Empty Calories: Open Your Spreadsheets!

Pull out your spreadsheets, folks (e-mail me for a copy).

Please enter the value "0" in cells B101 - B580.

Now, enter the value "10,000" in cell B397. These are new customers that are acquired via low price points. In this simulation, we acquire 10,000 customers per year at low price points.

Next, enter the value "10,000" in cell B395. These are new customers that are acquired via higher price points. Look at how your new business evolves in a manner that is quite different than when you are exclusively acquiring customers from cell B397. You have far more "A" customers, you have customers who purchase at higher price points, you have a $3.8 million dollar business instead of a $2.8 million dollar business.

Direct marketing has become a game of promotions and discounts. We seek to optimize our business based on conversions, and in order to maximize conversions, we have to offer 20% off or free shipping or gifts with purchase or great deals on inexpensive items.

These two simulations illustrate how these "empty calories" impact the business, over time. We're much better off putting veggies in our bodies than snack foods and cookies.

Buy the book, Online Marketing Simulations, on Amazon.com!

Dear Catalog CEOs: A Decade of Free Candy

Dear Catalog CEOs:

In January 2000, I prepared a presentation for the marketing management teams at Eddie Bauer and Spiegel (our parent company). Our annual online demand totals for the prior three years were as follows:

• 1997 = $15,000,000.
• 1998 = $60,000,000.
• 1999 = $100,000,000.

In my presentation, I described a future where, by 2003, the online channel would represent the primary way that customers shop from a direct-to-consumer brand.

My presentation stopped at the slide where I illustrated that online sales would overwhelm telephone sales in 2003. It stopped, because the marketing leaders in the room were busy laughing. They found the notion of online sales outpacing traditional telephone sales in just a few years to be pure folly.

In October 2009, I presented similar concepts to a Catalog Marketing Executive. Nearly ten years had passed since my Spiegel presentation. This Executive heard my presentation, and like so many in the catalog industry in the past ten years, rejected the thesis that catalog marketing needed to evolve in response to a world increasingly dominated by online marketing. This Executive suggested that improved targeting strategies would result in a robust catalog business, not an acceptance of online marketing strategies.

The decade started with the concept that the online channel was nothing more than "free candy", as the woman said in the Seinfeld episode where George attempted a Twix candy lineup.

This concept of "free candy" permeated the decade, and in so many ways, caused us to not fully capitalize on the potential of the online channel. The decade featured a series of pundits promising free candy if folks just did search engine optimization, e-mail marketing, employee blogging, mobile marketing via iPhone apps, a Twitter presence, or went deep into debt to open stores so that customers could buy merchandise online and pickup it up in a store in a flurry of bricks-'n-clicks excellence.

Overwhelmingly, on a tactic-by-tactic basis, the pundits were wrong. Horribly wrong. Unaccountably wrong.

And this level of error caused so many catalog marketers to feel burned. The catalog executive knew that a catalog delivered $3.50 per catalog mailed, even in a declining environment. What does the employee blog deliver, if anything? Tactic after tactic failed to be as effective as the old catalog. New tactics failed to scale, causing catalog executives to further dig their heels in.

The strongest companies I work with are like a well-designed mutual fund. They execute a ton of micro-channel strategies, none of which dominate total net sales. The strongest companies that I work with actively test all new micro-channels, but never expect any new micro-channel to contribute net sales in a meaningful way for a long time. These companies can prove the raw inaccuracy of matchback analytics via well-designed mail and holdout tests across catalogs and e-mail marketing. These companies love the art of selling merchandise more than they love the craft of cataloging.

Then there are catalog companies that are struggling. They cling to the hope of catalog marketing being the primary sales generator. They can prove that 80% of total sales are driven by a catalog, based on their matchback analytics. They deride paid search, e-mail marketing, social media, mobile marketing, seo, pay-per-click, affiliate marketing, and any other online endeavor as being a waste of time that results in a pittance of the sales driven by a traditional catalog --- and heck, the catalog caused sales to happen in those micro-channels, so why not just focus on the catalog? These companies love the craft of cataloging more than they love the art of selling merchandise.

"Free Candy" damaged the potential of online marketing among catalog executives.

And in the new decade, "Free Candy" will become an even bigger problem. A ton of experts will tell you that your HTC Droid phone is the secret to billions in profit, or that Hologram Marketing is the next big wave in customer preference. They will tell you to abandon profitable old-school strategies. They want for you to take risks. They won't be accountable for your failures, they'll suggest you failed to execute their vision correctly.

