Commerce Nightmares: Sales vs. Profit

Imagine, for a minute, being Mr. Ramsey. You are brought in to fix a restaurant. This restaurant spends a ton of money on marketing, and in return, has a full restaurant every night.

However, the restaurant is not as profitable as it could be. So Mr. Ramsey recommends not advertising so heavily. Mr. Ramsey instead recommends having food that is worthy of word of mouth. The owner hates this idea ... "but our sales will drop".

The CEO I worked for at Eddie Bauer had a phrase "drive sales profitability". He also had a phrase ... "grow or die". Now, I adored this CEO - he was absolutely fantastic. But those two mantras put a business in a tough spot. "Grow or Die" requires staff to do whatever it takes to keep the business moving forward, but usually, those tactics are not profitable, thereby violating the "drive sales profitably" mantra.

Ultimately, you end up with a graph like the one at the top of this post. And eventually, you move so far down the marketing expense line that you are, in reality, much, much less profitable than you could be. So when it comes time to "fix the problem", the business has moved so far down the expense line that a correction brings along an unintended consequence - sales pain. In the example above, profit can be improved from $14 million a year to $24 million a year, but there would be a corresponding drop in (in this case) catalog marketing expense of more than 60%.

Sales and profit issues are cultural. Amazon, for instance, reinvests all profits back into the business, allowing the business to grow rapidly. A company like Nordstrom prints 10% to 15% pre-tax profit, each and every year, and pays shareholders via dividends and stock buybacks. And then, in-between, are 95% of companies, companies that struggle to generate profit, companies that over-invest in marketing to grow sales in an effort to take market share from other companies.

We get ourselves in trouble when we try to do things opposite of the company culture. When I tried to "optimize" the Direct channel at Eddie Bauer (for profit), the culture rebelled against the sales drop required to optimize the business. In fact, most businesses I work with rebel against any drop in sales.

Commerce Nightmares: Sales Forecasting

Have you ever noticed that Mr. Ramsey always changes the menu?

Always.

Gone are the frozen calamari rings, replaced with fresh ceviche.

One of my all-time favorite Commerce Nighmares happened at Eddie Bauer, back in late 1998. You probably remember this time in history because you were either buying a generator to protect yourself against the devastating impact of Y2K, or you remember it because you were day-trading, looking to get rich on internet stocks.

But at Eddie Bauer, in 1998, business was an absolute disaster. I arrived at Eddie Bauer in late 1995. 1996 was a fabulous year, by Eddie Bauer standards (though if Lands' End had performed like Eddie Bauer performed that year, we all would have been fired). In May 1997, the wheels came off the bus, with dying merchandise productivity fueling comp store sales declines. By early 1998, we were posting -10% to -20% comp store sales declines, and our catalogs were bleeding sales out of numerous self-inflicted wounds. In other words, business was tough. 

And when business is tough, people don't get along with each other.

We had a meeting called a "QPM", or "Quarterly Planning Meeting". As Circulation Director, it was my job to put together the demand and catalog expense forecast for the business. In this "QPM", I presented to the 50ish business leaders who ran the Direct channel - I would share how sales would change, and in partnership with Finance, would illustrate how profitable the business would be next year.

These meetings weren't much fun.

In my first year as Circulation Director (1998), I identified a curious problem. Let's look at one item.

• 1997 Demand = $50,000.
• 1998 Forecasted Demand = $60,000.
• 1998 Inventory Purchase = $55,000.
• 1998 Actual Demand = $40,000.
• 1999 Liquidation Challenge = $15,000.

I asked myself, "why was this item forecast to generate $60,000 in 1998, when it only generated $50,000 in 1997?

The answer was simple.

"We had to forecast an increase to meet our budget."

In other words, as sales struggled to achieve potential, the merchandising and inventory teams were pressured to increase demand, in an effort to reverse the sales trend. The "budget", of course, was artificially inflated, to make the profit and loss statement look potentially good. In a "QPM" meeting, then, business leaders avoided being screamed at because they were "stepping up" to generate sales increases.

Never mind that there was no plan to figure out "how" to increase sales.

If Mr. Ramsey heard this story, he might express himself in this manner:

Once I earned accountability for the annual budget, I decided to do something different. I wanted out of this Commerce Nightmare.

Do you want to know what I did?

I forecast the business based on actual customer behavior. In 1999, for instance, our customer file would be 5% smaller, so I started with a 5% sales drop. I did not forecast a merchandise productivity increase. I did not forecast a creative presentation increase (as was customary).

In the past, each department (Merchandise, Creative, Marketing) had to "step up" and take responsibility for a portion of the projected sales increase. You'd see QPM documents with precise estimates for sales increases:

• Merchandise = +4.8%.
• Creative = +3.3%.
• Marketing = +1.9%.
• Total Business Increase = +10.0%.

And then, the business would run -10%, causing a 20% delta vs. plan. Merchants yelled at Marketers. Marketers yelled at Creative. Creative yelled at Merchants. Nobody took accountability.

What do you think happened when I shared with 50 Executives at a QPM that I was not forecasting a sales increase?

The message was not well received.

