Pay 'em

Out here in Phoenix, there's a lot of 55+ communities. These communities possess golf courses, and the golf courses have a clubhouse and restaurant.

The community might create a traffic event, like a "Quilt Show", for instance. After paying $3 to attend the quilt show, you have lunch in the restaurant, and then after paying $46 for lunch (plus gratuity), you visit the Pro Shop.

And while you are in the Pro Shop, you decide to head back out to the car.

Except one thing happens.

The lone employee in the Pro Shop says one sentence ...

• "... you mean to tell me you spent all that time in here and you didn't buy anything?"

That's when I bought a packet of 3 1/4" My Hite Fly Tees.

The Pro Shop made $8 on a gross margin of 80%, +/-.

No omnichannel strategy causes that $8 purchase to happen.

Sometimes, it happens because your employees say something.

Why not pay your employees something when they cause a moron like me to buy an $8 package of golf tees?

What Does Bifurcation Actually Look Like At A Typical Catalog Brand?

The table below shows the results of a typical Catalog Circulation Simulation (you'll need to click on the image to see it properly - heck, print it and put it in your office for easy reference).

The housefile is grouped into segments of 5% of the 0-60 month file. They were ranked as of January 31, 2018 ... then I measured actual performance in the year ending January 31, 2019.

Finally, I ran my Catalog Circulation Simulation to quantify the optimal number of catalogs to mail, after factoring in organic demand (demand not driven by catalogs).

Again, I'll ask two questions ... because if you answer yes to each question you already know what I'm about to say.

1. Do you measure your Organic Percentage?
2. Do you run Catalog Circulation Simulations?

Look at Rank = 1 ... the best 5% of the catalog file:

• Currently mailed 14.4 catalogs per year.
• Could be mailed 50.0 catalogs per year.

These customers are so darn profitable that this brand is woefully under-contacting the customers.

I know, I know, 85% of my catalog audience is going to balk at this finding. Well, I learned the simulation strategy when I worked at Nordstrom and we mailed our best customers more than a hundred times a year and I scoffed at what we were doing and demanded mail/holdout tests and then learned that the very top of the file could practically be mailed an infinite number of times.

Ok, but that only works for the "best-of-the-best" ... and each brand has a different number of customers that fit this criteria. Most catalogers have an "actionable" number of customers that can be acted upon.

Look at how customers were contacted.

• Rank 1 = 14.4
• Rank 4 = 12.6
• Rank 7 = 10.5
• Rank 10 = 8.5
• Rank 13 = 7.0
• Rank 16 = 5.6
• Rank 20 = 3.1

You like that nice, smooth-looking curve, don't you? It's what you've become accustomed to over the past thirty years.

Get ready to be angry with me. Here's what the simulation shows for an "optimal" solution.

• Rank 1 = 50.0
• Rank 4 =   8.0
• Rank 7 =   3.0
• Rank 10 = 2.0
• Rank 13 = 1.0
• Rank 16 = 1.0
• Rank 20 = 1.0

This is the very definition of BIFURCATION. 

The file has literally split into two pieces.

1. A small number of crazed catalog shoppers who should be contacted weekly.
2. A huge number of customers who "shop the brand" and could care less about catalogs.

In the simulation above, the brand makes about $5.6 million more profit by figuring out how to take care of the best customers ... and then makes about $3.8 million more profit by figuring out how to mail far fewer catalogs to everybody else. On a hundred million in annual sales, the brand makes more than $9 million in incremental profit.

Your mileage will vary.

But I've run enough of these simulations to know that I'll be able to demonstrate the same dynamic in your brand.

Catalog Marketing has been split in two ... gradually over twenty years, all-of-a-sudden in the past three years. 

Alright, I've shared this information with you for free ... time for you to tell me why you will or will not implement the findings ... contact me at kevinh@minethatdata.com and share your thoughts - especially if you don't plan on acting on what has been shared here ... what stops you from implementing the findings?

P.S.: Also let me know if your favorite catalog vendor isn't breaking down your door tomorrow to get you to mail more to your very best customers, ok? It says something about the industry if your favorite catalog vendor isn't sitting in your office at 9:00am tomorrow morning asking you to act on what I've shared here.

Bifurcation: Catalog Marketing

In retail, Bifurcation involves the format, square footage, and experience.

In e-commerce, Bifurcation is separated by subscription / rental vs. independent purchase / ownership.

