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Lists: Black Boxes or Known Quantities?

I want to talk about logic. The list rental world for multi-channel direct merchants is experiencing pressure for a profound change in logic and I’m not at all sure it is logical. First, let’s define our terms.

Co-Op Databases. There are two types of co-op databases: 1) list-specific co-op databases; and 2) membership co-op databases.

1. List-specific Co-Op Databases. These large aggregations contain numerous response, publication and compiled lists that have been specified as core continuation prospecting and test lists by the participating mailers. List-specific co-ops also contain the mailers’ house list files for suppression against their prospecting names. The mailer is not required to make its house file available to other mailers.

The list owners of the prospecting lists within list-specific co-ops are paid their data card list rental rates or the rate negotiated between the owner and the mailer. When a name is supplied to a mailer from two or more lists, credit is given on a fractional allocation basis. For example, if three list owners provide the same name, payment will be made fractionally at 33.3% to each. Although list-specific co-ops are almost exclusively used for prospecting, participants who furnish their house files to the co-op often find it productive and efficient to extract their own house file mailings directly from the co-op rather than building their customer mailings internally. While any list in the list-specific co-op is a part of the whole, specific lists can still be selected or suppressed on a list-specific basis. Custom response models are often deployed for use on a list-specific basis and for selections made across the database. List owners screen the participating mailers’ offers in the traditional manner and can refuse rental requests that are considered competitive or inappropriate. There are two business-to-business list-specific co-ops: 1) MeritBase and 2) Datawarehouse. There are none on the consumer side.

2. Membership Co-Op Databases. Only mailers who are members can use names from a membership co-op. To qualify as a member, the mailer is required to submit their customer files complete with recency, frequency and monetary data-the transactional data. The membership co-op then aggregates and integrates all of the data and creates a ‘profile’ or ‘customer-look-alike’ model with which to select names. The membership co-op is a ‘blind’ source of names, that is, the member who takes names has no idea from which contributing lists the names come. List-specific selection or suppression options do not exist and members do not have the option of screening offers. The six consumer membership co-ops are: 1) Abacus; 2) Z24; 3) Prefer Network; 4) Next Action; 5) Wiland; and 6) iBehavior. There are two business-to-business membership co-ops: 1) Abacus and 2) b2bBase.

In short, a membership co-op is a ‘blind, black box’ option while the list-specific co-op offers known quantities with ‘open optional selectivity.’

Additional Background

The membership co-op operators want all multichannel marketers to become members and to roll-up all of the customer files and transactional data into one massive model emanating from their ‘black box’ on a blind, single-source basis. There are list costs and fees to mail, but no list rental or list enhancement income is paid to the list owner mailers.

List owners can “block” certain participants from using their data, but some membership co-ops do not provide a list of participants. Therefore, in order to “block” other participants, it is incumbent upon each member to keep a comprehensive list of all actual or potential competitors. An obvious hole in this type of blocking is the small start-up catalog, operating under your radar, availing itself of its larger and more established competitor’s names.

In contrast, the list-specific co-op operators want only lists selected by the mailers to participate by providing their usual list rental files. They want the mailers using the co-op to participate with as much customer file data as necessary to suppress existing customers and to assist in reactivation and retention campaigns. There is list rental income paid to the list owners with standard commissions and charges. List owners and mailers have complete control and approval.

Features and Benefits of the Two Co-Op Database Types

List-specific Co-ops. For users, the features and benefits include access to a variety of known lists with the ability to tailor selections with additional data and models not available in a traditional list order. In addition, cost-efficiencies for both prospecting and house file mailings can often be combined, and firmographic and appended data are obtained and the usual merge-purge process is often eliminated. For mailers who are also list owners, list rental income is a significant benefit.

Membership Co-ops. A logical benefit of the membership database is access to transactional data as a part of the resultant model and selection criteria. In some instances, there can be an average of 20 individual purchases for a single name when aggregating from all lists. The greater the number of members, the greater the number of buyers and the number of transactions factored into the roll-up model, ideally making the model more effective. Pricing for membership co-ops is 10 to 20 percent lower than average list costs of a list-specific co-op or standard rental because list owners receive no rental fees.

