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Libey Incorporated
Economic Outlook
Secrets of the Catalog Master
Vol. MMVIII No. 1
January 2008
January 2008
Cherry Hill, New Jersey
Des Moines, Iowa
Donald R.
Libey, Editor
Why You Should Not Participate
In the Coming Economic Slowdown
by Donald R. Libey
Let’s be honest with each other: Things are going to slow down in 2008.
Here is why I believe you definitely should not participate in that slowdown.
The Avowed Contrarian
For most of my life I have been an ardent contrarian. If it was raining, I was not one to put on a raincoat; rather, I put on sun tan oil. I could never see the benefit of doing what everyone else was doing; rather, I could only see the advantages that came from doing something different. In my earliest businesses, my bait shop and vegetable stand at age nine, I ran them on the principle of always being different, always doing the unexpected instead of the expected. If the bait shop in town opened at 9 a.m., I opened at 5 a.m. If my competitor sold large minnows for a nickel each, I sold them four for a dime; after all, I caught them free; it was 100 percent gross margin. Never a conformer; always a contrarian.
During the 1970s cycle of oil scarcity and price inflation, when there were lines a half-mile long to purchase a few gallons of gasoline and interest rates were 20 percent, I bought my first retail business, a very large (for then), 5,000 square foot pet shop. Nobody else was starting a pet shop and I had a three-year head-start at owning the regional market for exotic pets, birds, fish, and the first massive salt water aquarium supply business in the State of Illinois. After three years, I sold it for top dollar as the economy began to recover. It was a successful business with tons of customers and was the market leader in the “nouvelle pet shop” niche. All the other “mom and pop” shops had pulled back, shrunk their inventory and abandoned advertising. I was the new concept in pets during a bad economic time when people stayed home and set up aquariums and found a bit of joy in life through their pets. Contrarian? You bet!
During my years as a trader on the Chicago Board of Trade, I bought gold and platinum when it was at twenty year lows, at a time when no one was interested in precious metals. As a contrarian, I could only see the advantage that would come when the inflationary spiral of the late 1970s would push the price of gold to all-time historic highs in 1981-82. It did. I won. Now, twenty-six years later, in another cyclical move, gold is back at similar all-time highs, and I was a buyer six years ago. Nobody else cared about it six years ago. You had to be “contrary” to even consider buying sleepy, lackluster gold in the first half of 2001.
A Contrary Direct Marketer
The contrarian strategy continued to follow me as a direct marketer. I very quickly learned by observing that postage increases, economic downturns, political unrest, imbalances of expenses, and other disruptors to the business cycle created a contra-momentum that always resulted in an increase in customers for those people who focused on growing their business without regard for the economic, political or business cycle disruption. Early on, I was taught and mentored by some very successful people, such as Stanley Marcus of Neiman-Marcus legend. He was a classic contrarian and whenever there were difficulties in the economy, he dreamed up a bigger promotion (matching His and Her elephants for Christmas at $349,000) and mailed out more catalogs. What Mr. Marcus did so successfully each year was to create demand for his catalog, and that created more customers for his business. The legendary contrarians—Barnum, Ringling, Trump—have always understood that fact. In tough times, creating demand for your product creates customers you did not have. More germane, however, is the ineluctable secret fact of direct marketing success: Regardless, always be in the market to recruit new customers.
The minute you stop recruiting new customers, you begin to reverse direction. It really is that simple. If you ask twenty successful business owners what is the secret of their success, you will get twenty slightly different versions of “recruit new customers.” (A few—and only a few—will have added the second all-important contrarian strategy to customer acquisition: new product expansion.)
How I Discovered the Secret of Contrarian Success
Allow me to wander a bit and to describe a contrarian philosophy from my first book, On Gold, a history of investing in the world gold market, written in 1981. I researched and unearthed an ancient method of charting the market for rice that was first used in China around 800 c.e. This unique technical method of charting—similar to today’s stock charts—produced an approach that—once I understood it—allowed one to flow with the market without having to guess where the market may be headed. It didn’t make any difference if the market went up or down because you are always positioned to follow the market rather than attempt to make a correct decision—or guess—as to the market’s direction. That was a revolutionary way of looking at the market.
I came to my understanding of this contrarian approach to investing by looking at—really looking at—the Great Wall of China. The wall provides resistance and support: resistance from attackers outside the wall and support to the Chinese people inside the wall. Similarly, a market’s direction is all about points of resistance and support. Resistance on the upside and support on the downside. But, the Great Wall of China disregards that fact. It gets its strength from its length and mass. The Great Wall has no bridges, no tunnels under it, no rivers, no breaks of any kind. It follows the land in whatever configuration the land takes—up, down, over—there are no weak spots in the wall. Because it follows the organic shape of the land, it cannot be breached at a pass, or a river crossing, or at a bridge. It cannot be beat and it never has been beaten.
When I realized where the strength of the Great Wall came from, I began to look at the ‘landscape’ of the historical market for buying and selling rice, and I discovered a way to display price and to chart the market that was only concerned with going “with” the market—over hill and dale—without concern for the direction. And that was a contrarian revelation. It took me almost two years to figure out what this all meant.
