Dear Catalog CEOs: The Prospect Catalog

Dear Catalog CEOs:

Some of you are already using a prospect catalog to improve overall performance.

Here's how the concept works. Let's assume you currently have a 128 page catalog. When you mail the 128 page catalog to your prospect audience, you observe the following metrics:

	128 Pages
Circulation	500,000
Demand	$900,000
$/Bk	$1.80
Profit Factor	37.0%
Book Cost	$0.64
Profit	$13,000
AOV	$100.00
Response	9,000
Profit/Ord	$1.44

Ok, those aren't bad metrics.

Now, what might happen if we used a 48 page prospect catalog? Let's assume that the old standby rule of "pages are added at half-productivity" holds here. In that case, we can use the "square root rule" to estimate demand for a 48 page catalog:

• Demand For A 48 Page Catalog = (48 / 124) ^ 0.50 = 0.612.

In other words, we'll obtain 61.2% of the demand.

Next, a prospect catalog is merchandised with only the best products. When merchandised in this manner, productivity usually increases by 20%, plus/minus. Let's assume a 15% increase in productivity.

• Demand For A 48 Page Catalog = 0.612 * 1.15 = 0.704.

Finally, we'll make two additional assumptions. First, we'll assume that the average order value is a bit less, because there are fewer pages ... we'll assume a $95 average order value. Second, we'll assume that each page in a 48 page catalog is more costly to print and produce ... we'll assume that this catalog is 15% more costly to produce.

With these assumptions, what might a profit and loss statement look like for a 48 page catalog, vs. a 128 page catalog?

	128 Pages	48 Pages
Circulation	500,000	1,340,000
Demand	$900,000	$1,037,584
$/Bk	$1.80	$0.77
Profit Factor	37.0%	37.0%
Book Cost	$0.64	$0.28
Profit	$13,000	$14,066
AOV	$100.00	$95.00
Responses	9,000	10,922
Profit/Ord	$1.44	$1.29

There are a lot of positives here:

• You expose your brand to 1,340,000 households, not a measly 500,000 households. Your co-op will love you for this!
• Demand increases by more than ten percent. Your CFO will love you for this!
• Profit increases in this scenario. Your CFO will love you for this!
• Responses increase by more than 20%. Your Circulation Director will love you for this!

This is why you create a prospect catalog. All of the metrics that matter improve, allowing you to greatly increase circulation depth, to increase demand, to increase orders, and to increase profit.

See, I'm not all about cutting catalog marketing, am I?

Fetzer's Footwear: Vision

Lauen Fetzer awaits me at the bottom of Mt. Youngstown. Today, we are going to hike up the mountain, this is the view that awaits us at the top of the 1,100 foot mountain ---->

As usual, Ms. Fetzer is listening to her iPod Touch via earbuds.

Kevin: "What are you listening to?"

Lauren: "Will Smith, 'Getting Jiggy With It'. You want the proper motivation to climb a mountain, don't you?"

Kevin: "Alright."

Lauren: "Let's go, dude."

Kevin: "What are we talking about today, Lauren?"

Lauren: "Have you ever tried to get a team to work together?"

Kevin: "Absolutely."

Lauren: "It's not an easy thing to do. I find that I spend close to sixty percent of my time trying to get people to work together in an effective manner. And the ratio doesn't ever change. I was awful at managing people a decade ago, so I spent a ton of time putting out fires. Five years ago, I spent a ton of time trying to develop people, to get them to achieve their potential. Today, I spend a ton of time trying to get people to climb on board and follow my vision. No matter the agenda, I spend sixty percent of my time motivating or challenging or encouraging people. I keep repeating the same messages over and over and over again, and it seems like nobody is ever listening to me."

Kevin: "I don't think that is uncommon."

Lauren: "The big problem now is getting people to follow my vision."

Kevin: "What is your vision?"

Lauren: "I think e-commerce is moving 'into the cloud'. In other words, the future of e-commerce has nothing to do with websites and shopping carts and landing pages and all of that pap. The future of e-commerce happens off of the website. It happens on your mobile device. It happens on whatever replaces Facebook. It happens where the customer wants it to happen, in other words, the customer doesn't go to a destination website, but instead, Fetzer's Footwear finds the customer. And quite honestly, Fetzer's Footwear in 2017 looks a lot more like CNN than like Zappos. Every company will be a media company."

Kevin: "How do you articulate that vision to your employees?"

Lauren: "My Executive Team hates it when I talk about this, they say I am being way too theoretical. They want for me to break my vision down into distinct projects that they can work on. I don't think it works that way."

Kevin: "Why not?"

Lauren: "The minute you break a vision down into projects, you lose the momentum of the vision. If I tell my employees to create apps for Facebook, they will inevitably lead us down the Facebook campaign rat hole. They understand campaigns, campaigns tie the past to the present. I don't want a campaign, a campaign does nothing for me. I want one of our customers to think Fetzer's Footwear when she has a need, and if she's spending the majority of her time on Facebook, then our business should be available for her when she needs us."

Kevin: "How do your programmers act upon this vision? They need detailed specs in order to be able to write code that meets your needs, right?"

Lauren: "Certainly. They get really angry with me when I 'get visionary' on them."

Kevin: "People can't possibly read you mind, you know that, right?"

Lauren: "I don't expect them to read my mind. I expect them to build a roadmap to the future."

Kevin: "What if their vision of the future is different than your vision of the future?"

