The Most Important Catalog Marketing Metric: Organic Percentage

The most important metric in catalog marketing is called the "organic percentage".

The metric is defined as the percentage of demand, at a segment level, that would occur if no catalog mailings were delivered to a customer.

Most of the catalogers I speak with assume that the organic percentage is zero --- in other words, if catalogs were not mailed to a customer segment, the segment would not spend any money.

Of course, this assumption is false, perpetrated by biased matchback algorithms that incorrectly assign online orders to catalogs mailed to the customer, when in reality, the catalog had nothing to do with the generation of the order in question. You'll know that your matchback results are biased if the percentage of demand you add on to your acquisition segments (after matchback) is significantly lower than it is for housefile customers.

Catalogers who attempt contact strategy tests, say over a three month period of time, find relationships like this.

• Telephone - Only customers have an organic percentage around 10%.
• Telephone + Online customers have an organic percentage around 25%.
• Online - Only customers have an organic percentage around 40%.

In other words, if no catalogs are mailed to an online-only customer, the online customer will still spend 40% of the demand they would spend if they are mailed all of the catalogs during the quarter.

The organic percentage metric is critical, because it dramatically impacts your calculation of profit and loss. If you have a high organic percentage, then you are significantly overmailing customers, regardless of what your matchback analytics vendor tells you. If you have a low organic percentage, then you have no choice but to mail catalogs in order to generate demand.

The image at the beginning of this post shows the difference in profitability for the same segment of customers, comparing a 10% organic percentage to a 40% organic percentage. The ten percent level requires four mailings per quarter. The forty percent level maximizes profit at just one mailing per quarter. Think about what you could do with the expense from the three additional mailings?

If there were just one metric I'd ask catalogers to track at a segment level, during 2009, it would be the "organic percentage" metric. Knowing this metric fundamentally changes how you decide to contact different customer segments.

How important is this percentage? Take a brand like Nordstrom. This is an $8.5 billion dollar business that is luck to generate ten percent of that total from marketing activities. Therefore, the organic percentage is ninety percent. This brand generates ninety percent of sales without the aid of traditional marketing activities. That's a strong brand.

Think about Zappos. There's the volume they generate due to online marketing and search marketing, and then there's the volume they generate via word of mouth. I'd guess that half of their volume happens without the aid of marketing, plus or minus twenty percent.

And then think about a traditional cataloger. The traditional cataloger believes that the vast majority of demand happens becaue of catalog mailings. If mail/holdout tests validate this, then the cataloger is at the mercy of catalog marketing --- if customers are no longer responsive to this form of marketing, demand dries up.

The goal, of course, is to build a brand that has a high organic percentage, not needing advertising to drive sales and profit.

We can learn how much of customer demand is generated by advertising by executing thorough mail / holdout tests, in both catalog marketing and e-mail marketing.

Zip Code Marketing: Claritas PRIZM and Hillstrom's Zip Code Forensics

Some of you are wondering about the differences between Claritas PRIZM Clusters/Segments and Hillstrom's Zip Code Forensics. Here's a quick comparison of the differences.

Claritas PRIZM Clusters/Segments: Each zip code (or zip+4) is categorized into one of more than sixty different lifestyle segments. Each segment is given a clever name, describing the type of person who lives in that segment. Demographic studies, surveys, and data are compiled to create a profile of the type of person who lives in that segment. The segments are well defined, and help the user understand "who" lives in a particular area --- you hear the segment name "Shotguns And Pickups", and you have an immediate image of the demographic of that area. This segmentation scheme can be used to improve direct marketing activities, as each brand is likely to align with customers who spend a lot, and live in specific segments. The cost of using PRIZM clusters is reasonably expensive, though marketers can gain an acceptable ROI.

Hillstrom's Zip Code Forensics: Each zip code (not at a zip+4 level) is categorized into one of six different performance and channel preference segments, similar to traditional zip code models used in zip code marketing programs.

• Catalog Crazies: Highly productive zip codes that prefer traditional direct marketing.
• Online Bliss: Highly productive zip codes that prefer e-commerce and online community.
• Catalog Fans: Average zip codes with a traditional direct marketing preference.
• Online Spend: Average zip codes that lean toward e-commerce.
• Catalog Preference: Zip codes with customers who do not spend much money on direct marketing, but do prefer traditional direct marketing (i.e. catalogs).
• Online Preference: Zip codes with customers who do not spend much money on direct marketing, skewing toward e-commerce if they buy something.

The direct marketer will use Hillstrom's Zip Code Forensics to target geographies that have higher-spending customers --- especially when the direct marketer is looking at marketing activities that perform at or below break-even levels.

The direct marketer can expect to reduce marketing expense by about seventy percent by targeting only Catalog Crazies and Online Bliss zip codes --- while improving sales performance by about ten percent, yielding a significant increase in profitability.

Hillstrom's Zip Code Forensics is based on anonymous sales data by channel, at a zip code level, from leading catalog brands across the United States. Mathematical Algorithms and Census Data combine to yield the six segments mentioned earlier in this post.

