How Do You Deal With The Organic Percentage?

In many of my projects, there are two significant outcomes.

1. You have customers that you are actually under-circulating ... the 55+ rural audience comes to mind.
2. You have the majority of your customer base that you are significantly over-circulating.

At this point, you have choices.

1. You can pocket the additional profit, but your business will shrink, because you were spending unprofitable ad-dollars to prop-up your twelve-month buyer file.
2. You can re-invest the profit in new customer acquisition.  Often, it's better to acquire a new customer at a $20 profit loss per newbie than it is to reactivate a lapsed housefile buyer at a $20 profit loss per customer, because in the newbie instance, you have two customers on your file instead of just one.
3. You can re-calibrate your catalog contact strategy.

Point #3 is an important one.  As your organic percentage increases, you will find yourself needing to mail fewer and fewer catalogs.  This will frustrate your catalog marketing team, as they will feel like their contribution to the business is being de-emphasized, and trust me, they don't want to feel like they are being de-emphasized!!

As the organic percentage increases, you'll learn that your page counts will be driven down.  You'll get by with 64 pages instead of 124.

Your printer is going to fight you on this.  They're going to tell you that you achieve "efficiencies" at higher page counts, so they will push you bigger, even though your customer is pushing you to a smaller page count.

Always listen to your customer first, your printer second.  Profit is going to be harder to come by in 2012 and beyond.  The entire delivery infrastructure of our business model is literally crumbling under decreasing volumes and increasing expenses.  We need to do what is right for our customers, not what is right for a crumbling delivery infrastructure.

Remember, as your organic percentage increases, your page counts are going to be driven down.

How Organic Demand Plays Out

Once you've executed your mail/holdout groups, you'll realize what your organic percentage is.

Let's take an example where a business sends 12 catalogs a year, and after matchback, believes that it generates $30.00 across the twelve catalogs.  Assuming zero to fifteen possible contacts, here's what catalog demand actually looks like:

Catalog Demand Table
		Organic Percentage
Catalogs	20%	40%	60%	80%
0	$0.00	$0.00	$0.00	$0.00
1	$4.21	$3.16	$2.11	$1.05
2	$6.85	$5.14	$3.42	$1.71
3	$9.09	$6.82	$4.55	$2.27
4	$11.12	$8.34	$5.56	$2.78
5	$13.00	$9.75	$6.50	$3.25
6	$14.77	$11.08	$7.39	$3.69
7	$16.46	$12.34	$8.23	$4.11
8	$18.07	$13.55	$9.03	$4.52
9	$19.62	$14.72	$9.81	$4.91
10	$21.12	$15.84	$10.56	$5.28
11	$22.58	$16.94	$11.29	$5.65
12	$24.00	$18.00	$12.00	$6.00
13	$25.38	$19.04	$12.69	$6.35
14	$26.73	$20.05	$13.37	$6.68
15	$28.06	$21.04	$14.03	$7.01

Here's what organic demand actually looks like:

Non-Catalog Demand Table
		Organic Percentage
Catalogs	20%	40%	60%	80%
0	$6.00	$12.00	$18.00	$24.00
1	$6.00	$12.00	$18.00	$24.00
2	$6.00	$12.00	$18.00	$24.00
3	$6.00	$12.00	$18.00	$24.00
4	$6.00	$12.00	$18.00	$24.00
5	$6.00	$12.00	$18.00	$24.00
6	$6.00	$12.00	$18.00	$24.00
7	$6.00	$12.00	$18.00	$24.00
8	$6.00	$12.00	$18.00	$24.00
9	$6.00	$12.00	$18.00	$24.00
10	$6.00	$12.00	$18.00	$24.00
11	$6.00	$12.00	$18.00	$24.00
12	$6.00	$12.00	$18.00	$24.00
13	$6.00	$12.00	$18.00	$24.00
14	$6.00	$12.00	$18.00	$24.00
15	$6.00	$12.00	$18.00	$24.00

Make sense?