Lauren: "My vision of the future is the one that matters, right?"

Kevin: "To an extent. Every employee will combine your vision with her vision, and that can create brilliance, and that can create chaos."

Lauren: "Exactly! So how do I stop the chaos?"

Kevin: "I don't think you get to stop the chaos. If you stop the chaos, you limit brilliance."

Lauren: "Would you be willing to spend some time with our Executive team? Would you be willing to sit in on upcoming Executive team meetings, and assess how we work together, assess how we push ourselves to the future, assess how we get ourselves stuck in the past?"

Kevin: "Certainly."

Lauren: "Good. We'll have you start meeting with us next Wednesday."

Kevin: "Who will I be meeting with?"

Lauren: "We have five members of our Executive team. Penny Parker is our VP of Marketing. I think she's a problem. She breaks everything down to a campaign. She wants to know what the objectives of a campaign are, then she wants to buy media, then she wants to measure how effective the campaign was. It's this cycle that causes her to completely lack vision. I'm tired of this 'conceive - execute - measure - conceive - execute - measure' cycle."

Kevin: "Ok."

Lauren: "Bill Bledsoe is our VP of Logistics. He is responsible for IT, for moving product between stores and the website and our suppliers. He's like the arteries and veins of our company. Without Bill, we're sunk."

Kevin: "How about merchandising?"

Lauren: "Ashley Zimmerman. Pure genius. She is our product, she is Fetzer's Footwear."

Kevin: "Stores?"

Lauren: "Bart Cox. Couldn't care less about e-commerce. He finds e-commerce and social media in particular to be completely phony. Everytime Ashley talks about creating lasting relationships on Facebook, he talks about lasting relationships with real customers in-person in stores. He's the person who holds our e-commerce efforts back, and that's probably a good thing, because his view of in-person relationships cause us to think long and hard about what the future of e-commerce looks like."

Kevin: "Who else?"

Lauren: "Connie Simpson. She runs Finance. She's a wet blanket. She views the world like a series of mutual funds. She doesn't like to invest in anything new and risky, and I'm here to tell you that I cannot achieve a vision of the future when somebody won't invest in anything new and risky. That being said, we need Connie, we need somebody with her discipline."

Kevin: "So I'll attend your Executive meeting next Wednesday, assuming that the authorities are able to retrieve my exhausted body from the top of this mountain?"

Lauren: "I have med-flight insurance, we'll be able to get a helicopter up here to bring you down."

Mobile Marketing: New Channel Preference

When a customer or user chooses the new channel as a first interaction with a business, existing channels can struggle to capture the fancy of the customer.

Here's our table. Let's look at the app-only audience.

			April
March	Visit	Use	Website	No
	Website	App	+ App	Activity	Totals
Visit Website	10,000	50	100	20,000	30,150
Use App	100	300	200	1,000	1,600
Website + App	50	250	300	1,000	1,600
No Activity	20,000	400	400	0	20,800
Totals	30,150	1,000	1,000	22,000	54,150

Here's the "Re-Visit Rate" for those who only use the app:

• Re-Visit Rate = (100 + 300 + 200) / (100 + 300 + 200 + 1,000) = 37.5%.

Now, let's calculate the re-visit index for each channel combination:

• Re-Visit Index, Website = 100 / 600 = 16.7%.
• Re-Visit Index, App = 300 / 600 = 50.0%.
• Re-Visit Index, Website + App = 200 / 600 = 33.3%.

The clear preference of the customer is to use only the app. Some customers/users will use both the website and the app.

When you see trends like this, you know that the app is going to win, long-term. And if the app is going to be the preferred channel, long-term, you have a responsibility to educate the rest of your management team about the implications of this shift in customer behavior. The new channel is clearly going to command the interest of the customer, and needs to be developed accordingly. Conversely, the existing channel is going to experience a slow customer drain over time --- if the existing channel is responsible for generating advertising revenue, then a lot of thought needs to go into how your brand will maintain a steady diet of advertising revenue when channel shift really takes hold.

Mobile Marketing: Measuring Channel Shift

Recall our table from last week:

			April
March	Visit	Use	Website	No
	Website	App	+ App	Activity	Totals
Visit Website	10,000	50	100	20,000	30,150
Use App	100	300	200	1,000	1,600
Website + App	50	250	300	1,000	1,600
No Activity	20,000	400	400	0	20,800
Totals	30,150	1,000	1,000	22,000	54,150

When measuring channel shift, always remember the "multi-channel mantra" that is posited by those who manage the incumbent channel: "Multi-channel customers are the best customers".

They aren't the best customers because they are multi-channel, of course. They are already the best customers, and as a consequence, they are often the first to try new channels.

What matter isn't whether they try multiple channels or not, what matters is what they do after trying a new channel. It's what they do after that is dangerous to the incumbent channel.

Look at the table from last week. Let's look at the customers who experience both the website and the app.

• "Re-Visit Rate" = (50 + 250 + 300) / (50 + 250 + 300 + 1,000) = 37.5%.

Now, we'll calculate the "Re-Visit Index" for each channel:

• Re-Visit Index, Website = 50 / (50 + 250 + 300) = 8.3%.
• Re-Visit Index, App = 250 / (50 + 250 + 300) = 41.7%.
• Re-Visit Index, Website + App = 300 / (50 + 250 + 300) = 50.0%

Any index with a value > 20% suggests that the customer wants to change or migrate to other channel combinations. In this case, the customer is not going to be a web-only customer ... the customer is either app-only, or app+website. This is a common trend early in the evolution of a new channel .... customers either switch back to the old channel in the early days, or the customer goes back and forth between channels.

