Denver - Afternoon of March 10?

I may have a few hours of free time the afternoon of March 10 - in Denver. If you're in the Denver area, and want to meet, contact me immediately (kevinh@minethatdata.com) - these sessions fill up quickly!

Where It Hurts Most - Lapsed Buyers

I frequently share thoughts about new merchandise.

Yup, that stuff. The stuff we largely ignored for the past half-decade.

Many of you keep telling me that you can no longer "reactivate" older customers.

Here's what happens, folks.

Let's say that you have a 10% drop in merchandise productivity, over time, fueled by a failure to generate enough new, "winning" items.

Among your best customers, you continue to mail catalogs, plenty of catalogs. As a result, you only suffer the 10% merchandise productivity hit.

Marginal customers, however, that's a whole different story. These folks might generate $2.00 per book, at a 40% profit factor, with a book cost of $0.75 each.

• $2.00 * 0.40 - $0.75 = $0.05 profit.

Now, you have a 10% merchandise productivity hit. The profit and loss statement fundamentally changes.

• $1.80 * 0.40 - $0.75 = ($0.03) ... a loss.

You cannot mail the customer at a loss.

So you don't mail the customer.

And you lose out on the $1.80 the customer would have spent.

As a result, best customers experience a 10% productivity drop.

But marginal customers experience a 50% productivity drop - you stop mailing these customers, causing only the organic portion of the demand equation to come through.

Just like that, marginal customer spending is cut in half.

And it's because of the cascading effects of merchandising problems, specifically, a failure to generate enough new items over time.

In this case (I see it every day), it's not the catalog business model that is dying - it's the business that is dying!

The Message

Take a look at this image ... see if you can count how many sale signs appear just in this one image.

Yes, you're right, there's more than twenty (20) red sale signs in this one image alone. Imagine being part of the visual merchandising team ... the #omnichannel color palette includes, well, um, uh, Red!

What about this business?

Think of the size of the audience that prefers merchandise within a Sears store.

Think of the size of the audience that prefers merchandise within an Anime World store.

Obviously, discounting is not required to draw a profitable audience, is it?

Think of the #omnichannel message you're sending to the customer ... what do 20+ red signs in a narrow field of vision communicate?

Impact of Paid Search on our Decisions

Let's say you are an email marketer. You send five email campaigns a week to customers who love to "engage" with "relevant" content.

If you do your job well, you cause an unanticipated by-product.

You cause your customers to use search to compare your merchandise to what other folks offer. When this happens, you must incorporate the cost of paid search in your email (and catalog) circulation decisions.

Here's an example. You're running email mail/holdout tests, right? Right?! Take a look at the difference between the mail group and the holdout group, when it comes to paid search.

• Mail Group = $1.00 spent on paid search.
• Holdout Group = $0.80 spent on paid search.

This tells us that 20% of paid search expense (I know, it's more complicated than this, and there are new customers using paid search, but come one, follow along for a moment) is caused, yes, caused by email. Take email away, and you eliminate the habit of the customer going out to search for competing merchandise.

Here's where things get interesting. In the real world, you must allocate the $0.20 of paid search demand back to your email marketing program. And, you must allocate the expense associated with paid search back to your email marketing program as well.

Now, across the top 20% of the email subscriber list, this has no impact whatsoever.

But among the 80% of the email subscriber list that spends almost nothing?

Here, paid search expense results in two or three email contacts per week, not five.

I know, you're saying, "the difference in profit is irrelevant". But if you're a hundred million dollar business, then this results in several hundred thousand dollars of profit a year.

Why ignore that?

Monday Mailbag

Email me your question (kevinh@minethatdata.com) for an upcoming Monday Mailbag!

This week's question comes at us from a different direction. I spoke at #Vircomm2014 in London last week (click here). A great experience. Mind changing. Strategy enhancing. One of the questions was fascinating, it came from a college professor who spoke earlier in the day, and he asked the question of another researcher who was wrapping up his presentation. Here was the question - from one researcher to another:

• "You mentioned that customers who joined a community at "Brand X" spend eight times as much as other customers. And yet, Mr. Hillstrom shared earlier that when you measure the incremental value of any marketing tactic, like joining a community or joining a loyalty program, customer value seldom increases by more than 10%. How do you explain the difference in measurement philosophy and outcome? Who is right?"

Ah HA!

I love it when we statisticians use methods that appear to satisfy all necessary assumptions, and yet, result in highly biased analytical results. I only know this because I made mistakes for eons before I figured out just how wrong I was. And having said that, I don't have a right answer. I just know that the best practice is wrong.

When measuring the value of an activity, researchers typically execute measurement techniques with varying levels of bias.

• High Bias = Compare those who are part of a group or marketing tactic against those who are not. Terribly biased. This would be like measuring the political beliefs of those who call in to Rush Limbaugh's radio show, comparing them against everybody else. This is the methodology that is used 90% of the time.
• Moderate Bias = Compare those who join a program at the time they join the program vs. those who are equal at that time and do not join a program. This is the method that is used by smart researchers (like the individual who was presenting at the conference). You equalize all customers, then you measure the "self-selected" activity against all other customers. This method is very good. It is also biased. There is something about the customer who self-selects for a community or a loyalty program or whatever that is not accurately measured by the fact that the customer self-selects. When using this style of measurement, we always show a positive outcome - always, and often, a highly positive outcome. I have yet to see this method applied and result in a negative outcome. Are we suggesting that we, as marketers, never make mistakes, and never do anything that doesn't deliver a sales increase? The measurement tactic is biased because we don't accurately capture the motivations behind why a customer joins a community or a loyalty program, and as a result, we over-state the importance of the behavior.
• Low Bias = My method (hopefully, maybe I'm wrong, too). My method is still biased, but I've removed much of the friction. I don't analyze customers at the exact point in time when they do something, I freeze/segment customers at a later point in time, then compare the customer against similar customers who are not in a program. Let's say that we start a community program or a loyalty program on July 1, 2013. I will freeze my file as of January 1, 2014 - and create a segmentation variable for the customers who joined the program during 2013 - along with other RFM-centric variables as of 1/1/2014. Then, these variables are entered into a model, measuring spend during January 2014. This method usually shows that the incremental value of any marketing program is in the 10% range, maybe lower. Yes, there's a million biases here, but you avoid the self-selection bias that occurs in the other two methodologies.