In the next decade, our job is to "sample free candy". We don't overeat, like the pundits suggest. And we don't starve ourselves, returning to our roots --- we won't be in business in 2019 if we do that.

As always, I am here to help you work through this transition.

Thanks,
Kevin

Change In Metrics: Open Your Spreadsheets!

Online Marketing Simulations are designed to illustrate to the marketer the long-term impact of short-term decisions.

So, let's open up our spreadsheets (e-mail me for your own copy).

Take a look at cells G10 - G25. This is the forecast for the business in Year 5, given current projections. Let's look at a few key cells.

• G16, Orders per Buyer = 1.615.
• G17, Items per Order = 2.424.
• G18, Price per Item = $65.80.
• G21, Customers With Grade Of 'A' = 58,417.

Now, let's make one small change. Let's assume that for just one year, in Year 1, customer retention improves by 20%. Enter the number 1.20 into cell C5. Now look at how all of the metrics change, in Year 5.

• G16, Orders per Buyer = 1.629.
• G17, Items per Order = 2.424.
• G18, Price per Item = $66.58.
• G21, Customers With Grade Of 'A' = 60,480.

Four years after the improvement, key metrics are, in many cases, changed.

Now, what do you think will happen to your business, long-term, when you give away the farm with free shipping and 25% off of every order?

Run your own Online Marketing Simulation to find out. Buy the book at Amazon.com!

Customer Acquisition: Open Your Spreadsheets!

Let's run another simulation, one similar to the one we ran last week when evaluating customer loyalty.

Open your spreadsheets (e-mail me for your own copy). Using the customer acquisition index row (C6 - G6), enter increases in customer acquisition that yield a business that is generating $80,000,000 in sales in Year 5.

There are many solutions that get you to the same answer. Share your simulated results in the comments section of this post.

And if you want to purchase the book, click here!

Dear Catalog CEOs: The First 20 Pages

Dear Catalog CEOs:

Walk down to your Business Intelligence department this morning, and ask them to demonstrate to you how the first twenty pages of your most important Holiday catalog performed, compared with the rest of the catalog.

You are probably familiar with the concept of "order starters", the items that are most often listed first in the order a customer places, right? Well, catalogs that perform well are frequently populated with a lot of "order starters" in the first twenty pages.

So this week, please take a walk down to your Business Intelligence team, and ask them to demonstrate how each item in your catalog performed as an "order starter". Please consider paginating your catalog based on the items most likely to "start" an order, using the first twenty pages of the catalog to your advantage!

Or give me a holler, and I'll help you complete this analysis.

Thanks,
Kevin

Analyst Spotlight: Which Personality Type Are You?

Are you an Organizer, Miner, Targeter, Futurist, or Strategist? Click here to take the quiz, and use the comments section to tell us what kind of Analyst you are.

Gliebers Dresses: Anna Carter's Sarah Wheldon

Sometimes, when you are a consultant, you enter into unusual situations. Such was the case when Anna Carter's VP of Marketing, Sarah Wheldon, the former VP of Marketing at Gliebers Dresses, called me in to "have lunch".

Sarah: "Kevin, it is so nice to see you. Now, from what I heard, Roger lost a sock in the dryer and basically voted you off the island, right?"

Kevin: "Well, that is confidential, I cannot talk about any of the circumstances surrounding their business."

Sarah: "Sure. I heard that their business was down something like ten percent to plan, and that the only way they boosted sales was via crazy levels of discounting. Is that right?"

Kevin: "Again, that information is confidential. Though you don't have to be a rocket scientist to know that many folks are discounting at levels previously unheard of."

Sarah: "But what do you hear from the folks at Gliebers Dresses? I mean, from what people tell me, it's literally a state of chaos. I heard that Lois is running the business into the ground with her stupid loyalty program, and I heard that Roger's office is piled a mile high with research white papers on how to be excellent."

Kevin: "Now Anna Carter hasn't done any discounting this Holiday season. How the heck did you pull that off?"

Sarah: "Inventory management and accurate forecasting. As long as you know how much you are likely to sell at the start of the year, you don't need to clear everything at a discount."

Kevin: "But you discontinued your catalog in October, right? You were going to discontinue mailing it in early 2010, but it looks like you started early. How the heck did you accomplish this transition without putting a huge amount of inventory at risk?"

