PRESIDENT'S CORNER FEATURE ARTICLE CASE STUDY CIRCULATION TIP CREATIVE TIP multichannel TIP CLIENT HIGHLIGHT—SELECT SEEDS EMPLOYEE SPOTLIGHT—ANNA-LISA ULBRICH AFFILIATE FOCUS—COLINEAR SYSTEMS INC. RESPONSE SOFTWARE
PRESIDENT'S CORNER As I review the hundreds of catalog companies with whom I have consulted in my career, there is one single factor that more than anything else separates those that have grown to be large, profitable companies versus those that have struggled, remained small, or eventually failed. It is not skilled management, astute marketing, brilliant creative, or even great product. While one must certainly do well in all these areas, the single factor is margin! Margin forgives all. Last month, we were approached by two entrepreneurs who asked our help in launching their home decor catalogs. Both already had established a viable web presence and realized that with their highly visual, non-branded product, they needed a catalog to drive their business. The first group had a broad assortment of product that was sourced at the High Point Market furniture show and had a margin of 50%. With a minimum in-the-mail cost per prospect catalog of 72 cents, I calculated that they would require over $1.50 in sales from each catalog to simply break even. The second group was a small designer, manufacturer, and wholesaler of a more narrow line of high-end furnishings. With a 25% cost of goods when selling retail, I calculated that they would require sales per catalog of 95 cents to break even. While the latter group will have its challenges developing new product, I was certainly more optimistic for both their short-term and long-term success due to the margins they were working with. When speaking with any direct marketer, I always discuss the 70% rule. It is a simple rule that most do not think about. The rule is that a mailer’s cost of goods added to marketing expense cannot exceed 70% of each sales dollar. Of the remaining 30%, 10% is for fulfillment, 10% is for administration, and, ideally, 10% is profit. So, if one’s cost of goods is 50%, marketing cost can be no more than 20%. Converting this to sales per book, if the catalog costs 65 cents in the mail, sales per catalog must average $3.25 to have a viable company. However, if cost of goods is 25%, allowing for a 45% marketing cost, average sales per catalog need be only $1.44. I have serious doubts about the long-term success of the home décor merchant who must on average achieve $3.25 in sales per catalog; conversely, the merchant who needs only $1.44 in sales has a higher probability of growing to be a large, profitable company. As we face increasing postage costs and other expenses, it is tempting to cut circulation and whittle away at other expenses. However, the most promising area that any direct marketer should work on is cost of goods. Step back and take a hard look at all opportunities that might improve margin. Here are my top five recommendations:
FEATURE ARTICLE We have all discussed at great length the negative effects of the recent postal increases. Now we have to get over it and move forward with adjusting our mailings to the new cost structure. By way of reassurance, keep in mind that postage increases have occurred regularly over the last two decades and despite this "mother of all rate cases,” our industry has always managed to absorb the increase and regain profitability. One reason this occurs is that your competitors also face the same cost structure and adjust their circulation just like you do to a level they can live with. And then the industry moves forward after a period of adjustment, much as it has in the past. So the important thing is to make your adjustments rationally and quickly to retain sales momentum or even gain share from your competitors if you act smarter and faster than they do. However, before you begin adjusting your mail volume, we do recommend that you thoroughly clean your files and update using the best address hygiene products and practices available. This step alone will reduce your postage cost and increase your response—and could be one of your most important long-term strategies for offsetting postal increases. Now, here are my three suggestions in areas that should prove productive: 1) Adjust mailing volume by reducing depth. This is really Circulation 101, but it is the first place to start. In general, there is usually little harm in judiciously decreasing mailing depth; you are usually, at best, trading dollars with the lowest ranked segments in your mail plan. My recommendation is to examine each mailing this summer and fall and cut segments by raising the bar. For a typical mailing, here is a hypothetical example of how this would work (I’m making up these generic numbers so please substitute your own real information): So the end effect is that $44,000 in profits is gained and $64,000 in sales is lost. This surprisingly “easy to take” result is because the reduction in sales is compensated by proportionately larger reductions in marketing costs. When cutting from the bottom of a segmentation ranking, where the lowest segments are below water, sales go down and profits go up. The net effect of this change if multiplied over eight books in a year’s time is that sales would go down by $512,000 and profits should go up by $96,000. But not all the listed sales actually disappear because they are partly offset by the lack of cannibalization of books that the same individuals would have received. This factor would tend to decrease the sales loss experienced from this change when considered as an isolated event and would further increase the profits. Here are the results from such a change summarized:
I realize that this sounds like “something for nothing” or a perpetual motion machine, but we do have examples of how this has worked with several LENSER clients. One mitigating effect is that the negatives in the reduced new-to-file (NTF) counts do not come into play for at least a year and by then they will be offset by recovering NTF generation due to less competition from other catalogs’ prospecting efforts. Most every catalog company will execute this tactic as a matter of course, but I thought it worthwhile to explicitly mention it as the first step. 2) Systematically decrease frequency to weaker buyers. Many companies we see are treating each mailing as an individual event and not deliberately resting weaker segments between contacts. If you do so, it will decrease marketing costs and increase profits at essentially no cost in sales. I have an effective formula for doing this that was originally developed by a long-term client. It is an elegant concept, easy to apply, and effective in its result. Take a look at the sequence of mailings for a set of segments of a given strength level. If the total segment’s seasonal sales contribution divided by the number of contacts is less than the cost of an additional catalog, then remove one contact from the sequence for that segment. You should also add contacts to high performing segments using this same concept. This frequency adjustment method is easiest to apply to a sequence of mailings which are of similar cost such as often appears in the Fall/Holiday mail plans of gift, home décor, and apparel companies. Here’s how it would work. Assume an in-the-mail cost of $.80/book and break-even of $2.00 with a 30% marketing contribution (sales minus marginal cost per catalog, gross margin, and variable operating cost):
Assuming your data supports it, this method is fairly simple to apply and quite effective in extracting the maximum profit from the fewest catalogs. It has the effect of lowering the marketing cost even further when layered over suggestion #1 above. 3) Begin to implement C-RFM to suppress keyword-originated buyers. The C in C-RFM stands for channel of origin. With internet so prevalent now, Channel has to be added to the Recency, Frequency, Monetary trinity. After examining the results of many LENSER clients, it has become clear that most search-originated internet customers are far weaker when mailed catalogs than are buyers whose first purchase was generated from a mailed catalog (and placed either via the phone or the web). Most companies now have enough internet-originated buyers that suppressing some of the ones known to have come from sponsored keywords and natural search will likely not hurt sales much—but might save significant mailing cost. These “drive by” purchasers typically have little loyalty. Those who have made a second purchase after getting a catalog are probably very similar to direct mail buyers, and they will not be suppressed from mailing. To implement, look at your 13-24 month keyword single buyers and see if my supposition is correct. There is probably a dollar threshold where this applies—perhaps less than $50? If the current database will not support this examination, then I guess you have yet another reason why you need to improve this capability. You might be able to evaluate this on an upcoming matchback at your service bureau. If this can be done, do so and look at the results. If you cannot extract this data, but do know which buyers are keyword-originated, I suggest you assume that they are 50% weaker in response to a catalog mailing than direct mail-driven customers. Keep in mind that the internet-originating buyers thus suppressed should still be used as a hitting file in the merge/purge. You do not lose all sales from these customers since by definition as internet buyers, they should be on your email file, thereby assuring they get those promotions—and you can include them in cooperative database optimization models. SUMMARY: These tactics, backing off the depth of mailing, controlling contact frequency, and isolating and suppressing lower responding internet-only names, should accomplish your objective in effectively reducing mailing costs this year. In many cases this will offset or even exceed the entire cost of the recent postage increase. I am acutely aware that it is easier for me to outline these practices than it is for you to actually accomplish them, but the payback from such diligent and systematic work will amply reward the effort. Most of the effect of these changes will be to lower costs and increase profits. Number 2 above can potentially increase sales, but maybe not enough to replace the sales lost from