Here's what total demand looks like:

Total Demand Table
		Organic Percentage
Catalogs	20%	40%	60%	80%
0	$6.00	$12.00	$18.00	$24.00
1	$10.21	$15.16	$20.11	$25.05
2	$12.85	$17.14	$21.42	$25.71
3	$15.09	$18.82	$22.55	$26.27
4	$17.12	$20.34	$23.56	$26.78
5	$19.00	$21.75	$24.50	$27.25
6	$20.77	$23.08	$25.39	$27.69
7	$22.46	$24.34	$26.23	$28.11
8	$24.07	$25.55	$27.03	$28.52
9	$25.62	$26.72	$27.81	$28.91
10	$27.12	$27.84	$28.56	$29.28
11	$28.58	$28.94	$29.29	$29.65
12	$30.00	$30.00	$30.00	$30.00
13	$31.38	$31.04	$30.69	$30.35
14	$32.73	$32.05	$31.37	$30.68
15	$34.06	$33.04	$32.03	$31.01

And finally, here's what total profit looks like:

Total Profit Table
		Organic Percentage
Catalogs	20%	40%	60%	80%
0	$2.10	$4.20	$6.30	$8.40
1	$3.08	$4.81	$6.54	$8.27
2	$3.50	$5.00	$6.50	$8.00
3	$3.78	$5.09	$6.39	$7.70
4	$3.99	$5.12	$6.25	$7.37
5	$4.15	$5.11	$6.08	$7.04
6	$4.27	$5.08	$5.89	$6.69
7	$4.36	$5.02	$5.68	$6.34
8	$4.42	$4.94	$5.46	$5.98
9	$4.47	$4.85	$5.23	$5.62
10	$4.49	$4.75	$5.00	$5.25
11	$4.50	$4.63	$4.75	$4.88
12	$4.50	$4.50	$4.50	$4.50
13	$4.48	$4.36	$4.24	$4.12
14	$4.46	$4.22	$3.98	$3.74
15	$4.42	$4.07	$3.71	$3.36

If, for a given customer, the organic percentage is 20%, then 12 catalogs is the right number to send to the customer.

If, for a given customer, the organic percentage is 40%, then just 4 catalogs is the right number to send to the customer.

If, for a given customer, the organic percentage is 60%, then just 1 catalog maximizes profitability.

And if, for a given customer, the organic percentage is 80%, then you are better off not mailing any catalogs to the customer.

Can you see how you end up dramatically over-circulating to your housefile when you believe in your matchback analytics?

On Thursday, we'll talk a bit about what you do with the money you save when you learn how significant an impact the organic percentage has on your business.

But I'm Only Losing $0.03 Per Catalog Mailed!

There are days when you realize that we're failing at math.

Here's the argument, as presented to me.

1. Company has 1,000,000 lapsed buyers (last purchase 13+ months ago).
2. On average, 1% of these customers respond to a catalog, if mailed, after matchback.
3. On average, if the company mails these customers, the company loses $0.03 on every catalog mailed.
4. Company only mails these customers ten times out of twenty annual mailings (whew).
5. We're only losing $0.03 per catalog mailed, that's not so bad, and they are our existing customers, so why not boost our customer file???!!!
6. The long-term value of a reactivated buyer is $20.00 profit, so we only lose $0.03 to gain $20.00 profit.

Here's the argument, as presented by me:

1. You are mailing 1,000,000 * 10 = 10,000,000 catalogs.
2. Only 1% respond, after matchback (and we've debunked that one a million times on this blog, right), meaning that 10,000 customers purchase.
3. You actually lose $0.03 * 1,000,000 * 10 = $300,000 profit, per year.  $300,000 profit.
4. You actually lose $300,000 / 10,000 = $30.00 profit per reactivated buyer.
5. You actually lose $20.00 long-term gain - $30.00 reactivation profit = $10.00 per reactivated buyer.
6. Strategy = DON'T DO THIS!!

Pennies are seductive.  It's so easy to make the decision to lose a few pennies, who's going to notice?

Well, pennies are the difference between being a highly profitable company, and being just plain average, or below average.

Yes, pennies.

