Monday Mailbag

Remember, each Monday in 2014 I answer your questions, both real and imagined. If you have a question, please send it to me (kevinh@minethatdata.com).

Our first question is from Tracy: "What do you think about the Target and Neiman Marcus credit card theft situations?"

• First, that stuff is going to happen. But it should happen less often.
• Second, and much more importantly, we've completely lost focus on what matters. We'll happily spend hundreds of millions of dollars on #omnichannel solutions that will be implemented over a half-decade (click here), but we don't invest the same organizational zeal protecting credit information? We have everything backwards. If we can't protect credit card information, we don't have a business. Instead, we're focusing on how to make up for inventory errors in one story by wiring systems so we can ship items from other stores. Protect customer information first!
• Third, we have information technology folks who are frequently paid more within the same job grades than garden variety employees - these folks need to do a better job of protecting information, and they need to say NO when marketing folks or consultants want them to prioritize big data nonsense over customer protection. And my goodness, try being an IT professional at a major "brand". Not enough resources, not enough respect, and everybody telling you what you must do. Not easy to protect customer information. We'll need to re-allocate resources to do a better job.

Our second question comes from Jessica: "What impact does company culture play in merchandising success?"

• It means pretty much everything!
• When I worked at Lands' End, more than twenty years ago, marketing folks were invited to inventory/merchandise/creative reviews. All data was shared. Here, in 2014, I seldom attend a meeting where a marketing person can clearly articulate merchandising success.
• At Eddie Bauer, sixteen years ago, the culture adored process. Process! Few cared how merchandise performed. Everybody cared that the inventory team would get the marketing forecast on Friday, January 10, for the fall season. Not surprisingly, the business lost 20% of merchandise productivity during my time there, ending in early 2000. Also, not surprisingly, the business had a lust for discounts / promotions to move merchandise. You've never seen marketers so passionate about getting the right offer to the right customer at the right time. This logic, of course, is backwards, but that's what happens when the focus strays from merchandise, as it did fifteen years ago at Eddie Bauer.
• Nordstrom was all about customer service, which, interestingly, results in a lot of merchandise knowledge. The organization didn't have the merchandising passion that Lands' End had, but customer service passion required employees to please customers, and you please customers by selling them something they want, and customers want merchandise.
• In other words, if the company culture cares about customers or merchandise, then you tend to see better-than-average merchandise productivity.

The final question comes from Roger: "Why are you so against omnichannel? It's the painfully obvious future. Would you rather see retail businesses close their doors?"

• Give this a read, Roger (click here). Nook sales were down 60%, year-over-year, in Q4-2013. Barnes and Noble did everything the omnichannel advocates demanded. They invested in the online channel, they have the stores that omnichannel advocates demand, and they had the Nook to protect their digital future. Shouldn't all of that, then, lead to riches? Wouldn't stores, online, and digital tablets trump Amazon?
• It turns out that Amazon has a merchandise plus pricing plus assortment advantage that trumps an obvious omnichannel solution.
• Here's another question - if omnichannel is destined for greatness, then wouldn't Microsoft, with in-store / e-commerce / mobile / tablets / integrated operating system across devices easily trump any other alternative?

Hillstrom's Contact Strategy Management

All right. All right!!

You've spent the entire week learning how I approach four key elements of contact strategy management.

• Catalog Contacts.
• Email Contacts.
• Interaction Between Catalogs and Email Contacts.
• Impact of Catalogs and Email Contacts on Paid Search.

Now, it's time to get busy.

I'm calling this product "Hillstrom's Contact Strategy Management". I'll price it the same as the old-fashioned Catalog PhD.

• Businesses under $10,000,000 in annual sales = $10,000 one-time fee.
• $10,000,000 to $29,999,999 in annual sales = $20,000 one-time fee.
• $30,000,000 to $59,999,999 in annual sales = $27,500 one-time fee.
• $60,000,000 to $99,999,999 in annual sales = $35,000 one-time fee.
• $100,000,000 to $999,999,999 in annual sales = $45,000 one-time fee.
• $1,000,000,000 or greater annual sales = $55,000 one-time fee.

Go compare the fees to what you're paying Clario - and then look at what you're getting here (optimal number of catalogs and emails given their interaction and impact on the paid search budget). You get so much more, and you pay so much less.

