November 11, 2014

Catalogers And Clario And Optimization Theory

There are two common questions among catalog marketers.
  1. How do our demographics and challenges compare to other catalog brands, and how do online businesses deal with these challenges?
  2. Clario is telling me that the optimal solution is to reduce housefile catalog mailings by 43%. This isn't optimal, this kills my business? Why are they saying this?
Mind you, I compete with Clario (Hillstrom's Contact Strategy), but my answer to #2 above should help you feel more confident about your working relationship with Clario.

Clario is telling you what the "optimal" strategy is ... after accounting for your mail/holdout test results (you routinely execute three month mail/holdout tests right ... RIGHT?), after accounting for attribution rules that factor in mail/holdout test results and matchback results and any other attribution rules they've developed for you, after factoring in book costs, and after factoring in the rate that demand flows through to profit. After all of those factors, Clario tells you what the contact strategy is that yields the most profit.

This strategy is going to cost you sales ... it's typical for a 40% reduction in ad-cost to be paired with a 10% to 15% drop in demand (do not believe those who tell you that they can cut 40% of your circ with minimal impact on demand - it's not going to happen). In other words, the optimal strategy is not the optimal net sales strategy - you need to mail more to increase sales.

In most cases, we're looking at "optimal" as being break-even short-term profit. If you want to optimize 12-month profit, you may mail deeper to reactivate customers, customers who will pay you back in the next year. You need to clearly communicate your strategy to Clario, plain and simple. If you want to optimize twelve-month profit (and not book-by-book profit), tell Clario that's what you want to do.

As an Executive, you know that there is no such thing as an "optimal answer". No such thing. There is a continuum of answers, and all answers have pros and cons. In the graph above, if you accept the optimal answer, then you cut circulation by 65% ... and you'll reduce the 12-month buyer file by 10% to 15%, and your business will contract year-after-year-after-year. That may not be optimal, unless you have a strong customer acquisition program in place. With co-op performance where it is, catalogers do not have strong customer acquisition programs in place if co-ops are responsible for more than 40% of new customers.

You are paying Clario a fortune ... usually 2x-4x what you'd pay me to do comparable work. Ask Clario to create the graph at the top of this post ... have them run a dozen different scenarios at different levels of "optimization", then invite Clario in at your cost to educate Clario how your business works. Tell Clario that when they demand you optimize your business that you'll have to liquidate six months of merchandise and that is "not an optimal outcome". Teach Clario how the dynamics of your businesses work.

And then listen carefully to the twelve different optimization outcomes Clario can simulate for you. Think carefully about why the optimal outcome requires so many fewer catalogs than you are currently mailing. Anytime Clario is telling you to greatly reduce circulation, they are not telling you to kill your business - they are telling you that the customers who shop from your business are different than they used to be, are more online-centric, and no longer need catalog saturation to generate volume. Clario is telling you that your business has changed. They are telling you that the world has changed. Why do you choose to argue with Clario? Why not listen to them?

As for the employees at Clario? It's not optimal to have your primary competitor defending your business model for you. I defend you, of course, because it is the right thing to do. Please, please, please, communicate better with the swath of your client base who call me in frustration. Show your clients multiple solutions, and let your clients choose what is right for them, as opposed to arguing over an ideal "optimal" answer.

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