Direct Marketing: Money, Money, Money, Mo-ney ... MONEY

Maybe you noticed that the economy is in dire straits, and that Main St. is upset with Wall St. I now start my day at 6:15am on the West Coast by turning on CNBC to listen to the pundits describe seemingly unfathomable financial scenarios.

Here in the humble world of direct marketing, we've participated in an unregulated world, propping up our profit and loss statement using funny money.

Think I'm wrong? Let me offer you a few examples.

An EVP of marketing told me this, paraphrased: "It's all about a value. We surgically offer discounts, promotions, and pricing opportunities to customers in different life states. The prospect gets a cheaper price than the established customer, along with free shipping. The lapsed customer gets 20% off their order of $100 or more. And best customers participate in our loyalty program."

An e-mail I recently received: "What are the best promotions and wording in the subject lines of e-mail campaigns --- we need to boost performance?"

An owner: "Should I use marketing dollars to subsidize free shipping?"

A blog subscriber: "What are the three or four really easy things I could do today that would dramatically improve the performance of my business?"

A business leader: "Who has the best algorithm to improve paid search results?"

Another business leader: "They keep sending me catalogs that say this is the last catalog I'll ever receive. And then they keep sending me catalogs. They just lie to me."

Funny.

You Google "Best-Practices Marketing Promotions", and you get 264,000 results. If you Google "Best-Practices Merchandising Strategy", you're rewarded with 77,000 results.

We, the direct marketing community, may not be much different than Wall St. We sell our customers money, not merchandise, and we use algorithms to do the work for us. We shy away from the fundamentals of our business, which take a lot of time and discipline to master, instead focusing on the packaging of money to drive results this quarter. Would you like a savings of up to 55% on this order? How about free shipping if you use this coupon code? And this month only, take an additional 20% off of your order with your store credit card (next month, you'll take 25% off of your order). Or earn $10 off your next purchase if you buy this week. Buy one, get one free!

We're selling money. We attempt different schemes, all looking for ways to get a customer to fork over hard earned wages so that we hit our short-term sales targets. When we find ones that work, we call them "best practices". Zappos raises prices, then offers free shipping, a new best practice. Amazon offers free shipping at different hurdles, and different annual pre-payment levels --- a new best practice.

Regardless, the marketing of money erodes gross margin. And when gross margins erode, profit becomes a challenge. So we outsource everything we can, in an effort to improve margins. We source merchandise from China. We eliminate jobs in America (but expect those same Americans to keep buying from us). We merge our operations with other brands.

I worked at Lands' End from 1990 to 1995. We never offered promotions. The DNA of the brand didn't allow for free shipping, or %-off offers. We worked hard to clear excess merchandise the old-fashioned way. We were wildly profitable. Now take a look at the e-mail campaigns you receive from Lands' End, fully owned by Sears. You cannot keep up with the discounts and promotions.

I worked at Eddie Bauer from 1995 to 2000. Everything was a promotion. The brand imploded.

I worked at Nordstrom from 2001 to 2007. Promotions and gimmicks were few and far between. It was all about merchandise and customer service. EBIT averaged around 10% my last four years.

Selling money is a lot like adding cream to coffee. Coffee (merchandise) is black. When you initially pour the cream in, you don't really notice much of a difference. But eventually, the cream blends with the coffee, and you cannot separate the two.

And algorithms are dangerous ... necessary, but dangerous. Ask somebody on Wall St. to explain the financial products they created, and you'll have a hard time getting feedback you can clearly understand. Similarly, ask any direct marketing CEO to explain the bidding algorithm used by a paid search vendor, or ask the CEO to explain the way that Abacus chooses half of their customer acquisition prospects, or ask the CEO to explain the statistical algorithm used to select customers for mailings, and you're likely to get a blank stare.

We've created a layer that goes between the customer and the merchandise. We marketers placed money and algorithms between the customer and the merchandise. By doing so, we gave up so much control.

America is about to begin the process of separating the cream from the coffee. Will we, the direct marketing community, follow suit?

Ann Taylor Credit Card Program: Multichannel Marketing Best Practice?

Ok all of you multichannel best practice mavens, here's one for you to chew on.

Ann Taylor introduces a credit card program, with direct mail and e-mail marketing of the card provided by Alliance Data Systems Corp.

Read the article, then let the audience know if you think it is a best practice to have a third party market a credit card for a brand like Ann Taylor.