By adjusting the buying and selling of gold (instead of rice) to this natural, holistic, contrarian approach to the market, I found that it was possible to successfully obtain a profit on the purchase and sale of gold about 85 percent of the time and a break-even on most of the remaining 15 percent of trades. The small number of trades that lost money was controlled to the point where the losses were small. The underlying secret of this strategy was: Regardless, always be in the market. Sound familiar? Regardless, always be in the market to recruit new customers. You cannot win if you are not in the market, whatever that market may be.
We are in the market every day. Our market is defined as buyers for our products. Therefore, to be in the market, we must have products and customers. And, to be in the growth market, we must have new products and new customers. And, that demands new product expansion and new customer acquisition. When we have both, we obtain customers from other sellers, just like we obtain rice or gold from other sellers at a lower cost and sell them at a higher price. But, unless we obtain an always increasing share of the market (through product and customer prospecting), we either remain static or we shrink. At the point, we are no longer in the market and decline begins. At that turning point, we are bucking the market rather than flowing with the market. And that is a near-universal strategy for loss.
The Architects of The Great Wall
Very smart people designed and built The Great Wall of China. They knew what they were doing physically and intellectually, and also strategically. That’s why it worked.
Think of the Great Wall as your Circulation Plan. Your circulation strategy provides you with support and resistance; resistance from outside competitive assaults and support for customer growth within. It must conform to the lay of the land of the market you serve, moving solidly over known terrain with no weak spots or breaches in the defense. Only then will you obtain the best possible ‘response’ from the market.
The Chinese Emperors decreed that only the very best designers would be allowed to plan and build The Great Wall; in fact, they were members of the Imperial Court. The Emperors—being highly intelligent and strategically superior—knew that only the very best, most experienced and proven minds would produce a flawless and impenetrable defensive Wall. The Emperors knew the power of dedicated specialists. The results speak for themselves. The Wall is still standing. China has remained impervious for centuries. They ‘won.’
The Architects of The Circulation Plan
It takes equally intelligent and smart people with great experience to design, build and maintain a circulation plan and strategy. It is still the most important thing you can do to assure you remain viable and in the market for acquiring new customers. Regardless of the channel, circulation strategy is at the center of success.
And yet, many of our direct marketing companies are allowing third party membership co-op vendors, such as Abacus, to be their primary designers and builders of their circulation plans. Read what Kevin Hillstrom has to say (reprinted with permission from www.minethatdata.blogspot.com.
Co-Ops and Dissatisfied Consumers?
While the numbers vary, many catalogers allocate about half of customer acquisition circulation to co-ops (Abacus, Z-24, NextAction, I-Behavior, Circ Base, Prefer Network, Wiland Direct).
So if the cataloger allocates half of circulation to customer acquisition activities (customers who have never purchased from the brand), and half of the customer acquisition circulation is allocated to co-ops, then that means that co-op statisticians decide who receives one out of every four catalog mailings.
To be fair, this isn't dramatically different than cataloger practices in the early 1990s, when the Garnet Hill list might be rented by Newport News. In either case, customers received unsolicited mailings.
There is a subtle difference, however. Customers might have been tolerant of receiving catalogs from a "similar brand" ... the fundamental difference between Eddie Bauer and L.L. Bean isn't enough for the Eddie Bauer customer to get ticked-off when an L.L. Bean catalog arrives. However, the co-op statistician uses equations to decide who receives catalogs. And equations, while more precise and profitable than list rental/exchange models, will frequently target customers incorrectly.
If the co-op statistician notices that apparel customers have an "affinity" with another merchandise line, the statistician builds that information into the model. This might result in an increase in response rate, from 1.5% to 1.65%, a wonderful result for a cataloger. But it could also mean that twenty or thirty percent of the names mailed are "different."
It is in this twenty or thirty percent that problems occur. If the statistician gets creative, there will be better response, but more "risks" are taken with the customers who are mailed. Co-ops may substitute "brand affinity," which customers might be tolerant of with "product affinity," which customers might not be tolerant of.
Is this the fault of the co-op? Does the co-op provide enough information for you to know who the co-op is mailing on your behalf? Do you provide enough oversight of the co-ops to know who they are mailing on your behalf? Did you pre-think how your customers might respond to knowing that you dumped their purchase information into multiple co-ops, so that they could be mailed complimentary offers by competing brands?
Kevin raises interesting questions. As we move into a time when new customer acquisition may be more important than it has ever been, are we abdicating our strategic as well as tactical strength to ‘black box’ models? Would the Emperors of China have outsourced the Great Wall to the Mongols, or worse, given over the responsibility for the design and construction to their least experienced architects and builders? Not if they really wanted to remain Emperor.
The 2008 Imperative
I can find no strategic imperative more significant than being in the market to create new customers with new product offerings. The contrarian in me says, ‘This is the time for expanding prospecting and giving the market more new product choices than anyone else.’
The contrarian in me says, ‘This is the time for intelligent and experienced creation of a multichannel circulation and contact strategy that supports being in the market for building share.’
The contrarian in me says, ‘Once more, into the breach! And while my strategic superiority has no breach, my competitors do have breaches. They have weakened their defenses by partially pulling out of the market. Since they are no longer “in” the market, I will double my efforts and take away their customers. In the next 3 years, I will emerge as Emperor of All!’
Go forth into this New Year and multiply!
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