February 25, 2013

Co-Ops: A Must Read For Catalogers

With NEMOA just weeks away, we are reminded of the primary vehicle catalogers use to maintain sales ... co-ops!

A customer purchases online from a popular catalog brand.  This purchase, in accordance with the privacy policy, is passed along to various co-ops, in a relationship not unlike a farmer passing chickens to Land 'O Lakes for free in exchange for the future purchase of eggs.

The name/address, channel, and merchandise information is absorbed into "the cloud", where it is modeled, re-shaped, morphed, transformed, digitized, homogenized, pasteurized.  It's a recent, active purchaser from a catalog brand.  Catalogers love these names.  They rent them, for one-time use at +/- $0.06 each, from the co-ops.  

These days, it's not uncommon to see 75% of new catalog buyers sourced from co-ops.

Since the cataloger must receive a positive return on investment for giving co-ops access to assets for free, the co-ops do a credible job of rank-ordering names from best to worst.  The cataloger has a reasonable chance of acquiring new customers.

In the cataloger / co-op feedback loop, we churn the same names through the ecosystem, over and over and over again.  Sure, there are 100,000,000 households in the ecosystem, but the top 8% keep cycling through.  

Judy keeps cycling through the ecosystem.  Over and over and over again, at $0.06 a pop.

Jennifer does not cycle through as often.  Her purchases from non-catalog brands do not enter the ecosystem.  Her behavior is cycled through Google's complex adaptive system.  Or through the giant Amazon cumulonimbus cloud.

Jasmine barely interacts with the ecosystem.  Her friends' IDs are being shared with various companies that allow login via popular social networks, a whole different set of pros and cons to deal with.  Talk about a complex adaptive system - Jasmine logs in at some random site via Facebook and brings 229 of her BFFs along with her.

Our complex adaptive system is skewed to Judy.  We know this, because demographic data is appended to our customer data.  We actively measure the customers acquired from the co-ops, we know their age.  These customers aren't heavily skewed to those age 18-44, are they?

From the early 1990s to the early 2000s, the co-ops built their footprint, one company at a time.  Hard, hard work, on their behalf.  They earned their success. I remember the reps coming in to Lands' End and Eddie Bauer, selling the convenience and inexpensive nature of co-op modeling, begging for equal treatment in the merge/purge process.

From the early 2000s to the late 2000s, catalogers went all-in, destroying the list industry in the process.  I'm not sure whether that's a good thing or bad thing.  I will say that the brain drain that followed was awful.  Smart catalog brains fled to e-commerce, and today, mobile/social.  We traded decades of business knowledge for a peripheral knowledge about statistical models.

With the list industry in ruins, catalog prospecting and customer housefile management moved to the cloud.  Popular database companies maintain the existing customer relationship.  Co-ops (sometimes the same company) maintain the prospect customer relationship.  The cataloger barely owns the customer anymore.  If lucky, the catalog marketer forecasts sales per catalog, online sales, and the number of and content of marketing contacts.  We now know how to manage a process.  We don't know how to manage a customer relationship.

The complex adaptive catalog ecosystem does the rest.

The next part of the story should frighten catalog marketers.

The complex adaptive catalog ecosystem is spinning older and older names, self-optimizing itself to maximize the short-term, immediate profitability of the ecosystem.  We know this, because we measure the age of customers acquired from the co-ops.  It's common to see names that age 7 years for every 10 years that pass.

If the co-ops are spinning 58 year old names through the system today, they'll spin 65 year old names through the system in ten years.  Those people won't be customers anymore, they will be retirees.  The very system that generates short-term profit today is destined to deliver significant profit challenges in the future, if it keeps spinning older and older names at catalogers.

This goes well beyond what is happening in the cloud.  When the co-ops spin you a 50-69 year old customer, they spin you a customer that has specific merchandise preferences, preferences of a person age 50-69.  This means that certain items, and certain creative presentations, are going to work best in catalogs to a 50-69 year old audience, causing your merchandising team to misread trends.  Your merchants are reacting to the names the co-ops give you, not to the macro-economic trends that exist.  The items your merchants feature purposely lack appeal to an 18-44 year old customer, further shutting out the very audience that may preserve your future.  If you think I'm wrong, show your catalog to employees age 35 and younger, and ask them to judge the creative style and merchandise presentation of the catalog.  Their critique may not please you.

Unknowingly, your merchants and creative team are fueling the feedback loop.  They have no choice, do they?  In a data-driven world, they have to honor the data.  The data is driven by the customers you acquire.  The customers you acquire come from the co-ops.  The co-ops optimize around the most frequent catalog buyer.  That's a 55+ customer.

Some feedback loop, huh?

That's the world, as it exists today.  Overlay demographic data, and decide for yourself if I am accurate.

You cannot blame the co-ops for hyper-optimizing to a solution that ages your customer file.  That's their job.  You can blame the co-ops for not explaining to you what is happening.  Without you, they don't exist.  They have a responsibility to teach you the information I'm sharing with you today.

If this continues, the co-ops will run you out of business, and in the process, will destroy their own business model.

Fortunately, your future is not pre-determined.  You, the catalog executive, have the opportunity to use propulsion to eject yourself from the co-op feedback loop.  You, that's right, you get to determine if this continues. 

In the short-term, this will not be a profitable opportunity.  In the short-term, there will be pain.  In the short-term, the metrics will appear unfriendly, they will scream at you to run back to the comfort of the co-op feedback loop.

We made decisions that, in the short-term, made the most sense, that maximized short-term profitability.

In the next few years, it will be time to make decisions that are best for the long-term.

At NEMOA in a few weeks, have robust discussions about the feedback loop we're currently stuck in.  Print this article, and take it with you.  Have a real discussion with your vendor partners about your future.