Secrets of the Catalog Master
Vol. MMV No. 5 August 2005
(Continued--page 2)
Chapter Five: Product
Mechanics of RFM plus Product Segmentation: Pickering
Product is powerful, not only in the intangible ability to create excitement and stimulate demand, but also in the qualitative sense. Segmenting by product can give enormous power to your RFM segmentation.
The question becomes, how do you segment by product? The answer, the standard answer taught at business colleges across the land is this: it depends.
Most direct marketing companies have between a few hundred and a few thousand products or SKUs. Using hundreds or thousands of variables to create different RFM segments would generate a set of data impossible to work with effectively. Additionally, the cells would be too small to produce meaningful, repeatable results.
At the highest product level, usually referred to as product category, there are generally a reasonable number of categories, a dozen or two. Initial analysis should be done on all available product categories, though with some analyses these can be collapsed further into ad-hoc groups that have similar predictive abilities.
There are nuances to using product categories for RFM segmentation. Some very powerful historical analysis can be done using the first product category purchased. Alternatively, on-going RFMP segmentation frequently develops from the first product category purchased to if ever purchased from a given product category.
As an example, computer peripherals manufacturers and retailers frequently sell printers at or near cost. The paradigm is set-up to make money from the ink cartridge sales, not the printer. If you would fill the average automobile gas tank with printer ink, it would take nearly $100,000 worth of ink to fill it up! As you can see, that is a lot of margin.
Thus, a customer who consistently buys a printer but not ink will not be a very valuable customer. This may not show when looking at RFM only, unless monetary value also includes some gross margin or profitability measure. Looking at the RFM + product category and being able to use an average margin can help separate the truly profitable customers (printer and ink buyers) from the pretenders (printer only buyers). The printer and ink example provides a good reason to assign margin or profitability on as micro a level as possible, at the product category at least and preferably at the individual product level.
The quickest way to include product in the RFM segmentation is to simply set-up a counter of how many different product categories have been purchased. Although not perfect, segmenting RFM cells by one product category purchased versus two, three or more product categories purchased will rank-order profitability in almost every instance.
Chapter 6: Channel
Catalog: Libey
Any discussion of multi-channel direct marketing must begin with the catalog channel. Any discussion that focuses on the size of the catalog channel and other macro estimates of growth will be outdated in a matter of months. It is wiser to find current statistical data on the catalog channel as it is required. Here, it is wiser to focus on the philosophical and conceptual elements of the catalog as a viable channel within direct marketing.
Catalogs have been around for a very long time. One of the first recorded references to a printed catalog was in the 12th Century. Monks working in scriptoriums produced illuminated copies of the catalog on vellum and they were carried by priests in the summer and fall of the year to abbeys throughout Europe. The catalogs contained drawings and descriptions of religious relics, which could be obtained by the abbeys as items of veneration for the faithful, for a price. The finger bone of a saint, the heart of a martyr, scraps of holy shrouds, chalices, splinters of the cross and other religious antiquities were offered along with add-on handcrafted reliquaries to house the treasures. Purchases were paid for in advance and the priest returned to headquarters with the orders and the cash, loaded up the products and delivered them on the return trip, along with a new catalog and the ‘spring’ offers. The cardinal elements of this earliest of catalogs remain the same today: 1) a good list; 2) good products; 3) a good offer; 4) circulation; 5) fulfillment; and 6) the first known bounce-back and package insert.
Almost eight hundred years later, catalogs have become a very big part of the global commerce. In the United States alone, we estimate there are over 20,000 catalogs of all types: business-to-business, consumer and manufacturing. The catalog is an established, respected and effective method of selling. The reason for its success is, I believe, because of its contemplative nature. Looking at a catalog of products is, largely, a personal and relaxing endeavor. The catalog shopper is engaged by photography, descriptive or specification copy, attainment of a dream or successful achievement of an application, all contemplative and pleasant intellectual activities, whether personal or business-related. That just doesn’t happen in a Wal-Mart.
While the contemplative nature of the catalog has endured, the call to action has shifted progressively from mail to telephone and now to online response. Online ordering, in response to contemplative catalog shopping, accounts for half of the orders, yet eighty percent of those online orders are driven by a paper catalog. At the same time, the total number of catalogs produced is increasing. Online ordering will continue to gain over mail and telephone, but the catalog will remain a primary driver of those online orders. Eventually, online catalogs will edge up in popularity, partly because of generational acceptance and familiarity, but also because of irresistible catalog economics. Suffice it to say, the online world will grow in importance, but the paper catalog world will retain its relevance and importance for many more years. It is not the catalog channel or the online channel; it is the symbiotic blending of both—as well as other channels—that drives the future of direct marketing.
