Customer Loyalty: Open Your Spreadsheets!

Here's one for those of you who have been following along with your own spreadsheet (e-mail me for your copy).

Quiz: Using the customer retention index line (cells C5 - G5), figure out how much you have to increase customer retention in order for this business to hit $80,000,000 in Year 5.

Use the comments section of this post to outline your solution. There are many different solutions that get you to the same answer.

Buy the book here, if you are so inclined!

Thanks For The Memories, ACCM

Those of you in the audience who spent all but the last few years being wined and dined by vendors at the Catalog Conference may enjoy one final glass of champagne this evening ... the ACCM is no more.

Of course, the Catalog Conference really wasn't the Catalog Conference once it became the "ACCM". Catalog marketers paid close attention to the name change, opting instead for Internet Retailer and Shop.org for advanced marketing topics.

Shop.org and Internet Retailer would be well-served by a post-mortem of the missteps of ACCM. A decade from now, it is not hard to envision an environment where Shop.org and Internet Retailer are considered old-school fossils when compared with the Hologram Marketing Conference (HMC) --- I mean, who the heck would use coal-based e-commerce servers to place orders on landfill-unfriendly laptops when one is able to verbally tell a solar-powered Hologram to buy whatever you want in a virtual shopping environment in your own living room?

You can only imagine the session titles at the old-school conferences ... "E-Commerce + Hologram Marketing, Using Your Website To Drive Multichannel Traffic To Your Personalized Hologram", or "Don't Forget Twitter When Launching Your Hologram Marketing Campaigns". You can imagine the rhetoric ... "Customers who use both e-commerce and hologram marketing spend 88% more than customers who use just hologram marketing, according to Woodside Research."

Sounds odd now, but we all know it is coming.

Catalogers, what are your favorite memories of the Catalog Conference?

This Week In Business: Twitter ROI

Last week's discussion about Social Media Snake Oil was the most read blog post of the Fall Season.

Not the most read, of course, by our core audience, but most read due to the viral nature of Twitter.

In my case, I had about 200 new individuals click-through some place in Twitter and read the article. Of the 200 new individuals, about 30 chose to follow me on Twitter, with a third un-following me within a few days. And of the 200 new individuals, about five or six chose to subscribe to my blog, where all of the in-depth discussion and analysis happens.

I need about 75 new subscribers to yield one new consulting project. And each new consulting project is worth, let's assume, an average of $12,000 (some small ones, some whoppers, the average being maybe $12,000).

Therefore, we can calculate the estimated consulting revenue that will be generated by a blockbuster article that is re-tweeted around the globe:

• Value = ($12,000 * (5 blog subs / 75 blog subs per project)) / (200 new visitors via Twitter) = $4.00 consulting revenue per new visitor from Twitter.

Hint #1: I cannot stay in business at $4.00 consulting revenue per new visitor from Twitter.

Hint #2: You have a better chance of making $/tweet if the tweet has a long "life". This doesn't happen in Twitter, with the average tweet having a 15 minute life, while articles that are re-tweeted have a life for maybe six hours.

This is where the Snake Oil aspect of Social Media appears. Retailers and business leaders understand this issue. For a tool like Twitter to be successful, you have to "scale" to a huge number of unique followers (those who don't follow you because you followed them), or you have to write blog content that is so stunningly outstanding that you get a ton of visitors at low monetary values to make it pay off, or you have to find the exact nine people who are highly likely to purchase your services at the exact moment your tweet is released into the ether.

My blog articles get re-tweeted at the levels of last week's most popular article about once every two or three months. So once every two or three months, I am able to achieve a potential windfall of $800 via Twitter. This isn't what the Social Media experts promise you the "conversation economy" will deliver.

In many ways, Social Media is a glorified Pyramid Scheme. My blog sustains my business, but I am one of just a handful of people who can do that. For everybody else, there is a fight for attention. You have to acquire a huge following, and that following must be seeded with influentials who re-tweet your content to large audiences, who then re-tweet your content to their smaller audiences, in order for the whole process to "scale" to a sustainable revenue level.

