Case Study: Multiple Zones International

There’s nothing like having a billionaire for a neighbor.

Especially one that throws a little business your way, like Microsoft did when it named Multiple Zones International (MZI) its chief supplier of computer hardware, software and services.

The contract is one of many changes taking place at MZI. Since moving online in 1995, MZI has seen fast growth in revenue and transactions, creating a $115-million company.

What began in 1989 as a three-title catalog company with PC Zone, Mac Zone and The Learning Zone, has grown into a multi-channel retail operation that includes a new business-to-business division. The new Zones Business Solutions division is comprised of Zones.com, Zones Auction and ZonesBusiness.com, and serves the small to mid-size business market, government and education institutions and large corporations.

Online and electronic marketing have had a dramatic effect on the company. MZI has decreased its print catalog circulation by 35 percent a month, cut customer-acquisition costs by 55 percent and increased customer acquisition by 19 percent a month. It has moved from producing 30 million catalogs a year to 20 million and from using the catalog as its main sales vehicle to using it to acquire customers.

Cutting catalog circulation is a scary proposition to most catalogers—usually it means less market penetration. MZI Chairman and Chief Executive Officer Firoz Lalji can’t argue with the fact that MZI’s catalog sales are declining (down 2.8 percent in the first half of 2000), but its online sales’ increases are outpacing the decrease significantly. Customer demand, lower marketing costs and a 59.7-percent increase in sales for the first six months of 2000 are something Lalji can’t ignore.

“Up to two years ago, we were primarily a cataloger company,” says Lalji. “We had started online in late 1995. We were an early pioneer, and there was a slow build up. The momentum started in 1997 and 1998 ... Now we do in excess of $100 million online, since we changed the format of the company. Today, we are less dependent on catalogs as a customer-acquisition strategy.”

Customer Demand

The move to the Internet for MZI was mostly customer driven. Because MZI deals with pretty tech-savvy, computer-oriented customers, many were using the Internet before the World Wide Web and before e-commerce was widespread. In addition to meeting customer demands, MZI also discovered that marketing online was cost effective, quick and more personalized.

Lalji says meeting customers’ high expectations of computer catalogers has always been a priority.

The key to Multiple Zones’ success as a cataloger has been its chameleon-like existence, and its ability to keep the focus on the customer. MZI has evolved and repositioned itself in response to new technology, market demand and a changing customer demographic to reap the benefits the Web has to offer.

An early adopter of the Internet, MZI’s first catalog Web site went live in 1995. Customers were able to place orders online by 1997. The company is currently on its fifth-generation Web site, which is outfitted with order tracking, online customer rep chat, Web page pushing technology and a Web-based order fulfillment system.

Multiple Zone’s presence on the Web helped open a valuable dialogue with its customers.

“There is something special about our product line; it was almost a natural for our customer audience to adopt the Internet sooner than clothing catalog consumers,” says Todd Savitch, MZI’s vice president of marketing. “We are not surprised to see that our business is Web-ifying.”

The company began acquiring customer e-mails, comments and shopping preferences as early as 1996; it now has a combined 3.6-million customer file. The information showed a customer demand for online shopping and e-mail communication, and revealed that many customers are businesses.

Demographic Changes

For nearly a decade, MZI’s customer base was made up of consumers for PCs and Macs, but in the late 1990s that changed.

While MZI has always had business customers, many were hidden in consumer clothing. As customer expectations have risen, they have demanded that MZI provide products and services specifically for them. MZI responded by creating a new business solutions division that caters to the corporate world.

MZI’s business-to-business segment was officially rolled out as a separate division in January 1999 to reach the business side of computer sales.

The sheer volume of business-to-business sales, which were in excess of $111 million for the first half of 2000, and limited competition in the b-to-b sector provide MZI with a powerful niche.

The Zones Business Solutions division accounts for more than 60 percent of the company’s total PC sales. The business-to-business segment is driven by online sales channels Zones.com and Zonesbusiness.com, and a handful of private networks built for individual companies, such as Microsoft. By the end of 1999, MZI had created 3,150 business-to-business Web sites for clients. The online catalogs are complemented by 100-person sales force.

Marketing-Cost Savings

Despite the fact that Internet sales are cannibalizing catalog sales, the print catalog is integral to customer acquisition. MZI made an important breakthrough when it decided to measure each catalog’s return on investment based on how many customers it generated rather than how much revenue it generated.