What would Kevin do (WWKD)?

1. Realize that half of the customers you are mailing would have reactivated anyway, due to your organic percentage being around 50%.
2. This means that you are actually reactivating half of the customers you think you are reactivating, meaning that you are actually losing $60.00 profit to reactivate a name, a rate of profit you'll never make up with $20.00 of future profit.
3. I would pocket half of the profit now, and re-invest half of the profit in new customer acquisition, growing your customer file more profitably in the process.  I mean, be honest, you're not losing $60.00 of profit acquiring new names from Abacus, right?  So spend a bit more with Abacus, be willing to lose $12.00 to acquire a customer that generates $20.00 of future profit, and you come out way ahead.

The difference between industry-leading profit and average profit is pennies ... pennies per catalog mailed.  When you say you're willing to lose a few pennies here and there, you're deciding to be average.

But If I Cut, I Could Lose Market Share, Right?

There are many arguments against working with me.  Cutting circulation is one of them.

The argument goes something like this.

1. Kevin recommends we cut circulation by 25%.
2. Kevin says this will result in a 6% drop in demand.
3. Kevin says this will result in an increase in profit of $1,000,000.
4. Kevin recommends reinvesting half of the money in new customer acquisition.
5. Company (or trusted vendor) suggests that this is bad, because instead of generating $50,000,000 in annual net sales, the company will now generate $47,000,000 in annual sales, even though company profit increases from $2,000,000 per year to $3,000,000 per year.
6. Company says that it is a terrible thing if infrequent buyers are not mailed, because this means that the customer file will be weaker in the future.

Ok, a couple of points for all of you to consider.

1. How does Zappos, without a catalog, get infrequent customers to purchase?  And don't tell me that "they are different, so they don't count"!!!
2. How does a retail store brand without a catalog marketing division (say Napa Auto Parts) get an infrequent customer to purchase again?

One of the least understood concepts in modern catalog marketing is the concept of the "organic percentage".  This is the percentage of customers who purchase again, without the aid of catalog marketing (or, if you are Zappos, without the aid of any marketing).


Back in 1995, when you stopped mailing a customer, you stopped generating demand from that customer.  This caused your future housefile to weaken, as you did not have enough customers to fuel future growth.


In 2011, when you stop mailing a customer, you face a different challenge.  Assume that the organic percentage for an online-centric audience is 58%.

1. In the next six months, you lose maybe 35% of the demand the customer would generate.
2. In months 7-12, you lose maybe 40% of the demand the customer would generate.
3. In months 13-24, you lose maybe 45% of the demand the customer would generate.

The secret, then, is to mail this customer infrequently enough to save a ton of money, generate a lot of profit, but remind the customer that you're still around.  The customer continues to generate 58% of the demand generated on a full diet of catalogs.

In 2011, this is what happens if you frequently mail 100 infrequent customers:

• 2011 = 100 customers with a last purchase of 13-24 months ago.
• 2012 = 90 customers with a last purchase of 25-36 months ago, 10 customers with a last purchase of 0-12 months ago.

In 2011, this is what happens if you infrequently mail 100 infrequent customers:

• 2011 = 100 customers with a last purchase of 13-24 months ago.
• 2012 = 94 customers with a last purchase of 25-36 months ago, 6 customers with a last purchase of 0-12 months ago.

In 2011, if you re-invest some of your profit in new customer acquisition, even at a loss, this is what happens:

• 2011 = 100 customers with a last purchase of 13-24 months ago.
• 2012 = 94 customers with a last purchase of 25-36 months ago, 6 customers with a last purchase of 0-12 months ago, 4 new customers with a last purchase of 0-12 months ago for a total of 10 customers with a last purchase of 0-12 months ago.

Re-investment can protect market share, if done appropriately.  Think about it.

Dealing With The Trends

I've shared these trends with you, many times previously.

Outside of a few folks nitpicking the results ("my twenty-four year old daughter just picked up the phone and shopped via a catalog, so you are wrong"), you aren't disagreeing with the thesis.

So, what do you do about it? 