And as you can see, it takes a lot of "scale" to make that happen.

Given the Pyramid Scheme style of development required by Twitter, it is easy to see why those at the top of the Pyramid Scheme tell you that you, too, can do this, and then belittle you when you don't succeed, saying you "didn't do things the right way", suggesting that somehow it is your fault that you didn't succeed.

It isn't your fault. It is a probabilistic game that only a small number of people/brands can win.

Take Nordstrom's Twitter presence, about 20,000 followers across a customer base of maybe 8,000,000 annual buyers. Just think about that when you consider "scale" ... they have maybe 8,000,000 annual buyers and only 1 in 400 care enough to follow Nordstrom on Twitter ... heck, they have only 14 times as many followers as I have.

If an eight billion dollar brand that is known world-wide for customer service only has 14 times as many followers as I have, what chance of success is there for anybody to make a living on Twitter?

Now, when Nordstrom takes care of a customer issue via Twitter, well, that is 100% consistent with what their brand is about, right? And when you think about using Social Media in that manner, well, then you are defining ROI differently, and then Social Media becomes a great fit.

Inefficiency

The best reason to dig into Online Marketing Simulations (buy the book, purchase via Kindle, or buy a digital download) is to find inefficiencies in your business.

Here's the deal. The vast majority of online marketing focuses on "easy conversions".

• SEO --- close to free.
• E-Mail via batch-based campaigns --- close to free.
• Promotions --- free shipping, % off, GWP, PWP.
• Paid Search --- expensive, but better when coupled with a promotion.

There are what I call "hard conversions". These are the conversions that happen the old fashioned way, when a customer finds your product so compelling that they cannot resist it. Hard conversions often lead to loyal customers.

So the goal is to find hard conversions that lead to long-term value. That's not easy. But that's what the OMS methodology enables you to do.

See, you'd rather get half of the clicks if it means that those customers are worth double or triple the value of easy conversions, right?

I'm here to tell you that Online Marketing is inherently inefficient. The entire ecosystem, and the Web Analytics solutions that measure the ecosystem, create a giant feedback loop based on easy conversions. It's easy to see how the conversion funnel worked via Google Analytics.

Now try to use Google Analytics to measure the five year simulated trajectory of your business, based on the customers who fall through the purchase funnel and eventually convert. Or Omniture. Or Coremetrics.

We use Online Marketing Simulations to find inefficiencies, seeking to optimize the long-term health of our business. Those who use Online Marketing Simulations have a clear competitive advantage over those optimizing the business based on conversion rates.

Dear Catalog CEOs: Financial Weapons of Mass Destruction

Dear Catalog CEOs:

Last week, I was asked the following question by an experienced catalog advocate:

"Have you looked at this L.L. Bean catalog cover? Are they selling product or promotions?"

The same thought came to mind when viewing the other half of the promotional arms race from Lands' End. Last week, I received the following e-mail marketing messages (wording isn't exact, promotions are).

• Message #1 = Final day of 25% off of everything plus free shipping.
• Message #2 = 25% off everything plus free shipping extended one day.
• Messages #3-4 = Up to 50% off all outerwear plus free shipping, two days only.
• Message #5: 25% off everything plus free shipping.

Interesting!

L.L. Bean and Lands' End, of course, are not catalog brands, and they certainly are not alone in their pursuit of market share via compelling discounts and promotions, are they?

They do, however, represent the fabled multi-channel brand, combining stores and e-commerce and catalog advertising and e-mail marketing and search marketing and affiliate marketing and portal advertising and social media and mobile marketing and television advertising and radio advertising and billboard advertising and newspaper advertising and magazine advertising and telemarketing and co-branded credit marketing and postcard marketing and package insert marketing and discounts and promotions into something that the pundits believe is nothing short of customer nirvana.

If all of that stuff worked as the pundits suggest it should work, would any multichannel brand have to give you free shipping and 50% off outerwear in order to encourage a purchase during the busiest shopping period of the entire year, a period of time when the customer is most likely to buy outerwear?

