Forrester Research

We hear about Forrester Research ... often.  You might feel like a fossilized trilobite after spending time reading their content!

How does Forrester Research market to their customers?  Is it all digital, all omnichannel, as we're told we have to be?  Or is it a different and potentially more effective strategy?

Click here and check out the 10-K from the year ended December 31, 2011.  They'll tell us what they do!

First, you come away with the realization that this is a well-run business.  Who wouldn't want to earn 13% pre-tax profit?  Kudos to Forrester for running a profitable, healthy business.

The 10-K tells us that "Forrester inspires customers to live in the future." 

Here's a few tidbits from their 10-K, about the way they view the future.

• Jim Collins' book, Good to Great, has been their bible since 2007.  It's not some modern whiz-bang text by a social media expert, is it?

• Did you know that 36% of Forrester employees are sales people?  438 out of 1,208.  They employ more sales people than researchers.  Or digital strategists.

• Did you know that Forrester wants to grow their sales force by 15% to 20% a year?  They do not talk much about their digital / omnichannel future.  They talk a lot about growing by adding to their sales force.

• Digital / Omnichannel activities are largely for lead generation, not immediate sales generation.  Think about that for a few moments.

• Four tactics are listed to promote brand awareness ... website, events, worldwide press relations, and direct mail (gasp) campaigns. 

Their analog-focused strategy works.  Net sales are growing at a 7.5% compound annual rate.

• 2011 = $283.6 million.
• 2010 = $250.7 million.
• 2009 = $233.4 million.
• 2008 = $240.9 million.
• 2007 = $212.1 million.

And pre-tax profit?  Growing at a 4.9% compound annual rate.

• 2011 = $37.0 million, 13.0%.
• 2010 = $30.8 million, 12.2%.
• 2009 = $32.4 million, 13.9%.
• 2008 = $38.0 million, 15.8%.
• 2007 = $22.7 million, 10.7%.

Nice numbers, huh?  Not stunning growth, but better than many of us, right?

Forrester sells us a digital / omnichannel vision of the future.  As they say in the 10-K,  "Forrester inspires customers to live in the future."   

Forrester's future, however, looks bright due to an analog strategy fueled by a large, human-centric sales force.

Fascinating!

We know why this happens, right?  Forrester isn't stupid, they're employing smart people.  Executives and CEOs tend to be in "Judy's Generation" ... baby boomers, by and large.  You reach these folks via relationships ... actual in-person relationships.

Keep this in mind the next time somebody belittles your business model for being old-school, analog, and relationship focused.  Use Forrester as a role model!

Dear Catalog CEOs: Your Annual Physical and Prescriptions

Dear Catalog CEOs:

I had my annual physical in December.  For just $400, you get to learn about all the unique ways you're destroying your own health.  For instance, did you know that it is bad for your health to eat an entire pan of Special-K bars in one sitting?

My doctor says my cholesterol is too high.  He'd like for me to exercise more, to lose weight, to eat more vegetables.  He wants me to stay away from Cheetos, 24oz prime rib dinners, and chocolate frosted brownies.  He said if I do those things, my cholesterol will go down, naturally.

Then he wrote the script for a drug similar to Crestor.

Problem solved!

What does this have to do with your business?  Everything.

When we belly-up to the Abacus bar and order 1,500,000 prospects at $0.06 each, Abacus is writing us a script for Crestor.  When our email subject lines offer 30% off plus free shipping, we're putting on weight, we're not running a lean, trim business.  And when we offer a loyalty program instead of doing the hard work to acquire new customers the old-fashioned way, we're not exercising our marketing muscles, are we?

At some point, we have to look in the mirror, and ask ourselves if this is the way we want to live?

I know, I know.  Who wants to follow doctor's orders?  Exercise?  That's like acquiring customers via word-of-mouth because our products are so highly desired that people cannot stop talking about them!  Diet?  That's like selling merchandise at full price - it's more fun to sell merchandise at 30% off plus free shipping (nachos).  High Blood Pressure?  That's like a high ad-to-sales ratio ... it eventually causes a stroke, heart attack, or business implosion.

We'd rather comb through the trade journals, searching for Crestor.  Maybe there is an omnichannel pill we can take, one that will fix everything, right?  Let's just hope that somebody can solve all of our woes in 400 words or less, with three easy steps, preferably somebody with no client-side business experience.