Pay close attention to the fact that the app index is five times greater than the website index (41.7% to 8.3%). This is a strong indication that the customer prefers the app over the website.

Dear Catalog CEOs: More Profit

Dear Catalog CEOs:

As mentioned last week, I receive one message a month from business leaders ... sometimes catalog CEOs, sometimes catalog marketing leaders, sometimes the owners/executives running vendor-based organizations. The message outlines a premise that I am not on the side of the catalog leader, that all I want to do is move a business online, that I don't respect the magic of the catalog marketing model, that my previous experience is irrelevant because I don't understand the unique characteristics of certain catalog business models.

If this is your point of view, then allow me to walk you through an example, so that you can visually see how I view this challenge.

Take an average RFM-based segment. You mail this segment of customers 14 catalogs a year. You generate $60.00 demand across the 14 mailings, yielding $11.20 of catalog marketing cost and $9.80 profit. Your RFM-based analysis suggests that the average catalog generates $0.70 profit per customer.

That's good, right?! Your matchback analytics prove that every catalog is profitable.

Here's how I view the world.

First, I use my proprietary methodology to determine the "organic percentage", the percentage of demand that will be generated independent of catalog marketing. Let's say that the number is 40%, and is validated based on your own mail/holdout tests. This means that 60% of the remaining demand is truly generated by catalog marketing.

Second, I use proprietary my proprietary methodology to estimate how much demand is generated by each incremental catalog mailed. It turns out that, across most business models, each incremental contact generates less and less incremental volume.

By combining the organic percentage with the incremental volume generated by each incremental catalog, I run a profit and loss statement at each combination of catalog mailings. The table looks something like this:

Catalogs	Organic	Via Mail	Total	Cost	Profit
0	$24.00	$0.00	$24.00	$0.00	$8.40
1	$24.00	$5.68	$29.68	$0.80	$9.59
2	$24.00	$9.22	$33.22	$1.60	$10.03
3	$24.00	$12.25	$36.25	$2.40	$10.29
4	$24.00	$14.98	$38.98	$3.20	$10.44
5	$24.00	$17.51	$41.51	$4.00	$10.53
6	$24.00	$19.89	$43.89	$4.80	$10.56
7	$24.00	$22.16	$46.16	$5.60	$10.56
8	$24.00	$24.33	$48.33	$6.40	$10.52
9	$24.00	$26.42	$50.42	$7.20	$10.45
10	$24.00	$28.45	$52.45	$8.00	$10.36
11	$24.00	$30.41	$54.41	$8.80	$10.24
12	$24.00	$32.32	$56.32	$9.60	$10.11
13	$24.00	$34.18	$58.18	$10.40	$9.96
14	$24.00	$36.00	$60.00	$11.20	$9.80

Look at the table. This business mails an RFM-based segment 14 catalog mailings a year, generating $9.80 profit. However, my proprietary methodology suggest that profit is maximized at just seven mailings a year, generating $10.56 profit.

So, within this segment, I can increase profit from $9.80 to $10.56 per customer.

Now, certain leaders in the catalog industry continually beat me up on this topic, suggesting that it is a very bad thing to decrease overall demand from $60.00 per customer to $46.16 per customer. They will claim that they are losing market share, and that is a bad thing.

Ok, if that is your point of view, then why don't we simply re-invest the $5.60 of catalog marketing expense in customer acquisition --- not even in online marketing, but in customer acquisition?!!!

Let's pretend that your average order value is $100. Among our housefile RFM-based segment, here's what the average individual catalog profit and loss statement looks like:

• Response Rate = 1.98%
  
• Average Order Value = $100.00
  
• Dollar Per Book = $1.98
  
• Profit = ($0.109)
  
• Profit Per Order = ($5.51)

This is the magic of the methodology. Your analytics don't allow you to see that the final seven catalog mailings of the year to this customer segment cause you to lose $5.51 per order.

Pretend that you are circulating customer acquisition to break-even ... that you don't want to lose money on customer acquisition ... or that you are willing to lose $2.00 profit per order acquiring customers. Instead of losing money mailing your housefile, go ahead and lose money acquiring new customers ... as long as you lose less than $5.51 per order, you are going to be more profitable re-investing the money in customer acquisition than you are going to be mailing your housefile.

If you are a catalog marketing vendor, maybe in B2B or B2C, a business that helps catalogers find new customers, what is not to like about this scenario? My methodology actually drives more business to the vendor community, keeps demand flat for catalog clients, generates more profit for catalog clients, and increase the number of new customers, which helps grow the entire industry. Who in the catalog industry is losing under this scenario?

Why, vendor community and various catalog business leaders, if you are actively demonizing this methodology, would you do so when the benefits are self-evident? Your business grows under this scenario, and the business of the catalog clients you support grows, all because of this methodology.

Show me the downside to what I outlined? Use the comments section to offer your thoughts. And click here if you want for me to help you with a project of this nature.

Thanks,
Kevin

Breaking News: Kevin Hillstrom Does Not Hate Catalog Marketing

In the past year, about a dozen Catalog Executives expressed their consternation to me --- these are CEOs, Executives at Catalog Companies, and President/CEO/Owner of vendor-based organizations. The quotes are nearly identical, and go something like this:

• "You just want to shut catalogers down, and you don't have any real catalog-based solutions to help us grow. Why do you want to shut us down?"
  

