Reacting To The Death Spiral

So it's becoming hard to acquire new customers, and the customers you are acquiring are EXPENSIVE!

What is the natural reaction of a company stuck in a Death Spiral? You already know the answer, don't you?

• Cut back on marketing / customer acquisition spend in an effort to "fix the profit and loss statement".

What happens when you cut back on marketing spend?

• You acquire even fewer new customers.
• This causes you to miss sales goals by an even wider margin.

What happens when you become desperate?

• You discount ... deeper and deeper.

What happens if you discount more and more?

• You pollute the customer file with customers who only love discounts.
• You generate less profit.

What happens when you generate less profit?

• More draconian cuts.
• A focus on "BEST CUSTOMERS" ... desperately trying to get more revenue from customers you already have ... which is a bad idea because the problem you are trying to solve to get out of the death spiral is new customers ... you're trying to figure out how to get more new customers at an acceptable cost.

Repeatedly across a 31 year career, I observe companies that make decisions that facilitate the death spiral ... at the very time they should be figuring out how to appeal to prospects, the brand spends less to convert prospects to customers and instead squeezes the existing customer base for everything the existing customer base can possibly give them.

Hint - this strategy "can" work, but more often than not, the tactics mentioned above push the brand further down the death spiral.

More on the topic next week.

Business Death Spiral

The topic came up last week, courtesy of an individual on Twitter who pointed out that a retail brand with a growing their BOPIS (buy online pickup in store) channel was a retail brand that was experiencing success.

And quite honestly, this business (I believe the business was Target) is experiencing a lot of short-term success. So that's a good thing!

For the next several posts, we're going to talk about businesses stuck in a death spiral, and we'll talk about how one gets out of a death spiral.

What are the first two signals that a business is stuck in a death spiral?

1. It becomes hard to acquire customers, and the customers you acquire are more expensive than they previously were to acquire.
2. The majority (or significant minority) of acquired customers are acquired via a channel that is struggling to survive.

Take your typical traditional retail brand. Say the brand used to acquire 1,000,000 new customers per year. Then malls began to die as customers shifted online and tenants told customers to avoid the store and instead shop online.

Old Scenario:  1,000,000 new customers, 900,000 via stores, 100,000 online.

New Scenario:  850,000 new customers, 650,000 via stores, 200,000 online.

This is a classic "death spiral" scenario (and catalogers know exactly what happens ... just replace stores with "co-op sourced catalog names" and you've got a disaster, right?).

In the short-term, you miss budgeted sales goals because you have too few new customers.

In the mid-term, you'll miss budgeted sales goals because you have an ever-decreasing number of new customers coupled with a lack of file momentum (last year's new customers are a small cohort and therefore they don't pay the brand back over the next 1-3 years).

In my Total Package projects (click here for project costs), this is the number one marketing-related finding. It comes up in a majority of catalog-centric projects. It comes up in a majority of retail-centric projects. And if Google/Facebook continue to be expensive, it's going to become an e-commerce issue as well.

More on this topic in the next post.

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Here's typical Total Package pricing (click here). You get about 20% of the benefit of a full project ... practically for free.

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Here are the key dates:

• June 1 = Announce Your Participation.
• June 14 = Payment Due.
• June 15 = Data Due (if you elect to participate, I'll forward you file layout information).
• June 30 = Project Delivery Date.

Memorial Day Weekend

This is the fourteenth summer writing this blog ... let that fact sink in for a moment.

As I've done in past years, expect a cadence of about three posts a week instead of five ... with a bonus post thrown in if something interesting happens in the industry. Also don't be surprised if the topics deviate mildly from what I usually post ... it's summer for crying out loud, and we need to have some fun.

Enjoy the long Holiday weekend!

Our Brand Needs To Get Younger

Your creative team is far more important than you realize ... and I'll bet that the typical reader (likely a marketing or analytics expert) doesn't spend much time analyzing "how" merchandise is presented.

I know the digital folks like to A/B test different presentations, but that's not really what I'm talking about.

Instead, I'm talking about the general "theme" that the creative team tries to convey to the customer.