First of all, recognize that the multi-channel mantra of one solution fitting all is not relevant in 2011 ... it might have been relevant in 2001 when all of this stuff was beginning to evolve.

Be honest ... if all of the multi-channel stuff really mattered, we all would have doubled or tripled the size of our multi-channel businesses over the past decade, right?

Now, the cataloger faces challenges.  

Customers age 55+ are still responsive to catalogs, but productivity will inevitably decline as the customer retires from the workforce.


Customers under the age of 45 are harder and harder to acquire via a catalog.  In fact, these customers are largely the reason for declining response rates and declining file sizes ... they are not easily acquired via catalogs.


Your co-ops respond to this by optimizing their lists based on response ... so the customers that you acquire tend to skew to 55+ rural customers.  This creates a self-fulfilling prophesy ... the customers we acquire are increasingly older.


So we have to identify audiences, based on behavior.  We have to reduce catalog mailings to customers who exhibit behaviors similar to the under-45 audience.  In many cases, we can mail more catalogs to customers who exhibit behaviors similar to the over-55 audience.  Yes, more catalogs.


When we reduce mailings, we have a choice.  We can mail fewer catalogs.  Or, we can mail smaller catalogs.  And as postage increases and the cost of paper increases, we'll get to fully explore these topics, in detail, won't we?


Over the next five years, we're going to deal with this constant cycle of "optimization", using the organic percentage to figure out where to make reductions.


Most important, we're going to figure out how the heck we sell merchandise to customers under the age of forty-five.  That may include a catalog, that may include online marketing, or mobile, or social, or Hologram Marketing in 2016, or whatever.  But we're going to figure this out, aren't we?

But How Do You Know What The Organic Percentage Will Be?

By analyzing more mail/holdout tests than I care to mention, I have a really good idea how catalog marketing drives demand to (or cannibalizes) other channels.

You might observe, for instance, that 40% of all search purchases were caused by catalog marketing (not matched back, mind you, but caused as measured in a mail/holdout test).

And you might observe that 90% of telephone orders were caused by catalog marketing.

Well, then you have something, don't you?


You can take a segment of customers at the start of 2010, and you can measure the percentage of demand spent during 2010 by channel.  Take 40% of search, 90% of telephone orders, get the picture?  That's your organic demand.  As a percentage of total, you have your organic percentage!

Now, I use more sophisticated methods than that ... I do this stuff at a customer level, with models that combine prior channel preference with Digital Profiles and the like.  I have time-honored and tested tricks that cause the outcome to be more robust.  

But in general, it's that simple!

That Organic Percentage Better Be Right, Right?

My critics lampoon me about the "organic percentage".

• "We provide our clients with the best matchback technology in the world.  That customer would never order without having first received a catalog.  Why did the customer even visit the website in the first place?  It was because the client mailed the customer a catalog.  Your methodology is just plain wrong."

• "You said that the organic percentage is 44%.  How can you even know that?  What if it is 39%?  Then everything you say is wrong.  Unless you nail this thing within one point, I can't possibly support your guess.  Come one, this is too important to be guessing!"

• "You want me to mail my best customers less and reinvest money in customer acquisition?  Are you crazy?  It costs seven times more to acquire a customer than it costs to retain a customer."

The comments are defensive, of course.  I get it.

Some folks think that if the organic percentage is off by a few points, then the whole methodology fails.  That's not the case, and that's a good thing.

Here's an example.  We assume that we mail this customer ten catalogs a year, we predict the customer to spend $40 next year, and we predict the organic percentage to be 44%.  Here's a profit and loss statement, by catalog.

	Catalog	Organic	Total	Total
Catalogs	Demand	Demand	Demand	Profit
0	$0.00	$17.60	$17.60	$6.16
1	$4.47	$17.60	$22.07	$6.97
2	$7.26	$17.60	$24.86	$7.20
3	$9.64	$17.60	$27.24	$7.29
4	$11.79	$17.60	$29.39	$7.29
5	$13.79	$17.60	$31.39	$7.24
6	$15.67	$17.60	$33.27	$7.14
7	$17.45	$17.60	$35.05	$7.02
8	$19.16	$17.60	$36.76	$6.87
9	$20.81	$17.60	$38.41	$6.69
10	$22.40	$17.60	$40.00	$6.50
11	$23.95	$17.60	$41.55	$6.29
12	$25.45	$17.60	$43.05	$6.07

You're currently mailing ten catalogs ... this methodology says that four catalogs is optimal.


