The New World of Direct Marketing

By Larry Kavanagh

I had breakfast with a couple at a conference recently. The woman was the founder of a business that sells beads to home hobbyists for bracelets and necklaces. Her partner runs the back-office operations for the business. I asked how they started their business.

"I've always enjoyed making bracelets and necklaces," the woman began. "But most craft stores don't stock the really interesting beads or take the time to offer patterns and instructions. It's just too specialized. I saw an opportunity to start a company for people who shared my passion. I began out of my home. Now we ship about 30,000 orders a year, have a warehouse and are  adding staff."

In my 20-plus years in direct marketing, I've met more than 100 entrepreneurs with very similar stories and can feel their passion when they speak about their businesses. But this time, the story had a very different twist. The couple had no idea of the size of the company's 12-month buyer file. The two of them didn't have a call center or a catalog. They were considering adding a website, yet the woman confided they were concerned that if they do, they'll also have to add people to take phone calls from customers.

The couple built its business on eBay. Meet the new world of direct marketing.

Yes, That eBay
In this new world, you don't need to know how to find customers. You can start on eBay, then add stores on Amazon and Overstock. These marketplaces yield the traffic, customers and engine to transact. This new world of direct marketing is huge.

There were more direct marketers at the conference where I met the couple than there were at this year's ACCM. And it wasn't even a conference in the true sense of the word — it was a user group meeting for a software company.

If the couple had started its business 10 years earlier, it would have gone to market with a print catalog. But new catalogers today are few and far between. As I looked around this meeting, it was clear where many of the direct marketing entrepreneurs had gone.

There are many similarities between this new type of direct marketer and classic catalogers.

The couple I met found an underserved audience and developed a product line to match it. These two figured out how to buy and price product, when to use sales and offers, when to add something new, and how to know what to add. They developed great graphics and wrote compelling copy to get customers to reach for their credit cards.
The couple had what I call "the skill of merchandising," the most common and fundamental skill of cataloging.

Going-Out-of-Biz Model
This new world is beginning to spread out to reach the old. ChannelAdvisor, the software that many eBay stores use to post ads and products, and the host of this particular conference, has been adding channels to its offerings. Companies on this platform now can advertise on comparison shopping engines, such as Shop.com, and manage paid search.

Many marketers tell me channels like eBay don't work for them. "Marketplaces and comparison shopping engines just don't fit into our business model … those shoppers are really just loyal to that channel."

As I looked around the room at these fresh, successful direct marketing companies, I wondered if the business model that traditional catalogers are clinging to may soon become the going-out-of- business model.

Catalog prospecting has been getting more expensive for years. Everyone knows that postal rates are up while list universes have shrunk. The real impact of these facts is just beginning to show. For a while, catalogers were able to hold profits steady by decreasing prospecting. But this catches up as top-line revenue begins to decline and fixed expenses, of course, don't. A vise grip of cost pressures traps small to midsize catalogers. This is one of the underlying factors behind merger and acquisition activity today.

For catalog retailers who still have a strong merchandising skill, this new world of direct marketing represents a way out. This path forward frees one from the constraints of catalog-based prospecting.

The trick is to sell product where the shoppers are, rather than spend money to find them. To do this, you have to ditch the old catalog business model.

Only about 22 percent of sales from the average company at the ChannelAdvisor user group come from the company and shoppers directly contacting one another. The rest come through channels such as the marketplaces, comparison shopping engines and search.

Follow the Shoppers
In the new world of direct marketing, merchants set up shop in places shoppers are likely to be, whether an Amazon store, a keyword on Google or a comparison shopping engine. These merchants work hard to adapt their shops to the particular channel. They change copy and merchandise mix. They don't just put their complete catalogs on Amazon or Shop.com and expect great results. They pay attention to the actual results and adapt.

This is still direct marketing. The effectiveness of marketing activities is still directly measurable. The merchants in the new direct marketing world test like crazy.

Today, the new and old worlds of direct marketing have only barely met. Because of the differences in business models, the two don't view each other as competition. That'll change, though, as the two worlds compete on common channels like  paid search.

Going to School Off One Another
Each of the worlds has strengths that the other could learn from. The new world doesn't carry the burden of historical certainty of what the marketing and operations staff of a direct marketing business should look like. It's free to create an organization focused around feedback ratings instead of answering phones.

The old world knows the value of measuring and optimizing metrics like the number of zero- to 12-month buyers and repeat order rates.

While the new world has a lot to gain from the old, it's the traditional, small to midsize catalog marketers that most need a sense of urgency about learning. Crippling cost increases combined with the economic slowdown haven't left them a lot of spare time or extra cash to experiment. For these entrepreneurs, it's now or never.

Larry Kavanagh is founder and CEO of multichannel solutions provider DMinSite (lkavanagh@dminsite.com).