You, of course, are a Catalog CEO. You are not required to discount to such apocalyptic levels, because you don't have to "be competitive" with retail stores in the same way that L.L. Bean and Lands' End theoretically have to.

Discounts and promotions are our version of "financial weapons of mass destruction". They are taxes placed upon brands for being unremarkable.

You are probably already executing reporting of this nature, but in case you aren't, please ask your Business Intelligence team to run the following report for you:

Step 1: Categorize customers into one of four buckets.

1. Historical customer who only purchases merchandise at full-price, and never uses discounts/promos.
2. Historical customer who buys using a mix of full-price, sale, discounts, and promos.
3. Historical customer who only buys using a mix of sale items, discounts, and promotions, never purchasing full-price merchandise.
4. First time buyers.

Step 2: Sum demand spent within each of the four groups --- full-price items with no promotions, sale-priced items with no promotions, full-price items using discounts/promos, sale-items using discounts/promos.

Step 3: Run this report, for the month of December, for each of the past three years.

What do you observe? Are you converting all of your full-price customers to sale items? Are you converting all of your customers to ones who only buy when there is a discount or promotion? Do discount/promo/sale customers ever purchase full-price merchandise without the aid of a discount or promotion?

We all know that the best way to manage a brand is to acquire customers who willingly pay full-price, without any need for external stimulation. The minute we pollute the customer file with customers who thrive on the need for external stimulation (% off, discounts, promotions), we place the long-term, full-priced health of our business at risk ... we insert a game (% off, discounts, promotions) in-between the customer and merchandise. Eventually, the purchase of merchandise becomes "conditional" on "playing the game" ... never a good thing.

As always, I am available to help you create sale/promo reporting that illustrates if your business is being skewed toward an unsustainable mix of promotional buyers. Contact me at your convenience for assistance.

Thanks,
Kevin

Gliebers Dresses: ResponseShop

Today, I am visiting the offices of ResponseShop, the co-op that Gliebers Dresses does most of their customer acquisition work with, meeting with account VP Rob Clarke.

Rob: "Kevin, thanks for coming, though I don't understand why you are here today?"

Kevin: "Glenn Glieber asked me to visit all key Gliebers Dresses marketing vendors, to understand how each vendor is helping Gliebers Dresses become more successful."

Rob: "You did something to get voted off the island, didn't you? This happens to all Gleibers Dresses consultants. Eventually, they say something that ticks off Roger Morgan, and they're banned from the building until they are willing to play ball again. Why do you think Chip Cayman only shows up there three or four times a year?"

Kevin: "I don't know about that. My job is to support Mr. Glieber."

Rob: "Sure it is. Anyway, what did you come all the way here to ask me about?"

Kevin: "Let's talk about the names you provide Gliebers Dresses."

Rob: "The absolute best names available anywhere. We have this thing called a 'harmony model', and it selects the absolute best names available anywhere."

Kevin: "And who are those 'best names available anywhere'? Can you describe for me the demographic composition of the names?"

Rob: "Well, we don't look at the world that way. See, these are names that are in 'harmony' with your business. They have similar buying habits and merchandise preferences across other companies."

Kevin: "So you don't really know who these customers are?"

Rob: "Yes, we do. They are customers who are in 'harmony' with Gliebers Dresses customers. A complex set of equations dictate who scores high in a harmony model. Our statisticians are among the best in the industry, doctorate degree holders and entry-level statisticians who really focus on complex math."

Kevin: "We carefully analyze ResponseShop sourced buyers. There are some very interesting trends. Did you know that the names you give Gliebers Dresses disproportionately prefer telephone transactions over online transactions?"

Rob: "Well, we don't really look at the world that way. We really care about simply finding customers who buy something from Gliebers Dresses."

Kevin: "Across all sources of acquisition, ResponseShop has the highest proportion of customers who order over the telephone. This is important, because those names are the easiest to track, meaning that ResponseShop gets more credit for these names, making ResponseShop performance look best, causing Gleibers Dresses to allocate more of their customer acquisition budget to ResponseShop."

