Kaley's Knits: Cheating

Today, we end our month-long journey through the customer file at Kaley's Knits.

I know, some of you are dissatisfied with my conclusions.

• "You diagnosed the problem, but you didn't tell us how to fix the problem.  What are the tactics we should use to quickly fix the problem?  Should we offer 10% off instead of 20% off?  Should we offer free shipping with a hurdle instead of free shipping, no hurdle?  Should we double our email frequency?  Should we expand into mobile?  Should we connect with the "social shopper"?  Would tablet commerce help us grow new customers?  Should we rent names from co-ops at $0.06 a pop?  Should we change paid search vendors?  Why not try big data, that should help, right?"

Those who complain are looking to cheat the system.

Kaley's Knits has an expense problem.  Fixed costs are increasing, and are rapidly eroding profits.  There are only two solutions to a fixed cost problem.

1. Reduce expenses.
2. Grow sales profitably.

How do we grow sales profitably?  Pretend that marketing didn't exist, that you had to rely on merchandise productivity to grow sales profitably.  What would you do?  Well, you'd place sales growth accountability squarely on the shoulders of the merchant.  The merchant would have to find products that customers craved, and would have to find products that aren't easily knocked-off by competitors.  And if the merchant failed, the merchant would not longer be employed by the company, right?

Yes, it is terribly hard to increase merchandise productivity.

Because it is so terribly hard to increase merchandise productivity, we try to cheat, don't we?  We hire marketers.  Marketers apply magic to the problem.  Of course, all magic comes with a price.  We chase expensive items with hefty gross margins, and when growth doesn't come fast enough, we offer discounts and promotions to "tickle the buying bone".  We abandon expensive new customers, seeking instead to squeeze more juice from the loyal customer lemon.  We starve new customers, we offer sugary confections to existing customers.  We hurt the profit and loss statement.

And then we look for easy answers to problems that the marketing team created.

This is cheating.  We're cheating on top-line sales growth, we're cheating the profit and loss statement, and we're looking to cheat via easy solutions to complex problems.

The solution, of course, is to simplify.  We're going to fill the bowling alley gutters with bumpers, so that the bowling ball cannot go into the gutter - as a result, we're guaranteed to knock down a few pins.

• Goal 1 = Increase Annual New Customers from 99,120 to 115,000 per year.
• Goal 2 = Increase Gross Margin to 59% of Net Sales.
• Goal 3 = Maintain Average Price per Item Purchased, to between $33 and $36.
• Goal 4 = Increase Variable Profit to $6.0 Million.
• Goal 5 = Maintain Annual Repurchase Rate at 37%

There isn't a single tactic among the five goals.  Your job is to create tactics.  You are accountable.  

Your tactics, however, cannot cause damage to any of your goals.  If you discount heavily, you eliminate a chance to succeed at Goal 2.  If you overspend to acquire new customers, you eliminate a chance to succeed at Goal 4.  If you trim marketing expense among existing customers, you eliminate a chance to succeed at Goal 5.  If you fail to accomplish Goal 1, you make it terribly hard to to achieve Goal 4 later in the year.  If you raise prices too much (Goal 3), you might have a clearance issue, requiring discounts/promotions, making it impossible to succeed at Goal 2.

In other words, we set Goals that prevent the marketer from going off the fiscal cliff.

By doing this, we place accountability squarely in two areas.

1. The marketer must not cheat.  The marketer must be disciplined.  Cheating is not allowed.
2. The merchant must improve merchandise productivity.

We don't tell employees HOW to do something.  Instead, we make sure that success will not happen by cheating.  

Success will come from hard work.

Many employees will hate this approach (you may be one of those who hate this approach).  We are causing each employee to be accountable for success.  If the employee fails, the employee should receive a poor performance evaluation, and ultimately, not be employed by the company.  This is the start of the documentation process, folks.

I know, this isn't what 90% of you wanted to hear about.  You wanted "Six Easy Steps For Social/Mobile/Local Success", things like this:

1. Identify your target customer.
2. Create products that your target customer needs.
3. Use social media to cause your products to go viral.
4. Apply mobile strategies to be everywhere your customer is - Woodside Research says that 77% of e-commerce transactions will be on mobile devices by 2018.
5. Use big data to leverage local opportunities.
6. Reap the rewards.

Good gravy!

Instead, I spent a month sharing a forensic strategy for identifying the reasons a business is in the middle of a painful collapse.  It's your job to fix the business.  

You are accountable.  Use this methodology to identify problems.  Then you, and only you, should fix the problems.

Discuss.

Kaley's Knits: Fixing Self-Inflicted Wounds

By running a simple set of diagnostics, we quickly diagnose why a business is struggling. In the case of Kaley's Knits, some of the problems are self-inflicted.  These problems won't be solved by a "robust mobile strategy" or "three easy steps to social media success".

No, self-inflicted wounds can be healed by refocusing on fundamentals.

There's enough time to set goals for the rest of 2013.  Why not do this?

