What If...?

by Paul F. P. Coenen

   This is the first in a series of articles to be called, "What if...?" The concept of the series is to try to determine what would happen if a seemingly unlikely event took place. A chance to sit back and say, "What if..." and ponder on what some very unexpected event could mean to your business.
   Naturally, events like 9/11, Mount St. Helens, Enron, Pearl Harbor, Krakatoa, the San Francisco earthquake and the rise of Hitler, Stalin, Idi Amin, Pol Pot, Milosevic and, dare we add, Saddam Hussein, say that everything IS possible. And, if you explain life or events as a series of Poisson probabilities (EMJ = See directly below), it makes sense that the longer something has not happened, the more likely it is that it will happen.
   In these articles, you will sometimes see the letters: EMJ. They are short for Esoteric Mumbo Jumbo. There is a mathematical concept or derivation being used or alluded to that is valid, but has often been used to "kick intellectual sand" into your face. When you see EMJ, think 'mathematical hocus-pocus', but the concept usually has a basis in fact and takes a long time to explain.
   Here is why you can benefit from reading on: Marketing is clearly changing. Whether we say the causes are intrusions into our privacy, unacceptable uses of personal information, identity theft, the Patriot Act or some people just not knowing when to quit, or a combination of all the above and more, marketing is changing. If nothing else, forewarned is forearmed and, at least, it should make you more aware of the challenges you face.
   Anyway, let's start with an easy one to get the feel for what we are going to do. What if...marketing laws changed so that you could only market to merchants or consumers by mass media or direct mail? No telephone calls, no emails and no FAX! The goal of your advertising is changed to rely on fewer media choices and getting merchants or consumers to contact you to get your message. This is the traditional function of the mass media, but one that only a comparatively small percentage of companies could afford. Because of your now diminished choices of both electronic and historic marketing and sales media, you must both sharpen your focus and increase your targets.
   Why is this marketing question both easy to imagine and timely? The question is both plausible and pressing because the changes have already happened to your choices for telephone marketing, FAX marketing and are happening to email marketing. What these changes mean may take a bit more to uncover, however.
   Telemarketing is virtually dead. There is a $500 per call penalty for calls that go to a person on the national Do-Not-Call file along with the potential for treble damages, being sued by the state and being further fined by the FCC. AT&T; was just fined $10,000 each for 78 calls placed to complaining consumers. Even if you're large and have lots of money, $10,000 per mistaken call can discourage telemarketing!
   There is the CAN-SPAM Act of 2003, which took effect on January 1, 2004, and was supposed to regulate email to reduce spam. But, that legislation has an uncertain effect because international spammers can blithely ignore US regulations and continue to flush their electronic toilets. But, let us say that a serious move against email marketing, (UCE or unsolicited commercial email), some dare call it spamming, is next, and is, in fact, well beyond the study phase. A national Do-Not-Spam file with penalties is envisioned.
   In a February 1, 2004, article entitled "Watch Your Language", Stephan Spencer and Brian Klais in Catalog Age magazine describe the language they feel needed to avoid e-mail spam filters and corporate firewalls and describe CAN-SPAM's nasty side effects. Briefly, Spencer and Klais say, "Effective January 1, it (CAN-SPAM) preempted California's more restrictive permission based e-mail legislation. But since CAN-SPAM allows marketers to make the first contact and places the burden of opting out upon the recipient, it has the effect of legitimizing spam, rather than curbing it."
   Spencer and Klais go on to say, "Although consumers can exercise their right to opt out from spam, there is nothing preventing the spammer from selling that list of unsubscribers to a fellow spammer, who has the right to make first contact, and so on down the daisy chain." Clearly, more efforts on CAN-SPAM are needed and you can bet they are coming by means both electronic and/or legal.
   Beginning in 2005, you must have written permission to send a FAX advertisement. If the recent past is prologue, marketing will be far more difficult in the years ahead.
   Suppose you just say that you never used this electronic marketing stuff and didn't plan to try it? You say that the only advertising you used were either flyers, cold calls or in the local newspaper and Yellow Pages, or nothing. What then?
   Well, to increase sales and get your message out, you're left with direct mail and mass media. And, you can see from the drops in the network TV viewers, there is movement away from the historical channels.
   But, regardless, you want to market and you're left with few affordable options and decide on a direct mail promotion. You figure you'll do it yourself or get one of the kids to draw you some pictures or use clip art. Then you'll mail the result out to every house or merchant in the county or, say, within three miles of your store or operation.
