The Corporate Blogging Book

For whatever reason, I follow the blogging efforts of Debbie Weil. This individual spent about one year writing a blog, always talking about concepts congruent with her book. Next thing you know, she has somewhere between 500 and 1,000 visitors a day, based on traffic data from Alexa and my estimates of their reach per million visitors.

So after a year of faithful blogging, her book debuts highly ranked on Amazon.

This example illustrates how marketing has changed. Via hard work, authenticity, creativity, dedication, reputation, and talent, she was able to build an audience that was very ready to buy her book the day the book was available.

Imagine the two-way conversation companies can have with their most loyal customers, and the benefits derived from such a conversation. Obviously, there are risks involved. But companies have a huge opportunity to obtain information about their best customer's interests and preferences, all for free. At minimum, the database marketer could capture the fact that avid customers are willing to comment, and figure out how best to use this information to better serve the customer.

Over the next five years, companies are going to figure out how to replicate this blogger's success in their business model. It should be interesting to see how this develops.

Shipping Expense at Amazon.com

Database Marketers frequently analyze the impact of shipping and handling rates on top-line sales and bottom-line profit. Amazon.com released second quarter results last week. Their 10-Q filing illustrates shipping and handling revenue. For the first six months of 2006, Amazon received $257 million in shipping revenue, 5.8% of net sales. During the same time period, Amazon incurred $385 million in shipping expense, 8.7% of net sales. In total, Amazon lost $128 million dollars shipping merchandise, or 2.9% of net sales. Amazon accounts for shipping revenue in their net sales line, and accounts for shipping expense in their cost of sales line.

As you may know, most direct marketers at least break-even on shipping expense, with many direct marketers realizing a profit on the shipping of merchandise. Amazon cannot possibly drive enough sales to offset the loss in shipping revenue. A ten percent increase in sales due to free shipping only results in an ever-increasing disparity in shipping revenue and expense.

There are instances in the document where Amazon states that their goal is to drive down expenses. And this is where the strategy becomes plausible. Without shipping and handling expense, gross profit was 28.5% of net sales. After accounting for shipping and handling expense, gross profit was 23.9% of net sales. In other words, free shipping significantly decreases gross profit.

Therefore, if Amazon can reduce cost of goods sold, they can offset free shipping, and maintain profitability. By applying the hammer to their suppliers, they reduce the cost of goods sold, thereby covering shipping expense, theoretically passing the savings along to the customer.

There is a flip side to this. Take my book, as an example. After accounting for shipping and handling expense, Amazon earns between seven and eight times as much profit as I earn from the sale of one of my books. By completely hammering the supplier (my publisher), they pass along free shipping to you.

So enjoy your free shipping next time you order from Amazon! Somebody is paying for it. It isn't Amazon, and it isn't you.

Database Marketers and Belief

Seth Godin has a brief post on belief. Database Marketers, especially those who work in the field of Business Intelligence, struggle with belief. Anytime a BI person has to share facts with people, beliefs are likely to override facts. If I had a dollar for every person who believed their opinions over my facts, I wouldn't have to work anymore.

The best you can do is work with honesty, integrity and humility. If people choose to disagree with your facts, let 'em. Show that you consistently act with honesty and integrity, and over time, people will be more likely to agree with your information. Database Marketing and Business Intelligence are about the long-haul, not about making a short-term splash.

Business Review: Circuit City

Circuit City shares (NYSE: CC) have tumbled by more than twenty percent in the past three months, though some pundits feel Circuit City is in the midst of a financial turnaround.

In the three months ended May 31, 2006, Circuit City posted a pre-tax profit of $7.8 million on net sales of $2.6 billion, yielding an approximate pre-tax profit rate of 3%. A year earlier, Circuit City lost $19.2 million on sales of $2.2 billion. This helps defend pundit opinions that Circuit City is improving their business.

Circuit Cirty SEC filings indicate that their US-based business is performing better than their international business. International business, primarily in Canada, generated an after-tax loss of $4.3 million, whereas the US-based business generated an after-tax profit of $9.3 million.

Multichannel statistics are interesting. Comp-store sales in the first quarter grew by 14.5%. However, online sales are included in comp store sales. Therefore, retail comps were greatly influenced by an 85% increase in web-originated sales verses last year. This should make multichannel pundits happy. Circuit City is continually lauded for its "buy online, pickup in store" program. The increases should also make Circuit City executives happy. Given that Internet Retailer estimated that online sales were 7% of total Circuit City sales in 2005, an 85% increase in online sales contributes about five of the 14.5% point increase in comp store sales. Reporting online sales in comp store sales overstates overall comp store productivity.