the cuts in circulation. So while these cost saving practices are being implemented, the merchandising and marketing folks had better prepare some tasty new offerings for the buyers. Otherwise the overall sales will decrease and fixed costs will reduce profits. But improving the offers is beyond the scope of the subject of this article on catalog cost savings and is a regular ongoing function of every healthy catalog/internet business.CASE STUDY The benefits of bringing hotlines (i.e., most recent buyers—those that have come onto the file since the previous merge) into a second drop cannot be overstated. Though intuitively you might say that they’ve just ordered and therefore are not likely to order again so soon after, for the vast majority of direct businesses recency is a huge predictor of propensity to buy. Hit them with another catalog when they’re ecstatic over the quality of your product and the professionalism of your customer service and delivery! The charts below show the circulation and results for a gardening mailer that had been mailing only once a season. They added a remail for the first time in 2004, at LENSER’s urging. The additional drop, six weeks later, consisted of hotlines, best buyers from drop 1, and prospect multis (which you have paid for, so you might as well mail them again in the same season before their recency response degrades). As you can see from the results, adding a second drop (and in subsequent years, a third drop) took nothing away from drop 1’s sales—in fact, the reverse is true. Not only did the company gain revenue from drop 2, but drop 1’s revenue increased, as well, probably because the second catalog served as a reminder to recipients of the first book.
The chart below shows that the revenue generated by the additional drops not only covered their cost in the mail, but contributed significant sales above and beyond. The investment paid off in this mailer’s case.
We advise mailers to change covers for the remail since you will be contacting many of your customers a second time (and maybe a third time), and you want them to pause when they get to your second catalog in the mailbox and not just assume they’ve seen it before. Remails should generally be done in the same season as drop 1, and you should test a remail in your core season. Your prospects were chosen specifically for that catalog and that time of year, so make sure you use up those prospect multis before another season comes along. Typically you would remail four to six weeks after your first in-home to ensure you don’t cannibalize sales from drop 1. Remember that some percentage of these sales may have come organically, without the catalog, but certainly it would have been a small percentage, especially for those companies not highly invested in internet marketing. As always, be sure and test a small secondary mailing before rolling out. We think you’ll be pleased with the results!CIRCULATION TIP The old adage, “birds of a feather flock together,” rings true, which is what allows zip models to be so successful. Through the research conducted we realized that the 80/20 rule truly does apply (though it really was 80/30 in our case)—80% of the leads generated were coming from 30% of the zip codes within the territory that was created. By using a model to target the top 30% of zip codes, we can easily and dramatically improve the productivity of our lead generation. Zip models come in a variety of formats, some simple and easy to produce and others complex and not so easy to produce. A zip model can be as simple as looking at how many customers you have in any given zip code and then comparing that to the number of households within that zip code to create a penetration ratio. The higher the penetration, the better that zip code is for your prospecting. This type of zip model can easily be built at LENSER. Then there are more complex zip models that can be created which will also take into account other variables such as promotion history, demographics, psychographics, etc. These models generally need to be created by an external vendor due to the complexity and availability of data. If you are currently prospecting and not using some form of a zip model, it’s almost guaranteed that you are wasting valuable marketing dollars by not focusing your efforts on the people who are most likely to respond. And remember, LENSER can build zip models to help you mail more efficiently.CREATIVE TIP Yet nobody’s finding you, and when they do, the visits are light and non-productive. What could be wrong? You may be suffering from the “My creative’s all wrong for my search engines” blues. And you’re not alone. Pretty vs. effective: must you sacrifice one for the other? Website creative priorities need to take advantage of the way of the web world today. Here are some quick tips to help: Content, content and more content. The more useful information you write, in terms of both your main pages and your added-value pages, the more likely you’ll have words that match your prospect’s search jargon. And the more likely your site will show up, and higher. Make that QUALITY content. Copy on your site should not be written by a