The Inventory Director and I planned the business conservatively. No need to liquidate merchandise an take a bath on gross margin dollars. No need to artificially inflate the forecast. We simply stated reality.

That's when the yelling started.

It turns out that CEOs who are used to seeing 10% sales increases presented in QPMs are not happy when 0% sales increases are presented in QPMs - even though they given a preview of the information days earlier. I was sitting next to the CEO. The CEO screamed directly in my face, not in a mean way, but certainly in an authoritative way. Spittle from his mouth caromed off of my cheeks. In some ways, I felt like one of the teens in "That 70s Show" as Red Foreman bellowed about some random issue.

1999, it turned out, was the most profitable year in the history of the Direct division at Eddie Bauer. There wasn't a need to liquidate merchandise at low gross margins, because the forecast accurately stated what was likely to happen. Sales were essentially on plan. We just figured out how to properly forecast the business, and we figured out how to manage expenses and gross margin dollars against a reasonable business forecast.

By the way, how many employees in the QPM elected to support me while I was being battered on "spittle island"? Not many, probably not any! Most of my Executive peers were simply happy they were not being yelled at!

I know, I know, it's hard being a merchandising leader. Ultimately, you bear a disproportionate level of scrutiny and accountability. But when you are responsible for a Commerce Nightmare (similar to a restaurant not serving good food), you have to make changes. You can't simply forecast that sales will be better, then keep serving the same old same old.

Even in the middle of a Commerce Nightmare (Eddie Bauer would fail, along with parent company Spiegel just a few years later), you can mitigate problems yourself. You simply have to be willing to let spittle hit you in the face. You have to have the courage to reflect actual customer behavior, prioritizing it over what you wish would happen.

The core issue, as always, is merchandise. Mr. Ramsey always changes the menu. Always. When the merchandising team and marketing team do not have a plan to "change the menu", then you need to reflect sales as they are likely to happen, regardless whether you get yelled at or not.

Kitchen Nightmares

Have you ever watched this show?

Mr. Ramsey visits a restaurant. He doesn't visit successful restaurants, does he?

At a restaurant, the merchandise is the food. Inevitably, Mr. Ramsey finds out that the food is awful. For if the food tasted great, then the restaurant would be full of paying customers, right?

When Mr. Ramsey points out that the food isn't very good, the owner(s) and employees get frustrated. You'll see employees quietly nodding their heads, as if to say, "see, I told you so".

The owner ... well, the owner takes it personally. Very personally. This is where we learn that the food is just fine, that the chef is screwing up or the staff are messing up or the customers simply "don't get it".

Mr. Ramsey gets to see a dinner service. The dinner service doesn't go well, does it? Employees fight, customers send food back, it takes 90 minutes to serve an appetizer, it's action made for television!

Ultimately, problems are identified. It's easy for all of us to see what the problems are.

• Dated menu.
• Bad food.
• Decor from the 1970s.
• Employees who don't like each other.
• Poor processes.
• Poor equipment.
• Filth.
• Mold.
• Trust.
• Owner vs. employee accountability issues.

Eventually, Mr. Ramsey "blows his lid":

Once he blows his lid, it is time for change, it is time for the re-launch of the restaurant. There are several aspects of a re-launch.

• Menu is revamped, and often, scaled way, way back.
• No more frozen foods.
• Fresh food.
• New kitchen processes.

Often, customers love the new food. But the in-fighting, and the internal processes, well, they often reappear, don't they?

At the end of the show, you'll hear what happened to the restaurant in the months after Mr. Ramsey departs. Sometimes, you learn that the owner went back to the old ways. Sometimes, you learn that the staff embraced the changes. Most often, a bit of both happens.

Why am I sharing this with you?

I'm twenty-six years into my professional career. I've decided that many of the situations we all deal with are terribly similar to Kitchen Nightmares. We all, every single one of us, work in our own little version of Kitchen Nightmares ... call 'em "Commerce Nightmares".

Commerce Nightmares can be corrected as easily as Mr. Ramsey fixes the restaurants he encounters. When you are watching an episode, you can easily see what needs to be fixed. Similarly, an outsider can easily see what needs to be fixed within your business. But it doesn't matter that it is easy to see what can be fixed. It's terribly hard to fix problems when the people within the "Commerce Nightmare" cannot see them.

We'll spend the next week or so talking about "Commerce Nightmares". Think about how the stories correlate with your experiences.

The Omnichannel Index

I like to create what I call an "Omnichannel Index". The index measures the percentage of demand that is likely to happen, in stores, in the future.

Take a look at this image.

Notice that the vast majority of the customer base is going to "transact" in stores. You can say all you want about omnichannel strategy, but for this business, the vast majority of the customer base has an 80% or greater chance of spending money in stores next year.

Does this mean that the business is not "omnichannel", whatever that word means?

No.

It means that the strategy employed by the marketing team is fundamentally different than the strategy employed by many marketers. The marketing team must drive customers into the store.