Twenty years ago I'm working at Eddie Bauer, and there's a new team in town ... the brand marketing team. They felt that the "brand" needed to get younger (this is a common theme, one I don't necessarily disagree with). However, this team was given control over creative, and that's about it. They only had one lever to pull. So they pulled it.

We had imagery that just killed ... I recall a rocky river somewhere in Idaho on a chilly cloudy spring day, featuring a steely dude with graying hair wearing jeans. That imagery just killed. The brand marketing team wanted to go younger, so in the "spirit of the brand" they replaced steely graying hair dude with twenty-somethings carrying a canoe over their heads on a comparable Idaho river ... rock hard abs and all.

Here's a quiz for you. Which creative presentation performed better?

1. Steely Dude with Graying Hair.
2. Twenty-Somethings with Rock Hard Abs.

The answer, of course, was (1).

Does this mean that the brand marketing team made the wrong decision?

Not necessarily.

There are consequences for all decisions we make.

If you try to "go young" you'll offend those who "are old" and sales will decline.

What was missing?

A credible awareness program.

If you are going to "go young", you have several options, and taking the core brand younger seldom works. What can you do?

• You can budget a sales decline of 20% and if Management / Ownership agree, go get younger and rebuild the business. Nobody likes that option, of course.
• You can budget a sales decline of 10% and invest heavily in an Awareness Program and commit to the program for several years. Nobody likes that option, of course.
• You can create a whole new brand from scratch and lose money for years and hope that the brand takes off. Nobody likes that option, of course.

Notice a theme?

Nobody likes the investment required or sales hit necessary to cause a brand to "go young".

However, we have no choice. If we want to change, there's a cost associated with making change happen. The core business is already close-to-optimized. Changes sub-optimize the business in the short-term.

Yeah, we've got a lot to think about as we consider where our businesses are headed over the next five years, don't we?

Amazon Prime Day

So Amazon created a major shopping event out of nothing, and now they're killing it in July (a month when nobody can sell anything other than ice cream cones and lemonade).

Many of you jump on board with your marketplace activity, trying to leverage their efforts. That's good.

What's better, of course, is that you create your own version of Prime Day ... something unique to your brand. It requires hard work, of course. But the rewards are clearly worth it. I was stunned when I worked at Nordstrom in the stone ages (2001-2007) and we could do Christmas business in July.

You can do this, too! An Anniversary Program is critically important to your success. Heck, have four key Anniversary Programs during the course of the year ... one in July, one in October, one in January, and one in April. You get a free event every year (Thanksgiving - Christmas), so why not create something clever?

A Common Marketing Mistake

Here's a mistake I made back at Eddie Bauer in 1999.

1997-1998 was awful ... terrible business. Terrible. As Circulation Director, it was my job to determine the marketing budget ... and I was in no mood to lose a ton of money on customer acquisition if our existing customers had no interest in buying our merchandise.

So I took a hatchet to the customer acquisition budget.

That was a really good decision when business was awful. We were able to get the p&l in order.

That was a really bad decision when merchandise productivity returned to normal. When that happened, I wasn't investing enough in new customers. As a result, I missed the bounce supplied by having good merchandise and while the business achieved record levels of profitability the top-line didn't grow and that hurt the business going into the recession of 2000-2001.

DON'T MAKE THE MISTAKE I MADE!!!

Use your comp segment analytics to closely measure merchandise productivity ... and the minute you see gains in merchandise productivity you need to immediately re-invest in customer acquisition to grow the brand.

Make sense?

Open Board Position?

My business is cookin' right now, and there's plenty of discussion about how a traditional business should evolve over the next five years. Since similar topics keep coming up in my phone calls and email communications, I'm ready to consider doing a few things differently with my business.

Specifically, if you have an open seat on your Board, I would be honored to be considered for the opening. This isn't the common "Advisory Board" opening that many of us in the industry are frequently asked to participate on. I'm looking for a traditional Board position. 

I'm open to considering a Board of Directors position to help guide your business through the next five years. My background:

• 225+ Clients, Personally Analyzed 10 Billion Purchase Transactions, Wrote More Than 1,000,000 Lines Of Computer Code To Analyze The Transactions. 
• I know how customers behave.
• Vice President of Database Marketing at Nordstrom.
• Director of Circulation at Eddie Bauer.
• Manager of Analytics at Lands' End.