Circuit City operates four divisions. Video represented 44% of first quarter sales, and produced double-digit increases in the first quarter. Information Technology, representing 29% of first quarter sales, experienced a low-double-digit increase, led by notebook computers and printers. Audio, representing 16% of the business, experienced a double-digit comp store sales increase. The entertainment division, 11% of the business in first quarter, experienced a single digit comp store sales increase. The company expects continued growth in flat-panel televisions, portable digital audio, and notebook computers.

Circuit City offered guidance that it expects to achieve net sales growth of between seven and eleven percent, and earnings before taxes of between 2.0% and 2.4%. The company also states that it will continue to invest in multichannel activities.

The results indicate that Circuit City is very dependent upon driving comp store sales increases to achieve profitability. Had comp store sales been below ten percent last quarter, it is unlikely that Circuit City would have generated a quarterly profit. The online channel is clearly contributing to the success of the business, in the first quarter.

Business Review: eBay

eBay announced a shakeup within its management staff this week, signaling continued change in their business. A review of their most recent SEC quarterly filing illustrates some of the issues facing the company.

During the first quarter of 2006, sales increased a healthy 35%, from $1,031,724 last year to $1,390,419. Gross Margin decreased from 81.9% last year to 80.0% this year. This metric was partially influenced by changes in stock option expensing.

Expenses, after accounting for changes in how stock options are expensed, have increased at a faster rate than sales have increased. Sales and Marketing expense increased by 39% verses last year. Product Development increased by 33%. General and Administrative expenses increased by 40%.

As a result, income from operations decreased by 4% after accounting for stock options. Income from operations, on a comp basis with last year, only increased by 20% on the 35% increase in sales. In other words, eBay is not generating sales fast enough to cover rising expenses.

Their filing indicates other interesting tidbits. PayPal is the fastest growing of the three mature business units at eBay, growing by 44% over last year. However, only 26% of PayPal dollars flow-through to profit. US Sales increased by 30%, and these sales flow-through to profit at a much more impressive 40%. The most profitable unit, International Sales, only increased by 25%, though these sales can be influenced by exchange rates. International Sales flow-through to profit at a whopping 48%. In other words, the fastest growing business areas at eBay generate the lowest rate of profit. This is not good for the future of eBay. Couple that with their purchase of Skype, which lost more than eight million dollars on sales of $35 million, and the profit story isn't great.

Further compounding eBay's growth problems are subscribers. Although net sales increased by 35%, the number of active users, those active over the past year, only increased by 25% verses last year. This may indicate a future problem for eBay. PayPal accounts, measured as active users over the past three months, increased by 32% verses last year, a rate that is less than the rate which net sales are growing.

The data may indicate that eBay is reaching maturity, as a business. Obviously, I don't know the inside workings of eBay, so any comments about eBay reaching maturity are purely speculative. It will be interesting to see if eBay can find additional ways to grow.

In their 10-Q statement, management states that they may need to increase marketing and brand expenses. One of their quotes states that "Brand promotion activities may not yield increased revenues, and even if they do, any increased revenues may not offset the expenses incurred in building our brands. If we do attract new users to our services, they may not conduct transactions using our services on a regular basis. If we fail to promote and maintain our brands, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, our business would be harmed." In other words, eBay may spend marketing dollars to promote business units, and those marketing dollars may not have a corresponding return on investment, limiting future growth.

eBay's PayPal unit is facing increased competition from Google. And reports indicate that Microsoft has an interest in merging their MSN unit with eBay. The next few months could prove to be very interesting for a previous stock darling that has lost more than fifty percent of its market capitalization over the past eighteen months.

Business Review: Bank of America

Several years ago, my wife and I sold a home we had purchased forty-five months earlier. At closing, we were surprised to learn that we had to pay a $5,000 pre-payment penalty, because the loan had been paid off before four years elapsed.

We paid the penalty. We did ask Bank of America to forgive the penalty, given that we had just taken out a mortgage that would generate far more interest in a short period of time than the penalty we were assessed. Naturally, Bank of America declined our appeal.

Two short years later, we refinanced with Wells Fargo. To-date, Bank of America lost $100,000 of interest income, but gained the $5,000 pre-payment penalty. Try calculating the lifetime value of that decision!

Bank of America makes their 10-K statements available on their website, www.bankofamerica.com. These financial documents tell a fascinating tale of the money-making machine that is Bank of America.