Rob: "That's silly. We have our new matchback tool, called 'ChannelMAX'. It clearly points out who buys online or in any other channel. We'll find those online buyers, and allocate them back to the catalog mailing that drove the order. In fact, any order within sixty days of a mailing is matched back to the original catalog."

Kevin: "That's a problem, Rob. We did a test at Gliebers Dresses. We purposely chose not to put 50,000 harmony model names in the mail. Then we looked at the results via ChannelMAX. It turns out that 60% of the housefile orders and 15% of the customer acquisition orders would have happened if no catalog was mailed. This means that ChannelMAX is over-stating results, which means that your clients unprofitably over-mail customers, causing your profit and loss statement to look really good."

Rob: "It's simple matchback business rules, Kevin. We just hope you use the tool as designed."

Kevin: "But all you have to do is encourage your clients to do holdout tests, like Gliebers Dresses did, then put the holdout tests into ChannelMAX. Your clients will learn that they are over-mailing customers, often significantly. Your clients will become much more profitable. Don't you want your clients to be more profitable?"

Rob: "Again, we encourage catalogers to apply simple matchback business rules. We fully believe in our matchback strategy. We're using leading-edge technology to match harmony model purchasers back to the catalog that drove the order. The same thing happens online, but I don't hear anybody complaining about Google cannibalizing orders."

Kevin: "Here's another question. You charge Gliebers Dresses six cents per name, but you charge other clients five cents per name, or even less in some instances, correct?"

Rob: "We negotiate specific deals with every one of our clients. We strongly believe that each client receives maximum value for their investment with ResponseShop."

Kevin: "And Gliebers Dresses is paying for gross names, correct?"

Rob: "Correct, they pay six cents for each of the 100,000 names they select via the harmony model."

Kevin: "And then Gliebers Dresses executes a merge/purge, and finds out that 67,000 names are already on their database. Gliebers Dresses can only mail 33,000 names. So, ultimately, Gliebers Dresses is paying eighteen cents per name, correct?"

Rob: "We're not holding a gun to their head, Kevin. They can do what they want with the information. Some companies use multi buyers in very creative ways, or they populate their internal customer database with the information that comes from the merge/purge process. You cannot put a dollar value on that type of information."

Kevin: "Well, no, they are already mailing the names, because the names are already on their housefile. Wouldn't it make sense to develop a relationship that is more equitable for Gliebers Dresses, so that they can mail more of your names? Eighteen cents per name is insane, given that they pay Google maybe fifty cents per click, and that potential customer has raised her hand, demonstrating interest in a specific item. Couldn't there be some sort of sliding payment scale, based on how deep the client mails, coupled with the names that net out of the merge?"

Rob: "We've actually done the math on this one, and the pricing model we currently employ is close to optimal for both parties, and is highly competitive with other co-ops in our industry."

Kevin: "We looked at the merchandise that harmony model customers purchase. The merchandise is skewed toward 'basics', skewed away from 'fashion'. It turns out that, as ResponseShop becomes a larger and larger contributor of names to Gliebers Dresses, that the business skews more and more toward customers who like 'basics'. And basics have a lower profit margin, making it increasingly harder for Gliebers Dresses to sell high-margin fashion items in the future. Can your harmony model account for this, and instead focus on finding buyers that buy high-margin fashion items?"

Rob: "Well, we don't really care what merchandise the customer buys, that's between the customer and Gliebers Dresses. We just want the names to perform the best."

Kevin: "I've got everything I need from this visit, Rob, thanks for taking the time to chat with me."

Rob: "Seems like a long way to come for so little information, Kevin. Hopefully you'll get out of the Roger Morgan doghouse soon. We've been with Gliebers Dresses since 1994, I think we know how to take care of Roger. We feed him a lot of white papers and research articles. When we give him 'food for thought', he tends to stay out of our way."

Social Media Snake Oil? Yes? No?

