Kevin Hillstrom's MineThatData

Are Discounts And Promotions Ruining E-Commerce?

2008-10-09T20:15:00.001-07:00

A quick quiz: If we removed every one of the twenty boxes in the image (click on the image to enlarge it) and all of the potential permutations of the boxes in the image, what would happen to net sales, and earnings before taxes?

Discuss.

Marketing Tactics Cannot Save Nordstrom Comps

2008-10-09T11:56:00.000-07:00

Many marketing pundits talk about branding and social media and word of mouth and multichannel marketing and online marketing and catalog marketing as if they were a magical elixir.

Now take a peek at Nordstrom's comp store sales results from September.

Nordstrom Rack (lower-price channel) = +2.6%.
Nordstrom Full-Line Store Sales (full-price channel) = -14%.

That's a price-sensitive customer responding to the end of easy money.

Nordstrom does all the things the pundits tell them they should ... they've worked hard to align merch and creative across channels. They have a credit program with a loyalty component. They offer high price channels and lower priced channels. They mail advertising-based catalogs. They have an e-commerce website with reasonable integration with stores. They have a presence on Facebook and MySpace. They offer better customer service than almost anybody. They offer free shipping promotions from time to time, and offer a reasonable $5 flat fee for shipping. They drive hundreds of thousands of visitors from blogs due to buzz-worthy merchandise. They have in-store events that drive traffic. They minimize sales events so that the three sales events they do have drive traffic and profit. They do outbound telemarketing, not CRM/computerized junk, but actual calls from actual store employees. They have an integrated database with data from all channels. They hired a plethora of highly qualified MBAs to drive marketing strategy fused with customer research and database insights. They have an experienced management team that tries to drive volume with honesty and integrity. They have more word-of-mouth marketing than almost anybody could ever hope for. They execute a solid paid-search program. They do portal advertising. They have an affiliate marketing program. They execute versioned e-mail marketing campaigns where customers can choose the e-mail marketing versions they receive. They do magazine advertising. They do radio and newspaper advertising during sales.

But all of those things mean almost nothing, when the customer is faced with challenges. The marketing tactics sure didn't enhance shareholder value, did they? The price of a share of JWN stock dropped by at least sixty percent in the past nineteen months --- wouldn't want to count on that for retirement --- my investment in Nordstrom, encouraged by management during my tenure, is now underwater.

Marketing pundits, here's your opportunity to fight back. Would Nordstrom comp store sales have dropped by 20% or 30% without all the tactics you've told retailers they must execute? Or are the strategies utterly feckless in the face of changing consumer sentiment?

And if the strategies are this impotent when faced with changing consumer sentiment, did they ever have any real worth in the first place?

Discuss!

Catalog And Retailer Differences In Matchback Strategy And Contact Strategy Optimization

2008-10-08T20:15:00.000-07:00

There's this huge shift in multichannel marketing strategy in recent years, with catalog matchback algorithms playing a significant role in the shift.

Fashion retailers (Neiman Marcus, Saks, Bloomingdales, Nordstrom) either eliminated traditional catalog marketing programs, or are in the process of significantly reducing circulation. Folks at Williams Sonoma are significantly trimming circulation.

When I talk to some of you, you tell me that these folks can cut circulation because they are retailers --- the retail channel somehow generates brand awareness that fuels a brand in a way that minimizes the need for advertising. You might be right, we simply cannot test your hypothesis.

Mechanically, retail brands are better at developing a testing discipline.

Here's an example. We randomly sample twenty customers, ten receive a catalog, ten do not, and measure performance across channels during the three weeks that a catalog is active. Here's what we observe:

Mailed		Holdout
Cust 1	Buy Store	Cust 11
Cust 2		Cust 12
Cust 3		Cust 13	Buy Online
Cust 4		Cust 14
Cust 5	Buy Phone	Cust 15
Cust 6	Buy Online	Cust 16
Cust 7		Cust 17
Cust 8		Cust 18
Cust 9	Buy Online	Cust 19
Cust 10		Cust 20	Buy Online

Here's the fundamental difference between the retailer and the catalog brand.

The retailer will compare the mailed group and the holdout group. In the mailed group, four out of ten customers responded --- in the holdout group, two out of ten customer responded. The retailer calculates response as (4 - 2) / 10 = 20%.

The cataloger does not execute the test. Instead, the cataloger takes the mailed group, identifies the four responses, matches the responses back to the mail file, and calculates response as 4 / 10 = 40%.

Again, notice the significant difference in response, using the two methodologies.

Retailer = 20% Response Rate.
Cataloger = 40% Response Rate.

In this comparison, the organic percentage is 20% / 40% = 50%. Half of the demand would happen without any advertising.

This fundamental difference in approach causes a shift in strategy.

Retailer = Cut Circulation, Re-Allcoate Marketing Dollars Elsewhere, Learn!!
Cataloger = Maintain Circulation, Ask For Additional Funding For Online Marketing, And Significantly Over-Spend In The Catalog Marketing Channel, Driving Down Profit.

This problem is systemic across the catalog industry. Matchback vendors aren't trying to rip you off, they simply aren't. But there isn't an incentice to create a "best practice" that accounts for the differences that retailers observe when executing contact strategy testing and what catalogers measure via matchback analytics.

A simple solution for catalogers is to execute a test similar to the one designed above. Do not tell the matchback vendor about the holdout group. Have the matchback vendor run the control group through the matchback algorithm, and see how many orders are allocated to the holdout group. Subtract the results of the holdout group from the results of the mailed group, and you have true incremental demand as illustrated in the retail example at the beginning of this post.

Hillstrom's Contact Strategy Optimization: A New E-Book.

My Keynote Address At The DMA08 Conference & Exhibition

2008-10-07T20:15:00.001-07:00

If I were invited to give the keynote address at the DMA Conference in Las Vegas (I realize I cannot compete with the multichannel marketing knowledge of Playboy CEO Christie Hefner or the direct marketing brand known as Extreme Makeover Home Edition Host Ty Pennington, both delivering keynote addresses), it would go something like this:

Good morning attendees, and welcome to the final day of DMA08! For those of you who dipped your toe in some of the fine gaming opportunities available in the greater Las Vegas metropolitan area, you probably enjoyed a better return on investment than you recently observed in your 401k account ... or in your recent direct marketing campaigns.

