Transferring Core Direct Marketing Competencies to the Web

Published in DM News

 

To a seasoned direct marketer, the Web is simply another media selling channel such as catalogs, direct mail, print, broadcast and alternative media. Like any other media, there are tested and timeless rules for marketing success to be both followed and broken. But the methodology and principles of direct marketing offer a proven road map about what works in the direct-to-consumer / direct-to-business sales channel. Here are a dozen core direct marketing competencies that should be applied to your Web presence.

 

1. Three tried-and-true guiding principles.

When selling direct to the customer, there are three components that when used wisely, help ensure success. It used to be referred to as the 40/40/20 Rule: 40% of your success was based on the mailing list you used; 40% on the offer you made; and 20% on your creative.

 

In the Web world, those categories are somewhat different, but nevertheless provide a basis for e-mail marketing. The “e-mail database” is the list. It may include a database of customers, qualified prospects, and suspects. It may be comprised of your own customers, or a rented list of e-mail addresses. If you don’t have such an asset as a proprietary database, off-line media is likely being used to generate traffic to your Web presence and ultimately a customer and prospect list. Off-line media may include direct mail where you selected lists based on who seems mostly likely to respond. It may include the print ads you ran (in a publication read by someone fitting your demographics). Or on a mass basis, it may have been the ad you ran on Super Bowl Sunday for $2 million for your 30 seconds of fame.

 

The “offer” has remained timeless. It’s why the prospective customer should act now. In the world of direct marketing, it’s imperative the customer order today, not tomorrow, for in the words of Scarlet O’Hara, tomorrow is another day with a new priority. It requires a compelling offer to stop a customer in their tracks. Something “free” may be the strongest offer of all, but with Web culture providing an expectation of “free stuff,” even free offers must stand out. Half off today means that tomorrow could result in a higher price. Without a strong offer, you’ll lose sales. Guaranteed. “Creative” in the Web world has broadened in scope. Arguably, technology is part of this element. What used to be the need for the right teaser on the outer envelope is today’s subject line on e-mail. Attention-grabbing copy in the Johnson Box of yesterday’s letter is today’s personalized opening paragraph. Arresting photos in the brochures of yesterday is today’s streaming video. And yesterday’s easy-to-use order form — the moment of truth — is a “shopping cart.” The name may be inane, but a “shopping cart” is what it is.

 

2. Using a two-step off-line media strategy.

If you build it, they will come — that is, if they know about you and have an interest in you. So to drive traffic, you’ll likely have to engage in a two-step lead generation program to convert leads to sales.

To be successful, you’ve got to make a great offer. In the last century, and still today, many marketers were content with “for more information” offers. Who cares about more information? Make me look and feel good, save time and/or money, or a host of other qualitative elements to craft your offer. Get my attention! Be different. And promise an extraordinary benefit.

 

That’s your bait. And while they may nibble when they get to your Web site, you must hook them. It may mean offering more, or exceeding expectations. If they come, you must find a way to capture who they are so you can invite them back again and again. But registration is a touchy subject, and it’s not just the issue of privacy (which may really be the biggest issue in the mind of your prospective customer). How many times have you walked into a store-front and were greeted by someone whose first question is “what is your name and address”? Of course that hasn’t happened. As prospective customers, most of us enter stores and browse at our own pace. The store owner’s challenge is having the right product the customer will buy. And when they purchase, feel at ease providing name, address, payment information, and more.

 

If the customer chooses not to buy today, then make sure that as they exit they are asked if they’d like to be on the preferred customer list for early notification of sales and other benefits. By then, the customer hopefully feels comfortable leaving you this personal information and will return again.

 

Within all of this were two steps: entry into the store (traffic generation) and transaction. The optimum will be that the traffic yielded a sale, but it won’t always be that way. So you must work at strategies to take prospective customers one step at a time. The first step may be viewing your Web site, but do what you can to encourage the prospective customer to opt-in to your database, because without that information, you may never be able to invite them back again.

 

3. Convert prospects into customers.

We’re still on the second step, really, of the two-step customer acquisition process. What does it take to go from viewer to participant to customer? There are many tactics you can use, but the bottom line is that you mustn’t be afraid to sell. And the customer should want to buy. With conversion rates likely to be in the 5% to 15% range, there is added emphasis to the claim that the most important purchase is the second purchase. It reaffirms your product, service and overall buying experience.