1. Emails should be personalized, obviously, but the core email message is a store message.
2. Home pages and landing pages facilitate the in-store experience. Yes, customers will transact online. But the customer, by and large, wants to transact in a store.
3. Online, the strategy is to acquire a customer. If the customer is acquired online, the goal is to make it as easy as possible for the customer to migrate to store purchases.
4. Mobile becomes more important for this business than for an e-commerce centric retailer.

If you are a cataloger, remove the word "store", and plug the word "catalog" in. You'll get to see what your omnichannel index looks like.

Contact me (kevinh@minethatdata.com) for your own, customized, omnichannel project.

More On Amazon And Inexpensive Products

Take a look here, folks. An SD card loaded up with maps, for $299. Same price online as in store. Free shipping to home or store (the pundits love this stuff). All sorts of wonderful social media integration.

#Omnichannel!

On Amazon, the item cost me $189, no sales tax, free shipping via Prime, arriving in just two days.

What, dear #omnichannel experts, is the customer supposed to do? I know, I know, I get it - you hate Amazon, a company closing in on $100,000,000,000 in annual sales without a retail presence. You love your retail stores. And if your retail stores go under, the whole thing goes under. I get it.

But please be honest. Why should a customer buy this item from a West Marine store (or online at West Marine) when Amazon can hook me up with a vendor willing to sell it for $110 less?

Discuss.

Summer ... And Visits

As you already know, I won't necessarily post every single work day between Memorial Day and Labor Day. So please keep that in mind.

Now, on to today's topic. Here's something from a recent project. I looked at all customers with exactly 3 purchases in the past year, then segmented customers based on the number of measured website visits in the past year. Finally, I calculated the probability of the customer purchasing in the next 30 days. Here are a few data points from that analysis:

• 3 Orders Last Year.
• 6-10 Website Visits Last Year = 29% chance of buying next month.
• 11-25 Website Visits Last Year = 44% chance of buying next month.
• 26-50 Website Visits Last Year = 61% chance of buying next month.

Of course, this is opposite of everything you've been taught. You've been taught to convert that website visitor RIGHT NOW, or you are a failure. You are supposed to follow this customer all across the internet, flashing silly ads featuring the product the customer recently looked at ("your local hardware store is featuring crescent wrenches at 20% off plus free shipping"), or using cart abandonment programs to give 25% off right now.

Basically, you are using discounts and promotions to encourage behavior that was likely to happen anyway. But because you only measure conversion, you don't ever get to see that the behavior was likely to happen anyway.

Get your web analytics data out of your web analytics tool, and analyze customers longitudinally. Or do it within the advanced web analytics tools. But please do it ... please analyze customer behavior longitudinally. Customers have a natural rhythm that we are constantly spending money to interrupt ... we spend marketing dollars to bring a customer back to the website when the customer was going to come back anyway ... and we give away gross margin dollars to get the customer to purchase when the customer was going to purchase anyway.

We've built an entire marketing ecosystem on top of faulty analytics. We happily choose to not analyze website behavior longitudinally. We're paying a hefty tax for not being willing to analyze website behavior longitudinally.

Contact me (kevinh@minethatdata.com) for your own, customized online/retail dynamics project.

Measuring Incorrectly

This chart, one you are becoming quite familiar with by now, outlines how twelve-month buyers use the website as part of an online/retail buying experience.

Want to know something fascinating?

The number of customers in each cell are reasonably equal.

But 40% of all website visits among this audience come from customers in the bottom-right cell.

In other words, when you're measuring customer behavior, be very, very careful! In this case, the bottom-right cell dominates the entire chart. If you don't segment customers appropriately, you'll think every twelve-month buyer behaves a lot like the bottom-right segment of customers.

They Don't Use The Website Much, Do They?

Take a look at the upper-middle customer segment.

• 3.52 purchases last year (that's a good number).
• Most purchases happening in-store.
• 3.8 website visits last year.

This is a customer that simply embraces the retail shopping experience. The website, "digital", if you will, is largely meaningless to this customer segment.

This is not a customer that you should chase all over the internet. This is not a customer that is a target for cart abandonment programs. This is not a customer that you force into a website purchase following an email campaign.

This customer segment is of above-average value, but the customer simply doesn't care about the digital half of the engagement experience. Please craft a retail-centric marketing plan for this customer.

They Visit, They Don't Buy Anything

Look at the lower-left segment. This one is fun to analyze, don't you think?

• 1.1 purchases last year, 2/3 happening on the website.
• 16.8 website visits last year.
• A 15-to-1 visit-to-purchase ratio.
• The customer visits the website once every 22 days (which isn't bad).

This customer segment was least likely to buy in the next month - purchasing only 0.31 times, mixed reasonably close to 50% online / 50% retail.

If there's a place where your attribution work should be focused, it is on this segment. This customer visits the website often, but doesn't purchase often (once a year, on average). This is the place where you are likely wasting significant marketing dollars.

Segment your 12-month buyer file based on retail purchase activity, website purchase activity, and website visitation behavior (go ahead and toss merchandise and channel-based attributes into the analysis as well). You'll be amazed by what you learn!

Contact Kevin (kevinh@minethatdata.com) for your own, customized online / retail dynamics project.

Segments That Do Not Convert

Look at the bottom-middle segment. This one has interesting historical attributes, don't you think?

