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Libey Incorporated
Economic Outlook
Secrets of the Catalog Master
Vol. MMVI No. 4
July 2006
Consultants & Recruiters to Multichannel Direct Marketing
Cherry Hill, New Jersey
Des Moines, Iowa
Donald R.
Libey, Editor
2006 MeritDirect Co-Op Edition
Lists:
Black Boxes or Known Quantities?
by Donald R. Libey
I want to talk about logic. The list rental world is experiencing a profound change in logic and I’m not at all sure it is logical. First, let’s define our terms.
Co-Op Databases. Two types of co-op databases exist in both the consumer and business-to-business worlds: 1) public co-op databases; and 2) membership co-op databases.
Public Co-Op Databases. These large aggregations contain response list and house list files of companies that are ‘invited’ to participate. If you wish to obtain names from the public co-op database, it is not required that you furnish names or be a ‘member.’ The participating owners of the lists making up the public co-op database are paid their standard list rental rate. When a name is supplied to a mailer from two or more lists, credit is given on a fractional allocation basis. Although the public co-op databases are almost exclusively used for prospecting, participants who furnish their house files to the co-op, often find it efficient to actually pull their own house file mailings directly from the co-op database rather than building their customer mailings separately back at the company. While any list in the public co-op database is a part of the whole, specific lists can still be selected or suppressed on a list-specific basis. Response models are frequently deployed both on a list-specific basis and for some ‘cross-base’ selections. As well, list owners can screen list renter offers in the traditional manner and can refuse rental requests.
Membership Co-Op Databases. Only those marketers who are members can use names from a membership co-op database. Members are required to submit their customer file complete with recency, frequency and monetary data—the transactional data. The membership co-op then aggregates and integrates all of the data and creates a ‘profile’ or customer-look-alike’ model with which to select names. These are ‘blind’ sources of names. The member who takes names has no idea from which list the names came from. List-specific selection or suppression options do not exist and members do not have the option of screening offers. In short, the membership co-op is a ‘blind, all or nothing’ option while the public co-op database offers ‘open optional freedoms.’ The membership co-op databases can be used not only for prospecting, but for retention and reactivation mailings, as well. Examples of consumer membership co-op databases include: Abacus and Z24. Examples of business-to-business membership co-op databases include: Abacus and B2B-Base.
Two Decision Points
The membership co-op database operators want all multichannel marketers to become members and to roll-up all of the customer files and transactional data into one massive model emanating from their ‘black box’ on a blind, single-source basis. There are costs and fees, but no rental income. List owners and renters have no control and approval.
The public co-op database operators want only targeted lists to participate by providing their usual list rental file. They want the mailers using the co-op to participate with as much customer file data as necessary to suppress existing customers and assist in reactivation and retention campaigns. There is, as a bonus, rental income and standard commissions and charges. List owners and renters have complete control and approval.
Benefits of the Two Co-Op Database Types
Public Co-Op Databases. For users, the benefits include access to a variety of known lists with the ability to tailor selections with data and models not available in a traditional list order. In addition, cost-efficiencies for both prospecting and house file mailings can often be combined, and firmographic and appended data are obtained and the usual merge-purge process is often eliminated. For participants, list rental income is also a clear benefit without the loss of control and list rental revenues.
Membership Co-Op Databases. A logical benefit of the membership, single-source database is access to transactional data as a part of the resultant model and selection criteria. In some instances, there can be an average of 20 individual purchases for a single name when aggregating from all lists. The greater the number of members, the greater the number of business contacts and the number of transactions factored into the roll-up model.
Both types of co-op databases can identify multibuyers. The member co-op has the ability to augment multibuyer identification with transactional data to segment highly qualified multibuyers with the potential for greater long term value. The public co-op has the ability to select multibuyers from specific lists. In both cases, the multibuyer data is central to the modeling capabilities.
Concerns about the Two Co-Op Database Types
Public Co-Op Databases. The primary concern for participants has been the confidentiality and security of the customer file. With many business-to-business marketers still reluctant to allow access to their house list, placing this most valuable of all direct marketing assets into a ‘public’ database is often anathema. Industrial-strength encryption and other data protection standards have been put in place and breaches of security are nearly non-existent; however, security remains a concern, primarily due to a lack of understanding about the security processes and safeguards in place in the public co-op databases. However, it is relatively rare that list owners refuse to provide their files given the long-term security records of the leading providers and the revenue opportunities associated with participation.
