Abacusification And The Merch Curse

We spent the past two days talking about the problems e-commerce and catalog brands have with loyal customers who adore the merchandise the brand used to sell.

1. The curse of great merchandise.
2. For best customers, the merch curse is worse.

In yesterday's example (averaged from actual e-commerce and catalog transactions), best customers spent 65% of their dollars on classic merchandise, stuff offered by the brand for at least the past four years.

Conversely, new and marginal customers spent 37% of their dollars on classic merchandise, 63% of new products offered by the brand for at least the past four years.

This brings us to the concept of Abacusification, named after the venerable catalog co-op (Abacus) that enables catalogers to mail prospects at a comparatively low cost. To be fair, the concept applies to all co-ops and list rental brands.

Abacusification occurs when a catalog/e-commerce brand shifts a disproportionate percentage of circulation (usually 20% or more) into co-op names. At this point, the co-op statistician has a disproportionate amount of influence over response rates, long-term customer retention rates, and the merchandise assortment offered by the catalog/e-commerce brand.

Using yesterday as an example, Abacusification is demonstrated by the fact that new customers spend two-thirds of their money on new products, while loyal customers spend two-thirds of their money on existing products.

What the heck do you do if you are the merchant responsible for this brand? Over time, you end up aligning your merchandise with the Abacusification of your customer file --- it happens naturally, without you even noticing it. Conversely, you notice that long-time loyal customers start to disappear --- well, you probably don't notice this, you simply notice that time-honored merchandise no longer performs as well, so you de-emphasize classic merchandise.

Within a few years, the Abacusification of your customer file is complete. Your customer file is composed of co-op dominated names that have merchandise preferences different than your legacy customers.

To be fair, this may have always happened when you worked with your list rental and list management partners. The difference is this --- in the past, the lists you selected determined your long-term merchandise assortment --- as you acquired customers from your competitors, you ultimately evolved your merchandising assortment along with the interests of the customers shopping your competitors.

Under Abacusification, the co-op statistician drives the evolution of your merchandise assortment.

There may be nothing wrong with having a co-op statistician have this much influence over the direction of your brand --- you may find the evolution to be more profitable than strategies you otherwise would have practiced. That being said, it makes business sense to have oversight into the practices of the co-ops you partner with. The co-op should be transparent, opening the books for you, showing you exactly how they determine who they decide to mail on your behalf, providing reporting that makes it perfectly clear who is being chosen.

Ok, your turn. What have you learned when you've analyzed your customer file in this manner? How often do you produce this reporting? How do you manage this challenge? Or do you view all of this as bunk?

For Best Customers, The Merch Curse Is "Worse"

We talked earlier about The Curse of Great Merchandise.

Frequently, the curse is even worse among the best customers you have.

In this query, I grade each customer, just like in school, based on life-to-date purchases. Look at the results:

By Customer Grade	Classic Products	Newer Products
Customer Grade = A	65.0%	35.0%
Customer Grade = B	48.0%	52.0%
Customer Grade = C	42.0%	58.0%
Customer Grade = D	39.0%	61.0%
Customer Grade = F	31.0%	69.0%
First Time Purchasers	37.0%	63.0%
Totals	53.5%	46.5%

The percentages skew even worse among the very best customers. The very best lifetime customers are most likely to keep purchasing the same merchandise you've always offered.

So think about this problem, multichannel CEOs. When you want to move your brand in a different direction, your very best customers are going to be the ones that are most likely to resist your direction.

What to do?

If your business is failing, and you want to try a different merchandise assortment, create two versions of a catalog. For your very best customers, send them what you've always sent them, protect your sales. For your "Bs", "Cs", "Ds" and "Fs", you test your new strategy --- these customers are the ones most likely to embrace newer merchandise. New customers might accept new product, I'd test them in either version.

For your website, if you have the ability to create two versions of landing pages or home pages, merchandise them differently based on the customer who visits.

For e-mail, you have huge testing opportunities among your "Bs", "Cs", "Ds" and "Fs". Try anything/everything here ... your risk is so minimal, given that probably 1 in 1,500 of these folks even bother to purchase from an e-mail.

Business leaders --- keep the merchandise curse top-of-mind, when thinking of taking your brand in a new direction.

The Curse Of Great Merchandise

E-commerce, catalog, retail and multichannel merchants focus more energy on merchandise than on customers. As disappointing as this may be to customer advocates, vendors and research organizations, it is probably a necessity.

Many find the customer/merchandise relationship akin to the chicken/egg relationship.

In reality, there are few brands that start with a throng of customers, then question what they should sell to the throng. Brands start with a merchandise offering, then build a community of customers who purchase the merchandise/experience offered by the brand.

Some brands are wildly successful. They offer merchandise that customers love. This audience becomes the "core customer audience". Customer advocates suggest you don't anger the core customer.

And yet, merchandise has a life expectancy. Merchandise eventually becomes unpopular, or no longer has utility.

This is the curse of great merchandise. Your best customers want you to keep offering the merchandise your best customers fell in love with. Take the latte away from the Starbucks customer, and you'll have a mutiny.