programmer, designer, or assistant—it should be written by a smart and direct marketing-oriented copywriter—and by someone who knows how to examine your keywords and develop the content to work with them. This may be the first and only contact you have with a potential customer. In other words, it needs to be great selling copy as well as quality content. Make sure your most important keywords are built into the pages in the right places AND in the correct format. Keep it simple. Images are fine, but make sure there are live, carefully-chosen words on every page. Things like flash intros chase a potential customer away so fast it will make your head spin. Wait until your customer is there, and take that opportunity to use language to woo them. Then, offer them the option of viewing streaming video if you want to impress them. But never make them have to watch it if they don’t want to. Use that keyword analysis to determine not only the words in your navigation, but the order of the nav information. Proofread the site meticulously. This is so rare. I would love a dollar for every typo on the web today. Typos and poor grammar are likely to turn off serious visitors. Additionally, there is less of a chance that you’ll have an all-important keyword misspelled. To keep the customer with you, make it “sticky” design. Write the site so your visitor can get anywhere they need to go in two clicks or less. This can be a challenge, so it means that you need to try it yourself and test it with others. Every click increases the chance that you’ll lose them. You control the action best when you use all your media wisely. It’s foolhardy to believe that most of your visitors will find you via a search engine. This is why it’s essential that you work hard to send out printed catalogs, direct mail cards or packs, and offer-driven emails to pull customers into your website. In summary, to make your site the most attractive it can be, your site should meet these criteria: Write lots and lots of relevant information on your site. Does this cost more? Probably. Will it pay for itself? Absolutely. Control your art director and designer so that they understand your priorities: lots of live and legible copy. Don’t let them do things that chase customers away, like tiny type, light-colored type, or reversed-out type. Avoid any and all special effects. Aggressively bring customers directly into your site using the best databases in the world—the mailing lists. Your well-maintained in-house email list will do better than most direct-mail generated mailing lists. Use printed catalogs, direct mail, postcards, et al developed by experts who know how to make those media work. Your web designer is most likely not that person. Use appropriate offers to draw them to your site, to register to get a gift, and then, of course, to shop.multichannel TIP The biggest concern is the accelerated decay of business contact data, in comparison to its residential equivalent. B-to-B marketers report that up to 70% of their contact information changes in any given year—not only do people switch companies, but they also accept new titles within an organization. Another concern relates to the pass-along effect—individuals within companies are a lot more likely to share marketing materials than those within residential households. When the time comes to run a response matchback, how have traditional B-to-B marketers solved the problem? They conduct matchbacks at multiple levels. For those of you operating in both the B-to-C and B-to-B space (hybrids), take note: if you are running your matchbacks only at the individual level, you may be under-estimating your results. LENSER suggests inquiring with those responsible for running your matchbacks (your service bureau, your ChannelView representative, the programmer on staff who derived the matching logic, whichever the case may be) as to what level you are currently running them at. If, historically, you have only run individual level matchbacks, we strongly encourage you to run another one at the site/building/company level, and compare the results side-by-side. The results, for certain, will be enlightening.CLIENT HIGHLIGHT—SELECT SEEDS As Marilyn notes, “We try to keep heirloom varieties in commerce and reintroduce "new" old-fashioned flowers to keep their history alive and well. We delight in finding rare floral gems for gardens from small seed companies in Europe as well as California.” “I feel that the act of nurturing plants instills in us a deep sense of the underlying goodness of life and opens our hearts to embrace it in all its complexity,” say Marilyn. “My goal with Select Seeds is to make certain every generation can enjoy the blossoms that were grown yesterday and long before that.” It’s with this passion that Marilyn wanted to get her message out to a larger audience, and in 2003, Marilyn hired LENSER to take her message to the masses. Says Marilyn, “I met John Lenser at the Mailorder Gardening Association’s convention, I listened to what he had to say, and decided to give LENSER a try. Certainly the fact that another niche gardening business was already in the stable had a part in it, as well as the fact that I