Multichannel Retail: History and Outlook
The business of selling directly to consumers is huge. In today's multichannel world, traditional retailers, catalog companies, online merchants, and other retailers are alike in at least one respect: they all sell merchandise directly to consumers without requiring a store visit.
Today, virtually all merchants are multichannel retailers.
Prior to the internet era, companies that sold merchandise directly to consumers did so primarily via the direct mail channel. Many, perhaps most, circulated a direct mail print catalog. Stores might ship directly to a consumer who visited or called a store, but few store retailers engaged in direct-to-consumer marketing campaigns that were intended to produce mail orders or telephone orders. That simple world is history; it just doesn't exist anymore.
Today, virtually all merchants are multichannel retailers. At a minimum, they have a website that accepts direct orders, and they ship virtually anywhere. Some who began strictly as store retailers or web-only retailers have begun to use the direct mail channel. Traditional catalog companies that once relied exclusively on direct mail have adopted new channels, but are continuing to rely on direct mail also. For many, print catalogs still produce the majority of revenue. Meanwhile, revenue from digital marketing is growing at a brisk pace.
A Little History
The introduction of the printing press around 1450 AD revolutionized education and enterprise in unprecedented ways. Retailing via catalogs and solo direct mail pieces is one of many innovative applications enabled by printing presses.
Johannes Gutenberg is generally credited with connecting several technologies and processes already being used in Europe and Asia to create the first printing press. The principles underlying Roman grape and olive presses developed during the 1st Century AD were among the technologies he employed. Large, wooden presses had long been used in Gutenberg's day to squeeze grapes and olives. Gutenberg used the same tools to impress letters and pictures onto sheets of paper. Thus, the tools of the winemaking trade are the reason printers use the term "press" to refer to printing machines.
In 1475 A.D., the first books were printed. By the end of that century, a Venice publisher printed a catalog of books he had in stock. In the 1660s, an English gardener published a seed catalog. It took almost another century for the idea of catalog merchandising to cross the Atlantic when, in 1744, Benjamin Franklin produced a catalog of books of scientific and academic interest.
A mail order catalog, from the time of Benjamin Franklin until the advent of the Internet, required two essential services to operate: (1) printing, bindery and addressing services to produce a catalog, and (2) a national postal service to deliver catalogs to consumers, facilitate placement of orders, and deliver products to the buyer. In the United Kingdom, the British Postal Service (Royal Mail) dates to the reign of Henry VIII but residential delivery didn't evolve until the mid-19th Century. Benjamin Franklin became the first Postmaster General of what is now the United States Postal Service (USPS) in 1775. However, only after the end of the Civil War in 1865 did the U.S. Post Office begin to develop a full range of services.
The first true consumer goods mail order catalogs emerged between 1861 and 1884, with the founding of such innovative companies as Royal Welsh Warehouse in the UK, Montgomery Ward in the USA and Eaton's in Canada. Sears, Spiegel and Neiman Marcus soon followed in the USA. All of these were general merchandise catalogs whose product assortment appealed primarily to agrarian and small town populations.
L.L. Bean, founded in 1912 in Maine, was one of the nation's first "niche" catalogs, specializing in boots and footwear. In the ensuing years, many other catalogs began operations in the region, making New England the mail order capital of the country. Some would argue that Wisconsin and northern Illinois, anchored by Chicago, should share this title, as mail order giants Walter Drake, Taylor Gifts and a host of other Midwest-based catalog companies soon emerged. Some of these companies were known as "big book catalog companies" because their catalogs were enormous. Thousands of pages offered virtually everything a person might want to buy. Consumers could buy apparel, tools, or a complete "assemble it yourself" cottage or barn from big book catalogs.
Special mention should also be made of Hammacher-Schlemmer, a retailer that published its first catalog in 1881 and is the longest continually operating catalog. As noted on its website, "During the 1930s and 40s, the name Hammacher-Schlemmer would become synonymous with innovation. We introduced the first pop-up toaster (1930), the electric razor (1934) and the first steam iron (1948). Later, we would offer the first electric pencil sharpener, food processor, electric can opener and automatic coffee maker. Other notable introductions include the first microwave oven (1968), telephone answering machine (1968) and cordless telephone (1975). At their introduction, these products were viewed by many as intriguing gadgets; we saw them as functional problem solvers." This point of view applies to many multichannel retailers: They specialize, and in so doing, they meet consumer needs and wants.
