Turning a Business Model Upside Down - 1
A great deal of palaver comes out of business schools and think tanks about the need of the CEO to spend time with customers and respond to customers' needs.
Customers don't have needs; they have wants. And marketing people are in the business of creating wants, not serving needs.
This is the story of how 200,000 customers managed to rip off a bunch of stupid marketers.
The year was 1969. After a meeting with Jack Barlass, president of the Meredith Book Publishing Division, and Bill Gohring, head of Meredith mail order in Manhasset, Long Island, I was hired to run book clubs at a salary of $15,000 a year.
It was my eighth job in nine working years since I got out of the Army.
On my first day at work in the Manhasset offices, I was handed a binder with a black pressboard cover. It was the annual report of book clubs for the prior years.
The bad news: The clubs had lost $250,000—a lot of money in 1968. My orders: "Fix this and make a profit."
The good news: Gohring told me that Meredith—with its massive magazine empire in Des Moines, Iowa, (e.g., Better Homes and Gardens) and legion of space salesmen—expected its various divisions to have expense accounts. With virtually no travel or entertainment in the mail order division, where we worked with computers rather than clients, it was incumbent on all executives to generate expenses just like every other division of Meredith. Therefore all lunches were to be expensed. We could eat anywhere—alone, with colleagues, outsiders or spouses—and charge it to the company.
I quickly acquired a taste for two- and three-martini lunches, gained lots of weight and had a splendid time with convivial company from noon to 2 every business day at the best eateries on Long Island's North Shore.
Best of all, the vodka anesthetized the perpetual pain in my gut.
The major club under my aegis was Family Book Service with 350,000 members. They were offered books on cooking, decorating and home health guides. It generated the lion's share of revenue and was responsible for the big losses. It was imperative to turn that sucker around first.
Family Book Service was a "negative option club"—the same model as Book-of-the-Month and Literary Guild. Members received an announcement mailing 15 times a year describing the main selection; alternate titles; and a collection of flyers offering a mishmash of merchandise, other titles and—in late fall—Butterfield Farms fruitcakes, which were delicious.
Included in the mailing was a rejection slip that gave the following choices: (1) Don't ship anything. (2) Ship the Main Selection plus the following alternate(s) and/or merchandise. (3) Ship the following alternates only.
A member who wanted the main selection did nothing, and the book (or two books that made up a dual selection) would be shipped automatically.
If you didn't get instructions into the mail by the deadline, you got the main selection whether you wanted it or not.
For years the club operated on the premise that 70% of the members would accept the main selection. When the club had 150,000 members, the print order for main selections was routinely 115,000 copies.
The Sweepstakes Miracle
My predecessor was Andy Svenson, a veteran marketer out of Doubleday, Weekly Reader, and Fuller & Dees. Svenson determined that the way to build the club was with an "Everybody Wins!" sweepstakes—a grand prize of $100,000, lesser prizes of cash and cars, and, for everyone who entered, a spice cookbook as a consolation prize.
The sweeps promotions were a huge success—adding 200,000 new members to the existing 150,000—and Svenson was a hero to Meredith management. With 70% of 350,000 members expected to accept the main selection, the print orders were upped to 265,000 copies.
A Sobering Experience
The traditional book club business model depends on a contract whereby I pay the publisher a royalty. I acquire books one of two ways: buy them at cost from the publisher's inventory, or send lower-cost paper and binding materials to the printer. In the second method, once the publisher's print run was finished, my economy paper would be fed into the press and then bound for an additional print run for me. The publisher made money two ways: royalties on books sold to customers that never visit a bookstore, and a per-title savings on each book because of the vastly increased print run.
It took a while for me to understand the monthly reports, but one set of numbers jumped out: unsold books. When I suggested to management that print orders be dramatically cut, the answer was no. Large print orders kept the cost per title low so each copy sold made a bigger profit.
This was especially true of the Better Homes and Gardens cookbooks—the 8 1/2" by 11", full-color cookbooks known as "flats" that were sold for $2.95 on racks in retailers all over America.