In catalog marketing, Bifurcation separates customers who pursue old-school catalog marketing and customers who prefer e-commerce.

Back in 1999, 95 out of 100 customers were catalog-centric shoppers. Bifurcation was happening, but you couldn't see it.

In 2009, the minority of customers were catalog-centric shoppers. Bifurcation was obliterating everything, but catalog professionals couldn't see it because the vendor community DIDN'T WANT CATALOGERS TO SEE IT ... the vendor community promoted "matchback analytics", blatant lies that "proved" that e-commerce transactions were generated by customers who received a catalog (and if you mailed every housefile customer a catalog, matchback analytics showed that every e-commerce order was tied to a catalog ... that's the worst part of the lie). This kept dollars flowing in the vendor ecosystem, and this delayed knowledge of Bifurcation by another decade for uneducated catalog professionals.

Now it's impossible not to see Bifurcation in catalog marketing.

You run circulation simulations, right?

RIGHT?

You are a modern cataloger, so of course you are using modern analytics tools to understand if you are making the right decisions. Of course you are running circulation simulations.

Here's an example. This company has great customers at the top of the file, and these customers have a low organic percentage (you measure your organic percentage, right ... RIGHT???), meaning that these customers LOVE CATALOGS. Read across the profit portion of the table (bottom half) at 72 pages (the average page count for this brand). How many catalogs should these customers get, per year?

These great catalog shoppers should not get 25 catalog mailings per year ... optimal is 45 times per year at 72 pages (or 30 times per year at 112 pages ... there are other options, but it's all about MORE for these customers).

The cataloger is making a grave mistake ... the cataloger is under-contacting the best customer.

Now, let's look at the same customer, but this customer (who is also being mailed 25 times a year at 72 pages) is committed to buying via email marketing and generates an 85% organic percentage instead of a 15% organic percentage. Here's the simulation outcome.

This is the EXACT SAME CUSTOMER, in terms of quality. The first customer shopped because of catalogs. This customer shops because of email marketing.

Read across the bottom portion of the table ... how many catalogs should the email-centric customer receive to generate optimal profitability?

1.

One.

One stinking catalog.

You run these simulations for your business, right? If you are catalog vendor worth anything to your client base, you run these simulations for your client base, right?

RIGHT??

If you are a catalog vendor and you are not running simulations like these, contact me immediately (kevinh@minethatdata.com) and be first in line to hire me ... I'll teach you how to create the simulations for yourself ... I will teach you how to do this, ok?

Back to you, the humble catalog brand. Think about what this means for your business.

• You mail best catalog buyers 25 times a year, they should get 45 contacts per year.
• You mail best customers with online preference 25 times a year, they should get 16 contacts per year.
• You mail best customers with email preference 25 times a year, they should get one (1) contact per year.

What the heck do you think happens when you get to the bottom 75% of your file?

• You should not be mailing more than 0-4 contacts per year, period.

This is classic Bifurcation.

• 10% of the file should be contacted with print weekly.
• 15% of the file is being treated properly via your current contact strategy.
• 75% of the file is being grossly overmailed.

A typical catalog brand cannot handle the outcome of the simulations given the current strategy employed by typical catalog brands:

• The typical catalog brand will not create a strategy to mail best customers 45 (or 85) times per year.
• The typical catalog brand will not create a strategy to mail 75% of the customer file four (4) or fewer times per year.

This is the biggest threat facing catalog marketing in 2019 ... what is the threat? The threat is that we are not Optimizing a modern catalog business to take advantage of the 10% of the file that should be contacted incessantly and we are not Optimizing a modern catalog business to take advantage of the 75% of the file that simply should not be receiving outdated and irrelevant communications.

You now have the knowledge ... you know that Bifurcation is happening to your catalog brand, or I wouldn't spend this amount of time communicating this fact to you. What will you, and your vendor partners, do about it? Which side of Bifurcation do you want to be on?

Bifurcation: E-Commerce

I didn't see this coming, but in hindsight I wonder how I missed it this long.

Back in the early 90s, surround sound was a big thing. You could buy a surround sound processor and plug your VCR into the surround sound processor. The processor would matrix the right/left signal and create glorious noise in the speakers you had behind the couch. The movie "The Fugitive" was a great example - you'd hear the horrifying sounds of a train derailing via five different speakers, and you'd think WOW!