The end of World War II marked the beginning of a substantial expansion of niche/specialty catalogs. Most of the aforementioned mail order pathfinders employed both retail stores and catalogs in their channel mix. However, catalogs largely became single-channel operations, using the mail as their exclusive promotion and fulfillment channel. Most store retailers gradually reduced reliance on mail order, setting the stage for the eventual disappearance of the "big book."
During the 1950s and 1960s, a variety of catalog businesses emerged, including some merchants that had been in the retail business for a very long time. Companies such as Tiffany, Williams-Sonoma, Talbot's, and the Kenton Collection (later Horchow) launched catalogs, with hundreds of others exploding on the scene. This prolific growth of specialty catalogs continued through the 1970s and into the 1980s and was a part of the overall migration toward specialty retail. In 1978, Saturday Night Live spoofed the trend toward specialty retailing and catalogs with a famous skit on a Scotch Tape Shop.
Several trends sparked the growth of the niche catalog industry. After World War II and continuing through the end of the century, more and more women began working outside the home. As a result, many families had more disposable income but less time to shop. For these busy people, traffic and crowds diminished the retail shopping experience. Additionally, universal access to credit cards and the advent of toll-free telephone numbers simplified mail order shopping. These trends coincided with advances among all the services that support the modern multichannel retail industry.
Evolution of Customer Data, Mail Processing Services, and Addressing Services
From the 1890s until after WWII, addressograph systems were the primary method of maintaining customer lists and addressing labels and mail pieces. This began to change rapidly in 1960s with the introduction of IBM and Honeywell computers and high-speed impact printers. Software that facilitated electronic maintenance of mailing lists and high speed printing of Cheshire and pressure sensitive labels and personalized mailing pieces (computer letters) became widely available. During the mid-1960s and early 1970s merge/purge systems were introduced and perfected. Alan Drey, Leo Yochim, and others pioneered this transition in the late 1960s. Shortly thereafter, beginning in 1971, Jim Downs, Phil Tobias, Mike Lawrence, Mike Buoncristiano, Wayne Shelley, Hank Ponder and hundreds of other marketing and technology pros joined Phil Wiland at Wiland Services, introducing breakthrough merge/purge and database technologies to serve direct marketers. Other firms sprang up to perform similar services.
These developments revolutionized the process of maintaining and utilizing marketing lists and databases (buyers, donors, subscribers, bad debt, etc.). They increased the ease with which lists could be rented and exchanged. They made it possible to save money by efficiently eliminating duplicates within and between lists (merge/purge). They enabled personalized letters and order forms. It became easier and more affordable to create nth samples for list tests and to eliminate previous usage on continuation lists. New list rental segments, including previously unavailable selections, became available. There was new flexibility in developing test panels from merge/purge net files, giving marketers more freedom to test new packages and offers.
By the 1970s, increased computing power, coupled with declining hardware costs, allowed analytical techniques to make a great leap forward. More purchase history data could be stored, accessed and analyzed. Recency, Frequency, Monetary (RFM) Analysis facilitated segmentation of customer databases. ZIP Code analysis, along with the application and analysis of demographic and lifestyle data, were not far behind, maturing in the 1980s and 1990s. At the same time, advances in database and analytical software, along with the proliferation of desktop computers, led to further development of predictive modeling and database management systems. The days of rudimentary file maintenance and addressographs were gone, replaced by a new era of customer relationship management and sophisticated analytics.
Wiland was at the forefront of this revolution. Since 1971, Wiland companies have been on the cutting edge of marketing technology. Early Wiland customer file maintenance systems were forerunners to contemporary databases. Wiland developed the first sophisticated merge/purge system using artificial intelligence. It removed duplicates, assigned and corrected ZIP Codes, overlaid data to enable predictive analytics, corrected erroneous addresses, and applied carrier route codes—before the United States Postal Service or anyone else even had a carrier route directory. When the USPS announced pre-sort discounts, Wiland was the only company in the country with a database to enable it.
