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Table of Contents

Chapter 3
Men Are Cheaper Than Guns

Chapter 4
Intellectual Capital And Bootstrapping

Thinking Like An Entrepreneur


A Comparison of Direct Mail Catalog Marketing to Internet Marketing

  Many people compare the relatively new field of Internet marketing to the much older and established field of direct-mail marketing and, specifically, niche catalog selling through the good old USPS.

  The comparison is valid. Direct mail shares much with Internet Marketing. As I said in my new book, Thinking Like An Entrepreneur, the new methods of Internet marketing are the natural evolution of direct mail.

  What are the differences?

  Well, at present, marketing over the Internet is still very much the province of niche sellers. A site which tries to be everything to everyone will not succeed. Most items sold simply do not appeal to most people.

  Yet, we all have our specialized areas and interests. While general mail-order catalogs, like Sears, have struggled and become extinct, specialized catalogs to niche markets have thrived.

  Consider specialized catalogs to outdoorsmen such as Cabela's, Gander Mountain, and The Sportsman's Guide. Being from Minnesota, I see many catalogs and catalog companies catering to fishermen, campers, hunters, and other outdoor types.

  Still, while many people order from such catalogs, the industry, itself, has gotten extremely competitive. Gander Mountain had a beautiful catalog that was relatively well-targeted. But, the costs of larger full-colored catalogs are significant, and the catalog was abandoned.

  Cabela's catalog is much like the old Gander Mountain catalog. It has extremely high quality printing and is moderately-well targeted. However, it suffers from the same difficulty plaguing all high-quality print catalogs. Printing and mailing costs.

  The only way to recoup high printing costs is to pass the cost on to the consumer. But, people who really belong to a given niche market receive many, many catalogs. The people who are significant buyers within a niche receive cheaper catalogs often printed in newsprint or similar quality.

  What these cheaper catalogs lack in elegance, they make up for in selection and in pricing. Often, these catalogs are nothing more than lists and lists of products and the associated price. And, the price is lower than the advertised price of the high-quality print catalog.

  Where does the customer buy?

  Usually, from the lower-priced catalog.

Lesson 1 of Direct Marketing
  The heavy buyers within any niche tend to know the products they are buying. They have probably read product reviews and have strong opinions about which products they might buy. Within the niche, they are informed buyers. And, they get many catalogs that offer the same products. Unless you truly have proprietary products, even if you are selling to a niche market, you are in a commodity-type business. Low-cost seller of the desired product gets the order.

  Given the above lesson, how do catalog sellers with higher-quality color catalogs that are aimed more at selling rather than offering the best price survive? It is not by selling to a targeted niche! As stated, the real niche buyers tend to be price aware and know what competitor's prices are.

  Catalog companies with more expensive catalogs survive, or try to, not by targeting the real niche, but rather by skimming the surface of the niche. By generating sales not to the most serious hobbyists, but by selling to the rainy-day hobbyists. By selling to those with a lukewarm interest in the area.

  The advantage of this strategy is that for every truly dedicated fisherman, there are probably hundreds or thousands of rainy-day fisherman. Or, sunny-day fishermen. Whatever.

  The disadvantage is that these lukewarm people buy fewer bobbers. Actually, they probably buy more bobbers, and basic hooks to use with night crawlers they brought to the surface the night before by flooding their backyard with water. But, they do tend to buy fewer of the killer-must-have-high-tech lures. The ones made of plastic, but that feel like live bait. They tend not to like the idea of casting something costing $5 into the weeds.

  It is precisely these higher-end toys that the more expensive catalogs are selling. Not to mention depth finders and other necessities. But, the core buyers of such toys are the serious hobbyists.

Lesson 2 of Direct Marketing
 In addition to the real niche buyers, any market has many more less-informed buyers who are much less price aware. They like to view themselves as knowledgeable in the field under question, but at heart they are dilettantes. Also, many people who are just getting involved with a specialty area will have first marketing exposure to the area from the companies that more aggressively promote their catalogs to more general audiences. These will tend to be the more expensive glossy catalogs.

  Which are you? A company marketing to a niche? Or, a company really marketing to the fringe of the niche? Many catalogs, circulated by companies that think they are niche marketers, are really directed to the fringe of the niche.

  That is not to say this practice is bad. Many real niches are very small, and many direct marketing companies seek growth. It is difficult to grow into a niche. This demands becoming the low-price provider of products and goods that are most highly desired by the niche. It would mean your company's growth would be market limited.

  Let's turn our attention away from catalog sellers and toward direct mail used to promote one product via a typical direct-mail package. Perhaps, a #10 envelope with a promotional letter, a flier, a lift letter, and a coupon and order card.

  Success in direct mail involves testing. I briefly discuss direct mail testing in Thinking Like An Entrepreneur and won't go into detail here. But, small changes made to the offer, the copy, and the mailing package do affect response significantly. Going from 1.0 order from every one hundred mailing packages sent out to 1.3 orders per every one hundred is a significant increase.

  But, direct mail gurus know response is usually not their main interest. They often want to maximize profits on the particular mailing. A mailing that draws only a 0.8% response might be far more profitable than a response of 1.5%.

  The key factor that makes the mailing getting only a 0.8% response more profitable than the mailing generating a 1.5% response is the price of the product. In addition to testing the copy, the offer, and the graphics of the mailing package, a most significant goal in direct mail testing is to test the price you charge for the product.

