May 2006

With a new year, we all get the chance to renew our vows, so to speak. At the Fall DMA, we had the chance to do that, and it was extremely intriguing. As a group of over 50 top-level list company executives, we tackled many big questions that challenge the industry, and I think we each were able to reflect on our own feelings about where we want our businesses to go. Like our LLG event earlier in the Spring, we hammered at the questions, but moved quickly to solutions. For instance, in the Changing Role of the Broker/Manager group discussion, one of the top ideas to emerge was that list company compensation should be structured more in line with agency payment structures, using retainer fees for services versus commissions, exclusively.

In another group, The Shrinking List Universe, there was healthy debate about universe sizing, but solid agreement that the consumer audience was shifting to multiple channel shopping and that list companies need to adapt their analytical tools to better understand the impact on results. With this event, our Spring event, increased collaboration with the DMA’s legislative communication, and the launch of The List Leader, the List Leader Group had a very successful 2005.

For 2006, we are planning events as well, and anticipate increasing our involvement with the leadership of the List and Database Council to co-develop networking and educational opportunities for senior executives.

On the legislative front, even this week, we have seen legislators and policy enforcers like the FTC increase the pressure on compliance, particularly of Can SPAM, the telemarketing rules, as well with data security laws. For sure, the LLG will be intimately involved with the DMA to sort out the relevant issues affecting our industry and to provide the proper forums for senior-level dialogue, one of our most important mandates.

Both in The List Leader as well as via email, be on the lookout for upcoming events. We’ve had sell-outs for all of our events, and we are eager to see you this year, and want you to become an active participant in our activities. Please be in touch directly with Lee or me, or any of the LLG board members. Our role is to serve you and the industry, and we are proud to represent you.

The last page of this newsletter will capture and summarize the challenges and resulting solutions that were proposed during the Fall DMA show.

We always want your input, so please feel free to contact any of the LLG Board members listed on the newsletter masthead by phone or e-mail with any ideas or concerns you may have. You can also e-mail to ListLdrs@the-dma.org with any additional ideas that you may have.

Until next time...

Leland Kroll and Chris Paradysz

The need for us all to stay connected and keep communication lines open has probably never been more important than it is in these times. Therefore, we invite you to access the DMA Member Directory to contact  your list leader colleagues in the hopes of fostering a continuing dialog on the issues and challenges within our community. The more we communicate, share, and work together, the stronger and healthier we can become. (Sign-on with your password to access the DMA Member Directory:  www.the-dma.org)

We know we have to maximize our sales and profits as the economy continues to grow and change. The challenge is HOW!

We have learned, during this time of change, to successfully manage each and every line of a P&L in order to remain viable in the direct marketplace. The challenge is GROWTH.

We have kept sales coming in during this period by wisely using a variety of media. We have proven that making increased use of targeted promotional techniques, in both online and offline promotions, lowers customer attrition and keeps inventories lean. The challenge is INTEGRATION.

Going forward, it’s the ability to integrate online marketing more fully into our sales programs that will generate significant increases in sales and profits for catalog/web merchants.

Look at the economics: Email advertising costs can be as low as 5% of net sales compared to the traditional promotional costs that are often in the range of 25-35% of net sales. Harnessing the power of e-mail marketing can put a significant dent in advertising costs, which are traditionally the second biggest drain on the P&L after merchandise costs.

Replacing just 10% of our offline customer contacts with e-mail promotions, without losing sales, could add a full two or three percentage points to our bottom line! Is there any one of us who would decline an opportunity like this?

To fully benefit from this opportunity, catalog/Web companies need to aggressively test and research various programs like:

• Contact Strategies to determine the most profitable combination of online and offline contacts with Web-only, catalog-only and combo buyers. The goal here is to quantify how many catalogs should be mailed and how many e-mails delivered to each customer.
  
• Offer Strategies to define what types of product, price point, and promotional offers work best for each medium and each group.
  
• Upsell and Cross-sell Strategies to increase the value of a telephone or Web order utilizing traditional methods and some of the state-of-the-art computer technology that now exists.
  
• Cross-Channel Sales Tracking of your company's Web, retail, and catalog sales to determine the effect each promotion has on sales from all channels.
  

• Each and every order that is migrated from the telephone to the Web can save your company $5 or more in processing costs, so long as your fulfillment and Web software are integrated.
  
• This transition can also significantly improve customer service and lower costs, by cutting down on the number of order inquiry calls and letters.
  
• Once an order is placed over the Web, there are opportunities for follow-up contacts with that customer during the ordering and shipping process — e.g., the order confirmation, shipping confirmation, and follow-up e-mails. Each of these contacts — which the customer is expecting and is thus more likely to open and read — affords an opportunity to offer your customer another product and thus increase lifetime value.
  