To which I have a simple reply, quoting the esteemed Col. Sherman T. Potter, of MASH fame.

• "Horsefeathers!"
  

If I have not made this 100% clear in the past four years, allow me to make it clear right now.

• Kevin Hillstrom Does Not Hate Catalog Marketing.
• Kevin Hillstrom Hates All Marketing That Is Wasteful And Drains A Company Of Profit.

I usually provide the following example to folks who ask the question ... this example, by the way, is the outcome of many of my projects.

• Kevin significantly trims circulation to the twelve month file, reducing demand by $5,000,000, but increasing profit by $1,000,000.
• Kevin asks the business to create a prospecting catalog series, small page counts, best merchandise, best creative, best offers, best pagination strategy with the absolute best product in the first twenty pages, no branding or lifestyle imagery whatsoever, no risky, untested products.
  
• Kevin reinvests $1,000,000 in both catalog customer acquisition and online marketing. Total company circulation, on an annual basis, increases by 10%. This re-allocation of the marketing budget results in an increase in demand of $5,000,000 and a loss of $700,000.

In the example I just gave:

• Annual Demand is flat.
• Annual Profit increases by $300,000.
• Annual Catalogs circulated increase by 10%.
  
• The catalog brand has more twelve-month buyers to mail next year.

What, in the name of the Direct Marketing Association, is wrong with that?

Isn't that an outcome you'd like to see happen?

I do not hate catalog marketing. I hate waste.

As it turns out, my projects tend to yield three outcomes. None of the outcomes are based on a pre-conceived agenda, they are the unbiased outcome of actual customer response to your catalogs and the underlying dynamics of your business.

1. I actually recommend that the brand mail housefile customers MORE OFTEN and outside lists MORE OFTEN. Yes, I have recommended this, in fact, this is a logical outcome in close to twenty percent of my projects. In fact, the usual outcome is the development of a prospecting vehicle, one with a small page count, mailed more frequently and to far more names --- hint, catalog vendors, you should like it when I recommend this!
   
2. I recommend that the brand mail housefile customers less often and outside lists MORE OFTEN. This is a common outcome, happening about sixty percent of the time. Hint, catalog vendors, you should like it when I recommend this!
   
3. I recommend that the brand mail housefile customers less often and recommend shifting marketing strategies online. This is what you think I advocate, but it is the outcome of only twenty percent of my projects, and is not something that I am authoring, but instead, is the outcome of tepid customer response to catalog mailings.
   

My projects are channel agnostic. All I care about is helping your business generate more profit. If I can also find a way to help your business grow while reducing waste, I'll be the first to recommend that outcome to you.

Now that we are clear that "Kevin Hillstrom Does Not Hate Catalog Marketing", here's a direct marketing best practice for you ... a call to action ... click here to contact me for details about your own Multichannel Forensics project.

Thanks,
Kevin

Fetzer's Footwear: Testing

Today, I'm meeting Lauren Fetzer at Willow Harbor, one of two ports on Madrona Island. Ms. Fetzer is standing on a dock, iPod Touch in one hand, Red Bull in the other hand, earbuds in her ears.

Kevin: "What are you listening to?"

Lauren (pulling earbuds from her ears): "DC Talk, Between You And Me". This is my church, being outside on Madrona Island, listening to DC Talk.

Kevin: "Amen".

Lauren: "Let's walk the docks. Six years ago, I see this giant yacht, and then Johnny Carson zooms by on a motorized scooter, heading to the yacht. This yacht had to be three stories tall, bigger than half of the cruise ships you see go through the strait. So you never know who you are going to see here."

Kevin: "What are we talking about today?"

Lauren: "Testing. We do a lot of testing at Fetzer's Footwear. We work with a service called Pinnacle Testing. They use Java Script to allow us to test different offers or creative strategies on our home page and various landing pages."

Kevin: "How many tests a year are you running?"

Lauren: "We run two tests a month, and this gets expensive. Pinnacle Testing charges $6,500 a test, so we spend more than a hundred thousand dollars a year executing various tests."

Kevin: "What have you learned?"

Lauren: "Maybe the most important thing we learned is that much of what we learn has a half-life. Certainly, there are eternal truths. Best customers visit our site to see what is new. New customers have higher conversion rates on our best selling items. That contradiction alone was worth the cost of testing, we basically serve up different pages to new and existing customers, featuring existing product to new customers, featuring new product to existing customers."

Kevin: "What do you mean by the term half-life?"

Lauren: "Most of what we learn has a half-life. We'll run a test to see where the best place is to put our shopping cart on the home page. We learned upper-right was the best place, that customers converted 18% better. Then six months later, we ran the same test, and found that customers converted 6% better. Then last month, we learned that the upper-left corner of the home page worked 9% better."

Kevin: "Is that due to sampling error?"

Lauren: "The folks who run the tests for us at Pinnacle Testing tell us they use statistical significance tests, so they promise that the results are statistically valid."

Kevin: "The tests are valid based on a series of assumptions. When you execute a test like this, you assume that the audience visiting the website in the future will be identical to the audience visiting the site during the test period. Does that assumption hold in the tests you run across time?"

Lauren: "Certainly not. The audience, in fact, would always be different. In December, the composition of the audience is totally different than the composition of the audience in May."