20th Century USPS & Introduction of Alternate Delivery Services
Prior to 1963 there were no ZIP Codes. Instead, cities had "zones." Thus, a letter might have been directed to St. Louis, 20, Missouri. In 1963, the USPS introduced ZIP (Zone Improvement Program) Codes. ZIP Codes facilitated speedier delivery of mail, streamlined the flow of incoming mail orders, and made delivery of packages more efficient. Moreover, along with improved data available from the U.S. Census Bureau, ZIPs opened the door to development of geographic results analysis and geographic segmentation of mailing lists. Later, the USPS implemented optical scanning and automated sorting, allowing it to process mail even faster and more cost effectively. In 1983, the USPS refined further ZIP codes with the introduction of ZIP+4 Codes.
In the 1970s, Federal Express (now FedEx) and United Parcel Service (UPS), once focusing solely on B2B package delivery, expanded their services to include deliveries to households. These companies did not challenge USPS's supremacy in the distribution of outbound advertising mail. However, they did end its virtual monopoly on order deliveries. Since then, these three enterprises, along with a handful of other players such as DHL, compete fiercely for the delivery of order shipments for multichannel retailers, whether or not they have a print catalog. Today, with shipping costs on the rise, there has been growing interest and experimentation with the employment of drones for the delivery of products, which has the potential to replace delivery trucks and personnel in the future. Whether or not drones actually begin delivering packages, rising costs remain a concern for both merchants and customers. More and more consumers are coming to expect free or discounted delivery from multichannel merchants.
The Evolution of Response (Order) Channels
Through the late 1960s, direct merchants received virtually all of their orders by mail, with 95% or more being handwritten by customers on an order form bound into an outgoing catalog or inserted into a solo mail package. This began to change in the late 1960s when Lester Wunderman introduced toll-free dialing via 1-800 phone numbers. In 1975, ATT began working on an integrated national 1-800 system that was finally implemented in 1980. Until 1980, 1-800 dialing was a fragmented, regional service limited by the disparate technologies of the Baby Bell phone companies. However, even then, its effectiveness as an order channel was clear, and retailers were able to work around the technical limitations. In the years that ensued, telephone companies significantly improved and expanded toll free services, adding new toll-free area code and even enabling international toll-free calling. Today, there are approximately 20 million toll-free numbers in use in the U.S.
From the 1960s to the 1990s, retailers evolved from providing customers with just one means of ordering to many.
From the late 1970s onward, fax machines became affordable for small businesses and consumers. As a result, commonly utilized order channels evolved from "mail only" to "mail, phone, and fax" in a short period of time. Mail, phone and fax continued to be the primary order channels until the mid-1990s, when the Internet exploded onto the scene and merchants began taking orders on their e-commerce websites. From the 1960s to the 1990s, retailers evolved from providing customers with just one means of ordering to many.
The evolution of order channels, along with a similar expansion in outbound marketing channels, has made it more difficult to track the source of a particular order. Direct mail marketing once generated almost all direct retail orders. Today, orders are generated from campaigns in many channels: direct mail, telemarketing, email, internet search, internet/video/mobile display ads, social media ads, direct response television (DRTV), broadcast media, and more. Today's multichannel retailers utilize numerous marketing channels in which a single consumer may be contacted repeatedly, making it difficult to pinpoint the source or sources that ultimately generated the order. Thus, many merchants have developed "order attribution rules," the creation of which is an art as much as a science, in an effort to measure the effectiveness of specific campaigns and advertising vehicles. While the advent of new marketing and order channels has been a boon for direct marketers, accurately measuring the effectiveness of a specific marketing effort can be more difficult today than it was fifty years ago.
Catalog Design and Printing
The last quarter of the 20th Century witnessed rapid evolution of desktop publishing, digital photography, and graphics software that streamlined the production processes associated with preparing a catalog or other direct mail offer for printing. These developments reduced design costs and enabled more sophisticated and aesthetically pleasing pages and covers.
Simultaneously, digital printing presses were introduced, and digital features were added to traditional presses, dramatically simplifying the interface between the design and printing functions. Likewise, digital enhancements improved quality control and color accuracy during the printing process. Other improvements included the integration of the addressing function with the printing function and the introduction of selective binding, which facilitated testing of alternate page sequencing, cover designs and order form variations.
