PUMP UP the VALUE

May 01, 2005 9:30 PM  By

THE DAYS OF MULTICHANNEL marketing as an independent business discipline, dominated by just a few tech-savvy marketers, are over. Successful direct marketers now provide multiple response mechanisms — mail, phone, store, Internet — so that customers and prospects can make purchases via the channel of their choice. Even traditional retailers are leaning on the Internet so that consumers — as many as 74% of them, according to Worthington, OH-based online market research firm BIGresearch — can investigate purchases before visiting stores. Multichannel has gone mainstream.

The impact on the catalog industry is undeniable: There is no longer a catalog industry. A catalog is a dynamic promotional medium, a proven lead-generation tool, and certainly an effective order-taking device. But just as other sales channels have adapted to the pressures brought forth by disruptive technologies, the role of the catalog has fundamentally shifted — from self-sustaining industry to powerful marketing tool.

Smart catalogers intent on growing their business and building long-term value must recognize that shift. Understanding the seismic shifts and best practices now driving the marketplace is essential to reinforcing a competitive stance and positioning a catalog — or, rather, a multichannel direct marketer — for profitable growth. And growing revenue without hurting the bottom line is key to increasing the value of your company.

IT BEARS REPEATING: A cataloger’s growth now depends upon its ability to intertwine multiple customer touch points, on both the promotional and response sides, to foster strong and profitable buyer relationships. That means adding e-mail, online, and even brick-and-mortar store channels to complement paper catalogs. It means that call centers, Websites, mail fulfillment providers, and stores must all be capable of receiving and processing orders promptly and efficiently. And most important, it means that those channels must provide a consistently high level of customer service underscored by a unified branding platform.

But those essentials don’t tell the whole story. As important as it is to provide customers with multiple purchase vehicles, it is just as important for catalogers to exploit their proprietary data to understand how those same customers prefer to buy, so that they can craft, tailor, and target their offers for enhanced response and return on investment.

Right now, catalogers measure response well but generally fail to tie their purchase data to their growing spectrum of promotional channels. According to CognitiveDATA, a Little Rock, AR-based customer data and address hygiene services provider, even the best catalogers match back only 60% of their online buyers to their original purchase source, leaving a substantial number of transactions in an informational black hole.

How did these customers learn about a product or an offer? What kinds of offers may appeal to them in the future? Via which media do they prefer to receive product information? Without that information, the benefits of the multichannel approach are lost, along with the unique added value that catalogers — already experts on analyzing customer data to increase response rates — stand to receive in comparison to other marketers. Wasting such powerful information relegates the newly multichannel cataloger to an unfortunate place: It must compete against the general marketplace in a commoditized, cost-centric environment where economies of scale, not customer service expertise, win every time. Clearly it’s not the best place to be.

Despite such imperfect and incomplete data, most catalogers have realized the critical importance that Websites play in their revenue mix. Many industry leaders report that they are seeing as much as 40% of their sales coming through the Internet.

Whether those sales are “pure online” or “catalog-driven online” is more difficult to determine. What is obvious is that multichannel customers are often the most profitable. One leading cataloger reports that its catalog/Website/store customers generate nearly four times more revenue, on average, than its catalog-only clients; upscale marketer Saks recently announced that its multichannel customers spend five times more than single-channel buyers.

In short, we’ve moved toward an integrated sales environment where merchants must use multiple tools to generate market share. In today’s catalog marketplace, where fewer than 5% of all players generate more than $100 million in annual revenue, that is a salient lesson.

TO GROW YOUR BUSINESS — and your business’s value — in these multichannel times, keep in mind that shoppers have become ever more sophisticated. Therefore, you need to give them more-sophisticated offers.

E-commerce platforms have made significant technological strides in recent years, adding comprehensive search and shopping-cart functions to help visitors get the most out of their interactive browsing. Unfortunately for some companies, those resources may be a bit too powerful for their own good. Shoppers are using proprietary search engines to find low prices before fleeing those sites to grab the same product at an even lower cost elsewhere. The same goes for information-rich online shopping carts, which they are abandoning in droves (more than half of all carts, according to Cambridge, MA-based Forrester Research) once they’ve accumulated the pricing knowledge they need to buy at competitors’ outlets.

The bottom line: Developing valuable long-term relationships with today’s buyers demands new promotional offers tailored to their level of insight. Catalogers are well positioned to experiment productively with such initiatives, given their wealth of customer and purchase history information, their natural ability to tailor offers for individual recipients, and the relative unobtrusiveness of direct mail. Experimental catalog offers can be product-oriented (free gift with purchase, buy-one-get-one-free) or process-oriented (free shipping, gift wrap) but must always be grounded in a concrete acquisition strategy and easily measurable. From there, the options for profitable customer development are virtually limitless.

