February 22, 2015

The Co-Op Feedback Loop - One Final Time

It's the story of 2015 among catalogers.
  • "Our housefile performance is reasonable, but our co-op customer acquisition efforts are bad. Really bad. And nobody in the vendor community seems to care."

I've been asked by clients to visit the co-ops, to help the client get the productivity needed to move the catalog needle once again. I've been told that when clients talk to the co-ops, with the notable exception of Wiland (keep that in mind), they get nowhere, even when they demonstrate that co-op productivity is down 10% to 30% vs. 2013, and 2013 was frequently down vs. 2012.

Do you realize that I've been talking about the co-op feedback loop for nearly nine years? In two weeks, this blog turns nine years old. I have consistently discussed the negative ramifications of the co-op feedback loop with you ... over and over and over and over and over again.

There's a direct correlation ... the more I talk about the negative impact of the co-op feedback loop, the more you shift your customer acquisition activities to the co-ops.

So I am going to outline the co-op feedback loop one more time. Once more. After today, I'm done. I have about 10,000 uniques who see at least one bit of my content on a monthly basis - clearly the majority of the catalog industry has read something from me over the past nine years outlining the problem. 

Obviously, you are entertained by what I say, as demonstrated by record readership levels, but most of you do the opposite of what I recommend. So I, too, am now going to do the opposite. I am going to stop talking about it. If most of you consistently do the opposite of what I recommend, then maybe you will, as an industry, finally address the problem if I stop trying to address the problem.

Here it is, the co-op feedback loop, for one final time. Soak it in. Bookmark this post (click here for the url), so that you can refer to it in 2025 when co-op response has been down at a compounded 20% rate for ten consecutive years and you cannot afford to use them anymore and have no way to acquire new names because your core customer is 78 years old.
  • In 1995, co-ops were a great idea, because the average catalog shopper was around 40 years old. Catalogers struggled with the concept, and did not fully embrace it.
  • In 2005, the co-ops were already past their prime, with an average catalog customer being +/- 50 years old, and Google / Amazon were undercutting the co-ops, fully owning customers age 35 and younger. However, catalogers were fully embracing the co-ops, and in the process, drove the catalog list industry into extinction.
  • In 2010, with an average catalog customer being +/- 55 years old (often much older) and co-ops now fully owning the customer acquisition process for catalogers, a terrible dynamic took over.
  • The dynamic:  Co-ops sent catalogers 55+ year old customers. These older Baby Boomer shoppers loved a specific set of merchandise ... merchandise that older Baby Boomers loved, of course! As a result, your merchandising teams responded to what older Baby Boomer customers were buying, and made sure plenty of it was in the catalog. Then, you sent the names of customers who purchased this merchandise back to the co-ops. The co-ops modeled their names, found that older Baby Boomer customers were most responsive, and sent you even more older Baby Boomer names. Your merchandising team observed that older Baby Boomer names loved more merchandise desired by older Baby Boomer names, and fundamentally shifted the assortment away from what a younger customer would ever consider buying. As a result, online, younger customers had terrible conversion rates when visiting your website, because they didn't want to buy what Grandma and Grandpa liked to buy. Where online conversion did exist, it existed among catalog source coded names, and it existed on merchandise that older Baby Boomers loved to purchase. So catalogers sent these responders back to the co-ops. The co-ops, meanwhile, were being starved of younger customers by Google / Amazon, and increasingly, Facebook. The co-ops could only send older Baby Boomer customers to catalogers, because that's who catalogers sent to them. This is a tough nut to crack for co-ops, too.
  • The co-op feedback loop was in full force, beginning in about 2010.
  • Today, in 2015, the co-op feedback loop has damaged both catalogers and the co-ops. I am not certain that catalogers and/or co-ops can get out now. I think it is too late. The cataloger can get out by using a bridge merchandising strategy coupled with online marketing tactics. The co-op cannot ever get out.
  • With the audience limited to older Baby Boomer customers, and with remaining catalogers aggressively targeting the co-ops (no other choice), response rates began to swoon.
  • With response in free fall in late 2013 and through most of 2014, the feedback loop is about to chew up both the co-ops and catalogers. Both sides are about to experience unfortunate long-term productivity declines that could have been avoided had action been taken five to ten years ago. There will be short-term gains, from time to time, but the long-term trend is not looking good. Go look at your productivity metrics from 2005 - 2014, trend the co-op numbers, and tell me what you see. Be honest.
  • No matter how hard your co-op models names for you, the problem cannot be reversed long-term, because the names are too heavily skewed to older Baby Boomers and are now over-contacted by catalogers using the co-ops, driving down response.
  • The only way (my opinion - your mileage will vary) to reverse engineer the problem is for catalogers to apply a bridge-merchandising strategy, identifying similar merchandise that young Baby Boomers and Gen-X appreciate, selling the merchandise via online marketing. This is a long process, a risky process, and a process that will not help the co-ops anyway, because the names are all part of a mass online ecosystem.
  • In case you were wondering, the Amazon / Google / Facebook ecosystem is about to be obliterated as well, by a yet-to-be-determined mobile ecosystem ... their dependence upon Jennifer / older Jasmine is shutting out younger Jasmine / Jadyn. Nature has a funny way of revealing fundamental truths to marketers.
That, my friends, is the co-op feedback loop.

