As most of you already know, Gliebers Dresses and Fetzer's Footwear are fictional stories about catalog and online businesses. The stories are created to relate marketing concepts to you via parable. Today, I join an Executive Meeting at Gliebers Dresses.
Roger Morgan (Chief Operating Officer): "Ok, folks, let's get busy, we have a lot to address today. I asked Kevin to Skype-in, just so you know, we're not paying him for this, because budgets are tight, but I wanted an outside opinion as we discuss a couple of concepts today. Ok, first off, let's talk about the possible promotion we want to run with a company called 'Kewpon'. As you know, Kewpon is a fast-growing location-based service that gives their e-mail subscribers opportunities for fantastic discounts at leading retailers. Kewpon is looking to branch-out into national campaigns with online retailers, so I approached Kewpon about the opportunity to run a promotion with Gliebers Dresses."
Meredith Thompson (Chief Merchandising Officer): "Isn't Pepper responsible for Marketing?"
Roger Morgan: "Look, we need to explore bold ideas, and I don't think we should be married to the old-school concept that ideas only come from the folks accountable for Marketing. According to Woodside Research, by 2013, 49% of company employees will be accountable for a portion of the integrated, cross-channel Marketing calendar, so let's not be closed-minded about how we grow our business, ok? I don't want for us to get stuck in old-school thinking anymore."
Lois Gladstone (Chief Financial Officer): "How does a Kewpon promotion work?"
Roger Morgan: "It's really quite innovative, to be honest. We'll take one of our best items, maybe our sheath dress for $49, and we discount the living daylights out of it. Let's say we sell it for $22 as part of a one-day promotion."
Meredith Thompson: "We sell it for what?"
Roger Morgan: "We sell it for $22. Then, we do a rev-share with Kewpon."
Pepper Morgan (Chief Marketing Officer): "Like they get 8% or something similar to what we pay our affiliates when they generate a sale for us? I know most marketing folks hate having affiliates suck 8% out of the demand equation for doing so little actual work."
Roger Morgan: "Oh, no, nothing like that. They get 50%, and we get 50%."
Meredith Thompson: "They get what? Do you realize that the cost of goods on a sheath dress is $19, Roger?"
Roger Morgan: "Of course I understand that, Meredith. Look, I checked out your inventory reports, and we have plenty of sheath dresses to offer as part of this promotion."
Meredith Thompson: "But Roger, think about it for a minute. We get $11. Kewpon gets $11. The item costs us $19. How do we make money on this, Roger? Because, as I understand it, the objective of a business is to turn a handsome profit."
Roger Morgan: "We don't! But that's not why we do this, Meredith. We do this because we get access to Kewpon's subscriber list of 22,000,000 e-mail addresses. They will promote this to every single one of the 22,000,000 e-mail addresses, nation-wide. That's a honkin' boatload of eyeballs that we're about to monetize! Just think about the traffic, the traffic, Meredith!"
Meredith Thompson: "Can we limit the number of items we sell?"
Roger Morgan: "I'll make that a condition of the promotion ... only the first 10,000 buyers get to take advantage of the promotion, given our inventory situation."
Meredith Thompson: "Why do you get to pick the item? I'm responsible for merchandising, Roger."
Roger Morgan: "Again, that's old-school thinking. We need to think like these modern digital marketing experts think. I recently read a Woodside Research report about digital marketers, and they said ... "
Meredith Thompson: "Lois, let's do a quick profit and loss statement here. We sell 10,000 items, we get $11 per item, we paid $19 per item, so we lose $8, so that's an up-front gross margin loss of $80,000. That kills the annual bonus for the merchant responsible for sheath dresses."
Roger Morgan: "We need to stop thinking about old-school incentives like bonuses, we need to start thinking like modern digital marketing experts. How many times do I have to say this?"
Meredith Thompson: "We lose $80,000 of gross margin. Roger, who pays to pick, pack, and ship the items, Kewpon or us?"
Roger Morgan: "We do. And we'll give the customer free shipping as our way of saying thanks. That should really sweeten the deal."
Meredith Thompson: "Ah. Now we get to lose another $10 of shipping and handling revenue, so thus far, we've lost $180,000 on the promotion. When the customer returns an item, and 20% of our sheath dresses are returned, does Kewpon refund us their share of the transaction?"