One of our loyal Twitter followers (click here to follow the action on Twitter) asked me to speak about the retailer gold rush into Social Media. This individual wanted to know if this was a broader trend worth paying attention to, or if this was the outcome of the Snake Oil being sold to businesses.

The answer, of course, is "yes".

Yes, this is a broader trend worth paying attention to.

And yes, this is the outcome of an unbelievable amount of less-than-optimal information being shared by a small number of individuals.

The broader trend is that social media is infiltrating daily life for those who choose to let it in. In five years, you'll view the communication tools (i.e. Twitter) much like you view your telephone in your office. Did you know that your telephone is an old-school version of social media? It allows you to communicate with other people. Did you know that e-mail is an old-school version of social media? It allows you to have communications with multiple people at the same time.

Both telephone and e-mail simply become part of the fabric of your daily life. Social Media, for those who want to invite it into their lives, will become another tool, like the telephone or e-mail. That's pretty boring, isn't it?

Now for the snake oil.

Did you hear that Dell has sold $6.5 million on Twitter? This fact is tweeted once a minute.

Did you hear that Dell sells over $60,000,000,000 of merchandise a year, much of it at full price, while the $6,500,000 sold via Twitter is often outlet merchandise at a significant discount?

On an annual basis, Twitter accounts for less than 0.01% of Dell's annual volume.

If you manage a very respectable business that sells $30,000,000 on an annual basis, and you experience Dell's level of unbridled Twitter success (touted once a minute on Twitter), you will sell about $3,000 a year.

Let that fact sink in for a moment.

This is where the snake oil comes in.

I've experienced this phenomenon. Many folks said that I "had to be on Twitter". So I'm there. Big time. 1,372 followers. 1,945 tweets. More free facts and information than you could throw a stick at.

Now let's look at what is important. I analyzed where every consulting dollar I earned from 2007 - 2009 was sourced from. Source can be double-counted ... for instance, one client told me that they follow my blog and buy all of my books ... so the blog and books each get credit.

• 73% of my consulting dollars can be directly tied to the 1,100 folks who "follow" my blog.
• 69% of my consulting dollars can be directly tied to people I had a prior business relationship with.
• 43% of my consulting dollars can be directly tied to people who have purchased at least one of my books.
• 6% of my consulting dollars can be directly tied to people who heard me speak at a conference, and decide to hire me after hearing me speak.
• 0.5% of my consulting dollars can be directly tied to the 1,372 folks who "follow" me on Twitter.

What you clearly see is that Social Media is both wildly successful (blog), and a complete, unadulterated snake-oil based catastrophe (twitter).

This, I believe, happens because of the "audience" using each medium.

• The audience reading the blog are mostly CEOs, VPs, and Directors at non-vendor-based companies. This is the target audience I seek, the folks who are most likely to hire me. These folks can follow me anonymously.
• The audience following me on Twitter tend to be Sole Proprietors, Consultants, and Vendor-Based leaders. These folks are never going to hire me, they follow me for competitive reasons. These folks usually have to identify themselves in order to follow me, thereby limiting the non-vendor-based audience considerably.

This is Classic Marketing 101, folks. In Classic Marketing 101, you identify your target audience, you identify what their needs are, and you communicate with them in the places where they want to be communicated to.

Social Media has snake oil tendencies when advocates promote the discipline without honoring centuries-old strategies like having a basic understanding of your target audience. If your target audience has no interest in being on Twitter, then your Social Media efforts are destined to fail.

This is what Retail brands are destined to learn, as they move into Social Media endeavors. Clearly, Dell's target audience isn't interested in hearing outlet-based promotions via Twitter, or they'd sell more than 0.01% of their volume via Twitter. $6.5 million sounds like a big number, until context is placed around the number.

So, yes, Social Media is snake oil, when applied without an understanding of basic marketing principals, as is evidenced by my failures on Twitter.

And yes, Social Media is a trend that must be honored, as is evidenced by the 73% of consulting revenue I generate via this blog.

Via trial and error, Retailers will learn which of the two outcomes applies to them.