Feedback Loops

One of our biggest opportunities in 2009 is to better understand the role feedback loops play in our business.

Feedback loops are everywhere. Our linear metrics make it nearly impossible to detect them.

• We offer discounts and free shipping in e-mail campaigns. Performance improves by 50%, so we offer more discounts and free shipping, attracting a larger e-mail subscription base, a base that craves discounts and free shipping. Then we realize that our full-price merchandise and marketing isn't working, but the inexpensive stuff sure seems to work, so we offer more of the inexpensive stuff, which the discount/free-shipping crowd crave.
  

• Catalog customer acquisition is struggling, so we invest more energy getting catalog-productive names from co-ops. These names are often from rural areas, and are unlikely to buy online unless they are mailed a catalog. Then, our matchback algorithms (sometimes executed by the very organization giving us the names) show us that we must mail catalogs to get online orders, forcing us to acquire more names via the co-ops.

• Our websites fail to convert customers at an acceptable rate, so we "Google-ize" them. Then the site converts customers better, so we dive deeper into "Google-ization".

Feedback loops are easy to spot in Multichannel Forensics. You'll see that free shipping and e-mail marketing are in equilibrium mode, for instance. I've observed cases where businesses create a list of 100 important customer attributes, then measure, via the Migration Probability Table, how customers move between the attributes. In this 100x100 matrix, feedback loops are easily detected.

Our Web Analytics systems are not set up to detect feedback loops, nor are the drill-down based Business Intelligence tools that work off of static, non-dynamic data. These days, it is really important to have a smart business leaders directing a SAS or SPSS or SQL or R programmer, converting feedback loop hypotheses into actionable computer code.

We hear a lot about "globalization", about how everything is now connected, how things spread like a virus. Our businesses, our customers, interact in this ecosystem. And within our own business, we have a unique ecosystem, one where customers freely migrate between products, brands, and channels.

We have an opportunity to spend 2009 creating the reporting and analytic tools that allow us to see the feedback loops, allowing us to act before we're consumed by the negative results of many feedback loops.

Do I Need To Keep Mailing Catalogs, Or Can I Stop?

The comments about catastrophe happening if you don't mail catalogs anymore are once again circulating throughout the industry.

And depending upon your point of view, that may just be the end result --- catastrophe. Or, your business could be more profitable without them. How would you know?

I have a pretty simple set of rules.

• If you don't have a way to replace all of the customers you acquired via catalog marketing (at the same cost or cheaper), you'll die if you stop mailing catalogs for customer acquisition purposes. This is the most important rule to remember. Don't listen to all of that customer retention marketing stuff you hear about in the trade journals, vendor papers, and blogs. It's important ... but not one-tenth as important as managing customer acquisition in a disciplined manner.
  

• If you don't know your organic percentage (the percentage of demand you continue to get if you stop mailing catalogs), you'll probably face catastrophe if you stop mailing catalogs.

• If your customer base is 50+, and is predominantly in an exurban/rural area, you'll probably face catastrophe if you stop mailing catalogs.

• If your organic percentage is above 70%, your catalog marketing program is not integral to your brand. Nice, but not integral.
  

• If your organic percentage is above 40%, and you mail more than 15-20 catalogs a year, start cutting catalogs ... NOW! Not all of them, but many of them.
  

• If your organic percentage is in the 10% to 20% range, you'll probably face a catastrophe if you stop mailing catalogs.

• If you're still generating half or more of your sales via the telephone, you'll probably face a catastrophe if you stop mailing catalogs.
  

So yes, from the perspective of a catalog brand that has a loyal customer base of 50+ year old women in rural areas shopping over the telephone with an organic percentage of 15% and a robust list rental and co-op marketing program --- YES, you'll face catastrophe if you stop mailing catalogs.

But for the rest of catalog marketers ... it is time for some serious experimentation!

Of course, you can know what to do by knowing your organic percentage (hint --- mail/holdout tests), by knowing your customer distribution via Zip Code Forensics, and by knowing your channel dynamics and customer acquisition projections via Multichannel Forensics.

E-Commerce Strategy

Here's a common set of findings for a Multichannel Forensics project, executed for a decent-sized specialty retailer, one with stores, an e-commerce site, and catalogs.

• Catalog Buyers (telephone orders, e-commerce orders matched back to a catalog) have a 53% annual retention rate. They are in equilibrium mode with e-commerce and stores --- in fact, catalog buyers are more likely to place a next order via e-commerce or stores than in catalogs.

