Co-Op Dollars

I seldom talk about this, though maybe I should be talking about it more often.

Let's go back in the time machine, way back to 2005.  Do you remember 2005?  You should.   Your home was worth 70% more than it is now.  You could get a home equity line of credit on your home at an amazingly low interest rate without documentation of income.  Gas cost about $2.70 per gallon.  MySpace dominated Social Media.  Mobile was an oil company, merged with Exxon, not an Android device you held in your hand.  A tablet was something you wrote on with a pen, not a device that allowed you to play Angry Birds in high-definition.

I worked at Nordstrom in 2005.  It was in 2005 that we killed our catalog division, and still generated sales increases in direct-to-consumer and retail channels with a corresponding increase in profitability.

Now, I can hear the blowhards already ... "Yabut, Nordstrom is a retail brand, so you had all of that brand equity that allowed you to kill your catalog, your strategy couldn't possibly work for us."  It's amazing how people who never worked at Nordstrom are always smarter than the folks who did work at Nordstrom, when it comes to catalog marketing (or any kind of marketing).

Regardless, the catalog division was killed.  Instead, a "brand book strategy" was employed.  Some called this a "catalog", but honestly, it wasn't a catalog.  Vendors paid a fee to have their products advertised on each page (a practice called "co-op dollars").  The catalog featured cobbled together images from various brands, low density, high fashion, you get the picture.

Well, the performance of this fashion catalog wasn't "all that and a bag of chips" as some say.


But the revenue associated with this advertising concept is worth pondering.


Let's say that you have a 96 page catalog.  If your product isn't proprietary, why not ask your supplier for a few pennies to help advertise their products (this works for e-mail, and it works for your landing pages ... and if you really want to get your suppliers to hyperventilate, ask them for a few bucks to give them added exposure on your mobile website)?


Or you could remove eight pages of crummy-performing merchandise with ads, sort of like a magazine.  Oh, I know, you don't want to "destroy the brand" ... but that's an opinion ... you already rent your very best customers to your competitors, and somehow that doesn't destroy your brand, so maybe the situation isn't as dire as perceived.


Anyway, I'm not asking you to do this ... I'm asking you to think.  How can you generate revenue from your advertising, revenue that allows you to mail deeper and reactivate more names or allows you to acquire more new customers?

Co-Op Overlay And Multichannel Forensics

Overlaying co-op attributes on your customer file is a common multichannel marketing best practice.

Maybe you have a housefile segment that is expected to spend $1.50 per catalog. The cataloger matches the names in the segment to their favorite co-op subsegment, dividing the list into matches and non-matches. In theory, matches will perform at $1.75 (mail these names), non-matches will perform at $1.25 (do not mail these names).

Co-op information is typically used for targeting purposes.

Co-op information is seldom used for strategic purposes. That's a shame, folks.

See if your co-op will do this for you.

Have your co-op determine a "competitive set", a group of a half-dozen companies that directly compete with your brand. Have your co-op determine a "non-competitive set" of a half-dozen companies that indirectly compete with your brand --- these companies are not your competitors, but your customers love to shop with these companies.

Now that this has been done, have your co-op perform a three channel Multichannel Forensics analysis for 2007 and 2008, projecting future sales for 2009 - 2013 given the trends of 2008.

Why do this?

You'll get to see how changes in competitive and non-competitive brands are directly influencing the future trajectory of your brand. You'll get to see if your customers are defecting to the competition, and if so, you'll get to see what impact defection has on your future sales trajectory.

If your co-op won't perform the analysis for you, see if they will put together a dataset with anonymous information that they'll send to me, so that I can do the analysis for you --- or so that you can perform the analysis yourself.

Partner with the co-ops to obtain strategic insights into how your competition impacts your business!

Attention Catalogers: Co-Ops (Abacus) And Matchbacks

If you do customer acquisition via catalog marketing, you undoubtedly elected to drink the co-op kool-aid. And why not? Based on our reporting (sometimes provided by co-ops like Abacus), co-op lists outperform outside lists.

I've mentioned this before, and I want to mention it again, because the topic keeps coming up in various projects I work on. Co-op customers tend to be more likely to purchase over the telephone than rental/exchange customers.

And since phone orders are nearly 100% attributable to the advertising vehicle sent to the customer (whereas online orders are at best semi-attributable if matchback analytics are performed properly), co-op names may "appear" to perform better simply because of the channel preference of the customer selected by the co-op.

This has long-term implications for the brands we shepherd. If co-op names work "best", with co-op customers more likely to order over the phone, we then "have" to mail catalogs in the future to get the demand. And by having to mail catalogs, we have to keep feeding the entire catalog ecosystem --- printers, merge/purge houses, USPS, the paper industry, and the co-ops.

