Multichannel Forensics: Calculating Migration Mode

Before we go into various studies, we need to know how to calculate the migration mode of each product, brand, or channel.

Here's an example for the online channel of a multichannel retailer.

Step 1: Calculate the annual repurchase rate for online customers, across all channels. Answer = 55%.

Step 2: Calculate the annual purchase rate for online customers within each channel.

• Total Company = 55%.
• Catalog Channel = 5%.
• Online Channel = 35%.
• Retail Channel = 30%.

Step 3: Calculate the purchase index for each channel, measured as the channel purchase rate divided by the total company purchase rate. Though we will calculate the metric for the online channel, we're only interested in the metric as it relates to the catalog and retail channels.

• Catalog Channel = 5% / 55% = 0.091.
• Online Channel = 35% / 55% = 0.636.
• Retail Channel = 30% / 55% = 0.545.

Step 4: Classify each metric into isolation mode, equilibrium mode, or transfer mode (oscillation mode occurs when two channels transfer to each other).

• Isolation Mode = Index between 0.00 and 0.20.
• Equilibrium Mode = Index between 0.20 and 0.50.
• Transfer Mode = Index greater than 0.50.

• Catalog is in Isolation with the Online Channel.
• The Online Channel Transfers customers to the Retail Channel.

Given the dynamics of this business, customers ultimately migrate from the website to retail stores.

Multichannel Forensics: The Building Blocks

We'll start our Multichannel Forensics series with a quick refresher course.

There are three loyalty modes for every product, brand or channel.

• Retention Mode: When at least 60% of prior year customers purchase again this year (if your business doesn't support a twelve month repurchase period, use a timeframe that is appropriate.

• Hybrid Mode: When between 40% and 60% of prior year customers purchase again this year.

• Acquisition Mode: When fewer than 40% of prior year customers purchase again this year.

We need to classify each product, brand or channel into one of these three modes, so that we can understand the primary way that growth will happen. So many brands are in "Acquisition Mode" and don't realize it, depending heavily on customer acquisition for long-term health.

There are also four Migration Modes that each product, brand or channel fall into.

• Isolation Mode: This happens when the customers in a product, brand or channel do not migrate to other products, brands or channels. For instance, customers who purchase Mens apparel are unlikely to buy Womens apparel. Mens apparel buyers are in "Isolation Mode".

• Equilibrium Mode: This happens when the customers in a product, brand or channel are willing to try other products, brands or channels. For instance, customers who purchase Womens apparel might purchase Mens apparel for their spouse. Womens apparel buyers are frequently in "Equilibrium Mode". This mode is common, and is responsible for all of the interesting dynamics that occur when customers shift from one product line (DVD Players) to another (Blu-Ray DVD Player).

• Transfer Mode: This happens when the customers in a product, brand or channel are actively switching loyalty. Over the next decade, automobile purchasers will actively transfer loyalty from gas-guzzling cars to hybrid cars and other technologies. CEOs need to recognize this mode, and react in a positive way in order to protect jobs.

• Oscillation Mode: Sometimes, customers switch back and forth between products, brands or channels. This is known as "Oscillation Mode". Computer buyers purchase software and peripherals, then switch back to buying a new computer, then switch to software and peripherals, resulting in "Oscillation Mode".

The combination of Loyalty Mode and Migration Mode yield the unique situation a product, brand or channel resides in.

Maybe you are a catalog CEO. If your catalog channel is in "Acquisition/Transfer" mode, your job is to scale back on catalog advertising over time, as your customers won't allow you to grow this channel anymore.

Maybe you are a Merchandise EVP. If your product is in "Retention/Isolation" mode, you thoroughly control your merchandise line. Your customers are loyal to your products, and do not switch loyalty to another merchandise line. You have the potential to be a rock star.

Maybe you are the General Manager of the Online Channel of a Multichannel Brand. If your channel is in "Hybrid/Equilibrium" mode, you have a very interesting channel to manage. Your customers want to shop your store channel, but aren't avid store customers. Strategically, you can influence your customers by the marketing techniques you use. Do you want your customers to shop online, in stores, or anywhere? In many ways, you get to decide!

This week, we'll look at several case studies, examples that help CEOs understand how to manage multichannel complexity!

Multichannel Forensics Week

The coming week will feature insight into several ways that Multichannel Forensics can be used to gain insight into critical business issues.

• When to cut back on catalog mailings.
• Multichannel Forensics for internet startups.
• The interplay between retail stores and the websites that support stores.
• E-Mail as a marketing channel.

Are there any other topics you'd like for me to explore this week?

Sour Business, Catalog Prospecting, And E-Mail

More struggles for Lillian Vernon, Sharper Image, Red Envelope, and Flax Art & Design.

A significant downturn in catalog prospecting performance (for some) is coupled with last year's postage increases, causing problems.

This is a really good time to test all possible online and e-mail marketing opportunities. For e-mail marketers and vendors, this is your opportunity to shine. We need e-mail productivity to double or triple in order to begin to reduce catalog mailings and protect jobs. Is this type of improvement possible?

Williams Sonoma / Pottery Barn And Multichannel Growth

The DMA is selling a research report suggesting that "Retailers Have Multichannel Skills But Need Help Integrating Channels". The conclusions are based on questions brands answered in a recent survey.

Is there any place we can verify the claims outlined in the report?