Trouble was, a dual main selection—two cheapo BH&G books for $2.95 ($5.90 total selling price) plus shipping—didn't make money for me. I made money on $10 and $15 titles from other publishers. But six times a year I was required to buy 530,000 BH&G flats and sell them at a loss because corporate in Des Moines was making money on the deal two ways: (1) I was buying books wholesale from them just like any other retailer. (2) The cost per book was far lower than if my print order were not included, which meant the profit per book was higher for the Des Moines crowd. To put it bluntly, my little business was being roundly screwed by Meredith corporate in Des Moines.
That October, the Direct Marketing Conference was in Boston and I rented a car for a trip to our printer—Colonial, as I recall—where I was taken into the warehouse and shown my inventory. Before me were wall-to-wall skids of unsold books vanishing to infinity, and they were all mine. I owned them. Talk about a need for three vodkas.
What Went Wrong
My comptroller was a numbers genius names Harold Schwartz, incongruously bearded and Jewish in an organization made up entirely of WASPs. I've seen Schwartz eyeball a 40-page computer printout just handed to him by an IT flunky, spot a number on the cover page and circle it. "This is wrong," he would proclaim. "And if this is wrong," he said turning to page 2 and circling an entire column, "then these numbers are wrong and this report is useless. Do it again right, and bring it back to me!"
I asked Harold to give me a customer analysis by source. When it arrived, I made a horrific discovery: Virtually none of the 200,000 sweepstakes customers were book buyers. I was spending roughly 50 cents a cycle to circularize them 15 times a year. That was $7.50 per member—$1.5 million annually—and they were buying bupkis.
On top of it, we were incurring huge expenses on overstock books that weren't selling, but rather lying like lox on pallets disappearing into infinity at a Boston warehouse.
Family Book Service under that business model was on life support.
The One Problem with Sweepstakes Promotions
Quite simply, sweepstakes buyers are out to win money and prizes. According to Federal Trade Commission rules, if you use a sweepstakes to promote a product or service, every person that enters must have an equal chance to win, and there can be no "consideration" (i.e., no purchase necessary).
Sweepstakes marketers claim the folks who respond have great demographics—good incomes, own homes, travel, drive nice cars, etc. But sweeps promotions only work for a one-shot offers—a magazine subscription, book or product. For a marketer, sweepstakes promotions are like heroin. You get a rush, but don't expect to get additional sales without sweetening the offer with another sweepstakes.
The folks that entered Meredith's "Everybody Wins" sweepstakes wanted the grand prize and knew they would get a free Better Homes and Gardens spice cookbook at the very least. Virtually none of the new 200,000 sweeps-sold members bought anything subsequently. The idea of including a sweeps offer to book club members in each of the 15 cycles a year was preposterous.
Changing the Business Model
We separated 200,000 non-buying sweeps members from the 150,000 good and loyal customers that made up our bread and butter. It turned out that the percentage of the 150,000 buying customers that took the main selection was more like 50% than the 70% that was forecast. In other words, instead of printing 265,000 copies of a main selection, the actual number of books sold—50% of 150,000 members—was more like 75,000.
Understand, if you can send a mailing and get a 50% response, it's hugely profitable—but not when you're spending $1.5 million a year circularizing 200,000 people who don't buy anything and overprinting 2.8 million books that don't sell.
I wrote a long, thoughtful memo to Meredith management explaining the lose-lose arithmetic of the current business model and telling them what I planned to do:
1. Write the 200,000 nonbuying members a warm, fuzzy and highly flattering letter to be included with the next mailing cycle. It would say that we loved having them as members, but since they had not bought anything in a year, this was going to be the last offer they received unless they placed an order. Virtually all of the 200,000 nonbuying members went bye-bye.
2. Cut the print orders for main selection from 265,000 to 75,000. Alternate selection print orders were commensurately cut.
3. Put the 200,000 sweeps-sold names on the list market as sweeps responders (as opposed to active book club buyers) so we could get a little bit of our money back.
4. Test a series of acquisition mailings and space ads that featured yummy premiums rather than sweepstakes. This would acquire readers as new members, rather than the freebie scavengers at the bottom of the mail order food chain.
5. Include in the monthly mailings a series of tacky flyers on newsprint announcing a huge warehouse sale with books starting at $1—cash only.
6. Call Nat Wartels of Crown Publishers, who was a major buyer of remainder titles for sale in his various outlets, and offer him titles at pennies on the dollar.
Next Week: More changes in the business model and the uproar that rippled through meredith.