PRESIDENT'S CORNER FEATURE ARTICLE CASE STUDY CIRCULATION TIP CREATIVE TIP multichannel TIP CLIENT HIGHLIGHT—EARTHBOX PARTNER SPOTLIGHT—AL BESSIN AFFILIATE FOCUS—EXECUTIVE SEARCH INTERNATIONAL
PRESIDENT'S CORNER In direct marketing, the 80/20 rule pops up just about everywhere. Given that LENSER’s forte is circulation management, you may think I am going to address the fact that 80% of your sales comes from 20% of your customers. We certainly work hard to identify that 20% for increased mailing and suppress the bottom 20% from mailing. However, equally true is that 80% of your sales are driven by 20% of your products. I recently listened to a talk by Gary Friedman, the current CEO of Restoration Hardware. One of the techniques that he says contributed to his success at The Gap, Williams-Sonoma, and Restoration Hardware is simply identifying those top products that drive a disproportionate number of sales and moving them to prominent positions in the store where the customer could not miss them. As I listened, I felt vindicated in that we, as catalogers, have always practiced square inch analysis of merchandise sales as a means of allocating greater space to winning product. We know all about using “hot spots” to feature our newest or best! But do we? Theory and reality are far apart. Most of our clients do not consistently apply square inch analysis. I observe that many of our clients’ catalogs, particularly those that are business-to-business, have VERY democratic presentations of products—with no particular emphasis on any given item. My suspicion is that for most merchants, square inch analysis of sales is just too cumbersome and the results not easily applied. So how to simplify? Many of us would greatly benefit from a much simpler approach. First, identify your top ten products and give them much more dramatic presentation—no less than a half to a full page presentation. Take the balance of your top 10-20% of merchandise and give them significantly more space—right-hand top corner of each spread or known hot spots. Do the same for your website—top ten on your home page! Also, declare the top 10% of your products to be “never out” items—meaning you always have ample inventory in stock. NEVER disappoint a customer with a backorder on your best selling items. I can almost guarantee that with these simple techniques you will sell more. All you are doing is what Gary Friedman preached—moving your bestsellers to the front of the store!FEATURE ARTICLE Anyone who has been involved in direct marketing and/or retail storefront businesses in the last five years has become comfortable with the term “multichannel.” My purpose in writing this article is to make readers less comfortable with that popular and misused term and to present an alternative perspective that is, at least, more representative of how business is driven in a world where consumer contact happens in many forms. Clearly this has implications in how data are presented to management. Like all business buzzwords, the term “multichannel” has changed from a term symbolizing new trends in consumer behavior and business models to being a term that is an essential part of any presentation by a merchant to an investor. Broad use of the term is recent, becoming a buzzword during the dot com boom. I recall many meetings with investment bankers during 1999 and 2000 where it was essential that, as a merchant, “multichannel” be part of the pitch. What Does “Multichannel” Really Mean? When we define what those three channels really mean, however, the flaw in that model becomes apparent. As shown in the table below, only Website and Storefront are channels where transactions take place. Of the three, Catalog is the only channel that generates independent demand or Pull Demand—defined as generation of demand from a consumer that is not already at the channel. All three channels generate Push Demand—defined as additional demand generated from a consumer that is already on or in a channel.
Add some other channels, below, and the picture is more complete.
When multichannel refers to transaction channels, there are basically three channels: call center, website, and storefront. If multichannel is to refer to demand generation, specifically defined as Pull Demand—demand that brings in consumers who were not previously in that channel—then the channels are Catalog, Email and, to some degree, Search Engine Marketing. Note that Search Engine Marketing, while having the potential to bring in prospects, only brings them in when they are actively looking—and only in the context of the terms they are seeking. Email is limited to opt-ins, typically meaning it would only generate demand from people already on the housefile. So, a better representation of what “multichannel” means is shown below: For the purpose of differentiating between demand generation and transactions, let’s refer to the drivers of demand generation as demand vehicles and to the locations where transactions are conducted as transaction channels. Demand vehicles, illustrated at the top of the chart, drive consumers to channels of transaction, illustrated within the circle. The challenge for “multichannel” merchants is how to measure the impact of those individual vehicles, aligning demand (revenue) and expense as accurately as possible to the typically defined transaction channels: Storefront, Website, and Catalog. Clearly the situation is complex and important, because improper attribution of results to these individual “channels” will drive inefficient allocation of resources and, more importantly, potential under-allocation of resources to demand vehicle channels that are key drivers of business and customer acquisition. How to Measure Demand Revenue Reporting for Direct Business Components. Often, revenue is reported directly to the P&L by transaction channel, with the demand labeled “catalog” really being “call center.” This is the simplest choice, since the data are usually clearly identified as such in most order management systems. Trending of call center and website demand, in almost every case, clearly shows that more and more consumers prefer transacting direct business through websites rather than call centers. This is to be expected, and will continue as consumers get more comfortable with the internet and as websites improve.