If this is of interest to you, please reach out to me (kevinh@minethatdata.com / 206-853-8278).

Thanks,

Kevin

Cracks in the Foundation

I'm full of praise for the marketing strategies used by Duluth Trading Company. But you already knew that.

Now go read their Annual Report (click here).

Growth is generally coming via retail ... and profit as a percentage of sales is eroding ... still amazing for a traditional catalog brand expanding into retail ... but eroding.

You're seeing the first cracks in a sound foundation. Nothing to stress about, heck, most retailers would kill to have Duluth Trading Company performance.

But cracks are beginning to show. This is the inflection point (in a business) where things become really fun, the point where a smart Management Team gets to demonstrate their skills.

New Item Spacing

It's common to see "Over 369 New Items" proudly pronounced. That's a good thing!!

It's an even better thing to "premiere" these items ... stagger 'em. Give each item attention, and give each item some space to breathe. Use email marketing to do this.

Email Marketing / Spacing

Recall this image from a few days ago? Look how the offense, via spacing, created a situation where one player ends up with the ball and doesn't have anybody within 10 feet of him.

When the player is this wide open, the probability of a made three pointer increases from maybe 30% to maybe 40%.

A vendor recently sent out a study about email opens and email clicks (click here). The study suggested that opens and clicks are in decline while volume increases. This is a classic example of Marketing Spacing.

In other words, if you send five email campaigns a week, you are not doing a good job of creating spacing. Everything is crowded.

Want an example?  Here are the messages from a brand you know and love ... from three days last week:

• Friends and Family Savings for our Best Customers.
• Spectacular Savings.
• Save Up To 40% Off.
• Special Invite - Free Shipping.
• Up To 50% Off Key Items.
• Good News: Friends and Family Savings.
• Save Up To 50%.

That's eight messages (8) within three days.

And you wonder why email marketing "doesn't work anymore" as a Professional recently told me??

The article goes on to talk about segmentation as a key strategy. And if you're going to send out three campaigns a day, I suppose that is a tactic, sure.

A strategy, however, might include not pummeling the living snot of out a customer with three %-off offers PER DAY.

Spacing is critically important in marketing ... it's something more of us should be practicing.

Join Me In London!!

How about joining me in London on June 13??

I'll spend an afternoon going through the magic of the "Great Eight", talking about attribution, discussing Merchandise Productivity and evangelizing the importance of New Customers.

Later in the session there will be a handful of case studies that the audience will work through. I know, fun, right??!!!!!

Click here for session details.

Click here for event and registration details.

Oh, did I mention ... the afternoon session is being held at Twickenham Stadium ... how cool is that???

So come on out on June 13th, ok??!!

Marketing Spacing

I've been a big fan of "Marketing Spacing" since joining Lands' End back in 1990. That's when Bush 41 was in office. That's a long time ago.

What is Marketing Spacing?

Let's look to the sports world for an example ... in this case, last week's Bucks / Celtics game. With the Bucks clinging to a 5 point lead in the 4th quarter, the Bucks inbounded the ball. The Celtics defended well, messing up the play.

Finally, Milwaukee begins the play, three seconds later.

It's often a good idea to get the ball to your best player ... and that's exactly what Milwaukee did. Look at the Spacing ... five players all 23 or more feet from the basket, all spaced out equally across the court.

Milwaukee's best player drives toward the free throw line. Look at how the defense collapses around him.

When multiple Celtics collapse to stop Giannis, somebody is open. That somebody is Brook Lopez.

Do you see what Giannis did there? He traded a 50% chance at 2 points for a 40% chance for 3 points.  0.40*3 = 1.20 points expected.  0.50*2 = 1.00 points expected.

The result?  BANG!!

A couple of things to think about.

First, the marketer would try to attribute credit for the three point shot. The marketer would spend endless hours debating whether the act of shooting (bottom of the funnel) deserves credit or whether the inbound passer (top of the funnel) deserves credit ... or whether Giannis gets credit for drawing two defenders. Naturally, the marketers spend days talking and analyzing and go absolutely nowhere. Yay, Marketers!!