Our clients demand ever-increasing levels of expertise, involvement, and productivity from us as organizations and individuals, while the average compensation for all of our efforts remains at (or even below!) the old industry standards of 20% of billing for brokerage and 10% for management. Clients are well aware of the value in our efforts, and yet we have no basis of compensation for the special services we increasingly provide.

When we face the facts, I think we can all agree that there must be a better way. Everyone has considered options within the scope of business as usual. However we may need to look further outside the box to find a model which might ultimately deliver a more equitable, if not profitable, work/compensation ratio.

Some facts. These are sometimes painful, but still facts of which we are all aware. Although there are a multitude of reasons, there are some that may have the greatest influence on our business economics.

• We wrote the book. We set our own standards many years ago and we’ve stuck to them, providing clients with all of the services needed to successfully market lists or rent lists for their own mailings, on a simple, low commission basis. To an extent, we’re stuck in a rut of our own creation.
  
• Costs are increasing. The basic costs of doing business are increasing across the board—postage, office space, advertising, supplies, salaries, technology, etc., become more expensive each year.
  
• Productivity demands are growing. As margins shrink, organizations demand more of each of their employees. Higher costs also lead to client staffing reductions, especially in marketing departments, which in turn increase existing staff workloads and produce greater needs for outsourced support.
  
• A shrinking knowledgebase. Expertise in client marketing departments may also be scarcer due to salary and staffing reductions, leading clients to call more often on the expertise of their brokers and managers.
  
• Competitive pressure. Someone will always do it for less, right? In the interests of retaining our valuable clients, we simply meet their increasing needs for services and expertise.
  
• Increasing industry legislation. As government involvement in consumer and industry affairs grows, we are faced with increasing needs to understand and cope with expensive and time-consuming legal issues.
  

• Commission increases. Managers and brokers might reasonably command a higher percentage based on increased effort alone, but it is likely that competitive pressure limits the viability of this option.
  
• List Owner contributions. We might ask list owners to contribute funds for advertising and marketing of lists for example. However in view of their own shrinking margins, such requests may not always be popular.
  
• Performance-based commissions. Scaling commissions up once an agreed baseline is achieved can be an option for both managers and brokers. For managers, the baseline might be a revenue level. For brokers, it might be a percentage of successful list tests. The hurdle here is often in reaching agreement on what the baseline should be, since clients will always want more.
  
• Transaction fees. Attaching a reasonable fee to order transactions in both management and brokerage can certainly help to offset rising operational costs. Still, we wonder whether clients will be willing to accept it, and how much of an offset it actually represents given the risk of poor client reception.
  
• Invert ratios for testing. We might both encourage performance and improve economics with a 90/10, manager/owner division of revenue on test orders, as opposed to the usual 10/90. In other words, reward the manager for test generation, which leads to continuation and ultimately increased list revenue for the owner. List owners might well see this as a positive.
  

• Basic Annual Retainer. This might be calculated as a standard percentage of estimated overall business conducted for a client.
  
• It might be specific to the client size/needs and should definitely be attached to specific levels and/or types of service. For example, the retainer might cover a specific number of sales hours, number of orders placed or entered, certain types of staff contribution, etc.
  
• This clearly establishes basic work parameters and helps to manage client expectations of performance.
  
• If the base retainer can be less than a standard industry commission, it will likely also be appealing to clients, who could then make use of additional services as needed or desired.
  
• It might be contended that clients will stop at the basic service, and some may indeed do that. However, given compensation balanced with effort, this may not be a negative at all. In fact, it can free valuable resource to pursue other lucrative projects.
  
• Billable Time. Services and/or staff use beyond those provided and specified under retainer, could be utilized by clients on request and billed at agreed hourly rates.
  
• Hourly rates might be developed based on the type of service, the level of staff involvement required, or some combination of the two.
  
• Billing of billable time could be monthly or quarterly, depending on the level of a client’s expected use.
  
• No matter how it is constructed, billable time creates potential over and above the retainer, and could be a good source of growth.
  

At what point did the datacard become the start of a negotiation? Regardless of what price is on a datacard, many list brokers tell their clients that they can get a reduction in price. Many times this requested reduction has nothing to do with any calculations related to performance or profit/loss analysis. While some list managers and list owners are firm in not allowing negotiations off of datacard pricing, many give in very easily. This is understandable, as the broker will threaten with any future business from that particular mailer.

So the question is whether datacard pricing is inherently too high, or our list brokerage skills and expertise become so devalued that the only thing of true interest to our clients is our ability to cut costs wherever possible?

If the answer is that the prices are in fact too high, do you believe that a price reduction would actually eliminate the negotiation process or simply drive prices even further down? Unfortunately I don't believe ratecard pricing for major mailers will ever be satisfactory. The mailer feels the need to 'win' at the expense of the list owner or manager.