Were I to venture a guess as to the mix in twenty years, I would think physical catalog response would be at the ten to fifteen percent level with online response at the eighty-five to ninety percent level. This means, of the eighty-five to ninety percent online orders, probably fifteen percent will be driven by a paper catalog and the remainder driven by search and online catalogs. Worst case, paper catalogs will still drive about twenty to twenty-five percent of orders. However, the direct industry will be magnitudes larger and the total number of orders will have increased dramatically. The larger number of orders will be obtained across numerous channels, one of which will be the enduring and ever-viable catalog channel.
With a positive long-range outlook for catalogs, common sense demands that, at the minimum, optimized RFM analyses be accomplished for catalog channel customers to derive the greatest possible understanding of the trends in their historical purchasing behavior. The added benefit of being better able to allocate resources to the catalog channel on a basis proportionate to earnings is a plus. If the catalog channel is twenty-five percent of your business in the future, and if industry growth produces a business that is four times your present size over twenty years, then the catalog channel alone could equal the same or more than your entire business today. The point: Catalogs are important to your future and knowing as much as you can possibly know about your catalog customers is like having life insurance.
Catalog: Pickering
We have lived through the Orwellian coming of 1984, the end of the world as we know it in 2000, and we have lived through the projected complete demise of the catalog in favor of the web and e-mail. The catalog is a tough old bird and has survived all these events.
Nonetheless, there are changes as well as constants with catalogs. For one thing, a stand-alone catalog, as we knew it in the 1960s or 1970s, with all responses coming via mailed in order form, is dead. There was debate in the late 1970s and early 1980s about the appropriate use of 800 numbers: do we include them and pay large phone bills or do we have regular numbers and reduce, but ‘qualify’ the inbound callers? History has shown that investing in making things easier for the customer to give you their money pays off.
Order forms today look much different. They used to be in the middle of the catalog (always) easily ripped out and usually included some sort of envelope. Today they are usually, but not always, in the middle but aren’t really intended to be detached. The order form has morphed into a vehicle to communicate shipping charges, delivery information, and sizing charts. In the 1980s, there was a story, perhaps apocryphal, about a new circulation manager who ordered an entire season’s worth of catalogs without an order form. It was the most elementary of mistakes. Today, it would scarcely be noticed.
The move toward using catalogs to drive order placement via toll-free calls was a great boon for catalogers. It became a built-in opportunity to cross-sell or up-sell and, at the minimum, the ability to provide ‘high-touch.’ The newer channels of outbound telemarketing, web, and outbound e-mail have similar opportunities inherent in them.
The cliché that says that the only constant is change is certainly true. Direct marketing has always been attractive to entrepreneurs because of the low barriers to entry. You don’t necessarily need to set-up distributors or retailers; all you need is product (not even inventory) and a catalog, website or telephone. That is true now more than ever.
With the increasing clutter that comes along, more and more offerings make knowing and putting into practice the basic lessons of direct marketing all that more important. We have had less than ten years to find our way through the new channels of web and e-mail. There will likely be five or ten more years before integrated multi-channel campaigns are the norm. By that time, we will likely have new channels of communication, payment, and delivery.
As Harry Truman said, “There is nothing new in the world except the history you do not know.” Knowing the history and principles of direct marketing as applied to catalogs will allow you apply tried and true principles and have a reliable guide to the new channels.
Chapter Seven: Position
Price: Libey
Positioning is the perception the marketplace has of your company based on at least six elements: price, quality, service, speed, selection and access. Other positioning elements exist, but these six are most often central to a multi-channel direct marketing position. Looked at another way, position is a vantage point from which prospects and customers determine whether they want to do business with you. As an example, what do you think of when you see a Wal-Mart ad? Now, what do you think of when you see a Williams-Sonoma catalog? Those two very different perceptions are the sum of your beliefs and vantage points of each company based on price, quality, service, selection, access and, in this comparison, image. Position tends to be either in-your-face or elusive. Some companies are masters of defining and presenting a clear position; some are tentative and fuzzy about what and who they are.
