The Great Implosion

Worse than a recession, better than the Great Depression, I coin our current economic situation "The Great Implosion".

I'm not sure when you first thought something was amiss. For me, it was the Spring of 2005. Nordstrom would announce spectacular annual profit levels, driven by robust comp store sales growth. Our stock price, languishing in the $8 to $13 range for years, surged past $30 in the Spring of 2005 (and would peak in the upper $50 range in early 2007).

All was good!

Well, good unless you were a garden variety analyst in the Database Marketing department, where we were handing out salary increases that, on average, were on par with inflation. I recall that my team howled at the injustice. They worked long hours to simply keep up with inflation, then went online and read the insider trading summaries, observing the ways we in management supplemented our compensation. My team felt that one of the one hundred greatest companies to work for might be able to offer them more than inflationary salary increases.

Of course, Nordstrom wasn't acting out of the norm, and wasn't trying to be nasty to employees, not in the least bit. The sole responsibility of a publicly traded company is to increase shareholder value, not to offer a database marketing staffer a higher-than-average wage.

It could have been worse for Nordstrom database marketing employees. Take AT&T, for instance. AT&T gave thousands of employees walking papers, then increased the dividend to shareholders. Gotta love capitalism!

Floyd Norris of the NYTimes shows us that from Q4-2004 to Q3-2008, S&P 500 companies generated $2.4 trillion in profit. They converted the profit into $1.7 trillion in stock buyback programs and $0.9 trillion in dividends. Shareholders made $2.6 trillion from the $2.4 trillion in profit generated by S&P 500 brands.

The data imply that S&P 500 brands had to borrow, in order to hand profits to shareholders while growing sales. This author of this article suggests that Nordstrom took on $1.5 billion in debt during the past few years, while buying back stock during the bubble, and is now on the hook for a hundred million dollars in interest payments each year, while absorbing huge comp store sales decreases and credit challenges.

Nobody should have been surprised that employees used their homes as a giant piggy bank, especially when the hopes of getting ahead in corporate America were/are slim. Borrowing against a home increasing in value became a vehicle to perceived affluence.

And when the piggy bank finally broke, the entire economic system collapsed --- The Great Implosion began.

TechCrunch keeps track of layoffs ... the numbers continue to grow. Worse, employees who get to keep their job will spend the next decade paying taxes for funds that bailed out the financial sector, a group of companies that largely benefited from the profit generated by S&P 500 brands.

The past eight years amounted to a gigantic redistribution of wealth. It was like a giant roulette wheel, where companies and employees made bets, periodically winning and losing, until a 00 turned up. The house collected while everybody wondered "what just happened?"

Now we have no choice but to dig out of The Great Implosion. Long-term, we won't do this by offering customers up to 60% off and free shipping. And we probably won't do this by ever trusting financial institutions again ... or by trusting big brands. We'll have to dig out of this by being crafty.

I get to work with companies in different geographic areas. Out West, I often work with startups, folks who exhibit very little fear --- they are hiring, finding funding, moving forward, creating products that will meet the needs of a future customer.

Elsewhere, I pay close attention to brands that have been around for a long time. Fall 2008 results are not optimistic ... these folks are hit hard by a spending slowdown.

They are also being hit by the redistribution machine known as Google. These companies work hard to generate demand, only to see Google take a penny here or there (on a massive scale) while re-directing demand to those who are best at playing the search and online marketing game. In the Fall of 2008, companies don't know how to fight back ... we simply race to the bottom, moving inventory at any cost. None of us can know what the long-term impact of an extended period of "up to 60% off and free shipping" will do to e-commerce. One might surmise that the impact won't be positive.

Most interesting to me is what will happen online in 2009. Assuming that customers continue to cut back on spending, leading to cuts in advertising by brands, it is reasonable to assume that Google will suffer. When Google stops fueling the growth of the online ecosystem, really interesting things start to happen.

The next generation of great online marketing leaders will come from this pressure-cooker. This new generation of leaders are, in my opinion, going to be different individuals than the ones that rode the updraft of e-commerce.

An entirely different skillset is required to acquire and retain customers when times are really bad. The e-commerce leaders of the next decade will create merchandising strategies that get customers to spend once again. Today, e-commerce is capable of taking orders ... it is not good at creating orders (as Alan Rimm-Kaufman says). This is one of the business tragedies of The Great Implosion ... we learned how to capture, intercept, and re-direct demand (often cannibalized from other channels), but we didn't learn how to create it.

I am actually filled with optimism about 2010 and beyond. I truly think this will be a period of tremendous innovation and creativity.