By feeding the catalog ecosystem, we anger some customers and prospects, which feeds the rampant growth of Catalog Choice.

We create our own problems, folks!

If you are a heavy user of co-ops, please consider extensive matchback analytics. At minimum, use the Migration Probability Table as outlined in Multichannel Forensics to understand future channel preference of co-op sourced names. You're in for a treat if you do!

Micro-Channel Challenges: Abacus And Co-Ops

I am continually told by traditional catalogers that there isn't a viable way to get away from a paper-based advertising model. Regardless of the sales success of folks at Zappos or Blue Nile or Amazon or Overstock.com, folks who do not use a catalog marketing channel, traditional catalogers usually have data (and more important, a belief system), to support the need for a paper-based advertising model.

Many (most?) catalogers have annual repurchase rates under fifty percent. In other words, fewer than fifty percent of 2006 purchasers buy again in 2007. When this happens, the business model demands a disproportionate focus on customer acquisition.

Catalogers look to outside lists and co-op databases (with Abacus being the primary co-op) as the primary way to acquire new customers, looking at paid search and online marketing as a secondary source.

Micro-channels like Abacus / Co-Ops present unique challenges. We need to seriously look at WHO the customers are that we acquire via these channels.

Have you completed this exercise? The exercise is valid for any micro-channel (not just e-mail or co-ops or rented lists or paid search).

Some folks see that the names they acquire from Abacus / Co-Ops are disproportionately rural. These customers are likely to stay in the catalog / telephone environment (which, by the way, is a more measurable environment, making Abacus / Co-Op names appear to perform better, simply because the phone/mail channel is the most measurable ... an interesting and unintended outcome).

Some folks observe that the names they acquire from Abacus / Co-Ops buy fundamentally different merchandise than customers acquired from other sources. This implies that the future value of these names will be different (maybe better, maybe worse). This also implies that, depending upon how many new customers are acquired from these sources, the future merchandise assortment is being driven by co-op statisticians applying sophisticated algorithms.

There are significant differences between names acquired from various sources.

• Rented / Exchanged Lists are brand loyal, this loyalty to another brand drives their future behavior within your brand.
  
• Abacus / Co-Op names are selected by a human using an algorithm. Future behavior is driven by the choices made by the human using the algorithm.
• Paid Search names self-select themselves on the basis of an algorithm. Future behavior is driven by the needs of the person self-selected by the algorithm.

Profiling the names acquired via these micro-channels will give you an idea where your brand is heading. Increasingly, algorithms and outside individuals are driving the future success of our multichannel brands. This is neither good nor bad, it is simply part of our new marketing reality.

Use tools like Multichannel Forensics (or simple future value tables) to understand the long-term trajectory of customers acquired via micro-channels.

Catalogers And Co-Ops: A Question

A question for my catalog readers.

Would you like for your co-op vendor (i.e. Abacus or Z24 or others) to do a multichannel forensics analysis, one that tells you the companies your customers are in transfer mode with (i.e. the companies your customers are leaving you to shop at), one that tells you which companies transfer customers to you?

And if you knew that information, would it be actionable?

Many of you already pay companies for panel data that provide you with similar information. Your co-op has a much better sample of information than organizations that use panel data.

Your thoughts?

Co-Op Funded Catalog Pages

Catalogers that sell branded merchandise (merchandise that they did not design and source themselves, merchandise they purchase from another branded vendor) have challenging decisions to make.

• Do you offer merchandise you know will sell very well, and pay for the cost of mailing the pages out of your budget?

• Or, do you accept funding from the branded vendor, allowing them to feature their merchandise on your spread, incurring no paper/postage/printing costs?

Unless you are selling iPods or HP computers, it is common for co-op funded merchandise to perform worse (often much worse) than the merchandise you would choose to feature in a catalog.

Here's an example of what I'm talking about:

Catalog Mailing: Spread Analysis, Circulation = 1,000,000
	Regular Merch	Co-Op Funded
Demand	$80,000	$40,000
Final Fulfillment	$68,000	$34,000
Net Sales	$54,400	$27,200
Gross Margin	$27,200	$13,600
Less Marketing Costs	$16,000	$0
Less Fulfillment Costs	$6,528	$3,264
Variable Operating Profit	$4,672	$10,336
Demand / 000 Pages Circ'd	$40.00	$20.00
Customers Purchasing	1,159	580

Which spread would you rather feature in your catalog?

• The spread that causes 1,159 customers to purchase, generating $80,000 demand and $4,672 profit?

• The spread that is paid for by vendors, causing 580 customers to purchase, generating $40,000 demand and $10,336 profit?

(Hint: You have to determine the long-term impact of generating less sales and more profit on your customer file. How would you do that?).