Microsoft Buys aQuantive

When folks say that "it couldn't have happened to a nicer guy", they should be talking about Mike Galgon, one of the founders of Avenue A, the banner advertising company that became aQuantive. The online advertising agency was purchased by Microsoft for $66.50 a share, a considerable premium over the current price of about $35 a share.

At a time when folks created flimsy business models, hoping to cash out via the drama of an IPO, aQuantive did things the right way. The CEO is the same CEO from 2000. Mr. Galgon, one of the founders, is still actively involved in the business.

aQuantive is one of a very small number of success stories from the internet bubble era. I'm very happy for those folks!!

P.S. Had I stayed for seven and a half years, I, too, would have been worth millions!!

Missing Plan

If you really want to test your professional character, see what happens when your business starts missing plan ... by 45%.

Back in 2001, I was part of a new management team recruited by the esteemed Michael Smith (of Lands' End, Classmates.com and Bag, Borrow Or Steal fame). Our job was to fix Nordstrom.com, a division of Nordstrom that was posting hideous double-digit negative EBIT, year-after-year.

In our first four months, we experienced something that tests professionals who think they're brilliant. A business that was failing mightily began to miss expectations by more than twenty percent. In fact, one series of catalogs missed plan by forty-five percent. That means customers liked the catalog so little that they spent almost half of what they spent in a comparable catalog the year prior --- a year where double-digit negative EBIT occurred.

Here is what the results looked like, with numbers altered to protect the innocent:

Analysis Of Catalog Results
	Rates	Plan	Actual
Circulation		4,000,000	4,000,000
Demand		$35,000,000	$19,250,000
Net Sales	71.0%	$24,850,000	$13,667,500
Gross Margin	52.0%	$12,922,000	$7,107,100
Less Book Cost		$5,000,000	$5,000,000
Less Var. Op Expense	11.0%	$2,733,500	$1,503,425
Var. Op. Profit		$5,188,500	$603,675

When your catalog misses expectations by nearly five million dollars profit (remember, numbers have been doctored a bit, to protect the innocent), folks begin pointing fingers at each other ... quickly! Your new merchandising expert blames the old administration. The old administration blames the new team. Your President suggests you don't know a thing about circulating catalogs.

After the finger pointing subsides, you have to get down to the hard work of planning next year's catalog. You use the catalog that completely failed as your planning base. Your circulation plan for the next year might look as follows:

Next Year's Plan
	Rates	This Year	Next Year
Circulation		4,000,000	1,600,000
Demand		$19,250,000	$10,900,000
Net Sales	71.0%	$13,667,500	$7,739,000
Gross Margin	52.0%	$7,107,100	$4,024,280
Less Book Cost		$5,000,000	$2,479,000
Less Var. Op Expense	11.0%	$1,503,425	$851,290
Var. Op. Profit		$603,675	$693,990

This is called "thinking inside the box". And it is damaging. You end up trimming circulation by more than half, to get rid of unprofitable names. By doing so, you only increase profit by about a hundred thousand dollars. And, you've made the business much, much smaller.

Actually, your customers are making your business much, much smaller, because they're voting with their pocketbook that they don't like you.

But this is where you get yourself in trouble, if you continue to "follow the rules". In other words, if you continue to circulate to a certain cutoff level, you are "certain" to run yourself out of business. You cut marginal names, the very names that will pay the freight in a year or two.

Missing plan by 45% requires you to re-think your business model.

In our case, many more members of the management team "left to pursue other interests, we wish them the best in their future endeavors".

A stable team of leaders "gelled". We "rightsized" the catalog business (fewer titles, fewer pages, fewer in-home dates, capitalize on e-mail and online marketing) A hideous profit and loss statement became one that any leader could be proud of.

You don't learn a lot when your channel is constantly growing by twenty percent, or thirty percent. You learn a lot about business, and about people, when your channel fails to meet plan by forty-five percent.

It will be very interesting to see what happens to today's online business leaders when the online channel begins to decline, an inevitability in the evolution of business channels.

Personas and Pressure

Personas are becoming a popular way to bring data to life, to make data actionable.

In the late 1990s, we were looking for ways to reinvigorate the Eddie Bauer "brand". One way management chose to do this was to hire a team of brand marketing experts. There's no better way to generate new ideas than to hire a dozen brand marketing experts.