Hillstrom's Zip Code Forensics is FREE (yes, I said FREE!) to customers who contribute anonymous, annual sales data by channel by zip code, with free quarterly updates as catalogers continue to add their sales data to the algorithm. For marketers using the segmentation scheme across at least 200,000 in annual marginal catalog circulation, it is expected that a positive ROI will be achieved, based on beta tests conducted earlier in 2008.

Folks who do not contribute anonymous, annual sales data by channel by zip code will be charged a fee of $5,000 for an annual license.

Contact me (kevinh@minethatdata.com) for details or to participate.

Customers Move From Catalog To Online To Retail

I've been telling you that Multichannel Forensics continually indicate that customers move from online to retail, glad to see others are also observing this relationship:

• IBM Research Suggests Customers Prefer To Move From Online To Retail, Not From Retail To Online, via Direct Magazine.

When you know that customers move from Catalog to Online, then from Online to Retail, then use Online to research future Retail activity, you view your multichannel marketing activities very differently than you view them through the multichannel marketing best practices we're currently being taught.

And long term, for those with a retail presence, the e-commerce channel is dwarfed by the "internet as a research channel" concept. The direct marketing community and web analytics community isn't ready for this reality.

If you are a retailer who has run simulations illustrating long-term customer migration, you've probably observed something like this (comparing an online/direct customer to a retail customer --- click on the image to enlarge it):



Again, you're likely to see this type of trend if you are Gap or J. Crew or Eddie Bauer or Best Buy or Ann Taylor or any brand with an online/direct and retail channel. Customers seem to migrate from online to retail. When that happens, they are much less likely to buy online, much more likely to research online. This changes how you view your website.

Williams Sonoma: Catalog And E-Mail Circulation Optimization

Courtesy of the folks at Multichannel Merchant, this article about huge circulation cuts at Williams Sonoma stimulates some thought, doesn't it?

The article mentions digital direct marketing as an alternative to catalog marketing. When you have a retail presence, it is much easier to go down this path, and sometimes it is more profitable to go down this path.

If you're a traditional cataloger, without a retail presence, life is more challenging. One of the things we have to do is more testing --- testing what happens when we combine catalog marketing with e-mail marketing.

Check out the sample test results, measured over a three month period of time to customers who receive both catalogs and e-mail marketing campaigns.

Catalogs	E-Mails	Phone	Online	Total	Profit
6	Yes	$6.50	$6.50	$13.00	$0.92
6	No	$7.50	$4.75	$12.25	$0.69
4	Yes	$5.50	$6.25	$11.75	$1.68
4	No	$6.50	$4.50	$11.00	$1.45
2	Yes	$3.50	$6.00	$9.50	$2.10
2	No	$4.50	$4.00	$8.50	$1.78
0	Yes	$0.00	$5.50	$5.50	$1.90
0	No	$0.00	$3.00	$3.00	$1.05

This is the style of test our industry can capitalize on. We compare combinations of catalog marketing contacts and e-mail marketing contacts, searching for the most profitable strategy. In this case, receiving two catalogs over the course of a quarter, coupled with a weekly e-mail marketing strategy, is most profitable.

Notice that this strategy doesn't yield the best result, in terms of total sales volume.

Also notice that sending no catalogs, and no e-mails, still causes customers to spend money. This might be the most important metric for you to obtain --- what percentage of volume happens if you don't execute any traditional direct marketing (catalog / e-mail)? Do you know this percentage? It's an awfully important one to know.

Where are we heading: We will slowly back off on traditional direct marketing --- and we will re-invest the advertising dollars we save in untested online marketing strategies. And over time, we'll identify online micro-channels that recoup the sales we lose by cutting back on catalog marketing, and we'll be more profitable!

E-Mail Marketing Gone Wild, Part 2

Ok, I corked-off plenty of you while ranting about e-mail marketing yesterday.

First, I fully understand the concept of offering discounts and promotions in the spirit of moving excess merchandise. So if your business is down 20% to last year, and you have no options for clearing excess product, I get why you have to go down this path. I also understand if you are trying to keep the customer file afloat so that there is file strength for next year.

But those are tactics in response to sluggish business.

Go look at Chad's subjectivity scanner, especially during the first half of 2007, a period not impacted by a sluggish economy. You'll consistently see 40% or 50% of messages focused on paying the customer money in exchange for a purchase. The strategy behind the channel is fundamentally broken. Why is the customer with broadband access in San Francisco worthy of a discount because she gave an e-mail address to you, while the customer in Vermont who orders over the telephone has to pay more when she gives you her telephone number?

Now, my wife just said, "why are you ranting when you should be offering solutions?" Point well taken.

What is the purpose of your e-mail marketing program? If the purpose is to facilitate low-profit purchases from customers craving discounts and promotions, then have at it. But clearly articulate your strategy to management.