This brings us back to the employee, the individual hosed by The Great Implosion. We have a responsibility to bring something to the table. We have a responsibility to innovate, and to be creative --- and if our employer won't recognize our innovation and creativity, we need to find another job, or start a business of our own. We need to compete! Or as Scott Adams of "Dilbert" fame recently suggested, maybe we need to have a diversity of bosses. Working for one bad one isn't great, working for numerous bosses allows us to pick and choose.

Time for your thoughts about The Great Implosion. What do you think will happen over the next few years?

Neiman Marcus Results

Looking for a some light weekend reading? Why not plow through ten or more pages of the Q3 Neiman Marcus earnings transcript!

You'll see that online sales declined last quarter --- though so many VCBs (vendors, consultants, bloggers) keep telling us that all is good in e-commerce (maybe not for Google next spring ... what happens to your business when people slow their searches for merchandise), we can dig through results and find that the days of unfettered e-commerce growth are ending.

Leadership mentioned that the online business has a much more diverse customer base than stores have. This is one of the mysteries of multichannel marketing that almost nobody talks about. We're told we have to serve that same magical multichannel customer across channels, only to find out that there are hardly any multichannel customers out there. Then we're left dealing with managing diverse audiences with limited tools, which is pretty much where all of us are.

All of the magic happens when we serve diverse customers who use channels in unique and different ways.

Alaska: An Online Marketing Hotbed

There are nice catalog marketing zip codes in Alaska as well.

Buy online / pickup in stores doesn't work so well in Alaska. This is one state that would benefit from a bit of customer understanding and personalization!


Hillstrom's Zip Code Forensics is free for all direct marketers contributing anonymous, annual sales totals by physical channel (mail, phone, online, retail) at a zip code level.

To-date, participants are seeing an improvement in direct marketing activities against the six segments of between 5% and 20%, based on actual tests and backtests.

I'm also looking for a few more B2B volunteers --- I am creating a separate model for businesses selling to businesses --- the dynamics are simply different than the B2C model that has been created. Please contact me if you want to participate, for free.

Irresistible

When was the last time you received a catalog in the mail that was irresistible?

When was the last time you received an e-mail marketing message that was irresistible?

When was the last time you clicked-through a paid search term, and found yourself on a landing page that was simply irresistible?

Finally, when did somebody outside of the industry tell you that they found catalog marketing, e-mail marketing, or an online landing page to be irresistible?

These things need to change by 1/1/2010 for us to have success.

Rule Of Thumb For Marketing ROI / Profit

You've been through this drill before, haven't you? Your CMO or CEO or CFO wants to know "what would happen if we cut twenty percent from the marketing budget?".

This is where you use the square root rule to your advantage, allowing you to give a "back of the envelope" answer to questions that require a lot of time and energy.

Assume you spent $1,000,000 on marketing last year, generating $3,000,000 sales. Your profit factor is 35%, yielding profit of $3,000,000 * 0.35 - $1,000,000 = $50,000 .

What would happen if you cut 20% from your marketing budget.

Step 1: Sales = (($800,000 / $1,000,000) ^ 0.5) * $3,000,000 = (0.894 * $3,000,000) = $2,683,282. The "0.5" number is the square root ... you are taking the square root of the ratio in change of marketing spend. In this case, a 20% reduction in spend yields a 10.5% reduction in sales.

Step 2: Profit = $2,683,282 * 0.35 - $800,000 = $139,149.

In other words, you'd lose a little over $300,000 in sales, but profit would increase by nearly $90,000.

The square root rule allows you to play these "what if" scenarios ... and the scenarios are important. Sr. Management needs to get directional answers quickly. You don't want to do a ton of work, only to have the CFO tell you to run a new scenario where you cut marketing expense by 33%.

Is the square root rule 100% accurate? Absolutely not. In fact, there are times when it is blatantly inaccurate (affiliate marketing, shopping comparison sites, e-mail marketing).

When your leadership team needs an immediate answer, at an aggregate level, this rule of thumb works well.

The Best Catalog Zip Codes

Modern cataloging disproportionately skews to various rural areas in New England.

This map illustrates a hyper-responsive cluster of zip codes in New York, Vermont, and New Hampshire.

Urban areas (Boston) love e-commerce. Rural areas shop via catalogs, and shop disproportionately over the telephone.

Our job is to recognize the fundamental differences in customer behavior represented by geography. Mobile marketing and social media and a "Twitter-storm" are not as relevant in New Hampshire as a well-merchandised 124 page catalog that drives the customer to a call center, where a pleasant voiced sales associate walks a customer through an order.

