University of Washington MBA Program

Managing Customer Relationships

through Direct Marketing

“Clubs and Continuity Programs ”

Instructor: Elizabeth Stearns

Content

• Definitions

• Benefits

• Front end and Back End

• 21st Century!

Definitions

Definitions: Club• A Club is a method of distribution whereby products

generally similar in content or theme are shipped to consumers on a positive or negative option (automatic) basis at a predetermined frequency.

• The incentive to join is a substantially discounted price on the initial purchase, or free give-away, in return for which the member agrees to buy a specific number of products (usually a numeric rather than a dollar amount) in a prescribed time-period. Some clubs operate on a “no obligations to buy, no time limit” basis.

Negative Option

• The basic mechanism of club selling. The member receives an announcement on a regular basis indicating what the automatic product shipment will be. If the member does not return a rejection card by a specific date indicating that the product is not desired or that an alternate or additional product is desired, the product will be sent to the member automatically.

Negative Option

• Frequency of purchase is typically greater in the early stages of membership when new member interest is high and the minimum commitment is not yet fulfilled. Later, it may pay to offer members incentives for buying more or remaining active after the minimum membership obligation is completed. It may also pay to purge inactive members or reduce the frequency of negative option announcements.

Negative Option

• Overcome consumer inertia by “forcing” the sale.

• Negative option clubs have been very effective for selling books, music, audio tapes/CD’s, home video cassettes/DVD’s and other products of mass appeal purchased and used on a regular basis.

Definitions: Continuity• A continuity plan is a method of distributing

related products or services on a contract or subscription basis, I.E., bought as a series of small purchases over time rather than all at once.

• There are two basic continuity plans: open-ended and closed-ended. An open-ended plan has no fixed number of product shipments. A subscriber may choose to continue to receive shipments indefinitely. A closed-ended plan has a fixed number of pre-determined shipments.

Definitions: Continuity

• In either case, subscribers are given the right to cancel their subscriptions at any time or after completing a specific agreed upon commitment.

• Continuity plans resemble subscriptions with renewal occurring by positive option with each product shipment.

Continuity Plans• The basic mechanism series selling. Subscriptions to

the series are taken out on a trial basis usually accompanied by the promise of a premium, discount offer, or free initial shipment. If the subscriber cancels.

• Since continuity front-loads offers, thereby generating heavy trial, cancellations are highest at the beginning of the series. Attrition-fighting efforts therefore must occur earlier rather than later. It may make economic sense to cancel subscribers with consecutive bad pay or return records, or those who are consistent late payers.

Continuity Plans

• Continuity plans have been very effective for selling food, toys, cosmetics, china, photographic film and other broad-appeal and/or special interest products which are either collected or consumed on a regular basis.

Benefits

Key Benefits

• The consumer appeal of clubs is:

–The initial money-saving offer

– Exposure to a wide variety of pre-selected products

– The convenience of shopping by mail

Key Benefits

• The consumer appeal of continuity programs is:–The ease of purchasing which results

from breaking relatively high-priced items into smaller, more affordable units

–The ability to examine the merchandise before buying

–Freedom to return each shipment or terminate the subscription at any time

Key Benefits• The advantages for the seller are:

–Lower marketing costs-rather than having to sell each unit over and over again, the initial customer acquisition cost typically results in ongoing unit sales.

–Breaking up a big-ticket purchase greatly expands the universe and usually results in much higher volumes.

Key Benefits–The number and monetary value of

product shipments can be forecasted based on past customer buying patterns, enabling:

I) ROI-targeted promotion spending

II) Manageable inventory levels

III) Predictable cash flow and income

Balance!

Front End• All aspects of the initial transaction involving the

acquisition of a member, subscriber, inquirer or other respondent

• Front end dynamics include:

– The “pull” or response rate-the number of respondents to an offer divided by circulation (or, mail quantity, viewing audience, etc.), expressed as a % response

– The cost per order (or, per application, per member, per subscriber, etc.)-the gross cost of solicitation (media, production, print, etc.) divided by the number of respondents

Front End

• “Pull” or CPO, in the absolute sense, is only a relative measure of front end success. A better indication of efficiency-and ultimate profitability- is how the actual CPO compares to the allowable CPO, which provides an acceptable return on the promotional investment

Factors Affecting Front End Performance

• Media cost per M

• Responsiveness of media vehicle

• Position of ad in publication

• Timing of commercial in radio or TV schedule

• Seasonality

• Competitive clutter

• Audience duplication

• Type and size of formats used

Factors Affecting Front End Performance

• Structure of offer

– Pricing -Payment Conditions

– Commitment/Term -Incentives

• Copy appeals

• Graphic presentation

• Involvement devices

• Response mechanisms

Back End• All aspects of member or subscriber behavior subsequent to

the original response. How well customers continue to buy or fulfill their promised commitment over time.

• Back end dynamics include:– Average take-the total number of units shipped divided by

the starting number of members or subscribers. Can be tracked by media, offer, format, list, etc. to measure customer purchasing behavior by source.

Back End– Average order size-total dollar sales divided by

the number of shipments. Indicates customer quality.

– Average-take multiplied by average-order size yields net sales per member or subscriber, the true measure of advertising effectiveness. Net contribution per member or subscriber-margin per customer after variable costs (product, fulfillment, etc.), acquisition costs, and sales promotion costs have been deducted-indicated total marketing effectiveness.

Factors Affecting Back End Performance

• The front end (especially, the offer)

• Accuracy of product description/presentation in the original ad

• Pricing

• Prompt shipment of goods

• Timing and sequence of shipments

• Accurate order fulfillment

• Quality of customer service

Factors Affecting Back End Performance

Balancing front end and back end

Is the key to successful

Club and continuity programs

21st Century Club and Continuity Plans

• Many mass market clubs and continuity programs experienced strong growth during the 1960’s and 1970’s when success was defined in terms of appealing to the common denominator. Indications are that attempting to be “all things to all people” may not work as well in the more complex marketplace of today.

• Today’s prospect is still drawn to a club or series by the opportunity of getting a lot now in return for gradual payment later. But once these new members or subscribers are signed up, they want to be treated will, not feel they are somehow trapped.

• The modern consumer seeks more personalization in service choice (“me” orientation vs. “we” orientation). These individuals are likely to appreciate efforts to make fulfilling their commitment a more pleasant, rewarding experience.

Club and continuity companies take advantage of technology to manage the relationship with

their customers on a one-to-one basis by incorporating:

• Attitudinal & performance segmentation

– Proprietary member “census” linked with data base analysis of member behavior pattern (AI use)

• High degree of interactivity

– Use of state-of-the-art communications technology for both negative optioning and positive ordering

• Customized distribution

– Targeting message and offer, sequencing product, and adjusting frequency to satisfy each individual’s need

• Enhanced information with special access

– Non-generic editorial and sales materials personalized to individual preferences

• Preferred customer ego enhancement

– Identification and special treatment of key members or subscribers, rewarding their loyalty and making it “painful” for them to drop-out.

Thank you!