These developments afforded numerous advantages to multichannel retailers: timeline shrinkage in the design and printing process, cost savings, and dramatic production efficiencies. But sadly, higher postage costs gobbled up the savings and then some. These rising expenses intensified an already growing demand for lower cost marketing channels that produce satisfactory consumer response. Yet, even as email and internet display advertising are being utilized with a high degree of frequency, direct mail offers continue to produce significantly higher response than any other channel. Higher response rate doesn't necessarily mean higher ROI because the cost of direct mail marketing per exposure is substantially higher as well. Nevertheless, the relatively high response rate produced by good direct mail offers should not be overlooked. Unless runaway postage costs become insurmountable, direct mail is likely here to stay for at least some time into the future, simply because it produces high response.
Methods of Payment
Prior to the mid-1960s, consumers typically paid for mail orders with check, money order, or cash (yes, a few customers did and occasionally still do place bills and coins in an envelope with their order form). Others paid using a USPS service called Cash on Delivery (COD), in which the recipient (customer) paid the postal carrier directly for the merchandise, shipping & handling, and a USPS service fee upon delivery. The USPS then paid the shipper (the merchant). Payment by check was the most common method.
Early forms of charge cards evolved in the first half of the 20th Century, but were generally limited to purchases made from the card issuer. Western Union, the big oil companies and the airlines were among the pioneers. After WWII, Diners' Club, American Express and Carte Blanche introduced the first general purpose charge cards, but their distribution was initially limited primarily to business executives and the wealthy. By the 1960s, some of these companies were sending a credit card to college graduates with no application whatsoever. One recent college graduate charged a $40,000 client party to a Carte Blanche card. Things in the credit world had certainly changed. High limit cards are more difficult to obtain, but most of the populace have multiple credit cards, and this drives many considerations: higher demand, increased bad debt, bankruptcies, fraud, and more.
Between 1958 and the end of the 1960s, the Visa and Master Charge (now MasterCard) credit card networks were established for use by the general public. A credit card differs from a charge card in that the balance on the latter must be paid in full every month, while the former includes a revolving line of credit with interest payments required on any unpaid balances. Debit cards were introduced in the late 20th Century as an alternative to cash and credit. Each time the cardholder uses a debit card, the amount of the transaction is immediately deducted from the user's bank account. Other twists such as prepaid debit cards and gift cards are also now part of the mix.
Catalog and other direct merchants were quick to grasp how credit cards simplified the ordering process for their customers. Within a few years of their introduction, it became the rule, not the exception, for merchants to accept them.
The advent of the Internet and the digital era has seen a new wave of payment choices, with PayPal and Bitcoin being two of the better known options. Given the enormous amount of revenue at stake with payment processing, it is likely we will continue to see new players with new technologies as we move further into the 21st Century. And, as antiquated as it may seem, the USPS still offers its COD service.
The Mailing List Industry and the Emergence of Cooperative Databases
Niche and specialty catalogs developed in the early 1900s and expanded in number throughout the twentieth century. That same period also marked the advent of what are known as "solo offers" and "continuity offers." A typical solo offer describes a single product or set of related products in a direct mail letter, possibly includes a brochure or other print pieces, and is sent in an envelope. A continuity offer is often similar to a solo offer but differs in that it asks a buyer to agree to receive and pay for continuous periodic shipment of a type of item (e.g., Book-of-the-Month, seasonal shipments of fruit, etc.).
Regardless of offer type, all direct marketers shared a common need: a steady flow of prospective new customers to sustain or grow their businesses. Naturally, lists of consumers who had previously bought via direct mail from other brands or offers became the primary source of prospective buyers for many merchants. This need for "mailing lists" gave rise throughout the 1900s to list management, list brokerage, and list compilation companies.
List managers represent list owners. The owner of a list might decide to make it available for one-time use by reputable marketers for a fee, typically a rate per thousand names provided. A list manager recommends the list to brokers and sometimes directly to prospective users. They handle billing and collection, and remit payment to the list owner after deducting an agreed upon commission.
List brokers represent list users. They learn their client's offer and seek out lists that they believe may perform well for that offer. Typically, brokers order lists through a list manager, bill their client, and remit payment to the list manager after deduction of a commission. Sometimes brokers work directly with list owners rather than through a list manager.
