RFM Turned Upside Down

For many years, the recency/frequency/monetary value (RFM) formula has been the cornerstone of catalog circulation plan segmentation. But what if this is no longer true? What if recent customers actually respond to your catalog mailings at a lower rate than older customers, frequent customers at an even lower rate, and higher spending customers even lower? No, I’m not kidding. This is happening right now and you may not be aware of it.

A brief review of the age-old formula is in order. First, recency. It’s been the most powerful predictor of the likelihood of a customer placing another order. For example, for one typical mailer with whom we work, mailing customers who’ve placed at least one order over the past 12 months yields a response rate that is two or more times greater than mailing customers who last placed orders between 13 months and 24 months in the past.

Similarly, customers who’ve made three past purchases respond approximately 1.7 times more than first-time buyers. Customers whose past average order values are more than $150 respond about 2.5 times more than customers with average order values below $50. By segmenting past buyers into groups combining all three attributes and tracking past results, you can predict future response rates and decide which segments to mail.

24/7 Factor

What’s changed over the past several years? It seems almost every catalog company has opened a “store” that’s open 24/7. I’m talking about Web sites, of course. For many years, catalog companies that also operated retail store chains were aware that direct response rates from customers living near a store were lower than from customers who lived farther out.

For one multichannel retailer we studied, response from customers living within five miles of a store were half the response rate of those living more than 20 miles from a store. Predictably, the company’s catalog management maintained that the missing response was occurring in the store, and it should be given credit. After all, they could prove that many of the customers showing up in the store had received a catalog. Conversely, the store management maintained that the customers would have come to the store anyway and that mailing the catalog was a waste of money.

Today, the staffers at most catalog companies make the same argument relative to the impact of catalog mailings to customers placing orders on their 24/7 Internet store. Catalogers have much more difficulty proving their point relative to retail stores in which customers’ names are not collected. But with Web sites, they know exactly who’s purchasing and can match the customers’ names back to mail files.

At this point in time, it’s become conventional practice for catalog response rates to include all orders placed on the Web if that customer was mailed a catalog. Unfortunately, basing future mailing decisions on such response rates can be disastrous.

Misleading Response Rates

Assuming that orders placed on the Web site resulted from a catalog mailing can be misleading. While it’s true, for the most part, with respect to prospects mailed, it may be far from the truth when it comes to past customers. It’s just as the argument made by the retail store management that suggests those customers would have come into the store, anyway. Well, at least a portion of them.

In a recent test we conducted with a client, we created two panels of 50,000 customers each, both groups acquired on the marketer’s e-commerce site within the past three months — neither had been mailed a catalog.

One panel was mailed a 48-page catalog; the other was not mailed. Based on a later matchback to the mail files, the one-time buyers not mailed the catalog responded at 3.7 percent, while those mailed the catalog responded at 2.1 percent. Of the two-time-plus buyers, those not mailed a catalog responded at 8.5 percent; those mailed responded at 3.6 percent.

Panels also were created for older buyers. For buyers who previously had purchased more than 13 months ago, those not mailed responded at 3.4 percent; those mailed responded at 2.8 percent. This isn’t a one-time test. We’ve repeated this test with several clients and seen similar results.

At this point, much additional research needs to be conducted to fully understand buyers’ behavior now that they have 24/7 Web stores available to them. I would postulate the following:

1. A certain portion of customers, particularly those originating on the Web, not only prefer to shop on the Web, but also are oblivious to (or may even resent) catalogs being mailed to them. Just as we all know that a substantial portion of the population prefers to shop in retail stores and rarely shops direct, it stands to reason that many Internet shoppers are the same way. You’re wasting your catalogs on them.

2. Your most motivated, best customers may need catalogs the least — particularly if they placed their initial order via the Net. Many of your best customers celebrated the day you opened a 24/7 store in their home. While they may need a catalog to introduce them to new product, they could respond just as well with less frequent mailings or smaller catalogs.

3. Recent customers who ordered online, especially those with frequent past orders, are most likely to place Internet orders regardless of whether they receive catalogs. As in the above test, you won’t receive a positive ROI from mailing them a catalog. But at some point in time, as they age, you likely will get a positive ROI.

In other words, RFM is upside down!

Set a New Standard

The point is that a new standard must be set that goes beyond basing mailing decisions on simple response rates. Rather, with past buyers, mailing decisions should be based on the difference between the sales of customers mailed vs. sales in the same period from a control group of like customers who aren’t mailed. You need to financially justify the catalog mailing not on the absolute response rate, but on the differential achieved. To properly determine if a segment should be mailed in the future, as we did in the test above, create panels that aren’t mailed and compare results to those that were mailed.

For example, if the customers mailed have average sales of $3.30 and those in the control group who aren’t mailed have average sales of $1.80, the mail/do-not-mail decision for the group should be based on a response rate of $1.50.

It’s also critical to segment buyers in new ways. While many catalogers have started to segment by method of ordering — Internet vs. phone — that, too, can be misleading. Take it a step further: Divide those who’ve placed their orders online into customers originating on the Internet (resulting from nonbrand paid or organic searches) and those who’ve placed their first order after receiving catalogs. This necessitates adding matchback results and Web tracking information to customer databases. These two groups may have very different behavior in response to subsequent catalog mailings.

In today’s multichannel climate, transitioning to a multichannel world requires new knowledge and techniques. At the same time, the cost of mailing catalogs continues to escalate, punctuated this year by rising postage costs. It’s incumbent on you to fully understand your customers’ behavior so you can target with even greater precision.

Test many of the traditional assumptions that underlie what you currently think of as “best prac-tices.” The current landscape harbors many unknowns, but your industry, perhaps more than any other, is equipped with the tools to understand what’s going on if you combine out-of-the-box thinking and sound discipline.

Set Up Control Groups in Four Easy Steps

Now that you have a 24/7 store available to customers, create control groups of past customers you haven’t mailed, to determine their buying behavior vs. that of those who are mailed.

1. Segment your buyer file to explore differential response from customers originating on the Web from search engine product keywords, search brand keywords, or after having received a catalog.

2. Through a back-end analysis, explore other potential segmentation variables, such as gender, past product category purchase and ZIP penetration, that may significantly impact response.

3. Irrespective of file size, segment your housefile by RFM and other key factors that drive response. While you may not find the number of names in a segment statistically significant, you can appreciate the impact of each factor by aggregating multiple segments by that factor; then apply that knowledge to later mail decisions.

4. Try mailing alternative formats, such as letter-qualified pieces or catalogs with alternative content, such as “all new products,” to stimulate response from those originating or placing orders on your Web site.

John Lenser is president of LENSER, a San Rafael, Calif.-based catalog consulting firm. You can reach him at (415) 446-2500 or john.lenser@lenser.com.