I had a conversation with the CEO of a very traditional direct marketing brand last night. This individual painted a bleak outlook of her brand. She's done all of the things she is "supposed" to do. In spite of a thirty percent increase in postage in 2007 and a twenty-five percent decrease in customer acquisition performance in 2008, she continues to mail catalogs to her customers and prospects, because it is considered a multichannel marketing "best practice". She boosted the amount of recycled paper in her catalogs in an effort to "go green", even though tests suggest that recycled paper reduces response to the catalog by two percent. In her head, she knows the days of catalog marketing are waning. In her heart, she badly wants to see if she can do something to delay the inevitable, because catalog marketing is part of her soul.

She continues to maximize her paid search campaigns, though the cost of each click is twenty percent more than it was three years ago, and she doesn't understand the algorithmic bidding process for keywords.

She doubled the frequency of her e-mail marketing campaigns to two per week, allowing her customers to choose which version of a campaign they receive. In the past three years, the performance of her e-mail marketing campaigns declined by twenty percent. E-Mail marketing vendors preach to her that e-mail marketing has the best ROI, but she knows that the medium drives very little volume, and works less well with each passing year.

She dove head-first into social media. Her CEO blog is one of the most read in the industry, and her pages on Facebook and MySpace invite conversation. She listened to customers who complained about her products via Twitter and Plurk, investing money in a new quality assurance department, a department that reduced defective merchandise by ninety percent. And she tried to measure the performance of her social media entourage. Social media loyalists have only one-fourth the conversion rate of her loyal e-commerce purchasers, causing the finance folks to fume about her disproportionate focus on emerging marketing technologies.

Her marketing team tried numerous word of mouth campaigns, without any success. She's hired the best digital marketing agencies to create the campaigns, only to be told by agency leaders (after the campaigns failed) that she must offer merchandise that is buzz-worthy. If it were only that easy.

Her brand was one of the first to embrace mobile commerce, though her Executive team feels the time required to experiment in this space is not worth the six hundred customers who are experimenting with this channel.

In fact, if the suffix "2.0" is behind any term, her social media team gave it a try. She's been lauded for being an innovator. One of the leading social media bloggers praised her for being "a bright light in the dark tunnel of permission marketing".

In terms of the topics discussed at this conference, her brand is one to be admired. She and her team have done all of the things the experts speaking at this conference told her to do.

And yet, it isn't working. If all of these speakers are right, then why are her results so wrong?

In 2007, her sales were down 3% compared with 2006, due to softness that began in November 2007.

In 2008, year-to-date, her sales are down 12% compared with 2007. Telephone sales are down 20%, and e-commerce sales are down 4% compared with 2007. Her e-commerce team is facing the first sales decline they've ever experienced.

The majority of the e-commerce marketing team honed their skills during the updraft of the e-commerce channel, and have no experience driving sales in an environment where the customer no longer wants to or needs to or can afford to buy non-essential items. The e-commerce team responded to sluggish sales by offering the only incentives they've ever tried --- free shipping and 20% off offers. Sales increased slightly, but the impact on the bottom line was unfavorable. The finance team lacks confidence in the ability of the e-commerce team to "move the sales needle". The finance team realized, for the first time, that it is really, really hard to create demand via e-commerce. How the heck do you get your award-winning website in front of a customer who has never heard of you, and has no interest in buying from you ... today?

The inventory management team is also frustrated with the e-commerce team. Over the past decade when there were big inventory issues, the catalog marketing team churned out clearance catalogs that moved excess merchandise. The clearance catalogs were targeted to sale buyers, folks who loved sale merchandise. The e-commerce team, however, lacks the marketing tools necessary to advertise overstocked items to a mass audience --- they can only advertise to folks in a "state of need". The inventory management team are afraid they are not going to get bonuses this year.

The inventory management team isn't as worried as the catalog marketing team is. This team believes that layoffs are coming in 2009. They don't know where they are going to find a job in a world where catalog marketing continues to contract. They know more about how to drive a profitable direct marketing program than anybody else in the company, and feel like they would fit well in the e-mail marketing department. The e-mail marketing team is already well-staffed with experienced e-mail marketers, however. Not surprisingly, the catalog marketing team is busy building relationships on "LinkedIn". You can tell how strong the economy is by simply counting the number of LinkedIn requests you receive each week. LinkedIn has the potential to be very popular during 2009.

Most marketing folks are resentful of the social media marketing team. This team has been unable to prove that their efforts drive sustained sales or profit, but they seem to have a lot of fun with their campaigns. They receive a ton of public praise from bloggers and followers on Twitter, are asked to speak at all the major social media conferences. They are very proud of a three point increase in "share of voice" over the same period of time when sales decreased. In reality, the other departments are jealous of the social media folks, just like folks were jealous of the e-commerce folks eight years ago. It's much more fun to be on the cutting edge than to be left holding the bag for the majority of the business.

The merchants are under pressure, too. They spent two years building a state-of-the-art multichannel merchandise analysis system, and spent the past year learning how to analyze multichannel merchandise trends. Many of the staffers feel frustrated, because the "art" of merchandising is being replaced by the science suggested by the new system.

The merchandising team heaves their frustration on the information technology team. If the merchants want to present items in a new and creative manner in the catalog, they simply shoot the models and merchandise as they wish, partnering with creative services. Online, everything is templated for them. Sure, the shopping cart is in the upper right hand corner of the screen, complying with established best practices, but the merchants and information technology team are constantly grumbling about the direction of "Web Tech 2.0", the new version of the multichannel e-commerce website (the first significant upgrade since 2002).

Speaking of multichannel marketing, the CEO told me that she cannot find one example of the "1+1+1=6" principal that the multichannel marketing vendor community keeps telling her exists. Her experience is that the channels are cannibalizing each other, not adding significant incremental value. Worse, she feels like she'll have to use a hundred channels five years from now in order to get the same level of sales she obtains today with a handful of channels.