Roger Morgan: "No, they keep their money. See, that's not their fault, it's our fault the customer returned the item."
Meredith Thompson: "Oh, they keep their money. But we take the item back, so that means we refund $22 to 2,000 customers, so we lose another $44,000, right?"
Roger Morgan: "But we get the gross margin on those items back, because we get to re-sell them, so we really lose $3 per item, costing us just $6,000. Glass half full, Meredith."
Meredith Thompson: "Fine, we lose just $6,000. In total, we lose $186,000."
Roger Morgan: "Wrong again. Kewpon told us that 20% of the customers will buy an additional item, this item would be at full-price, so for 10,000 customers, we'll get 2,000 additional items at an average gross margin of $30, so we'll make up $60,000 there as well."
Meredith Thompson: "Oh, Kewpon told you that. What, did they access our database and mine the information themselves?"
Roger Morgan: "Meredith, you always want to block new ideas and modern strategies. I just found a way for us to acquire 10,000 new customers, and we'll only lose $126,000. That means we lose $12.60 per new customer. That's well within our new customer acquisition cost limits."
Pepper Morgan: "How do you know that all 10,000 customers are new customers?"
Roger Morgan: "Kewpon told me that the vast majority of customers who take advantage of Kewpon promotions are typically new customers."
Meredith Thompson: "So you want for us to lose $12.60 per new customer?"
Roger Morgan: "The math is really quite optimistic. I asked Kevin to join us today because he did all of that lifetime value work for us. We know that the average newly acquired customer generates $15 profit in the next twelve months, so quite honestly, we'll come out ahead on this one. I'm making us money, something like $20,000 in the next twelve months."
Kevin: "The average customer generates $15 profit ... full price customers generate $25 of future value, discount/promotion buyers generate $5 profit."
Roger Morgan: "And we really have no idea what a Kewpon customer will generate, because we've never tried a promotion like this, so let's assume it is $15. The math works! And Kevin, you're always telling folks on your blog that they have to be willing to test new ideas. Well, here I am, I'm willing to test a new idea, and I've got math to support my numbers. So we're going to do this."
Meredith Thompson: "Your math is based on rogue assumptions."
Roger Morgan: "Look, Meredith, I'm attending Shopper.com's annual conference next week. They invited the CEO of Kewpon to be a keynote speaker. I'm meeting with the CEO after her keynote. Shopper.com wouldn't invite her to be the keynote speaker unless there was something really intriguing about her business model."
Lois Gladstone: "The math is intriguing, Roger."
Meredith Thompson: "Lois, the math is crap. Kewpon gets 10,000 orders at $11 per order. They make $110,000, no risk, no picking, packing, or shipping, no processing of returns ... just money. We lose $126,000 and deal with all of the headaches.. You are the CFO. On any other planet, you'd refute this argument as being complete garbage. Why would we ever give a third-party all of our profit? Intermediaries are sucking the life out of this business. Google, Kewpon, the USPS, it never ends."
Lois Gladstone: "Meredith, have you ever seen our Response Shop bill? We pay co-ops $0.06 per name for one-time use, month-after-month-after month, and only one percent of the customers we rent from Response Shop purchase. That means we technically pay Response Shop $6.00 for every customer who purchases from us. In this case, we're paying Kewpon just $11.00 for every customer who purchases from us."
Pepper Morgan: "Of course, the Response Shop customer is paying full price, plus shipping and handling, so we usually make money on that transaction, and then get $25 of long-term value after making money on the transaction. That's why we work with Response Shop, we get profit on the front-end, and we get profit on the back-end."
Lois Gladstone: "In this new, complex, modern world of digital marketing, especially during challenging economic times, we have to be willing to adapt to new business models. With Response Shop and with any co-op, we violate the rights of the customer by shoving a catalog in her mailbox when she didn't ask to receive the catalog. That's technically a violation of her privacy, and the customer doesn't make any money in the transaction, only Response Shop makes money. With Kewpon, the customer saves $27, the customer decided which Kewpon promotions to accept, and Kewpon gives us access to 22,000,000 e-mail addresses nation-wide. Kewpon makes money, the customer saves money, and Gliebers Dresses has the opportunity to make up the losses on the back-end. Meredith, it's up to you to convert these customers into full-price customers, downstream. Honestly, you're the one who is accountable to make this work, long-term."