Now, let's pretend that I was way off on the organic percentage, and it really is 34%.  Here's what the table looks like:

	Catalog	Organic	Total	Total
Catalogs	Demand	Demand	Demand	Profit
0	$0.00	$13.60	$13.60	$4.76
1	$5.27	$13.60	$18.87	$5.85
2	$8.56	$13.60	$22.16	$6.25
3	$11.37	$13.60	$24.97	$6.49
4	$13.90	$13.60	$27.50	$6.63
5	$16.25	$13.60	$29.85	$6.70
6	$18.46	$13.60	$32.06	$6.72
7	$20.57	$13.60	$34.17	$6.71
8	$22.58	$13.60	$36.18	$6.66
9	$24.52	$13.60	$38.12	$6.59
10	$26.40	$13.60	$40.00	$6.50
11	$28.22	$13.60	$41.82	$6.39
12	$29.99	$13.60	$43.59	$6.26

Let's review the findings.

• You're using matchback technology to mail ten catalogs a year.
• My methodology says you should go down to four mailings a year, and reinvest the money somewhere else (or pocket it, your choice).
• Even if my estimate is off by somewhere around 30%, you should mail six catalogs a year ... and mailing four catalogs, in this scenario, is more profitable than mailing ten catalogs.

I get that some of you in the audience will say "my file will be less strong if I follow your advice, so I won't follow your advice."  That's ok.  But you can reinvest the ad cost in new customers, and even if you lose money on the new customers, you frequently still come out ahead from a profit standpoint.


Most of the time, I underestimate the organic percentage.  That's when fun stuff starts happening!


I understand that you get frustrated by and concerned about this methodology.  It's a methodology that few in the catalog industry endorse.  It works.  And you can be wrong about the prediction of the organic percentage, and you still come out ahead vs. doing nothing.


Questions?  Contact me for assistance.

Inflation and the Organic Percentage

Let's describe what some of your phone calls sound like, over the past sixty days.

Kevin:  Good morning, this is Kevin.

You:  Hi Kevin.  What are you hearing about inflation?

Kevin:  What are you observing?

You:  The cost of everything is going up.  Gas costs more.  Paper costs more.  Sourcing merchandise from China costs more.  L.L. Bean is forcing us to do free shipping, but our tests show that we cannot offset the costs of free shipping via increased sales, so that's another hit to the expense line.  How do we deal with this?  Sales aren't increasing, expenses are increasing so fast, our profitability is being obliterated!

Indeed.  How do we deal with inflation?

I've been harping on the "Organic Percentage" for the past two years, because you are going to have to know this metric in an inflationary environment.

If you don't already know what the Organic Percentage is, here's a definition:

• The organic percentage represents the percentage of sales a customer generates, on an annual basis, that is not caused by marketing activities.

Why is it important to know this percentage?

Well, if your customer is happy to generate 72% of her demand without the aid of marketing, you have a significant opportunity to save yourself a ton of marketing expense when speaking with this individual customer.

Maybe half of the projects I'm being asked to work on this spring have something to do with inflation ... I'm being asked to find customers who are highly organic in nature, so that companies can reduce marketing expense among that audience.

The Most Important Catalog And E-Mail KPI: The Organic Percentage

Last week, I received an e-mail from a loyal blog subscriber. This person did the mail/holdout testing that many catalog brands execute. This person learned that more than 70% of the business that you see in best-practice based catalog results analysis happened regardless whether a catalog was mailed or not.

This phenomenon is known as the "Organic Percentage". You execute a mail group and a holdout group, very simple testing.