The fact that almost nobody in our industry talks about this stuff is a bit surprising, isn't it? After all, you can improve the profitability of marginal segments by between 5% and 20% by applying Zip Code Forensics, based on actual tests and backtests.

Analog Dollars, Digital Pennies, Micro-Channels, Catalog Marketing

Many folks have talked about the evolution of analog media to digital media. The key topic is the transition from "analog dollars to digital pennies", where the brand slowly gives up big revenue streams for a bunch of tiny online revenue streams.

Nowhere has the transition from analog dollars to digital pennies been resisted more than in catalog marketing.

Our catalogs, which used to generate $5 per mailing, now generate maybe $2 to $4 per mailing, even after factoring in the results of matchback analytics.

But the $3 catalog mailing is still a big deal, when compared with the $0.15 we get when sending an e-mail marketing campaign into the digital marketplace. We need twenty-one e-mail subscribers to equal the sales impact we get when sending just one catalog into the analog marketplace (though the $0.15 e-mail may be more profitable than the $2 catalog mailing).

And a catalog mailing is a big deal, compared with paid search, where you work your tail off spending $500 to get 1,000 folks to click on a keyword, resulting in maybe twenty orders.

You keep telling me that paid search "doesn't scale", that there simply aren't enough people searching for "Ugg Boots" to replace all of the business you're slowly losing in catalog marketing.

We just can't force people to search for "Ugg Boots" in the same way we can force a catalog in the mailbox!

Catalog marketing scales. You can always visit your favorite co-op or list broker and pay $250,000 for one-time mailing access to 5,000,000 names willingly contributed by your most feared competitors if your catalogs are productive enough and you have deep pockets. A few catalog businesses appear to be absolutely thriving as they push themselves toward critical mass, offering desired merchandise and capitalizing on customers nurtured by competitors.

So catalog marketing, like the music industry and the newspaper industry and television and radio, is inevitably evolving, increasingly trading analog dollars for digital pennies.

And this is where we resist change.

We resist the transition to online marketing, just like the music industry resists the $0.99 digital song, and the eventual transition to a subscription-based music service. Just like the newspaper industry, we want the customer to keep using paper. We want to stay focused on a small number of activities that generate large amounts of revenue, activities that scale.

But online, the cataloger who wants to "scale" has to be in a thousand, or ten-thousand different places, all at the same time, without appearing to "force" itself into those places. These places are called "micro-channels", representing all of the ways a cataloger can interact with small communities.

Force is a key part of the analog equation. Catalog marketing via the mailbox/co-op/list-broker/printer defines force. E-mail marketing, after the opt-in opportunity, is largely an issue of force.

Paid search is not about force. The customer decides to click on your keyword. Natural/organic search is not about force (it is, however, about Google controlling your business). Affiliate marketing, shopping comparison sites, social media, they are not about force. In each case, the cataloger puts herself in a position to be successful, but the customer makes the final decision.

Nowhere is this more apparent than on this blog. Vendors hire PR firms, and those PR firms try to force a message upon you, the loyal reader, thinking they are taking advantage of this micro-channel. "Kevin, love your blog (though I review my web stats and observed that they just did a Google search for 'database marketing blog'). We think your readers would love to learn more about our products and services. Could we pay to place an article on your site, or would you be willing to volunteer your time to write about our products and services? Thanks, looking forward to our relationship!!" This is a traditional approach to micro-channels, trying to force a message.

Micro-channels are not about force, they are about influence. What might have happened if the firm I mentioned above had their own blog, and had mentioned my articles a half dozen times? Might I have voluntarily mentioned their business without their firm ever having to ask? In this example, they are using a micro-channel to get my micro-channel to talk about their overall business.

Take Eddie Bauer. Instead of spending $250,000 renting catalog names, why not give the first 5,000 Cute Overload subscribers this Holiday Labrador Ornament for free, no strings attached? And don't do that on the big, popular blogs, but go give this opportunity to the good folks at The Lab Brats Blog, too! Go out and interact with folks, build relationships, give people something, test things, see what works. Or better yet, host your own blog and plant some seeds now.

It is easy to rent 5,000,000 names from a co-op. 5,000 names or 5,000,000 names, the work largely scales, one person asking the co-op for names, one accounting department paying the bill, one postal service delivering the catalogs.

It is hard work managing five thousand micro-channels.

List rental and co-op marketing represent analog dollars. Micro-channels represent digital pennies.

The transition is being made for us, so why not embrace it?

Your thoughts?