Remail Catalogs

Many of you who in the audience who are not catalogers may not realize that catalogers send you the same catalog, over and over and over.

This strategy is called a "remail" strategy.

It is a labor-intensive process to put a catalog together. It may be ten times harder to paginate a catalog than it is to construct a hundred landing pages. In saddle-stitched catalogs, you have to physically coordinate the merchandise on pages 2-3 as well as pages 78-79, since they are technically produced on the same piece of paper.

So catalogers figured out a way to be sneaky. We replaced the cover, back cover, and the inside pages associated with those pages with new creative and merchandise. However, what appears inside the remainder of the catalog is fundamentally the same.

This allows the cataloger to avoid having to pay the costs of producing new pages, often costing between $500 and $5,000 per page.

Of course, loyal customers indirectly realize that catalogers are fooling with them. We can see this, because the productivity of the "remail" catalog isn't as good as in the first release.

The table below illustrates what typically happens when a company sends a pair of remail catalogs to a customer, following new creative.

Catalog Remail Strategy
	Release 1		Release 2		Release 3
	$ per Bk	Profit	$ per Bk	Profit	$ per Bk	Profit
Segment 1	$8.00	$2.05	$5.60	$1.31	$3.92	$0.72
Segment 2	$5.00	$1.00	$3.50	$0.58	$2.45	$0.21
Segment 3	$3.50	$0.48	$2.45	$0.21	$1.72	($0.05)
Segment 4	$2.75	$0.21	$1.93	$0.02	$1.35	($0.18)
Segment 5	$2.50	$0.13	$1.75	($0.04)	$1.23	($0.22)

Notice that each time a catalog is mailed, it performs at 70% the level of the first mailing (in this example, your mileage will vary).

However, the productivity is usually good enough in subsequent releases that it allows the cataloger to mail the second and third release to many customers. In this case, the cataloger would not mail the catalogs to customers who are losing money. So, the best segment (segment 1) and the next best segment (segment 2) receives all three mailings. The third and fourth segments receive releases one and two. The fifth segment only receives the first release.

This strategy worked really well in a pre-Google world. Today, the fixed costs associated with producing new creative can be minimized in a veritable plethora of ways. And if the fixed costs can be minimized, new creative drives up productivity --- and causes customers to not feel like they are being duped. Further, with e-commerce sites changing often and e-mail marketing campaigns featuring fresh merchandise on a weekly basis, it makes less sense to stick to this old-school marketing strategy.

Until the profit and loss statement looks different than what is illustrated above, you'll continue to see catalogers execute this strategy. And it fuels a self-fulfilling prophesy --- customers feel exasperated when they keep getting similar catalogs in the mailbox, so they keep throwing them out.

Multichannel Forensics A to Z: Zendik

A "zendik" is a heretic, one who does not conform to an established attitude, doctrine or principal.

An open mind and Multichannel Forensics may well lead one to become a zendik.

I read an article this week, from an individual representing a vendor selling multichannel products and services. The individual, without providing any facts, stated that "it is now generally accepted that multichannel customers are the best customers". Ugh.

Some catalogers observe the following: Customer was a catalog customer, then customer uses the catalog to purchase online, then customer shops online independent of receiving catalogs, then cataloger wastes $$$ sending catalogs to this customer, compromising profitability. Is the alleged multichannel customer actually multichannel? And is the alleged multichannel customer the most valuable?

Here's another one. Retail customer doesn't find what she wants in a store, so she goes online to place her order. Retailer collects e-mail address, then pummels customer with an endless array of 20% off and free shipping offers that the customer doesn't want. Customer opts out of e-mail marketing program. Retailer simply ticks off the loyal one channel customer, because the retailer perceives the customer is multichannel.

STOP IT!

STOP IT!

STOP IT!

Stop trusting the pundits who are not concerned about the health of your business. Start analyzing your own customers --- actually figure out how customers move from step A to step B to step C, actually calculate the profitability of moving through these steps.

Stay away from the simplistic queries that dominate our industry --- queries like pulling out any customer purchasing from multiple channels, summing sales, then comparing those customers who buy from a single channel.

Be a zendik.

Credit Customers, Lifetime Value, Eddie Bauer

Some of you might have noticed talk in the media recently about our failing financial industry.

So it might be instructive to consider the role of credit within a retail brand.

Back in the day, in the late 1990s, I worked at Eddie Bauer. In the late 1990s, Eddie Bauer was a $1.6 billion dollar multichannel brand that routinely churned out ninety million dollars in pre-tax profit --- not outstanding performance, but not too shabby.

