May 10, 2009

The Death Spiral

Last week, folks were actively talking about "The Death Spiral".

We deal with "The Death Spiral" in our Multichannel Forensics projects, don't we?

In this instance, we have a traditional multichannel business that is stuck at about $30,000,000 in annual sales. And given
the state of the economy, the business isn't profitable. One of the opportunities is to give up on catalog customer acquisition altogether.

So here we go ... in year two, the Executive team makes the decision to stop acquiring customers via catalogs.
This seems like a good idea, right? All of that customer acquisition activity is unprofitable, and causes folks to visit third-party opt-out services to get off your mailing list.

Here's what the business looks like, now that catalog customer acquisition has disappeared.

"Hasta La Bye-Bye", as a former co-worker used to say. This business is now in "The Death Spiral". A business that generated more than $30,000,000 begins to crumble (by the way, the annual retention rate here is more than 50%, reasonably healthy), falling to $23,000,000, then $15,000,000, then $11,000,000, and finally $10,000,000.

Each of these decreases would require the Executive team to take a hatchet to headcount ... especially in the call center and distribution center. The business, however, may be more profitable, allowing Management to
hold on to corporate center staff. And at some point, Management will face the inevitable question ... "Should we kill the catalog altogether?"

Those of us who run Multichannel Forensics projects for our clients know the next question ... "How many online customers do we have to acquire to keep the business growing?".

The answer is ... "A Lot!"

This business will have to acquire about 42,000 new online customers per year, growing to that total ... and the business only gets back to $17,000,000 in annual sales.

This is "The Death Spiral" that folks talk about.

Customer Acquisition means everything to most businesses. We're being told to focus all of our efforts on retaining customers "during these challenging economic times". And we should do that. But for most of us, we should spend a lot more energy developing a credible customer acquisition strategy that fuels the future of our business.

The reality is that, for many of us, we're in the process of "resetting" the size of our businesses. Traditional customer acquisition strategies are dying, and if we don't formulate a strategy of customer acquisition "diversification", we're going to reset the size of our business, really fast.

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