The MineThatData Honor Roll: March 7, 2007

A well-deserving mention this evening. Friend of MineThatData Avinash Kaushik announced on Monday that he is leaving Intuit to start his own consulting business. In addition, he announced last week that he is donating the proceeds of his new book to charity.

That is Honor Roll worthy!

Multichannel Forensics And Postage Increases

There's been a lot of buzz the past few days about what appear to be an impending and significant postage increase for multichannel marketers, and in particular, small multichannel marketers.

Our industry is not likely to support other issues that place cost pressures on small, multichannel marketers. We don't rally around our partners when the cost of keywords or portal advertising increases. But postage increases, especially significant ones, can be easily quantified, and impact the entire multichannel marketing food chain. The food chain rallies around the cause.

Multichannel marketers can use Multichannel Forensics to understand the long-term impact of postage increases. If we assume that multichannel marketers reduce circulation to marginal customers and prospect lists, in an effort to offset cost pressure (this impacts list brokers, list managers, and compiled list folks, who depend upon a healthy prospecting business), the multichannel marketer will get fewer new/reactivated customers.

When fewer customers are acquired, the business fails to grow at a robust rate. Businesses must grow, or they die.

For instance, assume that a small multichannel retailer cannot mail 400,000 catalogs a year, due to the increase in postage. Assume that these catalog drive 7,500 new telephone-channel buyers, and 1,500 new online-channel buyers.

The cost increases cause the marketer to have to reduce circulation each year. This causes an ever-increasing impact on the business, over time, as is evidenced in the table at the bottom of this post.

Because the impact is cumulative, the multichannel marketer loses an equal number of customers each year. These customers cannot contribute to future sales.

In this example, $1.5 million in sales is lost in year one, $3.4 million in year two, $4.6 million in year three, $5.3 million in year four, and $5.7 million in year five.

Also notice that, in this example, the online channel is impacted by problems in the catalog channel. Our integrated, multichannel businesses suffer from price pressures in the catalog postage arena. Simple two-channel simulations can be used to illustrate the real long-term impact of short-term decisions.

These are frustrating times for catalog-based multichannel marketers, who are being pushed online by our customers, and ultimately, those who deliver our catalogs to our customers.

Five Year Business Simulation
Customers Not Acquired Due To Increased Postage Costs
		Year 1	Year 2	Year 3	Year 4	Year 5
12mo. Buyers	Telephone	7,500	9,803	10,709	11,117	11,315
	Online	1,500	2,693	3,704	4,389	4,802
	Phone + Web	0	1,305	2,104	2,523	2,738
Newbies	Telephone	7,500	7,500	7,500	7,500	7,500
	Online	1,500	1,500	1,500	1,500	1,500
	Phone + Web	0	0	0	0	0
Net Sales	Telephone	$1,312,500	$2,506,688	$3,065,062	$3,331,457	$3,462,622
	Online	$225,000	$890,438	$1,561,570	$1,971,198	$2,199,150
	Phone + Web	$1,537,500	$3,397,125	$4,626,632	$5,302,654	$5,661,772

Leaving Nordstrom

With mixed feelings, I have decided to leave my job as Vice President of Database Marketing at Nordstrom.

The positive side of this equation is that I am thrilled to be "running to something", not "running away from something". I will start my own business, appropriately called "MineThatData"!! My business will clearly explain the complex relationship between Customers, Advertising, Products, Brands and Channels to Multichannel CEOs and Executives.

My business will focus on the emerging field of Multichannel Forensics, a framework for understanding complex customer relationships coupled with a sophisticated forecasting tool used to understand the long-term sales, profit and growth potential of a multichannel business. Click here for a white paper on the topic of Multichannel Forensics.

I am so looking forward to starting this business!

This was not an easy decision to make. Nordstrom is a wonderful company to work for, consistently ranked as one of the top one-hundred companies to work for in the United States. I spent more than six years at Nordstrom, more time than at any previous company I worked at. That speaks volumes about the people I have worked with, and the environment at Nordstrom.