  Maybe, $50 for the product's price will maximize profitability on the mailing. But, maybe $100 will make even more, despite a drop in response rate. Direct mail marketers test price.

  You send out 5,000 pieces pricing the product at $50, or probably $49.99 or some such thing. You send out 5,000 pieces pricing the product at $99.95 or whatever. And, you test a midrange price by sending out 5,000 pieces, price testing at $75.

  It is the response to your price testing that will be used to set the price assigned to the product when you do the roll-out mailing to the entire mailing list. Changes in the price often will determine whether a particular offer is profitable or not for the direct-mail company.

  But, what would happen if you sent two different offers to the same customer? One offering the product for $50 and the other for $100? The customer would probably order the product for $50!

  What if the customer had already ordered for $100 when he gets your piece offering the same exact product for $50? The customer is not a happy camper anymore. He feels you charged him more and took advantage of him.

  The lesson is that direct-mail price testing works because the market being sent the promotional pieces is not price efficient. No one knows what the offer made to the other guy or gal is. You can discretely test $50 versus $100 and then use the information of your testing to set the final price which will be used with your roll-out to the entire list. And, the price chosen will be a significant factor in determining the financial success of the promotional mailing.

  Notice how price inefficiency, or customer unawareness of your competitor's pricing (and even your own pricing sometimes!), is a key factor in both catalog marketing and direct mail.

Lesson 3 of Direct Marketing
  You test offers. You test copy. You test teaser copy on your envelope. But, most important you test price. Testing is used to determine what price is best for a direct mail product. Only upon finding the optimal price do you set the product's price.

  Can you price test on the Internet? Is it possible a customer will only see one of your two offers? No. The customer will likely come across both offers and both prices. The Internet does not allow conventional methods of direct mail where you can test and then roll-out.

  Once a product is online, it is online for all to see. There is no ability to test only a small portion of a niche market and to make roll-out decisions based upon the test. The Internet gives consumers more power and makes markets more price efficient. The Internet makes price comparisons easier when dealing with retail products. It doesn't matter if those products are within a niche.

  Internet marketing is niche marketing. Direct mail is niche marketing. But, so is starting a scuba shop in California. All appeal to some small segment of the overall population, but the methods of direct mail do not rollover unmodified to Internet marketing.

  While it would be trivial for a company to put up two different web pages with the same product offered at different prices, and even lead customers selectively to one or the other, for a company that is seeking to build a customer base and preserve reputation, Internet price testing is not a good option.

  The area of the Internet corresponding most to direct-mail testing is Internet banner ad testing. Multiple banners can be run and you can measure the "clickthrough" for each banner, or how many people click on the banner and go to your web page.

  And, you can examine what proportion of the people arriving from a banner are converted into online sales. You must factor out the site from which the people are arriving for this to be valid.

  As discussed in Thinking Like An Entrepreneur often the most important factor in growing a marketing-oriented business is not the rate at which you can get people to place their first order with your company. The real key is the rate at which you can convert first-time buyers into repeat buyers.

  At present, Internet banners are relatively untargeted. But, in the future, banners will be highly targeted. Whereas traditional direct mail focuses upon getting lists of prospects, who are all very similar, and then finding an offer that is appealing to the aggregate, the evolution of Internet marketing will eventually target marketing right down to the individual level.

  Computer programs, called recommendation engines, will be used to select the content to be displayed to a given consumer. Information about a given person, stored in a database or in some cookie-equivalent concept, will be used to help generate most web pages. The individual customer profile will be used to recommend books, CDs, what banners are most appropriate to that particular customer, etc.

  Pages will be dynamically generated to the taste of the customer. Anyone looking over the person's shoulder will say, "What weird ads you have. Here's one from Mole (film lighting), one about a new book on Active X, one about Chinchilla farming."

  Of course, the person's real passionate hobby will be developing Active X controls that control lighting of Chinchilla farms. Take a look at, a Minnesota-based company which is a leader in developing software that works behind the scenes to recommend products. It really is amazing stuff.

  As Thinking Like An Entrepreneur mentions, this is the future direction of direct mail. While traditional direct mail is about testing and roll-out and segmentation of people by shared proclivities and interest, one-to-one marketing will be much more up-close and personal. Go ahead, try to find a mailing list of Active X programming Chinchilla farming filmmakers!

  The potential exists to generate web pages that really are more like collections of direct-mail promotions. An interest in film lighting might merit a flashing banner ad from Mole. Your interest in Active X programming might elicit a recommendation of a new book on Active X. Your interest in Chinchilla farming will generate an ad for…lingerie. Oh, well, there will always be some bugs in any computer program!

  Personalization will become very impersonal behind the surface. And the programming and data filtering demands will become relatively significant. Because of this, larger companies will be best able to use the power of recommendation engines and such behind-the-scenes customer evaluation tools. At least for a while, much of this power will be too highly-priced for smaller companies.

  Companies that are making intelligent decisions about Internet business, such as, will acquire customers, because they can provide a very customized "personal" shopping experience. Imagine going into a bookstore and finding it filled with shelf after shelf of books all of which are about topics that greatly interest you. But, these businesses are also aware of the need to be price competitive. Ordering from the competitor is only a click away.

  What does this all mean for the smaller business that has relied upon direct mailing of catalogs? Same question as always: Are you really marketing to a niche, or are you just nipping the fringe of the niche? If you have been nipping at the fringe of a niche, your life is going to become complex. But, if you satisfy the demands of the most price-conscientious and knowledgeable members of your niche, you should be well positioned as you put your catalog online.