Much more important, however, is the concept of Marketing Spacing and Optimizing Purchases. The concept is identical to what you observe above. Most marketers are pummeling customers with contacts. Not smart. And most marketers are not optimizing anything properly. Think of it this way ... you have an email marketing program ... do you want Giannis shooting a double-teamed 2 point shot or Brook Lopez shooting an open three pointer? You want the latter. Same thing in email marketing. You want the customer to get an email campaign that hasn't been crowded by three other email campaigns in the past thirty-six hours ... and you want to increase the odds of a purchase by personalizing the merchandise assortment to the customer.

Right?

Right??

Marketing Spacing is critically important. In our modern digital age, we bathe customers in a slurry of marketing contacts. It's not the right thing to do, we all do it, and we've got to install sports concepts into our marketing programs to avoid pummeling the customer.

Dear Management Analytics Consultant: Promotions

Dear Management Analytics Consultant:

Our email campaigns feature deep discounts. I'm talking about 40% off plus free shipping, or 50% off one item, that kind of thing. I reviewed the past 400 campaigns (we run five a week), and 369 of the 400 campaigns offered at least 30% off. This has to damage our brand. Our sales haven't increased in the past two years, but the average promotional discount increased from 33% off to 43% off. That can't be good. Here's my question: How do we get out of this mess?

Thanks,

Randall

Dear Randall:

I don't think your company wants to get out of this mess. If your company wanted to get out of this mess, you'd have clear communication from Sr. Management stating that you will only offer 20% off for the next year, no more, and your sales plan would include a 20% sales decline to account for the business you'll lose.

You are the marketing expert, so change the game. If you have to offer a huge discount, offer a huge discount on ONE ITEM ... an item that has meaning to your business. Or one category. Work closely with your merchandising team and focus on underperforming items, and offer discounts only on those items. Offer a discount for getting a customer to do something that is beneficial to your brand ... if the customer has switched to e-commerce and won't set foot in a mall anymore, offer an incentive for the customer to set foot in a mall. You do not have to have the same promotions in all channels.

Change your discounting strategy into one that pushes the customer places that are beneficial for both the customer and your brand. Back off your promotional percentage by 5% and see what impact that has on sales.

Now, if you want to do all of that stuff and Sr. Management tells you that it's 40% off plus free shipping in perpetuity, then maybe it is time to look for a new job.

Dear Management Analytics Consultant: The Right Email Merchandising Strategy

Dear Management Analytics Consultant:

Here's a problem. I have a segment of customers who love buying Men's Footwear. It's their preferred category. However, when I slice and dice the data, I observe that the category the Men's Footwear buyer is most likely to purchase next is Women's Dresses. This kind of makes sense, because a third of our business is Women's Dresses.

So how should I target this customer? Does this customer get Men's Footwear, other Men's Categories, or Women's Dresses?

Thanks,

Ashley

Dear Ashley:

This isn't an "optimization" problem. This is a "marketing strategy" problem. You are a marketer. It's your job to have a strategy.

Here's a tip. In the vast majority of my projects, the most valuable customers (after equalizing for recency/frequency/monetary/channel-preference) are those who buy from multiple merchandise categories.

This means you need to have a multi-pronged strategy for communicating to this customer. Let's use email as an example. This might be a "personalization strategy" for this customer, via email marketing:

• Monday = Primary Category (Mens Footwear).
• Tuesday = Primary Division (Mens).
• Wednesday = Most Likely Response Category (Womens Dresses).
• Thursday = Weekly Promotional Strategy.
• Friday = New Merchandise Friday.

This means that Monday/Tuesday/Wednesday campaigns exploit "merchandise personalization" based on prior purchasing behavior.

Dear Management Analytics Consultant: How To Evaluate This Stuff

Dear Management Analytics Consultant:

How the heck do we evaluate how our catalog is working? Seriously? If I have twelve items on pages 8-9, how do I know if those twelve items worked in harmony and delivered sales/profit?