Is the purpose to communicate a marketing story? If so, then do you care if the customer ever buys from your e-mail marketing program? Simply communicate the story, and measure if the sales are made up for in other channels. And if the sales are not made up in other channels, do you care? Do you quantify the impact of all of the copy you write for products online?

Is the purpose to drive the customer to the website? Then find the creative presentation that is most effective at driving customers online, and let the website convert the customer.

Is the purpose to communicate authority on key items? If so, then communicate your authority --- but you don't have to give promotions to accomplish this.

Is the purpose of e-mail marketing to clear excess inventory? If so, that is fine, go ahead and feature overstocked items at remarkable prices, and build an e-mail file that craves these opportunities. Be consistent, and communicate this strategy.

But if the purpose of e-mail marketing is to have e-mail marketing be part of an integrated multichannel marketing strategy, then listen to the pundits --- all promotions and discounts are offered in all channels at the same time --- build a congruent customer file that will respond in all channels.

The purpose here is not to belittle you. The purpose is to get all of us to view our channels strategically, and to optimize each channel based on what each channel is best at. I do not believe that the e-mail marketing channel is best served as the place where the customer gets to buy merchandise and not generate significant profit for the company.

A Veritable Plethora Of Updates

We talked about credit this week --- namely the way our industry sells money to customers as well as merchandise. I scolded our industry for this behavior. None of you elected to leave a comment, pro or con. But some of you sure liked the article on Ann Taylor's new credit/loyalty program, interacting with it and e-mailing it to your friends.



It's one thing if I suggest there's a catalog customer acquisition problem. It's a whole 'nother thing when it comes from a respected individual like Paul Imbierowicz.

Our challenge, as an industry, is to find the 100 micro-channels that replace the 15% drop in catalog customer acquisition circulation. Until we figure this one out (some folks have figured out some of the pieces, some catalogers are doing really neat stuff these days), mining lapsed buyers is a short-term fix.

Also notice that Mr. Imbierowicz promotes the concept of different marketing tactics for different customer segments. Good! Mr. Imbierowicz has always been one of the positive voices coming out of Abacus, in my opinion.



You've been enjoying the discussion about Hillstrom's Zip Code Forensics, based on my RSS stats and Google Analytics results and extensive beta test participation. Check out tip #1 from Lori Paikin, via Multichannel Merchant.



More on catalogers using social media:

• KooKoo Bear Kids.
• Michael Chiarello's Blog --- from NapaStyle.
• SwellBlog, from Swell.

Notice the brief comment in this Shop.org post about "questioning the ROI of blogging". Let me ask a question of the wise pundits who demand that the ROI of blogging be quantified ... Do you measure the ROI of the following activities?

• Do you measure the incremental value of each of the paragraphs of copy you write for the products on your website?
• Do you measure the incremental value of the color scheme you use on your website?
• Do you measure the incremental value of the font you choose to present information with on your website?
• Do you measure the incremental value of the periodicity of website updates ... i.e., do you measure whether it is right to update your homepage monthly, weekly, or in real-time?

If pundits aren't pontificating about measuring the ROI of these activities, then why in the name of Robert Scoble do the same pundits demand you measure the ROI of "blogging", which is really nothing more than a modern version of writing copy?


Multichannel Forensics A to Z: Interestingly, you enjoyed two articles more than any other during the last half of this series.

• Uncoded Demand
• Segmentation

Apparently, you want to know what to do with all those online orders that aren't directly attributable to a catalog --- and then you want to segment customers in a way that is actionable. Both are important. Both only scratch the surface of the real issues we face these days --- they are symptoms of bigger problems, like high blood pressure being a symptom of heart disease.

E-Mail Marketing Gone Wild

If you don't subscribe to Chad White's Retail E-Mail Blog, you have an opportunity to learn more about e-mail marketing. Where else are you going to find out what the popular retailers are doing with their e-mail marketing programs?

During the past two weeks, I looked through his "subjectivity scanner", trying to calculate the percentage of e-mail subject lines that focus on price/discounts/sales/free-shipping/promotions. Here's what I found:

• 61% of the e-mail marketing messages focused on price, discounts, sale, free shipping, bogos, or promotions.
• 39% focused on merchandise, disproportionately skewed to L.L. Bean, Lands' End, and Williams Sonoma.

Folks, how do we ever expect our customers to take us seriously, when six in ten messages tell the customer NOT to pay full price? We get upset that Wall St. drank the easy money kool-aid, now take a look at our own behavior?

E-mail marketing is fundamentally broken. We are poisoning our customer files, teaching customers to never pay full price anywhere. Why should a customer pay full price from the catalog when they can wait for the perfect promotion from an e-mail campaign?

Merchants should be taking us to the woodshed for a good 'ole fashioned paddlin'. We're poisoning their products with our endless quest for inflated open rates, click-through rates, and conversion rates. Heck, why don't we simply offer the merchandise for free???!!!! That would drive the metrics in the right direction, wouldn't it?

Until we, as an industry, stop trying to get an easy buck all in the name of best practices and inflated metrics, we won't be viewed by peers or customers as offering a respected marketing channel.