It will be particularly hard to leave the wonderful people who work in our Database Marketing department. My management team is among the most talented and experienced in the multichannel retailing industry.

• Few folks know more about multichannel circulation than Michael Einfalt. Not many folks manage teams that can explain the multichannel ROI of over 1,000 direct mail campaigns each year. Fewer people have linked clickstream behavior and retail purchasing to catalog response analytics. Almost nobody is a better manager of people than Michael. The latter is simply taken for granted. Few people truly see or appreciate his genius. Michael is too humble to brag about it.
  
• Few individuals are as innovative as Jennifer Thornton, our E-Mail Circulation and Online Analytics Manager. She has a rare combination of enthusiasm, energy, creativity, innovation, and an instinct to know whether something is 'right' or 'wrong', correct or incorrect. Jennifer has the potential to be a great leader in multichannel database marketing. I doubt anybody in our industry knows more about catalog circulation, e-mail campaign execution and analysis, and the use of social media in retailing. What a unique combination of skills. Jennifer is well-positioned for the future of our industry.
  
• Jay Long is our Director of Business Intelligence, the data mining, ad-hoc query and analysis arm of Nordstrom Database Marketing. No individual in the history of Nordstrom answered more questions about customer behavior (from a database) than Jay answered during the past six years. Jay completes more analyses per hour worked than any individual I have ever worked with. Couple that fact with his typical twelve hour day, and you have one of the most productive Business Intelligence individuals to ever work in multichannel retailing. Jay exhibits everything that is good about Nordstrom. Humble, honest, bursting with integrity and accountability, Jay has done more to make others look good at Nordstrom than any individual I have worked with. He sacrificed his career objectives to help others, always looking to support our Executive Team and our Decision Makers. Future leaders in Consumer Insights / Database Marketing will look great because of the foundation Jay built.

Linda Finn is our Chief Marketing Officer. She deserves huge kudos for providing an environment that allowed our team to do our job, without the micro-management and "do-it-my-way-or-the-highway" style exhibited by some leaders. She trusted our information, and trusted we were always trying to do what was best for Nordstrom. "LT", as she is known by, will go in the books as one of the better bosses I've worked for.

A few years ago, Jim Bromley was leaving his post as the leader of the online and catalog division of Nordstrom. Mr. Bromley asked me what I wanted to accomplish during the remainder of my time at Nordstrom. I told him that I "wanted to see how the story ended".

My first assignment at Nordstrom was to help Nordstrom Direct (catalog + online channel) become a profitable arm of a multichannel retailer. Several management teams later, the mission has been accomplished!

My second assignment at Nordstrom was to integrate separate teams that analyzed customer information and managed circulation for different divisions. Our employees did an exceptional job of building a team that looked at "one customer", across all Nordstrom channels.

My final assignment at Nordstrom was to use customer information to help our transition into multichannel retailing. I got to see what happens, politically, professionally, and financially, when a traditional catalog program ceases to exist. I learned what happened to the online business and the retail business when a catalog program is shut down. I observed what happened to customer acquisition when all traditional catalog acquisition activities end (list management, list brokerage, compiled lists, etc.). What a valuable learning experience!

Truthfully, I learned more about the impact of multichannel advertising during the past two years than I learned in my first seventeen years as a professional. That kind of experience can only happen when you essentially shut down one of your channels.

Having survived these assignments, I got to see how the story ended. I am ready to tackle my next endeavor. Thank you to everybody at Nordstrom, for making the past six years so educational, so memorable, so intellectually stimulating. I highly recommend Nordstrom as an employer, and think the world of my team at Nordstrom.

Cost Per Click In Multichannel Retail

SpyFu is a website that helps users understand how much various businesses spend on online advertising.

Having insider information about accuracy of the data at several multichannel retailers, I can tell you that SpyFu is at best, directionally accurate.

That being said, one can summarize and classify the information. By doing so, many of the numerical inaccuracies are mitigated.