In 2005, Bank of America received $34.8 billion dollars (yes, billion dollars) in interest and fees on loans and leases. For instance, when you make your $1,500 payment on your mortgage, the majority of that payment goes to interest, not to the principal on your home. Across all interest income categories, Bank of America generated $58.6 billion dollars of revenue. Amazingly, Bank of America only generated $27.9 billion dollars of interest expense, yielding $30.7 billion dollars of income.

Bank of America also earns $25.4 billion dollars of non-interest income, including $7.7 billion dollars in service charges, things like ATM fees or annual fees on your credit card. Another $5.8 billion is earned on credit card income.

So, in total, Bank of America earned $56.1 billion dollars of income. Non-interest expense was $28.7 billion dollars, yielding $24.5 billion dollars of pre-tax profit. $24.5 billion dollars of pre-tax profit.

Bank of America then paid $8.0 billion dollars of income tax expense. And we wonder why big business is so influential in governmental issues?! After subtracting taxes, Bank of America took home $16.5 billion dollars of after-tax profit.

It is amazing that we Americans don't raise more of a stink about how much money we give to banks, like Bank of America. We grumble over paying $3.50 for a gallon of gas, and feel frustrated when our annual gasoline bill is $3,000. We feel like the oil industry is gouging us.

Yet, homeowners deal with a situation that is much more severe on their checkbook. A family with a $200,000 mortgage at a 6% interest rate pays as much as $8,700 a year in interest expense. If this family earns $50,000 per year, as much as a quarter of take-home pay goes to the bank servicing the mortgage. Add to that home equity loan interest, credit card interest, car loan interest, service charges and annual fees, ATM charges, and any other expense, and it becomes obvious that your local bank has control over your checkbook.

Business Review: Regal Cinemas

Have you ever wondered why your popcorn and diet soda cost $9 when you visit the movie theater? It is probably because that is the only way that a movie theater can stay in business. A simple review of Regal Cinemas SEC filing for 2005 illustrates the problems facing movie theaters these days. Let's MineThatData, and understand how expensive concessions contribute to the profitability of this organization.

Regal Cinemas operates 6,463 screens in 555 theaters across 40 states, representing a significant portion of the movie industry. During 2005, here is how their financials break down:

Revenue (Sales Numbers in Millions):

Admissions $1,662.2

Concessions $659.8

Other Operating Revenue $194.7

Total Revenue $2,516.7

Two-thirds of their revenue comes from ticket sales. The average ticket sold at a Regal Cinemas is $6.80.

Twenty-six percent of their revenue comes from concessions, with the average customer spending $2.70.

The fastest growing source of revenue is in other operating revenue. This category represents the advertising you see before a movie, as well as business meetings held in the theatre during off-hours.

A movie theater is expensive to run. Let's break down some of the expenses at Regal Cinemas.

Fifty-three percent of admissions revenue is gobbled up in film rental and advertising costs. This means $3.62 of your movie ticket are gobbled up by the movie industry.

Of the $2.70 you spent on concessions, Regal Cinemas pays $0.39 for the product, pocketing $2.31 of your expenditure. The product you purchase at the concession stands costs about seven times as much for you to purchase as it cost Regal Cinemas to purchase. Wow.

The remainder of your movie ticket is gobbled up by other expenses. Remember that $3.62 of your movie ticket goes to cover film rental and advertising costs. Another $1.27 goes to cover the rental expenses of the actual theater. Another $3.90 cover general and administrative expenses, depreciation, and an assortment of other costs.

So, you spend $6.80 on your movie ticket. Regal Cinemas pays $3.62 + $1.27 + $3.90 = $8.79 per ticket to cover their expenses. See the problem? The theater has already lost $1.99 on you, the customer, the minute you purchase your ticket.

This explains why the theater needs the $2.31 profit generated by concessions, and why the theater needs an average of $0.80 advertising revenue per customer, in order to survive.

With movie traffic decreasing year-over-year, Regal Cinemas generates all of its profit from concessions and advertising. And as traffic continues to decrease, Regal Cinemas continues to ask its most loyal customers, the ones still going to theaters, to pay more and more money on food, and to watch more and more advertisements. This is the way Regal Cinemas is trying to remain profitable.

It should also be noted that almost half of the profit Regal Cinemas generates is gobbled up by interest expense. $0.19 of your $6.80 ticket go to cover the interest on debt that Regal Cinemas has.

This is a business model that is tough to profitably manage. The next time you decide to boycott the $9 you will be charged for popcorn and a diet soda, consider the alternative --- that one day in the not-so-distant future, the theater industry just won't exist.