We've been trained to seek the pill, the easy way out.

We need to get back to doing hard work.

I'm walking most days now.  Haven't had a chocolate frosted brownie in months.  Can't say the same thing for the Cheetos, however.  But it's a start.

Isn't it time we gave our business an annual physical?  And after seeing the results, wouldn't it make sense to start doing the hard work to restore business health?

Kaley's Knits: Cheating

Today, we end our month-long journey through the customer file at Kaley's Knits.

I know, some of you are dissatisfied with my conclusions.

• "You diagnosed the problem, but you didn't tell us how to fix the problem.  What are the tactics we should use to quickly fix the problem?  Should we offer 10% off instead of 20% off?  Should we offer free shipping with a hurdle instead of free shipping, no hurdle?  Should we double our email frequency?  Should we expand into mobile?  Should we connect with the "social shopper"?  Would tablet commerce help us grow new customers?  Should we rent names from co-ops at $0.06 a pop?  Should we change paid search vendors?  Why not try big data, that should help, right?"

Those who complain are looking to cheat the system.

Kaley's Knits has an expense problem.  Fixed costs are increasing, and are rapidly eroding profits.  There are only two solutions to a fixed cost problem.

1. Reduce expenses.
2. Grow sales profitably.

How do we grow sales profitably?  Pretend that marketing didn't exist, that you had to rely on merchandise productivity to grow sales profitably.  What would you do?  Well, you'd place sales growth accountability squarely on the shoulders of the merchant.  The merchant would have to find products that customers craved, and would have to find products that aren't easily knocked-off by competitors.  And if the merchant failed, the merchant would not longer be employed by the company, right?

Yes, it is terribly hard to increase merchandise productivity.

Because it is so terribly hard to increase merchandise productivity, we try to cheat, don't we?  We hire marketers.  Marketers apply magic to the problem.  Of course, all magic comes with a price.  We chase expensive items with hefty gross margins, and when growth doesn't come fast enough, we offer discounts and promotions to "tickle the buying bone".  We abandon expensive new customers, seeking instead to squeeze more juice from the loyal customer lemon.  We starve new customers, we offer sugary confections to existing customers.  We hurt the profit and loss statement.

And then we look for easy answers to problems that the marketing team created.

This is cheating.  We're cheating on top-line sales growth, we're cheating the profit and loss statement, and we're looking to cheat via easy solutions to complex problems.

The solution, of course, is to simplify.  We're going to fill the bowling alley gutters with bumpers, so that the bowling ball cannot go into the gutter - as a result, we're guaranteed to knock down a few pins.

• Goal 1 = Increase Annual New Customers from 99,120 to 115,000 per year.
• Goal 2 = Increase Gross Margin to 59% of Net Sales.
• Goal 3 = Maintain Average Price per Item Purchased, to between $33 and $36.
• Goal 4 = Increase Variable Profit to $6.0 Million.
• Goal 5 = Maintain Annual Repurchase Rate at 37%

There isn't a single tactic among the five goals.  Your job is to create tactics.  You are accountable.  

Your tactics, however, cannot cause damage to any of your goals.  If you discount heavily, you eliminate a chance to succeed at Goal 2.  If you overspend to acquire new customers, you eliminate a chance to succeed at Goal 4.  If you trim marketing expense among existing customers, you eliminate a chance to succeed at Goal 5.  If you fail to accomplish Goal 1, you make it terribly hard to to achieve Goal 4 later in the year.  If you raise prices too much (Goal 3), you might have a clearance issue, requiring discounts/promotions, making it impossible to succeed at Goal 2.

In other words, we set Goals that prevent the marketer from going off the fiscal cliff.

By doing this, we place accountability squarely in two areas.

1. The marketer must not cheat.  The marketer must be disciplined.  Cheating is not allowed.
2. The merchant must improve merchandise productivity.

We don't tell employees HOW to do something.  Instead, we make sure that success will not happen by cheating.  

Success will come from hard work.

Many employees will hate this approach (you may be one of those who hate this approach).  We are causing each employee to be accountable for success.  If the employee fails, the employee should receive a poor performance evaluation, and ultimately, not be employed by the company.  This is the start of the documentation process, folks.