In an ideal world, position determines almost everything. If a company opts to be known only for low prices, as does Wal-Mart, that choice of a single position determines the flimsy, cheap plastic bags, the eyesore-blue color of the stores, the littering of the surrounding neighborhood, the rare cleaning of the carpets in the entryways, the purely utilitarian shelving and lack of attractive displays, uninformed, part-time, minimum-wage employees, the absence of meaningful customer service, and the overarching aura of lowest-common-denominator-mediocrity that so typifies the Wal-Mart experience. In contrast, the multi-position choices of Williams-Sonoma determine taste, style, elegance, informed and friendly staff, high-design, spotlessness, extreme customer services, and the overarching aura of highest quality and exclusivity. Decisions about creative, logos, training, website design, packaging, products, wages, location—literally, everything—begin and end with the corporate position. That’s in an ideal world. In reality, position is partially ignored and the elements get confused.
When doing the preliminary interview work with CEOs to begin the process for long range strategic planning, I always ask two questions:
- What is your exit strategy? Until the objective of the end is known, we cannot create a strategy to get there. You operate businesses very differently depending on whether they will be sold to a competitor, sold to an investment group, given to the children, structured as an employee buy-out, or liquidated for cash. For each end game, there is a different strategy for almost every interim business decision and direction.
- What is your position? Once the exit strategy and the end game are known and described, the position necessary to get there with the greatest amount of business valuation can be determined and all tactical and strategic decisions flow from there. If it’s all about price, certain things become important. If it’s all about service, certain other things become important. The integration of channels is determined by the position. The design of catalogs is determined by position. The product selection is determined by position. Position is the elephant we ride on to get to the Taj Mahal.
One of the positioning points is price. Three price positions are found: 1) high price leader; 2) mid-price player; and 3) low price leader. The first sets the price standard for the market or product group; the second hides in the weeds and adjusts; the third battles for share on price. None of the three is the best position and none is the worst position; each is a viable position provided all other positioning elements are in synch and integrated properly.
If all of direct marketing were organized as a circus, then the companies that position themselves on price would be the high flyers, the aerialists, the trapeze artists operating without a net. Price always performs in the center ring and is not very forgiving. With a price position, you are always holding your breath. Have you ever noticed that the businesses that operate on pure price, such as commodity traders buying and selling corn, wheat, pork bellies, foreign currencies, crude oil (or any other classic ‘good’), buy and sell on fractions of a cent? A transaction on the Chicago Board of Trade for 20 contracts of wheat (100,000 bushels) may be done for as little as one-quarter of a cent gain per bushel. The profit per trade is only $250, but if you do that over and over 100 times a day, you make $25,000 a day. Of course, the floor trader standing next to you is probably willing to do the business for one-quarter of a cent less. When you are the high price or the low price leader, there is always someone who will do the business for a fraction of a cent less. That is the problem with the price position.
The mid-price player position takes you out of the center ring. Unfortunately, that means you are just another act and are relegated to the side rings. As the price leaders parry and dodge, the mid-price player works the spread and makes a little more or a little less depending on the price extremes. Most business-to-business direct marketers like to be mid-price players, never appearing on the radar screen at either the highest or the lowest price. There is a nice bit of business to be done just working ‘the middles.’ After all, that’s where most of the buyers will be found. At least until the unholy Wal-Martization of America is complete.
The Turn of the Century will be remembered as the time when price became primary in the mind of the American consumer. Prior to the advent of online technology, price comparison was a physical and intellectual effort involving on-site or telephone research. With Internet access, price comparison has become an automated and technological process involving search engines and shopping aggregators. What previously took perhaps weeks, now takes only nanoseconds. The effect of this is, of course, that most purchases going forward will involve price comparison, thereby forever establishing price as the primary driver of commerce, an evolution of the buying process that remains to be evaluated for its future positive or negative effects.
Chapter Eight: Market
Adjacent Market: Libey
Adjacent markets exist side-by-side with core markets. If the core market is antique Studebaker restoration shops, an adjacent market is antique Corvette restoration shops. If the core market is larger, say, auto body shops, an adjacent market is brake shops or transmission shops. If the core market is broad, auto repair, an adjacent market could be airplane maintenance or boat repair.
Adjacent markets tend to be horizontal with some overlap. If the core market is health care, for example, an adjacent market may be health care record keeping. Since all health care professionals have to keep records, the adjacent market overlaps concentric markets such as physicians, veterinarians, dentists, and chiropractors. Another adjacent market might be health care uniforms, also an overlapping market. A third adjacent market might be health care practice furniture. Each of these adjacent markets have a logical basis for expansion: universe. When we look at the giants of direct marketing, such as Patterson Dental Supply, we find an adjacent market strategy serving the dental, the companion pet veterinary and the rehabilitation markets. Similarly, NEBS, the venerable business forms direct marketing company, serves tilers, plumbers, electricians, HVAC, landscapers and other adjacent markets within the broad contractor market.
