Mining Data

A friend visiting from Japan showed me how the creators of Doraemon have a number of free apps which when arranged on the iPhone create a full image. Interesting to think of such strategies to drive app downloading.

Dear Catalog CEOs:

I've discussed the four themes that are captivating customers, pulling customers away from traditional direct marketing. The four themes are "Algorithms", "Social", "Mobile", and "Content".

Last week, the Dow Jones Average dropped more than a thousand points, about ten percent, in about fifteen minutes, then rebounded just about as fast. Rumors abound, some think that computer algorithms ran the average down and then brought it back up just as fast --- it's hard to believe that human beings could react that fast, both positively and negatively.

Makes you feel real comfortable trusting your retirement to a 401k account that can jump up or down 10% in a half hour for no good reason, doesn't it?

Algorithms run your life, too ... especially the business that you manage.

Algorithms decide who the new customers are that you acquire offline. You pay your co-op a hundred thousand dollars to get access to a million names, names chosen for you by a computer algorithm.

Algorithms decide who the new customers are that you acquire online. Google largely decides who sees your brand via search, you only influence Google by playing by their organic search rules, or by paying cash within paid search.

When your business isn't performing to expectations, your first instinct is to think "merchandise".

Maybe your first instinct should change, when business isn't meeting expectations. Maybe "algorithms" are part of the problem.

When you have a 40% annual retention rate, as is the case with my average client, it means you have to find a ton of new customers. Within three or four years, you'll find that seventy percent of your twelve month file was populated by algorithms.

It means that algorithms are ultimately determining seventy percent of your success.

It means that, as CEO, you had better be all over your marketing team, because your marketing team is the only interface you have with the algorithms. Your marketing team must be able to provide customer reporting that proves that customers sourced from algorithms foster real relationships with your business. The reporting must demonstrate that these customers have long-term value. The reporting must demonstrate that these customers have merchandise preferences that are directionally aligned with the vision of your merchandising team.

What you can't let happen to your business is what happened on Thursday, when the Dow imploded and then inexplicably rebounded, and nobody really knows why.

My first meeting with Lauren Fetzer, the CEO of Fetzers footwear, is at Southside Park, a popular local park where tourists watch the orca whales swim by. Ms. Fetzer is "as advertised", wearing a beanie cap and white earbuds tethered to an iPod Touch. Ms. Fetzer sees me approaching her, pulls the earbuds from her ears, and greets me.

Kevin: "What are you listening to? I hear you like listening to music from the 1990s, is that correct?"

Lauren: "Absolutely, the 90s rock! I just finished listening to Montel and 'This Is How We Do It' ... I can't shake the image of Ellen parading through the audience, dancing to this song on her show.

Kevin: "So, what do you want to talk about today? And by they way, it's cold here, the wind is absolutely whipping around, isn't it?"

Lauren: "You get used to it. It's late spring across most of the country. But here on Madrona Island, summer doesn't really kick-in until about July 10. Anyway, each time we meet, we're going to talk about any of a number of business issues. Like growth.

Kevin: "Growth?"

Lauren: "Yes, like how the heck are we going to grow our business in the future? Ok, here's the deal as I see it. Growing a business via classic e-commerce ... that's a door that is closing."

Kevin: "It is?"

Lauren: "Absolutely. Every one of us that runs a mid-sized business knows that the big boys are going to dominate. I can't compete with Zappos in a traditional sense. Somebody buys two pair of shoes from them and they pay $6 for shipping but think they get free shipping because the price of shipping is embedded in the item. My customer buys two pair of shoes from me at pays $5 shipping and grumbles to our customer service team about how Zappos gives them free shipping. And Zappos has the scale to deliver the shoes to you in twenty-four hours, I can't ever accomplish that. All of us mid-sized brands have an online competitor that can clobber us in this manner."

Kevin: "Sure."

Lauren: "But that's what makes this fun, Kevin. Every problem has a solution. And just because Zappos kills us online doesn't mean we can't beat them in some other way."

Kevin: "Do you really think it is the perception of free shipping?"

Lauren: "I think it is the perception of free shipping and the fact they get you shoes in a day and that they are perceived to have great customer service. But you know what? They sell a commodity product. And at some point, that means you are at the mercy of the brands you sell. I learned early in my career to control distribution of my own products. I got tired of dealing with the big boys and their rules. So now, we have fat margins, 65%, and we've earned those margins."

Kevin: "Sixty-five percent?"

Lauren: "Absolutely. That's the way you make money, Kevin. We retain 55% of our customers, year-over-year ..."

Kevin: "That's a good retention rate in footwear."

Lauren: "... and they love us because we give them something they can't get anywhere else. It seems like you have three choices online. You can sell high-end brands, you can sell merchandise at the lowest price, or you can control your own destiny and control your own margins and then manage the living daylights out of expenses."

Kevin: "And that's why you are always somewhere between 8% and 15% in annual pre-tax profit?"

Lauren: "Right. For all of the kudos and back-slapping that the folks have earned at Zappos, they were only at 3% or 4% pre-tax profit prior to being purchased by Amazon. Before the recession hit, we generated four times as much profit per dollar sold that Zappos generated. Granted, we're not World Wrestling Entertainment ... can you believe they generated 24% profit/EBITDA last quarter?"

Kevin: "And you don't have any debt, either."

Lauren: "That's what a healthy gross margin does for you. It allows you to print money, and having cash means not having to borrow. Once you start borrowing, you pay interest, and interest kills you. I'd rather be under a hundred million in sales and have cash in the bank than to be a half-billion in sales and owe my soul to an investment bank."

Kevin: "It sure helped you ride out the recession."

Lauren: "Two things about the recession. Yes, by not having debt, we weren't crippled by a change in customer spending habits. More important, we got to spend time thinking about how to please a customer by producing great products. Others had to spend time thinking about how to simply survive. And I don't really buy into this concept of a recession. When your sales plummet during a recession, it simply means that, as an Executive, you failed to anticipate how customer behavior would change if economic conditions changed. Honestly. You failed as an Executive. It is your job to anticipate changes in the economy, and to provide solutions for customers when the economy changes."

Kevin: "Barring the spread of debt worries in Greece and Spain and Portugal and anywhere else, the economy appears to be changing again."

Lauren: "Exactly. So it is my job to think about how this business grows in 2012 and 2013 and 2014. And I don't think growth is coming from e-commerce anymore. E-commerce has cannibalized the majority of the sales it can cannibalize. Going forward, sales are going to be won or lost by stealing market share from competitors. And even more interesting, mobile devices and tablet devices are going to form a fundamentally new channel. Most of my e-commerce peers can't see that, yet. They see mobile and tablet devices as being complementary to e-commerce. They're not, as far as I am concerned. They are going to pull demand away from e-commerce, to a new channel that we cannot yet envision."

Kevin: "It's freezing out here."

Lauren: "And that channel, which we cannot yet envision, that's where I want to be. I think what we'll see in three years is no different than what we saw back in 2001 or 2002 or 2003, when classic direct marketing was being cannibalized to death by e-commerce and nobody in classic direct marketing could see it yet. We have a generation of e-commerce experts who don't see the storm on the horizon. They're busy trying to game their AdWords Quality Score, or they are trying to be friends with a customer on Facebook, or they are tweeting about some glorious 10% off promotion. It's all tactics for most of my peers. We get paid to be strategic."

Kevin: "So how do you grow when you can't yet see what the future is like?"

Lauren: "You invent the future, Kevin. You test everything. You hire different people for different purposes. Half of my Executive team is asked to manage the business, it is their job to extract as much profit as possible from the existing business. The other half of my Executive team works with me on charting a course to the future. That's how we are going to work together, Kevin. You're going to give me the data I need to get to my vision of the future."

Kevin: "And what is your vision of the future?"

Lauren: "That's for another day, Kevin. Look at the boats up to the north. Those boats see whales. Look at the seaplane hovering above the boats, the pilot sees whales. That's the blessing and the curse of living on Madrona Island. You get to see the orca whales go by all the time. The blessing is that man-made technology tips us off as to when the whales are coming. The curse is that the whales are always being peppered by man-made technology."

Kevin: "Sort of like e-commerce, right? Man-made technology allows us to see when customers are searching for hiking boots, but the curse is that, as a customer, you are always being peppered by man-made technology."

Lauren: "Interesting. Now let's stop talking about business, and let's wait for the whales to go buy."

Kevin: "I'm still freezing."

You overwhelmingly supported Gliebers Dresses, a story about a catalog brand struggling to remain relevant in the internet era.

So why don't you come along for another ride? This summer, we're going to talk about another business, an online/retail brand named "Fetzer's Footwear" (note ... this story, the characters, and the location where the story takes place are a work of fiction).

Fetzer's Footwear is led by Lauren Fetzer, the 39 year old daughter of outdoor enthusiast and entrepreneur Lou Fetzer, who founded Fetzers Footwear as a lone shoe store in downtown Seattle in 1980. By 1995, Mr. Fetzer grow the chain to seven stores across Pierce, King, and Snohomish Counties in Western Washington. His unexpected passing from Pancreatic Cancer in December 1995 could have left the brand in disarray. Fortunately for all, his will clearly stated that the brand was to be run by his lone daughter, Lauren.

Lauren never told anybody whether she wanted to run the business, or felt it was an obligation. She assumed the role of CEO in January 1996 and never looked back. Lauren was instrumental in making Fetzer's Footwear an early multichannel force. By 2005, online sales grew to $55,000,000, easily outpacing respectable retail sales of about $11,000,000. Fetzer's Footwear was a true online force to be reckoned with.

And then along came Zappos.

By late 2007, online sales had declined to $50,000,000. Zappos had clearly cannibalized the online business. Ms. Fetzer faced considerable pressure from the local press, who blasted her for an inability to compete with Nordstrom in retail and Zappos online.

It certainly didn't help that the economy blew up in late 2007. But Ms. Fetzer, with a BS Degree in Accounting from the University of Washington, never went into debt, and never grew the business faster than cash flow allowed. Her staff marvel at her ability to crunch numbers in a spreadsheet. Her staff were especially thankful Lauren was able to lead her team through the Great Recession without a single layoff or store closing. In fact, through 2009, Fetzer's Footwear actually observed sales growth in both the retail and online channels. Through April 2010, Fetzer's Footwear is a $12,000,000 retail and $52,000,000 online business that operates at an 8% pre-tax profit of about $5,000,000. Ms. Fetzer keeps 15% of profit for her annual salary, and plows the remaining 85% of profit back into the business. She has maintained this structure since taking the company over in 1996, the same structure her Father used.

The pundits are mystified by the fact that Ms. Fetzer can grow a business through the teeth of the economic downturn. We'll explore how she accomplishes consistent and outstanding performance throughout the series.

As mentioned earlier, Lauren Fetzer is thirty-nine years old. She never married. Her co-workers understand that she is "married to the business". Lauren is exceptionally bright, talented, articulate, and easy to get along with. She is an avid outdoor enthusiast, and actively wears her own merchandise. Some thought she went too far by moving the corporate headquarters to the tiny village of Coho Bay on Madrona Island (a rural island in the Salish Sea, northwest of Seattle) in 1999, but Lauren wanted her employees to "live the brand". Secretly, Lauren wanted to live in a place where she could watch the Orca whale pods swim by each day! Most employees live in Seattle, and commute via ferry to work each day.

Lauren Fetzer loves 90s music, she carries her iPod touch with her everywhere she goes, her earbuds and a beanie cap are her signature. You would be equally likely to see her wearing her earbuds in her office, while putting a crab pot in the ocean, or when enjoying an amber beer at Dale's Pub.

We will spend the next several months analyzing business issues associated with an online brand that is moving into mobile, social, and content generation, a brand that also has synergy issues with retail stores.

Let's assume that you have your mobile marketing strategy in place. Maybe you built an app, and are taking live, actual orders. You are ready to get started.

There are plenty of good sources for measuring the basics of mobile marketing, so we aren't going to focus on basic metrics readily available in your web analytics application.

The very first metric worth calculating is new customers.

You already calculate simple metrics for your other channels.