I know, this isn't what 90% of you wanted to hear about.  You wanted "Six Easy Steps For Social/Mobile/Local Success", things like this:

1. Identify your target customer.
2. Create products that your target customer needs.
3. Use social media to cause your products to go viral.
4. Apply mobile strategies to be everywhere your customer is - Woodside Research says that 77% of e-commerce transactions will be on mobile devices by 2018.
5. Use big data to leverage local opportunities.
6. Reap the rewards.

Good gravy!

Instead, I spent a month sharing a forensic strategy for identifying the reasons a business is in the middle of a painful collapse.  It's your job to fix the business.  

You are accountable.  Use this methodology to identify problems.  Then you, and only you, should fix the problems.

Discuss.

Kaley's Knits: Fixing Self-Inflicted Wounds

By running a simple set of diagnostics, we quickly diagnose why a business is struggling. In the case of Kaley's Knits, some of the problems are self-inflicted.  These problems won't be solved by a "robust mobile strategy" or "three easy steps to social media success".

No, self-inflicted wounds can be healed by refocusing on fundamentals.

There's enough time to set goals for the rest of 2013.  Why not do this?

Goal #1 = Increase annual new customer counts from 99,120 to 115,000 per year.  Yes, this is an audacious goal.  But the impact on the business is substantial.  The customer file fell off the fiscal cliff once marketing dollars were taken away from customer acquisition activities.  When the customer file drops, sales drops are coming within a 6-12 month window, if not sooner.  I would immediately shift the focus of the marketing team away from a "socially engaging business that capitalizes on the burgeoning mobile opportunity" to a simple goal - "find more new customers"!  I don't care how Kaley's Knits finds more customers, that's the job of the marketing department.  Notice that I did not put a spending parameter on this goal.  If marketing can yield customers that generate profit during 2013, then marketing should be able to spend whatever marketing needs to spend to accomplish the goal.

Goal #2 = Increase gross margin percentage to 59%.  Gross margin was at or above this level from 2009 to 2011.  Of course, this is going to lead to a significant reduction in discounts/promotions, which may lead to a decline in demand.  This will be offset, in part, by the increase in new customer acquisition, which will fuel the business.

Goal #3 = Maintain average price per item purchased at between $33 and $36.  This prevents the merchandising team from artificially marking-up merchandise to artificially inflate gross margin dollars.  This will push down average order value inflation.  As we have observed, average order inflation pushes some customers out, requiring the brand to offer discounts/promotions to bring the customer back.  Why play this game?

Goal #4 = Increase variable profit to $6.0 million.  This should be achievable with a focus on new customers and a de-emphasis of discounts/promotions.  Notice that my goal has nothing to do with earnings before taxes.  99% of employees have little or no control over fixed costs.  Give employees the ability to manage metrics they control.

Goal #5 = Maintain annual repurchase rate.  I did not share data about annual repurchase rates in this project, but annual repurchase rates were 37% in 2012, 38% in 2011, and 38% in 2010.  Keeping customers is not the problem at Kaley's Knits.  So, the goal, given all of our moving parts, is to maintain repurchase rates at 37%.

I'm not telling Kaley's Knits staff HOW to do anything, am I?  I am simply setting goals that, when reviewed by smart people, eliminate all of the activities that cause a business to self-inflict wounds upon itself.  It will take a solid year of discipline for Kaley's Knits staff to adjust to the goals, make changes, and properly manage the profit and loss statement.

As staff manage to the goals I assigned, the focus can shift to the activities that cause profitable sales growth.  It is my guess that this will be a difficult transition for the staff at Katie's Knits, because through most of 2013, there won't be an easy path to sales growth.

In most cases, sales growth comes from two factors.

1. Low-cost customer acquisition programs that yield a significant increase in the number of new customers (marketing's responsibility).
2. A significant increase in merchandise productivity, yielding a significant increase in annual repurchase rates and orders per buyer per year (merchandising's responsibility).

When you look at the profit and loss statement, you see that Management at Kaley's Knits tried to artificially grow the business.  The results, predictably, were not good.