Often, the same firm serves as both manager and broker, but different people usually perform the two functions. Some of the list usage arrangements they negotiate are rentals (one-time use, for a fee) while others are exchanges (two list owners agree to let the other use its list), with a manager and broker arranging the exchange and charging a negotiated fee. List compilers create a list from public records, consumer surveys, or other non-transactional sources. They make the list available for rental, usually through their own sales team but sometimes through a list manager. For example, they might compile a list of businesses by type and size, create a list of consumers from a telephone directory or real estate records, or send an opinion survey to millions of people and compile the responses.
Mailing lists of all types were rapidly computerized during the 1960s and 1970s. Simultaneously, more lists became available for rental and exchange. The list industry expanded rapidly as more companies offered list management, brokerage and compilation services. Their inside knowledge of what types of lists performed well for which types of mailers made them an invaluable resource for direct marketers hungry to grow and add to their customer, subscriber or donor bases. This network of list companies continues to be an important factor in the industry today. However, the rise of channels other than direct mail and the advent of cooperative databases have substantially altered their role. Most multichannel retailers continue to have a relationship with list brokers and list managers for obtaining vertical lists (selections of consumers who have recently transacted with a relevant brand or offer). Conversely, while there are notable exceptions, most multichannel retailers do not use a broker or manager to interface with cooperatives. Instead, many prefer to work directly with companies that offer cooperative database services.
Cooperative databases emerged on the scene in the 1990s. A cooperative database is a single, aggregated database containing name, land address, email address, transaction history and other information about the buyers, donors, or subscribers of multiple individual brands, companies and organizations. Such a database not only consolidates and aggregates data from participating brands but also verifies and enhances the combined data in various ways, including use of proprietary data mapping techniques, overlay of census and postal data, and incorporation of various other information intended to enhance the consolidated database for marketing purposes. In return for providing input data to a cooperative database, list owners typically receive a variety of services, which fall into two broad categories.
Customer Marketing Services
Every brand needs customers who make multiple purchases, and produce good ROI over a long period of time.
The lead customer marketing service is statistical modeling that predicts the probability that a past buyer from a brand will transact again in an upcoming marketing campaign. Traditionally, this function has been performed in-house or at a brand's database service bureau, primarily using RFM segments, such as "30 Day Multibuyers, $100+ Largest Purchase." RFM methodologies are effective in a general sense, but are being replaced by statistical modeling, which typically ranks customers more effectively than RFM methodologies, adding money to the brand's bottom line. Some large companies perform statistical modeling in-house. Others use consultants or cooperative companies. Cooperative companies have a significant advantage because of the unmatched depth of transactional data that can be utilized in models. Because large cooperative companies such as Wiland have superior data, even large retailers that have talented in-house modeling staff often use a custom model developed for their brand by Wiland as an independent variable in their in-house models.
Some cooperatives also provide customer profiles that give merchants a more comprehensive view of their customers' transactional activities and affinities and, ultimately, help them better understand their needs and wants. Many brands struggle or fail to optimize their bottom line because they have a suboptimal definition and understanding of their target market, or because different departments have a different view or understanding of the target market. At Wiland, for example, there is huge emphasis on providing excellent customer insight that is highly beneficial to senior management, merchandising management, and marketing management. It isn't good enough to just have customers. Every brand needs customers who make multiple purchases, and produce good ROI over a long period of time.
Prospect Marketing Services
Acquiring new customers is crucial to every multichannel retail brand. Existing customers lose interest, age to a new lifecycle stage that makes the brand's merchandise less appropriate, move and cannot be located, pass away, or become dormant for a wide variety of other reasons. They must be replaced with new customers if the brand is to sustain itself and grow.
Cooperative database companies should provide their clients with prospect audiences that are not only responsive initially but also are likely to produce Long-Term Value (LTV) superior to that previously produced by the inactive customers they replace.
Everyone knows that a brand needs new customers but high-level thought about acquiring new customers is often too simplistic. It stops with the simple concept that the customers who bought last year but don't buy again this year must be replaced by new customers, and ideally the number of new customers acquired in a given year will exceed the number of past customers that become inactive during that year. This concept is correct. It is fundamental. It is essential. But, it doesn't go far enough. It fails to address a very important question: Who should the new customers be?