When you have a moment, have your business intelligence team run this query for you. This is a very common relationship among e-commerce, catalog, retail and multichannel brands.

Percentages By Customer Acquisition Year
		Year Merchandise Was Introduced
When Acquired	Old Products	Recent Products	New Products	Grand Totals
Long-Time Customers	64.0%	28.0%	8.0%	100.0%
Recently Acquired	46.0%	38.0%	16.0%	100.0%
Newly Acquired	37.0%	40.0%	23.0%	100.0%
Grand Totals	53.5%	33.3%	13.2%	100.0%

In this example, the most loyal customers, those with the brand the longest, spent sixty-four percent of their 2007 sales on old products, products introduced to customers more than four years ago. They only spent eight percent of their sales on products introduced during 2007.

Recently acquired customers, those acquired two to four years ago, strike a balance across product offerings.

New customers, those acquired in 2007, are much more willing to purchase new merchandise, merchandise offered for the first time in 2007.

This is a huge challenge for the direct-to-consumer CEO, especially if the brand is struggling.

If the CEO elects to offer a lot of new product, the core customer group will be offended, lowering annual sales, response rates, and conversion rates.

If the CEO focuses on best merchandise, the core customer group is pleased, but new customer acquisition struggles, hurting the long-term potential of the brand.

Each week/month, the e-commerce, catalog, retail or multichannel CEO should receive a report that illustrates the customer segments who purchased each item offered to consumers. By scrutinizing the customers who prefer each item, the CEO knows just how far s/he can push new merchandise to customers. By understanding how best customers interact with new merchandise, the CEO can hopefully avoid the curse of great merchandise.

The Writers Strike And Multichannel Employees

You might not think there's a link between the tentative end of the writer's strike and multichannel employees. I think there are many parallels.

Writers wanted to make sure that they were compensated as the business model they helped build moves online. Because they are represented by a union, they were able to halt their industry, allowing negotiations that protected their future.

Conversely, retail, catalog and online multichannel employees are not unionized. And look at what is happening across our industry. Merchants, catalog marketers, inventory managers and copywriters are being displaced by technology, though we're frequently told that the macro-economic environment is to blame.

Displaced workers now contact me, asking about the future of our industry.

We can speculate about a few things that could happen down the road:

• Internet technology will eliminate retail jobs as consumers shift a small minority of purchases online.
  
• Internet technology will eliminate call center jobs.
• Multichannel integration will cause the elimination of white collar jobs.
• Catalog jobs (especially customer acquisition jobs) will be eliminated by green initiatives.
  

Since we won't have the power of a union to defend folks in our industry, we'll need to protect ourselves. We need to add relevant industry experiences to our resume.

Employees who have been displaced, or who might be displaced in the catalog and retail marketing fields might consider the following:

• Volunteer to help a non-profit or startup execute/measure e-mail campaigns or paid search programs.
• Start a small, humble little blog, in order to learn all about SEO and social marketing.
  
• Leave your big-company job, and acquire relevant skills at a smaller company.
• Attend web analytics conferences, and learn the craft. Install Google Analytics on your small, humble little blog, in order to get yourself oriented with web analytics.
  
• Go out on your own, providing services for businesses going through multichannel transition.

Obviously you'll have better ideas than I have. This is a really good time to build a skill set that prepares you for the future.

Multichannel Customer Value: A Case Study

Click on the image to enlarge it.

We make a lot of decisions on the basis of multichannel customers. And why not? Our industry leaders tell us our customers demand a seamless multichannel customer experience.

For me, frustration boiled over this past week, when industry leaders cheered J.C. Penney's decision to consolidate marketing and merchandising functions across channels.

When did it become so fashionable for industry leaders to cheer the loss of jobs, all in the name of operational efficiencies that allow vendors to profit from the sale of multichannel solutions?

The phrase that vendors, industry experts, research organizations, and trade journals most frequently use to promote a multichannel agenda is this one:

"Multichannel customers are the most valuable customers".

We now know that this statement isn't accurate. Business Intelligence teams that use fair queries, controlling for other factors, do not observe this relationship.

The analytics used to defend the statement are highly biased. The metric is backward looking, not forward looking. Analysts query a database, splitting customers into two groups --- those that purchased from multiple channels last year, and those who purchased from a single channel last year. Next, the analyst computes the mean of last year's net sales in each group.

By default, the multichannel group will have spent more. The query is designed to make this happen. A single channel customer is disproportionately skewed toward one purchase. A multichannel customer, by definition, had to purchase at least two times. This greatly biases the results of the query.

The bias benefits our entire vendor industry, from those offering inventory solutions to those promoting the use of paper advertising to those offering e-mail solutions to those promoting pay-per-click marketing to those providing website marketing products and services.

Now honestly, you might find that multichannel customers are your best customers. But it will be because your unbiased queries prove they are your best customers, not because somebody surveyed 849 customers and extrapolated the results to 300,000,000 residents of the United States.

What happens if we try to eliminate this bias?

