annual customer retention rates are down in the past decade. There is a disconnect.

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  5. Hi, Kevin...
    Thanks for your thoughts. I suppose my real point here is being missed. Sorry if I was unclear. That is: our industry leaders don't seem to be as interested in promoting *only* the 3 out of your 97. They don't, candidly, have the knowledge to discern between the 3 and other 97 -- the ability to ultimately present the best
    case study content."

    I don't have much issue with *real* cases (focused on incremental sales) being reported and then being touted as commonplace. I do have a problem with retailers being presented with cases that, clearly, have lousy methodology -- do not focus on incremental sales yet *claim* they do!

    I dare say the knowledge needed to discern is available to our industry media and conference leaders (ie. guys like you who give it away).

    So at some point this, in my humble opinion, crosses over into the realm of active irresponsibility. What irks me is the active "looking past" the truth in the interest, many times, of vendor sponsors. It irks me but I certainly understand and appreciate the power of the almighty dollar.

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  6. Jeff posted a comment that doesn't appear to have made it to the blog, here it is:

    Hi, Kevin...
    Thanks for your thoughts. I suppose my real point here is being missed. Sorry if I was unclear. That is: our industry leaders don't seem to be as interested in promoting *only* the 3 out of your 97. They don't, candidly, have the knowledge to discern between the 3 and other 97 -- the ability to ultimately present the best
    case study content."

    I don't have much issue with *real* cases (focused on incremental sales) being reported and then being touted as commonplace. I do have a problem with retailers being presented with cases that, clearly, have lousy methodology -- do not focus on incremental sales yet *claim* they do!

    I dare say the knowledge needed to discern is available to our industry media and conference leaders (ie. guys like you who give it away).

    So at some point this, in my humble opinion, crosses over into the realm of active irresponsibility. What irks me is the active "looking past" the truth in the interest, many times, of vendor sponsors. It irks me but I certainly understand and appreciate the power of the almighty dollar.

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  7. If we agree with your hypothesis that the information is freely available (i.e. I give it away) and yet, the industry doesn't elect to use different methodologies, then we have to ask ourselves why they are choosing not to use them, right?

    It is my opinion that every individual has an agenda, and it is so easy to take the easiest metrics available and use them to report on results that confirm the agenda. Sure you or I might notice that incremental sales aren't being used, but 97% of the population reading a study don't view the world in terms of incremental volume, and probably won't ever view the world that way, so basic metrics that may be misleading win.

    And you can use basic metrics to promote any story, you'll always find some that confirm your story. Just today, I saw a tweet that said "46% of marketers report a positive ROI from social media activities." This outcome was celebrated. The same data suggests that 54% of marketers report no ROI or a negative ROI from social media activities. And honestly, if incremental volume were measured, the 46% success rate would drop significantly.

    Amazingly, the entire e-mail industry fails to measure incremental volume. They adhere to open rates and click-through rates and conversion rates, not even focusing on average order value or the more important level of incremental volume identified through mail/holdout tests. One would think that this audience would be very likely to test mail/holdout strategies, heck, they test stuff like subject lines and offers and caps/no-caps and the like, but the most basic question, like "does e-mail drive incremental volume", well, I dare you to go find a vendor white paper that shows the outcome. It simply isn't measured.

    I just don't think you can teach people to care about incremental volume. In so many cases, there's a financial disincentive to measure it.

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  8. Points well taken. Sure enough, Kevin. A quick study reveals it wasn't just a private SMS-announced sale. Email was also involved to the customer list!

    http://budurl.com/426v

    But that doesn't stop the mobile marketing company from claiming all the "ROI" via the sales figure held against the cost of their service (only).

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  9. Oh, an existing e-mail list helped drive revenue too. Seems that it works like that a lot!

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  10. Im not sure that I understand the negative demand of catalogs. I feel that as a consumer Im more likely to take the time to look at an interesting catalog that I get in the mail over an email blast. But maybe that is just me?

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