Note that, in the example shown above, the measurement on net sales by transaction channel suggests that “Catalog” is down 6.0% and 11.5% in 2005 and 2006, respectively, while Internet is up 34.5% and 36.5% in those same periods. The logical conclusion to be drawn by an executive looking at this exhibit, in the absence of any commentary, is that the internet is overtaking the catalog, and therefore investment in catalog should be reduced. As direct marketing professionals, we know there is a lot more to the story. However, I have found that when data go into an exhibit in a report, or up on the screen, the data that people see are what they remember, regardless of any qualification or explanation. So when a graph shows that “Catalog” is down 11.5% year over year and Internet is up 36.5%, this image is what tends to guide future thinking and decision-making and at the very least, colors opinions. Let’s examine the same business but, in this case, use a matchback process to tie sales to demand generation vehicles. In this case, we find that a large proportion of this company’s internet sales are generated by catalog mailings, and a smaller proportion are attributed to various e-marketing vehicles (email and paid search—other than on company brand). Comparing shipped sales again, we see that catalog demand grew 7.3% and 9.8% in the two years. Sales generated by e-marketing grew at a healthy pace, 15.3% and 13.8%, respectively, but at a rate far shorter than the rate at which consumers migrated to the website to transact business. This exhibit tells an entirely different story than the prior one, and one that would potentially avoid having the business make a significant error in resource allocation. In both examples, however, the values used are net sales. Net sales can be affected by backorders, order cancellations due to lack of inventory, and other factors not related to the performance of marketing investment. By doing matchback processing using gross demand instead of sales, we eliminate some of the impact of factors external to marketing. Note that inventory shortages, for example, will also reduce gross demand as buyers may not order if they know product is not available for shipment. The impact may be dramatic but is often less noticeable. In the exhibit above, the percentage difference between Gross Demand and Net Sales for each year was 8.0%, 8.5%, and 12.0%, respectively. As a measure of marketing performance used as a basis for the allocation of resources (i.e., budgets), this analysis is far more accurate than the earlier ones. By eliminating the impact that inventory shortages had in 2006, it unmasks the significant improvement in response to catalog mailings during that year. The initial exhibit is what I often see when presented with financial results for a company. Sales data by transaction channel are easily measured and require no conversion using a model or algorithm. The same cannot be said for matchback data, which are driven by a model with allocation rules. For the purpose of establishing budgets and resource allocation for transaction channels such as a call center, using transaction channel data are entirely appropriate. However, for financial reporting purposes, if an allocation scheme such as matchback is not used, it is much more appropriate to aggregate the direct channels (call center and website) into one. This is particularly essential in a business with a storefront channel where direct and storefront must compete for resources. Expense Reporting. It follows that expenses need to be allocated using the same scheme used for revenue. For direct businesses, this is complicated as operations expenses, such as the call center, should be allocated based on the transaction channel, whereas marketing expenses, such as catalog paper, printing, and postage expenses, should be allocated based on the demand generated. For the purpose of P&L reporting, it is simplest to group all of the expenses under “Direct” rather than using multiple allocation schemes. For resource allocation and budgeting however, multiple allocation schemes must be used. Application of Principles
Understanding how marketing influences consumer behavior is very complex. When catalog mailing response was only by mail order or call center, it was much easier to draw correlations. The internet complicates this in two ways: it is harder to draw a firm conclusion about what triggered purchase behavior at a specific time, and there has been so much hype and infatuation surrounding the internet that there is a tendency for management to be biased towards e-marketing as a replacement for more traditional forms. The best solution is to measure and base decisions on the facts. In our experience, best practices are those that optimally leverage the strengths of all the tools in the marketer’s tool chest. We can provide you with best practices recommendations that will help you establish the optimal reporting for your business management needs.CASE STUDY