This team created personas of the Eddie Bauer customer --- Ken and Karen, if I remember correctly. These folks were mid 40s but felt like they were in their mid 30s, $75,000+ annual household salary, sitting in the ski lodge next to a fire watching folks ski, after arriving in an Eddie Bauer Ford Explorer.

Because these folks felt like they were younger than their mid 40s age, the brand marketing team felt our creative should skew younger, to reflect how these personas felt about themselves.

Within a few months, a new creative approach appeared in our catalogs. The 46 year old graying male wearing jeans while walking along a raging river in Alberta was replaced with a 31 year old, muscle-bound set of men carrying a canoe over their heads.

Instantly, mens pages in catalogs that were missing expectations by 10% became mens pages in catalogs that were missing expectations by 20%.

In other words, the new way of presenting men in the catalog, based on the personas created by our brand marketing team, caused a ten percent reduction in demand of mens merchandise.

There's nothing that strikes terror in the hearts of an Executive team than a ten percent decrease in sales volume, a decrease that is quite possibly self-inflicted.

The brand marketing folks fought back, suggesting that it would take Eddie Bauer customers six months, a year, or two years to get used to the new creative. They were probably correct in their assessment of the situation.

Meanwhile, inventory managers were frustrated, because they had to liquidate merchandise that used to sell better. Merchants were frustrated, because merchandise they believed in was not selling as well due to the implementation of a vision endorsed by the brand marketing experts.

I recall sitting in a conference room on a Friday afternoon, watching this brand marketing team get chewed out like you wouldn't believe. Folks left the room crying. Within a year, most of the brand marketing team either lost their jobs, or chose to leave the company. The brand marketing experiment of 1998-1999 was over.

Pressure causes leaders to make decisions that may not be in the best interest of the long-term health of the business. It is entirely possible that the brand marketing folks were doing the exact right thing for the "brand". It is also possible they unintentionally damaged the "brand".

We still have to meet short-term sales expectations, regardless of the long-term vision of brand marketing experts. This conflict causes pressure.

Personas may be the right thing for your business. It is how personas are implemented within your culture, how that implementation impacts short-term sales, and how short-term expectations are communicated to all employees, that determines how successful the business strategy will be.

Listen To Tuesday's Webinar!

The good folks at Intelligent Results recorded today's webinar on Multichannel Forensics. The event was well attended. Thanks to everybody who joined me, I appreciate that you spent time listening to this topic.

Please click here to listen to today's presentation. You'll be able to follow along with the slides as you listen to the audio portion of the presentation.

Up next is the Seattle DMA's "Market To The Max" event on Monday, May 21. If you're in Seattle, stop by after the presentation for a chat! You'll also have a chance to hear uber-bloggers Robert Scoble and Ben McConnell, as well as Friend of MineThatData Chris Baggott at this conference.

Tell Me About Your Vision For "CRM"

I recall reporting to an Executive who called CRM a "four letter word". This person felt burned by the failed promises of a movement that may have been ahead of its time (or maybe way behind the times) in the late 1990s.

Maybe things would have been different if CRM were shepherded by marketing folks. Often, CRM was driven by the Information Technology folks, in partnership with vendors selling solutions. All too often, the focus was on "Management", not on the "Customer Relationship".

These days, it gets harder and harder to define "CRM". I believe that's a good thing. Here are examples of "CRM" in the year 2007.

• The President of Whole Foods talks directly to his customers via a blog, allowing customers to respond to him.
• Nielsen and Experian enter an alliance to provide "CRM for CPG Companies", promoting use of a series of traditional direct-marketing techniques to traditional brand-marketing organizations.
• Tamara Gielen writes a great blog about using E-Mail to build relationships with customers.
• The American Catalog Mailers Association is formed to protect the craft known as cataloging.
• Google might say they own relationships with customers, by matching customer needs with vendors willing to pay Google the most to meet the needs of a customer.
  
• Salesforce.com might argue that they provide software that allows folks to manage relationships with clients.

My questions for you, the loyal reader, are these:

• Do you believe that a "brand" can manage customer relationships? In other words, is the term "CRM" antiquated, given today's marketing environment?
• If you were building a "brand" from scratch, which elements of "CRM" would you use to build your business? E-Mail? Catalogs? RSS? Blogs? Paid Search? What else?