The attached image classifies apparel and shoe multichannel retailers into nine cells. Among these thirty-seven businesses, I use SpyFu data to determine if the retailer spends a lot, or very little on online advertising. Next, I use SpyFu data to determine if the average Cost per Click is inexpensive, average, or expensive.

The best place to reside in this image is in the upper right cell. In this cell, spend is huge, while Cost per Click is low. If these clickers convert at an acceptable rate, there is significant efficiency in the online marketing efforts of retailers in this cell. Interestingly, only Zappos meets this criteria.

Of course, SpyFu data does not have access to online or retail conversions. In other words, a customer might search for denim. The customer clicks on J. Crew in the paid search section of Google, views an item on the website, drives to the store, and purchases the item. Whether the item is purchased online or in a J. Crew store, SpyFu cannot see the conversion.

Many of the businesses in this table sell far more in their retail channel than in their direct channel. Some of the more sophisticated multichannel retailers already link paid search to estimated retail conversions. While it is important to look at cost per click, it is much more important to measure variable operating profit across all channels. This concept certainly isn't new, and has been documented many times in Database Marketing literature (this is frequently called a "matchback" analysis).

The table at the end of this post looks at multichannel profit, obtained by spending $100,000 on a paid search program. Notice how important it is to at least be able to estimate the retail conversions driven by online advertising.

In this example, the multichannel retailer generates $33 of profit for every conversion. Also notice that the multichannel retailer generates $1.49 profit per click, in this example. If these metrics were negative, the multichannel retailer would have to conduct a lifetime value analysis, to see if future sales offset short term losses.

Amount Spent, Paid Search	100,000
Cost per Click	0.75
Number of Clicks	133,333
Online Conversion Rate	2.5%
Estimated Retail Conversion Rate	2.0%
True Conversion Rate	4.5%
Online Average Order Size	225.00
Retail Average Order Size	175.00
Online Demand	750,000
Retail Net Sales	466,667
Online Profit to Demand Ratio	23.0%
Retail Profit to Net Sales Ratio	27.0%
Online Profit	172,500
Retail Profit	126,000
Less Online Advertising Expense	100,000
Net Profit	198,500
Return on Investment (Profit/Expense)	1.99
Profit per Conversion	33.08
Profit per Click	1.49

Multichannel Retailers and Conversion Rates

Pundits spent a lot of time telling us that multichannel customers are the most valuable customers. This finding has become largely unusable.

The concept of multichannel customers becomes very interesting, when explored via conversion rates online.

When you get to work on Monday, try this exercise.

Step 1: Segment your online visitors, from February 1, 2006 to January 31, 2007. Segment them into the following classifications:

• Those who purchased online, in catalog, and in stores during that time period.
  
• Those who purchased online, and in catalogs during that time period.
  
• Those who purchased online, and in stores during that time period.
  
• Those who purchased in catalog, and in stores, during that time period.
  
• Those who only purchased online during that time period.
• Those who only purchased via catalog during that time period.
  
• Those who only purchased via stores during that time period.
  
• Those who had not purchased, but had visited the website multiple times during that time period.
• Those who had not purchased, but had visited the website just one time during that time period.

Step 2: For each of the nine segments listed above, calculate the following metrics:

• Number of Households.
• Number of Households who visited the website during February 2007.
• Average Number of Visits per Household Visiting, during February 2007.
• Total Number of Visits, during February 2007.
• Percentage of Households Purchasing Online During February 2007.
• Percentage of Households Purchasing In Catalog During February 2007.
• Percentage of Households Purchasing In Stores During February 2007.
• Percentage of Households Purchasing, Any Channel, During February 2007.
  
• Online Conversion Rate (Total Online Purchases / Total Online Visits), February 2007.

The magic of this type of analysis is that the multichannel executive gains an understanding of who is visiting her website, how her customers use the website, and how much more effective the multichannel retailer's website is at converting online customers.

Even better, the multichannel executive will learn that the website is frequently used as the research tool for offline purchases. We hear that customers use our websites in this way all the time --- this reporting is a first step in understanding how different customer segments utilize the site to purchase merchandise.