How many cooperative databases, or even outside lists, should be used is a question of how many unique names are being generated from each source and how those unique names perform compared to breakeven. Do they generate an acceptable response rate? It is important to create separate segments and structure the merge to isolate the unique names from each model as well as the different combinations of multis. If unique names do not perform well, the model or list may need to be dropped from future consideration. In this example, the unique names are tracked from Abacus, NextAction, and I-Behavior. With an index of 100 representing an acceptable response level, the unique names from all three cooperatives performed at an acceptable level in all four seasons. In this case, all three cooperatives should continue to be utilized in the circulation strategy. But what to do with all the multi prospects that were created between the cooperatives and between the co-ops and outside lists? These multis actually become the cornerstone of your prospect contact strategy. By utilizing one merge/purge for a season, we are able to distribute the mailing of these multis across different mail dates. The chart below depicts a seasonal contact strategy with drop three being the strongest mail date of the season.
By running one merge/purge for the season, multis (the strongest names available) can be mailed at the start of the season with drop one even though the unique names are not mailed until drop three. Three time multis can be mailed in three drops and four time multis in all four drops. Not only are all the names paid for utilized, the interaction has, in effect, identified those names that can sustain multiple contacts and still perform at an acceptable level. As an aside, when running one merge/purge for the season, it is important to supplement future drops with hotline buyers—those buyers that have purchased since the last buyer file was pulled. Hotline names from the best outside lists can also be added to later drops along with balance models from a cooperative database. Weaker names identified in the merge can subsequently be optimized and mailed in one of the three later drops. The chart below depicts the results of the strategy outlined above. Again, the index refers to that segment’s results compared to an acceptable response, which is indexed at 100. As can be seen in Spring 1, the first drop of the season, multis performed as high as 2 ½ times base. Even with the fall off of 15-20% in subsequent drops, the multis performed very well. By skipping a drop between the mailing of multis we allow these names to rest and yield a higher performance in the season they are most likely to buy. This approach avoids holding multis over to the next season when results may be lower since these names were specifically selected for the season in which they were rented.
In summary, it is to your advantage to use multiple cooperative databases not only to expand the universe of available unique prospect names but to create an abundance of multis whose higher response justifies frequent contact. This will necessitate the careful segmentation of names within a more complex merge/purge that drives multiple mailings within a season. This approach will also allow you to better manage contacts over a season with your housefile based on segment strength. You will be rewarded with improved response, higher sales, greater potential growth, and lower costs. CIRCULATION TIP First, though, let’s back up and define terms: confidence level is the likelihood (expressed as a percentage) that test results are repeatable, not merely random. If, for instance, a test result produced a confidence level of 95%, that means there is a 95% chance that the observed result can be repeated (i.e. the higher-responding sample will, in an equivalent random test, produce higher results). A 50% confidence level is tantamount to a coin flip—there would only be a 50% chance that one would observe similar results upon repeating a test. Remember, when discussing probability, nothing guarantees precisely repeatable results. We recommend re-testing on confidence levels below 95% and rolling out when they are above 95%. Scenario # 1: Response Rates The following example shows the relative confidence level of two tests with equal sample sizes producing only slightly different response rate differentials.
On the surface, both results appear actionable—one producing a 20% lift over the control, the other an even better 30%. A more careful analysis, though, reveals a much lower confidence level in the test producing the smaller lift in response. Scenario # 2: Sample Sizes The following example shows the relative confidence level of four tests with different sample sizes producing precisely the same results.
Notice how we were able to improve the confidence level from 82% to 90% between test quantities of 20,000 and 30,000, but between 30,000 and 40,000 we were only able to improve the confidence level by 4%. Scenario # 3: Number of Responders The following example shows the relative confidence level of two tests with equal sample sizes and response rate differentials, but an increase in the number of responders.