• You know that 42% of all purchasers in April came were first time buyers.
• You know that 47% of offline/catalog purchasers in April were first time buyers.
• You know that 50% of branded paid search purchasers in April were first time buyers.
• You know that 61% of non-branded paid search purchasers in April were first time buyers.
• You know that 38% of organic search purchasers in April were first time buyers.
• You know that 19% of e-mail purchasers in April were first time buyers.
• You know that 40% of affiliate purchasers in April were first time buyers.

You know those things, right?

So the very first thing you do with any customer purchasing from a mobile app (or social media for that manner) is you identify how many of the customers are new, and how many are existing.

If, by comparing the numbers above, you find that 11% of your app buyers are new buyers, well, then there's going to be some fun analysis, right? We are going to have to determine whether the buyers would have purchased anyway, or if the app captured demand that would not have happened otherwise.

If, by comparing the numbers above, you find that 67% of your app buyers are new buyers, well, then you have something magical happening in the early stages of the channel.

Start simple. And communicate simple facts to your Executive Team. Stay away from making this stuff more complex than it has to be ... because as we work through this series, things are going to become more complex, and the more complex things become, the less people trust you!

Many of you are now peppering me with questions about mobile marketing.

No, not questions about whether it works or not, or how to create an app. Instead, you are asking whether any demand attributed to a mobile app is "incremental".

The concept of "incrementality" is an old one. Back in the early 1990s, catalogers raced to maximize demand by mailing as many catalogs as possible. The goal, of course, was to find the number of catalogs that generated the most incremental profit. Some catalogs generated no incremental demand, if you didn't mail the catalog, the customer spent just as much.

An entire generation of direct marketers, now age 40-55, earned their stripes in this area of expertise. I count myself in this camp. This camp thinks very differently than other generations of direct marketers.

The online generation, folks who earned their stripes between 1995 and 2005, do not think in terms of incrementality. These folks never had to think in these terms, because their craft cannibalized sales from existing channels. They fought the "catalog generation", the folks who were being cannibalized, the folks who spent way too much time measuring the incremental value of the internet.

The online generation is about to care, to really care, about incrementality.

Tablet devices (iPad) will spawn micro-sites that are directionally linked to an e-commerce website, but are technically different ... just like the 18th catalog offering targeted merchandise was fundamentally different from the core catalogs mailed by a brand in 1992.

Mobile devices change purchase patterns. You walk into a Talbots store to buy a dress, but they only offer core sizes ... so you punch up your Talbots app to buy the extended size. This behavior makes you fundamentally different than the average customer, for at least two reasons.

1. You are a technology shopper, vs. the non-app shopper.
2. You buy extended sizes not available in stores, making you different than the core size shopper.

Is this purchase incremental? Maybe. Are future behaviors, now changed because of this shift from a store purchase to an app purchase, worth more? Maybe. Will the customer visit the e-commerce website, given the app purchase? Maybe.

None of these questions are answered by allocation models. They can be answered via Online Marketing Simulations and Multichannel Forensics.

We are going to spend time in May talking about the incremental value of a mobile channel. It seems that this is worth discussing, given your feedback. And almost nobody addresses the topic, so it is worth considering.

Dear Catalog CEOs:

Last week, I presented an idea to an Executive. I gave the Executive three options.

• Option #1 = Run a $100,000,000 catalog business, and generate $3,000,000 of pre-tax profit in 2010.
• Option #2 = Cut catalog circulation in half, run a $90,000,000 business, and generate $5,500,000.
  
• Option #3 = Drop the catalog, run a $60,000,000 online business, and generate $5,000,000 pre-tax profit in 2010.
  

The Executive chose Option #1.

I asked why the Executive chose the less profitable option. Here is his response:

• Shrinking the business would require the loss of numerous jobs.
• Shrinking the business would require a significant restructuring process.
  
• Shrinking the business would cause a loss of market share, and you never want to lose market share.
• The catalog has an intangible brand value that cannot be measured via profit dollars.

This Executive looked at me, and said, "if you endorse option #2 or option #3, you are crazy".

What do you think? If an individual offers an unpopular idea, is the individual crazy? Is it worth it to pay a $2,000,000 profit tax, per year, in order to prevent the loss of jobs, maintain market share, and perpetuate intangible brand value that cannot easily be measured? Discuss your thoughts in the comments, please!