Trust

I frequently read articles that use a formula to engage the reader.

• The article starts with an obvious statement that cannot be disagreed with, like "multichannel customers are the most valuable customers".
  
• Next, the author creates a sense of fear, as in "today's time-pressured customer won't stay loyal to a business using antiquated systems".
• Finally, the author offers a solution to the perceived threat, often structured as something like "'x' steps to an improved multichannel experience". The steps are either so elementary as to be virtually useless, or the steps include products or services offered by the author or the organization employing the author.
  

From time to time, I'm probably guilty of this style of writing. Interestingly I don't think I ever contacted a vendor or consultant on the basis of this style of writing.

I noticed that almost nobody visits my blog when I write articles for various publications. Maybe readers perceive I'm being a 'pundit'.

Conversely, I noticed that this blog receives a significant spike in traffic when I speak at conferences.

Lastly, I've had more than a thousand downloads of my white paper on Multichannel Forensics, a free paper that has only been publicized on this blog, a paper than can only be downloaded by my loyal readers, or via word of mouth.

My question for you, the loyal reader of this blog, is this ... when looking to purchase services, what/who are you most likely to trust?

• Folks you've worked with in the past.
• Companies with a proven track record in your profession.
• Companies offering innovative solutions.
• Companies offering inexpensive solutions.
• Consultants with a proven track record of success.
• Consultants with large 'name brand' consulting firms.
• Individuals who write blogs.
  
• Folks who write articles in trade journals.
• Folks who speak at conferences.
• Folks who offer white papers for free.
• Folks who offer discounts and promotions.

Your thoughts?

Return On Investment When Business Is Good

If you're one of the lucky folks managing online or catalog marketing at a company that is "winning", you have an interesting opportunity.

Let's say that this profit and loss statement represented what you expected to happen in April.

Demand	$100,000
Net Sales	$85,000
Gross Margin	$42,500
Less Marketing Cost	$25,000
Less Fulfillment Expense	$10,200
Operating Profit	$7,300
% of Net Sales	8.6%
Ad to Sales Ratio	29.4%
Average Order Size	$85.00
Number of Purchasers	1,176
Cost Per Purchaser	$21.25
Profit Per Purchaser	$6.21

You expected to generate $7,300 profit, and 1,176 new customers.

You execute this marketing plan, and observe these actual results for the month of April:

Demand	$115,000
Net Sales	$97,750
Gross Margin	$48,875
Less Marketing Cost	$25,000
Less Fulfillment Expense	$11,730
Operating Profit	$12,145
% of Net Sales	12.4%
Ad to Sales Ratio	25.6%
Average Order Size	$85.00
Number of Purchasers	1,353
Cost Per Purchaser	$18.48
Profit Per Purchaser	$8.98

Courtesy of the magic of your merchandising team, customers loved what you offered them, spending 15% more than expected.

Here's the challenge. If you believe that during the month of May you will see similar results, you can pocket a similar level of sales and profit.

Or, you can increase your advertising, and acquire more names, while still generating the same level of profit you promised to your CFO. This example shows what could happen, if you boosted your advertising spend:

Demand	$143,635
Net Sales	$122,090
Gross Margin	$61,045
Less Marketing Cost	$39,000
Less Fulfillment Expense	$14,651
Operating Profit	$7,394
% of Net Sales	6.1%
Ad to Sales Ratio	31.9%
Average Order Size	$85.00
Number of Purchasers	1,690
Cost Per Purchaser	$23.08
Profit Per Purchaser	$4.38

This is one of those unique mysteries that complicate the lives of those of us who manage profit and loss statements for online or catalog channels.

Choice number one allows us to pocket an additional five thousand dollars of profit.

Choice number two allows us to achieve our budgeted profit, but grows the top-line by an additional $28,000, and adds an additional 337 customers that contribute to future sales and profit.

I've always advocated spending more money when times are good, and spending more money when times are bad (to liquidate merchandise, but not at liquidation prices) --- holding to the marketing budget when business is close to plan.

What would you do? Would you pocket the profit today, or, would you spend more to acquire more customers, customers that deliver future sales and profit? Your thoughts?