Kevin: "That means you are violating the assumptions of each test, if you assume that the results of a test in May will hold in November. And when you violate the assumptions of a test, you make sure that your results cannot be replicated, no matter what folks tell you about the statistical significance of a test. It's a big reason why all of these tests sound scientific, but in reality, can often represent a point-in-time outcome that isn't easily replicated. It's really a misinterpretation of statistical testing, we violate the assumptions underlying the original test."

Lauren: "Help me understand this half-life concept. So often, we run these tests, and we see that one creative treatment will outperform another by 65%. We get huge conversion rate increases for a month or two, but then the increases seem to evaporate. We test a big product swatch, and that works great, and then six months later, we re-test and find that the small product swatch works better. What's up with that?"

Kevin: "There's two reasons for that. First, customers get bored. You dazzle them, then they get used to what you did, and they revert back to their old behavior. Think about how spectacular e-commerce is today, compared with ten years ago. And yet, conversion rates over time have steadily decreased. Customers almost have to be 'shocked', if you will, in order to see increased productivity, and you cannot continually shock customers into improved performance on a consistent basis. So in some sense, all of this conversion optimization is fool's gold, if you will, because you seldom if ever truly improve the annual retention rate. Well, fool's gold is a harsh term. Simply put, the outcomes of the tests evaporate in performance over time, they have a short half-life."

Lauren: "So am I wasting my $100,000ish annual investment in testing?"

Kevin: "Absolutely not, in fact, you're way ahead of your competition. The important thing is to focus tests on things that matter. Font sizes, product swatch sizes, colors of buttons, size of buttons, subject line testing, all of that stuff has a short half-life, it is transient, and quite honestly, none of it addresses the real issue with a business."

Lauren: "And the real issue is?"

Kevin: "The real issue is the merchandise you sell and the story you tell. What folks test online is so similar to testing how you display the mannequins in a retail store, or the color of the sale signs in a retail store. Sure, that plays a role in causing a customer to purchase. What really plays a role is the merchandise you sell or the story you tell. The only reason a customer is shopping your brand is because you sell merchandise the customer wants. All of the other testing ideas skirt the real issue of presenting great merchandise in a way that resonates with the customer, or skirts the real issue of writing copy or blogs that romance the customer or educate the customer in a way that causes the customer to feel compelled to shop with you. So few people talk about this stuff, but this is the stuff that truly matters. I mean, honestly, do you care if McDonalds changes the color of the arches? Would you not go through the drive through if you were in a pinch and McDonalds was just down the road and then you see that they changed the color of the arches to an off-yellow color?? That's the kind of stuff folks want you to test on your website. It is fool's gold. It has a short half-life, and it diverts you away from true business strategy. Honestly, I think we are lazy. It is easy to test a small green button vs. a large green button vs. a small red button vs. a large red button, it takes no thought, no creativity, no imagination, it is psuedo-strategy. It is really hard to create four different stories surrounding the reason why a customer should purchase a blu-ray DVD player, then test how the four different stories resonate with the customer. Give the latter a try!"

Lauren: "So when we learned that new customers prefer existing product, and existing customers prefer new product, we learned something timeless?"

Kevin: "Quite possibly. Try testing strategies that are 'timeless', if you will, or at least test ideas that have longer half-lives."

Lauren: "Why don't we ever read about this style of testing? When you read the blogs, all you ever see are articles about testing tactics on the home page or on landing pages?"

Kevin: "Nobody is going to tell you the real secrets, right? The most delicious, most interesting findings are never discussed publicly. Pinnacle Testing knows this, they can't ever share the real findings with anybody, those findings are proprietary to the brands they work with. It certainly isn't the fault of the testing organization."

Lauren: "I suppose you are right. We never tell anybody what we learn about the merchandise testing we do. We view that information as being proprietary."

Kevin: "So keep testing. Use all that fancy multivariate testing and learn whatever you can possibly learn. Everything you learn puts you one step ahead of competitors who choose to never do testing. But test things that matter. Most of the time, the stuff that matters is what you offer the customer on the home page or on a landing page, or what matters is how you romance the customer. That's the secret sauce!"

Lauren: "Ok, then. Hey, you want to stop at the sundry shop and pick up a Red Bull for the road?"

Kevin: "No."

Lauren: "Do you ever drink Red Bull?"

Kevin: "No."

Lauren: "Would you drink Red Bull if they changed the color of the can, or the size of the can, or if they personalized the can in any way for you?"

Kevin: "No."

Lauren: "I see. So it's the merchandise that matters, it is what is inside the can that matters, huh?"

Kevin: "Amen!"

Mobile Marketing: Measuring Channel Shift

Multichannel Forensics are ideally suited to help us understand what impact mobile marketing might have on the future.

Let's say that you have a mobile app, one that you launched on March 1. Do this for me.

Step 1: Segment users into one of three groups during March. Group 1 = Visit Website. Group 2 = Use App. Group 3 = Website + App.

Step 2: Segment users into one of three groups during April. Group 1 = Visit Website. Group 2 = Use App. Group 3 = Website + App.

Now, what you want to do is create a two-way table that counts how many users fell into each group in March, and then again during April. Here's an example:

			April
March	Visit	Use	Website	No
	Website	App	+ App	Activity	Totals
Visit Website	10,000	50	100	20,000	30,150
Use App	100	300	200	1,000	1,600
Website + App	50	250	300	1,000	1,600
No Activity	20,000	400	400	0	20,800
Totals	30,150	1,000	1,000	22,000	54,150

This table forms the basis for our study of channel shift. I'll give you six days to think about this table. What do you observe happening here with app users?