Contact me now (kevinh@minethatdata.com) for your own, customized Hillstrom's Contact Strategy Management project. Hurry, slots are going to fill up fast!!

And if you want to keep working with Clario, then why not encourage them to license my methodology, so that you get the best of both worlds? Think about it.

Service: Looping Through The Contact Strategy Algorithm

Ok, now you're interested!

You want to know what, exactly, I'm doing.

Say I have a customer who is forecast to spend $20 of catalog demand on 12 contacts. Also assume that this customer will spend $10 on 250 email contacts.

If I want to bump up the catalog side of the strategy to 15 contacts from 12, I use a law of diminishing returns (based on prior test results -  not highly inaccurate matchback outcomes) to estimate annual catalog demand. In this example, annual catalog demand goes up from $20.00 to $22.36.

Next, let's say that I want to bump up the number of email contacts, from 250 to 300. Again, I use a law of diminishing returns (based on email mail/holdout test results, not opens/clicks/conversions). In our example, annual email demand goes up from $10.00 to $10.47.

Then, we have to account for the fact that additional catalog contacts will drive additional email demand, while additional email contacts will cannibalize catalog demand. I know these relationships from a ton of mail/holdout tests. In our example, catalogs will drive an extra $0.10 of email demand, while email will cannibalize $0.08 of catalog demand, yielding a net increase of $0.02 across channels.

Next, we calculate profitability. We factor in the additional cost of three more catalogs, we factor in the additional cost of 50 more email campaigns, and we factor in the additional cost of paid search clicks generated by additional catalog/email marketing activities. In our case, profit drops, from $2.43 per customer to $1.47 per customer. Clearly, we're moving in the wrong direction!

In fact, in our example, the most profit is generated by sending just 3 catalogs, and 250 email campaigns.

Why go to all this trouble?

Because 99% of B2C catalogers are GROSSLY OVERMAILING customers, even after working with Clario or another credible vendor who goes beyond simple models and RFM segments.

In fact, if you factor in the paid search costs, you'll find that you're over-mailing by 10%, right off the bat, +/-.

My contact strategy work now includes catalog contacts, email contacts, and the impact on the paid search budget. All three elements work together, interacting with each other. The result is beautiful. And you need to be doing all three elements, simultaneously. If not, you're over-mailing, badly in most cases.

Contact me (kevinh@minethatdata.com) for your own contact strategy model!

Service: Contact Strategy Management, With Paid Search

Here's the interesting thing about paid search. If you don't execute catalog marketing programs, and if you cut way back on your email marketing contacts, you stop driving traffic to Google. And when you stop driving traffic to Google, you stop paying Google. And when you stop driving traffic to Google (and Amazon), e-commerce-only businesses and retailers suffer.

In other words, if you are going to come up with the appropriate catalog + email contact strategy, at a customer level, you have to factor in the impact of catalogs and emails on paid search.

Take a look at the image above. This customer segment received 12 catalogs and 250 email campaigns last year. But we have to factor in the following:

• How catalogs drive volume to email.
• How email campaigns cannibalize catalogs.
• How catalogs drive traffic to Google, traffic you have to pay for a second time.
• How emails drive traffic to Google, traffic you have to pay for a second time.

After we account for each factor, we get the "Total Demand" grid outlined above. And after factoring in catalog costs, email costs, and paid search costs, we get the "Total Profit" grid.

Which strategy is most profitable?

• 3 catalogs, not 12.
• 250 email campaigns, same as last year.

This is the direction my projects are heading in, during 2014. A handful of lucky clients got to beta-test this technique at significantly reduced rates in late 2013. Now I'm diving in, head first, by assigning the optimal contact strategy, at a customer level, based on an evaluation of every combination of catalog contacts and email contacts, factoring in the impact of each contact strategy on the paid search budget.

Fun stuff, eh?!

Service: Contact Strategy Management

In the "Merchandise - Service - Story" (MSS) framework, optimizing the contact strategy is a perfect example of providing great service.

You see, these days, the classic e-commerce buyer doesn't need many catalogs. This isn't 2003 - catalogs don't drive online volume like they used to. Instead, we mis-attribute online demand to catalogs - often badly. I've been observing this since founding MineThatData in 2007.