“Catalogs are a very important part of the media mix,” says Lalji. “We don’t plan on dropping it completely.”

MZI has not determined whether it will continue to shrink circulation. In the recent past it has decreased distribution in proportion to the increased moving of customers to the Internet business. Like the pure plays, MZI is using the catalog as a prospecting tool, and for existing clients who prefer the print medium. Savitch and Lalji say the catalog’s circulation is determined by its customer-acquisition and online traffic-driving capabilities.

Personalized Service

Online marketing offers a cost-effective marketing format for most catalogers, especially those with tech-savvy clients. Multiple Zones’ customers are now targeted at the personal level via e-mail and at the site when they shop. Using an advanced content management systems from Broadvision, MZI can offer customers real-time deals on products relevant to their computer needs.

The cost to version a print catalog to such a detailed level is immense compared to an online catalog, and off-line products cannot be updated to reflect current pricing or carry all of the company’s 100,000 SKUs.

“From an analytical point of view, there is a much higher cost to do versioning in print, especially with e-marketing, [where we can] combine a lot of customer choices ... the customer’s data, along with their own transaction data,” says Savitch. “The technology is out there to make the manual versioning process a more automated one.”

Making the Transition

Before MZI could make a full-fledged move into e-commerce, it knew it had to accept that the Internet would dilute its catalog business. Instead of fretting, MZI decided to analyze the catalog’s best use. It determined that customer prospecting/ acquisition and driving existing customers online would be the new functions of the catalog.

“When we launched our Web site, we used our catalogs to direct [customers] to the Web site,” says Lalji. “We were not trying to protect our sacred cow. We offered special online offers for them to take advantage of.”

In 1997, ordering online was relatively new and encryption technology had emerged only in late 1996, making credit card security an issue. Many of MZI’s sales were assisted through the call center.

“While there were online sales, a high ratio of them were assisted sales because the customers still did not feel comfortable ordering online. They were apprehensive about security. Three to four years ago we had easy access to a call center for them. The assisted sales ratio is starting to change now, as is the average order size. It was smaller in the early days. Until they felt comfortable, the sales were about $40 to $50. Once their confidence rose, the orders climbed to $400 to $500,” says Lalji.

As assisted sales dropped, more than 97 percent in the first half of 2000 alone, and more customers moved online, MZI has seen significant cost savings.

MZI officially made its transition from a cataloger to multi-channel retailer in 1998. At that time, the company formalized a plan to decrease catalog circulation, alter the catalogs’ goal and begin actively transitioning more of its customers to the Internet.

“In 1998, the customers were saying ‘great print catalog, but instant response and gratification are important’,” says Guio Barela, senior vice president of corporate development from MZI.

To satiate its customers, MZI changed how it ran the company, and its culture. The evolution to an online retailer was done methodically and with great care.

MZI increased the number of products it offered through a 1999 merger with Ingra Micro, the world’s largest wholesale provider of technology products and services. It overhauled its fulfillment system and converted each division’s and catalog’s legacy system into one integrated system—uniting ordering, fulfillment, credit and other back operations for each sales channel.

In addition to offering more product and better fulfillment, MZI pulled out all the stops on its e-mail and online marketing and revamped its catalog marketing. Until late 1998, banner advertising and affiliate marketing were cost-prohibitive. Lalji says the change to performance-based marketing, the increase in number of advertisers and the establishment of companies that manage online marketing, has made advertising on the Internet affordable and effective. E-mail marketing has become quite sophisticated, with audio, rich media and streaming video possible, as well as enhancements in tracking click-throughs, purchases and pass-alongs. MZI has pulled much of its online, and even e-mail marketing, in-house with the creation of its own e-marketing company, touchMarketing. Lower marketing costs caused MZI to increase electronic marketing from 3.9 million e-catalogs for the first six months of 1999 to 9.7 million in 2000.

Increase of SKUs

The agreement with Santa Ana, CA-based Ingram Micro in November 1999 gave MZI the push it needed to enter the online world with security.

Online orders can be unpredictable, even with demand planning, and having a stable supplier can be instrumental to success.

The increase in SKUs also created another draw for MZI—one of the largest sites in the computer industry. It is backed by a formidable Web-based ordering system and fulfillment operations. Customer orders can be delivered in a single day. Product availability is known at the time of ordering.