Next week, we'll explore the meaning of the numbers in the table.

Mobile Marketing: Channel Shift

Fear.

That's what I hear when I talk to the e-commerce generation about mobile marketing.

It's almost like there isn't any fear regarding Social Media, like that's a harmless thing that is fun to measure and be part of, but not something that will replace traditional e-commerce.

Mobile Marketing is a different story.

Time spent on a mobile device may be incremental time that would not have been spent interacting with the internet five years ago. Conversely, a ton of time spent on a mobile device today is time that would have been spent on a laptop or a desktop computer.

And when you spend time in a different way, you begin to interact with different things. Instead of visiting a website, you use an app to interact with a brand. Once the individual uses the app a few times, the relationship between the individual and the traditional website is fundamentally changed.

This is what frightens the e-commerce generation.

What if the customer stops interacting with the traditional website?

Our job, of course, is to validate customer behavior. We determine if the customer "adds" mobile to the total experience (this is what the e-commerce generation wants to see happen), or we want to determine if the customer "shifts" away from e-commerce, toward the mobile experience.

When the customer is shifting away from e-commerce, we have a responsibility to look into the future. It becomes our job to predict how this shift impacts each channel, and once we visualize this shift, we need to educate folks, and chart a path to the future.

Dear Catalog CEOs: Hearts

Dear Catalog CEOs:

Have you ever played the card game called "Hearts"?

Four people play the game. Each player gets thirteen cards. One player leads out with a card (say the four of spades). If you have a spade, you have to play a spade. If you don't have a spade, you can play any card (including a heart). The highest card among the suit lead wins the trick, collects all of the cards played, and leads the next trick. If you collect any hearts, you get a point for each heart. Hint ... you don't want to collect any points! Worst of all is the queen of spades ... this card is worth thirteen points. You cannot lead a heart until "hearts are broken", meaning that a heart can only be played when one cannot follow suit.

What does any of this have to do with catalog marketing?

For the past decade, catalog marketing has been a craft of "avoiding hearts". Many of the folks who are good at playing hearts are good because they avoid collecting seven or eight or nine hearts in any hand, and they consistently avoid collecting the queen of spades, worth thirteen points. These folks play a game of damage control and risk avoidance, they are satisfied if, at the end of a hand, they accidentally picked up two or three hearts.

There's one quirk in the game of hearts. If a player captures every single heart and the queen of spades, then the player doesn't earn a single point ... instead, the other three competitors all earn twenty-six points. This is called "going for them all", and is one of the most exciting aspects of the game. It is a very risky strategy! You have to have just the right combination of cards in your hand, and your competitors have to make a few stupid plays early in the game.

You never announce to your competitors that you are "going for them all". You have to be clever, you take a few tricks early on that have a heart or two in them. Your competitors think 'good, he just took a few hearts, glad I didn't take a few hearts'.

And then, all of a sudden, you lead out with the Jack of Hearts, and the entire table is shocked. Somebody will say "oh oh, he is going for them all".

At that point, the three competitors work together to defeat the individual who is going for them all. The three competitors will gladly take on five or six hearts if that means that they avoid being penalized with twenty-six points.

If you are "going for them all", there is nothing more satisfying than "getting them all"! Your competition feels burned, and you feel an adrenaline rush!

For the past decade, catalog marketing has been all about capturing as few hearts as possible (hint, double-meaning there). Everything is about risk avoidance. We'll cut four pages from the catalog to save some expense. We shift from list organizations to co-ops to save a few pennies. We change the trim size to save a few pennies. We put the shopping cart in the upper right hand corner of the home page because we're told that it is a best practice. We offer 20% off and free shipping in e-mail campaigns but not in the catalog because we're told that e-mail has the best return on investment and e-mail customers simply won't shop without a promotion. Everything is safe, everything is without risk

Meanwhile, some companies are "going for them all". They are employing new and innovative strategies. Take http://bubbleroom.se for example. This is not a traditional catalog business model, is it? Syndicated blogs, product development from ideation to sale in just a few weeks. This is "going for them all"!

When the other players realize that somebody is "going for them all", the instinct is to gang up on the individual going for them all. We decide that this risk taker must be vanquished, that more damage must be done to the risk taker than is done to us by the risk taker. We all defend our turf against the risk taker. Most of the time, we defeat the risk taker ... and that furthers our belief that what we are doing is right.

In the past five years, non-catalogers began to "go for them all". Our reaction has been to play it safe, to believe that we have to team up and work together to beat the risk taker.

Maybe, just maybe, it is time for us to "go for them all".

Join Me Next Week At Two Great Conferences

Two fun events are coming up next week, I hope you'll join me if you can.

Monday - Wednesday, I will be at the Rimm-Kaufman Summit, courtesy of the gracious invitation of George Michie! I'll present information about how digital marketing and direct marketing and humans and the future are all merging together, causing us to step back and re-think what it means to "market" to a customer.

Thursday - Friday, I will be attending the Vermont / New Hampshire Marketing Group's annual conference. I will share a boatload of tips to make your business more profitable tomorrow. I'm really looking forward to speaking and interacting with this audience, after all, this truly is the home of direct marketing, isn't it?!

If you are attending either event, please stop by and say hello!