Membership Co-Op Databases. Concerns about security of the proprietary information are expressed by marketers when considering membership in these co-ops. Cloaking of the source of the data, as with competitive blocking of information has, to some extent, relieved these concerns. Every participant, whether public or membership, wants assurance that their names are protected. The list industry and the co-op operators have a vested interest in absolute security. If trust by the list owners is ever compromised, the co-op databases will cease to exist within a matter of hours. As the industry has nearly 15 years of history with these databases, it speaks to the seriousness of security measures and the success of the resultant trust between list owners and database operators.
The Logic Concerns for the Future
I began by saying I was concerned by the profound shift in the logic of the list aspects of multichannel direct marketing. As I see the situation looming ahead, the growth and potential dominance of the blind, single-source membership co-op model could have serious consequences for the direct marketing industry. Here is where I run into trouble.
Logic tells me that the largest variety of response lists possible from which to choose is more logical than a single source of homogenized names, no matter how good the model. Further, logic tells me that direct marketers having the freedoms to control their list choices and their circulation destinies through a free market is more logical than having their futures dictated by a single-source, ‘black box’ oligarchy. And, perhaps less philosophical and more practical, logic tells me that giving up list rental income to the oligarchy’s single-source black box could be tantamount to giving up an important component of my net earnings (read: EBITDA and corporate valuation). But, there are other potential effects that slam directly into the Great Wall of Logic.
Membership co-ops (a la Abacus and others) tend to use models that isolate what I call the ‘Super-Buyer.’ These are super-frequent buyers who dominate category-specific buying, such as computer peripherals or office supplies. However, the membership co-ops are less effective at identifying the two-time or three-time ‘evolving’ multi-buyers. And they tend to be mediocre in identifying niche customers and our ever-important and high-value 30-day hotline names. Okay, let’s say the membership co-op names are only 20 percent of your overall prospecting program. What may actually be occurring is that you are diluting the diversity of your downstream customer database as well as future growth—even at 20 percent. The future value may less than if you used ‘rich-source’ names from a public co-op database or traditional list approaches.
What this issue of logic calls into question is the future lifetime value of the customer base. The only way to satisfy the logic is to do a real-time lifetime value comparison of public co-op sourced names and membership co-op names; in other words, open-sourced names versus closed-source names, or stated another way, known and controllable list selections versus unknown and uncontrollable list selections.
Lifetime value is a bit of a moving target for most direct marketers. Believe it or not, still less than 30 percent of direct marketers can actually do an accurate lifetime value calculation—after all these years. Of those that can, some are finding that the membership co-op model using the blind, single-source produces a group of buyers who may not be strong repeat buyers. Why? They are Super-Buyers buying from many catalogs and tend to be less loyal (or, they may be from less traditional business-to-business sources and have lower demand potential). The traditional list approach and the public co-op nuances may be better at producing new buyers, niche buyers, hotline buyers and overall more loyal buyers with a greater lifetime value. In short, the restrictive, black box membership co-op model has an inherent fatigue factor in the quality of the customer. Results look great up-front, but lifetime value is corroding over time. Short term gain; long time decline. Logic tells me to always retain the control over the quality of my future. When I hand it over to the black box, I no longer am in control. Shame on me.
Additionally, the more clients that mail from the same universe, the more incestuous the pool. As more mailers mail from the membership co-op database pool, the percentage of new sites available for productive prospecting steadily decreases. The long-term health of every business-to-business mailer requires constant discovery of new sources of names to add to the prospecting pool.
Another logic ‘chafing point’ emerges in thinking about this insidious shift of quality control. Aside from the very real give-up of list rental income potential, the initial single-source black box pricing may seem attractive for catalogers with large prospecting budgets, but the near-total control rests with the membership co-op operators. All future pricing is in their control because they are managing a group model not an individual client model. Sorry, Dad taught me never to get involved in a Socialist pricing system. More importantly, he taught me never to give up price control in the first place. What possible leverage would I have in the membership model if the lifetime value begins to tank, especially if I am locked into a multi-year contract? This is illogical. Worse, if I do have to revert to controlling my own destiny and to using lists that I determine and that I use my own intelligence and common sense on in selecting, I would have to likely go through two years of testing since I had to give up all of the specific list knowledge while participating in the single-source black box with no discriminating information allowed. Again, this is illogical.
And, that spotlights a major flaw in the membership co-op model: Loss of knowledge and flexibility. First, you don’t know what lists are in the ‘pool’ and the source of the names spit out by the model is unknown to you. Do you really think that is logical? Long term? If you give up the intimate, hard-won and immensely valuable knowledge of your expensively tested list-by-list performance, you are effectively giving up the temperature, pulse and respiration, as well as the all the laboratory testing, that your doctor relies on to treat you properly and maintain your health. Is it logical to do that to your catalog, your house list, to your circulation strategy, to the health of your business?
