Catalog Watch--Prospecting Online
By Steve Trollinger
In the past three years, the Internet has gone from being the answer to cataloging—the way companies were going to cut costs and grow profits by eliminating paper catalogs—to being recognized as a sound marketing channel within an established mix of response media.
Today, many catalogers have learned that the Web offers an efficient way for customers to find more information, place orders or check an order's status. Not unlike previous technological advancements, companies scrambled to get on board with the Web and touted all of its glorious, paradigm-shifting wonderment before finally understanding the limitations of the technology and incorporating what worked into an existing framework. Opportunities for Internet advertising and customer acquisition are constantly being explored, but most companies today are trying to make the Internet fit into a proven framework for success.
Still getting on-board
When it comes to prospecting for new customers online, most catalogers continue to have mixed results mostly on the poor side. Traditional banner ads still get very low click-throughs and, not surprisingly, very few orders. Advancements in banner technology and increased bandwidth will no doubt produce spikes in overall banner effectiveness, but most customers still find banner ads annoying—whether the ads fly across their screens or not.
Portal sites, shopping sites, communities, affiliate programs and rented e-mail lists all are being used to build the catalogers' e-customer files. While each method has its pros and cons, the real measurement of "success"—return on investment—is hard to put a finger on. Too often, the metrics of online cataloging and direct marketing success are overlooked in place of gross performance—catalogers are so excited to see that 20 percent of revenues is coming from the Internet that they fail to adequately evaluate the overall impact of those sales.
Missing the forest for the trees
Take the following scenario as an example of what can happen if a cataloger fails to look at the big picture concerning its Web sales. The following assumptions, based on findings from research and client studies, will be used in the example:
• In many cases, average order value (AOV) for an order placed online is 10 percent to 25 percent lower than an order placed through traditional channels such as phone or mail. This decrease is likely due to the perceived hassle involved with shopping online (slow download times, illogical navigation, etc.). While catalogers often can increase online AOV by improving various site aspects, this example will assume a $75 AOV for the catalog and a $63.75 AOV online.
• Fulfillment costs online are 30 percent to 50 percent lower than traditional channels because of the lower labor costs involved in processing catalog orders from the Web. Assume a net fulfillment cost of $7 per order for the catalog and $3.50 per order for the Web.
• Assume cancellations and returns combined account for 5 percent of sales and that the cost of goods sold (COGS) is 40 percent of sales.
Based on these assumptions then, the cataloger would see the following P&Ls for each type of order:
This example results in an 8-percent drop in contribution per order when a customer is converted from a catalog buyer to an Internet buyer. If this is the case, the question of whether it makes sense to try to convert catalog customers to Web buyers "because it doesn't cost as much to process an order online" has to be asked. The picture becomes even grimmer if the cataloger implements an offer of, say, $5 off for all orders placed online. The net result in that case would be a 22-percent drop in contribution per order.
To take this example one step further, consider a mailing of 500,000 catalogs with an overall response rate of 5 percent which includes Internet orders as well as catalog orders. Of course, it is unlikely that 100 percent of a cataloger's online orders are generated as a result of the catalog, as is the case in this example. Many catalogers, however, find that as many as 80 percent or 90 percent of its online orders are directly correlated to the paper catalog.
So, the 5-percent response in this example will generate 25,000 orders. If the Internet represents 15 percent of sales, then 3,750 orders were converted from the catalog to the Web. Those 3,750 orders represent almost $11,000 in lost contribution directly related to pushing customers from the catalog to the Web. The number jumps to almost $30,000 lost if you add in a $5-off offer.
Now, this DOES NOT mean that catalogers are making a mistake by pushing orders to the Web. It does mean that catalogers must understand the metrics behind the medium. For instance, AOV can be improved through site enhancements. Many catalogers have had success in matching or exceeding the catalog's AOV online by incorporating "smart" cross-sells and upsells where the software behind the e-commerce site picks related products from an inventory database and presents them to the customer at the time of checkout.
Others have improved AOV by altering the site's navigation so that getting from one product to another or from the shopping cart to more items is fast and easy. The point is that understanding what the metrics mean and how to use them is paramount to knowing if the Web is working.
Without a global evaluation of "what's going on" with the Web, catalogers—and all marketers—can take a hit at the expense of the newness and intrigue that the Internet presents. And this goes for the database too.
A customer is not a customer is not a customer
Several studies conducted in the past few years have found that anywhere from 30 percent to 70 percent of Internet buyers are new-to-file buyers. What's more, many of those are new to direct marketing all together, meaning that they have never purchased from a catalog, a direct mail piece, a space ad, an infomercial or a radio spot.
So should you treat those customers like all the others in your database? Absolutely not. A customer's status as an Internet-only buyer, an Internet and catalog buyer or a catalog-only buyer should be incorporated into the segmentation process just as recency, frequency, monetary and product information are. For the reason listed in the previous paragraph, it is common for catalogers to find that when they mail Internet-only buyers with the same contact strategy as they do catalog buyers, the results are often poor. And the same can be said for e-mailing Web offers to traditional catalog-only buyers. The key is in understanding buyers' behaviors and communicating with them in the way that is most appropriate.
The big picture
Today, the Internet is no longer the be-all and end-all of cataloging, rather, it is an integrated piece of the puzzle. Technological advancements in database development, customer service, e-mail technologies and other "wish list" items will no doubt build on the enthusiasm that so many catalogers already feel toward the Web, but the overriding point cannot be stated often enough: Catalogers must understand the impact of their Web efforts from both a marketing standpoint and a fiscal standpoint.
Whether developing a new set of metrics for the Internet or falling back on modified traditional direct marketing analytics, catalogers and marketers have to justify spending the next dollar, offering the next goodie. What's important though is that each action or measurement with respect to the Internet is conducted as a part of an overall multi-channel marketing approach. Brand has to be maintained, goals have to be defined and achieved, and tracking has to be in place.
Steve Trollinger is vice president of client marketing for J. Schmid & Assoc., Shawnee Mission, KS. You can reach him at (913) 236-8988 or by e-mail at email@example.com.