Both types of co-op databases can identify multibuyers. The membership co-op has the ability to augment multibuyer creation with transactional data to identify the most responsive multibuyers. The list-specific co-op has the ability to select multibuyers from specific lists or groupings of lists. In both cases, multibuyer data is central to the modeling capabilities.

Concerns about the Two Co-op Database Types

List-specific Co-ops. There have generally been three concerns for list owners about list-specific co-ops:

  1. Security of the list
  2. Putting the list on the market
  3. Impact of list-specific co-op databases on list rental revenue

Concerns about security, though important, have not proven to be an issue in the nearly 20 years of list-specific co-ops. Data security measures on incoming files have ensured that files are handled with the appropriate safeguards these files deserve. Automated validation tables control each mailer’s access to each list in the database. This is a proven technology used by both major list-specific databases.

Participation in a list-specific co-op does not require that a mailer’s list be on the market, and if it is, does not require that the list be available for rental in the database. The list owner can control this. Should a list owner choose to contribute their file to generate list rental revenue, both of the major databases have hundreds of mailer/offers mailing from them, usually resulting in more list rental revenue opportunity for lists as compared to not participating in the databases.

Membership Co-Ops. Concerns about membership co-ops often start, as with list-specific co-ops, with security of the files. Again, the industry is sensitive to these issues and the experience has been that files are handled with a level of security commensurate with the value of the files.

The other concern regards sharing of the direct marketer’s most valuable asset: the customer list with all the recency, frequency, and monetary data. The blocking schemes in place can prohibit data being used by a competitor and they do work, when used correctly. (Blocking is easier to set-up in some membership databases than others.)

Sharing RFM data at all gives pause to many marketers. Sending this most precious of all data out of house to be used in a ‘black box’ is a serious decision. Many strain, as I often do, to see the logic in a model whereby I provide the raw materials free of charge in order to access rental names later at a rate not significantly different than response lists that would not require me to provide any data at all. One thing is certain, long and serious thought must be given when contemplating contributing RFM data into a processing model that uses it not only for selecting names for other non-members, but for producing other database products as well, particularly when the revenue is not shared with the list owners.

The Logic Concerns for the Future

I began by saying I was concerned by the pressure for a profound shift in the logic of the list aspects of multichannel direct marketing. As I see the situation looming ahead, the growth of the blind, single-source membership co-op model could have serious and unintended consequences for the direct marketing industry. Here is where I see potential trouble.

Logic tells me that the largest possible choice of response lists from which to choose is more logical than a single source of “mystery meat” names, no matter how good the model.

Further, logic tells me that direct marketers having the freedoms to control their list choices and their circulation destinies through a free market is more logical than having their futures dictated by a ‘black box’ oligarchy.

And, perhaps less philosophical and more practical, logic tells me that giving up list rental income to the oligarchy’s black box is tantamount to giving up an important component of my net earnings (read: EBITDA and corporate valuation).

But, there are other potential effects that slam directly into the Great Wall of Logic.

Membership co-ops use models that isolate what I call the ‘Super-Buyer.’ These are super-frequent buyers, of unknown downstream value, who dominate category-specific buying, such as computer peripherals or office supplies. However, the membership co-ops are less effective at identifying the two-time or three-time ‘evolving’ multi-buyers. They tend to be mediocre in identifying niche/vertical market customers and there is no effective method for targeting new businesses and new movers.

But of the greatest concern to me are mailers who find themselves caught up in the cost and simplicity benefits of the membership co-op. They begin to overweight their prospecting in favor of the black box and are seemingly rewarded with a response rate lift. Many of these mailers are oblivious to what is happening downstream to the lifetime value of their customer base. The ‘Super-Buyers’ inevitably disappoint on this front.