• 3.3 purchases last year (which is pretty good, actually).
• Mix of website and retail purchases is reasonably close to 50/50 (#omnichannel!).
• 37.3 website visits last year.

In other words, this customer visits the website 11 times for every 1 purchase, with nearly half of the purchases happening in-store.

In the future, this customer is not likely to buy - but very likely to visit.

This is the kind of traffic you probably don't want to pay for. The customer is visiting all the time, but is not buying anything (in the next month, this customer visits 4.8 times, but purchased 0.47 times ... maintaining a 10-to-1 or 11-to-1 visit to purchase ratio).

We'll be tolerant of a customer who visits 100 times a year and buys 13 times a year ... this is an amazing customer, we'll take her garbage out to the curb on Friday morning if necessary.

Analytically, however, we want to pay close attention to customer segments that visit often but buy infrequently. When an existing customer, after adding retail purchases into the mix, buys infrequently and has an 11-to-1 visit-to-purchase ratio, we need to look much deeper into the motives expressed by this customer segment. Is the customer looking for discounts? Promotions? Clearance merchandise? Please research what this customer purchases when she finally does buy something. Look carefully at the pages and merchandise viewed online, or via mobile.

An Average Customer

Look at the customer in the center segment ... this customer is as average (probably above-average) as customers come for many retail-centric brands.

• 3.5 purchases last year, the majority happening in-store.
• 9 website visits last year, one every six weeks.

If you count the retail purchases, then the assumed conversion rate is 3.5/9 = 39%.

When you segment customers appropriately, when you add retail purchases to the mix, and when you measure conversion over time, you get a different story - a far different story - than your typical web analytics package measures.

For this retail business, the customer buys something every two-and-a-half months. When the customer buys something, the customer visits the website 2.6 times before buying, then purchases something, 2/3 of the time in-store.

Since the behavior is consistent and repeatable (and usually happens in-store), do we really need to hound this customer with retargeting efforts, cart abandonment programs, discounts, promotions, and other margin-eroding nonsense? Or do we simply let the natural rhythm of this segment's behavior generate $60 of gross margin on a $100 purchase?

Merchants love gross margin.

CFOs love gross margin.

Gross margin allows you to keep your job.

Try taking a longitudinal view of customer behavior, not a conversion-centric view of customer behavior. You'll find that, often, you're giving margin dollars away to drive behaviors that are going to happen anyway. What a shame.

Contact me (kevinh@minethatdata.com) for your own, customized online / retail dynamics project.

Measuring Conversion - We Mess It Up All The Time

The upper right segment buys 14 times a year (almost always in-store), and only visits the website 21 times a year.

The lower right segment buys 13 times a year (more often online than in stores), and visits the website 100 times a year.

Shouldn't the strategy for each segment be different?

That first segment ... your web analyst will tell you that the customer "doesn't convert". Then the marketing team will start throwing money at this customer ... 20% off ... 30% off ... free shipping ... gift with purchase. But in all honesty, the customer converts at a 67% rate, with most purchases in stores.

• Analytics and Marketing Teams view this customer as a digital failure.
• This customer is an amazing, highly profitable customer.

Look at the second segment. The customer visits your website every three days. Why do we bore this customer to death with the same home page for fifteen days of the month? The customer will see the home page five times before it changes! And just as important ... this customer buys once every four weeks ... that's an amazing rate ... and yet, your web analyst and marketing expert will say that this customer doesn't "convert" ... and as a result, will start throwing money at this customer ... 20% off ... 30% off ... free shipping ... gift with purchase.

A little bit of measurement patience and cross-channel measurement discipline completely changes our view of each of the two customer segments outlined here. Stop wasting company money and gross margin dollars demanding that the customer convert according to your rules!

Contact me (kevinh@minethatdata.com) for your own, customized Online / Retail Dynamics project.

Omnichannel Customer Behavior

I call this a "Online / Retail Dynamics Map".

The analytics methodology yields nine customers segments (for customers who purchased in the past year ... in-store or online ... and have visited the website at least one time in the past year).

The highest value customers are outlined on the right-hand column. The most valuable customers are in the upper-right cell. Look at their characteristics.

• Purchased more than 14 times in the past year ... these customers are buying something every 26 days.
• They only visited the website 21 times last year. In other words, these customers know what they want, and they go get it.
• 12.4 of the 14.1 purchases happen in-stores. Basically, these customers visit the website every 17 days, buying every 26 days. Again, these are not browsers - these are outstanding customers who simply get the job done. If you're measuring engagement, you might be frustrated with these customers, since you don't get to see the fruits of your labor given that the purchases happen in stores.

Let's compare this customer segment to the lower-right cell in the table.

• Purchased 13.3 times in the past year ... these customers are buying something every 27 days ... very similar to the upper-right segment.
• These folks visited the website 100.3 times in the past year ... once every 3.6 days ... essentially twice a week. These customers are obsessed with this brand. OBSESSED!
• 7.8 of the 13.3 purchases happen online. These are true #omnichannel customers ... the kind of customer you keep reading about in trade journals ... the kind of customer you keep hearing about at conferences.