Fetzer's Footwear: Returns and Allocation

Today I am meeting Lauren Fetzer, CEO of Fetzer's Footwear, at Dale's, a local tavern in the village of Coho Bay. Coho Bay is the primary port on Madrona Island.

Dale's was recently remodeled, though it appears that the remodeling project suffered from many rough Friday and Saturday evenings. It doesn't quite smell right when you enter the tavern ... let's just say that the tavern hasn't been disinfected as often as the tavern should be disinfected.

Lauen is sitting at a table in the middle of the tavern. In front of her are two red, plastic baskets, each has a hot dog in a bun with onion straws and ranch dip. Lauren's earbuds fit perfectly in her ears. Her head sways back and forth.

Kevin (yelling): "What are you listening to?"

Lauren (pulling the earbuds out): "Shawn Mullins, Lullaby."

Kevin (not yelling): "Ah. You know, I didn't order a hot dog."

Lauren: "Just sit down and eat. It's the best hot dog in all of Coho Bay. Make sure you dip the onion straws in the ranch dressing."

Kevin: "I just set an onion straw on a napkin, and the napkin absorbed a pint of vegetable oil."

Lauren: "Are you going to eat the meal, or are you going to grumble?"

Kevin: "Why am I here today?"

Lauren: "A customer visits our website, and buys two pair of Mid Light Hiking Boots with GORE-TEX membranes, size ten and size ten-and-a-half." Two weeks later, the customer visits our store in Downtown Seattle, and returns one pair."

Kevin: "Ok."

Lauren: "My store manager hates this."

Kevin: "Really, why? Isn't that the perfect multi-channel customer experience that the pundits talk about?"

Lauren: "It's a good experience for the customer. My store manager hates it because it kills his comp store sales performance. In April, he did $180,000 in net sales, but he lost $20,000 because of direct channel returns to stores, for a net of $160,000. Last April, he did $175,000 in net sales, but he lost $8,000 because of direct channel returns to stores, for a net of $167,000."

Kevin: "So in his eyes, he posted a +3% comp, but his performance is evaluated as a -4% comp because website customers returned merchandise to his store?"

Lauren: "Exactly."

Kevin: "So, what is the problem?"

Lauren: "My store manager says that he shouldn't be penalized because of the problems that the website cause his business."

Kevin: "Maybe your store manager shouldn't be credited for orders that the website creates for his business?"

Lauren: "Here's the problem with that line of thinking. In any company, the reporting that is available to folks clearly shows sales and returns. So everybody can see that his performance is at the bottom of the ladder. We don't have reporting that shows the sales that are caused by the website, and quite honestly, you could never prove that the website caused an order, right?"

Kevin: "A lot of vendors try to accomplish that for you. They'll say that you sent an e-mail on April 15, and then the customer visited the website on April 17, and then ordered shoes in the store on April 19. These vendors have solutions that will allocate the order on April 19 in a store back to the website, or in this case, back to the e-mail campaign that drove the order."

Lauren: "But how does the algorithm know that the e-mail or the website caused the order to happen? I mean, what if that customer was going hiking on April 20, and was simply doing research? That customer wasn't influenced by marketing or by the website, the customer was simply going to buy hiking boots. So how the heck does the algorithm know how to parse out customer intent?"

Kevin: "It doesn't know customer intent. It can't know. Folks will use mathematical algorithms and they compare correlations and r-squared statistics and regression analysis, they do t-tests and they use neural networks and genetic algorithms. So they do have a lot of science that provides directional evidence."

Lauren: "None of that helps me. I need a report tomorrow morning that tells me what the website drove to a store yesterday, and the number must be rock solid, it can't be a guess made by a computer algorithm. My store managers won't trust mumbo-jumbo created by a computer algorithm. My store managers believe the daily net sales report, a report that clearly ties out returned shoes with what is piled-up back in the stock room."

Kevin: "What you have identified is the gulf between the 'quants' and business leaders. The quants, folks like me, we have all of this alleged science to prove or disprove what is happening. And we can't ever be sure that what we are measuring is what is reality. Meanwhile, you have business leaders who are skeptical about reporting that doesn't easily tie out to something that is readily observable."

Lauren: "The bonus plan that my store managers are compensated from doesn't count direct channel returns to stores. They are given credit for store purchases and store returns, and they get credit for converting a direct channel return into a store purchase. For the most part, that keeps them happy. But our daily net sales reporting, that really sticks in the craw of my Downtown Seattle store manager, because his performance is good, but the reporting suggests his performance stinks."

Kevin: "Change the reporting."

Lauren: "I wish it were that easy. That type of reporting must be based on facts, it can't be based on an algorithm."

Kevin: "And yet, your store manager benefits when the customer searches on Google and then buys something in the store ... the search algorithm drove the sale, right?"

Lauren: "Again, the store manager sees the purchase, he sells the shoes, so he doesn't care that an algorithm helped him. He cares when he can't prove that sales allocation from an algorithm helped or hurt him."

Kevin: "Five years from now, folks will probably be more accepting of reporting that has uncertainty."

Lauren: "Until then, we have to figure out the returns problem, too."

Kevin: "What do you mean?"

Lauren: "Well, the items that are returned to a store are not necessarily the items that sell in the store. In stores, we have a limited assortment. You have the 20% of shoes that drive 80% of sales. You simply cannot have a broad assortment in a store, or you will be killed. So we use our stores to sell winners, and we sell odd sizes and less popular styles online. The customer buys less popular styles online, then returns them to a store, and the store manager cannot resell the items. This works against the store manager, of course. He wants to resell the items, because that helps improve comp store sales. These are merchandise alignment issues that real Executives deal with every day."

