June 02, 2015

A Cataloger Must-Read: New Customer Megatrends Threaten The Existing Business Model

These are the days you wish Don Libey still roamed the planet. He'd write something interesting and compelling ... half the industry would call for his head ("he's an #idiot, ignore him"), half the industry would realize he was right and would take action.

You read the story about the Orchard Brands acquisition, right? (click here please). Why don't we take an opportunity to think strategically, and not tactically, about commerce in general. Instead of talking about an acquisition, why don't we talk about a megatrend that threatens the existing catalog business model?

Think about this question, for a moment:
  • "How the heck are we going to acquire a new customer in 2020, or in 2025?"
Have you given this question any thought?

Smarter minds are already attacking the problem.

Let's use the vendor community as an example, so that you can understand what comes next. In the list world, all of the noted list brands (Millard, Mokrynski, those folks) were weakened by the co-ops, rolled up by large brands, and ultimately, they disappeared. In the end, four large co-ops rolled up what was once a thriving ecosystem of smaller brands. From 2005 - 2014, catalogers were at the mercy of the co-ops. That trend is changing. More on that later.

Let's use the catalog consulting ecosystem as an example. There used to be dozens upon dozens of noted catalog industry consultants. These folks worked independently, trying hard to find new clients ... hard work, indeed. Too hard for most. In the past eighteen months, these folks have been rolled-up (CohereOne as an example). Combined, they have clout that they did not have as independent forces. One consultant can bring a new client into the fold, and that new client can become a new client for other consultants as well, easing the hard work necessary to find new clients.

Let's use Etsy as an example. Think about how hard it is for a tiny business, doing $3,000 sales per year, to find new customers. It's close to impossible! Etsy rolls up small businesses, allowing each small business to leverage the new customer acquisition of other small businesses.

Let's use Amazon as an example. If I need to purchase a power inserter for my satellite dish, I go to Amazon (click here), and I find out that there are multiple vendors offering the same item. Amazon rolls up numerous vendors, creating a customer acquisition platform for each vendor, helping each vendor find new customers that would be difficult to find otherwise.

There are many online marketplaces, where the concept is to roll up new customer acquisition to benefit the entire ecosystem. eBay, Craigslist, Newegg, Sears, BestBuy, are all in the business of rolling up new customers across sellers.

In the app world, the concept is similar ... Uber and Airbnb come to mind. It's the same thing ... suppliers are rolled up and given access to new customers.

If you don't participate in an ecosystem where new customers are rolled up for you, then you have two choices.
  1. Sell something so amazing and so wonderful that customers have to have it, and happily spread the word for you via word-of-mouth. This is really, really hard to do.
  2. Pay a gatekeeper a toll. The gatekeepers include but are not limited to Google, Facebook, and in the catalog world, the Co-Ops.
Have you ever played a slot machine in a casino? This is a toll-based system. You pay a small toll in exchange for an opportunity to win big. If 100 people bring $100 into a casino and pay the tolls at the slot machine, almost all of the 100 people will eventually lose $100. That's what Google, Facebook, and for catalogers, the Co-Ops represent. They take a slice of the pie in exchange for access to customers. If you keep renting the same name from the Co-Ops, eventually, after two years, you've paid $1 each for access to each non-responsive customer. Think about it for a moment. If you have a 1% response rate across your co-ops, and you rent names 10 times a year, at the end of the year, about 90% of the names did not respond, and you pay $0.06 * 10 = $0.60 to 90% of the circulation ... obtaining nothing in return. That's a toll. Google works the same way.

In terms of the big picture, the cataloger has three choices.
  1. Sell something so amazing and so wonderful that customers have to have it, and happily spread the word for you.
  2. Pay a gatekeeper a toll.
  3. Partner with folks, in an effort to avoid paying tolls while minimizing fixed costs.
In the mobile world, it's all about #3 ... Uber and Airbnb are examples of avoiding tolls. If you drive people around in a Corolla, you're not selling something amazing. And you sure don't want to pay a gatekeeper a toll (i.e newspaper classified ads). So you partner with folks (Uber). Yes, the partnership leads to somebody being paid. Somebody always gets paid. But you understand the logic, right?