You'd want not just the VHS version of The Fugitive ... you'd want all the movies that sounded good. If you had enough cheddar, you'd get a laser disk. If not, you'd join the Movie of the Month Club. For a penny you could pick from twelve titles ... and then each month you'd either be mailed a movie you had absolutely no interest in and you'd return it or you'd be required to buy a movie on your own. After "x" months, you could cancel at NO OBLIGATION.

These were called "Continuity Programs". You'd get locked into the program, and next thing you knew you weren't renting movies from Blockbuster Video.

Continuity Programs were everywhere.

Then e-commerce disrupted direct-to-consumer shopping, and weak companies were replaced by modern e-commerce brands.

One problem.

Modern e-commerce brands had horrible annual repurchase rates. It's common to analyze an e-commerce brand that retains 30% of last year's buyers. When this happens, the e-commerce brand becomes a slave to Google and/or Facebook ... the e-commerce brand has to put a quarter in the Google/Facebook slot machine, pull the lever, and hope to hit the jackpot (a new customer).

Digital gurus had to come up with a solution to this problem.

And they came up with a solution to this problem.

Continuity Programs were rebranded as "subscriptions".

To make subscriptions work, digital gurus had to make sure that you couldn't possibly own the product. Nope. You had to rent the product. And if you did end up owning the product, then for crying out loud you had to rent "something".

Netflix is the "Movie of the Month Club". You pay your streaming fee, and you get "access" to everything even though you own nothing. As long as they keep adding new stuff or you love watching reruns of The Office, you're in business. You pay your fee, they keep ads out of your face (more on this in a moment), and everybody wins ... well, at least Management wins. If Management is on the right side of Bifurcation, Management always wins.

Spotify is the music version of the "Movie of the Month Club". You rent music for one low fee, and you get everything. As long as you are locked in to your playlists and you like new music at high quality, you're not leaving Spotify. They're on the right side of Bifurcation.

Stitch Fix is the apparel version of the "Movie of the Month Club". You aren't renting apparel, that model doesn't work so well, so you have to rent something. What are you renting? You are renting the algorithms and you are renting the humans that curate your box of goodies. In exchange you get to "look cute". And Stitch Fix sidesteps the problem most e-commerce businesses experience ... low annual repurchase rates with few customers who buy multiple times per year.

Once you are buying from Stitch Fix, they don't need to spend money on anything other that algorithms/humans/merchants to keep you buying. Meanwhile the folks at Wayfair are running TV ads and spending money with Google/Facebook to keep the wheels on the bus. That's expensive stuff ... Wayfair is paying a tax to get you back while Stitch Fix is automatically sending a $200 box of stuff you didn't ask for.

Amazon (Prime) is the best example of a subscription-based model ... you pay more than a hundred dollars ahead of time in exchange for the right to have merchandise shipped quickly ... often the same day. On one side of Bifurcation you charge customers for the right to buy stuff from you (Amazon Prime) ... on the other side of Bifurcation you have to offer free shipping and 40% off to beg the customer to buy from you after paying Google/Facebook at tax.

Which side do you want to be on?

This is Bifurcation in e-commerce.

• On the good side, you'll pay a subscription to keep products rolling into your world, facilitated by mobile convenience.
• On the other side, you'll pay Google/Facebook a "traffic tax", and those two brands will decide if you get any traffic or not.

The product you offer determines whether a subscription-centric view of the world works. Have you noticed that nobody seems to want a subscription to merchandise from Gymboree? Almost nobody makes pre-paid annual shipping work, largely because the merchandise assortment is too narrow to enable 7x or 24x purchases a year.

In other words, if you want to get on the right side of Bifurcation, you have to do something about your merchandise assortment, so that it is broad enough or requires non-stop attention to keep you in the subscription program.

Make sense?

Tomorrow we go old-school & talk about catalogs.


P.S.: It does make you wonder ... customers are Bifurcating along paying for subscriptions vs. ad-supported models. What happens if capitalism (i.e. customers) prefer subscriptions over ad-supported models? What happens if the customer rejects Google/Facebook (ad-supported) and you can't acquire new customers anymore?

Bifurcation: Retail

Let's talk about Bifurcation in three arenas ... today is retail.

Retail is splitting into pieces. You have the best retailers with the best experiences in the best locations. You know it when you see it. You'll be able to offer 3x the square footage and it will be profitable. Anybody who has ever been to Bass Pro Shops understands what this is all about.

