Silo Busting

These days, it is popular to want to "bust down silos", especially among members of the vendor and consulting community.

Silos are loosely defined as organizations of individuals working independent of each other. In a retail brand, silos might include online marketing teams and retail marketing teams working on initiatives without significant collaboration or coordination. In a catalog brand, the catalog marketing team operates independent of the e-mail marketing team, or the online marketing team.

Intuitively, the logic makes sense --- if everybody is working on the same page, the customer should theoretically benefit, right? The customer better benefit, because working as an integrated unit is hard work, much harder than having independent teams operating as a loose federation .

All theories, of course, should be proven with valid metrics, metrics that increase owner or shareholder value.

So here's my challenge to you, the vendor or consultant who promotes silo-busting strategies. Share with our readers a case study where tearing down silos resulted in the following:

• An increase in annual repurchase rate.
• An increase in orders per buyer per year.
  
• An increase in the percentage of customers who purchase across channels.
• An increase in overall profitability.

Use the comments section to forward links to our audience.

I've had the benefit of working in silo-based environments, and in fully integrated environments. There's something to be said for getting people to work together, regardless of org structure.

Micro-Channel Profitability

Don Libey asks the following question (of more than a hundred) in his February Multichannel Advisor newsletter:

• Has anyone shown me the actual, proven profitability for pay-per-click, affiliates, adwords, social media, and all the other micro-stuff? Is it accounted for in the same way as catalogs or any other marketing effort? Is it accurate? How do I know that?

I've always been an advocate of evaluating marketing activities on a variable cost basis. I've always believed that mailing another 10,000 e-mails does nothing to the fixed cost structure of the business, once you decide to mail the first 1,000,000 in your weekly campaign.

Maybe I've always been wrong.

Take your average $50,000,000 online/catalog brand. Assume that it costs about 4% of net sales to keep the wheels on the website --- servers, bandwidth, widgets, web analytics tools, commissions to 3rd party vendors for each sale, IT staff, programming code for new applications, inventory system alignment across channels, you name it.

4% of $50,000,000 is $2,000,000.

Finally, assume you have 12,000,000 annual website visitors.

One could make an argument that each visit to the website costs $2,000,000 / 12,000,000 = $0.167.

Imagine adding $0.167 to every paid search visitor. Or to every organic search visitor? Or every visitor who randomly visits from Twitter? Here's a paid search example:

	Current	With Fixed
Clicks	5,000	5,000
Conversion Rate	2.1%	2.1%
# of Buyers	105	105
AOV	$95.00	$95.00
Demand	$9,975	$9,975
Net Sales	$7,481	$7,481
Gross Margin	$4,115	$4,115
Less Marketing Cost	$2,500	$2,500
Less Est. Fixed Costs	$0	$835
Less Pick/Pack/Ship	$860	$860
Profit	$754	($81)
Profit Per Buyer	$7.18	($0.77)

The most important part of this exercise is to think! I'm not saying one way is right or wrong, but we have a responsibility to consider whether our activities are truly profitable or not --- we need to ask ourselves if some channels get a free ride while others carry too much of the freight.

Who Says Newspapers Cannot Monetize Content?

Newspapers need to monetize online content in order to stay in business.

And catalog brands need to continue to acquire customers via the internet.

Combine the two, and you've got this when you click through your NY Times RSS feed.

Don't know if you can tell ... but Horchow is offering free shipping.

CEO Questions About Online Marketing And Profitability

There are two hot CEO topics in 2009, based on my e-mail inbox:

1. Help me reduce advertising expense without a drop in sales.
2. Help me calculate the true profitability of my online marketing efforts.

Online marketing experts ... your fifteen year run of management by conversion rate is coming to an end. And that's a good thing!

The discussions are different than they used to be. Lately, the online marketing employee is being considered a scarce resource. Allocation of scarce resources is becoming a trendy topic ... and it should be, given the scarcity of employees after layoffs.

One individual asked it if was ok to add the human costs associated with managing a blog and maintaining a presence on Twitter to the variable costs associated with the website traffic generated by those activities, and then link those costs to the variable costs associated with picking, packing, and shipping merchandise generated by those activities.

Another individual wanted to know if she could calculate the incremental variable cost of each website visit, and then allocate that expense against visitors that browse the website on a frequent basis, calculating the true profitability of "best" customers.

A CEO wanted to allocate the cost of all website visits driven by an e-mail marketing campaign back to the e-mail campaign that caused the visits to happen --- holding e-mail marketing accountable for the 19 of 20 visits that did not result in a conversion but did chew up website expense.

So the scarcity of employees is causing a renewal of focus on activities that generate profit over buzz.

Ten years ago, the catalog industry went through a transformation. All expenses were carefully monitored, and all revenues were carefully tied to the catalog marketing effort that may have been responsible for generating the sales. This was the genesis of the matchback algorithm. The popping of the internet bubble resulted in a new era of accountability.

Today, the online / e-commerce industry is about to go through a similar transformation. The popping of the housing bubble is leading us to a new era of accountability.

E-Mail Strategy

Which of the following three strategies would you recommend to management?

Strategy #1:

• Two e-mail marketing campaigns per week, untargeted, delivered to the entire list, no promotions or offers (THIS IS THE CURRENT STRATEGY).
  
• List Size = 100,000.
• Average Sales Per E-Mail = $0.10.
• Average Opt-Out Rate = 0.25%.
• Average New Subscribe Rate = 0.35%.
  
• Average Weekly Demand = $20,000.
• Average Weekly Profit = $7,000.

Strategy #2:

• Two e-mail marketing campaigns per week, untargeted, delivered to the entire list, each with a free shipping offer.
  
• List Size = 100,000.
• Average Sales Per E-Mail = $0.20.
• Average Opt-Out Rate = 0.20%.
• Average New Subscribe Rate = 0.40%.
  
• Average Weekly Demand = $40,000.
• Average Weekly Profit = $9,000.

Strategy #3:

• One e-mail marketing campaigns per week, untargeted, delivered to the entire list, no promotions or offers.
  
• List Size = 100,000.
• Average Sales Per E-Mail = $0.15.
• Average Opt-Out Rate = 0.15%.
• Average New Subscribe Rate = 0.30%.
  
• Average Weekly Demand = $15,000.
• Average Weekly Profit = $5,250.

Strategy #4:

• One e-mail marketing campaigns per week, untargeted, delivered to the entire list, each with a free shipping offer.
  
• List Size = 100,000.
• Average Sales Per E-Mail = $0.25.
• Average Opt-Out Rate = 0.15%.
• Average New Subscribe Rate = 0.35%.
  
• Average Weekly Demand = $25,000.
• Average Weekly Profit = $5,625.

Strategy #5:

• One e-mail marketing campaign per week, ten versions highly targeted only to the "active" e-mail list of 20,000 addresses, with free shipping offers given only to the 10,000 who like free shipping offers.
• List Size = 20,000.
• Average Sales Per E-Mail = $0.50.
• Average Opt-Out Rate = 0.10%.
• Average New Subscribe Rate = 0.20%.
• Average Weekly Demand = $10,000.
• Average Weekly Profit = $2,500.

Which of the five strategies would you employ? If you chose strategy #5, describe why you would choose this strategy.

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.