Multichannel CEOs and CMOs: We spent a lot of time integrating purchase data across channels during the past decade. Integrating clickstream data with multichannel purchase data is another logical, important, and necessary step in the evolution of mulitchannel marketing.

Web Analytics Experts: This is a really good time to expand your skillset beyond clickstream and funnel analysis. Your future depends upon being able to segment customers at one point in time, and then measure customer performance over a future period of time.

One Positive Day

Last week, I became frustrated with marketing bloggers and their pesky attack on jetBlue. I asked if folks might consider hosting One Positive Day --- focusing on positive stories on the first day of the month.

Becky Carroll at Customers Rock! talked about a positive experience she recently had at Coldwater Creek.

Becky also lists three bloggers who write positive stories about customers. Please give Meikah at Customer Relations --- The New Competitive Edge, Phil Gerbyshak at Make It Great!, and Daryn at DarynKagan.com some of your attention, view their example of positive writing.

Jeff Larche at Digital Solid stayed away from negative posting today!

Six blogs being positive today. How about sixty next month, six-hundred in May, and six-thousand in June?


Update: Teresa Valdez Klein of the Blog Business Summit shares with us a positive article she wrote about a Seattle area pizzeria. Good for you, Teresa!

Leaving Eddie Bauer

Last week, I talked about the last days of my tenure at Lands' End. Things ended differently at Eddie Bauer.

Eddie Bauer was a profitable business in the late 1990s. Following a bad year in 1998, our catalog team was able to drive all-time record levels of profit in 1999.

By the end of 1999, the online channel had captured the imagination of Eddie Bauer customers, and the imagination of employees all across the Seattle metropolitan area. New online businesses were springing up right and left, offering employees stock options loaded with potential for significant wealth.

At Eddie Bauer, I was willing to settle for a new computer. My personal computer could not handle the volume of data I wished to analyze. It worked, but not to the level of performance I desired.

Acquisition of a new personal computer (if you already had a working personal computer) required the signed authorization of your Divisional Vice President, as well as a Finance Director and an Information Technology Director.

For whatever the reason, my personal computer request was denied. Repeatedly. Big Company + Red Tape = One Frustrated Employee!

Meanwhile, all around me, people were becoming paper millionaires. I couldn't order a new personal computer, while paper millionaires were playing Foosball at internet startups. It was time for a change.

A former Eddie Bauer employee worked at an internet startup called 'Avenue A', and recommended I speak to the founder about an analytics leadership position. I interviewed for a position, and ultimately accepted an offer that included stock options, an office, a high-speed personal computer, and budget for research and hardware as needed. Sign me up!!!

I resigned from Eddie Bauer. In my final week at the heralded multichannel retailer, Avenue A celebrated its IPO. My shares, granted to me at $8, were valued at nearly $79 on Day One!

With great excitement, I embraced my employment opportunity at Avenue A. My first day was an orientation day.

I showed up early for the start of day two, arriving at 7:50am. At 7:55am, my boss (not one of the founders, whom I am very fond of) informed me that I would not have an office. I would share my office space with at least three individuals. I would not have budget for research and hardware. In fact, the job I accepted did not exist. I would be assigned to large clients, responsible for helping them with their online analytical needs. I would be responsible for developing analytical products and services.

I reminded my boss that this is not what I signed up for. My boss reminded me that this was an internet startup, and that it was important to be flexible.

Five minutes into my sceond day at my new job, I realized I was in for an interesting ride.

Over the next ten months, the value of a share of Avenue A stock would decrease from nearly $79, to around $1 a share.

If there is anything I learned from that experience, it is the importance of running "to" something, as opposed to running "from" something. Because I became frustrated by the red-tape at a large, established retailer, I chose to run from it. Having something great to run to may have benefited my career.

Next week represents seven years since I left Eddie Bauer. Eddie Bauer has struggled since 2000. Avenue A became aQuantive, and became one of the most successful of the internet startups of the late 1990s, generating profit since 2002.