With catalogers under fire from emerging interactive channels, big-box retailers, and price-obsessed consumers, one might think that the top issue confronting them would be the need to differentiate products and carve out a niche in such a volatile marketplace. But a staggering 81% of catalogers polled for Catalog Age’s Benchmark Report on Critical Issues and Trends (see December 2004 issue) revealed that “reducing costs without reducing offerings or services” is the most pressing management issue by far.

Reducing unnecessary costs is essential for any company, of course, but cost-cutting should not be the primary goal of growth-focused businesses. Focusing on revenue growth, channel expansion, new customer development, and yes, the integration of multiple complementary promotional vehicles is core to the marketer’s mission. All other functions — technology, infrastructure, even product fulfillment — can be contracted to outside suppliers who can manage such processes more efficiently, leaving the growth-focused business to zero in on its core business objectives.

MERGER AND ACQUISITION activity is intense in the direct marketing sector right now, offering a rare opportunity for successful catalogers to showcase their value. In 2004, 550 transactions involving direct marketing companies and marketing services providers were completed, encompassing $27.2 billion in aggregate value. Within that group, 65 deals (or about $5.7 billion in value) were in the catalog sector.

The role of strategic investors — looking to add profitable catalog platforms, customers, and channels to established brands — has been particularly prominent. On the financial side, the lack of attractive opportunities in recent years has resulted in a glut of available capital for potential catalog owners looking for liquidity. Dozens of private equity groups, in fact, are actively searching for opportunities in the catalog world. Profit is the main motivator here; firms with earnings before income, taxes, depreciation, and amortization (EBITDA) in the $5 million-plus range are considered attractive, while those that manage to top $10 million in EBITDA are generating tremendous interest.

Remember that long-term value relies on long-term fundamentals. Growing profitably and generating value requires a straightforward assessment of the market and a proactive approach to corporate growth. It means doing away with old channel biases and moving toward a new retail reality where the catalog is the centerpiece of a selling strategy — but not the strategy itself. It demands the integration of new technologies and the outsourcing of business processes not central to the catalog business.

Most of all, it means recognizing the fundamental changes sweeping the marketplace and acting to exploit them proactively before the market moves yet again. The challenge to prosper in a dynamic marketplace is daunting but unavoidable — and stands to reward those who embrace the changes. The move to multichannel may not be easy, but it is an essential element for any catalog firm looking to grow in the “new” catalog retail industry.


Michael Petsky is CEO of New York-based investment bank Petsky Prunier and direct marketing consulting firm Winterberry Group; Jonathan Margulies is manager of Winterberry Group.

Competing with pricing pressure

As the U.S. increasingly becomes a nation of bargain hunters, marketers are up against extreme pricing pressure. Retail giant Wal-Mart generates its astronomical revenue by leveraging economies of scale to offer a huge array of products at prices so low that most competitors can’t keep up.

Wal-Mart’s fastest-growing rivals, among them Target and Costco, have developed their own means for generating scale via a combination of consumer-friendly pricing, streamlined supply-chain processes, and bulk purchasing. No-frills dollar stores represent yet another burgeoning retail sector and the fastest-growing channel in the consumer packaged good sector.

Pricing pressure isn’t limited to stores. Online search portals such as BizRate and Kelkoo let consumers comparison-shop instantly via the Internet and serve as natural lead-generation tools for any interactive retailer that just happens to offer the most competitive price. As a result, a number of online marketers have begun competing almost solely on price as a means to deter store visits and compensate for product delivery lags inherent to the channel. Free shipping, after all, helps sooth the sting of six-day delivery cycles.

With such rampant pricing pressure, and with U.S. consumers showing no signs of relenting in their demand for high-quality goods at rock-bottom prices, further striation of the marketplace is inevitable. On one side will be the high-margin specialty providers, offering luxury items for high prices (and at low volumes). On the other side will be the high-volume mass market, driven by depressed product quality, low prices — and low margins. Those in the middle will be squeezed out.

In such an inhospitable climate, a cataloger cannot choose a “high-margin, high-price” or “low-margin, low-price” strategy. The key is to differentiate — to carve out a defensible position in a crowded marketplace by offering proprietary and private-label products, building unique brands, and reducing reliance on merchandise that consumers can easily buy elsewhere.

The move toward high-value niche catalogs is not new; witness the case of Sears, Roebuck & Co., which folded its landmark catalog business after technology rendered its once-extensive product variety wholly unspectacular.

But it is a trend that will play an increasing role in the retail landscape as consumer demand continues to depress the value of commodity goods and generate pockets of opportunity for marketers that can respond to unique consumer needs, be they high or low-cost in nature.
MP/JM