Goal #1 = Increase annual new customer counts from 99,120 to 115,000 per year.  Yes, this is an audacious goal.  But the impact on the business is substantial.  The customer file fell off the fiscal cliff once marketing dollars were taken away from customer acquisition activities.  When the customer file drops, sales drops are coming within a 6-12 month window, if not sooner.  I would immediately shift the focus of the marketing team away from a "socially engaging business that capitalizes on the burgeoning mobile opportunity" to a simple goal - "find more new customers"!  I don't care how Kaley's Knits finds more customers, that's the job of the marketing department.  Notice that I did not put a spending parameter on this goal.  If marketing can yield customers that generate profit during 2013, then marketing should be able to spend whatever marketing needs to spend to accomplish the goal.

Goal #2 = Increase gross margin percentage to 59%.  Gross margin was at or above this level from 2009 to 2011.  Of course, this is going to lead to a significant reduction in discounts/promotions, which may lead to a decline in demand.  This will be offset, in part, by the increase in new customer acquisition, which will fuel the business.

Goal #3 = Maintain average price per item purchased at between $33 and $36.  This prevents the merchandising team from artificially marking-up merchandise to artificially inflate gross margin dollars.  This will push down average order value inflation.  As we have observed, average order inflation pushes some customers out, requiring the brand to offer discounts/promotions to bring the customer back.  Why play this game?

Goal #4 = Increase variable profit to $6.0 million.  This should be achievable with a focus on new customers and a de-emphasis of discounts/promotions.  Notice that my goal has nothing to do with earnings before taxes.  99% of employees have little or no control over fixed costs.  Give employees the ability to manage metrics they control.

Goal #5 = Maintain annual repurchase rate.  I did not share data about annual repurchase rates in this project, but annual repurchase rates were 37% in 2012, 38% in 2011, and 38% in 2010.  Keeping customers is not the problem at Kaley's Knits.  So, the goal, given all of our moving parts, is to maintain repurchase rates at 37%.

I'm not telling Kaley's Knits staff HOW to do anything, am I?  I am simply setting goals that, when reviewed by smart people, eliminate all of the activities that cause a business to self-inflict wounds upon itself.  It will take a solid year of discipline for Kaley's Knits staff to adjust to the goals, make changes, and properly manage the profit and loss statement.

As staff manage to the goals I assigned, the focus can shift to the activities that cause profitable sales growth.  It is my guess that this will be a difficult transition for the staff at Katie's Knits, because through most of 2013, there won't be an easy path to sales growth.

In most cases, sales growth comes from two factors.

1. Low-cost customer acquisition programs that yield a significant increase in the number of new customers (marketing's responsibility).
2. A significant increase in merchandise productivity, yielding a significant increase in annual repurchase rates and orders per buyer per year (merchandising's responsibility).

When you look at the profit and loss statement, you see that Management at Kaley's Knits tried to artificially grow the business.  The results, predictably, were not good.

Fortunately, self-inflicted wounds can heal.  For 2013, I would ask the staff at Kaley's Knits to refocus on the basics of running a business.  In 2014, I would expect the merchandising team to step up to the plate with improvements in merchandise productivity.  In 2014, I would expect the marketing team to have a low-cost acquisition plan that could yield 125,000 new customers per year.  The combination of merchandise productivity and new customer acquisition would solve all profitability problems at Kaley's Knits, generating enough profit to offset increases in fixed costs, generating enough profit to fund future mobile developments.

Your turn - what goals would you set up for the Management Team at Kaley's Knits, and why would you create the goals you are advocating?

Kaley's Knits: The Profit Problem

Remember the profit and loss statement?

Look at the fixed costs line.  Fixed costs are increasing at a fast rate, from $3.5 million in 2010 to $3.7 million in 2011 to $4.2 million in 2012 ... a 20% increase in just two years.

The increase in fixed costs puts pressure on the entire profit and loss statement.  We know this by looking at the variable profit line.  In 2012, $5,654,610 of variable profit was generated.  In 2011, $5,616,541 of variable profit was generated.  Basically, the number is the same, right?  Kaley's Knits is generating the same amount of profit, prior to fixed costs, in 2012 as in 2011.

We have a business that has several fundamental problems.

1. Fixed costs are growing faster than top-line demand/sales are growing.
2. To partially account for this problem, Management decided to slash the marketing line in 2012.
3. Consequently, new customer acquisition dried up, putting even more pressure on top-line demand/sales.
4. Management tried to "squeeze more out of the lemon", by increasing price points.
5. Customers responded, somewhat, by buying more expensive items, at the expense of other metrics (orders per buyer per year, items per order).
6. Management responded by countering increases in price points with discounts/promotions, which caused a slight increase in orders per buyer per year.

Management had a healthy business with a satisfying mix of new and existing buyers, purchasing at reasonable price points.

Management traded this for a less healthy business, one being starved of new buyers, one of existing buyers being asked to pay more for items, then being given discounts and promotions to encourage the customer to come back.

Assuming that fixed costs remain flat, or continue to grow, what prescription would you write to fix this business?  Use the comments section to describe how you, the prospective CEO, would approach further diagnosis of business problems and ultimately how you would fix this business?

Discuss.

Kaley's Knits: Squeezing More Out of the Lemon

Let's briefly review what we already know:

1. Demand, on an annual basis, continues to grow at a modest rate.
2. The customer file began to collapse around August 1, 2012.
3. Existing buyer growth remains flat.
4. New customer acquisition began to collapse around July 1, 2012, and is down 7% from previous highs, suggesting that if this trend continues, we'll see new customer acquisition down about 13% on an annual basis by mid-2013.
5. Marketing spend is down in 2012, by about 10%.
6. Gross Margin is down to 53% of net sales in 2012, compared to 59% in 2011, and a high of 60% in 2009.
7. Orders per Buyer per Year began growing in June 2012.
8. Items per Order began to fall in October 2012.
9. Price per Item Purchased began a "race to the top" in the Fall of 2011.
10. Average Order Value is $13 higher today than two years ago.

A combination of Orders per Buyer per Year, Items per Order, and Price per Item Purchased yield Annual Demand per Buyer.

In July of 2011, the average twelve month buyer spent $102.25 per year.

In January of 2013, the average twelve month buyer spent $122.89 per year.

This metric has been increasing for eighteen months.  New customers fell off the cliff five months ago.  This tells us that new customer acquisition is not responsible for the change in this metric.

Clearly, Management is trying to "squeeze more out of the lemon".  A conscious decision was obviously made to get customers to spend more.  The focus of Kaley's Knits clearly shifted, in an 18 month window, from a balanced approach to one focused on trimming customer acquisition marketing dollars in favor of spending gross margin dollars on existing customers.

Why did I mention gross margin dollars?  Well, gross margin percentages are down from 59% in 2011 to 53% in 2012.  Discounts and promotions are frequently subtracted from the gross margin line.

Next time, we'll talk about the impact of this strategy on the total business.

Attribution Beyond Catalogs

Yesterday, I outlined the methodology I use to perform catalog attribution (click here please).  The article got good numbers, and generated questions.  This is the theme of the most commonly asked question.

Question:  You only care about catalogs.  We live in an omnichannel world.  How do I account for paid search, you moron?

Paid Search is the most complicated case, simply because we have to also ascertain the click-through rate within catalog / email driven searches.

First, we need to have both catalog and email holdout test results available.  You have email holdout test results available, right?  Right?  Because if you're going to do attribution work, you're going to apply real science, not just hokum-based guesses used by other practitioners.  Promise me that you have catalog and email holdout results.  If not, don't go further, you're just guessing, and that's really dangerous.

Here are the results from a sample catalog holdout test.

And here are the results from a sample email holdout test.

We only need a few additional pieces of information to identify the profitability of paid search.

First, in the catalog test, we learn that 50% of paid search demand is catalog-driven.  In other words, if we took catalog marketing away, 50% of paid search demand disappears.  Therefore, half of paid search demand is immediately allocated to catalog marketing.

Second, in the email test, we learn that 10% of paid search demand is email-driven.  In other words, if we took email marketing away, 10% of paid search demand disappears.  Therefore, 10% of paid search demand is immediately allocated to email marketing.

Let's say that our paid search program possesses the following metrics.

• Total Budget = $1,000,000.
• Total Clicks = 2,000,000.
• Conversion Rate = 2%.
• Average Order Value = $100.
• Total Demand = $4,000,000.
• Flow-Through Rate to Profit = 40%.
• Total Profit = $4,000,000 * 0.40 - $1,000,000 = $600,000.

Here's where things get a little bit messy.  You need to know the conversion rate of clicks attributed to catalog marketing, and to email marketing.  Few people possess this knowledge.  Go talk to your analytical gurus, vendors, or Google Analytics ninjas, and have them derive this number for you.

Let's pretend we know this number.

• Catalogs and Email Paid Search Conversion Rate = 2.5%.

Ok, we're making progress now.  Let's calculate the conversion rate for non-catalog and non-email clicks.  First, we know that 60% of paid search demand is caused by catalog and email marketing.  So we subtract that out of the equation.

• $4,000,000 * (1 - 0.60) = $1,600,000.

In other words, $2,400,000 paid search demand is catalog and email driven.  We know that the average order value is $100, we know that the conversion rate is 2.5%.  Therefore, we can calculate catalog/email driven clicks:

• $2,400,000 demand / $100 AOV = 24,000 orders.
• 24,000 orders / 0.025 = 960,000 clicks.

If 960,000 clicks are catalog/email driven, then 1,040,000 have to be paid search driven.

• 2,000,000 - 960,000 = 1,040,000.

Let's run the profit and loss statement for catalog/email driven clicks.

• Total Clicks = 960,000.
• Total Budget = 960,000 * $0.50 = $480,000.
• Conversion Rate = 2.5%.
• Average Order Value = $100.
• Total Demand = $2,400,000.
• Flow-Through Rate to Profit = 40%.
• Total Profit = $2,400,000 * 0.40 - $480,000 = $480,000.

By simple subtraction, we can calculate the impact of paid search, outside of catalog/email.

• Total Clicks = 1,040,000.
• Total Budget = 1,040,000 * $0.50 = $520,000.
• Conversion Rate = (1,600,000 / $100) / 1,040,000 = 1.54%.
• Average Order Value = $100.
• Total Demand = $1,600,000.
• Flow-Through Rate to Profit = 40%.
• Total Profit = $1,600,000 * 0.40 - $520,000 = $120,000.

There you have it.  You just attributed paid search driven orders to catalog and email marketing, and you know what remains.  What remains is still profitable, though it converts at a much lower rate.

Now, you have yourself a dilly of a pickle here.  It's not terribly easy to identify a customer as a catalog/email driven visitor to Google, then make separate decisions based on that information.

Because of that, some of the attribution talk is nonsense.

Let's pretend that the non-catalog and non-email clicks were unprofitable.  You have to have a working relationship with Google that allows you to tell Google, at the time somebody visits Google, that the visitor is catalog or email driven - and if not catalog/email driven, don't pay for the click.

So if you can do that, then the attribution exercise is actionable.

If not, then the attribution exercise is done for knowledge, but is not actionable.

This process, of course, is repeated for all advertising channels.  Demand/Expense are allocated to catalogs and email marketing, with the remainder allocated to each individual marketing channel.

If the remaining marketing channels are shared, most would just allocate fractionally, based on pre-determined rules.  This, of course, is largely hokum, but there is a market where people are willing to pay for hokum-based research, so be it.

Dear Catalog CEOs: Hillstrom's Catalog Attribution

Dear Catalog CEOs:

Many of you are asking about attribution projects.  Yup, I do them, do them all of the time.  A few years ago, this was popularly known as Hillstrom's Catalog PhD.

Today, you generally call the topic "Attribution".  Good for you!

Click on the link below. You'll see how I approach attribution. I lay everything out for you, for free.  If you don't want to do the work yourself, hire me, I outline pricing in the document.  

There's no magic in the document.  All magic comes with a price.

I describe ...

• How I use mail/holdout tests to determine attribution rules.
• How two customers with identical future value have dramatically different catalog value, based on attribution rules.
• The four steps required to predict how many catalogs to send to a customer, annually.
• The contact strategy grades I develop.
• The cost of an Attribution / Catalog PhD program.
• The files I need to complete the project.

Ok, click this link here to obtain a copy of a document that outlines how I approach catalog attribution.

Click here to contact me, so that we can get started on your attribution project.

Frontgate = A Jennifer-Centric Email And Omnichannel Case Study

Let's walk you through the story of Sunday, January 27, 2013, in the Hillstrom household.

An email campaign from Frontgate's Preferred Email Registry arrives.  The subject line, like most out there, is not merchandise-centric, rather, it's discount-centric.

Save up to 60% - Today Only.  Wow.  Better act now.  Take a look at the bottom of the campaign ... there's a portable iPod speaker.  I like speakers!

You can see it down there on the bottom, on the left.  NOW - $199.  I click through the message to the website.

$199, of course, is only 20% off, not 60% off, but it is up to 60% off, so at least the semantics of the subject line please the folks in the legal department.

Here's the problem with Jennifer's generation.  She doesn't trust marketers.  At all.  And I'm a charter member of Jennifer's generation, so I have some concept of her thought process.

What would Jennifer do, when presented with a discount-oriented solution like this?

She'd head out to Google and key in the phrase "frontgate iBlock" and see what happens.  Let's see what happens.

Look at the purple link ... that's the one I clicked on ... the item is available on Amazon.

Let's visit Amazon.

Wait ... what?  $149.00?  And it ships from and is sold by Frontgate?  The same Frontgate that sent a valued member of Frontgate's Preferred Email Registry an opportunity to buy the item for $199.00?

A random non-buyer, an Amazon customer no less, stumbles across the item by accident and enjoys the low price of $149?

Now, if you click through the Amazon link, you are taken to Frontgate, where the item is offered at $199.  What?  How is that fair to the Amazon customer?

I know.  I know.  Somebody is going to say that this isn't anybody's fault, it's just an error in a data feed.  But this still suggests that somebody pays $249, somebody pays $199, and somebody pays $149, at some point ... right?  Why so many games?  Imagine sitting in your office, with a person across from your desk radiating heat off of her face because she feels like she got ripped off at $249 when somebody on Amazon obviously, recently, paid $149 for the same item?  Answer her tough questions.  Have fun.

This is what Jennifer experiences.  $249 becomes $199 becomes $149 becomes $199.  Her whole commerce career is one of mistrust, of dodging land mines in an endless quest to find a fair price.  She's so sick and tired of this that she pre-pays the only e-commerce brand she trusts, Amazon, $79 for shipping and handling expenses that she may never recoup.  We fight back by offering a dizzying array of confusing discounts and promotions.

You don't solve this problem via omnichannel solutions ... by tearing down silos, by linking devices and crossing privacy boundaries, by retargeting, by offering CRM-centric pricing tiers based on statistically derived segments, by opening stores, by teaching every employee to join the conversation on Twitter, by focusing on surprising and delighting best customers, by offering prospects 20% off if they like us on Facebook, by having an app for Android devices, by utilizing responsive website design.  These are all distractions that benefit vendors, consultants, and trade journalists.

We solve problems with fairness, honesty, and integrity.  Why not just offer all customers a fair price?  Why not cut out all of the nonsense?  

Discuss.

Kaley's Knits: Manufacturing Growth Via AOV

We know that new customer acquisition is in the tank, while orders per buyer per year are on the rise.  It sure looks like the Management team at Kaley's Knits shifted focus from new customer acquisition to retaining existing customers.

There are two key metrics to evaluate, when considering orders per buyer per year.  The first is items per order.  Sometimes, when orders per buyer increase, items per order decreases.  What do we see here?

That's what we see here, right?  In late 2012, items per order dropped, from 2.52 to 2.47.  That's a big drop.  Customers are placing more orders per year, but are buying fewer items per order.

How expensive are the items the customer is purchasing?

Look at that!  Since late 2011, customers are buying items at ever-increasing price points. Clearly, Management is trying to encourage the customer to buy more expensive items.

If we multiply items per order by price per item, we arrive at a metric everybody looks at ... average order value!

Average order value is taking off like a rocket ship, since the middle of 2011, growing from $77 per order to $87 per order.

Next week, we'll talk about the ramifications these metrics.  We have enough information here to understand what the Management Team at Kaley's Knits is trying to do.

Hillstrom's Unified Commerce Ecosystem

Thought you might like to see a new presentation titled "Hillstrom's Unified Commerce Ecosystem".  The presentation builds upon the Judy/Jennifer/Jasmine framework, linking existing and emerging marketing channels with big data, omnichannel, and many other trends that folks are talking about.

If you prefer, I have a link to a PDF of the presentation ... click here to retrieve the presentation ... print the fourth page, an image of the Unified Commerce Ecosystem.

I anticipate presenting this information at numerous conferences in 2013 - demand is expected to be high.  If you're a conference organizer, contact me by clicking here.

Time for your thoughts.  What is missing?  What did I say that resonated with you?  What did I say that you believe is completely wrong?

Dear Catalog CEOs: USPS Shutdown, Would You Be Out Of Business?

Dear Catalog CEOs:

By now, you've had the opportunity to enjoy this little ditty about the possibility of the USPS shutting down in 2013 (click here for the article).

I'll bet 22,000 of you relish the thought of 535 Republicans and Democrats playing games while you await the death of your business because of their action or inaction.

And I know, the online folks will chide you for not moving your businesses online - for being dependent on paper, for killing trees - they'll tell you that you deserve this.  Remind them that their day of reckoning is coming ... it's called mobile.

But I digress.

You need to know what happens if your business is destroyed by our Government.  In other words, what the heck happens if you cannot mail catalogs anymore?

Do you know the answer to this question?  What happens if you cannot mail catalogs anymore?

For just $9,950, I'll answer it for you - click here to send me an email - and we'll get started solving the problem.

Here's a catalog brand.  Take a look at the customer file.

Click on the image for more details.  Clearly, this business is stuck, but at least it isn't in terrible decline like so many businesses.

Here's the profit and loss statement for this business.

Now, the business may not be growing, but it is printing money.  The owner is forecast to continue making at least $2.8 million per year, pre-tax.  Who wouldn't love that?  Yes, fixed costs are swamping the business, so the owner better figure something out, long-term.

But that's not what the owner is worried about, in the short term.  The owner is worried about the USPS shutting down.  So she asks me to show her what her business looks like in the next five years, if she's not allowed to mail catalogs anymore.

In order to perform this analysis, I have to figure out the organic percentage for this business, and I have to figure out how many new customers are generated because of catalog marketing.  Both metrics can be easily calculated (that's what I do for a living).

Then, we simulate the five year trajectory of the business, without catalogs.  Here's what the customer file looks like:

Oh oh.

A $32 million dollar business, without a corresponding increase in online marketing activity, becomes an $11 million dollar business.  Nearly half of the loss in volume happens in year one.  Look at new customers labeled as "Judy" 1x (one order) - without a catalog, we go from 13,128 newbies to 2,626.  Now look at newbies classified as "Jasmine" 1x (one order) - without a catalog, we go from 29,687 to 23,750.  The loss of the catalog isn't cataclysmic to Jasmine.

Over five years, the lack of a catalog essentially eliminates the presence of Judy and Jennifer in the business.  This business becomes a Jasmine-focused business, one that is a third as big as today.

That's what not having a catalog does to the composition of the customer file.

What happens to the profit and loss statement?

This is depressing, but surprising.  This company is not out of business.  In fact, for a short period of time, the business is highly efficient, generating 15.7% pre-tax profit ... of course, that's only $2.3 million of profit vs. $3.3 million under current circumstances.  But it isn't the death of the business, in the short-term.

In other words, our owner "has a chance".  If the USPS disappeared, her business would die a long, slow, painful death, but not an immediate one.  There would be time to craft a new business model.

This is the kind of information you must know ... this analysis must be sitting on your desk, for your entire Management team to observe, understand, and act upon.

This is the kind of information you must forward to the American Catalog Mailers Association.  How can you ask this organization to defend your business model without providing them with the appropriate information?

This is a simple simulation.  Find your data analyst, and demand that s/he perform this work for you.

Or hire me ... it's just $9,950, I'll knock the project out in ten days ... click here to contact me right now, this is what I do for a living.

I'm sure you agree ... you have to know this information.  Right?

ACTION REQUIRED FOR CATALOG PROFESSIONALS: NAME YOUR FAVORITE MATCHBACK VENDOR

This is a picture of the Red Cross.  They are in the process of responding to a disaster.

If you had to attribute events that caused the Red Cross to be here, you'd have a challenge on your hands, right?  It would be easy to demonstrate that the disaster gets most of the credit.

It would be hard to show how individual contributions and corporate contributions led to this response.  It would be hard to show how the actions of a Red Cross volunteer or employee led to the purchase of the vehicles, which contributed to the response.

Similarly, in catalog marketing, we have to attribute response.  In the rest of the marketing world, this is called "attribution".  In catalog marketing, catalogers frequently take credit for actions that should be attributed to online marketing ... as a result, the methodology is called "matchback", not "attribution".

There are many matchback vendors.  Often, I'm asked to comment on the strengths and weaknesses of matchback vendors.

Instead of my opinions, let's focus on your thoughts.

In the comments section, please leave an anonymous comment.  Here's what I want you to share.

1. Name of the Matchback vendor you use.
2. Grade you would give their services ... "A", "B", "C", "D", or "F".
3. Tell us what your matchback vendor does best.
4. Any additional considerations.

If you wish to put your name behind the comments, go ahead.  If not, please leave an anonymous comment, and give your thoughts to the catalog community.  Via the magic of search engine optimization, this can become the post that folks look to for your thoughts about matchback vendors.

Kaley's Knits: Demand Up, Newbies Down. How?

If a business is growing the top line, regardless of profit, then growth can only come from a select set of tactics.

1. Increase New Customers.
2. Increase Annual Repurchase Rate.
3. Increase Orders per Buyer per Year.
4. Increase Items per Order.
5. Increase Price per Item Purchased.

We already demonstrated that there is a dramatic decline in new customers.  Let's look at orders per buyer per year.

Hey, we have good news, huh?  Around the time when new customer counts plummeted, orders per buyer per year increased.

Without having knowledge of the marketing strategies employed at Kaley's Knits, I can tell that Management made a shift from spending money on customer acquisition to spending money on customer retention.  The metrics (new customers, orders per buyer per year) move in opposite directions at about the same time (mid-2012).

By the way, it's really tough to get customers to purchase more times per year.  You accomplish this by ...

1. Having outstanding merchandise.
2. Marketing to the customer more.
3. Offering discounts and promotions, like free shipping or 20% off.

In a few days, we'll look at items per order and price per item purchased, as we continue our forensic study of Kaley's Knits.

Getting There

You're standing here, in this field.

Riches are to be had, over there, in the mountains.  Social ... mobile ... local.  A targeted and highly relevant notification on a Samsung phone that will cause you to spend $80 you don't even have because the highly relevant notification was so engaging.

Just one little problem.

It's hard to get there, isn't it?

We're taught to build a bridge to the future.  With three hundred foot pilings and a six lane structure that spans twenty-six miles, we transport our customers from this fenced-in, highly protected meadow to the rugged, mountainous, highly profitable future visualized across the strait.

The minute you build the bridge, two things happen.

1. Many of your customers don't like the bridge, choosing instead to frolic in the grassy meadow.
2. Somebody flies an airplane to the mountains for the customers who want to go to the mountains.  This is a lot cheaper than the bridge you built, rendering your solution obsolete.

Pundits accurately articulate the importance of getting to the mountains.  They cannot tell you how to get to the mountains, and when they tell you how to get there, you fail, because pundits don't know your customers ... only you know your customers.  

Does a 59 year old Baby Boomer want to check in via Foresquare?

Thoughtfully consider whether you fly a few customers to the mountains ... or you build an expensive bridge so that all of your customers can get to the mountains ... or you simply build a new business over in the mountains.

Kaley's Knits: A Problem With New Customers

The twelve-month buyer file is in decline.  And yet, when we look at existing buyers (those with a purchase in the past twelve months, and a purchase prior to that, we see this:

If the existing buyer file is in decline, then first-time buyers (customer acquisition) must be in trouble.  Let's take a look.

Wow.

Clearly, something happened to the new customer acquisition program at Kaley's Knits in late spring 2012, or the trajectory of new customers wouldn't look this bad.

Recall our profit and loss statement?

Look at the marketing cost line.  In 2011, nearly $3.0 million was spent on marketing expense.  In 2012, the total is down to $2.7 million.

I would ask Management what happened to the marketing budget?  Did a change in strategy happen in 2012?  In late spring 2012?  Was it in programs (i.e. search) that disproportionately skew to new customers?

A question for you, dear readers.  How does this business continue to grow the top line, when fewer customers are purchasing, and fewer marketing dollars are being invested?  Are there any metrics you'd evaluate to answer this question?

Dell, HP, and Apple: It's The Merchandise!!

In marketing and analytics, we read breathless headlines.

You know what I'm talking about.

We learn how Big Data will revolutionize our businesses.

We learn how Omnichannel is the strategy of the future, and without it, we're dead (never mind that H/M doesn't even have a US e-commerce website and does billions of sales in-stores each year ... and never mind that Amazon is mulching the in-store experience ... just ignore the facts and go Omnichannel folks, it's HOT right now).

In Social Media, Dell is the sweetheart, and for good reason ... you see, Dell shares findings with the social media community (click here) and (click here).  After reading one of the statements (fans create cash), you might think, "you're darn right fans create cash".  It's an accurate statement, no doubt.

It's just not the company that the social media folks like to study that possesses fans who create cash.

Look at the performance of three computer-focused companies above.

• HP does not excel at social media, based on the comments of the social media elite.  Their five year sales trajectory is flat, profit is a disaster.  Stock prices are down 75%.
• Dell is the social media darling, though their social media success is astroturfed.  Their five year sales trajectory is flat, profit is virtually non-existent, and stock prices are down 25%.
• Apple has no social media presence whatsoever.  Their five year sales trajectory is a rocket escaping Earth's gravitational pull.  Their stock price is four to five times what it was five years ago.  Profit growth is exceeding sales growth.

Apple, without the social media astroturfing employed by Dell, possesses an avid fan base, and those folks spread the word, don't they.

HP - merchandise that customers are not embracing (no social media excellence).

Dell - merchandise that customers are not embracing (astroturfed social media excellence).

Apple - merchandise that customers cannot get enough of (organic, fan-based social media).

Clearly, astroturfed social media can make a difference ... a percentage point here or there.

Clearly, outstanding, must-have merchandise means everything ... and leads to customers/fans who must share their love of the merchandise.

So, if you have a choice ... which route would you take to achieve growth and profitability?

• Merchandise customers are neutral about, coupled with minimal social media activity.
• Merchandise customers are neutral about, coupled with astroturfed social media excellence.
• Merchandise customers absolutely must have, coupled with no social media excellence and customers who must share, via social media, their love of merchandise?

Hint - it's all about merchandise.  Always has been.  Always will be.

And yet, almost nobody in marketing, analytics, omnichannel excellence, big data, or social media talks about merchandise.

Focus on what matters ... merchandise!

Kaley's Knits: Twelve-Month Buyer File Issues

This graph shows the trajectory of the twelve-month buyer file at Kaley's Knits:

Remember, demand increased in the past year, but the housefile was in decline.  Let's look at a rolling twelve month graph of existing buyers (those with a purchase in the past year, and a purchase prior to the past twelve months).

Oh, oh.  What does this graph tell you?

Kaley's Knits: Diverging Metrics

Recall, the profit and loss statement showed top-line growth, but weak metrics below the net sales line.  Let's take a look at demand growth, on a rolling twelve month basis.

What we see is a business that was struggling, then reversed flat growth in the fall of 2011.  Since then, growth has been reasonably robust.  On the surface, things look good.

The next chart I look at is a rolling twelve month analysis of twelve-month buyers.

What do you see?

This business had marginal growth in the number of twelve-month buyers, followed by a significant drop that started in late spring 2012.

The customer file is in decline.  Top-line growth continues.  What do you think is happening at Kaley's Knits?

A MineThatData Minute

We're going to try something a bit different.  It's Tuesday.  Your co-workers are at the NRF conference learning how omnichannel will transform their lives, even though there is no proof whatsoever that an integrated experience across channels causes sales increases on an annual basis.

So take a break, and enjoy A MineThatData Minute (click here to go through to the website to view the video if you're viewing via RSS or Email):

Dear Catalog CEOs: Stubborn

Dear Catalog CEOs:

This is one of my favorite images.

Why?

Because this image tells us more than any trade journal article on omnichannel marketing could ever communicate.

You see, we're stubborn people.  Both catalogers, and the digital marketers purporting a social/mobile/local solution founded on big data.  Both are stubborn.  Terribly stubborn.

The catalog marketer wants to take the two Jasmine-esque individuals in this image, and teach them to love catalogs.  I know this, because you ask me this question all of the time ... "how do I get Jasmine to love direct mail?"  At a recent conference, an individual told me "if I get Jasmine to love direct mail, then I get to keep doing what I love."