   Wait! There is a better way. First, spend some time on analysis. Second, treat the resulting data as if they were part of your body. You wouldn't take cardiac pills you got from the podiatrist, would you? No, you take cardiac treatment from a cardiologist. Go to an expert.
   There are direct marketers who can and do help. Like the old saying goes: don't try this at home! Use a professional, automated direct mail producer; these people provide templates, printing, letter shops and fulfillment. Their costs, driven down by millions of uses, are probably as good as or better than you can do locally. And, if you make the right choice, the direct mailer has access to others who should be your customers. We'll talk about that and profiling soon enough.
   Finally, remember that any time you plan a locally executed trade area promotion, there could be a lead time of as much as 90 days. Always build this time frame into your plans.
   Below, there is a recommendation for a company called MarketTouch that can help you get the advantages of quality direct mail marketing, without the pain and the scars all too often associated with direct marketers and list vendors. MarketTouch, along with Target Outsource Marketing ([email protected] or http://Call-Tom.com), can make your marketing dollars work harder for you.
   Consider that smart marketing is based on targeting a well defined audience, often accompanied by building a profile. Yes, the whines and protests can be heard from some circles about the term "profiling", but it is essential. A business typically profiles its best customers and seeks to find others who fit that profile in or near its service area.
   Stop! Ask yourself if you really know the geography from which your customers come? A solidly done profile can answer that question definitively, just not anecdotally.
   However, no matter the geographic size of your market or customer base, a phenomenon called "universe truncation" may be taking place. What this means is that a business does not always look at the full range of what customers are possible, but looks only at current customers, who are an artifact of all past marketing practices. If past practices were unnecessarily narrow due to prejudices, misconceptions or simple human inertia, the past will narrow your view of the set of those who could be your customers.
   Simply put, the profile of the customer you use limits you to looking only at prospects who meet that profile.
   The danger of any kind of profiling should be obvious, but it is often overlooked. Any time a specific sex, age group, height, weight, ethic groups or income range is selected, all others, even "near misses", are totally excluded by definition and will be cut off from the selection, the "universe truncated".
   Universe truncation can be insidious and may occur without even realizing it. But, today's statistical profiling capabilities, driven by advanced analytics (EMJ), are capable of delivering very efficient and effective prospected tools, both for direct mail and for opt-in email marketing.
   Typical financial customer profiles usually contain a credit risk assessment element such as Credit Bureau Risk Scores (FICO). According to Fair Isaac, "FICO risk scores rank-order consumers according to the likelihood that their credit obligations will be paid as expected." In other words, the FICO score measures the likelihood of a consumer not going bankrupt and not paying credit debts.
   So now you may be selecting your customers based on the 'likelihood that their credit obligations will be paid'. If FICO scores are 'rank-order' scores, they clearly profile consumers above or below some pre-selected number. What about the customers just below that number? If you say more "universe truncation," you are correct.
   Let me give you one more example of the potential problems with FICO scores. From the author byline, you'll note that my name is Paul F. P. Coenen. That's the name on my driver's license, social security card, W-2, federal and state taxes, etc. Anyway, I got turned down for credit recently. When I inquired, I found out there was a Paul F. Coenen who had my social security number and lived in my house and had a note in his file that he used an alias of Paul F. P. Coenen. In short, I could have been your happy new customer, but incorrect FICO data were used and I was erroneously excluded.
   Even more important is that you may have turned down a customer because he/she is a potential risk to someone else, the holder of credit obligations. If the FICO score says the consumer may not pay outstanding credit obligations, but you are always in fulfillment of your obligations in honoring credit cards (i.e., get authorizations, do signature compares, submit tickets in a timely fashion, etc.), the risk belongs to whoever issued the credit card, not to you who rightfully honored it.
   From years of working with ISOs and both large and small merchants, it is clear that there is little understanding of the potential problems and interactions among universe truncation, credit risk and profit. However, there is a business I mentioned above, MarketTouch, which recognizes the "universe truncation" and FICO problems when the criteria are used independently. This company is able to increase prospects by as many as a third. They can be reached at www.markettouch.com and deserve a serious look.
   How can you use new and creative marketing thought to increase profits? Consider a joint project for all of your ISO customers as a way for them to market to new customers; you will have something that other ISOs do not have. You may even find that many customers are willing to participate in paying as a way for them to find new marketing targets.