Both of these customers have similar historical value, and both have good future value. However, the customers exhibit very different behavior, don't they?

• Upper Right = 14 purchases for every 21 website visits, retail-centric customer.
• Lower Right = 13 purchases for every 100 website visits, omnichannel customer.

Let's stop here for today. Please think about how you currently market to each of these customer segments (because you, too, have similar segments). Please think about how you should market to each of these customer segments.

And email me (kevinh@minethatdata.com) if you want to understand how online customers interact with your retail or catalog business.

Webrooming Nonsense

Look at the heading for the "Top Story":

That'll get page views, which means the folks at Shop.org get paid by the folks at Kronos.

Of course, we want customers to "webroom" ... within our "brand". Right? Right??

Ten years ago at Nordstrom, my team proved that "webrooming" was a very, very good thing. Ten years ago! Those folks were way, way ahead of the curve.

At Nordstrom, customers visited the website 3 times a month, they visited the store 2 times a month, and they bought 1 time a month, with 85% of the purchases in-store.

In other words, our customers were "webrooming" all the time ... every 10 days, in fact (and we'd be naive to think they weren't webrooming with Neiman Marcus and Macy's and Banana Republic and dozens of other businesses ... that's life). These customers seldom converted online - they researched online, then bought in the store.

Webrooming is not a problem. Webrooming is exactly what you want. You want a customer who loves your business so much that they visit your site all the time ... you simply don't care if the customer visits 20 times between purchases, as long as the customer purchases something!

In a recent project, I learned that each unconverted website visit (in the past 30 days) increased the odds of a customer buying from the website next month by 10%, and in stores by 4%.

Each visit.

What if the customer visited four times last month, and did not purchase?

• A 40% increase in direct channel buying probability next month.
• A 16% increase in in-store buying probability next month.

Webrooming! It's a good thing!

I think we're measuring things wrong. We have customers, customers who are at different stages of a relationship. By measuring engagement (page views) and by measuring conversion optimization, we miss a larger truth about customer behavior.

On and off, over the next two months, I'm going to present a segmentation strategy that illustrates that unconverted website visits are simply part of the customer relationship. There's a reason that mobile converts poorly. There's a reason customers visit the website then buy in a store. There is a reason why email marketing appeals to a small fraction of the customer base, enabling you to save a fortune in other marketing expenses across the email buyer file. We're going to learn that we don't care if a customer visits the website 10 times and then buys 1 time in a store.

In other words, we're going to learn to re-evaluate our metrics surrounding conversion "success". Come along for the journey!

An Open Letter To Catalog CEOs From Don Libey

Recall yesterday's post (click here). I asked for email feedback. If you have valid and interesting feedback, even if your feeeback 100% disagrees with my thesis, please forward it to me (kevinh@minethatdata.com). If the response is well written and offers reasonable and new insights, I will reprint it on this blog.

One of the responses came from Mr. Don Libey. With his permission, I am reprinting this for you to read.

Dear Catalog CEO:

I have been an advocate for you—the catalog entrepreneur—for over 35 years. I’ve managed or owned over 30 different catalog brands; made contributions to education with the former DMA of “the day” that benefited your ability to grow and prosper; taught over 30,000 people worldwide through my NCOF, DMB and private seminars on catalog marketing, RFM and strategic planning; was a founder of the American Catalog Mailers Association (ACMA) and even had the pleasure of naming the organization; sat on the boards of dozens of large catalog companies in the US and Europe; written 17 books and hundreds of articles for the catalog industry; created a couple thousand successful catalog products; and been an advisor and M&A intermediary for hundreds of catalog companies and a lot of deals. I am an experienced, wily, catalog silverback who is still advising and growing companies because I care about them.

After all of that catalog experience, I have read—for the first time ever—the most rational and common-sense solution to the enormous problem that Kevin Hillstrom has so accurately diagnosed. I was there when the co-op databases were born and the handwriting was on the wall from day one: you—the catalog owner and CEO—would wind up with a greatly weakened customer database and you would pay dearly over time for diminishing performance. Everything Kevin Hillstrom has said in his prescient article of May 12, 2014 is absolutely accurate and true. Deny the validity of his futurist vision and you will surely experience further margin erosion and the end of your era.

Hillstrom has presented a solution: a cooperative solution putting you in control. It is the first innovative, common sense solution I have seen since the 1990s when a few catalog people began thinking about how to influence the postal “partner” and the force that was to ultimately become the ACMA was given birth. The great weakness of our catalog industry has always been our independence and our inability to create our own “special interests” to benefit our catalogs.  It takes time, energy and a lot of money to have a place at the American business table.  The catalogers have always been 20,000 individual, small businesses operating alone and in secret; now, you are far fewer in number and you are weak.  What you have reaped is the result of that insular history and innate cheapness.

Don’t shoot the messenger, however. I have no relationship or business interest with Hillstrom, but I do know the truth when it is described by someone with honest vision, and I also recognize the BS when “trusted partners” speak. Whether you or any of the “trusted partners” that are using you for their survival have the cojones to admit it or not, Hillstrom has clearly seen the inevitable future and is the only one I know—anywhere in the world—who is willing to tell you the truth and sound the alarm.  Either you change your business model and reclaim your advantage or you are doomed to irrelevance. Your “trusted partners” are already picking your bones.

