Direct mail-order businesses have traditionally traded on the convenience that shopping from home can offer. Now they are under attack from direct operations by major retailers, extended store opening hours and the advent of online shopping.
Yet Express Gifts, which specialises in Christmas-related products and home and gift items, has been able to increase sales from its mail-order catalogues while cutting costs.
Using customer segmentation tools from IBM, which are based on sophisticated algorithms, Express Gifts has cut the number of customers receiving multiple copies of its catalogues, reduced the level of cannibalisation between its various brands and targeted promotional offers only at customers who will not pay full price. This marks a distinct change in approach for the firm, which traditionally used a simplistic recency, frequency, monetary value (RFM) model to select customers for mailings.
The problem, explains Tim Broughton, systems development manager at Express Gifts was that, "our best customers got selected for every mailing, while people who could potentially be developed into good customers never got selected at all, limiting our potential for growth.
At the same time, catalogues were cannibalising business from each other - some customers were getting catalogues every week, but would only shop from one or two of them. We needed to be able to divert those spare catalogues elsewhere."
Express Gifts' new approach is based on a concept called horizontal marketing, which plans mailing activities over an extended period and treats each customer as an asset generating a return for the company. The idea is to invest marketing effort in each customer only to a level commensurate with the likely return, preventing over mailing of some customers and under mailing of others.
Express Gifts was introduced to horizontal marketing through a presentation by IBM at a conference in Rome. The company quickly decided to test the idea in a proof-of-concept project involving consultants from IBM's business intelligence team. Broughton explains that Express Gifts considered other proponents of horizontal marketing but stuck with IBM because it felt its algorithms and segmentation tools were superior and that it had greater experience of mail-order catalogue operations.
IBM was also willing to provide some of its most senior staff for long periods of consultancy, even though Express Gifts is a relatively small client, because Express Gifts was willing to let IBM test out its ideas about how a marketing department should be reorganised to maximise the potential benefits of horizontal marketing.
The proof-of-concept project centred on a mailing of the company's spring "bargain bonanza" discounted catalogue. The company's customer base was divided in half and the existing RFM model was applied to one half to identify people who had spent more than £30 with the company in the previous year. The other half was segmented by identifying only those customers likely to buy in the spring. This target list was further subdivided according to how likely customers were to buy from this particular catalogue, with each group being offered a different level of incentive in the accompanying mailshot.
The result was that, compared to the traditional approach, Express Gifts was able to save £70,000 in mailing costs by cutting the number of catalogues sent out, while generating £10,000 more profit.
Similarly, when Express Gifts launched a new up-market catalogue called Autumn Living last year, it wanted to make sure that it did not cannibalise from its existing catalogues.
Instead of sending the catalogue out in a single mailing, it used its improved understanding of customer behaviour to identify when customers had finished shopping from its main pre-Christmas catalogue. It then sent customers the new catalogue in a campaign spread over six to eight weeks.
"We had a good response from the new catalogue, yet we didn't cannibalise our main catalogue, so all the sales were incremental," Broughton explains. "We also used our greater understanding of buyer behaviour to determine which products to put into the new catalogue in the first place."
While Express Gifts is now seeing significant benefits from horizontal marketing, the new approach did challenge the existing culture of the marketing department and required investment in training and new staff.
However, the biggest headache was to gather together all the relevant data, clean it and transform it correctly through the clustering algorithms.
This didn't just mean dealing with customer and order data held within the company's DB2-based mainframe system. "We had to bring in other data sitting in cupboards which had never made it onto our systems," Broughton explains. "For instance, we had information measuring how similar catalogues are to each other in terms of product content or production quality. That kind of information is very significant in terms of cannibalisation issues."
He points out that even small pieces of data can have a significant impact on the outcome of the segmentation exercise, so the company spent a long time making sure its segmentation models were right, and that it was correctly interpreting its data, before using it to select mailings.
All that investment in horizontal marketing is now paying off. Broughton explains, "Previously, we had catalogues and sent them to our best customers. Now, we can say, here is an area of our customer base we want to grow, what kind of catalogues do we need to put together, when should we send them and with what kind of incentives?"
How to target catalogue mailings and promotional offers to maximise profits and minimise cannibalisation between catalogues
Sophisticated segmentation tools which provide detailed understanding of buyers' behaviour
Express Gifts' solution allows it to: