The next stage Jun 1, 1998 12:00 PM
, Bill Nicolai
JobZone
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Virtually every savvy cataloger agrees that the effective use of a
company's database is key to catalog success. More than merchandising,
creative, and order fulfillment-the other critical components of
cataloging-database usage has probably changed the most dramatically over
the past few years and is likely to continue evolving rapidly over the next
decade.
Where we stand
But before we discuss where we'll be with database marketing in 2001, let's
review some of the key developments and trends in database marketing over
the past five years.
The explosion of the consumer cooperative database, most significantly that
of the Abacus Alliance co-op, from a practically unknown entity to a
driving force in catalog information technology has occurred in only five
years. Though I suspect that it still makes up a low double-digit
percentage of the total market for consumer purchase data, Abacus appears
to have the potential to dominate the data market over the next decade.
Several smaller players-including SmartBase and Z-24-are also contributing
to the growth of the co-op database phenomenon.
In working in database marketing, first as a consultant and then as a
catalog owner for the past five years, I've noticed that the bond between a
catalog company and its customers is much weaker than just a decade
earlier. Ten years ago, I often found that a cataloger's 12-month buyer
file produced three times more sales per catalog than the better part of
the company's prospecting universe. Now I estimate that the "buyer lift" is
perhaps only 1.7 times better than the response from prospects. Some niche
players may still enjoy the triple-sales buyer lift, but it's safe to
assume that even their lift will eventually decline the way it has in the
more general clothing, gifts, and home markets.
Oddly enough, this is a byproduct of the strides catalogers have made in
improving the quality of service and value they deliver to their customers.
It appears that good service has become so pervasive that customers give
credibility to nearly any catalog that displays a product they want; the
customers assume that the company can and will deliver the product quickly
and accept returns if they choose to send the item back. As a result,
customer loyalty to any one standout catalog has eroded. This decline in
loyalty is the heart of the challenge facing database marketing in the
future.
Despite many consecutive years of sales growth, the consumer catalog
industry appears permanently stuck in a low-profit posture. Whatever the
reason (some would say cost pressure; I say excessive capitalization), this
phenomenon has led to changes in database marketing. The industry is
forever chasing database marketing innovations that yield momentary
advantages for the early adopters.
This pursuit, which is reminiscent of a cat chasing its tail, doesn't seem
to yield any long-term profits, but woe to the company that misses a
significant opportunity. Aggressive apparel catalogers such as Coldwater
Creek and DM Management are credited with hugely profiting from the co-op
database phenomenon, while more conservative players such as L.L. Bean and
Norm Thompson are thought to have missed that boat. Earlier waves of
database innovation that swept the industry included inhouse multiple
regression modeling and mega, or universal, merge technology-an advanced
technique most often used by large companies with more than one catalog.
In each case, it appears that the early adopters gained significant short-
and mid-term profit and sales growth. As the new millennium approaches, all
players in the database game must keep this lesson in mind. It is not
enough to master current state-of-the-art methodology. You must continually
change your methods to stay abreast of the competition-or better yet,
innovate to beat them.
Where we're going
With that said, let's look at what we can expect in the next three to five
years.
Databases will provide almost instant access to purchasing behavior.
Rather than monthly hotline names, databases will offer weekly and even
daily hotline names. New database products, such as RFM+ from Direct Tech,
are already being beta-tested. These products rely on super-recency data to
find both outside and house file names that are currently buying. These
products should yield a modest lift in outside list response (perhaps 20%)
if all other factors are held equal. But they are both too new to provide
definitive results.
The key to maintaining the power of super-recency data will be how the
database gatekeeper metes out this data to participants. If each new name
receives too many catalogs, then the mailers will receive no lift. But with
restraints on how many times the data provider ships a given name within a
certain time frame, the data should work well.
Co-op databases will offer product selects.
Many catalogers are taking advantage of the increasing number of list
owners offering product selects. For instance, a jewelry cataloger can rent
the names of only the jewelry buyers from upscale clothing and gifts mailer
Neiman Marcus, and not have to rent the names of apparel buyers. Once
co-ops combine product selects with database scoring, the additional data
will be incredibly powerful.
To make product selects work, co-ops will probably need to establish
hundreds of standard categories in which any specific item purchased will
fit. Each company's inhouse product group codes would then fit into this
standardized system, similar to the way business-to-business marketers use
standard industry classifications (SICs).