This is a question of the future lifetime value of your customer base. The only way to satisfy the logic is to do head-to-head lifetime value comparisons of list-specific co-op and membership co-op sourced customers; in other words, open-sourced names versus closed-source names, or stated another way, known and controllable list selections versus unknown and uncontrollable list selections.

Unfortunately, lifetime value is a bit of a moving target for most direct marketers. Believe it or not, still less than 30 percent of all direct marketers actually do an accurate lifetime value calculation-after all these years. Of those that can, they are finding that the membership co-op model often produces a group of buyers who are not strong repeat buyers. Why? They are Super-Buyers from many catalogs and tend to be less loyal (or, they may be from less traditional business-to-business sources and have lower demand potential). Growing evidence shows that the traditional list approach or the list-specific co-op are better at producing high frequency buyers, niche buyers and overall more loyal buyers with a greater lifetime value. In short, the restrictive, black box membership model has an inherent fatigue factor that influences the quality of the customer. Response rates may look good up-front, but lifetime value is corroding over time. Short term gain; long time decline. Logic tells me to always retain the control over the quality of my future. When I hand too much of it over to the black box, I no longer am in control.

Additionally, the more clients that mail from the same universe, the more incestuous the pool becomes. As more mailers mail from the membership co-op pool, the percentage of new sites available for productive prospecting steadily decreases. The long-term health of every consumer and business-to-business mailer requires constant discovery of new sources of names to add to the prospecting pool.

Another logic ‘chafing point’ emerges in thinking about this insidious shift of quality control. Aside from the very real give-up of list rental income, the initial single-source black box pricing may seem attractive for catalogers with large prospecting budgets, but the near-total control rests with the membership co-op operators. All future pricing is in their control because they are managing a group model not an individual client model. Sorry, Dad taught me never to get involved in a Socialist pricing system. More importantly, he taught me never to give up price control in the first place. What possible leverage would I have in the membership model if the lifetime value begins to tank, especially if I am locked into a multi-year contract? This is illogical. Worse, if I do have to revert to controlling my own destiny and return to using individual lists that I select based upon my own list-level analytics, intelligence and common sense, I would have to likely go through one to two years of intensive and expensive re-testing since I had to give up all of the list specific response knowledge while participating in the single-source black box. Again, this is illogical.

And, that spotlights a serious flaw in the membership co-op model: loss of knowledge and flexibility. First, you don’t always know what lists are in the ‘pool’ and the source of the names spit out by the model is unknown to you. Do you really think that is logical for the long term? If you give up the intimate, hard-won and immensely valuable knowledge of your expensively tested, list-by-list performance, you are effectively giving up the temperature, pulse and respiration, as well as the all the laboratory testing, that your doctor relies on to treat you properly and maintain your health. Is it logical to do that to your catalog, to your house list, to your core continuation lists, to your overall circulation strategy, to the fundamental health of your business?

When you know the intimate details of core list performance, through careful list testing and selection, and through careful and fully-analyzed continuation strategies, including list resting and quarterly hotlist name revolving and other tactical approaches, you know and understand not only what is working, but why it is working. What do you know with a single-source, black box approach? Some of the lists in the black box are direct response, some retail and some are from the internet. How do you specify channel selection to see which buyers from which channel test better? Future mailing and online campaigns will require in-depth channel selection. How will you do that with the “blind” approach to prospecting? And, how can you execute “combo” campaigns that alternate postal with email? You can’t.

The Growth of the Black Boxes

I am no neophyte to the membership co-ops. I was exposed to them as far back as 1990 and I had reservations about them then. Today, there are six membership co-ops in the consumer direct marketing world and two in the business-to-business arena. Why is that? The brick wall of logic for me is they all contain too many of the same names! This is some kind of giant flea-market of product. Somebody’s making a bunch of money here and I don’t think it’s the cataloger. Taken to the extreme, I can see thousands of catalogers all mailing the same people every week. Illogical!