The digital marketer wants to take the two Baby Boomers in this image, and teach them to "embrace the future".  I know this, because on Twitter, folks ask me "how do we get a Baby Boomer to embrace Facebook commerce? I mean, they're going to be left behind."

In the real world, we're all climbing into our own little niche-based pods.  The combination of 175 people I follow on Twitter aren't replicated anywhere.  The combination of 175 books you have on your Kindle aren't replicated anywhere.  The combination of 175 paperbacks that somebody has on a bookshelf are not replicated anywhere.  Your friend watches Once Upon a Time on ABC and calls you on a land line to talk about the episode ... meanwhile, 40,000 folks are using a "second screen" to chat about the episode on Twitter ... and you're oblivious to their discussion ... even though they're doing the same thing you're doing, just in the confines of a different niche.

In the real world, we're evolving, fast ... falling into tiny niches suited to our interests.

But in marketing, we're stubborn.  We demand that somebody else embrace what we're offering, and if they won't embrace it, we'll just discount it to the point where we lose money, but you'll embrace us.  

It's pretty obvious now, based on the data, that there are many different paths to the future.

For the cataloger, there's a 5-15 year window where, if we meet the needs of a Baby Boomer (Judy), we'll be very happy.  Tell me why that's a bad thing?

For the digital marketer, there's a 5-15 year window where, if we meet the needs of Jasmine, we'll be very happy before hologram marketing swamps everybody.  Tell me why that's a bad thing?

The bad thing, of course, is "omnichannel".  Instead of wasting so much money, time, and energy doing everything so that you appeal to an 18-88 year old customer, why not do what you love, and attract those who also love it?  Especially for catalog marketers, every dollar spent chasing dreams is a dollar that isn't spent generating profit.

Why be so stubborn?

Seeing The Future

I am a HUGE Green Bay Packers fan.  Hard not to be, when you grow up forty minutes from Lambeau Field.  So naturally, last night was pretty disappointing (click here to see how disappointing it was).

In 2010, the team won the Super Bowl.  In 2011, the team utilized a style of offense that spread the ball across the field to a myriad of outstanding receivers, leading to a 15-1 record tarnished by a home loss in the Divisional Round of the playoffs.

For awhile, late 2009 to mid-2011, the offense appeared innovative and magical ... a hybrid of the West Coast offense that Bill Walsh created and some of the spread concepts that you see in college football, mixed wonderfully by a good coaching staff led by Mike McCarthy.  So, win or lose, you had a certain feeling ... a feeling that your team was innovative, on the cutting edge.  Other teams had to respond to this style of offense.  They had to innovate to compete.

Last night, I felt like my team was on the receiving end of innovation.  A quarterback running for 183 yards?  Unheard of.

Did you see the offense that San Francisco ran?  Some call it a "read option" ... the quarterback reads the defense, then hands off to the running back, runs himself, or drops back to pass.  This causes confusion among the defense, they don't know what to defend ... an outside linebacker can collapse in on a running back, only to leave gaping holes that the quarterback can exploit by running outside of the pocket.

San Francisco runs elements of this offense with Colin Kaepernick.  Seattle runs elements of this offense with Russell Wilson.  Washington runs elements of this offense with Robert Griffin III.  Carolina runs elements of this offense with Cam Newton.

In other words, we're seeing the future ... this is a fairly recent trend in pro football, though the concepts have been used effectively in college football for a long time.

When you see the future, you have three choices.

1. Take your system, double down, and improve it to combat the innovation you see.
2. Convert your system to the new system (i.e. copy).
3. Create a new system.

This brings me to your business.  If you're a cataloger, you're largely being told to convert your system (catalogs in mailboxes) to an omnichannel system (do everything).  By and large, catalogers are not doing this ... catalogers are doubling down ... sure, there's paid search and email and e-commerce and a mobile website, but those are all there to support the catalog.  Catalogers, simply put, have doubled down.

If you're going to convert your system, you better have the personnel to convert it.  You can't take Tom Brady and expect him to run the offense that Russell Wilson runs.  This is a problem faced by catalog brands.  Pundits hound catalogers, demanding that they run a "social / mobile / local" marketing system.  Catalogers, however, do not have the personnel (i.e. customers) to run a "social / local / mobile" system.  If catalogers try it, it won't work ... sure, there will be 50,000 new customers who embrace it, but there will be 500,000 customers who will stop shopping ... your 63 year old rural Vermont customer doesn't want to check in via Foresquare!

Out there in marketing land, startups are doing two things.

1. Converting to the new system ... copying what others are doing, digitally.
2. Creating a new system.

In catalog world, we're pretty much doubling down on our system.

Any of the three strategies can work.

But as a marketer, you have to be able to see the future.  Last night, when I watched my beloved Packers get mauled by San Francisco, I could see the future ... it was an offensive system that utilized an athletic quarterback in innovative ways.  My team, and my quarterback, are not wired to run the new system.  They have to double down, or they have to create a new system.

Are you seeing the future?  What do you see?  How will you respond?