Even though the lift in response rate was the same (20%), nearly doubling the number of responders brought the confidence level up significantly. In conclusion, be mindful when rolling out your marketing programs based on test results. You may be acting at a lower confidence level than you think.CREATIVE TIP Often, those sending catalogs are to the point where printing more books is not costing them that much per book incrementally. The longer the press runs, the cheaper your catalogs are to produce. And historically, direct mail has come in more expensive than catalogs, when the quantity gets that high. But direct mail doesn’t have to cost that much…and there are factors other than the cost of the mailing that should be part of your decision. So why use direct mail, and how can it work better?
If they’d made me a 10% off offer, the card would never have been used. A 15% off offer? Hmmm…maybe, maybe not. But the free tee? I’m there, in the store, and I’m buying something else while I’m there!
Sounds like a challenge to make direct mail work, eh? But the good news is that direct mail, to both your prospects and your house list, is something that, if done right, will get MORE response than a catalog since you’re hitting them in a new and different way. And with so many really dull direct mail packages in the mailboxes these days, you don’t need a miracle to get a fine response—you just need to do it really well, keep your message clear, and make it exciting. Don’t wait to include direct mail in your annual mailing strategy. It’s one more fresh and new way you can get your customer’s attention and dollars!multichannel TIP Of the multiple channels of customer contact we leverage over the year, “bouncebacks,” or package inserts, often rank high in ROI. This makes sense when we frame this program as remarketing to our most recent buyers. Sweetening the deal for the retailer is the fact that the customer is essentially paying the postage cost of delivering that catalog since shipping & handling is often a zero sum proposition. So why not use this marketing channel to enrich your testing data at a lower incremental cost? Inkjet keycodes on all catalogs allocated to your bounceback program, do an A/B split when fulfilling orders, and then compare the response to the new offer versus your control. If you have a winner, continue testing in the broader marketplace.CLIENT HIGHLIGHT—EARTHBOX What is an EarthBox? It is not just another planter box. The EarthBox is a revolutionary container gardening system that is earth-friendly and is a mere 29 inches long, 13.5 inches wide and 11 inches in height—yet can grow multiple times the yield of a regular planter with half the fertilizer and less than 40% of the water. According to Blake Whisenant, EarthBox inventor, its success lies in its unique approach to gardening. “The fertilizer remains on top of the soil and the water comes from the bottom,” he says. “While this may seem unusual, our scientific research proves that the EarthBox system provides the best possible growing environment for plants, and yet it’s so simple to use.” Acting on the laws of nature, the patented EarthBox system facilitates the movement of nutrients from areas of high concentration to areas of low concentration. When the EarthBox is set up, the fertilizer strip is placed on top of the potting mix—creating an area of high nutrient concentration. At this time, the potting mix around the roots of the growing plant has no fertilizer. When water is added, the moist potting mix slowly conducts the diluted nutrients down the concentration gradient to the plant roots, which absorb optimal amounts of nutrients at any given time. The EarthBox's plastic cover drastically reduces the water evaporation rate and returns condensed water vapor to the potting mix. As the plants draw water from the reservoir below, they consume only what they need to stay healthy. Plants cannot be over-watered or under-watered if the reservoir is kept full. The plastic cover also prevents fertilizer from being diluted or washed away by rain. All well and good, but the proof is in the pudding, right? Last Spring, Frank DiPaolo, General Manager at EarthBox, sent EarthBoxes to the folks at LENSER to try for themselves. “We are always going on about testing so I did a head-to-head test with the EarthBox against a traditional black plastic pot with tomato plants from the same cell pack, good soil, proper fertilizer, and frequently watered,” says Michele Salmon of LENSER. “After just a few weeks, I knew there was no contest. By mid-summer, we had tomatoes, squash, beans, and even edamame, and I was taking bowls full of cherry tomatoes to every summer party and BBQ possible. By November, I finally had to cut the tomato vine down. It had trailed 30 feet down the back of the house and still had tons of cherry tomatoes on it. I love my EarthBoxes.” EarthBoxes are in use all over the world. “We have sold over a million EarthBox gardening systems directly to consumers,” says Frank, “but anything as revolutionary as the EarthBox cannot be confined to the backyard gardener.” Just take a look at their website,www.earthbox.com, click through to The Growing Connection and