February 03, 2015

Co-Op Performance Is Hemorrhaging For Businesses With Customers < Age 65

Yesterday, I received two consulting inquiries, both with essentially the same request.

  • "Would you be willing to help us work with the co-ops? Could you review their modeling strategy, could you help me see why their performance has become so awful, and could you encourage the co-ops to offer the catalog industry better performance? In just a few years from now, the co-ops are going to bankrupt all of us, if this keeps up."

Fifteen years ago, folks like Don Libey told you this was going to happen. Some of you crucified him.

I've been documenting the feedback loop since 2006.

Your list teams told you this would be trouble, but some of you helped run them out of business because you liked bellying up to the bar to purchase an oversized container of frothy names at $0.06 each.

Let's briefly review the feedback loop, so that you understand what is happening.

  • The catalog industry, as a whole, chose the co-ops as the primary source of new customers.
  • The e-commerce industry, as a whole, chose Google as the primary source of new customers.
  • The mobile industry is in the process of choosing a preferred vendor as the primary source of new customers.
  • Companies succeeding in e-commerce / mobile do not contribute their younger shoppers (age 13-44) to the co-ops. This creates a age bias in the co-op responsive universe.
  • Catalogers, meanwhile, heartily contribute their names to the co-op universe, flooding it with 60-79 year old shoppers.
  • The co-ops, of course, must optimize performance. Therefore, they send to you, the cataloger, the names "most likely to respond". Those names shop via the phone/mail (yes, mail, they mail a check, that's not a typo from 1988).
  • When the co-ops send you phone/mail shoppers or online shoppers who love buying via a catalog source code, they send you shoppers who have specific merchandise preferences.
  • Your merchandising teams, unconsciously of course, see that certain merchandise "works", and they get more of that merchandise. It turns out that this is merchandise preferred by customers age 65+ (Judy).
  • When a 45 year old customer visits your website, the 45 year old customer sees merchandise tailored to customers age 65+. The 45 year old customer does not convert, and does not respond via catalog, and who can blame that customer?
  • You, in your marketing reporting, see that younger customers have poor lifetime value. You decide that online buyers are not worth the trouble.
  • As a consequence, you embed your business even deeper into the co-op ecosystem, and continue to contribute customers age 65+ to the co-ops.
  • The co-ops receive masses of customers age 65+ from catalogers, further optimizing those names.
  • In most of my projects, customer spend begins to drop as the customer passes 72 or 73 years old.
  • In recent years, many, many names sent by the co-ops are now older than 72 or 73 years old, driving down co-op name responsiveness.
  • Catalogers are now over-targeting customers age 65+ ... a ever-decreasing audience of responsive catalog names getting mailed a comparable number of catalogs yields lower performance.
  • Meanwhile, few/none of the names in the Google / Facebook / Snapchat ecosystem enter the co-op ecosystem. The co-op ecosystem cannot be refreshed with younger names, and if it could be refreshed, it wouldn't matter, because catalogers by and large now offer a merchandise assortment tailored to a customer age 65+.
This feedback loop cannot be broken.

It's over.

We asked for this. Truly, we did.

For many catalog clients with customers > age 70, this isn't an issue (yet).

But for everybody else, this is the logical end game of a multi-step process that we couldn't see happening, because we chose to only look one step ahead.

Catalogers with a core customer base < age 65 must find new customers. This is going to be a very difficult proposition. Many catalogers find 70% or more new customers from co-ops, and the majority of co-ops are owned by corporate conglomerates who simply want your data, for free, so that they can monetize it and profit from it. 

Let that one sink in for a moment. You give them data, for free. FOR FREE! That's like vendors giving you merchandise for free so that you can profit from it. And then co-ops move your data into their ecosystem, they profit from selling your data to non-catalogers, and they profit from your data by regurgitating it and re-selling it back to you. Name a logical business person in an adjacent industry who would accept this business model?

Our industry agreed to a one-sided and now, increasingly, unprofitable business model. We did this. It's our fault.

I know - you want me to fix it. "Stop criticizing us, tell us what to do - and give us your advice for free, please."

Here's how I'd approach it ... you'll be certain to agree with parts, and hate other parts. That's ok.
  1. You have a five-year window to keep generating profit from the current ecosystem ... using co-ops to acquire 65 year old customers who love merchandise catering to 65 year old customers. Then things get difficult. So please take full advantage of your opportunity. If you love your business, love your merchandise, and love the co-ops, why not target a 75 or 80 year old customer with merchandise a 75-80 year old customer loves? Move toward an older customer. Yes. Older. Follow the customer.
  2. Otherwise, you have no choice, no choice, but to begin the process of finding a merchandise assortment that an "adjacent customer", one age 45-64, will appreciate. It may be your current merchandise assortment, it may be a similar merchandise assortment.
  3. If you wish to acquire a customer age 45-64, you'll find an adjacent merchandise assortment that is congruent with your "brand". And you will become an online marketing guru. I know, you don't want to hear this. You don't want to be an online marketing guru, you want to be a cataloger. If you want to be a cataloger, please revisit #1 above.
  4. If you don't like the idea of an "adjacent" customer and "adjacent" merchandise, consider creating a new brand. I know, this is painful and risky. But you have the infrastructure in place to be successful, right? Find merchants who understand the adjacent customer, and find online marketers who understand the adjacent customer.
  5. If you don't like #2, and you don't like #3, and you don't like #4, I encourage you to go back to #1, and follow the customer to the logical end game.
Ok, if you don't like my ideas, why not use the comments section to chart a path to the future for the catalog industry. Share your ideas, how about it?