New customers should be qualitatively equal or superior to the inactive customers they replace. They should buy at least as many times during their lifecycle as did the prior customers. They should spend at least as much. Fundamentally, they should produce at least as much lifetime profit. Who exactly are these great new customers?
Using the wealth of information available, cooperative database companies should provide their clients with prospect audiences that are not only responsive initially but also are likely to produce Long-Term Value (LTV) superior to that previously produced by the inactive customers they replace. Accomplishing this superior LTV goal should be a key part of every brand's customer acquisition strategy.
Additionally, a properly-managed cooperative database service should help clients reduce the incidence of consumers receiving unwanted offers. In part this involves generally universal services such as removal of consumers who have indicated to the Direct Marketing Association that they do not wish to receive marketing offers. Some cooperatives go beyond what is now viewed as absolutely required. Virtually every brand is marketing to prospects that, even if they buy once, are unlikely to produce good LTV. At Wiland, optimization of prospect universes is a key part the service set because optimization not only improves a client's bottom line, it also reduces consumer annoyance.
In addition to providing services to clients, cooperative databases play an important role in the with regard to consumer privacy. For years Wiland has set high standards relative to consumer privacy. Wiland does not possess or utilize social security numbers, bank account numbers, credit account numbers, HIPAA data, etc. Wiland does not sell age, income, occupation, or other such data to anyone. Rather, Wiland uses data strictly to perform analytical services and rank consumer audiences as to their likelihood of interest in a particular offer from a Wiland client. Thus, consumers are well served by Wiland because omission of uninterested consumers is stressed. Also, Wiland operates Wiland Consumer Choice, a service that allows a consumer to opt-out of receiving direct mail and/or digital offers for which Wiland creates audiences. To varying degrees, other cooperatives address these same issues.
In the 1980s cooperative databases did not exist. Today, cooperative databases provide the considerable majority of prospects utilized by multichannel retailers. In many cases the audiences they provide also produce superior response. Lists in the 1990s cost as much as $150 per thousand or more. Today, direct mail audiences obtained from a cooperative database are usually less than half that amount. Wiland maintains one of the largest, most diverse, most responsive cooperative databases and is absolutely dedicated to helping clients be more successful while respecting consumer preference.
Current Challenges in Direct Merchandising
History demonstrates that multichannel retailers have encountered and ultimately benefitted from massive changes in the past. Today's challenges demand further changes, positive changes that quickly move multichannel retailers into the future , with new methods, new practices, and new approaches that make them successful for years to come. But before focusing on the opportunities, we are well advised to identify and understand some of the major challenges.
Challenge # 1: Declining to Flat Direct Mail Channel Volume
As the chart points out, direct mail remains huge. The USPS classification "Advertising Mail" was 80.9 billion pieces in 2013. This amounts to over 600 pieces per adult household in the country. That's a lot of marketing activity.
Many jump rapidly to the conclusion that digital advertising, email, social media, and other competing channels are stealing budget from direct mail. There is truth in this hypothesis. For example, Wiland's digital media platform is connected to about 35 advertising networks, including Google, Facebook, and many others. Combined, these networks present Wiland an opportunity to bid for clients in real-time on over 1 million advertising opportunities per second, and the number is growing rapidly. That's about 31,536,000,000,000 (32 trillion) advertising opportunities per year and growing. This is about 400 times the volume of Advertising Mail pieces. No doubt this and other channels are taking budget from what the postal service calls Advertising Mail.
The recession certainly had something to do with the decline in Advertising Mail volume from the 2007 peak. The leveling off of the trailing three year trend line in the above chart suggests that for five years Advertising Mail volume has been relatively stable, and there was a slight tick up in 2013. The key point is this: to be healthy, multichannel retailers need to grow. Growth helps everyone. Every channel should be tested, including direct mail. Firms that have traditionally relied heavily on direct mail need to find ways to make it more profitable even as they learn how to use the other channels effectively. And firms that have not traditionally used direct mail need to test it, because it still produces far higher response rates than digital channels.
Challenge # 2: Health of the United States Postal Service
Multichannel retailers no longer use the direct mail channel exclusively. Some don't even use it primarily. But most multichannel retailers do use direct mail to some degree, and they absolutely depend on the USPS to deliver it. If the USPS is weak, has excessive costs, or has inadequate volume, it isn't just "their problem." It is a problem for all businesses that rely on mail.