When you know the intimate details of list performance, through careful list testing and selection, and through careful and fully-analyzed continuation strategies, including list resting and quarterly hot name revolving and other tactical approaches, you know and understand not only what is working, but why it is working. What do you know with a single-source, black box approach? It’s like calling a blind 800 number and ordering 6 million names sight unseen. Some of the lists in the black box have email and Internet buyers, some don’t. How do you specify channel selection to see which buyers from which channel test better? Future mailing and online campaigns will require in-depth channel selection. How will you do that with the “blind blender’ approach to prospecting?
The Growth of the Black Boxes
I am no neophyte to the membership co-ops. I was exposed to them as far back as 1990 and I had reservations about them then. Today, there are six membership co-ops in the consumer direct marketing world and two in the business-to-business arena. Why is that? The brick wall of logic for me is they all contain the same names! This is some kind of giant flea-market of exactly the same product. Somebody’s making a bunch of money here and I don’t think it’s the cataloger. Ultimately, I can see 10,000 catalogers all mailing the same people every week. Illogical!
So, as I see it, we’re slicing and dicing up the universe of the best buyers . . . changing the model slightly in six or eight membership co-ops . . . whirring all of the contents up in a mega Waring blender . . . spitting out a bunch of names who buy pretty good the first few times but usually diminish over subsequent purchases . . . telling nobody who participates who they are, where they came from, or what they look like (“Trust us; we know best because it’s our model”) . . . charging you for this privilege . . . eliminating any possible list rental income . . . likely diminishing your overall customer lifetime value . . . removing all potential benefits of knowledge, experience and flexibility . . . and dictating who, what, how, when, how much and how long . . . . and we are letting everybody mail that select group of names over and over and over in increasing volumes and in the ever-relentless pursuit of magic returns. Plus, the available quantity of names ultimately dries up—forever. Seems to me that’s about where we are.
The Proof is in the Pudding
Well . . . there are a few things I feel are fairly logical (and fair) to ask:
- Who, specifically, is using membership co-ops successfully?
- What are the short and long term results?
- How long do members participate and why do they stay or leave?
- Can you show me a uniform suite of metrics that fairly compares the results of the membership co-op versus the public co-op or traditional list rental? Long-term?
- How well did the member companies perform prior to and after joining the membership co-ops? This would be an ‘oranges and oranges’ EBITDA, repeat purchase measurement, and customer lifetime value calculation.
- Who are the successful companies using membership co-ops and what
do they look like. Are there really only a very small number of really big mailers who fit this model?
My skepticism tends to be fed from observing the results of shifts in the prospecting models of many catalog companies over the last ten to twelve years. More and more companies try the membership co-ops and ultimately abandon them in time, saying, “A sadder and wiser person am I.” I keep asking, “Why is that?”
It seems it’s a little like the fashion industry. This year, someone somewhere (no one really knows who or where) says, “Capri pants” and the world makes, markets, sells and buys Capri pants. No one ever asks the question, “Why?” No one ever asks, “Do these things look good on a 50 year-old with a few extra pounds and bad ankles?” No one ever asks, “What does this do to my fashion credibility and value?” Yet, Capri pants keep coming back every 30 years or so. But, good style and good taste are forever and eternal.
So is a solid, proven, rich-content list strategy.
A Possible Place for the Black Box
If it was up to me to decide on the fate of my circulation performance and my catalog company’s profitability, I would probably approach the membership co-op, single-source, black box like this:
- Execute the model only on a post-merge universe.
- Provide incremental names that are net of the mailing file after the merge-purge.
These two qualifiers might lead to a more reasonably successful prospecting approach with better longer term results. There will be fewer prospecting names produced by the model, but they could be more ‘unique.’ This approach would also likely introduce some customer leverage in pricing that might make up for all of the illogical ‘give-ups’ that the membership co-op oligarchy now demands. In other words, maybe there should be something in it for me, too.
Regardless of the ultimate outcome, I am always wary of band wagons. There are only two absolutely pure bits of wisdom that I have learned in my years in this business:
- Always avail yourself of a bathroom whenever one appears; and
- Avoid band wagons.
My logic failure receptor keeps going off in my head. If left unquestioned, this band wagon called the ‘membership co-op’—this Capri pant black box—this Abacus dominated world—might just somehow unbeknownst take over the long-stable and long-profitable direct marketing list world and we might all be mailing long-term unprofitable names that somebody somewhere (without our input or consideration) justifies by saying, “Mail these.” That is totally illogical.
I gotta tell ya, this one just doesn’t pass my long-term smell test. I have to have something more sure in return for my support and loyalty. And, it just isn’t an acceptable concept of direct marketing when I have to give up everything beneficial for me and my company for the promise of something that might be. Sorry. On this one, I’ll stick to tradition.
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