Fortunately, self-inflicted wounds can heal.  For 2013, I would ask the staff at Kaley's Knits to refocus on the basics of running a business.  In 2014, I would expect the merchandising team to step up to the plate with improvements in merchandise productivity.  In 2014, I would expect the marketing team to have a low-cost acquisition plan that could yield 125,000 new customers per year.  The combination of merchandise productivity and new customer acquisition would solve all profitability problems at Kaley's Knits, generating enough profit to offset increases in fixed costs, generating enough profit to fund future mobile developments.

Your turn - what goals would you set up for the Management Team at Kaley's Knits, and why would you create the goals you are advocating?

Kaley's Knits: The Profit Problem

Remember the profit and loss statement?

Look at the fixed costs line.  Fixed costs are increasing at a fast rate, from $3.5 million in 2010 to $3.7 million in 2011 to $4.2 million in 2012 ... a 20% increase in just two years.

The increase in fixed costs puts pressure on the entire profit and loss statement.  We know this by looking at the variable profit line.  In 2012, $5,654,610 of variable profit was generated.  In 2011, $5,616,541 of variable profit was generated.  Basically, the number is the same, right?  Kaley's Knits is generating the same amount of profit, prior to fixed costs, in 2012 as in 2011.

We have a business that has several fundamental problems.

1. Fixed costs are growing faster than top-line demand/sales are growing.
2. To partially account for this problem, Management decided to slash the marketing line in 2012.
3. Consequently, new customer acquisition dried up, putting even more pressure on top-line demand/sales.
4. Management tried to "squeeze more out of the lemon", by increasing price points.
5. Customers responded, somewhat, by buying more expensive items, at the expense of other metrics (orders per buyer per year, items per order).
6. Management responded by countering increases in price points with discounts/promotions, which caused a slight increase in orders per buyer per year.

Management had a healthy business with a satisfying mix of new and existing buyers, purchasing at reasonable price points.

Management traded this for a less healthy business, one being starved of new buyers, one of existing buyers being asked to pay more for items, then being given discounts and promotions to encourage the customer to come back.

Assuming that fixed costs remain flat, or continue to grow, what prescription would you write to fix this business?  Use the comments section to describe how you, the prospective CEO, would approach further diagnosis of business problems and ultimately how you would fix this business?

Discuss.

Kaley's Knits: Squeezing More Out of the Lemon

Let's briefly review what we already know:

1. Demand, on an annual basis, continues to grow at a modest rate.
2. The customer file began to collapse around August 1, 2012.
3. Existing buyer growth remains flat.
4. New customer acquisition began to collapse around July 1, 2012, and is down 7% from previous highs, suggesting that if this trend continues, we'll see new customer acquisition down about 13% on an annual basis by mid-2013.
5. Marketing spend is down in 2012, by about 10%.
6. Gross Margin is down to 53% of net sales in 2012, compared to 59% in 2011, and a high of 60% in 2009.
7. Orders per Buyer per Year began growing in June 2012.
8. Items per Order began to fall in October 2012.
9. Price per Item Purchased began a "race to the top" in the Fall of 2011.
10. Average Order Value is $13 higher today than two years ago.

A combination of Orders per Buyer per Year, Items per Order, and Price per Item Purchased yield Annual Demand per Buyer.

In July of 2011, the average twelve month buyer spent $102.25 per year.

In January of 2013, the average twelve month buyer spent $122.89 per year.

This metric has been increasing for eighteen months.  New customers fell off the cliff five months ago.  This tells us that new customer acquisition is not responsible for the change in this metric.

Clearly, Management is trying to "squeeze more out of the lemon".  A conscious decision was obviously made to get customers to spend more.  The focus of Kaley's Knits clearly shifted, in an 18 month window, from a balanced approach to one focused on trimming customer acquisition marketing dollars in favor of spending gross margin dollars on existing customers.

Why did I mention gross margin dollars?  Well, gross margin percentages are down from 59% in 2011 to 53% in 2012.  Discounts and promotions are frequently subtracted from the gross margin line.

Next time, we'll talk about the impact of this strategy on the total business.

Attribution Beyond Catalogs

Yesterday, I outlined the methodology I use to perform catalog attribution (click here please).  The article got good numbers, and generated questions.  This is the theme of the most commonly asked question.

Question:  You only care about catalogs.  We live in an omnichannel world.  How do I account for paid search, you moron?

Paid Search is the most complicated case, simply because we have to also ascertain the click-through rate within catalog / email driven searches.