The image at the start of this post illustrates future twelve month net sales, based on customer activity in the past twelve months for a client. Sure, this metric will be viewed by some as being biased. Maybe I'll spur a discussion that improves how we view our field.


Here's how you run the query.

Step 1: Identify all customers who purchased from your brand in 2006.

Step 2: Within this audience, select customers who were customers prior to 2006 (in other words, eliminate all new customers in 2006).

Step 3: Identify the top 25% cutoff point for spend in this audience in 2006. Say that amount is $350. Keep that amount in mind for subsequent analyses. Select only customers who spent at least $350.

Step 4: Within this universe of great customers, calculate the average number of channels the customer purchased in during 2006.

Step 5: Calculate the mean net sales spent by this audience in 2007. If a customer did not purchase in 2007, the customer spent $0.

Step 6: Repeat steps 1-5 for all prior years, using the $350 cutoff (or whatever your dollar cutoff is for really good customers) in each year you run the analysis.

Step 7: Plot average channels purchased from (x-axis) by mean net sales in the next twelve months (y-axis).

Step 8: Review your graph (the graph attached to this post).


If the experts are right, then this graph should have a linear relation, with future sales increasing as prior channels increase.

In this example, we don't observe a linear trend, do we? In fact, the correlation is negative. Among really good customers, years where there was high multichannel activity were followed by years of lower spend.

What caused increased spend? Merchandise productivity! When the brand offered great products, customers spent more. When the brand didn't have great products, customers spent less. Channels didn't play a significant role in increasing or lowering customer spend.

Our industry demands that we improve the multichannel customer experience, offering little proof that customers will spend more.

Data consistently tell us that when customers love the merchandise we offer, customers spend more.

Focus on merchandise, the main reason customers buy from your brand. Then allocate proportionately fewer resources to the vendor / expert / research / trade-journal agenda of multichannel excellence.

Seven Ways To Get Your CEO To Follow You

Ever had a good idea that just sat there, collecting dust?

There are many ways that effective leaders make things happen. And leaders aren't always executives. Leaders are people who have a vision, who get things done, and are able to get people to follow them.

Sometimes you need to get your CEO to follow you. Believe it or not, your CEO wants to follow you. She can't possibly come up with all the ideas on her own.

Here's seven ways to get your CEO to follow you.


Just Do It

I know of an employee who wanted to start a blog. This employee presented the idea to the executive. The executive turned the idea down. A day later, the executive asked the employee why the employee didn't just execute the idea, guide it to success, then ask for forgiveness? The executive couldn't possibly authorize the idea, but could have potentially saved the idea if it had been implemented and become successful without the knowledge of the executive.

Seasoned employees, those trusted by leadership, have a longer leash than those who are new to a company. Sometimes the idea needs to be implemented in order for leadership to understand the potential of the idea. The seasoned employee gains much by learning how to read the tea leaves.


Profit And Loss

Two employees have an idea. One has a beautiful powerpoint presentation, chocked full of facts and figures and market research. The other employee has a simple presentation, but presents two profit and loss statements --- one illustrating minimal risk, one showing a reasonable expectation of potential.

Over time, the latter presentation has more potential for success than the glitzy powerpoint presentation. Know your facts, but also know the profit and loss implications of your idea.


Budgets And Timing

Ideas are more likely to succeed at the start of a fiscal year, and at the end of a fiscal year. Your CEO has a budget for projects. At the start of the year, that budget is full of money. At the end of the year, especially if your company had a good year, there may be money left in the budget that can be spent. Time your presentations around the rhythm of your fiscal year accounting cycle.


Evangelize The Idea

Back in 2002, I was the VP of Direct Marketing at Nordstrom Direct, the catalog/online channel at Nordstrom. Our employees were divided. Some liked catalogs, and believed that catalogs were the reason the website was so successful. Others loved the online channel, and thought the catalog folks represented a fossilized group of old-timers.

I took a presentation "on the road". I scheduled meetings with every department at Nordstrom Direct, illustrating to every employee how the combined efforts of all team members contributed to a happy customer, reminding each employee that Nordstrom was about pleasing customers, not about in-fighting over which channel was most important.

Sometimes, you sell your idea to the masses, not to leadership. When the masses align on a concept, leadership falls in place.


Be Humble And Confident

Leaders listen to humble, confident employees. Leaders are turned off by arrogant employees.


Align With Leadership Objectives

Ideas that foot with leadership objectives have a far better chance of succeeding than ideas that do not, on the surface, help leaders accomplish their objectives. Your CEO wants to be successful, and will do what it takes to keep her job. Help her succeed, and you succeed in the process.


Leave

Is your idea really important to you? Instead of fighting a battle you can't win, find a company that believes in your idea, and become a happier employee in the process.

Forrester Research Survey On Green Direct Marketing

Last fall, you asked me to cover "green" issues in cataloging. We've had many good discussions, haven't we?

Today, Forrester Research analyst Dave Frankland asked direct marketers to participate in a survey on green direct marketing. Here is a link to the Forrester blog post, and here is a link to the survey. Let your voice be heard!