 

On the subject of conversion, the 40/40/20 Rule shifts. The media quotient disappears (since the prospect has gone to your Web site), which leaves the offer and creative. Arguably, the creative got the prospect there, so unless the creative is totally new and different, it probably doesn’t have a great impact in terms of the decision to buy.

 

This leaves the all-important offer. Remember, this is the first purchase. Promise 50% off the price, and you risk creating a price-driven customer. Give away a premium, and the customer may expect something free every time. But whatever you do, make a compelling offer.

 

4. Create a dynamic database that allows you to define your business strategy.

Your customer and prospect database have enormous potential to lead you with the development of your business strategy. This involves more than just knowing names and addresses, but the source of the prospect or customer (which off-line media, search engine, etc.), what they looked at on your site, and importantly, what they purchased. What can you infer for your product strategy by knowing this data?

5. Capture vital data to develop a spaced-repetition contact strategy.

For example, if your customer bought snow and ice melter, why do they use that product? Perhaps it melts snow and ice quickly. Maybe it is easy on concrete. Or easy on the vegetation. Or it’s cheap. There all kinds of reasons people buy, and often they fall into three broad categories:

Righteous — it’s the right product to buy.

Social — others are buying it and I should too.
Pragmatic — it’s the best value for the dollar.

As your customer purchases, ask a few questions, the answers which will lead you into customized marketing later on.

 

So back to snow and ice, if the customer’s reason for selecting a certain product is based on its cost, use e-mail or direct mail to deliver a value message. If they use it because they are concerned about the environment, deliver a message that reinforces the benefits of the product based on its features. Or if the sale can be traced to a referral, make sure the circle of friends are included in the message (if not by name, at least by inference).

 

I am an advocate of creating flow charts that plot out every marketing tactic that will be used (e-mail, direct mail, telephone calls, etc.), along with what happens to those who respond or purchase, and a plotted line for those who do not respond. A reasonable frequency should be established — if your product is seasonal, promote it when the time is right. If the product can be consumed year-round, does it make sense (and can you afford) to promote it weekly? Monthly? Quarterly? Or perhaps your product is event driven (birthdays, anniversaries, holidays). Plot your promotion around what makes sense.

 

Bottom line: have a plan. Create a flow chart or calendar. And stick to it.

 

6. Apply the Pareto Principle to customer segmentation and watch your profits more quickly grow.

You’ve heard the Pareto Principle many times: 80% of your business comes from 20% of customers. The relationship isn’t always 80/20, but there is a ratio of customer volume to number of customers in every business. In a direct-to-consumer business, past analyses I’ve done suggest there could be a 60/40 ratio (60% of business comes from 40% of customers). In the business-to-business environment, the ratio is often more like 90% of business generated from just 10% of customers.

 

If you have a business where 40% of your customers are responsible for 80% of your business, for example, how do you market to them versus the 60% who make up 20% of your business. The frequency and types of marketing programs should be different. And what if the bottom quintile (20%) of your business represents just 5% of your volume? Do you include them or save your marketing money and effort for a more productive customer type?

 

7. How a long-term customer value model justifies heavy up-front marketing investment.

To repeat an important point: the most important sale isn’t the first one; it’s the second sale. Most direct-to-consumer and business-to-business marketers do not make money on the first sale because the marketing cost has been higher than the gross margin, or potentially the gross revenue of the sale. A long-term model factors in several assumptions:

1. Average price per order
2. Net orders after returns
3. Percentage of first time buyers who purchase a second time. A good working number is likely to be from 5% to 20% of your first time customers will purchase from you a second time.
4. Percentage of second time customers who purchase a third time, and so on. Usually retention increases with the number of purchases. If 5% to 20% of first time buyers make a second purchase, then perhaps 20% to 40% of second time purchasers will make a third purchase, and so on.
5. Cost of Goods
6. Fulfillment Costs
7. Overhead
8. Profit Contribution
9. Projected Marketing Costs to retain the customer.

