A detailed profit and loss statement for each channel – and for each store location and catalog title – gives you the best handle on resource allocation and employee responsibilities
The print catalog landscape is quickly changing to incorporate new and different channels, from traditional retail to the new frontier of the Web. As a result, multichannel marketers face a variety of challenges and questions with regard to financial reporting. What will the new financial model look like? Should you spin off your Web business and treat it separately, or should you blend online sales with catalog results? Do you need a separate plan for retail?
In addition to the issues of reporting, resource allocation, attracting and retaining talent, and the ability to raise capital, multichannel marketers must deal with merchandising, pricing, customer service levels, sales tax implications, and incentives for different channels. With this in mind, you should set up separate financial plans for each channel – at least down to a net contribution level. Different plans will provide you with the appropriate detail knowledge to take actions in the future, including resource allocation, incentives, and repositioning.
Print catalogers that have successfully expanded into retail have a grasp of what’s involved with moving into another channel and how to plan for it. I experienced this phenomenon first-hand when I was chief financial officer for hardware, tools, and gadgets cataloger Brookstone in the late 1970s – when the Nashua, NH-based company opened its first retail store in Boston. That experience demonstrated the importance of developing detailed profit and loss statements for each channel – and for each store location and catalog title. This level of reporting will give you the best handle on resource allocation and employee responsibilities and incentives.
The challenge of separation
Developing separate plans is no easy task, however, since you have to give careful thought to the proper allocation of both revenue and expenses. Thus, it is critical for multichannel marketers to measure and properly allocate the cannibalization of the customer base. At Brookstone, I remember list industry veteran Steve Millard, who was then our head of direct marketing, arguing vociferously that his catalog was driving customers to the store and thus he was losing sales. He was absolutely correct (even though he lost the argument to have the cost of all catalogs east of the Mississippi charged to the Boston store.) On the other hand, the presence of the retail stores ultimately drove new customers to the Brookstone catalog.
You have to measure and then properly allocate the cannibalization of the customer base. At Brookstone, we accomplished this by carefully measuring mailings into specific zips close to the stores. We also captured the retail customers’ names and addresses on an order pad attached to a clipboard – which was a unique concept in retail at the time – and mailed them retail key-coded catalogs.
As with retail, catalogers now moving into e-commerce will need to capture information from Web customers and determine what drove them to the site. Of course, this is easier said than done. In the future, software developers and consultants will be able to help catalogers with the capture, measurement, and appropriate allocation of online sales data. But for now, many companies are doing surveys and other forms of research to try to determine where customers to various channels are coming from.
This is increasingly important, because I am hearing about catalogers cutting their circulation because they are incorrectly seeing a drop off in response, when in fact the customers are still buying, but from their Website. Thus, you might have store customers who do a search for your company’s name on the Web, find your site, and then start buying online rather than at retail. So it’s also critical for mailers to capture e-mail addresses of their catalog customers, and for the Web channel to capture snail mail addresses of their e-customers, and for retailers to try to capture both addresses. This will help sort out cannibalization, and provide marketing opportunities for the future.
The multichannel plan
In creating a financial plan, you’ll start by listing the net sales, cost of sales, gross profit, direct selling, general and administrative expenses for each selling channel, You’ll then detail the allocation of marketing expenses, which will vary by channel. For instance, you would have a detail schedule explaining the allocation assumptions, such as circulation into retail U.S. Postal Service sectional center facilities (SCFs).
Marketers also need to use different measurements to analyze each channel, since many factors are unique to catalog, retail and Internet. Below, the key measurements by channel:
cost-per-book in the mail
positioning in the store
positioning within the mall
sales per square-foot
But the ultimate measure across all channels is the customer acquisition cost measured against the lifetime value of that customer. Getting this information within each channel and across all channels will be a critical financial measurement of the future model.
You have to take all your marketing costs – mailings, print ads, television spots, banner ads – and divide by the number of unique orders. In measuring the cost of acquiring a customer by channel, some marketers are finding that it’s cheaper to bring customers in through catalogs than over the Web, once you factor in the cost of paying Web affiliates for click-throughs.
The product and pricing model is typically different for each channel. Catalogers with retail channels, for instance, often use the stores to test new products or shift product positioning. In addition, marketers can use stores to sell obsolete or slow-moving items at markdowns with more flexibility than with a print catalog.
The Web provides many of the same product and pricing opportunities as retail for catalogers – particularly for sales and liquidation. But you must adjust the financial reporting to account for liquidation so that you don’t penalize this channel for effectively removing obsolete inventory at lower margins.
Customer service levels, expectations, and measurements will be different for each channel, from the instant gratification expected in a store to the instant customization capabilities offered in e-commerce. The key for the multichannel cataloger is to measure customer satisfaction and always try to improve it, as long as there is sufficient return on investment. You do this by listening to customers, conducting surveys and focus groups, and make improvements if you can or if you need to.
You have to balance service enhancements with cost elements, however. Customers may say in a focus group or survey that they don’t want to pay shipping and handling charges. But you will lose money if you waive shipping and handling entirely (although this may work for a special promotion). Some of the dot-com start-ups that offer free shipping are now finding it difficult to make money.
I recently witnessed a cataloger and a dot-com discussing the question of backorders. The dot-com proudly said he had none, because if he was out of stock on an item, he removed it from his Website so that customers didn’t perceive the back-order as poor service. The cataloger, on the other hand, saw this action as a lost revenue opportunity – as well as a missed chance to provide exceptional customer service by properly notifying the customer and then later filling the backorder as promised.
New channel challenges
If you are primarily a print cataloger, be prepared for new challenges when you move into another channel. When we moved into retail at Brookstone, for instance, we had differences to handle in the areas of taxes, legal issues, and controls. We had to deal with sales tax collecting and remitting, as well as new income tax issues that we were not accustomed to, being based in New Hampshire – the “Live Free or Die” state. We also quickly ran into new legal issues with operating a retail location, such as customers falling or getting injured in stores. In addition, we had to deal with a whole new set of control and reporting issues, accounting for various factors such as rent based on sales at different retail locations, and the problem of shoplifting.
Today’s catalogers moving into retail and cyberspace will run into similar issues. For one, the Internet sales tax issue has yet to be resolved, (although it looks like Web merchants will get a reprieve through 2006), but marketers had better keep detailed sales records within each channel to avoid potential future liabilities should they need to start collecting use-tax.
Without question, catalogers are now in a very dynamic, exciting, and fast-paced era. But marketers should never lose sight of the basics that made them successful in the past – sound reporting techniques, target marketing strategies, ever-refining measurements and feedback, paying constant attention to ROI, and always listening to their employees and customers.
Given the substantial valuations of dot-coms just a few months ago, many multichannel marketers have been tempted to spin off their Internet divisions as a separate company, and some have even done it. And six months ago, I might have even encouraged catalogers to create separate Web companies. But now that Web valuations have cooled off considerably, I’d lean toward keeping the Web under the same company for now. After all, few cataloger/retailers see the need for a separate retail division.
Forrester Research predicts a “massive shakeout in dot-com retailers” before the year is over, with the brick and mortar retailers and catalogers emerging as the survivors. This reminds me of the late 1980s, when highly overpriced leveraged buy-outs were in fashion (Brookstone was one) and the marketplace came to its senses then and made major corrections. I believe this will continue to happen with e-commerce valuations.