And I'm done talking about it.

I know, I know, you're asking me, "Kevin, what else can you write about to entertain us, and when we finally cannot take it anymore, how will you help us get out of the co-op feedback loop?"

There is a core problem that most catalogers, e-commerce marketers, and retailers need to deal with. This core problem overrides what is happening with the co-ops, it overrides the pay-to-play structure that has overwhelmed conferences that give you non-stop vendor-centric messaging. The core problem explains why when you ask your co-op to help improve catastrophic response declines you instead get no assistance and are told to be more omnichannel or to trust the models or to work with boutique agencies that "get it" or are told that it is your fault because your merchandise stinks (even though housefile names are performing just fine).

The core problem is vendor accountability vs. employee accountability.

See, in 1995, I worked at both Lands' End and Eddie Bauer. The direct marketing department would have averaged about 24 people, between the two companies. Almost all tactics were managed in house.

In 2015, at comparable companies, you'd have maybe 8-10 employees, and the 8-10 employees would manage 20 different vendors, maybe more. In other words, your modern direct marketing team is comprised of more vendor staffing than in-house staffing.

With your 8-10 employees, when performance is bad and the employee refuses to help you, you fire the employee and find somebody more talented and more cooperative. You have control.

With your 20 different vendors, when performance is bad, do you have any control over the employees working for the vendor? No. You have no control. At all. If a co-op employee tells you to trust the models, well, you're stuck. There are only four big co-ops, and you're already in all four, so what exactly are you going to do? You're not going to leave the co-ops, and you're unlikely to be able to fire the folks who are not giving your account attention.

In other words, you've lost control. You outsourced pay-per-click, you outsourced your database, you outsourced all customer acquisition to the co-ops, you outsourced email to an email service provider, you outsourced housefile planning and circulation strategy and merchandising analytics to a boutique agency. Every one of those decisions was probably a good one at the time, when made individually. In total, however, your decisions represent a catastrophe. These folks, your vendors, they control your future. Not you. You don't control your future. They control your future.

How, exactly, do you get all 20 of the vendors on the same page, doing exactly what you want, 24/7/365? Go ahead, tell me how?! How much time do you, personally, spend with the modeler in Denver working on your co-op models, for instance?

This, my dear readers, is the core problem.

I'll bet you can lose your job when your company isn't profitable. Your vendor employees, well, they lose their job when their company isn't profitable. Do you see the conflict of interest there?

This is the core problem.

Going forward, I'm not going to single out the co-ops, or anybody else. Instead, I am going to focus on vendor accountability. Vendor accountability is the true problem you're vexed by. You don't have a credible way to nudge a vendor down the path that is most beneficial to your business. Vendors, however, have an entire ecosystem of trade journalists, pay-to-play relationships, consultants, and conferences to nudge you down the path that is most beneficial to their business model.

You want an example?
  • Did you get an email from a printer or paper rep when JCP decided to mail one (1) catalog, an email "proving" that catalog marketing is back in vogue?
  • Did you get an email from a printer or paper rep when SkyMall went bankrupt, an email lamenting that catalog marketing is dying?
Vendors have an entire ecosystem designed to nudge you down the path that is most beneficial to the vendor business model. Your job depends upon bending that system into a system designed to be most beneficial to your profitability.

Tomorrow, we begin the process of holding your vendors, of which there are more individuals working on your issues at vendor brands than within your entire in-house staff, fully accountable for your business performance. It won't be easy. But I've used a system in the past, a system that was highly successful at Nordstrom. I will expand upon the system, building upon it in upcoming posts this week and next week.

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