needed professional help to grow the business. Four years later and we’re still growing.” Today, Select Seeds is an incorporated company of gardeners who are dedicated to helping other gardeners grow successful gardens. In this regard, they hand-pack most of their seeds and grow their plants in the glass greenhouses of Stafford Conservatories, a local greenhouse range that has been in business since Victorian times, as well as in their own greenhouse properties. As for the future, Marilyn, along with other responsible gardeners, will be discussing the issue of genetically engineered seeds. She says, “Agriculture, whether it has a direct or indirect consequence, must be a safe and genetically stable source for future generations. The mechanical transfer of genetic material outside of natural reproductive methods and between genera, families, or kingdoms, poses biological risks as well as economic, political, and cultural threats. We will continue to support agricultural progress that leads to healthier soils, genetically diverse agricultural ecosystems, and ultimately people and communities." To learn more about Select Seeds or to order a few heirloom treasures for your garden, visit their website at www.selectseeds.com and prepare to be dazzled!EMPLOYEE SPOTLIGHT—ANNA-LISA ULBRICH In the short period of time that Anna-Lisa has been with LENSER, she has played a significant role in LENSER’s continued growth. According to Michelle Houston, Vice President of Circulation and Client Services, “Her intelligence and inquisitive nature is evident everyday. And even though she has been with us less than two years, she’s a pro and one of the finest circulation managers at LENSER.” Because of this, Anna-Lisa works with diverse and complex companies such as her former employer, Title Nine, as well as Smart Scrubs, Gooseberry Patch, and Highlights, to name a few. This is just fine with Anna-Lisa as she says, “I was looking forward to the challenge of handling multiple clients. I learn a lot from each of them and they all keep me fully engaged and on my toes.” Plus she says that she likes the “perks” of traveling to her client’s offices. “Seeing the full scope of my clients’ operations gives me a good feel for their business.” As everyone at LENSER knows, Anna-Lisa is a die-hard Oakland Athletics’ baseball fan. She’s a season ticket-holder and routinely heads to Arizona during spring training to get up-close and personal with her team. One of her goals is to take an RV road trip tour of all the Major League ballparks in the country. When the Oakland A’s are not in town, Anna-Lisa enjoys cooking, knitting, quilting, and hitting the horse races with other LENSER aficionados. To learn more about Anna-Lisa, please visit her bio.AFFILIATE FOCUS—COLINEAR SYSTEMS, INC. RESPONSE SOFTWARE When asked what sets CoLinear’s Response direct commerce software system apart from the competition, Lloyd Merriam, Founder and CEO replied, “We provide a solid application that the user can tailor, or have us tailor, to their specific needs without having to incur expensive custom programming.” Why? “Because all of the variable logic resides outside the actual application.” An example of such innovations is the ability to customize your order entry screen to take full advantage of upselling, cross-selling, and identifying your “gold” customers when they call in. This allows your CSRs to seem very knowledgeable with all the right scripts and prompts and enables them to have a better interaction with the customer. Other innovations include telephony integration which “pops” records to the screen when calls are routed to the agents, real-time CASS addressing to verify every mailing address as it’s entered into the system from both phone orders and from the web, a media matchback function that can automatically assign the proper media/source code to every order, and even carrier rate shopping (at the shipping scale) to save on shipping charges. “In fact,” says Lloyd, “Response can even handle any conceivable shipping configuration formula from both the consumer’s perspective and on the back-end fulfillment. And one of the newer features most appreciated by our web commerce companies is the Response Connectivity Kit that allows hanging almost any shopping cart on the system for full integration.” Back in 1992 when Geoff Wolf, now a LENSER Partner, was founding Back In The Saddle, he chose CoLinear’s Response software. “CoLinear offered the best value at the time, and you know what? They still do! We used Response successfully for many years and I have many clients who use it most successfully right now. It is very accessible with an absolutely excellent and experienced user’s group. That’s an unbelievable resource for a company.” CoLinear Systems, Inc. has 32 clients that have been with them for more than 10 years, including one that dates back to 1986. Now that is customer satisfaction in action! 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 CoLinear Systems, Inc. to our clients’ direct benefit. To get in touch with Lloyd Merriam at CoLinear 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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