Sarah: "We did a test in February and March and early April. We did not mail one single catalog between February 1 and April 15, not one. We measured how customers behaved during this "paper vacation". And we learned a ton."

Kevin: "Like what?"

Sarah: "We learned that e-mail marketing metrics all improved, immediately. Instead of getting a paltry $0.20 per campaign, we got $0.35 per campaign in February, and $0.45 per campaign in March. It turns out that catalog mailings cannibalize the living daylights out of e-mail marketing. Well, that, and the fact that so many e-mail orders were being inaccurately matched back to catalogs by ResponseShop's 'ChannelMAX' algorithm".

Kevin: "Yes, lots of catalogers see that when they execute catalog holdout groups. It is something that you never know happens unless you do testing, or in your case, shut a channel down for a bit."

Sarah: "We also noticed that, by mid-March, customer behavior changed. Customers in urban and suburban zip codes began visiting the website much more often, and began ordering 'on their own', if you will. Now what they bought was different than what was purchased when catalogs were mailed. The customers purchased fashion products more often, basics less often. But still, we could accurately forecast based off of what we saw happening.

Kevin: "What happened to other online marketing channels?"

Sarah: "Funny you should ask. Our portal advertising productivity improved by about 70%. Our search marketing productivity improved by 100%. This allowed us to project that we could spend a fortune in each of those advertising channels, generating incremental demand and customers that we wouldn't normally acquire."

Kevin: "I imagine that customer acquisition really suffered, right?"

Sarah: "It sure did. Now, that being said, we projected what size business we would have without catalog advertising. We calculated that our business would shrink, over five years, by about 35%. But, our EBIT, earnings before interest and taxes, was projected to double. Kevin, you know that you don't take empty calories to the bank, you take profit dollars to the bank. We will be able to invest the increase in profit in online marketing, in website development, in a user review platform, in website personalization, in cross-sell algorithms, in social media activities, and in other forms of offline advertising. We will be able to offer $4 shipping, all day, every day, we won't be like Glieber Dresses, offering free shipping promotions followed by $16 shipping."

Kevin: "If EBIT doubles, then that means that a ton of orders were being incorrectly allocated back to catalog activities via ChannelMAX, correct?"

Sarah: "Exactly! Listen, we've been blasted by our contemporaries. Every vendor in the industry called to tell me what a moron I was. Our paper rep said I'd be out of business in two years. Our co-op rep told me that she'd join me in the unemployment line if more companies did what we did. We were mocked at the annual Direct Marketing Alliance conference by a dozen different speakers. Everybody is an expert, Kevin. It's a shame that everybody isn't held accountable for their foolish predictions. That level of accountability would cause Twitter to shut down for a month!"

Kevin: "Did you anger any of your loyal customers?"

Sarah: "Yes, tons of them. You should read the hate mail. All of it on stationary, written with ball point pens, with the script appearing to be just a little bit unstable. That tells you that the customers we angered are generally sixty years old, or older. We received a few e-mail complaints. We barely got any complaints via Facebook or Twitter. It's pretty easy to infer who the audience was that purchased from catalogs."

Kevin: "So you are willing to let those customers go?"

Sarah: "Yes, we're willing to let those customers go. They can buy from Gliebers Dresses if they want. We aren't about market share. We are about profit. And honestly, we're not telling those customers they cannot buy from us. They can come to our website and purchase."

Kevin: "You were such a huge catalog advocate. What happened?"

Sarah: "I got to see a different way to run a business. I got to see what happens when leadership is passionate about merchandise. At Gliebers Dresses, outside of Meredith Thompson, they only care about catalogs, discounts, and promotions. This company loves the connection between merchandise and customers. For all of the marketing expertise out there, it is amazing how few marketing leaders talk about the connection between merchandise and customers."

Kevin: "Ok, Sarah, I think our time is up, I need to catch a plane. It was nice seeing you."

Sarah: "It was nice seeing you, Kevin. If you don't mind me asking, would you have any interest in meeting with the management team for a few days? We'd like to pick your brain about some of the 2010 strategies we're employing. I doubt you signed a non-compete with Gliebers Dresses."

Kevin: "I didn't sign a non-compete, so maybe we can chat about what a mini-project would look like."

Sarah: "Good, I'll have my folks get in touch!"