Some multichannel retailers are sending less mail. Many consumers send fewer greeting cards, write fewer letters, use mail less frequently (or not at all) to pay their bills, etc. Many businesses send invoices and other business communications via email rather than postal mail. These changes have had a negative impact on postal volume, making it harder for the USPS to cover its operating costs.
For years poorly informed critics have complained that advertising mail is subsidized by the USPS via discounts. The truth is that large advertising mail customers help the USPS tremendously. For example, a typical catalog merchant pays private companies to print the catalogs, put them in postal bags with a tag addressed to the specific postal carrier who will deliver them, and truck them at the marketer's expense to a post office near the addressee for entry into the postal system. This eliminates many costs for the USPS (mail sorting, trucking, etc.). When advertising mail volume declines, it hurts the USPS, creating a vicious cycle of declining USPS revenue leading to postage increases leading to further volume and revenue declines. The USPS needs to manage its costs more effectively, and it needs to provide further incentives to multichannel merchants to drive volume. But this isn't all the fault of USPS. They still have to deliver mail six days a week to every delivery point in the country at a flat rate, even if a postal carrier has to ride a horse several miles to deliver one letter. Sanity and cost-based pricing need to trump politics if USPS is to be healthy.
Challenge # 3: Strong Competition
Before the Internet, catalog companies had several competitive advantages. One was that direct shipping to customers by traditional store retailers was uncommon, so there were relatively few places to "buy direct." Internet search didn't exist, so if a person found an item in a catalog that they wanted or needed, they just bought it. There was no easy way to locate alternative places to buy the same item, or a similar one. By some estimates, catalogs faced serious direct competition from fewer than 2,000 companies in those times.
Today, virtually every retailer, from Wal-Mart to Grandma's Gift Shop, has a website and ships direct. The rise of big online players such as Amazon is another factor. In order to compete in today's environment, multichannel retailers must develop a strong brand, build a strong customer base, and advertise in all productive channels.
Challenge # 4: Price Competition
As if having more competitors wasn't enough, that competition has put pressure on prices, even as costs continue to rise. Postage, the biggest single marketing cost for multichannel retailers that rely heavily on direct mail, continues to rise. So do other costs. In the face of rising costs, some competitors are cutting prices. One company recently tracked an item it sells and found that a large online competitor changed its price for the item 12 times in one day, scouring competitor websites to beat the lowest price in what might be called "a race to the bottom." Price competition has always been a part of the merchandising business, but it may be at a high point now.
Multichannel retailers need to better understand price competition and react to it appropriately. This doesn't necessarily mean that they need to enter the race to the bottom. But if they don't match prices, they should take action that gives consumers a good reason to pay more and/or focus marketing efforts on consumers for whom quality, reliability, trustworthiness, shipping time, and other factors are primary.
Challenge # 5: The Attribution Issue
The ability to precisely track the source of orders—and thus utilize reliable source performance information to influence marketing decisions—has traditionally been a fundamental advantage of the direct mail channel. Years ago, a typical catalog firm might capture a keycode (source code) on as many of 99% of its orders. These codes identified offer, list and creative variations, making order attribution easy and accurate. Marketers knew precisely what worked, and what didn't work.
The introduction of toll-free order lines represented the first small chink in attribution's armor. Some individuals ordering by phone would not have their catalog (and/or order form) near them when they ordered and could not (or would not) provide their keycode to the order taker. In other cases, the order takers failed to ask for it. Likewise, faxed orders sometimes did not list the keycode. As a result, over the years, there was a small, gradual rise in "white mail" (orders received without a key code).
As catalog merchants began to accept orders on their websites, there was a precipitous decline in keycode capture, as consumers didn't have the code handy when they ordered via the web or, pressed for time, felt no obligation to enter it at checkout. Merchants were, and continue to be, unwilling to require customers to enter a keycode for fear of losing the order.