Consumer adjacent markets are often less horizontal and logical, more circular. The popcorn and flower markets, as an example, are both served by 1-800-FLOWERS and would seem to be an illogical fit until you understand that the core market is actually gifting. In that context, their brand line-up makes sense: Popcorn Factory, Plow & Hearth, HearthSong, Magic Cabin Dolls, Cheryl & Co. cookies and 1-800-FLOWERS.
Another perspective on adjacent markets can be obtained with Amazon.com. Since beginning with books, the online marketer has expanded to 29 adjacent markets, not all logical. Books and music are clearly logical, as are DVD/VHS. But books and tools is illogical, as are pet supplies, apparel and kitchenware. Amazon’s definition of adjacent markets is broad, almost ‘general department store’ in nature. Yet, all of the adjacent markets are home related and all can be serviced online.
In contrast, multi-channel direct marketer Barnes & Noble views adjacent markets quite differently. The core book market is supported by used, out of print and textbook markets. Music is a major retail department as well as an online market. Considerable retail space is devoted to the coffee bar and specialty baked goods, soup and sandwiches. The adjacent market strategy is much more horizontal and overlapping than we find with Amazon. Barnes & Noble is retaining its core market while adding adjacent markets that are quite logical.
When adjacent markets and RFM segmentation and optimization are examined, Amazon is far more advanced than Barnes & Noble. After more than twenty years of shopping at Barnes & Noble, they have no idea who I am and what my interests are, nor do they have any way of contacting me as a customer. Why? Because I have never signed up for their membership program. I spend between $2,000 and $3,000 almost every year in the retail stores, but am still a nameless customer they know absolutely nothing about. Compare that to Amazon, which knows more about me and my interests than any company or person on the face of the Earth. Amazon does everything we talk about in this book and more. Amazon actively manipulates my RFM behavior, my affinities, my linear purchases, literally everything I do in my relationship with the company, and optimizes my lifetime purchases and my lifetime net profitability. As a result, I spend more with Amazon than I care to think about. But, I only buy books and the odd CD. I’m a core market guy and probably will never be an adjacent market customer. Yet, I buy cappuccino, music, new books and used books from Barnes & Noble. The point: If you want to expand to adjacent markets, first decide whether you really mean adjacent markets or adjacent products.
Adjacent Market: Pickering
Adjacent markets can occur or they can be developed. With more channels and more advertising vehicles being deployed by direct marketers today, there is more opportunity for adjacent markets to develop unintended and unaided.
There is nothing whatsoever wrong with adjacent markets that naturally occur, think of it as marketing Darwinism (my grandfather used to call these occurrences ‘volunteers’). Adjacent markets can develop from the most unlikely of places.
WD-40 was developed as a degreaser and penetrating solvent intended for use on engines and other machinery. As such, the core market was defined as people who service machinery. However, many anglers swear that WD-40 is a great bait for bass fishing. The bass fishing market is probably not the audience that WD-40 started out to serve, nor was attracting bass the problem they hoped to solve. Yet WD-40 is extensively used in that way.
What does WD-40 do with this unusual opportunity? It could do nothing. Or it could start to package the product differently, perhaps in smaller containers that are more easily taken with the angler. It could also start to look for advertising opportunities reaching those who both work on machinery and enjoy fishing as a hobby,
Among direct marketers, government agencies and educational institutions often occur as an adjacent market. And it only makes sense. What building has more office space than any other in the world? The Pentagon. What do you think its budget is for things like cellular phones, office supplies, floor mats, computers, light bulbs, and the plethora of things used and consumed in an office?
An adjacent market, by definition, is not, or was not, the core market or the intended market. Therefore, to move effectively into a adjacent market, the tactics must be reviewed to see if they are as applicable in the adjacent market as in the core. April may be a great month to mail the core market, but it is probably a poor time to try to send a mail piece or an e-mail to anyone at the I.R.S.
Adjacent markets are usually defined using the same variables and descriptors used for core markets. For business-to-business marketers, the language generally includes variables like SIC, employee size, and job title. Consumer marketers may look at age, income, special interest, ethnicity, gender, USDA growing zone, and the like. It is important to develop definitions that are executable in the real world. If you want to define a market by SIC, but that variable only has coverage on twenty percent of your file, is that really a useful definition? It probably makes sense to investigate how to increase the coverage of that variable and see if the market definition still works.
Back Next Page
Pages: 1 2
3