Eddie Bauer was owned by Spiegel, the century-old catalog brand out of suburban Chicago. Spiegel owned a bank, FCNB. That bank provided credit to credit-worthy consumers.

Retailers adore proprietary credit. There's no better way for a retail brand to extract an extra ten percent out of a $100 order than to encourage the customer to make $10 payments for a year at 24% interest.

The theory, then, is that after administrative expenses, proprietary credit can be responsible for nearly doubling the profitability of a customer, as long as the customer fails to pay down their debt in a timely manner.

	No Credit	With Credit
Demand	$100.00	$100.00
Net Sales	$70.00	$70.00
Gross Margin	$38.50	$38.50
Less Marketing Expense	$20.00	$20.00
Less Pick/Pack/Ship Expense	$7.70	$7.70
Variable Profit	$12.30	$12.30
Add: Interest Revenue	$0.00	$10.00
Less: Banking Expense	$0.00	$1.50
Net Contribution	$12.30	$20.80

On paper, the profitability of a proprietary credit customer looks too good to be true. The fairy tale drives a brand in a new direction.

If we know that the proprietary credit customer is this profitable, then we want to aggressively market credit to the customer, right? And we especially want to market credit to new customers. If credit customers are worth more, then we can prospect much deeper, increase sales, and on the surface, significantly increase profit. In the short term, this is all good.

At Eddie Bauer, we closely monitored the percentage of sales that were generated via proprietary credit. And we were strongly encouraged by Spiegel to amp that percentage, because a higher percentage of sales on proprietary credit resulted in more interest revenue, and theoretically, more profit.

So we amped-up our credit push. New customers were strongly encouraged to sign up for credit. Existing customers were given in-store, catalog, and e-commerce incentives to sign up for credit. Credit customers were offered promotions to take advantage of credit.

A funny thing happens when you focus on credit. You attract a customer who needs credit.

Not surprisingly, this customer is fundamentally different than bank card customers. The proprietary credit customer buys a slightly different merchandise assortment than does the bank card customer. This causes the merchandising division to chase merchandise preferred by the proprietary credit customer, not to chase merchandise preferred by quality customers.

Within two or three years of a consistent, relentless credit push, the brand has been fundamentally changed. Well, the brand has not been fundamentally changed --- the brand is the brand. But the customer file has been fundamentally changed, and the core of the brand, merchandise and customer service, has taken a back seat to proprietary credit.

Ultimately, the brand reverses direction. Instead of selling merchandise to the customer, the brand uses merchandise as a teaser to sell credit to the customer. Eventually, customers max their credit limits. Our analysis suggested that when a customer got within $100 of their credit limit, the customer stopped purchasing. Some customers failed to pay their debts.

When the credit "channel" begins to fail, the whole house of cards crumbles, bringing down everything.

The lessons are clear. By focusing on merchandise, by focusing on serving the needs of a customer, one can build a healthy business. By focusing on selling money to a customer, we don't sell anything of long-term value. Admittedly, we boost short-term performance. Essentially, we push long-term profit into a short-term window, paying a long-term price for the benefit of goosing short-term numbers.

At Nordstrom, credit was viewed in a different light. During my time at Nordstrom, credit was never the primary mechanism for a customer relationship. Strong credit leadership (Kevin Knight), and strong executive leadership (i.e. the Nordstrom family), prevented the business from going down the path that Eddie Bauer took.

Eddie Bauer is still trying to dig out of this problem, nearly a decade later.

And now our nation will attempt to dig out of a period of time when we gorged ourselves on credit.

The Customer Is In Charge

On a sale from 1 to 5, where a one implies that we are simply feckless consumers bowing at the knees of commerce giants, and a five suggests that commerce giants are at the mercy of a Web 2.0 empowered shopper who gets to call the shots, where do you think the customer stands, here at the end of 2008?

After the events of the past few weeks, my vote is for a "1". And I have an endless array of anecdotes to back up my position.

The Death Of Catalog Customer Acquisition, Coupled With Database Marketing And Best Practices

It's funny. If you read the pages of DMNews, Multichannel Merchant, or Catalog Success, you won't read a word about one of the biggest headaches facing the modern catalog brand (and online pureplays are going to deal with this soon, in a different way, when Google and online growth stall). And you won't find our industry leaders talking about this, either. Why? I don't know.