Today, direct keycode capture rate has fallen to 10% or lower for some companies. This contrasts starkly with the 95%+ capture rates that were typical 30 years ago. The result, to some degree, is that enterprises understand their results less well today than they did before the advent of the internet. Much has already been done to mitigate this problem, but much more needs to be done. There are two options for dealing with it. Attribute every order to some marketing source using an attribution methodology that is sufficiently reliable that budget decisions based on it are well-founded or forget about attribution and focus on evaluating profit levels of consumers that received various combinations of marketing messages. Also, every brand needs to determine whether the incentives and practices it has in place are causing different departments (say, a digital marketing group inside a company and a direct mail group in the same company) to lobby for credit for an order rather than seeking accurate order attribution, and fix it fast if such a problem exists.
Challenge # 6: Marketing Budget Waste
What exactly is "marketing budget waste?" In the extreme, one could say that every consumer contacted at some marketing cost who does not order is a wasted contact, but such an extreme view is unreasonable. No one will ever achieve a 100% response rate on any consequential volume. But what if a marketer is spending $500,000 to generate just $200,000 in orders? Isn't that waste? Perhaps there is a long-term value scenario in which it would be worth spending $500,000 to produce $200,000 in revenue, but such scenarios are rare, if they exist at all.
Marketers need to be very serious about identifying marketing budget waste, reducing it, and better deploying the associated budget savings. This is fundamental. It is absolutely essential to any multichannel retailer who seeks a better bottom line.
Specifically, every multichannel retailer should take steps to identify and omit the waste, people who are very unlikely to buy, in their marketing audiences. Predictive analytics has traditionally focused on "finding the top," identifying consumers most likely to buy. The future demands that predictive analytics focus not simply on the top but also on the bottom. Who is very unlikely to buy? If this question can be reliably answered, considerable marketing budget can be reallocated to more productive efforts, or simply fall to the bottom line.
List brokers, list managers, service bureaus, agencies, consultants, internal circulation planners, cooperative database companies and other audience providers need to transition away from thinking about "minimum acceptable segment performance" and begin focusing on "Marketing Budget Optimization." This is good for marketers, who experience less budget waste and good for consumers, who face fewer uninteresting offers. Marketing Budget Optimization needs to become the standard, and every brand needs to become good at it.
Challenge # 7: Inadequate Brand Synchronization
Multichannel retailers need to adopt a set of practices that lead to superior brand synchronization.
In some cases the owner of a multichannel retail business is the Chief Merchant, Chief Marketer, and Chief Customer Service Officer. Maybe he or she is the Chief Financial Officer and Operations Officer too. Coordination of all these functions may be relatively easy in such cases because everything is inside one gigantic brain. If such an entrepreneur knows the business well, every aspect of it can be run in a way that ensures any changes in merchandising, marketing, or creative strategy do not stray from the desires of target customers and prospects. Or if such changes are made, they make sure it is intentional and that the marketing plan takes the change into account. But this is rare.
More often, especially in larger companies, there is no one individual responsible for direct management of customer service, merchandising, marketing and other critical functions. These functions are more typically widely dispersed. This makes coordination considerably more difficult. Merchandising and Marketing and Creative may be in different buildings, seldom in touch with each other. This may lead to inadequate brand synchronization. Multichannel retailers need to adopt a set of practices that lead to superior brand synchronization. They need to make absolutely certain that all functions that influence brand position and brand identity are in perfect harmony.
Brand Enhancement Opportunities
Wiland has over 2,500 clients, and the client list is growing rapidly. Our clients include traditional catalog companies, online-only merchants, store retailers, solo and continuity marketers, and others. Thus, Wiland has opportunity to observe the branding process from a variety of perspectives. For example, we have seen striking similarities in the manner successful companies approach branding; and we've observed similarities in the practice of brands that struggle. This led to the development of Wiland's Brand Success Formula™, which is presented in this chart. It reflects a proven formula for brand enhancement.
This success formula provides the framework to enhance a brand using techniques, technologies and best practices employed by industry leaders. The formula should be persistently applied. By regularly evaluating every element of the formula, a multichannel retailer can develop and maintain a rock-solid brand that serves as a vehicle for growth, profitability, and the ability to successfully take on formidable competitors.
Retailing began thousands of years ago. In the United States it evolved slowly during the early years of the country. The pace of change accelerated during the 20th century, and when the digital age dawned the changes became even more frequent and significant. Every brand should know the history because it is instructive, but it should look to the future—a future of great promise. Wiland is here to help.