Don Libey

Catalog Advisor and Intermediary

Libey LLC

Ocala, Florida

www.libey.com

Dear Catalog CEOs: Who's On Your Side?

Dear Catalog CEOs:

The USPS will deliver on Sunday for Amazon, helping make life difficult for you. FedEx will charge you more for box size, but let Amazon negotiate a better deal (click here).

Yes, I know, you're going to dive in and "pretend to be strategic", figuring out how to deal with FedEx and UPS and USPS ... your "trusted partners".

Meanwhile, your trusted partners are using you, and profiting from you. They're using you in so many ways.

FedEx uses you to generate profit, profit they can then pass along to Amazon. You pay more so that Amazon can pay less, so that your customers can choose Amazon.

Why do you continually tolerate this? Why do you let your trusted partners stick their thumb right into your eye?

You have a small handful of major partners.

• FedEx / UPS - you kind of need them to deliver merchandise, right?
• USPS - Raising prices, giving preferential treatment to Amazon (Sunday delivery).
• Paper / Printers - constraining supply - locking you into agreements that greatly limit your circulation flexibility. I had somebody recently tell me that they couldn't make circulation changes for the next six months because they were locked into paper for six months. Another individual told me that their printer, their PRINTER, told them not to go with anything smaller than a 64-68 page catalog, because that page count was "optimal". Optimal for who, the printer? Stop it!!
• Abacus - passing your information into the Big Data ecosystem so that they can generate profit in the digital economy while dramatically aging your customer base.

Your partners are using you for their survival. They have to.

Who is looking out for your survival?

Have you thought, at all, about how silly your business model looks right now?

1. Your trusted partners are all figuring out how to charge you more so they can survive/thrive.
2. You are figuring out how to charge customers less (20% off or 30% off plus free shipping) so you can compete?

Do you understand how hard, mathematically, it is to survive when your trusted partners are charging you more, but you are asking your customers to pay less? 

I mean, are we even capable of doing simple math anymore?

Some of you criticize me, because I am telling you to not mail catalogs to Jasmine ("he's telling catalogers to mail less, he's an idiot") ... I mean, I easily find ways for you to generate a million dollars of incremental profit a year (does FedEx do that for you) and yet, some of you find my approach offensive ... but you happily support FedEx / UPS / USPS / Abacus / Printers / Paper Reps / legacy catalog vendors.

Look at the Epsilon (Abacus) home page, as of Saturday (two days ago):

Go ahead and take a look at Epsilon's blog (click here, I'll wait for you):

One of their thought-leadership focused articles was titled "tweet your way to relevance".

Did you read the "tweet your way to relevance" article? Oh, that was a thing of beauty, alright. Let's think about this one for a moment.

• You give Abacus your most valuable asset, your customer data, to Abacus, FOR FREE. They don't have to pay to get access to your data.
• Abacus, in kind, CHARGES YOU MONEY for access to data you and your partners gave to Abacus FOR FREE.
• Do you think that the relationship described above is profitable to Abacus/Epsilon? Oh yes.
• Abacus then spins you 60 year old customers - customers that will in the next decade put you out of business as they retire and stop spending money. Thanks, Abacus.
• Abacus transmits your FREE customer data into Epsilon's BIG DATA ecosystem where, guess what, they sell the information to Twitter and advertisers on Twitter. The data is overlaid on top of social/mobile information, helping Twitter and advertisers on Twitter.

We give an asset to a vendor for free. The vendor sells the asset back to us, and we willingly pay for access to the asset. Then, the vendor sells our data to Twitter and advertisers on Twitter, allowing the vendor to earn profit two ways from data we willingly give to Abacus for free.

We will pay FedEx extra money to pay to have our packages shipped. FedEx, in return, negotiates better rates with Amazon, allowing Amazon to deliver packages faster and cheaper, allowing Amazon to have a better value proposition, allowing Amazon to have a better value proposition for our customers than we can offer.

Who is on your side?

What we need is a database provider that is on our side - a hybrid database provider, co-op, and negotiating advocate. Something like this:

• We pay a one-time-a-year fee, somewhere between $25,000 and $100,000 a year (or whatever is needed to fund the database).
• You pay $0.01 per name from the database.
• You are paid every time your names are pulled from the database. If your names are amazing, they'll get pulled often, and you'll make list income.
• Only catalogers could participate - you have to be a cataloger contributing names to buy names, and to get paid when your names are selected. Yes, I get it - this will be a problem because all catalogers will simply toss 60 year old names at each other - but that's already where you are at today.
• Full transparency - you pick the names, or you let a model pick the names for you. The converse, of course, is that you are accountable. You pick the names, and if the names don't work, it is your fault, because you are picking the names. You are given a menu of attributes (actual & modeled) that you pick from.
• Full transparency in reporting - you get to see how this living, breathing catalog ecosystem behaves. If it gets stronger, you see it. If it gets weaker, you see it, in real time.
• You get to see how often your customers are selected/mailed. 
• You get to select based on how often customers are selected/mailed. 
• You get to see the merchandise preferences of the customers you select. 
• You get to pick age cohorts and/or personas (Judy, Jennifer, Jasmine). 
• You get to pick by marketing channel (mail/phone/catalog, online matchback, online marketing).
• You get to overlay the information on your housefile, and you get access to a proprietary algorithm that tells you the optimal number of catalogs to mail to the customer, on an annual basis. This optimal number of catalogs changes dynamically, as your catalog peers at other companies make their mailing decisions.
• Your data does not get passed along into the BIG DATA borg - it's a database by catalogers, for catalogers. When it fails, it fails because cataloging fails. When it succeeds, it succeeds because catalogers succeed.
• Because this is for catalogers - catalogers would have negotiating power. Say you had 2,500 catalogers in this database, generating ten billion in annual sales - would folks not want to negotiate with you as a unified front? FedEx / USPS / UPS? Would a paper rep not give you, as a collective group, a deal? Would your printers not give you, as a collective group, a deal? Would Clario or CohereOne or Merkle not give you, as a collective group, better terms?
• Would you not, in this situation, flip the competitive balance in your favor, to some extent?

What do you think of a this idea? Would the person creating this business model be on your side? Absolutely! Would you participate? Please tell me your thoughts (kevinh@minethatdata.com). 

Channel Differences

When you run a Merchandise Forensics analysis (click here for the booklet), you learn that merchandise does not sell at the same rate across channels.

Each channel has a specific purpose. This purpose is not well understood by the omnichannel community.

Let's go way back to the late 1990s, at Eddie Bauer. If we were selling a shirt, we found that core sizes sold well in physical stores, while extended sizes (2XL, XLT) sold exceptionally well in catalogs and online.

Some in the omnichannel community demand that you sell the same merchandise in all channels - they tell you that the customer "demands" that you sell the same merchandise in all channels.

Others suggest that you use stores as digital distribution centers - when the 2XL size is not carried at the Northgate store in Seattle, you fulfill it from Bellevue Square.

Ignore the tactics and opinions. Follow the customer.

A well-done Merchandise Forensics project illustrates unique customer differences across channels. I routinely find that each business possesses unique behavior - behavior that is different than what you are taught when reading trade journals, research reports, different from what you learn at a conference. Merchandising data by channel tells you, rather clearly, what your channel-centric strategy should be.

Or contact me now (kevinh@minethatdata.com) for your own, customized Merchandise Forensics project.

The Leaking Profit Bucket

In 1994, there was variable profit, and variable profit was good.

• The customer spent $100.
• The item cost $40.
• The customer spent $15 to ship the item.
• It cost $10 to ship an item.
• The company spent $20 in marketing cost (catalogs) to generate the purchase.
• The company generated $50 variable profit.

In 2004, there still was variable profit, but there was less of it.

• The customer spent $100.
• The item cost $40.
• The customer spent $15 to ship the item half the time, got free shipping the other half of the time, generating $7.50 of income for the company.
• It cost $10 to ship an item.
• The company spent $20 in marketing cost (catalogs) to generate the purchase.
• The company spent $3 on paid search to generate the purchase.
• The company generated $34.50 variable profit.

In 2014, things are certainly spinning out of control.

• The customer spent $100.
• The item cost $40.
• The customer spent $0 to ship the item due to a free shipping promotion.
• It cost $10 to ship an item.
• The company spent $15 in marketing cost (catalogs) to generate the purchase.
• The company gave up $20 due to a 20% off promotion.
• The company spent $3 on paid search to generate the purchase.
• The company spent $1 to pay affiliates to send the order back to the website.
• The company spent $1 on email marketing to send six blasts a week.
• The company spent $1 on retargeting fees to facilitate the order.
• The company spent $1 with Facebook to create awareness among "fans".
• The company generated $8 variable profit.

Yes, of course, this is an exaggeration. It's designed to get you to think. 

Please think about what you're doing. We're in a world where there appear to be three options.

1. Proprietary Merchandise that yields a premium price and healthy gross margins.
2. A race to the bottom, where, as always, there can only be a handful of winners.
3. Pricing games that allow a "brand" to only give away the farm to smart customers, generating all profit from uninformed customers.

Which option represents your business?

Take The Great Catalog Marketing Quiz!

Time for a little fun ... take the following quiz ... answers and grading are found at the end of the quiz.


Question 1: Are you ...

1. A merchant who uses catalogs to sell merchandise to customers.
2. A cataloger who uses merchandise to keep mailing catalogs.

Question 2: How old is your average customer?

1. Under the age of 55.
2. Age 55 or older.

Question 3: Do you take existing catalogs, change the cover and back page, then "remail" the catalog to the customer?

1. Yes.
2. No.

Question 4: When a customer purchases online, what do you do?

1. Match the order back to a catalog.
2. Dig into the marketing channels that caused a purchase, looking to optimize the marketing mix.

Question 5: When business is down 10% to plan, who gets the blame?