Folks contact me about this issue all the time. I field a lot of questions that sound like this:

"Hey, what are you seeing out there in terms of customer acquisition performance? Our performance continues to get worse, and we don't know how we'll acquire enough customers, long-term, to grow, or to simply stay in business. Where can I find a scalable source of new customers if catalog customer acquisition no longer works?"

Catalog customer acquisition, as we know it, is dying a slow and painful death ... especially if you are an established catalog brand.

Best practices (a term I despise, as you know) used to require you to rent and exchange names with competing companies. In the early 1990s, this was the primary way to grow a brand, especially for smaller companies, folks who could obtain productive names from larger brands. Larger brands benefited by having deep enough pockets to rent/exchange names with numerous small companies. Customers, not having access to companies they didn't know existed, didn't protest against the sale of their name and address the way a few million customers protest today.

Then Abacus changed the world. By having companies pool names in a database, companies could essentially take advantage of cross-company buying habits. Abacus modeled the names, harvesting those that are most productive across brands. Catalogers initially resisted the co-op model, but eventually learned that these names performed better, and were half as expensive as renting the same name from a competitor.

Abacus did so well that a handful of competitors arrived on the scene. The competition resulted in lower prices. The combination of competition, lower prices, and declining performance severely damaged the list rental/exchange industry. Now, the established best practice is to use co-ops for maybe a third to two-thirds of customer acquisition circulation, a major deferral of business responsibility from the catalog CEO to the co-op statistician.

Over the past three years, the world changed. Social Media and third-party catalog opt-out pundits will tell you that "the customer is in charge". And they are right, to some extent (would you suggest that the customer is in charge of financial products ... nope, the taxpayer will foot the bill), though the issue is far greater in scope that the pap-like structure of that sentence, so great, in fact, that we don't have time to discuss it here today. Maybe we'll address that topic tomorrow.

Make no mistake, maybe a third of the customers who used to shop via catalogs now look elsewhere when deciding to make a purchase decision for the first time. Oh, they may still purchase from our brands, but are now much less likely to do so because we sent them a catalog when they hadn't purchased previously. The customer uses other tools, and doesn't always welcome the intrusion in their mailbox.

The economics are clear. As performance degrades, the cost to mail so many prospect catalogs becomes prohibitive in comparison with the long-term value generated by a new customer.

The big brands are observing this, and are inventing new best practices. Some companies are aggressively building their own internal co-op style of database. Based on what some of you tell me, some big brands import data from their competitors, use the information to augment their own customer information, then make names/addresses available to the competitor submitting the information.

All of this is semi-futile, as name/address paper-based marketing slowly dies.

At this time, there are several paths companies are going down to address the death of catalog customer acquisition.

1. Partner heavily with co-ops, leveraging their matchback algorithms and results programs to manage both retention and acquisition circulation. This boosts results in the short-term, helping companies make the p&l for this quarter, or this year.
   
2. Big companies are building their own in-house prospect databases, looking to bypass the co-ops altogether, holding more information.
3. Small companies are being gobbled up by private equity firms, allowing the companies to leverage names/addresses from sister brands.
4. Folks are greatly expanding the use of paid search, and are finding that they cannot recoup the losses observed in catalog customer acquisition, and cannot scale paid search to replace paper-based customer acquisition.
   
5. Others are trying numerous social media strategies, finding that these micro-channels do not scale at the level that catalog customer acquisition scales, even when executed exceptionally well.
   

The reality is that the days of a nice, big, mass audience that can be marketed to via catalog customer acquisition strategies are ending. People are going to expend energy and see success in catalog customer acquisition --- but over the next ten years, performance will trend down --- some ups, a lot of downs.

So what? What do we do about this?

Well, I'm not a fan of building an internal prospect database, adding data from other companies to complement my marketing strategies. Put yourself in the seat of the customer. Do you want Big Brand "X" combining your purchase from Little Brand "Y" to their database, then use that information to market to you differently? You don't like the thought of Google knowing everything about your online habits, so I doubt you like the idea of big brands knowing everything about your offline habits.

Over the next three years, we have no choice but to dramatically expand our testing opportunities in every possible micro-channel that exists. We are losing a sure-fire source of most of our new customers. Now we begin the hard work of exploring a hundred or five hundred or a thousand micro-channels that will eventually replace the one big macro-channel we've used for a hundred years.

This won't be easy. It could be fun. If we don't do it, we face a significant downsizing.