• E-Commerce Buyers (non-catalog sourced orders) have a 45% annual retention rate. They are in isolation mode with catalogs, but are in transfer mode with retail. In other words, the e-commerce buyer will not go back to shopping via old-school catalogs, but is very likely to leave e-commerce in the future for retail store purchases.
  

• Retail buyers have a 38% annual retention rate. They are in isolation mode with catalogs, and are in isolation mode with e-commerce. In other words, once a customer shops in a store, the customer becomes unlikely to shop via catalogs or e-commerce.

• Management is upset that customers appear to migrate to channels that have ever-decreasing customer retention rates. Lifetime value calculations bear this out. The catalog buyer has a LTV of $50. The e-commerce buyer has a LTV of $35. The retail buyer has a LTV of $25.

• Retail store comps are at -10%, while e-commerce is at +10%. Catalog comps are at -20%.
  

• 60% of all new customers are acquired in retail stores. 25% of all new customers are acquired via e-commerce. 15% of all new customers are acquired via catalog marketing.
  

• Retail buyers visit the e-commerce website an average of eighteen times per year.

• E-Mail marketing drives $0.10 per customer to e-commerce, and $0.10 per customer to retail stores.

• Catalogs drive $1.50 to the telephone, $0.50 to e-commerce, and $0.15 to retail stores, per catalog.

• E-commerce paid search orders are matched to the mailing of a catalog in half of all instances. In 1/3 of all cases where a customer visits the site via paid search, an order occurs at a retail store within three days.

• You have a "buy online --- pickup in store" option. You find that your best customers use this option, but the option does not increase long-term customer value at all.
  

Given the findings listed above, describe your marketing strategy for catalog marketing, for the e-commerce website, and for driving traffic into retail stores.

And even more important, describe your e-commerce strategy for this brand. Do you focus on e-commerce, or do you make your website a research tool for store purchases, or both? And if the answer is both, describe how you do both!

Discuss.

Small Is Winning

I'm familiar with a small catalog startup. This business is bucking all the trends --- a pure catalog brand with a website that basically serves as a glorified order form. Here's something shocking, folks ... this business is growing, and they aren't on Twitter, and they don't have a blog. I know, it seems impossible, given the rhetoric we read.

When you ask the owner how this brand grew, you learn that there are two key elements to their marketing success.

1. Co-Ops. This brand participates in some of the big co-ops, and by participating, they get access to the very best catalog names that exist ... all for a few pennies per prospect.
2. List Rental. This brand works with maybe the most reputable list rental name brand in the industry --- harvesting decades of experience from the leaders of this brand.

Not surprisingly, this brand is thriving. They went from $0 to about $25 million in less than three years. They cannot hire people fast enough, in the midst of the worst economy of the past sixty years.

There's no reason why this business can't hit $100 million in a decade.

And then there's another catalog brand that I'm familiar with. This business, generating under a billion dollars in sales, is struggling. They simply cannot acquire enough catalog customers to keep the wheels on. Housefile customers are performing maybe 10% worse than two years ago --- largely due to the impact of our economic situation. But catalog customer acquisition is off by maybe forty percent during the same timeframe.

This brand acquires the majority of their names from two key sources.

1. Co-Ops.
2. List Rental.

How does one brand thrive by using co-ops and list rental, while the other brand struggles to stay afloat due to horrific co-op and list rental performance?

One possible answer is size.

Back in the 1990s, large catalogers were very hesitant to participate in the co-ops, and for good reason.

Let's pretend that only two companies in the same industry are in a co-op --- one with 100,000 twelve month buyers, one with 10,000 twelve-month buyers. 4,000 of the customers overlap, meaning that there are actually 106,000 unique twelve-month buyers in the co-op.

Now it is time for each business to pull some names out of the co-op. The big company actually has access to 6,000 households, but it needs maybe 50,000 households to meet customer acquisition goals. Meanwhile, the small company actually has access to 96,000 names, while it only needs access to maybe 10,000 names to meet its customer acquisition goals.

Co-ops will take steps to protect the larger companies. And large companies will quickly mention that all 100,000,000 households are already in the co-ops, so there is nothing they can do about the situation anyway.

Still, the die has been cast. Small companies gain significantly more benefit from co-ops than do large companies. Big companies, due to the scale necessary to feed the customer acquisition beast, are getting access to grade "C" and grade "D" households. By default, they already have most of the grade "A" households.

For about the same cost, small brands are getting access to grade "A" households. By default, their customer acquisition activities are destined to be much more productive. The co-op ecosystem benefits the small brand, helping the small brand grow faster, helping the small brand gain markeshare from the larger brands.