So what happens in the catalog world, going forward?

First, the cost structure for catalogers is unsustainable. You cannot consume 25% of net sales on paper. Cannot. Not when your online competition does not have to pay a 25% toll on net sales. It's impossible to compete, long-term. So you're going to see catalogers who evaluate any/every way possible to reduce this expense. Where is this expense greatest and least productive? New customer acquisition. Who collects the toll in new customer acquisition? The Co-Ops. Which business model would I least want to manage in 2025? The Co-Op business model. No doubt about it. The Co-Op business model is dying. Not today. But it doesn't exist in 2025 in the same structure it exists today.

Second, the payment of tolls places great pressure on fixed costs. When the tolls become too great, it is very difficult to remain profitable. Without the tolls, it is very difficult to find new customers. Consequently, something has to give. Either tolls, or fixed costs (or both).

A collection of catalog brands, an "ecosystem" if you will, can be rather advantageous.
  1. If Magellan needs new customers, Magellan can pay the Co-Ops a toll. Magellan can also prospect off of the Cuddledown list, should modelers be able to find responsive names on the Cuddledown list. How much of a toll does Magellan pay Cuddledown, in theory? None. How much of a toll does Magellan have to pay the Co-Ops? A lot.
  2. Over time, finance, human resources, distribution centers, call centers, information technology, these fixed cost aspects of the business can be consolidated. Consolidation yields a lower fixed cost structure.
  3. Ecosystem negotiated costs are less than independently negotiated costs. Does the paper rep want to give Potpourri Group a better deal than an individual $20,000,000 brand? Absolutely! Does Quad Graphics want to give Potpourri Group a better deal than the $20,000,000 brand? Most likely, the answer is yes.
A catalog ecosystem yields an opportunity to broaden growth via customer acquisition within the core prospect audience, without having to pay tolls to the Co-Ops, without having to deal with an onerous fixed cost structure. It's the same concept that Etsy applies to small marketers. It's the same concept that Uber applies to independent drivers.

Our world, our catalog world, is moving toward two ends of the bar bell.
  1. On the left hand side of the bar bell are large ecosystem brands who leverage shared customers, reduced tolls, and minimized fixed cost structures. Individual brands within the ecosystem are similar to individual brands in a Nordstrom store.
  2. On the right hand side of the bar bell are numerous small catalogers who provide products and services that are so exemplary that they do not need to pay tolls.
The middle of the bar bell is a place you don't want to be. You don't have access to the benefits of an ecosystem. You don't have exemplary products and services that generate sufficient profit and word-of-mouth so that you don't have to pay tolls. In the middle of the bar bell, you reside in a toll-riddled world with profit proportional to the circumference of the bar bell.

This megatrend threatens the existing business model. It has become terribly hard to acquire new customers, making it terribly hard to grow. Choices need to be made.

Now, the cataloger caught in the middle of the bar bell need not think "OMG, I need to be acquired, immediately." Instead, the cataloger caught in the middle of the bar bell simply needs to think.

How are you going to acquire a new customer in 2020 or in 2025?

If you are not part of a catalog ecosystem, who will you be dependent upon for finding new customers?

If you do not have products/services that enable you to bypass the toll-based system set up by Google / Facebook / Co-Ops / Others, who will you be dependent upon for finding new customers?

If you are stuck in the middle of the bar bell, you do have competitive advantages. What are those advantages? How do you use your advantages against either end of the bar bell?

Is it possible that a thousand catalogers could work together, as one self-organized ecosystem, to achieve the same outcome as The Potpourri Group? Yes. Will this ever happen? Only if the pain becomes severe enough to force action. If I were a standalone cataloger, I'd be running, not walking, down this path. If I were one of the remaining list vendors, I'd be running, not walking, my catalog clients down this path. This path can allow catalogers to bypass the Co-Op toll booth altogether.

It's time to think about the megatrends that are rattling catalog marketing, as we speak. It is time to think about one important question:
  • "How are you going to acquire a new customer in 2020, or in 2025"?