How Do I Know When Catalog Buyers Need To Continue Receiving Catalogs?

There are two ways to look at this topic:

• Non-Traditional View:
• Use Multichannel Forensics: Over the past several years, if catalog customers remain in "isolation mode" and online customers are in "equilibrium" or "transfer mode", then catalogs are your primary reason for being.

• Traditional View:
• Look at Demand per Thousand Pages Circulated on an annual basis for a segment of customers (adding in your matchback results for sales driven by catalogs to the online channel). If this metric is flat or increasing over time, your catalogs are highly relevant. If this metric is decreasing, either customers no longer pay attention to the catalogs, or the merchandise is not enticing, or the creative isn't enticing, or there are pricing issues.
• Look at your "opt-out" rate across customer segments --- what percentage of last year's purchasers are saying they no longer want to receive catalogs? Is this percentage increasing over time?
• Look at the number of pages a customer was mailed, over time. Is this metric increasing while DMPC decreases? If so, your customer wants fewer catalogs, or fewer pages per catalog.
  

I hesitate to look at the metrics within any one catalog. Aggregate results over the course of a year, looking at DMPC (Demand per Thousand Pages Circulated), a metric that at least controls for the number of pages a customer was mailed during the year.

Basically, the answer to the question is sitting right there in your database!

Cute Kids Opting-Out Of Catalogs To Be Featured On The Today Show January 23

According to the blog of the folks who originated the cute videos about kids opting-out of catalogs, Ann Curry of the Today Show "loves the idea" --- the content/topic will be aired on the January 23 edition of the Today Show.

Cute Video:

Announcement From Ted Wells' Catablog:

How Do I Know When Catalog Buyers Don't Need To Receive Catalogs Anymore?

A loyal reader recently asked how he could understand when customers who shop via phone/mail and via the web are ready to forgo catalog marketing, are ready to shop on the web without a veritable plethora of paper advertising?

Good question!

For those of you who own the Multichannel Forensics book, turn to pages 72-79 for an example of the evolution of a catalog business that transitions to an online business.

One thing you can do is run the Migration Probability Table for your multichannel customers (phone/mail and web buyers during the past twelve months). Run this table for each of the past five or six years.

If your customers are ready to shop without the aid of catalog advertising, you will see at least four things happen.

1. The "phone/mail" channel will be progressively changing modes from isolation to equilibrium to maybe even transfer mode. This means phone/mail customers are becoming less and less likely to stay within the phone/mail channel.
2. "Phone/mail" channel loyalty will de-evolve from hybrid to acquisition mode.
3. The "online" channel will be progressively changing modes in the opposite direction, from transfer to equilibrium to isolation.
4. "Online" channel loyalty will evolve from acquisition to hybrid or retention mode.

It's not much more complicated than that. Once customers evolve to a point where the online channel is getting close to or is in "isolation" mode, customers are then ready to purchase without the aid of catalogs.

The folks at Catalog Choice should be advocating this analytical technique --- they'd befriend catalog brands, save trees, make catalog brands more profit, and please customers.

Everybody wins.

Netflix: 2001 to 2012 Sales Trajectory

I'm spending an increasing amount of time helping new online businesses develop long-range sales forecasts.

There are two important components of a long-range sales plan for a new business.

First, we have to estimate how likely customers are to defect.

Second, we have to estimate how many customers we can attract via marketing, and what those customers will spend.

By being a publicly traded company, Netflix freely provides us with a rich history of marketing spend, and the customers attracted by marketing spend.

If you like, download a Netflix 2001 - 2012 spreadsheet I created, a spreadsheet that outlines historical results and a projection for the future. Change marketing spend in row 13 for years 2008 - 2012, to get an idea of how Netflix sales and profit might vary based on different marketing spend levels.

The spreadsheet is driven by churn rate, and more importantly, the marginal effectiveness of marketing and customer acquisition. The graph at the top of the page illustrates this trend at Netflix. In the early years, Netflix was able to greatly improve the effectiveness of marketing activities.

But after 2003, cost per new subscriber steadily increases as marketing spend increases. One can play with different marketing spend levels, understanding the long-term sales and profit potential of Netflix.

Give this simplistic spreadsheet a try. Give me a holler if you want a model built for your new or existing online business.

Profit Per New Customer (PPNC)

One of the least utilized metrics in the online, e-mail and catalog world is "profit per new customer", or "PPNC".