So, as I see it, we’re slicing and dicing up the universe of the best buyers; changing the model slightly in each of the membership co-ops; whirring all of the contents up in a mega Waring blender; spitting out a bunch of good first-time buyers who may not convert to loyal buyers; telling nobody who participates who they are, where they came from, or what they look like (“Trust us; we know best because it’s our model”); charging you for this privilege; eliminating any possible list rental income; likely diminishing your overall customer lifetime value; removing all potential benefits of knowledge, experience and flexibility; and dictating who, what, how, when, how much and how long . . . and we are letting everybody mail that select group of names over and over and over in increasing volumes and in the ever-relentless pursuit of magical returns. Seems to me that’s about where we are in consumer and where we may be heading in business-to-business.

The Proof is in the Pudding

Well, there are a few things I believe are logical (and fair) for every multi-channel direct marketer to ask:

  • Who, specifically, is using membership co-ops successfully?
  • What are the short and long term results?
  • How long do members participate and why do they stay or leave?
  • Can you show me a uniform suite of metrics that fairly compares the results of the membership co-op versus the list-specific co-op or traditional list rental? Long-term?
  • How well did the member companies perform prior to and after joining the membership co-ops? This would be an ‘oranges and oranges’ EBITDA, repeat purchase measurement, and customer lifetime value calculation.
  • Who are the successful companies using membership co-ops and what do they look like. Are there really only a very small number of very large mailers who fit this model?

My skepticism tends to be fed from observing the results of shifts in the prospecting models of many consumer and business-to-business catalog companies over the last ten to twelve years. In my experience, more and more companies try the membership co-ops and ultimately abandon them or scale back their use of them, saying, “A sadder and wiser person am I.” I keep asking, “Why is that?”

The Logical Role for the Black Box

I am not flatly against the use of the membership co-ops. These names can be a productive addition to the core continuation prospecting pool but only after they are properly tested and the lifetime value metrics are clearly understood. Then, mailers can deploy these names, along with the list-specific core continuations, each in proportion to the contribution they can be expected to make to the acquisition and retention objectives-short term and long term-producing a balanced strategy.

These determinations cannot be based on simplistic list cost benefits or initially promising response rates. They must be based upon the productive yield, over time, of each and every list source right down to the key code level.

In deciding on the fate of circulation performance and company profitability, I would approach the membership co-op, single-source, black box like this:

  1. Understand the model, how it was built, the goal, and most especially, the potential roll-out universe. If testing 25,000 names in a segment leaves a roll-out universe of only 13,000 prospects, then that is not a desired result.
  2. Use membership names that are incremental to the list-specific portion of the mail plan. This provides a clear answer to the question, “What am I getting in return for providing my RFM data?”

These two qualifiers would most certainly lead to a more reasonably successful prospecting approach with better longer term results. There will be fewer prospecting names produced by the model, but they would be unique names better serving my constant need for universe enlargement. This approach would also introduce some customer leverage in pricing that might make up for all of the illogical ‘give-ups’ that the membership co-op oligarchy now commands. In other words, maybe there should be something in it for me, the cataloger, too.

The logic failure receptor keeps going off in my head. If left unquestioned, this band wagon called the ‘membership co-op’ might just somehow, unbeknownst, come to dominate the long stable and long profitable direct marketing list world, and we might all be mailing long term less profitable names that somebody somewhere (without our input or consideration) justifies by saying, “Mail these.”

Regardless of the ultimate outcome, I am always wary of band wagons. There are only two absolutely pure bits of wisdom that I have learned in my years in this business:

  1. Always avail yourself of a bathroom whenever one appears; and
  2. Avoid band wagons.

Donald R. Libey of Libey Incorporated is a world-renowned consultant, advisor and futurist in multi-channel direct marketing and cataloging. He is the author of eight books on direct marketing and is the Editor of The Libey Economic Outlook, a monthly newsletter examining current conditions in multi-channel direct marketing. He is a major contributor to the industry trade publications and his views are sought by the media covering the multi-channel arena. He has owned, operated and served on the boards of numerous multi-channel direct marketing companies and his industry contacts and resources are deep and comprehensive.

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