Now the CEO deals with new challenges. Her finance team pressured the organization into "turning" merchandise six times per year, because it was far more profitable to do so. Now that this discipline is part of the DNA of the company, the CEO cannot obtain the short-term financing she used to receive to fund frequent inventory turns, due to the credit crisis gripping the global economy. She's afraid that her merchandise assortment will be stale and meager in 2009, further alienating customers. She's upset that she ran her business with honesty and integrity, only to see Wall St. greed create instability in her business model. She doesn't understand why the taxes her organization paid in an honest manner are going to help folks who misbehave, while she has to consider downsizing her staff in response to their actions?

How many of you feel like the CEO of the company I spoke with last night?

Of course, conferences offer great networking opportunities, and offer the chance to learn about best practices being employed by leading brands and gifted leaders. All of this is good.

Few speakers at this conference are allowed to present the reality I just described.

The reality is that direct marketing, the craft many of us have practiced since the 1960s, is disappearing. So is e-commerce, as we know it ... a cold, discount/promo/low-price wasteland that offers few emotional benefits. Conversely, social media offers the humanity that is missing from e-commerce. If only social media drove sales and profit instead of comments and feedback.

One might consider this to be a dire message. On the contrary, I believe we are on the precipice of what I call a "direct marketing reformation". We're about to become direct merchants once again, dropping fancy marketing hype in favor of an honest relationship with the customer.

Direct marketers make progress when times are tough --- when times are easy, we simply enjoy the updraft, focusing on ideas that are easy to implement, calculating whether our annual bonus will be 27% of our salary or 33% of our salary.

But when times are tough, "the tough get going" (the music video plays in the background ... audience sings along, clapping). It's like we're "living on a prayer" (another video pops up, remember those three minute masterpieces from the 80s? That's when you had to be "multichannel", video on MTV and song on the radio --- now, videos are dead, hmmmmmm). Big applause from the audience.

We're halfway there.

It won't happen in 2009, and it probably won't happen in 2010. But sometime during 2011, somebody is going to figure out how to fuse traditional direct marketing, e-mail marketing, digital direct marketing, e-commerce, social media, Google, widget-based marketing, mobile marketing, portal advertising, and whatever comes between now and then. And when somebody fuses these elements together in a way that resonates with the consumer, LOOK OUT! A hundred micro-channels all interacting seamlessly, effortlessly, without coordination from a centralized marketing borg. A fusion of algorithms and sweat equity that actually brings humanity to the cold, lowest-price buying process. We will recapture the spirit of the "direct merchant".

Multichannel marketing is not about pummeling the best customer with messages from twenty-seven channels while at the same time having a conversation with the customer via social media. We're going to figure out something new, something relevant to the way the customer behaves in 2008. A direct merchant is not a direct marketer. We're about to go through a reformation.

I leave you with the words of Richard C. (Dick) Anderson, the second President of Lands' End. You can read the words from this link on the Lands' End website. They are copied here, word for word, unchanged from his presentation to the audience at DMA91.

"When I first became involved with Lands' End as a director in 1978, it was on the strength of my extensive experience in advertising. And both Gary Comer and I wanted to convey the uniqueness of the Lands' End experience. Somehow, reflecting on how best to do this, on a trip through the warehouse, my guide — the manager, chose to say: "I just wish we didn't have to call our business mail order." Mail order, at that time did not enjoy the most savory reputation, you may remember.

This triggered in me a vision of the original great merchants of British history, for some reason or another. The way they prowled the seven seas and brought treasures back to London from the four corners of the earth, and a phrase occurred to me which is now a part of our name and certainly a part of our philosophy. We are, as you will recognize...direct merchants.

I call this to your attention because the majority of you in attendance here — and I who represent Lands' End — may differ widely in the ways we do business. But, however distribution possibilities evolve — old ones, new ones — we share the same identity. We are all merchants. And for me, that is an honorable and vital identity — even in this day when it is fashionable to hold forth on the subject of marketing in all its forms. I don't decry that exactly, but I'm more comfortable considering myself a merchant. And here's why. In my view...

A marketer deals with many; a merchant deals with one.
A marketer moves from the mind; a merchant moves from the heart.
A marketer is logical; a merchant is perceptive.
A marketer does business across the world; a merchant does business across the counter.
And finally, a marketer bets his all on a System; a merchant bets his all on His Store.

Fellow merchants, I salute you on behalf of each of the 5,500 employees of Lands' End, in whose behalf it has been my privilege to address you.

They thank you for that privilege. As do I."

I recall being at Lands' End when this statement was made. I was a marketer. I would have bet my all on my system, a series of statistical equations that determined who received nearly every single Lands' End housefile catalog. Today, I side with Mr. Anderson. Our future is about betting on our store, not on a marketing system.

Hillstrom's Contact Strategy Optimization On A Budget

2008-10-06T20:15:00.000-07:00

Hillstrom's Contact Strategy Optimization On A Budget is a new e-book and spreadsheet available from the MineThatData Store at Lulu.com.

Contact Strategy Optimization is not a new concept. During my time at Lands' End in the early 1990s, we worked with a team of IBM researchers on an optimization solution that formed the embryonic version of the solutions offered by Decision Intelligence.

During the past two weeks, many of you told me that you don't want to spend tens or hundreds of thousands of dollars on black box algorithmic solutions that optimize the number of catalog contacts to various customer segments. That being said, you told me you want a solution ... one that can be implemented by Business Leaders, Analysts, and Managers ... one that can be implemented on a budget.

So I wrote this e-book, outlining a reasonably simple approach to identifying the most profitable combination of catalog mailings and e-mail marketing messages to different customer segments.

What Do You Get, What Will You Learn?

You'll learn that matchback algorithms over-state the importance of catalog marketing, causing us to mail too many catalogs to our customers.

You'll learn that the "organic percentage" is the most important metric to understand when considering an appropriate contact strategy.

You'll learn that contact strategy testing is critical to understanding multichannel customer behavior.

You'll learn how cannibalization between catalog mailings and e-mail marketing messages directly influence a profitable contact strategy.

You'll apply versions of the "square root rule", identifying profitable strategies.