First, we need to have both catalog and email holdout test results available.  You have email holdout test results available, right?  Right?  Because if you're going to do attribution work, you're going to apply real science, not just hokum-based guesses used by other practitioners.  Promise me that you have catalog and email holdout results.  If not, don't go further, you're just guessing, and that's really dangerous.

Here are the results from a sample catalog holdout test.

And here are the results from a sample email holdout test.

We only need a few additional pieces of information to identify the profitability of paid search.

First, in the catalog test, we learn that 50% of paid search demand is catalog-driven.  In other words, if we took catalog marketing away, 50% of paid search demand disappears.  Therefore, half of paid search demand is immediately allocated to catalog marketing.

Second, in the email test, we learn that 10% of paid search demand is email-driven.  In other words, if we took email marketing away, 10% of paid search demand disappears.  Therefore, 10% of paid search demand is immediately allocated to email marketing.

Let's say that our paid search program possesses the following metrics.

• Total Budget = $1,000,000.
• Total Clicks = 2,000,000.
• Conversion Rate = 2%.
• Average Order Value = $100.
• Total Demand = $4,000,000.
• Flow-Through Rate to Profit = 40%.
• Total Profit = $4,000,000 * 0.40 - $1,000,000 = $600,000.

Here's where things get a little bit messy.  You need to know the conversion rate of clicks attributed to catalog marketing, and to email marketing.  Few people possess this knowledge.  Go talk to your analytical gurus, vendors, or Google Analytics ninjas, and have them derive this number for you.

Let's pretend we know this number.

• Catalogs and Email Paid Search Conversion Rate = 2.5%.

Ok, we're making progress now.  Let's calculate the conversion rate for non-catalog and non-email clicks.  First, we know that 60% of paid search demand is caused by catalog and email marketing.  So we subtract that out of the equation.

• $4,000,000 * (1 - 0.60) = $1,600,000.

In other words, $2,400,000 paid search demand is catalog and email driven.  We know that the average order value is $100, we know that the conversion rate is 2.5%.  Therefore, we can calculate catalog/email driven clicks:

• $2,400,000 demand / $100 AOV = 24,000 orders.
• 24,000 orders / 0.025 = 960,000 clicks.

If 960,000 clicks are catalog/email driven, then 1,040,000 have to be paid search driven.

• 2,000,000 - 960,000 = 1,040,000.

Let's run the profit and loss statement for catalog/email driven clicks.

• Total Clicks = 960,000.
• Total Budget = 960,000 * $0.50 = $480,000.
• Conversion Rate = 2.5%.
• Average Order Value = $100.
• Total Demand = $2,400,000.
• Flow-Through Rate to Profit = 40%.
• Total Profit = $2,400,000 * 0.40 - $480,000 = $480,000.

By simple subtraction, we can calculate the impact of paid search, outside of catalog/email.

• Total Clicks = 1,040,000.
• Total Budget = 1,040,000 * $0.50 = $520,000.
• Conversion Rate = (1,600,000 / $100) / 1,040,000 = 1.54%.
• Average Order Value = $100.
• Total Demand = $1,600,000.
• Flow-Through Rate to Profit = 40%.
• Total Profit = $1,600,000 * 0.40 - $520,000 = $120,000.

There you have it.  You just attributed paid search driven orders to catalog and email marketing, and you know what remains.  What remains is still profitable, though it converts at a much lower rate.

Now, you have yourself a dilly of a pickle here.  It's not terribly easy to identify a customer as a catalog/email driven visitor to Google, then make separate decisions based on that information.

Because of that, some of the attribution talk is nonsense.

Let's pretend that the non-catalog and non-email clicks were unprofitable.  You have to have a working relationship with Google that allows you to tell Google, at the time somebody visits Google, that the visitor is catalog or email driven - and if not catalog/email driven, don't pay for the click.

So if you can do that, then the attribution exercise is actionable.

If not, then the attribution exercise is done for knowledge, but is not actionable.

This process, of course, is repeated for all advertising channels.  Demand/Expense are allocated to catalogs and email marketing, with the remainder allocated to each individual marketing channel.

If the remaining marketing channels are shared, most would just allocate fractionally, based on pre-determined rules.  This, of course, is largely hokum, but there is a market where people are willing to pay for hokum-based research, so be it.