Let's look at long-term sales trends from a respected and profitable multi-brand retailer, Williams Sonoma (WSM), owner of the flagship Williams Sonoma brand and the popular Pottery Barn brand.

One can go back to at least 1991 to understand how Williams Sonoma grew sales in the direct-to-consumer (catalog + website) channel and in the retail channel (here are results from the past five fiscal years).

Williams Sonoma introduced the e-commerce channel in 1999. In the table below, annual results are listed, as well as pre-internet and post-internet results:

Williams Sonoma: Comp Store And Direct Channel Growth
Year	Direct Growth	Retail Comps
2007 (Nine Months)	2.9%	0.5%
2006	4.5%	0.3%
2005	13.6%	4.9%
2004	17.1%	3.5%
2003	20.8%	4.0%
2002	10.2%	2.7%
2001	8.4%	1.7%
2000	33.1%	5.5%
1999	34.2%	6.4%
1998	15.7%	5.0%
1997	11.2%	2.8%
1996	11.9%	4.6%
1995	16.2%	3.4%
1994	55.0%	16.5%
1993	23.9%	13.8%
1992	-0.2%	2.1%
1991	-3.8%	0.5%
Results: 2000 - 2007	13.5%	2.9%
Results: 1991 - 1999	17.1%	6.0%

It isn't a stretch to suggest that Williams Sonoma and Pottery Barn do an above-average job of integrating channels, per the recommendations offered in the DMA research report.

And yet, during this era of multichannel goodness, direct-to-consumer sales are growing slower post-internet than pre-internet. Retail comp store sales are growing slower post-internet than pre-internet.

Some of this is due to scale --- as a business grows, it becomes harder to grow sales as a percentage of prior year sales.

Could some of this be due to a failure of perceived multichannel best practices? Adding an e-commerce channel to an established catalog channel should result in new customers, a new audience, and much improved growth, right?

Instead, we see slower growth rates.

We're also told that catalogs and e-commerce drive comp store sales increases. Pages circulated increased a total of 36% in the past four years, but comp store sales increases are, at best, tepid.

Williams Sonoma is a respected brand with increasing sales and robust profit, profit levels that any company would be proud of. Williams Sonoma exhibits most of the multichannel marketing behaviors and cross-channel integration that we're told we must employ to be successful.

To date, multichannel best practices at Williams Sonoma have not translated to incremental increases in direct-to-consumer sales or retail comps.

Why do you think this is the case? Are the multichannel experts missing something? Is Williams Sonoma an anomaly? Is there a multichannel brand that executes multichannel marketing well, demonstrated via publicly reported sales and profit increases?

The Multichannel Customer Merch Curse

It is always interesting to hear different catalogers tell me different things.

• "If we didn't mail a catalog, our online business would not exist".

• "Our catalogs don't drive a lot of sales to our online channel".

Similar brands sometimes say contradictory things.

Here's a query that your business intelligence team should run for you.

• Identify anybody who purchased during 2007.
• Group them into telephone-only, phone + website, and website-only customers based on 2007 activity (if you're a retail multichannel brand, use retail-only, retail + website, website-only).
• For each of your three segments, calculate the percentage of 2007 sales spent on classic products (those introduced to the customer a long time ago), and the percentage spent on new products (those introduced to the customer recently --- you decide on the timeframes based on your product cycles).

Sometimes you'll see this:

• Phone-Only = 63% spent on classic product.
• Phone + Website = 45% spent on classic product.
• Website-Only = 43% spent on classic product.

When this happens, it is very possible that your catalog is not effective at driving sales online.

Sometimes you'll see this:

• Phone-Only = 63% spent on classic product.
• Phone + Website = 53% spent on classic product.
• Website-Only = 43% spent on classic product.

When this happens, you catalog drives customers online, but the customer finds something else to purchase.

Then you might find this relationship:

• Phone-Only = 63% spent on classic product.
• Phone + Website = 61% spent on classic product.
• Website-Only = 43% spent on classic product.

In this situation, you'll probably find that your catalog drives a ton of volume online.

The reason your business intelligence team runs this query for you is to better understand how to merchandise your catalog. If multichannel customers buy product that is somewhat different than what is offered in your catalog, you will want to test different creative strategies in your catalog, from repaginating the merchandise to creating an entirely different catalog for multichannel customers.

Your turn ... what have you observed when running this type of query, and how did you change your marketing practices as a result of learning this information?

Survey Results: What Purpose Does Catalog Choice Serve?

Please visit the homepage for the latest survey, asking why you read The MineThatData Blog.

You were given a chance to speak out about Catalog Choice, the customer-friendly and eco-friendly organization that protects customers from the misery of receiving unsolicited catalogs.

Here is how you responded:

• 43% = Catalog Choice simply gives customers a way to opt-out of unwanted and unsolicited catalog mailings.

• 14% = Catalog Choice uses this service to promote an eco-friendly agenda.

• 29% = Catalog Choice wants to dictate a new business model to catalogers.

• 14% = We cannot possibly know or understand what Catalog Choice wants to accomplish.

As you can clearly see, our readers are split in their perception of what Catalog Choice wishes to accomplish.

I truly believe catalogers want to honor opt-out requests. I have yet to hear information contrary to this.

Catalogers want to trust one or both organizations (Catalog Choice and the Direct Marketing Organization, contrasting organizations promoting common objectives). Catalogers are reading your press releases and blog discussions, scrutinizing your words and actions. Use your platforms to do good!