We know from most mail/holdout tests that, for catalogers, +/- half of online demand will happen anyway, even if catalogs are discontinued.

Furthermore, there is interaction between catalogs and email campaigns. Catalogs typically push a modest amount of demand to email campaigns (i.e. the more you mail, the better email campaigns perform). Conversely, email campaigns typically cannibalize a small portion of catalog demand (i.e. the more emails you send, the more discount/promotional messages you offer, re-directing catalog demand to email promotions).

As a result, we have to evaluate email contacts and catalog contacts simultaneously. If we increase email contacts, we reduce catalog demand. In other words, we must run a profit and loss statement on every combination of annual catalogs and annual email campaigns, after accounting for the interaction between each channel. The combination that yields the most annual profit is the combination that should be assigned to a customer.

More on this topic tomorrow. And we'll throw paid search into the mix!

Monday Mailbag

Welcome to the third week of the "Monday Mailbag", featuring real and simulated questions from real and simulated readers. Email me (kevinh@minethatdata.com) with your questions.

Question #1 comes to us from "Anonymous":  We all sell merchandise, and we all care about merchandise. What do you want us to do, above and beyond what we're already doing, to care more about merchandise?

• Read this article about J. Crew (click here).
• Find one person at your company (this person already exists) who cares this much.
• Give him/her a chance to succeed.

Question #2 is from Chris: Don't you think that people like you are ruining society? You track and measure everything that customers are doing. You are like the NSA, aren't you?

• I've been through four stages of customer tracking.
• Stage 1 = Catalogers rented names from competitors, and traded names with competitors.
• Stage 2 = Catalogers gave customer data to co-ops, for free, then paid $0.06 a pop for re-assembled data.
• Stage 3 = E-commerce terrified customers, so businesses kept information "private" and "secure", which caused measurement folks to use cookies to track customers anonymously, which caused measurement folks to not like anonymous behavior, which caused measurement folks to find clever ways to link name/address and email address to a cookie, so that all data could be tracked all the time while telling the customer that their behavior was "private" and "secure".
• Stage 4 = Mobile. Want to download a chess game app? Congrats! The app wants to know where you are at all times - it wants to know your location. Why does a chess game need to know your location? Think about it. Mobile isn't mobile, mobile is data collection with context. The data is fed into a giant borg, where it is sliced and diced and re-sold. As I've mentioned previously, I met with the CEO of a mobile company - this individual told me that he didn't care about the product he was selling, he cared about the data generated by the product. Think about that sentence for a moment.
• Stage 5 is coming - wearable devices and the "internet of things".
• Ultimately, all of us are, in some way, like the NSA. We collect data about our friends (Facebook), we collect data about our favorite media companies (Twitter), and we use that data to monitor what our friends and our media outlets are doing. The path, from Stage 1 to State 4, is becoming more intrusive, and will continue to become more intrusive. Stage 9 looks really terrifying.

A Walk Through The Mall

Let's take a walk through the mall for a moment.

That's a pretty clear message, don't you think?

Or this one:

Lotta savings there, don't you think?

January is clearance month, you're getting rid of stuff. You tell me that you "can't sell anything at full price in January". Or December. Or November. Or June. Or July. Or August.

I know, I know ... it never ends ...

Taxes and apps and discounts at Sears.

Good time to get a candle! Better than before Christmas.

Good question! Why shop anywhere else?

Why shop anywhere else when everybody else is offering you the opportunity to pay less?

Well, not everybody.

J. Crew applies a different story.

Go inside J. Crew, and you still see discounting and clearance and all the stuff leaders love:

It's just that the story is different. Different. Not red, but black on white, congruent with all other signage. And the store front is clean. The story is about the merchandise, but business must happen.

Think about that, for a few moments.

Here's a couple of stories for you:

I know, I'm biased. I worked for Nordstrom. They don't count ... they generate more than a billion dollars of pre-tax profit at between 10% and 15% EBT as a % of sales. Doesn't count. It's fashion, they can get away with over-charging the customer (even though you buy their stuff elsewhere in the mall, from competitors, at the same price). Show me somebody else.

What is the story Lego is telling the customer?

85% of the mall is communicating a story.

A minority of retailers communicate a different story.

What story are you communicating to the customer?

Do you think the story you're communicating resonates with the customer?