1. The person who created the plan.
2. The catalog.
3. The online marketing team.

Question 6: Your paper rep and your print vendor is ...

1. A trusted advisor.
2. A paper rep or a print vendor.

Question 7: When your co-op creates a new model, do you ...

1. Enthusiastically test the new model.
2. Question your co-op how they are using data from the new model to sell digital solutions that integrate your data with social / mobile activity from other companies.

Question 8: When a catalog is in-home on a Monday, do you ...

1. Measure catalog performance on an hourly basis.
2. Wait patiently for a month for results.

Question 9: Do you measure the profitability of your online marketing activities with the scrutiny that you measure the profitability of your catalog marketing activities.

1. Yes.
2. No.

Question 10: You probably have a report that tells you how many new customers you acquired in the past year. Do you have a report that tells you how many new items achieved best seller status in the past year?

1. Yes.
2. No.

Question 11: You have three managers. Which manager is most likely to be promoted to the Vice President of Marketing position next year?

1. Manager of Catalog Circulation.
2. Manager of Online Marketing.
3. Manager of Mobile / Social / Community Strategies.
4. We don't have a Manager of Mobile / Social / Community Strategies.

Question 12: When we attend NEMOA, we attend NEMOA because ...

1. Of the parties and the people we get to see.
2. Because the content is better than what you see at Shop.org, Internet Retailer, or the DMA Conference.

Question 13: If the cost of postage were to increase by 15% in 2015, what would you be most likely to do?

1. Yell about how messed-up our Government is, then accept the cost increase as a "cost of doing business" while publicly stating that the USPS is putting you out of business.
2. Re-engineer the catalog strategy with fewer pages per contact, less circulation in prospecting, and reduced circulation to marginal housefile customers.
3. Move toward an online-marketing-centric business model.

Question 14: What is your "go-to" source for new customers?

1. Online Marketing.
2. Co-Ops.

Question 15: If you spend a half-hour in a one-hour meeting talking about catalog marketing issues, how much time do you spend talking about email marketing issues in the same meeting?

1. A half-hour.
2. Five minutes to a half-hour.
3. Less than five minutes.

Question 16: Which website are you more likely to frequent?

1. DMNews.
2. re/code.

Question 17: Which strategy is most appealing to you?

1. Adapting your merchandising assortment to aging baby boomers.
2. Adapting your merchandising assortment to appeal to the children of baby boomers.

Question 18: What is more important to you?

1. The merchandise featured on the first spread of the catalog.
2. The merchandise featured on your home page.

Question 19: What is more important to you?

1. Deciding whether a catalog will be 64 pages, or 68 pages.
2. Deciding what merchandise to feature on key landing pages.

Question 20: In the future, a cataloger will ...

1. Convince today's 45 year old shopper on Amazon to embrace catalog marketing.
2. Evolve and change.

Ok, go ahead and tally up your point total ... here are the points earned per response.

Question 1: 1 = 5 points, 2 = 0 points.

Question 2: 1 = 5 points, 2 = 0 points.

Question 3: 1 = 5 points, 2 = 0 points.

Question 4: 1 = 5 points, 2 = 0 points.

Question 5: 1 = 0 points, 2 = 5 points, 3 = 2 points.

Question 6: 1 = 5 points, 2 = 0 points.

Question 7: 1 = 5 points, 2 = 0 points.

Question 8: 1 = 5 points, 2 = 0 points.

Question 9: 1 = 0 points, 2 = 5 points.

Question 10: 1 = 0 points, 2 = 5 points.

Question 11: 1 = 3 points, 2 = 2 points, 3 = 1 point, 4 = 5 points.

Question 12: 1 = 5 points, 2 = 0 points.

Question 13: 1 = 5 points, 2 = 2 points, 3 = 0 points.

Question 14: 1 = 0 points, 2 = 5 points.

Question 15: 1 = 0 points, 2 = 2 points, 3 = 5 points.

Question 16: 1 = 5 points, 2 = 0 points.

Question 17: 1 = 5 points, 2 = 0 points.

Question 18: 1 = 5 points, 2 = 0 points.

Question 19: 1 = 5 points, 2 = 0 points.

Question 20: 1 = 5 points, 2 = 0 points.

Now, how many points did you earn?

• A = 90 or more points. You are a die-hard cataloger who will defend your craft to the last days of catalog marketing. You have a set of skills that are likely unparalleled in today's marketplace. You should have your own exhibit at the Catalog Hall of Fame, located just outside of Rutland, Vermont.
• B = 80 to 89 points. You are a strong cataloger who thoroughly believes in the craft. You are going to adapt to changes by finding ways to make catalogs relevant.
• C = 70 to 79 points. Your catalog marketing passion is very high, but you have a toe in the online marketing world. If anything, you might be labeled an "omnichannel" marketer, with catalogs at the core of the customer experience.
• D = 50 to 69 points. Still a catalog marketer at your core, you can clearly see that the world is changing, and you are interested in taking your company and customer on a journey into the future.
• F = 0 to 49 points. You are a marketer, not a cataloger. You care about merchandise, selling, and profit.

How did you do? Why not leave a comment with your score, and your opinion of the quiz?