This article is excerpted from a presentation the authors made recently to the Kansas City Direct Marketing Association.
We talk with many top direct marketers and CEOs, listening to their concerns about the economy – up or down – and how it affects their business. They’re afraid they won’t be able to afford to deliver their direct marketing vehicles, and they don’t see delivery through electronic vehicles happening soon enough.
How should direct marketers respond? What we recommend comes down to this: Learn how to make money equally on the economy’s down side as on the up side. You can do it – and you’ll have to do it.
To prosper in a flat economy, aim for improving your company’s valuation, not growth, since that’s the key to determining your business’s viability. Strategies should encompass the following:
Product strategies. This includes decisions on how many new products to introduce. Healthy DM businesses introduce 35 percent new product annually. When customers pick up a catalog, they want to know what’s new.
Customer strategies. Start by doing your database marketing basics right: segmenting your list right, communicating with your customer, prospecting in a unique way and having a strong merchandising strategy. Determine how to get more customers, take better care of ones you have and sell more to them. Mailing smarter is a priority. By profiling customers, you can drop unproductive segments and spend more on productive ones. Our client base can mail 15 percent to 20 percent less but get more response and improved results.
Market strategies. Look at your metrics to determine market potential. One proven method is to use the “tree ring” approach to expand in concentric circles. If you sell insurance, consider adding pet insurance. If you sell swimsuits, add ski apparel. Where do you mail? In the Libey-Concordia Economic Outlook, we bend economic factors toward direct marketing and to 12 U.S. regions. Then we recommend which regions are the best to mail to in the next three months. You need the ability to reallocate mailings from regions doing poorly into parts doing well. You must be able to shift in 30 days or fewer.
Channel strategies. Move more toward using e-mail and your Web site. E-mail is taking over First-Class mail, with the average Web-connected person receiving 32 e-mails a day. Since there’s no distribution cost, getting even one new customer is a plus.
We are finding that 82 percent of buyers are using an order catalog to drive the Web order. The good news is that 18 percent are not. That shows the continuing transition toward electronic ordering. Immediately put on your Web site a field that asks, “Did you use a catalog in making this order?” Make it a required field that must be completed before the order can continue.
Many direct marketers try to determine the lifetime value of their customers. There is no such thing so it is inefficient to try to measure it. What we measure is “absolute lifetime net profit.” Everyone from the CEO on downstream must understand that the objective is to reach a specific return on investment for a specific group of customers this year. Then you build mail plans, contact plans and offers to meet that objective.
Key to measuring lifetime net profit is to look at 20 rolling quarters – five years – at all times. This includes 95 key measurements the CEO should check monthly. As an example, for each quarter, measure your return on investment per order or per customer. Chart the measurements and determine what is causing the amounts to rise or fall.
At any time you can take three quarters and see a trend forming. You will be able to project ahead that in 20 months your cost per order is going to cross into your profitability and put you in a negative situation. Then you make course corrections now to prevent that.
When we look at companies with poor results, we find that they have an 80/20 mailing ratio of prospects to customers. That’s out of whack. We move them to a 60/40 ratio, with 60 percent to customers and 40 percent to prospects. This lets them grow the business at a manageable 15 percent per year.
In these uncertain times, the winners will be those who pay attention to the basics by prospecting selectively while working to get more revenue out of their current customer base.