Organic Percentage: Mail & Holdout Test Groups
	This	Other	Website	Total
	Catalog	Catalogs	Demand	Demand
Mail Group	$3.00	$4.00	$8.00	$15.00
Holdout Group	$0.00	$5.00	$9.50	$14.50
Increment	$3.00	($1.00)	($1.50)	$0.50
Organic %, Catalog = (3.00 - 0.50) / 3.00				83.3%
Organic %, Total = 14.50 / 15.00				96.7%

This outcome is seldom if ever mentioned by e-mail vendors or catalog marketing vendors. The opposite outcome is mentioned all of the time --- we hear that catalogs and e-mails drive sales across all channels. This outcome is more common than the oft-publicized "catalogs drive sales to all channels" outcome we read about.

Almost nobody talks about reducing marketing expense and increasing profit because we are mis-attributing orders to customers who would have ordered anyway. The vendor ecosystem would be hurt if this outcome were published on a frequent basis.

In this case, 96.7% of customer demand happens anyway .. only 3.3% of the $15.00 is because of catalog marketing.

Quantifying the organic percentage is the single most important thing that catalog and e-mail marketers will do in 2009.

Acting upon the organic percentage is the single most important thing that catalog and e-mail marketers will do in 2010.

At this time, the majority of my Multichannel Forensics projects require me to greatly reduce marketing expense while keeping demand coming in at a high rate. It is likely that you'll be spending a ton of time on this issue in 2010 as well.

Mega-Metrics: The Organic Percentage

For traditional direct marketers, there is no single metric that is more important to calculate than the organic percentage.

Simply put, the organic percentage is the percentage of demand that is generated independent of marketing activities. For many catalogers, the percentage is calculated as the percentage of demand that is independent of catalog marketing.

We care about this, of course, because our matchback analytics frequently attribute orders to catalog and e-mail marketing activities, orders that would have happened regardless of any catalog or e-mail marketing.

Catalog marketers are growing comfortable with this percentage, because of the actionable ways it gets put into use. Organic percentages of maybe 10% suggest that your catalog is the reason your business exists!

Organic percentages of maybe 35% to 40% suggest a considerable amount of over-mailing. These businesses are probably attributing too much business to catalogs and direct marketing in their matchback algorithms.

Organic percentages of 80% or more suggest a powerful brand that is complemented by direct marketing, not driven by direct marketing.

For my catalog readers out there, work closely with your co-op or other matchback provider, calculating this important percentage. If that number creeps up over 30%, it is time for serious catalog contact strategy testing. For my online marketing readers out there, this is another good place to partner with a Coremetrics, Omniture, or Unica, folks who can help you get to the bottom of this important metric.

Consulting Project Focus Is Changing

The Multichannel Forensics projects you're asking me to work on have taken a turn.

Two years ago, you asked me to explain how customers interacted with channels.

One year ago, you asked me to explain how customers interacted with both channels and merchandise divisions, with an eye toward forecasting the future.

Then you saw what the future held, and it wasn't pretty.

Today, you ask me to use Multichannel Forensics to identify customers who will keep purchasing if advertising is significantly reduced.

The framework isn't significantly different than Multichannel Forensics projects from a few year ago. I still measure how customers interact with products, brands, and channels. And I still forecast the long-term trajectory of your business by product, brand or channel.

The mechanics of the project, however, have changed. We use whatever data is available to understand how customers move along the continuum above --- organic, social, algorithm, advertising, and begging. We attempt to identify where the customer resides on this continuum.

Customers who respond to begging (discounts, promotions, free-shipping, GWPs) are at the bottom of the ladder. We'll need to market to them, and we'll need to give them a reason to purchase. These may be profitable customers, but we'll have to work hard at creating gimmicks to encourage them to purchase. This is the realm of the marketer, especially in Fall 2008. In so many ways, we ruined e-commerce with our obsession of begging customers to purchase.

Traditional direct marketing focused on customers who respond to advertising. This is a segment of the customer file that is decreasing in size. We look for attributes that suggest a customer must be advertised to, in order to purchase. Customers who order over the telephone, customers who give catalog key-codes when shopping online, customers who click-through e-mail campaigns, customers living in zip codes classified as "Catalog Crazies". These customers are unlikely to buy in the future unless they are marketed to.

