Strategy: Decipher Web vs. Catalog Customers

Start with the premise that catalogs and the Internet are interdependent and not adversarial. Remember the brick-and-mortar days when retail channels thought they should receive credit for catalog sales within their trading area? The Web vs. catalog debate is just as silly.

Catalog/multichannel companies today recognize the importance of having an e-commerce presence, and many successful dot-coms now have a catalog or are starting one. The best run companies maximize both selling channels.

This month, let’s explore how to manage those channels together, including mailing strategies for catalog/Web customers, internal allocations to both channels, the importance of matchbacks and profit contribution by channel. Understanding these differences is key to the success of your business.

Internal Allocations
Catalogers tend to allocate a disproportionate share of sales to the Web. Intuitively, catalogers want to mail less and use the Internet more. Since they’re not always clear on what’s really driving the business, they favor the Web out of a desire to ultimately circulate fewer catalogs.

Organic and paid search can certainly be credited to the Web. So can affiliate programs like LinkShare or Commission Junction. But what about e-mail campaigns? Should sales generated by e-mail campaigns to your catalog customers — catalog mailings generate most companies’ e-mail lists — be credited to the Web? Catalogs are mailed to these customers. And so are e-mail campaigns, which frequently offer a stronger incentive to order online.

That Web initiative is great, but over-allocating these results to the Web will lead to the wrong conclusion. If you reduce catalog circulation, you also reduce the number of e-mail addresses you can add to the file.

Contribution Margins
Today, 40 percent to 50 percent of all orders come through the Web — not necessarily from the Web. For customers ordering online, the Web provides another, more convenient way for them to obtain merchandise. Approximately 15 percent to 20 percent of that business comes directly from the Internet, via paid and organic search engines and affiliate programs. The catalog is still responsible for 80 percent to 85 percent of all sales.

Catalog companies should know how much total business they’re doing through the Web. They also must know how much comes from the Web and understand the difference so marketing efforts can be targeted properly. The chart below shows the percentage of revenue we typically see coming from catalogs and various Internet marketing programs. Then there are the e-mail campaigns, which are extremely effective and generate 10 percent of total revenue for a typical consumer catalog company — a significant portion of revenue at a very low cost.

The selling expense to sales ratio for a typical catalog company is 25 percent to 30 percent. Some firms experience even higher ratios due to higher costs for postage and paper. Internet marketing selling expenses should also be managed by this critical ratio, as shown in the provided chart.

Just like catalog prospecting universes have their limits, paid search opportunities aren’t unlim-ited. When investing in Internet marketing programs like shopping sites, the selling expense to sales ratio needs to be tracked. In my example, the selling expense to sales ratio for shopping sites is fast approaching the same ratio for the catalog. Paid search is also becoming more and more expensive.

Preferred Mailing Strategies
With paper and postage costs continuing to rise, catalogers feel they can circulate fewer catalogs and use the Web more to maintain the same levels of sales. While this thinking makes it difficult to maintain the same volume of sales, you can improve profits by mailing smarter.

Most catalogers have considered reducing mailings to Web-only buyers as a way to save money. When you look at your source code report, it appears these buyers don’t perform well. Even the results of the zero- to 12-month Internet buyers often don’t look good on the surface. It’s perfectly logical to assume they shouldn’t be mailed a catalog, or at least mailed less frequently than catalog buyers who fall within the same housefile segments. But is this really the case?

Before you come to any conclusion regarding Internet buyers and how often to mail them, have your service bureau do a matchback. To prove my point, my company did the split and created a holdout panel, and found it totally worthwhile to mail Internet buyers a catalog. We created two panels of roughly 25,000 each. One panel was mailed seven times, the other only once.

The net contribution for the group mailed seven times was approximately 55 percent higher than the group mailed only once. The additional mailing expense was more than justified.

What Matchbacks Tell Us
As you should already know, a matchback is the process where your order file is “matched back” against your recent mail tapes in order to give credit to the proper source code. This tells you where the business is coming from and which key codes should be given credit for the sale — even Web orders.

When the nontraceable factor on matchbacks ranged from 15 percent to 20 percent, we could simply allocate the unattributed portion across all source codes on a proportional basis. This doesn’t work today, however. Matchbacks have shown that it isn’t appropriate to give equal weight to the housefile, inquiries, co-ops and rented lists. Every time we do a matchback, 50 percent to 75 percent of the Internet results should be allocated to the housefile, our own customers. Another 10 percent to 20 percent of these results should be allocated to rented lists. This varies based on how much prospecting you do.

Allocation is far from proportional. Matchbacks provide benefits beyond tracking Web buyers. There are often lists made up of heavier Web buyers that may look like they don’t work well, when actually they’re profitable. Without a matchback, you’d never know this, and any testing would be without reason.

You might think you have trouble finding lists that work, when in actuality you have some winners to add to your continuations. In addition, you might have lists that look like they’re falling off, or your total rentals look like they're trending downward, but it’s just the result of heavier Web sales.

It sounds simple, but without knowing the performance of all segments mailed, false conclusions can influence your marketing strategy. A matchback keeps you on track and gives you the confidence in your results needed to make sound judgments.

Summary
There are catalog-only buyers. There are Web-only buyers. And there are multichannel buyers who purchase from the catalog and your Web site. So segment your housefile by this division so results can be tracked accordingly.

You might find, for example, that the Web-only buyers should be mailed, but not as often as your catalog or multichannel buyers. But again, maybe they should be mailed every time. Conduct a contact strategy test to help make the correct decision; the results may surprise you.

Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in circulation planning, forecasting and analysis. He's also the author of the Catalog Success-published book, “Strategic Catalog Marketing.” Reach him at (302) 539-7257 or by e-mail at steve@lettdirect.com.