The first co-op vendor that makes product select data a factor in its
multiple regression scoring models will immediately drum up usage from
existing clients plus the business of hundreds of small catalogs whose
narrowly vertical product lines prevent them from renting any lists except
those of their closest competitors and special interest magazines. Such a
data development will actually spur the rapid expansion of hundreds of
niche businesses.
Let me point out the recent example of the Edutainment Catalog, which has
cracked open the children's educational software market with 100% annual
growth for the past four years. The company, which grew from $1 million in
sales in '94 to a projected $15 million this year, evidently accomplished
this by working with Abacus to combine purchase data from kids' products
catalogs with "known computer at home" data.
Eventually, every mailer will have access to every name, and since so much
will be known about each household, the large data service providers will
principally compete over which can provide the most effective and useful
data about each individual's propensity to buy from a particular offer.
Widespread business access to product select history will fuel this
development.
Postal worksharing discounts will increase.
Regardless of when the next couple of postal rate increases become
effective, they will clearly be structured to benefit larger mailers. The
U.S. Postal Service recently proposed a steep discount for sectional center
facility (SCF) direct barcoded carrier rate mail-mail drop-shipped into
SCFs-as the USPS seeks to increase profits and shed costs. This development
will revitalize multicompany comailing efforts and database postal saving
methods such as add-a-name, in which catalogers mail additional books to
nonrespondent names to satisfy a carrier route minimum.
The availability of larger and stronger responding pools of names from
co-op databases will further enable large mailers to increase their cost
advantage over the small players. The real losers here will be the smaller
general interest catalogs, which will have to deal with the double whammy
of low response and high costs. Database, postal, and print efficiency
issues will make it almost impossible for a general interest catalog with
sales of less than $50 million to succeed.
New consumer protection issues will emerge.
I believe that catalog customers are no longer so concerned about how
catalogs acquired their names. A more significant issue will emerge over
the use of recurring credit card charges by membership clubs and
publications-organizations that have the ability to charge people for items
or services they didn't actually order. Such activity is likely to attract
the attention of politicians and regulators. I would expect to see
battalions of baby boomer grannies testifying to Congress about how their
Visa cards were maxed out by unscrupulous product and service providers.
The unethical use and sharing of specific credit card data will, in my
opinion, become a big concern within five years.
The list and database industry will continue to consolidate.
List brokers and managers will see their businesses evolve through
consolidation and absorption. This business will increasingly flow to the
larger integrated data service companies, such as Acxiom and Direct Tech.
Indeed, three to five major players will dominate the information game.
These companies will vertically integrate data services from the point of
data collection through mail preparation. I expect that the data supplier
business will pretty much be dominated by the surviving large players that
combine list marketing and data services.
The emergence of large companies in deregulated industries, such as utility
companies, that are trying to leverage their rather weak database assets
will in fact support the list industry and fuel overmailing after the
current excess of public capital peters out. Companies with few natural
skills in marketing, including airlines, banks, and Baby Bells, will
probably contribute further capitalization to the already overmarketed
consumer field.
Mass mailings will become a thing of the past.
The marketing philosophy that will distinguish the cataloger of the next
decade will be a decreased emphasis on how many catalogs it can mail.
Instead, mailers will place much more emphasis on response rate and the
value of the customers generated. By bringing more purchase history data to
bear on each marketing decision, companies will be able to mail much
smarter and ultimately drive more profits to the bottom line.
Gross margins will erode.
Customer loyalty will continue to decline, and catalogs will counter this
by becoming more price competitive. I expect widespread adoption of loyalty
programs and discount pricing-even in upscale markets that have resisted
such developments. Since the data genie is already out of the bottle and
there is no way to protect one's customers from one's competitors, catalog
companies are going to have to face up to the need to compete strongly with
a true value proposition. This development will further increase the
negative pressure on larger companies' profits.
Brands will consolidate into megabrands.
A partial solution to the lack of loyalty brought about by universal access
to sales data would be assurance of service through brand. Among the
multititle companies, there appears to be a clear division of opinion on
the importance of brand. On one side are Coldwater Creek, L.L. Bean,
Sharper Image, and Lillian Vernon-catalogers that always leverage the lift
inherent in name recognition by making it clear who is sending the catalog.
In the other camp are companies such as International Cornerstone Group,
Hanover Direct, and Norm Thompson, whose names don't always appear within
their catalogs. I believe that over the next few years the megabrands will
gradually prevail, although the further weakening of loyalty may prevent
decisive victory for either faction.