Thanks,

Darren

Dear Darren:

That's a good question. Each catalog should have a mail/holdout panel. But instead of measuring success at a catalog-level, we're going to measure success at an item level. Measure the sales the mailed group generate for a SPECIFIC ITEM and compare the sales to the control group (for that SPECIFIC ITEM) ... a group who did not receive the catalog.

Sum the results for all items on pages 8-9.

Look at items not offered in the catalog, compare mailed vs. holdout for those items, and allocate the difference equally across all spreads.

Now run a profit and loss statement on the incremental sales (mailed totals - holdout totals) for items on pages 8-9.

• RED = Profit vs. Net Sales Between 30% and 39%.
• ORANGE = Profit vs. Net Sales Between 20% and 29%.
• GREEN = Profit vs. Net Sales Between 10% and 19%.
• BLUE = Profit vs. Net Sales Between 0% and 9%.
• PURPLE = Profit vs. Net Sales < 0%.

Repeat this for every spread in your catalog.

On the wall in your Omnichannel Seamless Customer Experience Conference Room (formerly known as Conference Room 1A), post each spread and color-code the spread.

Tell me what you see.

You'll see why the catalog worked or did not work.

Not only is this analysis highly valuable, it's FUN to run!!!

P.S.:  This analysis also works for email marketing.

Dear Management Analytics Consultant: Merchandise Control

Dear Management Analytics Consultant:

You frequently talk about the importance of merchandise. But honestly, I don't have any control over merchandise. I'm just a marketer. Shouldn't I just assume that the merchandise is great and then focus on my role in creating a frictionless customer experience?

Thanks,

Elmer

Dear Elmer:

You couldn't be more wrong. You play a major role in determining the merchandise that succeeds and the merchandise that fails. Who owns email marketing? You do! Why can't you feature new merchandise, personalized based on prior customer purchases, every Wednesday and Friday? If you give customers a chance to buy new merchandise today, those items will become winners tomorrow. This stuff isn't rocket science. Use Instagram to share the new items that have the best chance of success, and create an in-house Influencer to convince customers to buy the stuff. That's your job, and your co-workers are waiting for you to do something. So do something!! Put your best winning items in expensive marketing channels, put new items in inexpensive marketing channels.

P.S.:  Spend less time creating a frictionless customer experience and instead cause a customer to crave your merchandise.

Dear Management Analytics Consultant: Attribution

Dear Management Analytics Consultant:

Our Marketing VP is as old-school as they come. She strongly believes that the catalog is responsible for all sales, telling me that without the catalog we wouldn't have acquired the customer in the first place, meaning that all downstream orders should be credited to the catalog. At minimum, she'll accept matchback results that give credit for all online orders to the catalog recently mailed to the customer. Meanwhile we've A/B tested our catalogs (without telling her) and we learned that 42% of demand is catalog-attributable while 58% is organic and is generated without catalog mailings.

Here's my question. How do I convince my boss that we have actual data that proves the catalog has limited value? I've even hired a pair of attribution vendors to analyze a month of data, and their analyses are wildly different and are unreliable. How can I get my boss to trust me when I can't trust attribution vendors because their algorithms disagree?

Sincerely,

Sophia

Dear Sophia:

You probably won't convince your boss that you are right and her worldview is wrong. Your boss built an entire career based on a worldview not unlike the J. Peterman character on Seinfeld had. If she accepts your view of catalog marketing (which is based on data, by the way), she has to come to terms with the fact that the value she brings to the organization is diminished.

There are several things people in your position do. If Management demands that a lot of catalogs be mailed, then mail them ... but not necessarily to housefile customers. Mail them to prospects and hold out online housefile buyers. Stuff as many catalogs into the mailbox of a first-time buyer for three months. Use email marketing to communicate to pure online buyers with high organic percentages. Recommend smaller catalogs (which are more productive - chalked full of winners of course) and then run scenarios showing that you can mail MORE of the smaller catalogs, which should be pleasing to your old-school boss.

A final note. All attribution models are flawed. They are all based on assumptions, though some of the assumptions (and math behind the assumptions) are better than others. The digital age promised us clarity. Instead, the digital age delivered confusion. Use your A/B test results to inform investment decisions. Work with a trusted attribution vendor and help shape their work with your A/B test results. Vary your search and Facebook spend on a monthly basis, giving attribution vendor algorithms more opportunities to detect key relationships.