Roger Morgan: "That's some sweet action!"
Meredith Thompson: "When did we become stupid marketers, everybody?"
Roger Morgan: "We're not going to be stupid marketers next Friday when we sell 10,000 sheath dresses that we wouldn't have sold otherwise. Imagine the rush folks working in the building will feel when we're 100% over plan? When is the last time we were 100% over plan? It will be like one of those telethons from the 70s, with folks chanting 'light those lights ... light those lights ... light those lights'!"
Meredith Thompson: "No really, when did we become stupid marketers? Do you remember Glenn Glieber's favorite saying about marketing?"
Pepper Morgan: "I love free marketing!"
Meredith Thompson: "Yes, that's what he always said. He loved free marketing. He hated paying for anything. Worse, he hated to lose money."
Roger Morgan: "We're not losing money, we'll make it up on the back-end. You old-school folks really need to start thinking more like us digital marketing experts, you know, the folks that are truly driving the new economy in this post-recessionary environment."
Meredith Thompson: "How do you know that we'll make it up on the back-end, given we've never tried anything like this before? Yours is a theory, a hypothesis, not a reality. You are assuming that these customers will purchase again, and they will purchase at full price. Kevin just told us that the discount/promotion buyer has $5 of lifetime value, while the full-price customer has $25 of lifetime value. Why do we think we can convert this Kewpon customer into a Gliebers Dresses full-price customer?"
Roger Morgan: "That's your job, Meredith, your merchandising strategy has to be held accountable at some point. Your job is to provide such compelling merchandise that the Kewpon customer cannot help but buy merchandise at full price. That's your job, Meredith. In this case, it is my job to drive traffic. We Digital Marketers are all about driving traffic, it's up to the rest of the employees to turn that traffic into profit. Old-school marketers are afraid of this paradigm shift."
Meredith Thompson: "You don't take a discount/promo customer loyal to another platform and convert them into a loyal, full-price Gliebers Dresses customer."
Roger Morgan: "Figure it out, Meredith, that's your job. You are accountable here."
Lois Gladstone: "I'm willing to make the investment, then let's measure the results and see if it was a worthwhile endeavor."
Roger Morgan: "Woodside Research and Shopper.com seem to suggest this is a worthwhile endeavor. Look at all of the sales that Shopper.com created with their innovative post-Thanksgiving online holiday event? These organizations love to promote the concept of giving the customer a great deal at a low price, and their interests have to be aligned with ours, or they would go out of business. Woodside Research and Shopper.com would not lead us astray."
Meredith Thompson: "Kevin, can you help me here? Have we all become stupid marketers? I think we're just plain stupid. Since when is it a good idea to lose money?"
Roger Morgan: "I didn't ask Kevin to be here for free today just to beat us up, that's not in our best interests. I asked Kevin to be here so that he could provide us with the lifetime value of an average Gliebers Dresses customer, and he did that, so thank you Kevin, you can leave now."
Meredith Thompson: "No, he can't leave. I want to hear his opinion. Kevin, tell us about marketers in general, keep Gliebers Dresses out of this for a moment. Are marketers stupid?"
Kevin: "Keeping Gliebers Dresses out of the equation, I think that Marketers are mis-guided. Look at what happened when Gap did a promotion with Groupon, that promotion was mentioned by the national media, by the trade journals, by just about everybody associated with direct marketing. If you are a Marketer at Gap, you were on top of the world for a few days, weren't you? Within a company, the marketer only gets beat up, beat up by the merchant for not promoting merchandise, beat up by the operations expert for not being a modern, smart marketer, beat up by the CFO for wasting valuable resources, beat up by the CEO for not growing top-line sales fast enough. In fact, it is always about top-line sales, isn't it? When is the last time a Marketer had to provide the CEO with a profit and loss statement of all marketing activities, illustrating both short-term and long-term profit?"
Roger Morgan: "We just went through a profit and loss statement here, so clearly, we're not stupid marketers, are we?"
Kevin: "All of the information technology systems in our industry are designed to illustrate what happened to top-line sales after a catalog was mailed, an e-mail was delivered, a search-term was clicked on, or after a social media follower visited the website. Our web analytics and business intelligence software packages seldom interface with financial information, so we seldom see the short-term profitability of our work, and we almost never get to see the long-term profit impact of our work."