Then we have customers who use algorithms to purchase. Yup, these are the customers who use tools like paid search to purchase merchandise. These customers are different. They don't always respond to future advertising, and when they do respond, they combine advertising and algorithms to make decisions. This is where your Net Google Score comes into play. Catalog brands really struggle with algorithm customers, and online marketers struggle with e-mail marketing programs for algorithm customers.

Increasingly, we find ourselves managing social customers. If you're Crutchfield, you have customers who buy merchandise, customers who write reviews, and customers who are referred from blogs to your site. The latter two groups represent "social customers". Social customers are different than are typical catalog customers, and are different than typical e-commerce customers. Catalogers are way behind the curve when it comes to managing social customers. In fact, almost everybody is behind the curve regarding social customers. Hint: Social customers don't necessarily embrace catalogs, and sometimes get really angry when they are stuffed in the mailbox.

Finally, we get to the most valuable customer on the planet, the organic customer! I receive a lot of criticism about my assertion that there are customers who do not need to be advertised to. Why? I don't know. Many of you think customers only buy something if they are advertised to. Amazon.com gets a lot of organic business. Now it is true that maybe Amazon sent an e-mail at one time, and you bought because customers like you purchased certain texts. But that doesn't explain the fact that you see "Outliers" discussed on a blog, so you go and buy the book on Amazon (that makes you a social customer!). Or maybe you read about the book in New York Magazine, then buy it on Amazon (that makes you an organic customer). Organic demand is the most important kind of demand to generate, because it comes without advertising cost. Retailers have thrived for centuries via organic demand. E-commerce is a hybrid of retailing (organic demand) and cataloging (advertising demand).

So how did project work change?

These days, I score customers across each of the five dimensions listed above. If the customer generates organic demand, the customer gets an "A", if not, the customer gets an "F". The same process happens for Social Customers, Algorithm Customers, Advertising Customers, and for Customers Who Respond To Begging.

Once customers are graded, we monitor migration. Does the "Begging" customer migrate to "Organic" status? If so, then discounts and promotions work! Does the "Algorithm" customer slide down to "Begging"? If so, then Google isn't doing us any favors. Is the "Advertising" customer married to advertising? If so, then we have to keep streaming the catalogs at this customer. We apply the migration patterns, understanding the long-term trajectory of your business. Finally, we identify the customers who we can stop marketing to, without a significant dip in business.

Online pureplays are using this methodology, too ... they want to understand who should receive e-mail marketing, and they want to understand how deep they should dive into paid search.

Retailers ask me to do this, so that they can identify retail shoppers who are unresponsive to direct marketing, customers who have a high organic percentage.

Catalog Choice should love this (especially given the slowdown in user growth in recent months), because the end result of the project is the discontinuation of catalog marketing to customers who no longer respond to advertising, while protecting the catalog relationship among highly responsive customers.

That, my dear readers, is a description of the type of project I am being asked to work on by online marketers, retailers, and catalog brands. And it is big-time fun!

Hillstrom's Contact Strategy Optimization On A Budget

Hillstrom's Contact Strategy Optimization On A Budget is a new e-book and spreadsheet available from the MineThatData Store at Lulu.com.

Contact Strategy Optimization is not a new concept. During my time at Lands' End in the early 1990s, we worked with a team of IBM researchers on an optimization solution that formed the embryonic version of the solutions offered by Decision Intelligence.

During the past two weeks, many of you told me that you don't want to spend tens or hundreds of thousands of dollars on black box algorithmic solutions that optimize the number of catalog contacts to various customer segments. That being said, you told me you want a solution ... one that can be implemented by Business Leaders, Analysts, and Managers ... one that can be implemented on a budget.

So I wrote this e-book, outlining a reasonably simple approach to identifying the most profitable combination of catalog mailings and e-mail marketing messages to different customer segments.

What Do You Get, What Will You Learn?