MZI has an excellent command of its inventory, using a fourth-generation automated forecasting system, designed to keep inventory at a bare minimum, which lowers warehouse costs. Products are re-ordered when they drop to a certain level. The system saves on labor and is often more reliable given the monthly product line changes. The biggest impact on inventory is the Web site, which is updated four times a day with new product and pricing. A significant drop in price can make products fly off the shelf. A forecasting system can account for and track the flow of merchandise better than a human.

“The information system changed a lot of things,” says Barela. “Information on a real-time system added speed to fulfillment. We now have a fully integrated value-chain process. Our culture has changed to where speed and intensity have become more obvious values. It made us look and feel like a dot-com company, but we had a bricks-and-mortar legacy.”

Customer Retention

The business-to-business online sales are a direct result of using the catalog as a marketing tool. When MZI first launched its consumer sites in 1997, it used its catalog to drive traffic to the Web site, offering discounts and quicker delivery of products.

MZI began e-mail marketing in early 1998 with rather “primitive” e-mails by today’s standards. While its marketing is not limited to e-mail, it has constructed a comprehensive and elaborate e-mail marketing program to target existing customers.

Its Mac and PC customer segments had been segmented from the beginning, making personalized e-mail campaigns easy. MZI customers were very open to being marketed to via e-mail, and the double opt-in e-mail marketing allows customers control over frequency and content.

E-mail marketing is used for retention and to drive sales. The e-mails vary in content from informative with no sales pitch to offers for best-of-breed equipment to sale items and incentives.

“The target is existing customers. We don’t prospect with e-marketing and we don’t buy any names. It is our own customer base,” says Lalji. “It is a more cost-effective way of keeping customers. We use it to send out e-postcards. The e-mailing has developed into a whole area of dialogue. We are targeting customers to exactly meet their needs.”

E-mails come in rich media, contain graphics, audio and are being enhanced as technology changes. They employ sniffers to detect what a customer can open so the communication is always in an appropriate format. The e-postcard is one of MZI’s more innovative formats.

The postcard is used to send out perishable information. The most common use for the e-postcard is for new-product releases. MZI sent a representative to the August MacWorld show to gather details on the newly released iMac. From a cell phone, the representative relayed the information to Seattle. In under an hour an e-postcard was created outlining the computer’s specs, complete with graphics that were downloaded from Apple Computer’s site. The e-mail was sent out to Mac customers in two hours.

Customer Acquisition

On the customer-acquisition side, MZI uses catalogs, banner advertising and affiliate marketing. It is the premier sponsor for C/Net, an online magazine site. It also has agreements with AltaVista and ZDnet to drive traffic.

The catalogs PC Zone and Mac Zone are largely used for acquisition, but many existing customers still like to receive the catalogs, particularly Mac users. Lalji and Savitch say the catalogs work well with loyal customers, because receiving one reminds them to buy. Lalji says that customers are not dropped from the print catalog mailing list unless requested.

Mac Zone’s circulation has been decreased less quickly than PC Zone’s, Barela says, for several reasons. Macs are not as price-sensitive as PCs, there is less competition among vendors and the catalog is still an effective form of sales. Because Mac customers are so information driven, the circulation for the Mac Zone catalog has remained high compared to PC Zone. Mac Zone currently has a 1.25-million circulation rate per month, while PC Zone mails just 400,000.

PC products have a high level of competition on the consumer side, which makes manufacturers more attentive to pricing. The culture dictates that being first, fast and cheap is necessary to capture clientele in the PC market. As a result, MZI uses the site to move product, updating it numerous times a day, and uses the catalog for customer acquisition.

Results

Lalji says being successful online is about more than just being there. It has to do with offering customers choices of content and form of communication. He says the advances of online marketing, including automated product selection, online catalog versioning and audio and rich media e-mails are becoming a customer expectation. Constantly meeting the customer’s expectations is what it’s all about.

“The customer will have control in terms of what they want, when they want to hear from a vendor, how often, what product they want to see. There will be a greater shift of control over to the customer. They get very annoyed if you don’t treat them on a personalized basis,” says Lalji. “[Cataloging] has to move to one-to-one marketing for more efficiency and to meet the needs of customers. That’s the direction it’s going to go if you start looking three to four years out.”CS1