You'll receive access to a URL where you can download a spreadsheet that allows you to play "what if" games using your own assumptions and your own customer segment performance.

This is not meant to be an elegant or mathematically perfect solution. This e-book and spreadsheet are written for you, the Executive or Analyst who has to come up with solutions on a limited budget.

Do you not have a quarter of a million dollars to spend on an optimization solution, but have access to $79? If so, purchase "Hillstrom's Contact Strategy Optimization On A Budget"! For those of you who criticize me for giving away too much information, you'll be happy, because the contents of this e-book will not be made available on this blog.

$79 is a fair price, considering you'll be given tools that could result in hundreds of thousands of dollars of annual profit, don't you think?

So visit the MineThatData Store on Lulu.com, and download this e-book for the nominal fee of $79.

Neiman Marcus To Reduce Catalog Mailings

2008-10-06T10:57:00.001-07:00

Courtesy of the folks at Internet Retailer Magazine, read the article here.

You are seeing a parting of the sea when it comes to multichannel marketing.

Retailers like Saks, Bloomingdales, Nordstrom, and Neiman Marcus de-emphasized or eliminated catalog marketing --- and can do so because the interaction between retail and online channels allows them to generate a high organic percentage.

The traditional cataloger, without the benefit of retail, struggles, because as catalog dies a slow death, there isn't a channel that has achieved critical mass, ready to supplant catalog advertising. We may never find one or two channels to replace catalog marketing. We will need to find one hundred tiny micro-channels that, collectively, replace a dying advertising channel.

The Most Important Catalog Marketing Metric: Organic Percentage

2008-10-05T20:00:00.000-07:00

The most important metric in catalog marketing is called the "organic percentage".

The metric is defined as the percentage of demand, at a segment level, that would occur if no catalog mailings were delivered to a customer.

Most of the catalogers I speak with assume that the organic percentage is zero --- in other words, if catalogs were not mailed to a customer segment, the segment would not spend any money.

Of course, this assumption is false, perpetrated by biased matchback algorithms that incorrectly assign online orders to catalogs mailed to the customer, when in reality, the catalog had nothing to do with the generation of the order in question. You'll know that your matchback results are biased if the percentage of demand you add on to your acquisition segments (after matchback) is significantly lower than it is for housefile customers.

Catalogers who attempt contact strategy tests, say over a three month period of time, find relationships like this.

Telephone - Only customers have an organic percentage around 10%.
Telephone + Online customers have an organic percentage around 25%.
Online - Only customers have an organic percentage around 40%.

In other words, if no catalogs are mailed to an online-only customer, the online customer will still spend 40% of the demand they would spend if they are mailed all of the catalogs during the quarter.

The organic percentage metric is critical, because it dramatically impacts your calculation of profit and loss. If you have a high organic percentage, then you are significantly overmailing customers, regardless of what your matchback analytics vendor tells you. If you have a low organic percentage, then you have no choice but to mail catalogs in order to generate demand.

The image at the beginning of this post shows the difference in profitability for the same segment of customers, comparing a 10% organic percentage to a 40% organic percentage. The ten percent level requires four mailings per quarter. The forty percent level maximizes profit at just one mailing per quarter. Think about what you could do with the expense from the three additional mailings?

If there were just one metric I'd ask catalogers to track at a segment level, during 2009, it would be the "organic percentage" metric. Knowing this metric fundamentally changes how you decide to contact different customer segments.

How important is this percentage? Take a brand like Nordstrom. This is an $8.5 billion dollar business that is luck to generate ten percent of that total from marketing activities. Therefore, the organic percentage is ninety percent. This brand generates ninety percent of sales without the aid of traditional marketing activities. That's a strong brand.

Think about Zappos. There's the volume they generate due to online marketing and search marketing, and then there's the volume they generate via word of mouth. I'd guess that half of their volume happens without the aid of marketing, plus or minus twenty percent.

And then think about a traditional cataloger. The traditional cataloger believes that the vast majority of demand happens becaue of catalog mailings. If mail/holdout tests validate this, then the cataloger is at the mercy of catalog marketing --- if customers are no longer responsive to this form of marketing, demand dries up.

The goal, of course, is to build a brand that has a high organic percentage, not needing advertising to drive sales and profit.

We can learn how much of customer demand is generated by advertising by executing thorough mail / holdout tests, in both catalog marketing and e-mail marketing.

Zip Code Marketing: Claritas PRIZM and Hillstrom's Zip Code Forensics

2008-10-04T21:30:00.000-07:00

Some of you are wondering about the differences between Claritas PRIZM Clusters/Segments and Hillstrom's Zip Code Forensics. Here's a quick comparison of the differences.

Claritas PRIZM Clusters/Segments: Each zip code (or zip+4) is categorized into one of more than sixty different lifestyle segments. Each segment is given a clever name, describing the type of person who lives in that segment. Demographic studies, surveys, and data are compiled to create a profile of the type of person who lives in that segment. The segments are well defined, and help the user understand "who" lives in a particular area --- you hear the segment name "Shotguns And Pickups", and you have an immediate image of the demographic of that area. This segmentation scheme can be used to improve direct marketing activities, as each brand is likely to align with customers who spend a lot, and live in specific segments. The cost of using PRIZM clusters is reasonably expensive, though marketers can gain an acceptable ROI.

Hillstrom's Zip Code Forensics: Each zip code (not at a zip+4 level) is categorized into one of six different performance and channel preference segments, similar to traditional zip code models used in zip code marketing programs.

Catalog Crazies: Highly productive zip codes that prefer traditional direct marketing.
Online Bliss: Highly productive zip codes that prefer e-commerce and online community.
Catalog Fans: Average zip codes with a traditional direct marketing preference.
Online Spend: Average zip codes that lean toward e-commerce.
Catalog Preference: Zip codes with customers who do not spend much money on direct marketing, but do prefer traditional direct marketing (i.e. catalogs).
Online Preference: Zip codes with customers who do not spend much money on direct marketing, skewing toward e-commerce if they buy something.

The direct marketer will use Hillstrom's Zip Code Forensics to target geographies that have higher-spending customers --- especially when the direct marketer is looking at marketing activities that perform at or below break-even levels.

