Segmenting: It's Time to Walk the Walk
The top 100 catalogers spend roughly $5 billion in marketing costs and only $200 million results in a sale. About $4.8 billion is wasted! Reducing this waste represents the biggest opportunity for catalogers to improve their competitive position in the marketplace and to increase their profit. It is time to stop talking and to do something about it.
The picture is not pretty. Competitive pressures are increasing. The retail goliaths that compete on price continue to expand and steal market share from all players. The mail-order buyer universe is not expanding as it once was. It is becoming increasinly difficult to acquire new customers in a cost-effective way. And the cost side of the equation is not very rosy, either. Catalogers are bracing for a series of postal rate increases of a magnitude we have not seen since the late 1980s. Paper prices have been under control, but most do not expect the paper market to be so fair in the few years.
The opportunity. The first and easiest opportunity to change the economic model for catalogers is in customer file marketing. Fewer than 25 percent of new buyers will become highly profitable customers, and more than half will never buy again. Yet all new customers get run through the same kind of contact strategy and marketing program in the first 18 to 24 months on the file. The numbers change slightly, but the same economic equation is true of two-time and even three-time buyers. It takes catalogers too long to weed out the good customers from the bad ones. Scoring models and recency, frequency, monetary value systems rely on sending expensive catalogs as a tool to predict who will be a good buyer and who will not. We think any buyer is a good buyer, but the reality is that there are some customers you want and others you do not.
The first step is recognizing that all customers are not created equal. The big opportunity is at the opposite ends of the spectrum: the very best group and the large group of people who will never become great customers. All catalogers spend too much of their marketing budget on low-value customers, and they do not invest enough in high-value and high-potential customers. There are techniques and approaches to change this.
The approach. First recognize and commit to the opportunity. It is about strategy; good marketing and business strategy. Recognize the opportunity and commit the organization to seizing it. Like any other business success, it is about strategy and execution. Set the strategy and see that the organization can execute it.
To move quickly, you most likely will need to bring in experts. You probably do not have the expertise inhouse, or if you do, they are unable to focus enough on this kind of opportunity. If you have the resources inhouse, free them up to get moving quickly. The experts can help you set the strategy and start reaping the benefits as quickly as possible.
Over time, it is critical that you build the culture and capabilities within your organization to continue progress and to move to the next level. The effort does not stop with the first initiatives. It is only the beginning.
Most marketing departments are used to get the mail out and are seen as an expense line, not as an opportunity to change the business. A key part of the strategy is to become direct marketers, not direct mailers. You have to think about changing the role of the marketing department, and you probably will need to commit resources to do this. The good news is that if you implement some of the latest techniques today, you can pay for this investment through immediate cost savings and not the promise of future savings.
You will need better marketing information systems, but do not start there. It is not about the system. It is about the marketing programs that rely on the system. There are many documented failures of sophisticated customer relationship management and database systems. Catalogers already have the backbone of a CRM system in place; a system where each customer is given a unique account number and that customer account can be accessed and recognized at the point of contact. But catalogers are not doing CRM, even though I hear many lay claims to that today. Where catalogers need the help is in the database/analytic systems behind the account management systems and in the marketing strategies and programs to leverage their CRM infrastructure.
The problem is that catalogers approach the technology problem in a backward fashion. They buy the system first and focus on the strategies and programs second. Create, develop and test the applications and the solutions first. You can benefit by having some low-cost, database and analytic solutions, but do not spend a fortune on complicated and sophisticated systems before you know exactly what you are going to do with them.
Everything in this business can be tested. Develop the ideas and strategies and test them on a small scale. Once you find out what works, you can then think about investing in automation or technology.
If catalogers hope to compete more effectively with their bigger retail rivals, they will start using their main competitive advantages, customer information and convenience. If catalogers do not seize this opportunity, they will become more and more marginalized and many will be forced to shrink or go out of business.
If they seriously go after the tremendous waste in the marketing budget, by using the advanced marketing and segmentation techniques, it should be possible for those top 100 catalogers to cut about $200 million out of their marketing costs and bring it to the bottom line in the short term. In the long term, the potential is many times this amount.