• You'll learn that matchback algorithms over-state the importance of catalog marketing, causing us to mail too many catalogs to our customers.

• You'll learn that the "organic percentage" is the most important metric to understand when considering an appropriate contact strategy.

• You'll learn that contact strategy testing is critical to understanding multichannel customer behavior.
  

• You'll learn how cannibalization between catalog mailings and e-mail marketing messages directly influence a profitable contact strategy.

• You'll apply versions of the "square root rule", identifying profitable strategies.

• You'll receive access to a URL where you can download a spreadsheet that allows you to play "what if" games using your own assumptions and your own customer segment performance.
  

This is not meant to be an elegant or mathematically perfect solution. This e-book and spreadsheet are written for you, the Executive or Analyst who has to come up with solutions on a limited budget.

Do you not have a quarter of a million dollars to spend on an optimization solution, but have access to $79? If so, purchase "Hillstrom's Contact Strategy Optimization On A Budget"! For those of you who criticize me for giving away too much information, you'll be happy, because the contents of this e-book will not be made available on this blog.

$79 is a fair price, considering you'll be given tools that could result in hundreds of thousands of dollars of annual profit, don't you think?

So visit the MineThatData Store on Lulu.com, and download this e-book for the nominal fee of $79.

The Most Important Catalog Marketing Metric: Organic Percentage

The most important metric in catalog marketing is called the "organic percentage".

The metric is defined as the percentage of demand, at a segment level, that would occur if no catalog mailings were delivered to a customer.

Most of the catalogers I speak with assume that the organic percentage is zero --- in other words, if catalogs were not mailed to a customer segment, the segment would not spend any money.

Of course, this assumption is false, perpetrated by biased matchback algorithms that incorrectly assign online orders to catalogs mailed to the customer, when in reality, the catalog had nothing to do with the generation of the order in question. You'll know that your matchback results are biased if the percentage of demand you add on to your acquisition segments (after matchback) is significantly lower than it is for housefile customers.

Catalogers who attempt contact strategy tests, say over a three month period of time, find relationships like this.

• Telephone - Only customers have an organic percentage around 10%.
• Telephone + Online customers have an organic percentage around 25%.
• Online - Only customers have an organic percentage around 40%.

In other words, if no catalogs are mailed to an online-only customer, the online customer will still spend 40% of the demand they would spend if they are mailed all of the catalogs during the quarter.

The organic percentage metric is critical, because it dramatically impacts your calculation of profit and loss. If you have a high organic percentage, then you are significantly overmailing customers, regardless of what your matchback analytics vendor tells you. If you have a low organic percentage, then you have no choice but to mail catalogs in order to generate demand.

The image at the beginning of this post shows the difference in profitability for the same segment of customers, comparing a 10% organic percentage to a 40% organic percentage. The ten percent level requires four mailings per quarter. The forty percent level maximizes profit at just one mailing per quarter. Think about what you could do with the expense from the three additional mailings?

If there were just one metric I'd ask catalogers to track at a segment level, during 2009, it would be the "organic percentage" metric. Knowing this metric fundamentally changes how you decide to contact different customer segments.

How important is this percentage? Take a brand like Nordstrom. This is an $8.5 billion dollar business that is luck to generate ten percent of that total from marketing activities. Therefore, the organic percentage is ninety percent. This brand generates ninety percent of sales without the aid of traditional marketing activities. That's a strong brand.

Think about Zappos. There's the volume they generate due to online marketing and search marketing, and then there's the volume they generate via word of mouth. I'd guess that half of their volume happens without the aid of marketing, plus or minus twenty percent.

And then think about a traditional cataloger. The traditional cataloger believes that the vast majority of demand happens becaue of catalog mailings. If mail/holdout tests validate this, then the cataloger is at the mercy of catalog marketing --- if customers are no longer responsive to this form of marketing, demand dries up.

The goal, of course, is to build a brand that has a high organic percentage, not needing advertising to drive sales and profit.

We can learn how much of customer demand is generated by advertising by executing thorough mail / holdout tests, in both catalog marketing and e-mail marketing.