July 19, 2011

But If I Cut, I Could Lose Market Share, Right?

There are many arguments against working with me.  Cutting circulation is one of them.

The argument goes something like this.
  1. Kevin recommends we cut circulation by 25%.
  2. Kevin says this will result in a 6% drop in demand.
  3. Kevin says this will result in an increase in profit of $1,000,000.
  4. Kevin recommends reinvesting half of the money in new customer acquisition.
  5. Company (or trusted vendor) suggests that this is bad, because instead of generating $50,000,000 in annual net sales, the company will now generate $47,000,000 in annual sales, even though company profit increases from $2,000,000 per year to $3,000,000 per year.
  6. Company says that it is a terrible thing if infrequent buyers are not mailed, because this means that the customer file will be weaker in the future.
Ok, a couple of points for all of you to consider.
  1. How does Zappos, without a catalog, get infrequent customers to purchase?  And don't tell me that "they are different, so they don't count"!!!
  2. How does a retail store brand without a catalog marketing division (say Napa Auto Parts) get an infrequent customer to purchase again?
One of the least understood concepts in modern catalog marketing is the concept of the "organic percentage".  This is the percentage of customers who purchase again, without the aid of catalog marketing (or, if you are Zappos, without the aid of any marketing).


Back in 1995, when you stopped mailing a customer, you stopped generating demand from that customer.  This caused your future housefile to weaken, as you did not have enough customers to fuel future growth.


In 2011, when you stop mailing a customer, you face a different challenge.  Assume that the organic percentage for an online-centric audience is 58%.
  1. In the next six months, you lose maybe 35% of the demand the customer would generate.
  2. In months 7-12, you lose maybe 40% of the demand the customer would generate.
  3. In months 13-24, you lose maybe 45% of the demand the customer would generate.
The secret, then, is to mail this customer infrequently enough to save a ton of money, generate a lot of profit, but remind the customer that you're still around.  The customer continues to generate 58% of the demand generated on a full diet of catalogs.

In 2011, this is what happens if you frequently mail 100 infrequent customers:
  • 2011 = 100 customers with a last purchase of 13-24 months ago.
  • 2012 = 90 customers with a last purchase of 25-36 months ago, 10 customers with a last purchase of 0-12 months ago.
In 2011, this is what happens if you infrequently mail 100 infrequent customers:
  • 2011 = 100 customers with a last purchase of 13-24 months ago.
  • 2012 = 94 customers with a last purchase of 25-36 months ago, 6 customers with a last purchase of 0-12 months ago.
In 2011, if you re-invest some of your profit in new customer acquisition, even at a loss, this is what happens:
  • 2011 = 100 customers with a last purchase of 13-24 months ago.
  • 2012 = 94 customers with a last purchase of 25-36 months ago, 6 customers with a last purchase of 0-12 months ago, 4 new customers with a last purchase of 0-12 months ago for a total of 10 customers with a last purchase of 0-12 months ago.
Re-investment can protect market share, if done appropriately.  Think about it.