Circulation Strategy to Web vs. Catalog Customers

by Stephen Lett

I want to start with the premise that the catalog and the Internet are important to each other.  It’s not the web vs. the catalog or vice versa. (I remember the old brick-n-mortar days when the retail channel thought they should receive credit for catalog sales within their trading area.) Traditional catalog companies recognize the importance of having an e-commerce presence. And many of the successful dot.com companies now have a catalog (or are starting one). The best run companies maximize both selling channels. This month, I want to discuss mailing strategies to catalog/web customers, internal allocations to both channels and the importance of match-backs. I also want to touch on the profit contribution by channel. How you look at these channels and understand the differences is important to the success of your business.

Internal Allocations and View Points

I feel there is a tendency within catalog companies to over allocate and to give a disproportional amount of credit to the web.  Intuitively, catalogers want to mail less and use the Internet more. Catalogers are not always clear on what’s really driving the business so they often favor the web out of a desire to circulate fewer catalogs.  Organic and paid search can certainly be credited to the web. So can affiliate programs like Link Share or Commission Junction.  But what about e-mail campaigns? Should orders/sales generated by e-mail campaigns to customers who came from the catalog (catalog mailings generate most of the e-mail addresses) be credited to the web? Catalogs are mailed to these customers. So are e-mail campaigns which frequently offer the customer stronger incentive to order on-line. That’s great! But over allocating these results to the web can cause us to come to the wrong conclusion. For example, if we reduce catalog circulation we will also be reducing the number of e-mail addresses that we can potentially add to the file.

Results by Channel

Today, approximately 40% to 50% of all orders/sales are coming through the web (not from the web).  For customers electing to order on-line, the web provides another perhaps more convenient way for them to obtain merchandise. Approximately 15% to 20% of the business is coming directly from the Internet via affiliate programs, paid and organic search engines. The catalog is still responsible for 80% to 85% of all sales. It is important for catalog companies to know how much total business they are doing through the web. It is also important to know how much comes from the web. And to understand the difference so that marketing efforts can be targeted properly. The chart below shows the percentage of revenue we typically see coming from the catalog and various Internet marketing programs. Then there are the e-mail campaigns which are extremely effective and on average generate 10% of total revenue for a typical consumer catalog company. E-mail campaigns generate a significant portion of revenue at a very low cost.

LETT Direct, Inc. Date: 03-01-08	PERCENT TOTAL REVENUE	SELLING EXPENSE RATIO
Catalog Channel (after match-back)	73.00%	32.00%
E-mail Campaigns	10.00%	1.00%
Affiliate Programs	6.00%	13.00%
Paid Search	2.00%	11.00%
Organic/Natural Search	6.00%	0.00%
Shopping Sites	3.00%	29.00%
Total	100.00%	25.00%

Contribution Margins

Selling expense to sales ratios for a typical catalog company range from 25% to 30%; some firms experience even higher ratios today due to higher costs for postage and paper. Internet marketing selling expenses should also be managed by this critical ratio as shown in our chart above. Paid search opportunities are not unlimited just like catalog prospecting universes have their limits. When investing in Internet marketing programs like shopping sites the selling expense to sales ratio need to be tracked. In my example, the selling expense to sales ratio for shopping sites is fast approach the same ratio for the catalog. Paid search is also becoming more expensive.

Catalog and Web Preferred Mailing Strategies

With catalog mailing costs, i.e., paper and postage, continuing to increase, catalog companies feel they can circulate fewer catalogs and use the web more to maintain the same level of sales. While this line of thinking will make it difficult to maintain the same volume of sales, a catalog/internet company can improve profits by mailing smarter. If you are like most catalogers, I’m sure you 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 do not perform well. Even the results of the 0-12 month Internet buyers as reflected on the source code report often do not look good, at least on the surface.  Therefore, it is perfectly logical to assume they should not be mailed a catalog or at least mailed as frequently as catalog buyers who fall within the same       R-F-M house file segments. But, is this really the case? Before you come to any conclusion regarding Internet buyers and whether or not they should be mailed, be sure to have your service bureau do a match-back first. To prove my point, we did the split and created a hold out panel, and found that it absolutely paid to mail the Internet buyers a catalog. We created two panels of roughly 25,000 each. One panel was mailed seven times the other only one time.  The net contribution for the group mailed seven times was approximately 55% higher than the group that was only mailed once. The additional mailing expense was more than justified.

What Match-Backs Tell Us

This 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 will tell you where the business is coming from and which key codes should be given credit for the sale, even web orders. When the non-traceable factor ranged from 15% to 20% we could simply allocated the unattributed back across all source codes on a proportional basis. This method of allocating the non-traceable results will not work today. Match-backs have shown us that it is not appropriate to give equal weight to the house file, inquiries, coops, and rented lists. What we have found every time we do a match-back is 50% to 75% of the Internet results should be allocated to the housefile … our own customers. Another 10% to 20% of these results should be allocated to outside rented lists (this varies based on how much prospecting a company is doing). The point is the allocation is far from proportional. There are other benefits beyond tracking web buyers which match-backs provide.  There are often lists that are made up of heavier web buyers and therefore, they may look like they do not work well, when in actuality they are profitable.  In this case, without a match-back you would never know this and any testing would have been 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 are falling off, or your total rentals look like they are trending downward.  This might just be a result of heavier web sales.  It sounds simple, but without truly knowing the level of performance of all segments mailed, you could be lead to some false conclusions that influence your marketing strategy.  A match-back will keep you on track and give you the level of confidence in the results needed to make sound judgments.

In Summary

There are catalog-only buyers. There are web only buyers. And, there are multi-channel buyers who purchase from the catalog and from the web. It is good to segment your housefile by this division so that results can be tracked accordingly. You might find, for example, that the web-only buyers should be mailed but perhaps not as often as your catalog or multi-channel buyers. But again, maybe they should be mailed every time. You might want to set-up a contact strategy test to help you make the correct decision before coming to any conclusion. The results may surprise you.