Online, this trend happens in real time. I just did a search for "mock turtleneck" on Google. Here, small brands are on equal footing with the big brands. You'll see Lands' End, Target, Orvis, L.L. Bean, and Nordstrom appear near the top of the paid and natural search pile. But you'll also see Clothing Warehouse and CheapesTees.com. You'll see ShopStyle and Like.com, brands who offer a huge assortment from all brands --- you can compare in one place and then shop where you like.

Now clearly, big companies float to the top in search. But in aggregate, the small companies sum to a level of a "formidable competitor", cannibalizing business that would have gone to bigger companies.

Small is winning.

The nature of modern e-commerce favors the small. Offline, the co-ops and small brands (unintentionally) benefit by having access to big company names that are re-distributed to the smaller companies. Online, Google (unintentionally) benefits by simply directing traffic to any site that plays by the rules that Google gets to determine.

I'm aware of an online pureplay that happily recognizes the benefits of being small --- they notice that every time their biggest retail competitor advertises, their paid and natural search results improve.

None of these issues are good or bad ... they just are what they are. Small is winning. A whole new genre of marketing awaits large brands. The online marketing leaders of the next five years will figure out how to win this battle.

Costco E-Mail Campaigns

I have no information about whether this style of e-mail merchandising and creative works or not ... but it sure is different. Click here to see a recent Costco E-Mail Campaign.

Your typical merchant or creative staffer might say "Hey, you cannot have a spa gift certificate located next to a set of Michelin brand tires." If I had a dollar for every time I heard something like that, I could buy a set of Michelin brand tires ... or a spa gift certificate.

So many e-mail campaigns look the same ... one featured item "Our Best Hooded Sweatshirts At The Best Prices Of The Season!" coupled a free shipping offer (hurry, free shipping ends on Wednesday), some tabs across the top of the e-mail campaign featuring key merchandising divisions, and mouse print on the bottom of the e-mail campaign that makes lawyers feel comfortable.

Here's the challenge. We're moving into a new era of merchandising. Somehow we have to communicate that we stand for something, even if that means featuring a tray of Sliced Meats and Cheeses next to a Nutrisystem 35 Day Favorites Meal Plan.

And think about what Costco can learn from this e-mail campaign? It's one thing to measure an e-mail campaign that features one item. It's quite another thing to quantify which of 77 unique products the customer clicks on --- to do a Multichannel Forensics analysis on the items customers cross-shop. Who do you think learns more about what works and what doesn't work? Who can evolve and adapt faster?

Back in the day, we agonized over how to merchandise a catalog. We had to agonize, because we had to plan nine months ahead of time for the catalog, and when it went in the mail, it HAD to work. There was no room for sloppiness.

This e-mail campaign can be put together on a Monday, delivered the following week, yielding a ton of knowledge insights in just four days. Two weeks later, somebody can start the process all over again.

It is this "rapid cycle of learning" that we have to learn to master.

Simple Business Forecasting For E-Commerce And Cataloging

We now have a responsibility, an important one, to take a look at what our future looks like.

E-Commerce leaders need to understand the "inflection point", that point where customer acquisition stalls and the online business stops growing organically. Catalog leaders need to understand what happens when catalog customer acquisition ceases to be a viable channel.

Take a look at this business. Here is a common table run by direct marketers, reviewing how the customer file (as of 2008/01/01) purchased during 2008 ... and then the forecast for 2009 and 2010.


This business has stalled. Assuming that customer acquisition and customer retention stay the same in the future, this business will not grow. Among catalogers, we know that for many, customer acquisition is dying.

Take a look at the forecast for the next two years, assuming that customer acquisition drops by 20% each of the next two years.


Notice that the business starts sinking ... slowly. Now let's look at this same trend, for 2011, 2012, and 2013.


The business is imploding. This is the challenge we face.

Those of us managing the catalog channel have to decide if we can find micro-channels online that can replace what we're losing via catalog customer acquisition --- and if we cannot find those customers, we have to seriously consider what size of business we are comfortable managing in the future.

Those of us managing the e-commerce channel have little experience with this style of business analysis --- we've grown very comfortable taking "Saturn Research" channel growth estimates and applying them to our sales growth trajectory.

Ok, your turn. What has been your experience with this style of forecasting, and what have you done with the forecasts you've generated?

Happy Data Analyst Day!!

Thoroughly enjoy the one day of the year especially for you, the person who analyzes corporate or customer data!