It is always refreshing to hear from a broker whose mailer has found a list to be "no longer be profitable to mail". This comment is often supported by actual details and facts that result in an intelligent price negotiation. Unfortunately these conversations are few and far between.

In addition to the wonderful world of price negotiation, we have another exciting area of business dealings called "the make-good". In the postal world, a list may be run incorrectly and need to be re-shipped, but generally, if a list drastically under performs, the file is not included in the next campaign. That is the basics of direct marketing 101. In the world of e-mail list rental many mailers feel that a certain level of performance is inherently guaranteed, and if not achieved a "make-good" is due. While this is never stated on an order or even discussed, it is apparently expected. Many newbie and non-traditional direct marketers are at the core of the e-mail list rental environment. Perhaps this is why they do not feel that the creative/copy or the actual offer plays any part in performance.

Perhaps this is more of a rant than an article, but I believe sharing frustrations with my peers is a healthy thing to do.

Here’s what three of Jay’s peers have to say about his “rant”:

Richard Vergara
CEO, LDSGroup

Betty Abion
CEO, Response Media Products

Alan Zamchick
Hackette Filipacchi Media
US List Management

LEGISLATIVE UPDATE
By Chicca D'Agostino,
President, Focus USA

• Notice (to consumers when there is a breach)
• Access and Correction (allowing consumers to correct inaccurate data)

• social security number
• financial account number (e.g., bank account, credit card, etc.)
• driver’s license

• exact date of birth (YYYY/MM/DD)
• mother’s maiden name
• any government license number (e.g., hunting, fishing, nursing, etc.)

• maintain a distinction between marketing data and PPI. Jerry asked during the meeting if mother’s maiden name or exact DOB are necessary marketing data. It was generally agreed that it was not, provided the industry could keep year and month for DOB. It was felt that including government licenses would crimp the marketing efforts of companies who compile – and use – such licensed information;
  
• keep “significant” rather than “reasonable” as the trigger;
  
• exclude “access and correction,” as this could open up numerous problems and be very costly for marketers. However, if it is to be included, the DMA wants to make certain that it pertains only to PPI data – not marketing data.

MARK YOUR CALENDAR

Recap of List Leader Meeting – Sunday, October 16th, 2005

The following are the notes taken at the round tables on these issues:

The Changing Role of the Broker/Manager:

• Brokers and Managers are working harder for less money. There are smaller margins so managers are struggling to do operations and marketing for the standard 10%.
  
• Mailers are asking for more “out-of-the-norm” services and not paying for them.
  
• Managers and brokers are taking on more of the decision-making/marketing and processing role.
  
• Negotiations are fluid, making it more difficult to determine an optimum deal.
  
• Most of the pressure coming from mailers is due to their increasing costs of doing business.
  
• Compensation for list company services will vary, and there is always someone who will do it for less.
  
• Dealing with legal issues has become more daunting, and firms are evaluating whether to outsource or insource legal counsel.
  

• Ask the list owner for a marketing allocation over and above the management fee.
  
• Consistent technology with a uniform ordering system.
  
• List rental agreements – create “shell” LRA’s rather than all the disparate ones.
  
• Commission for selling a test should be higher.
  
• Have a labor fee for transactional orders.
  
• Have the compensation structure like an agency using either a retainer fee or billable hours so we’re paid for our “brain time.”
  
• Need to evolve and expand services, improve staff and customer service.
  

• Co-op database name contribution is decreasing despite the addition of incremental new programs.
  
• The internet has empowered consumers to easily get what they want. It is difficult to track this behavior and result, but it does represent the future.
  
• Big box stores and the internet are major drivers of consumer demand.
  
• List companies should compel non-traditional marketers to utilize direct response marketing to sell their products and services, creating new sources of names.
  
• Mailers have become risk-averse and are not experimenting with sources outside of response files.
  

• The creative needs to be revitalized; need new packages that are directed to the right people and brokers/managers would like a role in it.
  
• Education is needed to bring perspective on response rates in the market and by category, and list companies need to bring better analytics to understand the dynamics behind where consumers are responding.
  
  

• The LLG and DMA board need more communication so that the list and database industry can be better informed.
  
• Could there be better integration of the DMA board, the List Leaders Group and the List and Database Council to better inform the industry of what decisions are being made that could affect all?
  
• The DMA itself could do more webinars or information conference calls.
  
• Work to privatize the post office.
  
• Could they facilitate better negotiations on deals between mailers and the post office.
  
• Could the DMA petition major mailers to get additional money for lobbying efforts.
  

• Standardized processing.
  

(Overall comments? Tell us what’s on your mind – ListLdrs@the-dma.org.)

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