see a sample of their work around the world. The EarthBox is hard at work in Ghana, Mexico, Nicaragua and even at Google’s home campus where a Growing Connection Garden of 100 EarthBoxes, all planted with vegetables and herbs from different regions of the world, was recently dedicated. It is much noted and quoted that the Earthbox is “making food happen where it couldn’t happen before.” That is the magic and the power of an authentic EarthBox gardening system, and LENSER is proud to have EarthBox as a client since 2003. To learn more about the EarthBox or to order your own, please visit their website at www.earthbox.com.PARTNER SPOTLIGHT—AL BESSIN When Al sold his interest back to his business partners, he intended to get into management consulting on his own. “Thankfully, Al asked to meet with me to give him some advice about building a consulting business and to act as a mentor,” John recalls. “I knew Al’s experience with many large and entrepreneurial companies would serve our clients well, especially with his exceptional operations background.” In the end, both men saw tremendous synergy between their two objectives, and in 2005, Al joined the LENSER team as a partner at the firm. AFFILIATE FOCUS—EXECUTIVE SEARCH INTERNATIONAL This is why many companies turn to Executive Search International, a LENSER affiliate and a very well-regarded boutique firm providing best practice search and recruiting services to the direct marketing industry. Les Gore, founder and managing partner, is a 23-year veteran of the “recruiting wars” and has been dubbed by noted industry guru Don Libey, “The Dean of Direct Marketing Executive Recruiters.” John Lenser concurs. “I am frequently asked for the recommendation of a seasoned recruiter by a client or colleague who is searching to fill key positions in a company. I have always been comfortable sending them to Les Gore. He has conducted several successful searches for companies that I have managed. Not only has he identified candidates with superior qualifications,” says John, “but he has also assured that said candidate would be a good ‘cultural’ fit with my management style.” Recruiters have a distinct advantage in conducting a search. Not only do they maintain extensive databases of highly successful executives, they have the ability to directly contact currently employed individuals. In contrast, those attempting to conduct their own search frequently are referred to the unemployed or those looking to move on. The best candidates may be reluctant to move from their current employment and need to have the new opportunity “sold” to them. This is something that can be more effectively done by a seasoned recruiter. Much of the additional value of the recruiter is their ability to objectively assess the culture of your company and determine that the candidate will be a good fit in this delicate matchmaking process. They also have an obligation to thoroughly investigate the candidate’s credentials and validate their suitability for the position. This nationally recognized recruiting service, Executive Search International, delivers best practice retainer-based search and recruiting services for client organizations ranging from small entrepreneurial businesses to multinational corporations by partnering with clients to provide access to the best leadership talent. Les Gore personally leverages strong, established relationships and combines them with an assertive and tenacious approach to give you the industry leaders, key decision makers, and the best executive talent—and the best people for your organization. As we continue to strengthen our breadth of services, LENSER has identified and carefully screened key services to support its clients, representing the best in their areas of expertise. As part of the LENSER promise, each of these companies will keep its fees competitive and “always go the extra mile” for LENSER clients. We have successfully partnered with Executive Search International to our clients’ direct benefit. To get in touch with Les Gore at ESI or any of our other affiliates, please call Michele Salmon at 415-446-2500 ext. 211 or email her at michele.salmon@lenser.com.NEWS BRIEF
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The first question is: how many cooperative databases should be used? Some of the cooperatives will tell you one, meaning only them. What LENSER has seen is that each of the cooperatives provides valuable unique names. For example, in a recent merge for one of our clients, three different cooperatives were used. As the chart illustrates, 60% of the cooperative names did not overlap with either the other cooperative names or outside list names. While one might assume that as more models and names are used from each cooperative fewer unique names would be produced, the duplication rate actually decreases to as low as 10%. In other words, as the cooperative models have to work harder to find that next qualified prospect, each cooperative is going about this process in a different way and finding different prospects. Thus, it is important to use more than one cooperative database, even before exhausting the prospecting opportunity a single cooperative offers. 