Kevin: "So the optimal assortment isn't a multi-channel assortment that works best in both channels, huh?"

Lauren: "It can't be. I'd lose 20% of retail sales if I moved my online assortment into stores. And I'd lose 20% of my conversion rate if I only sold my store assortment online. Each channel has strengths, and each channel has weaknesses. Returns across channels are a weakness for both channels. We have to move merchandise between stores, and we have to move a lot of returned merchandise back to our direct channel distribution center. It's one of the hidden costs of running a multi-channel brand. Do you have any solutions for this problem?"

Kevin: "No."

Lauren: "I buy you lunch, and you don't have any solutions?"

Kevin: "Each brand has to find the right mix of online and offline assortment. Don't listen to the experts, how's that for a solution? Experts communicate multi-channel theory, you work in multi-channel reality. Now I will say this. You don't need to market to customers who return merchandise. Pay close attention to customers who have purchased three times, and returned merchandise each time. Three purchases and three returns represent a habit. Obviously, these customers can buy online or in stores, you're not going to prevent them from buying something. But there is no law that says you have to send e-mail campaigns to them. Only market to customers who provide positive, profitable outcomes."

Lauren: "Three purchases represents a habit, huh? Ok, I'll take that one back to the marketing team. That's worth lunch. How were those onion straws?"

Kevin: "I think I need a hot towel to blot my face with."

Mobile Marketing: Lift

Now that we understand how our mobile app shoppers are distributed across our customer file, it is our job to begin to measure the incremental "lift" we expect from these customers going forward.

When file counts are small, we're just kind of stuck having to use what we have.

Remember, in yesterday's example, most of the mobile customers were graded as "A".

	Total	Mobile
	File	File	Index
Grade = "A"	50,000	394	2.58
Grade = "B"	50,000	176	1.15
Grade = "C"	50,000	88	0.58
Grade = "D"	50,000	65	0.42
Grade = "F"	50,000	42	0.27
Totals	250,000	765

So here's what we can do. Let's take everybody at the end of March who had a grade of "A". Split that segment by those who used a mobile app recently, and those who did not.

Now, for each group, measure the incremental demand generated during the month of April. Your table should look something like this:

							Non-
						% Via	Mobile
		HHs	Rebuy	Spend	Value	Mobile	Value
Grade = A, Mobile		394	3.4%	$165.00	$5.61	17.5%	$4.63
Grade = A, Other		50,000	3.1%	$170.00	$5.27	0.4%	$5.25
Lift					6.5%		-11.8%

There are a couple of things worth noticing here. First of all, the mobile app buyers, after equalizing a bit for customer quality, are worth 6.5% more in the month of April than are other customers. That's what we want to see, we want to see that the new channel creates value among customers.

Also notice that the number is 6.5% ... it's a small number. In cases like this, don't expect mobile apps to be the life saver you've been looking for to generate huge sales increases (unless the percentage of mobile app users are disproportionately new customers).

Finally, notice that non-mobile volume is nearly 12% less among mobile app shoppers. If you see an outcome like this, then you know that your efforts are causing these customers to shift business from your core website to the mobile app ... in other words, your online sales are being cannibalized by the mobile app.

Cannibalization matters, folks. Most businesses miss cannibalization until it is too late. Just ask catalogers, just ask the newspaper industry, just ask independent record stores. When sales are cannibalized, you have strategic issues that need to be addresses, so that "channel shift" is not devastating to your business.

Ok, you've read several posts about measuring fundamental relationships in mobile marketing, what are your thoughts, what questions do you have? We've got more posts coming ... that being said, this would be a good time for input.

Mobile Marketing: Loyalists

Once you've identified the mix of new/existing mobile app users, the next step is to identify how loyal these customers/users have been, historically.

In e-commerce, I like to take my customer file, and split it into six segments. Any customer without a purchase in the last twelve months, but at least one life-to-date purchase is put into segment "Z".

Then, I use dollar cutoff points to rank customers based on twelve month activity. For any customer who purchased in the past twelve months, I create five equal cutpoints. Here's an example:

• Spend $500+ = "A"
• Spend $300 to $499 = "B"
• Spend $200 to $299 = "C"
• Spend $100 to $199 = "D"
• Spend $1 to $99 = "F"

I try to use cutpoints to make sure that there are reasonably equal numbers of customers in each "grade".

Now that you've done this exercise, look at all mobile app purchasers in the past twelve months, and look at total dollars in the past year. Compare the distribution to the entire file:

	Total	Mobile
	File	File	Index
Grade = "A"	50,000	394	2.58
Grade = "B"	50,000	176	1.15
Grade = "C"	50,000	88	0.58
Grade = "D"	50,000	65	0.42
Grade = "F"	50,000	42	0.27
Totals	250,000	765

In this example, it is obvious that your mobile shoppers are disproportionately skewed to the top portion of your twelve month buyer file. This means that your mobile shoppers are likely to be disproportionately loyal to your business.

When this happens, the question of "incrementality" comes into play. Your most loyal buyers are often the ones most likely to try new channels, and when they try a new channel, they are not necessarily interested in purchasing more, they are simply trying a new channel.

So that's not so hard, is it? Give the methodology a try. It's basic, simple, and it allows you to clearly communicate results to management without your leaders becoming paralyzed by methodology issues.