The direct marketer can expect to reduce marketing expense by about seventy percent by targeting only Catalog Crazies and Online Bliss zip codes --- while improving sales performance by about ten percent, yielding a significant increase in profitability.

Hillstrom's Zip Code Forensics is based on anonymous sales data by channel, at a zip code level, from leading catalog brands across the United States. Mathematical Algorithms and Census Data combine to yield the six segments mentioned earlier in this post.

Hillstrom's Zip Code Forensics cost $5,000 for an annual license, with free quarterly updates as catalogers continue to add their sales data to the algorithm. For marketers using the segmentation scheme across at least 200,000 in annual marginal catalog circulation, it is expected that a positive ROI will be achieved, based on beta tests conducted earlier in 2008.

Contact me (kevinh@minethatdata.com) for details or to participate.

Customers Move From Catalog To Online To Retail

2008-10-03T21:45:00.000-07:00

I've been telling you that Multichannel Forensics continually indicate that customers move from online to retail, glad to see others are also observing this relationship:

IBM Research Suggests Customers Prefer To Move From Online To Retail, Not From Retail To Online, via Direct Magazine.

When you know that customers move from Catalog to Online, then from Online to Retail, then use Online to research future Retail activity, you view your multichannel marketing activities very differently than you view them through the multichannel marketing best practices we're currently being taught.

And long term, for those with a retail presence, the e-commerce channel is dwarfed by the "internet as a research channel" concept. The direct marketing community and web analytics community isn't ready for this reality.

If you are a retailer who has run simulations illustrating long-term customer migration, you've probably observed something like this (comparing an online/direct customer to a retail customer --- click on the image to enlarge it):

Again, you're likely to see this type of trend if you are Gap or J. Crew or Eddie Bauer or Best Buy or Ann Taylor or any brand with an online/direct and retail channel. Customers seem to migrate from online to retail. When that happens, they are much less likely to buy online, much more likely to research online. This changes how you view your website.

Williams Sonoma: Catalog And E-Mail Circulation Optimization

2008-10-02T21:28:00.000-07:00

Courtesy of the folks at Multichannel Merchant, this article about huge circulation cuts at Williams Sonoma stimulates some thought, doesn't it?

The article mentions digital direct marketing as an alternative to catalog marketing. When you have a retail presence, it is much easier to go down this path, and sometimes it is more profitable to go down this path.

If you're a traditional cataloger, without a retail presence, life is more challenging. One of the things we have to do is more testing --- testing what happens when we combine catalog marketing with e-mail marketing.

Check out the sample test results, measured over a three month period of time to customers who receive both catalogs and e-mail marketing campaigns.

Catalogs	E-Mails	Phone	Online	Total	Profit

6	Yes	$6.50	$6.50	$13.00	$0.92
6	No	$7.50	$4.75	$12.25	$0.69
4	Yes	$5.50	$6.25	$11.75	$1.68
4	No	$6.50	$4.50	$11.00	$1.45
2	Yes	$3.50	$6.00	$9.50	$2.10
2	No	$4.50	$4.00	$8.50	$1.78
0	Yes	$0.00	$5.50	$5.50	$1.90
0	No	$0.00	$3.00	$3.00	$1.05

This is the style of test our industry can capitalize on. We compare combinations of catalog marketing contacts and e-mail marketing contacts, searching for the most profitable strategy. In this case, receiving two catalogs over the course of a quarter, coupled with a weekly e-mail marketing strategy, is most profitable.

Notice that this strategy doesn't yield the best result, in terms of total sales volume.

Also notice that sending no catalogs, and no e-mails, still causes customers to spend money. This might be the most important metric for you to obtain --- what percentage of volume happens if you don't execute any traditional direct marketing (catalog / e-mail)? Do you know this percentage? It's an awfully important one to know.

Where are we heading: We will slowly back off on traditional direct marketing --- and we will re-invest the advertising dollars we save in untested online marketing strategies. And over time, we'll identify online micro-channels that recoup the sales we lose by cutting back on catalog marketing, and we'll be more profitable!

E-Mail Marketing Gone Wild, Part 2

2008-10-02T20:48:00.000-07:00

Ok, I corked-off plenty of you while ranting about e-mail marketing yesterday.

First, I fully understand the concept of offering discounts and promotions in the spirit of moving excess merchandise. So if your business is down 20% to last year, and you have no options for clearing excess product, I get why you have to go down this path. I also understand if you are trying to keep the customer file afloat so that there is file strength for next year.

But those are tactics in response to sluggish business.

Go look at Chad's subjectivity scanner, especially during the first half of 2007, a period not impacted by a sluggish economy. You'll consistently see 40% or 50% of messages focused on paying the customer money in exchange for a purchase. The strategy behind the channel is fundamentally broken. Why is the customer with broadband access in San Francisco worthy of a discount because she gave an e-mail address to you, while the customer in Vermont who orders over the telephone has to pay more when she gives you her telephone number?

Now, my wife just said, "why are you ranting when you should be offering solutions?" Point well taken.

What is the purpose of your e-mail marketing program? If the purpose is to facilitate low-profit purchases from customers craving discounts and promotions, then have at it. But clearly articulate your strategy to management.

Is the purpose to communicate a marketing story? If so, then do you care if the customer ever buys from your e-mail marketing program? Simply communicate the story, and measure if the sales are made up for in other channels. And if the sales are not made up in other channels, do you care? Do you quantify the impact of all of the copy you write for products online?

Is the purpose to drive the customer to the website? Then find the creative presentation that is most effective at driving customers online, and let the website convert the customer.

Is the purpose to communicate authority on key items? If so, then communicate your authority --- but you don't have to give promotions to accomplish this.

Is the purpose of e-mail marketing to clear excess inventory? If so, that is fine, go ahead and feature overstocked items at remarkable prices, and build an e-mail file that craves these opportunities. Be consistent, and communicate this strategy.

But if the purpose of e-mail marketing is to have e-mail marketing be part of an integrated multichannel marketing strategy, then listen to the pundits --- all promotions and discounts are offered in all channels at the same time --- build a congruent customer file that will respond in all channels.

