February 03, 2009

Small Is Winning

I'm familiar with a small catalog startup. This business is bucking all the trends --- a pure catalog brand with a website that basically serves as a glorified order form. Here's something shocking, folks ... this business is growing, and they aren't on Twitter, and they don't have a blog. I know, it seems impossible, given the rhetoric we read.

When you ask the owner how this brand grew, you learn that there are two key elements to their marketing success.
  1. Co-Ops. This brand participates in some of the big co-ops, and by participating, they get access to the very best catalog names that exist ... all for a few pennies per prospect.
  2. List Rental. This brand works with maybe the most reputable list rental name brand in the industry --- harvesting decades of experience from the leaders of this brand.
Not surprisingly, this brand is thriving. They went from $0 to about $25 million in less than three years. They cannot hire people fast enough, in the midst of the worst economy of the past sixty years.

There's no reason why this business can't hit $100 million in a decade.

And then there's another catalog brand that I'm familiar with. This business, generating under a billion dollars in sales, is struggling. They simply cannot acquire enough catalog customers to keep the wheels on. Housefile customers are performing maybe 10% worse than two years ago --- largely due to the impact of our economic situation. But catalog customer acquisition is off by maybe forty percent during the same timeframe.

This brand acquires the majority of their names from two key sources.
  1. Co-Ops.
  2. List Rental.
How does one brand thrive by using co-ops and list rental, while the other brand struggles to stay afloat due to horrific co-op and list rental performance?

One possible answer is size.

Back in the 1990s, large catalogers were very hesitant to participate in the co-ops, and for good reason.

Let's pretend that only two companies in the same industry are in a co-op --- one with 100,000 twelve month buyers, one with 10,000 twelve-month buyers. 4,000 of the customers overlap, meaning that there are actually 106,000 unique twelve-month buyers in the co-op.

Now it is time for each business to pull some names out of the co-op. The big company actually has access to 6,000 households, but it needs maybe 50,000 households to meet customer acquisition goals. Meanwhile, the small company actually has access to 96,000 names, while it only needs access to maybe 10,000 names to meet its customer acquisition goals.

Co-ops will take steps to protect the larger companies. And large companies will quickly mention that all 100,000,000 households are already in the co-ops, so there is nothing they can do about the situation anyway.

Still, the die has been cast. Small companies gain significantly more benefit from co-ops than do large companies. Big companies, due to the scale necessary to feed the customer acquisition beast, are getting access to grade "C" and grade "D" households. By default, they already have most of the grade "A" households.

For about the same cost, small brands are getting access to grade "A" households. By default, their customer acquisition activities are destined to be much more productive. The co-op ecosystem benefits the small brand, helping the small brand grow faster, helping the small brand gain markeshare from the larger brands.

Online, this trend happens in real time. I just did a search for "mock turtleneck" on Google. Here, small brands are on equal footing with the big brands. You'll see Lands' End, Target, Orvis, L.L. Bean, and Nordstrom appear near the top of the paid and natural search pile. But you'll also see Clothing Warehouse and CheapesTees.com. You'll see ShopStyle and Like.com, brands who offer a huge assortment from all brands --- you can compare in one place and then shop where you like.

Now clearly, big companies float to the top in search. But in aggregate, the small companies sum to a level of a "formidable competitor", cannibalizing business that would have gone to bigger companies.

Small is winning.

The nature of modern e-commerce favors the small. Offline, the co-ops and small brands (unintentionally) benefit by having access to big company names that are re-distributed to the smaller companies. Online, Google (unintentionally) benefits by simply directing traffic to any site that plays by the rules that Google gets to determine.

I'm aware of an online pureplay that happily recognizes the benefits of being small --- they notice that every time their biggest retail competitor advertises, their paid and natural search results improve.

None of these issues are good or bad ... they just are what they are. Small is winning. A whole new genre of marketing awaits large brands. The online marketing leaders of the next five years will figure out how to win this battle.


  1. Anonymous5:50 AM

    This is exacerbated in a niche. If you're the biggest player in your niche by far, the smaller guys will feed off of you in the co-ops. But you probably participate because you need the names so badly. Not a good situation in our day and age.

  2. Anonymous11:31 AM

    When you say "The nature of modern e-commerce favors the small.", I assume you mean that includes everyone but Amazon. Because they are kicking it like no one else of a comparable size.

  3. Rusty ... I'd say small is anything under $100,000,000, give or take.

    And yes, Amazon is smokin'.

  4. Kevin,
    How much of that is the novelty effect as well? How would you measure that?
    In any event ties back to your poll---have great product. and focus on customer acquisition, while attaining higher profitability.
    Customer retention and brand-building, and rest of poll options should be secondary as without first three you, rest is inconsequential.

  5. Novelty could be an issue, that is possible.

  6. Nice post! And just to add an aspect: 'social web' favors small companies too!


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