   You, as their ISO, provide your customers with a touchstone to the evolving world of marketing. You give them something that not only meets their current payment needs, but also provides them with a proven way to the future.
   Further, have you considered the payment choice of your customers as a competitive weapon? What about marketing incentives based on the type of payment used? Almost never tried, and seldom even discussed, this marketing/sales approach reflects how the cost of accepting payment affects a business.
   Someone once described the successful Acquirer and therefore ISO and therefore merchant as a baby: Indiscriminate on the eating end and irresponsible on the other end. What that meant, of course, is that the successful Acquirer (et. al.) had to accept all types of payment and connect to whichever source of funds account held the customers' payment. The ISO or merchant can see, beyond their selective promiscuity of payment, that there is a difference between the costs of the types of payments.
   For example, taking one type of credit card costs some percentage more than taking another; taking one type of debit card costs X cents, while another is charged at a percentage and Y cents and costs more than taking the flat rate card.
   Recently a nationwide study on consumer payments done by the American Bankers Association found that debit and credit cards had moved into first place, at 52%, as the preferred way to pay in stores. While not by a large margin, the cards had replaced checks and cash which fell to 47 percent of in-store purchases. Cash has steadily fallen from 39 percent in 1999 to 32 percent last year.
   Not only are the consumer's choices changing, but the reasons and choices can probably be affected by the merchant. The change to a less costly alternative should be seen as pure profit for the merchant.
   Check your ISO contract and your banking relationships to determine, as best you can, the cost of accepting each type of payment. You already have the interchange fees, from reading Transaction World, and those fees are a large element of the costs of each type and method of accepting credit and some types of debit cards. What are you charged for accepting debit cards and verifying checks and taking cash? Add in a figure for losses from bad checks and chargeback fees and any time factor of money build into the availability of funds.
   Then determine what it would cost and save you to shift your customers to a lower cost method of payment. If you say, "Accepting every form of payment is how I do business," you may be right. Understand you are not punishing any one form of payment, but you may find extra profit in rewarding customers who use your lowest cost method of payment.
   This shift in payment methods may be the grounds for talking to and partnering with a bank, the local debit card network or for new discussions with your ISO/customers. Again, you may find that what you thought was strictly a volume-based cost is a profit opportunity.
   Thinking further, what does it cost a business to shift from one type of payment to another? The cost could be something as small as giving a chance to win a desirable prize that you add to your media advertising or some addition to a loyalty card you already have in place.
   Need a 'for example'? Well, for example, customers who use a network (typically PINned) debit card, which you decide you want, get an opportunity to stay at a desirable hotel for a weekend, get tickets to a local attraction or get a coupon from your store that is good for some desirable prize. For me, there's even a choice: The prize could be ice cream or bakery goods!
   Naturally, set up something with the vendors of the prizes to make your costs as low as possible. Check with the local banks or network to see if they would help you sponsor a "double dollars" event as they are helped with volume and notice for their cards. The successful customer gets twice the value of her/his card purchase. The prizes have to be desirable, but a "double dollars" coupon or store credit can seem very nice indeed.
   If you already have a store loyalty card or program, giving the "double dollars" to the loyalty program can help fuel that program. Make it as easy as possible for the consumer to do what you want.
   Make as big a deal as you can about successful customers. The more the word spreads about your program, the more likely you are to be successful about achieving your goals.
   Be sure to check with local law enforcement on any problems that may ensue with lotteries or games of chance. There should not be a problem, but better to find that out before your customers and the law begin to call.
   You may find you cannot refuse to accept a type of payment because of the structure of your ISO contract. But, figure that that was a lot of what the very recent settlement with Visa and MasterCard was about. It may be time to examine your choices and look at your options.
   If you have a "What if..." type question, please feel free to send it to me. Chances are if you have a question, many others have the same question. I'll try to fit your questions into these articles and give you a thoughtful and innovative answer.
   Let's just say there are three guidelines:

  • Answers must be limited to the size of this column. That's a nice way of saying that questions that have long and detailed answers are probably not subjects that can be addressed;
  • No questions like "How high is up?" can be fully and correctly answered without significant artificial assistance, like lots of beer or EMJ. The question about "Is the sky up?" is a good example of this. Remember your quick answer the next time you are in a flying airplane and some of the sky is down. Or even worse, the world cannot end today, because it's already tomorrow in Australia; and
  • This column, as good as it may get, cannot replace a full study and analysis. Again, a nice way of saying I probably can't solve a specific problem without seeing and knowing all of the details.