The purpose here is not to belittle you. The purpose is to get all of us to view our channels strategically, and to optimize each channel based on what each channel is best at. I do not believe that the e-mail marketing channel is best served as the place where the customer gets to buy merchandise and not generate significant profit for the company.

A Veritable Plethora Of Updates

2008-10-01T22:38:00.000-07:00

We talked about credit this week --- namely the way our industry sells money to customers as well as merchandise. I scolded our industry for this behavior. None of you elected to leave a comment, pro or con. But some of you sure liked the article on Ann Taylor's new credit/loyalty program, interacting with it and e-mailing it to your friends.

It's one thing if I suggest there's a catalog customer acquisition problem. It's a whole 'nother thing when it comes from a respected individual like Paul Imbierowicz.

Our challenge, as an industry, is to find the 100 micro-channels that replace the 15% drop in catalog customer acquisition circulation. Until we figure this one out (some folks have figured out some of the pieces, some catalogers are doing really neat stuff these days), mining lapsed buyers is a short-term fix.

Also notice that Mr. Imbierowicz promotes the concept of different marketing tactics for different customer segments. Good! Mr. Imbierowicz has always been one of the positive voices coming out of Abacus, in my opinion.

You've been enjoying the discussion about Hillstrom's Zip Code Forensics, based on my RSS stats and Google Analytics results and extensive beta test participation. Check out tip #1 from Lori Paikin, via Multichannel Merchant.

More on catalogers using social media:

Notice the brief comment in this Shop.org post about "questioning the ROI of blogging". Let me ask a question of the wise pundits who demand that the ROI of blogging be quantified ... Do you measure the ROI of the following activities?

Do you measure the incremental value of each of the paragraphs of copy you write for the products on your website?
Do you measure the incremental value of the color scheme you use on your website?
Do you measure the incremental value of the font you choose to present information with on your website?
Do you measure the incremental value of the periodicity of website updates ... i.e., do you measure whether it is right to update your homepage monthly, weekly, or in real-time?

If pundits aren't pontificating about measuring the ROI of these activities, then why in the name of Robert Scoble do the same pundits demand you measure the ROI of "blogging", which is really nothing more than a modern version of writing copy?

Multichannel Forensics A to Z: Interestingly, you enjoyed two articles more than any other during the last half of this series.

Apparently, you want to know what to do with all those online orders that aren't directly attributable to a catalog --- and then you want to segment customers in a way that is actionable. Both are important. Both only scratch the surface of the real issues we face these days --- they are symptoms of bigger problems, like high blood pressure being a symptom of heart disease.

E-Mail Marketing Gone Wild

2008-10-01T21:51:00.000-07:00

If you don't subscribe to Chad White's Retail E-Mail Blog, you have an opportunity to learn more about e-mail marketing. Where else are you going to find out what the popular retailers are doing with their e-mail marketing programs?

During the past two weeks, I looked through his "subjectivity scanner", trying to calculate the percentage of e-mail subject lines that focus on price/discounts/sales/free-shipping/promotions. Here's what I found:

61% of the e-mail marketing messages focused on price, discounts, sale, free shipping, bogos, or promotions.
39% focused on merchandise, disproportionately skewed to L.L. Bean, Lands' End, and Williams Sonoma.

Folks, how do we ever expect our customers to take us seriously, when six in ten messages tell the customer NOT to pay full price? We get upset that Wall St. drank the easy money kool-aid, now take a look at our own behavior?

E-mail marketing is fundamentally broken. We are poisoning our customer files, teaching customers to never pay full price anywhere. Why should a customer pay full price from the catalog when they can wait for the perfect promotion from an e-mail campaign?

Merchants should be taking us to the woodshed for a good 'ole fashioned paddlin'. We're poisoning their products with our endless quest for inflated open rates, click-through rates, and conversion rates. Heck, why don't we simply offer the merchandise for free???!!!! That would drive the metrics in the right direction, wouldn't it?

Until we, as an industry, stop trying to get an easy buck all in the name of best practices and inflated metrics, we won't be viewed by peers or customers as offering a respected marketing channel.

Zip Code Marketing: Top 10 Most Productive Direct Marketing Customer Regions

2008-09-30T21:30:00.000-07:00

Based on the current version of Hillstrom's Zip Code Forensics (read about and buy here), I present you with the top ten most productive direct marketing customer regions --- the places where zip code marketing is likely to be most effective.

Number 10 = Eastern New Jersey.

Number 9 = Wyoming.

Number 8 = Boston / Providence / Cape Cod.

Number 7 = Southwest Colorado.

Number 6 = Southern Maryland.

Number 5 = White Plains & New York City.

Number 4 = New Hampshire.

Number 3 = Northern Virginia.

Number 2 = Connecticut.

Number 1 = Vermont.

Yup, good 'ole Vermont is the most productive area for direct marketing in the United States. In fact, outside of portions of Colorado and Wyoming, the East Central and Northeast United States, and New England are the most productive (demand per household) in the United States.

In fact, these regions spend 2.5 times as much per capita as do any other region in the United States.

Of course, this is actionable at a zip code level, because there are significant differences in spend by zip code and channel preference by zip code.

It does make one wonder about all of this multichannel marketing stuff. It becomes more and more clear that there are customer-specific micro-channel preferences and geographic influences that override multichannel best practices.

Another Day In The Life Of A Multichannel Marketer

2008-09-29T20:46:00.000-07:00

7:33am: You open Microsoft Outlook, and are greeted with 64 e-mail messages since you logged off at 10:41pm last night. At 4:06am, your CEO sends an e-mail to the Executive Team, asking all "hands on deck" for the big "Rocktober Magic" campaign that begins October 15. At 4:16am, your EVP of Marketing assigns you the task of coordinating a multichannel marketing effort for this campaign.

7:39am: The next twenty-two e-mail messages deal with variations of the promotion. Everybody has ideas!

9:16am: A meeting of the Multichannel Marketing Task Force has been convened for 2:00pm today.

2:13pm: You call the Multichannel Marketing Task Force meeting to order. This is a room full of heavy-hitters, and you're leading the pack!