 

Often you can justify not allocating profit and overhead to a newly acquired customer, assuming that your existing customer base is covering your overhead expense. If you’re a start-up company, you’ll have to evaluate at what future point in time you would expect new customers to contribute to overhead. But this process goes even further, because you’ll need to calculate your allowable marketing cost.

8. Calculate your allowable marketing cost

You’ll need to consider several items, but it is important to remember that every dollar in revenue from direct-to-consumer or business-to-business transactions must cover five categories:

1. Cost of Goods. Usually a fixed cost.
2. Fulfillment (order entry, shipping and handling). Usually a fixed cost.
3. Overhead. Usually stated as a percent of sales.
4. Marketing. On a per-thousand basis.
5. Profit Contribution. Your profit expectation.

 

To arrive at an acceptable allowable marketing cost, you must work into the numbers backwards. You might want to put two sets of numbers side-by-side. One set calculates your allowable for the first sale. The second uses a total sales number from your long term value model you have created.

 

Using these sales numbers, back out cost of goods sold and fulfillment cost. That number becomes your gross margin. Then you have to determine if you will allocate overhead costs. If so, it’s usually best to allocate that number based on a percent of sales. An established business will have those numbers based on historical company performance. If you’re not established, you’ll need to develop several assumptions.

 

The remaining number (sales less COGS less fulfillment less overhead) is your contribution to marketing and profit.

 

Then I suggest you determine your profit objective as a percent of sales. Back out that number, and what is left is your allowable marketing cost for a first time sale, and along side of it your allowable marketing cost for a long term sale. On a per customer basis, using costs per thousand in media, you can back into the number of paid orders you need. And if you’re engaging in a two-step program, using assumptions for conversions, you’ll know how many visits you need to your Web site.

 

When you calculate this number, you have now established the benchmarks you should use to evaluate your success. Without this number, you will be operating in the dark.

 

9. Establish key metrics you should monitor frequently.

There are key numbers you should examine on a rotation basis. Some are numbers you should see daily. Some weekly. Some monthly, and others either quarterly or annually. There are obvious numbers such as sales, perhaps sales per hour, visits, conversions, units, comparisons of tests you are running and much more. The numbers should provide today’s data, this week’s, this month’s and year-to-date.

 

But don’t allow yourself to drown in data. Choose what is important and watch those numbers closely. And by all means, put them in a chart so you can see relationships between the numbers.

 

10. Analyze the relationship with space to sales.

In the catalog business, you may engage in a square inch analysis. The space, or real estate, allocated to a specific item tells you how profitable you were based on square inches. Or if you have a retail orientation, it’s your sales per square foot. The key is to strike a balance of what is profitable based on space allocation and what’s not profitable.

 

In the Web world, you can measure sales per page or screen, or derive another metric that permits you to determine how much space is not enough, about right, or too much.

 

11. Develop a loyalty program that ensures repeat business.

Loyalty programs can be very effective. They can also be difficult to administer or cease if they don’t work, so choose your program carefully. Perhaps the most successful, and certainly highest of profile, are airline frequent flyer programs. Arguably, miles are the currency of choice among many consumers, so with that in mind, you may choose to give miles for dollars.

 

But if you want your own unique program, think it through and test it on a basis that permits you to suspend it at a point in the future in the event it is not successful.

 

12. Measure your Web site’s effectiveness with meaningful marketing reports.

Marketing reports are perhaps the least understood and most misused of all tools. Reports are crucial. They should provide you with data that can be sliced, diced, and sorted into meaningful ways.

Reports should be designed to cover several categories of users, ranging from sales to inventory, fulfillment to units sold, and much more. Reports should do more than just flash numbers on a screen or print on paper. They should include mathematical equations to equalize the numbers (percentages), cumulate sales and calculate percents per line item, and much more.

 

To do this right requires that the marketing user design the architecture of the reports as you want them. Don’t expect technology people to just invent these. And don’t expect technology people to be mathematical wizards. If you want a percentage calculation, provide the mathematical equation. Yes, it may be as easy as dividing two numbers, but to get the decimal in the right place, you must multiply the outcome by 100, otherwise you risk understating your results by 10 times.

 

That’s not an error you want to publicly make.