We start with a paid search marketing program. The marketer spends $10,000 and observes these results.

Profit And Loss Statement
Clicks	20,000
Conversion Rate	1.00%
Customers	200
Average Spend	$125.00
Demand	$25,000
Net Sales (80%)	$20,000
Gross Margin (55%)	$11,000
Less Marketing Cost	$10,000
Less Pick/Pack/Ship (12%)	$2,400
Variable Profit	($1,400)
Cost Per Click	$0.50
Cost Per New Customer	$50.00
Profit Per New Customer	($7.00)

There are two metrics that we commonly look at ... cost per click ($0.50), and CPA, or Cost per New Customer ($50.00).

In this case, the marketer is spending $50.00 to acquire a new customer.

The metric that really matters is profit per new customer (PPNC).

In this example, the brand loses $7.00 profit for every new customer.

Next, the brand compares this metric with the long-term value of the customer. For instance, this segment of customers might generate $15.00 profit in the next twelve months.

In total, the marketing activity is responsible for (-$7.00 + $15.00) = $8.00 profit, over a twelve month period of time.

Where possible, we want to evaluate profit per new customer (PPNC), instead of easier-to-compute metrics like cost per click or cost per new customer.

DMA Enhances Product To Compete With Catalog Choice

Kudos to the Direct Marketing Association for enhancing their mail preference solution. The enhanced product more closely resembles the product offered by Catalog Choice, and is free to consumers (though a credit card number must be given to validate the request).

We shall see which service the customer trusts more, maybe that will be the only fun part of all this for us catalogers.

Catalogers --- you've been amazingly quiet over the past two weeks. What are your thoughts on all of this activity?

Profit And Loss Responsibility

If there's anything the past three weeks have taught me, it is that there are two kinds of marketers.

1. Those who have had P&L responsibility.
2. Those who have not been blessed/cursed with P&L responsibility.

Those who have had profit and loss responsibility seem more likely to defend "what has always been done".

Those who have not been blessed/cursed with this responsibility seem more likely to take risks.

Why don't we analyze a multichannel business, and see what profit and loss responsibility does to one's psyche?

Table #1: Current Profit And Loss Statement
	Catalog	Online	Online	Online	Onilne	Total
	Ph/Mail	Via Catalog	Via E-Mail	Marketing	Organic	Volume
Demand	$50,000	$25,000	$5,000	$10,000	$10,000	$100,000
Net Sales	$40,000	$20,000	$4,000	$8,000	$8,000	$80,000
Gross Margin	$20,000	$10,000	$2,000	$4,000	$4,000	$40,000
Less Ad Cost	$7,500	$3,750	$50	$1,250	$0	$12,550
Less Pick/Pack/Ship	$4,600	$2,000	$400	$800	$800	$8,600
Variable Profit	$7,900	$4,250	$1,550	$1,950	$3,200	$18,850
Less Fixed Costs	$5,000	$2,500	$500	$1,000	$1,000	$10,000
Earnings Before Taxes	$2,900	$1,750	$1,050	$950	$2,200	$8,850
EBT … % of Net Sales	7.2%	8.7%	26.2%	11.9%	27.5%	11.1%

Here's a perfectly healthy business. The catalog channel, e-mail channel, and online channel combine to yield a business that generates $80 million in net sales and $8.9 million in earnings before taxes.

Now let's say that somebody in management says "We don't need catalogs anymore ... customers can simply use the internet to shop!!"

If you've had profit and loss responsibility, you're likely to think that this is what your profit and loss statement will look like:

Table #2: Elimination Of The Catalog Program, Catalog Demand Lost
	Catalog	Online	Online	Online	Onilne	Total
	Ph/Mail	Via Catalog	Via E-Mail	Marketing	Organic	Volume
Demand	$0	$0	$5,000	$10,000	$10,000	$25,000
Net Sales	$0	$0	$4,000	$8,000	$8,000	$20,000
Gross Margin	$0	$0	$2,000	$4,000	$4,000	$10,000
Less Ad Cost	$0	$0	$50	$1,250	$0	$1,300
Less Pick/Pack/Ship	$0	$0	$400	$800	$800	$2,000
Variable Profit	$0	$0	$1,550	$1,950	$3,200	$6,700
Less Fixed Costs	$0	$0	$2,000	$4,000	$4,000	$10,000
Earnings Before Taxes	$0	$0	($450)	($2,050)	($800)	($3,300)
EBT … % of Net Sales	0.0%	0.0%	-11.2%	-25.6%	-10.0%	-16.5%

Once you've had profit and loss responsibility, you are likely to be terrified of ending anything! Heck, look at the numbers!