2:15pm: Anita in Inventory Control wants to offer up a Halloween Costume for the promotion. Her team accidentally purchased eight hundred Halloween Costumes, and only sixty-five have sold so far. She thinks a BOGO promotion (buy one, get one free) coupled with free next-day shipping would qualify as "Rocktober Magic" and really bail her out of a dilly of a pickle. Anita believes this promotion could be "blasted" to the e-mail marketing list, and thinks marketing could help out by participating on Halloween blogs, generating a groundswell of interest that would make Charlene Li, Mack Collier and Seth Godin proud ... after all, look at what Dell and Southwest Airlines have been able to accomplish?

2:17pm: Besty in Merchandising doesn't think anybody wants to pay $49 for two costumes, much less one costume. She read a Forrester Research report suggesting that multichannel customers are the best customers. Betsy thinks a "marketing blitz", featuring best sellers that provide great value, but the "marketing blitz" should only be targeted to best multichannel customers, and should offer free shipping with a $100 hurdle --- the hurdle would protect profitability while generating volume.

2:18pm: Dale in Business Intelligence asks the team to define what a "best multichannel customer" really is? This stimulates some chatter. Howard in the Web Analytics department says that returning customers visit the website four times a month and have a 3.47% or better conversion rate. Anita in Inventory Management thinks best customers should have at least one purchase in each of the past five years. Dale reminds the team that the new Oracle database only houses three years of purchase history, and in spite of independent research and opinions, best customers truly are 0-3 month dual-channel customers with 5+ orders and an average order value of $100 or more --- fitting nicely into RFM segment #26. Independent Marketing Consultant Vic Montana tells the team that Williams Sonoma might have the best multichannel marketing database in America, and points the team to a recent Pottery Barn e-mail campaign that had a nice call-to-action.

2:22pm: Felicity in E-Mail Marketing wants to blast three campaigns, every-other-day, leading up to the start of the promotion, but wants to surgically target only customers who purchased items similar to the products that Anita wants to clear. Dale in Business Intelligence says that he can only pull product-level purchases that are ten days old or older, because the update cycle of the database is not in real time. Howard in Web Analytics can confidently pull the 1,432 customers who viewed that item in the past month and have a valid e-mail address, but worries that with 62% e-mail address coverage, we might be missing out on a real opportunity with the remaining 38% of the database who viewed the item in question. Dale in Business Intelligence questions this strategy, because customers have multiple e-mail addresses, and the company doesn't have a valid strategy for de-duping records across multiple e-mail addresses. Howard thinks Dale's apartment-level name/address de-duping leaves something to be desired, because his niece, Kayla, received three catalogs in her dorm room last week on the same day.

2:29pm: Celeste in Creative Services volunteers to provide an aspirational presentation strategy that puts the consumer in the middle of "Rocktober Magic". Felicity suggests that the company avoid an aspirational presentation in e-mail marketing, because aspirational presentations violate the tenants of e-mail marketing best practices. Celeste reminds the team of the aspirational presentation strategy used in 1999 to promote the July 4th "America's Birthday" bounceback promotion that worked so well.

2:31pm: Abe in Public Relations asks who owns the Social Media strategy for this campaign? Dale in Business Intelligence and Howard in Web Analytics both agree that without a proven set of KPIs, nobody is going to be able to measure the effectiveness of any Social Media strategy, so maybe it is better for the team to focus on proven ROI-based tactics like postcard marketing? Besides, blogs are so 2006! Celeste in Creative Services volunteers to promote the campaign via Twitter and asks if the company could support a 25% off promotion exclusively for Twitter users? Shannon from the Call Center says that the order entry system can only accept offers ending in a "0" percentage. Betsy in Merchandising reminds the team that Forrester Research recommends that all multichannel campaigns be executed in an integrated manner, so let's all make sure that we use the same percentage off promotion in all cross-channel marketing activities, making sure it is either 10%, 20%, 30%, or 40% off, in accordance with the limitations of the order-entry system.

2:34pm: Rick in Catalog Marketing reminds the team that the catalogs have already been printed, and will be delivered to customers next week. Abe in Public Relations questions why catalogs are even sent to customers anymore --- how many customers buy from those things anyway, one in fifty? Abe recommends sharpening up the catalog targeting strategy next time, focusing only on customers who like the product offered in the catalog. Abe recommends cutting half of the circulation for the next catalog, and recommends that he send a press release communicating this new "green" marketing strategy. Abe thinks this will create a lot of buzz, and the buzz will drive the "Rocktober Magic" marketing campaign while protecting hundreds of trees in Northern British Columbia.

2:35pm: Rick in Catalog Marketing leaves the room for a moment. Felicity in e-mail marketing asks the team why Rick "disengaged" from a healthy conversation?

2:37pm: As Rick from Catalog Marketing re-enters the room, Independent Marketing Consultant Vic Montana asks Rick if he could quickly get access to 500,000 names and addresses from the Abacus synergy model, and send them a digest sized catalog that features a couple dozen key items that the company could really get behind? If this could be done in the next ten days, it would get around the fact that the catalog has already been printed. Rick reminds the team that it takes months to produce catalogs. Independent Marketing Consultant Vic Montana suggests that there are print-on-demand solutions that could speed this process up considerably, heck, he just purchased a book from Lulu.com and it arrived in five days. Rick from Catalog Marketing excuses himself from the meeting again.

2:39pm: Adam in the paid search marketing department wants $125,000 to really "blow out" the most important keywords. He believes that stiff competiton from Celebrate Express and Chasing Fireflys will limit the ability of the team to drive online volume without a significant and meaningful investment. He cites past campaign metrics that indicate that his ad-hoc bidding system yielded a cost per new customer of just $4.33, coupled with a lifetime value of over $29.00. He can promise a cost per new customer of under $22.00 with a $125,000 investment, an investment that will pay for itself within just nine months. The room stares at him, confident that he's on to something, but not really sure what he's on to. Besty in Merchandising wants to know if lifetime value information could be integrated with her daily flash sales merchandise selling reports?