This side of the business operates in stark contrast to the rest of retail. Think Gap. For their flagship brand, sales are tepid. Stores are closing. And quite honestly, the 10,000 square foot Gap store is a dinosaur ... if they could dynamically shrink that thing down to 3,500 square feet featuring only winning items they'd do it in a heartbeat ... and if they are reading this and say "no, we'd never do that", then they have no idea how bifurcation is destroying retail.

We're going to have the best stores in the best locations with maximum square footage and maximum experiences.

Everybody else will be optimizing their way through the bifurcation process ... closing stores, building smaller stores, figuring out how to drive online volume which further accelerates the bifurcation process, speeding up store closures and creating even smaller formats. When a "savvy" online brand builds a store that doesn't sell anything, that's the optimization process. They are dealing with bifurcation with smaller experience-centric formats.

Retail is being bifurcated into the future.

1. Best customers shopping large stores in popular locations, stores big enough to be able to offer great experiences.
2. Everybody else is bifurcating toward a completely different experience ... smaller stores with only the best products or no products with the best experiences ... but not both because the store cannot be big enough to handle it.

Does that make sense? And don't come back at me with the one example in forty that refutes this as a way of refuting the thirty-nine cases where this is happening ... y'all have seen this, you've experienced it, and you know where it is headed. You are smart!!! Now respond to it reasonably and profitably, ok?

February

There's a lot of reasons why February is fantastic.

If you are paid twice a month, you make more money per day in February than any other month ... and that includes leap years! Good for you, for a month you earn a raise.

Did you know that sunset times increase faster in February than any other month? You begin the month in the grips of a polar vortex and you end the month on the precipice of Spring, enjoying nearly twelve hours of daylight.

How many other months include the breathless romance of Valentine's Day? That's a tradition/anniversary that 1-800-Flowers sure appreciates.

The Super Bowl is in February ... an unparalleled annual celebration of capitalism. Heck, that's the only day that people actually pay attention to television commercials., the only day nobody is fast-forwarding through messages from Gillette. Makes one long for the days of the Bud Bowl, don't you think?

On another channel on Super Bowl Sunday you can watch the Puppy Bowl. Happens every February now. Those folks created a tradition off of another tradition.

In a few days, we'll ponder the meteorological musings of a groundhog. Happens every February, right?

Here in Phoenix, they host a PGA Golf Tournament the weekend of the Super Bowl. It's the best attended tournament on the tour. A couple hundred thousand people act like they are behind the basket at a college basketball game. Golfers don't like that. The fans sure seem to like it. This happens every February now. It's a tradition.

Did you know that February is National Bird Feeding Month? And February 9 is National Pizza Day. How can National Pizza Day be a bad thing?

In the Catholic Tradition, February is the month of purification of the Virgin Mary.

An average person might view February as a worthless waste of a month. Another month of cold and misery in what has become a long and miserable winter. The average person would be wrong. February is the best month of the entire year, a unique month filled with tradition, with Anniversary-style events that only happen once a year ... in February.

Why couldn't you have an Anniversary Event in February? Right? Something that you do every February, something your customers simply cannot wait for each and every year. Why not? Why not do something clever? It's February after all!!

P.S.: In my time at Lands' End, we used to stick Platteville Peri in the snow on February 2. If Platteville Peri saw her shadow, it wasn't going to be a good fiscal year. But if she didn't see her shadow, well, my goodness, one could prepare for an absolute sales-oriented bounty leading up to bonus checks at Christmas. Here's your chance to give Omnichannel Owen or Catalog Craig or Retail Ron or Digital Diane a try.

It's Just A Game!

I'm on the phone with a professional, somebody a lot of you know and respect.

He's not happy with my position on discounts and promotions, and he explains why:

• "The discounts and promotions are irrelevant. All that matters is that there is sufficient markup to allow the discounts and promotions to yield a gross margin of 40%. If the brand delivers a 40% gross margin, the profit and loss statement takes care of itself and everybody is happy. It's just a game!!"

It's just a game!!

Is he right?

Of course he is right.

And that's the problem with a subset of business professionals. You chose an alternate path. You decided that business was a game, and you made that choice years ago, and now you are complaining that business isn't good, and it isn't good in part because you decided that business is just a game". You need to deliver a 40% gross margin and the "game" requires that you deliver a 35% gross margin and the p&l hates that and you think somebody else can fix the problem you created. 

It's just a game, you said so. Now you have to go play the game smarter than everybody else. Are you smart enough to do that? I think you are, and I think you know what you need to do. Go do it.