Roger Morgan: "We have a lot of that type of data integration on our book of work, and we're likely to get to it in 2013, so we're moving in the right direction."
Kevin: "So you take a Marketer who isn't respected in her own company ... I mean honestly, how many times did you as a team ask Pepper today what her thoughts were on this Kewpon promotion, and remember, she's the Chief Marketing Officer, right? The Marketer isn't respected in her own company, because every employee thinks that he is a marketer at heart. So the Marketer gets little internal validation. The Marketer is forced to look outside for validation, and there are plenty of places to get external validation ... Twitter followers, Facebook fans, Kewpon promotions, keynote presentations at the Shopper.com conference, you name it. The Marketer doesn't get love internally, the Marketer doesn't have internal reporting to show how much profit the Marketer actually generates on a short-term and long-term basis, so the Marketer goes for the only things that provide love ... external recognition and internal top-line sales growth. Honestly, it's a failure of the entire ecosystem, when it comes right down to it. If the Merchant respected the Marketer, if the Executive team respected the Marketer, if the Operations executive didn't try to be a marketer, if the web analytics / business intelligence team / information technology team actually provided the marketer with the right information, and if the Marketer was motivated by profit and not by top-line sales, then the whole thing could work. In lieu of that, we've trained a generation of Marketers to be stupid, to look for recognition via the wrong metrics, metrics that don't correlate with profit. And we trained a generation of web analysts, business intelligence analysts, and IT professionals to provide the wrong information."
Lois Gladstone: "I agree with Roger, we shouldn't have asked Kevin to pop-off about his opinions of Marketing. If we assume that the Kewpon customer has average long-term value, then this promotion is fine."
Kevin: "But that's exactly the problem. Lois, that's 'truthiness'. You want to believe that the Kewpon customer has average long-term value, because the assumption of average long-term value leads one to a math calculation that enables one to run the promotion. And then you'll never measure the promotion on the back-end, because there will be some other priority that is more important than analyzing something that happened in the past. This is where Marketers are stupid. Marketers always get to manipulate figures in a way that enables the Marketer to do something stupid. We have more facts and figures than we've ever had in history, and yet, we don't have anything resembling actionable insights."
Lois Gladstone: "Roger, maybe it is time to ask Kevin to leave?"
Kevin: "We all know that the Kewpon customer is more likely to generate $5 long-term value, congruent with the discount/promotion customer, than the $15 long-term value of the average customer, or the $25 long-term value of the full-price customer. It is the lie that we tell ourselves that enables us to do stupid things, and then it's the failure to measure on the back-end and learn from our mistakes that makes us stupid. Roger, I can respect a person for wanting to test a promotion. There's nothing wrong with saying that you want to partner with Kewpon, I applaud that. I have zero problem with testing a promotion and losing money in the process."
Roger Morgan: "Keep talking."
Kevin: "But I am 100% against the way that Marketers use truthiness to justify actions. The Marketer will point out that the Kewpon promotion may lead to word of mouth, and that you cannot discount word of mouth, because word of mouth is the modern way that Marketers leverage customer interactions, right?"
Roger Morgan: "Yeah, we didn't factor word of mouth into our profit and loss statement. That alone might make this thing profitable! Think of the social media ramifications. Oh, this whole thing could go viral. You really don't want to stop something that could go viral, right? That's the strength of social media."
Kevin: "Or it might mean nothing. Or there might be negative word of mouth that devastates Gliebers Dresses. That's the problem. We'll use the social media and word of mouth argument if it benefits our objectives, and we'll discount the word of mouth argument if it works against us. We use all of these facts, figures, and metrics to defend truthiness, we don't use them to improve business performance."
Roger Morgan: "Well, folks, that's the end of the hour. I think between what Woodside Research says, what Shopper.com says, and Kevin's average long-term value estimates, this Kewpon promotion is the right thing to do, and Kevin just said that he lauds folks who test new strategies, so we're going to do it! Thanks for helping us flesh through this situation, Kevin, and thank you for spending an hour with us for free ... you know what trying economic times we are faced with, so every little bit helps us achieve our profit objectives."