2:40pm: Stephen from the CRM / IT team thinks an automated phone messages to best customers would provide an instantaneous bump to the campaign. Howard in Web Analytics reminds the team that Coremetrics will not be able to accurately measure the influence of offline marketing strategies on the website. Dale in Business Intelligence reminds the team that he can measure the effectiveness of the offline marketing strategy, but will not be able to link it to data from Coremetrics due to systems limitations. Stephen from the CRM / IT team says that there is an "SR" (Service Request) that will link offline and online data sources in early 2011. The room groans with disapproval, though Stephen reminds everybody that the members of the room are responsible for assigning priorities for all projects. The room groans even louder! Independent Marketing Consultant Vic Montana tells the team that Williams Sonoma does a nice job of linking together data across brands and channels, that he recently returned a $173 latte machine and received a marketing e-mail within just six days of the return, and he never even had to opt-in to that program! Felicity squirms, realizing this is a clear violation of e-mail marketing best practices. Anita in Inventory Control asks if we could start an e-mail marketing program for customers who return merchandise?

2:46pm: Your CEO stops by for a quick visit on her way to the Supply Chain Efficiency Task Force Meeting. Oh, the marketing ideas are flowing ... the members of the room cannot stop talking over each other as they share what can be done within each channel. Your CEO is so pleased that everybody "has skin in the game", and offers your meeting as a shining example of how Congress could work together in a bipartisan manner to pass bailout legislation. The room applauds as your CEO exits at the same time that Rick from Catalog Marketing re-enters the room.

2:49pm: The room, exhausted from such a productive conversation, looks to you for leadership and resolution.

What would you recommend as an appropriate multichannel marketing strategy, given the feedback you've heard from your team?

Direct Marketing: Money, Money, Money, Mo-ney ... MONEY

2008-09-28T21:30:00.000-07:00

Maybe you noticed that the economy is in dire straits, and that Main St. is upset with Wall St. I now start my day at 6:15am on the West Coast by turning on CNBC to listen to the pundits describe seemingly unfathomable financial scenarios.

Here in the humble world of direct marketing, we've participated in an unregulated world, propping up our profit and loss statement using funny money.

Think I'm wrong? Let me offer you a few examples.

An EVP of marketing told me this, paraphrased: "It's all about a value. We surgically offer discounts, promotions, and pricing opportunities to customers in different life states. The prospect gets a cheaper price than the established customer, along with free shipping. The lapsed customer gets 20% off their order of $100 or more. And best customers participate in our loyalty program."

An e-mail I recently received: "What are the best promotions and wording in the subject lines of e-mail campaigns --- we need to boost performance?"

An owner: "Should I use marketing dollars to subsidize free shipping?"

A blog subscriber: "What are the three or four really easy things I could do today that would dramatically improve the performance of my business?"

A business leader: "Who has the best algorithm to improve paid search results?"

Another business leader: "They keep sending me catalogs that say this is the last catalog I'll ever receive. And then they keep sending me catalogs. They just lie to me."

Funny.

You Google "Best-Practices Marketing Promotions", and you get 264,000 results. If you Google "Best-Practices Merchandising Strategy", you're rewarded with 77,000 results.

We, the direct marketing community, may not be much different than Wall St. We sell our customers money, not merchandise, and we use algorithms to do the work for us. We shy away from the fundamentals of our business, which take a lot of time and discipline to master, instead focusing on the packaging of money to drive results this quarter. Would you like a savings of up to 55% on this order? How about free shipping if you use this coupon code? And this month only, take an additional 20% off of your order with your store credit card (next month, you'll take 25% off of your order). Or earn $10 off your next purchase if you buy this week. Buy one, get one free!

We're selling money. We attempt different schemes, all looking for ways to get a customer to fork over hard earned wages so that we hit our short-term sales targets. When we find ones that work, we call them "best practices". Zappos raises prices, then offers free shipping, a new best practice. Amazon offers free shipping at different hurdles, and different annual pre-payment levels --- a new best practice.

Regardless, the marketing of money erodes gross margin. And when gross margins erode, profit becomes a challenge. So we outsource everything we can, in an effort to improve margins. We source merchandise from China. We eliminate jobs in America (but expect those same Americans to keep buying from us). We merge our operations with other brands.

I worked at Lands' End from 1990 to 1995. We never offered promotions. The DNA of the brand didn't allow for free shipping, or %-off offers. We worked hard to clear excess merchandise the old-fashioned way. We were wildly profitable. Now take a look at the e-mail campaigns you receive from Lands' End, fully owned by Sears. You cannot keep up with the discounts and promotions.

I worked at Eddie Bauer from 1995 to 2000. Everything was a promotion. The brand imploded.

I worked at Nordstrom from 2001 to 2007. Promotions and gimmicks were few and far between. It was all about merchandise and customer service. EBIT averaged around 10% my last four years.

Selling money is a lot like adding cream to coffee. Coffee (merchandise) is black. When you initially pour the cream in, you don't really notice much of a difference. But eventually, the cream blends with the coffee, and you cannot separate the two.

And algorithms are dangerous ... necessary, but dangerous. Ask somebody on Wall St. to explain the financial products they created, and you'll have a hard time getting feedback you can clearly understand. Similarly, ask any direct marketing CEO to explain the bidding algorithm used by a paid search vendor, or ask the CEO to explain the way that Abacus chooses half of their customer acquisition prospects, or ask the CEO to explain the statistical algorithm used to select customers for mailings, and you're likely to get a blank stare.

We've created a layer that goes between the customer and the merchandise. We marketers placed money and algorithms between the customer and the merchandise. By doing so, we gave up so much control.

America is about to begin the process of separating the cream from the coffee. Will we, the direct marketing community, follow suit?

Ann Taylor Credit Card Program: Multichannel Marketing Best Practice?

2008-09-27T22:07:00.001-07:00

Ok all of you multichannel best practice mavens, here's one for you to chew on.

Ann Taylor introduces a credit card program, with direct mail and e-mail marketing of the card provided by Alliance Data Systems Corp.

Read the article, then let the audience know if you think it is a best practice to have a third party market a credit card for a brand like Ann Taylor.