May 09, 2010

Dear Catalog CEOs: Algorithms

Dear Catalog CEOs:

I've discussed the four themes that are captivating customers, pulling customers away from traditional direct marketing. The four themes are "Algorithms", "Social", "Mobile", and "Content".

Last week, the Dow Jones Average dropped more than a thousand points, about ten percent, in about fifteen minutes, then rebounded just about as fast. Rumors abound, some think that computer algorithms ran the average down and then brought it back up just as fast --- it's hard to believe that human beings could react that fast, both positively and negatively.

Makes you feel real comfortable trusting your retirement to a 401k account that can jump up or down 10% in a half hour for no good reason, doesn't it?

Algorithms run your life, too ... especially the business that you manage.

Algorithms decide who the new customers are that you acquire offline. You pay your co-op a hundred thousand dollars to get access to a million names, names chosen for you by a computer algorithm.

Algorithms decide who the new customers are that you acquire online. Google largely decides who sees your brand via search, you only influence Google by playing by their organic search rules, or by paying cash within paid search.

When your business isn't performing to expectations, your first instinct is to think "merchandise".

Maybe your first instinct should change, when business isn't meeting expectations. Maybe "algorithms" are part of the problem.

When you have a 40% annual retention rate, as is the case with my average client, it means you have to find a ton of new customers. Within three or four years, you'll find that seventy percent of your twelve month file was populated by algorithms.

It means that algorithms are ultimately determining seventy percent of your success.

It means that, as CEO, you had better be all over your marketing team, because your marketing team is the only interface you have with the algorithms. Your marketing team must be able to provide customer reporting that proves that customers sourced from algorithms foster real relationships with your business. The reporting must demonstrate that these customers have long-term value. The reporting must demonstrate that these customers have merchandise preferences that are directionally aligned with the vision of your merchandising team.

What you can't let happen to your business is what happened on Thursday, when the Dow imploded and then inexplicably rebounded, and nobody really knows why.