Organic Percentage as a Key Targeting Variable

I spoke at a conference a few weeks ago, and the topic of "attribution" was popular. Folks wanted to know "how" to attribute orders to marketing activities.

The most important variable to store in your database (for attribution purposes) is the "organic percentage". At a customer level, you calculate the percentage of demand that your mail/holdout tests show happens regardless of catalog mailings (in a print environment). When evaluating your matchback results, you discount the results by the organic percentage.

In other words, if your matchback analytics (a lousy form of attribution) show that you generated $3.50 for a segment of customers, you discount the matchback analytics by the 50% organic percentage (in the example above) ... and that means that a $3.50 matchback result is actually a $1.75 incremental outcome based on mail/holdout testing.

And the difference in results is staggering. When you run your simulations for optimal page counts (and yes, the ad costs above are inaccurate due to printing efficiencies, but they're outlined as they are to prove a point), you see dramatic differences between matchback analytics and the far more accurate outcome calculated via the organic percentage.

• Via matchback, your optimal page count is between 80 and 192 pages ... fatten-it-up and let-er-rip!!!
• Via the organic percentage, you are limited to a tiny 32 page catalog.

The former is inaccurate (and benefits the entire print ecosystem).

The latter is far more accurate (and benefits your brand).

Store the organic percentage in your database at a customer level ... you know how to do this, you have your mail/holdout tests to calculate the organic percentage.

Yup, this targeting stuff works!

Hillstrom's Targeting: Consequences of Targeting

You analyze hundreds of companies and you see recurring themes. One of the themes is the impact of digital messaging on a retail audience.

Here's how this works ... you have a previously retail customer who you bombard with digital messages (frequently via email or social) ... and guess what? The customer buys online.

When a former retail customer buys online, customer behavior changes. I've run countless simulations that demonstrate what happens ... but you don't need the simulations, you've got real data to prove the point.

Here's an example ... a group of equalized customers (weighted historical spend of $450 - $499, 0-12 month buyers). There are four segments. Then, I measure next-twelve-month spend based on the segment the customer belongs to. Here's the data.

The details tell a fascinating story.

If you have a retail-only buyer, that customer will spend $184 in the next year (in this dataset, your mileage will vary).

Now you convert the customer to a digital buyer instead of getting the store purchase you normally would have obtained. Look at future retail/online spend.

• Retail spend drops from $149 a year to $126 a year ... -15%.
• Online spend jumps from $36 a year to $87 a year ... +142%.
• Total spend increases from $184 a year to $213 a year ... +16%.

In this case, we find the beloved "omnichannel gain" that vendors constantly scream at us about ... the "multi-channel" buyer spends 16% more.

But ... BUT ... spend in retail is -15% to what it would have been.

If the customer eventually converts preference online (a minority currently do this, the dynamic will change over time), then look at what happens to retail spend ... it drops from $149 to $126 all the way down to $54.

In other words, if your targeting strategy constantly screams benefits of online buying, you'll get prior retail-only customers to embrace your digital messaging ... and then what?

• You close stores.

What happens when stores close?  Well, the retail history will disappear ... and then look at the future value of the online-only buyer ... it's $175 ... in our case, it's the lowest of the four segments. You close the store and the customer spends less (Macy's has gone on the record publicly that this dynamic happens) and you might be more profitable but customers are less loyal.

This is the consequence of targeting in a retail environment. Your targeting strategy shifts customers in/out (usually out) of stores. When that happens, the store dies, and when the store dies, customers who used to shop in that trade area become less valuable.

#Omnichannel!!!!!

You might have a great targeting environment ... and you might do a spectacular job of targeting. But short-term ROI measurement is feckless if you don't understand the consequences of targeting. Run simulations and understand what the long-term impact of targeting strategies are. You HAVE to do this, right? RIGHT??

Run the simulations.

Understand what the consequences of targeting are.

Then make better decisions.

Contact me (kevinh@minethatdata.com) if you need help. Pricing information is outlined here.