The executive team would be likely to assume that all of the phone/mail volume, and half of the online volume, would disappear if catalogs weren't mailed. $8.9 million of profit becomes a loss of $3.3 million. This business is sunk!

Of course, the folks who originated the idea that all of the volume would simply move online will chime in, citing anecdotal evidence of Aunt Helen in St. Louis who throws her catalogs out, only buying online from credible brands.

If you're lucky, your circulation team tested what happens when catalogs aren't mailed. Most folks who execute these tests realize that a third of the volume will occur anyway, while two-thirds is driven by advertising.

So, let's add a third of the catalog-driven volume back into the profit and loss statement.

Table #3: Elimination Of The Catalog Program, 2/3 Catalog Demand Lost
	Catalog	Online	Online	Online	Onilne	Total
	Ph/Mail	Via Catalog	Via E-Mail	Marketing	Organic	Volume
Demand	$0	$0	$10,000	$20,000	$20,000	$50,000
Net Sales	$0	$0	$8,000	$16,000	$16,000	$40,000
Gross Margin	$0	$0	$4,000	$8,000	$8,000	$20,000
Less Ad Cost	$0	$0	$100	$1,250	$0	$1,350
Less Pick/Pack/Ship	$0	$0	$800	$1,600	$1,600	$4,000
Variable Profit	$0	$0	$3,100	$5,150	$6,400	$14,650
Less Fixed Costs	$0	$0	$2,000	$4,000	$4,000	$10,000
Earnings Before Taxes	$0	$0	$1,100	$1,150	$2,400	$4,650
EBT … % of Net Sales	0.0%	0.0%	13.7%	7.2%	15.0%	11.6%

Now we're getting some place. Earnings before taxes improve to $4.7 million. Still, sales and profit are not where they were, prior to eliminating the catalog. Those accountable for the P&L dig their heels in!

A final scenario is run. E-mail marketing goes from one campaign per week to two campaigns per week. And online marketing spend increases from $1.2 million to $5.0 million dollars, assuming this money can actually be spent in an efficient manner (and hopefully, somebody would have tested this before getting to this stage). Quadrupling online marketing results in a doubling of online volume, in this example.

Here's the profit and loss statement.

Table #4: Elimination Of The Catalog Program, Increase Online Budget
	Catalog	Online	Online	Online	Onilne	Total
	Ph/Mail	Via Catalog	Via E-Mail	Marketing	Organic	Volume
Demand	$0	$0	$14,140	$40,002	$20,000	$74,142
Net Sales	$0	$0	$11,312	$32,001	$16,000	$59,313
Gross Margin	$0	$0	$5,656	$16,001	$8,000	$29,657
Less Ad Cost	$0	$0	$200	$5,000	$0	$5,200
Less Pick/Pack/Ship	$0	$0	$1,131	$3,200	$1,600	$5,931
Variable Profit	$0	$0	$4,325	$7,801	$6,400	$18,525
Less Fixed Costs	$0	$0	$2,000	$4,000	$4,000	$10,000
Earnings Before Taxes	$0	$0	$2,325	$3,801	$2,400	$8,525
EBT … % of Net Sales	0.0%	0.0%	20.6%	11.9%	15.0%	14.4%

At this point, earnings before taxes are about equal to the current profit and loss statement, a statement that includes catalog marketing.

Of course, the business loses about $20 million in net sales, suggesting that a portion of the catalog volume was not being generated efficiently.

Here's the rub. Those who have never had profit and loss responsibility are willing to change strategies, in large part because they've never been accountable for delivering promised sales and profit numbers to owners/shareholders. Those who have had profit and loss responsibility are often not willing to change strategies, because the risk involved in trying something different might cost them their job.

In-between those who advocate risk, and those who have to deliver numbers, are a set of assumptions that can help leaders feel comfortable with a different business model, a different strategy, a different approach.

What is needed is a healthy mix of strategy, database research, open-mindedness, and fiscal accountability.

The future of the catalog industry will include all three of these components.