Now, let's be perfectly honest - the person at the session did a great job of reducing bias in his analysis - at least 90% of the work I see out there doesn't go as far as this individual did. He tried very hard to eliminate bias. Very hard.

Here's our challenge, folks. With the high-bias and moderate-bias methodologies, we will always show that any marketing activity - any activity - has a positive return on investment, and frequently, a grossly overstated return on investment. The outcome does not pass the smell test ... if all these programs worked, then all companies would use the programs and all companies would show sales gains that are +20% or +50% per year.

That never happens.

That's how we know that the methods are biased.

How Retail Structural Change Plays Out

Let's pretend you are a small retailer, serving a 45 - 55 year old customer. You own five stores, and you have a strong e-commerce presence. You have two strong stores, you have two weak stores. Your online business is growing by 15% to 20% per year. But as the online channel grows, the weaker stores continue to get weaker.

Let's project this business out, from 2014 - 2020.

Do you see what happens, folks?

In just three years, the productivity drops cause the fifth store to be unprofitable. In six years, the productivity drops cause both the fourth and fifth stores to be unprofitable. Meanwhile, the online channel grows and grows and grows, fueled by mobile.

Between now and 2020, your CFO runs the projections. She sees the writing on the wall. Strong stores will get even stronger. Weak stores have no purpose in a mobile world. They become unprofitable.

By 2017, your CFO has convinced the Executive Team that Store #4 and Store #5 need to be closed when the leases run out at the end of 2020.

The projected profit and loss statement in 2020, with stores closed, looks very healthy. But the business has cut back on total stores by 40%.

This is how structural change in retail plays out. It's not a big, dramatic "end-of-the-world" scenario, it's not doom. And it's not the success promised by the omnichannel community. It's a slow evolution that eventually achieves critical mass, resulting in the closing of what have become unproductive stores.

In other words, the retailer without debt and with 10% - 15%+ pre-tax margins survives. Easily. The outcome is worse for 5% pre-tax retailers.

This whole thing plays out the same way it did for catalogers from 2003 - 2013. The only problem is that paper can simply disappear from the ecosystem. Dying stores will turn into dying shopping centers.

What comes next? That's the really interesting question. You almost have to believe that the stores that survive will become far more entertainment/service/emotionally based. They will have to become that to compete with the cold, sterile omnichannel solutions being thrust at us by technology. They will have to fuse, in some way, with mobile ... a mobile channel that will likely be in the process of thoroughly consuming e-commerce by 2020. The stores that die will sit vacant, or will be replaced by something that folks currently age 8-34 will embrace. That's going to be very interesting to watch unfold.

Thoughts?

Structural Change in Retail

Have you read Mr. Walker's recent essay (click here)? 

Mr. Walker speaks to a structural issue that cannot be avoided. His quote:

• "During the 2013 holiday shopping season, U.S. retailers received approximately half the holiday foot traffic they experienced just three years ago, according to ShopperTrak."

Structural issues cannot be fixed by omnichannel solutions - in my opinion (you and almost every other soul on the planet probably disagrees with me - go ahead - but please bring facts to the table when you argue your hypothesis, including facts that show that customers love turning mall-based stores into digital distribution centers more than they love merchandise presented creatively). When I look at the future, I see omnichannel as a tool that delays the inevitable, just like multichannel delayed the inevitable in catalog marketing.

Use Barnes and Noble as an omichannel example. This is a business that did largely what omnichannel advocates demand - stores as fulfillment centers and a better in-store experience with coffee shops and what not - offering a digital solution integrated across channels (Nook - and website). How did that work for Barnes and Noble? And yes, I get it, the omnichannel experts are going to send me email messages suggesting that Barnes and Noble "did it the wrong way" - they'll blame the victim. 

These folks seldom work at actual retail brands, where they are hired/fired for their success in the real world. Why aren't omnichannel experts ever fully employed at real, live, retail brands? Why are they usually sitting on the sidelines?

Barnes and Noble had the benefit of having the biggest in-store based competitor go out of business (Borders) ... and did not get a sustained sales increase from that. How is that possible? 

Well, it's possible when you're in an era of structural change.

It happened to catalogers from 2003 - 2013. The utility of shopping via paper was replaced with the utility of shopping online.

It will happen to retailers from 2015 - 2025. The utility of shopping in person is being replaced by the utility of shopping anywhere (mobile).

You simply cannot overcome structural change with omnichannel tactics. Using a mall-based store as a digital distribution center serves only 5% of your customer file - meanwhile, we fail to address the needs of 95% of the customer file while half of our traffic simply disappears.

Give Mr. Walker props - I almost never praise anybody, so I'm holding his identification of a crisis in high esteem. He deserves major props.

The solutions are not going to be omnichannel in nature. We're going to see the death of a significant fraction of the existing retail portfolio, that which caters to baby boomers, likely replaced by new retail entertainment concepts that appeal to customers currently age 8-34. That's what we need to be thinking about - not about fulfilling items between stores/channels.

If a customer is going to get in the car and drive to a retail store, we had better entertain the living daylights out of the customer. Cold, sterile omnichannel strategies are not entertaining, are they?

Tomorrow, I'll show you how, financially, this will probably play out.