A Bird In The Hand
Instead of wooing new customers, you might do better persuading those you have to buy more
Treadmills are boring.
Oh, sure, they're not bad if there's 14 feet of snow on the ground, and you absolutely have to go jogging. And they do let you practice running up a 25% grade. But with the exception of a few mountain goats, Sisyphus, and the folks who spend their days tilting at windmills, we aren't sure why anyone would want to.
No, the fact is that no matter how you look at it treadmills are a waste of time. You run and run and run, and when you're done, you've gone absolutely nowhere.
And that's exactly where Robert Sidell felt he was going with California Cosmetics Inc. A fixture behind Hollywood's powder puff for 27 years -- the balding, stocky 51-year-old Californian did the makeup for "The Waltons," Body Heat, and E.T., among others -- Sidell started the company in 1985 to capitalize on the specialized skin cleaners and toners he had created for the stars. But by 1988, when people asked, "How's business?" he always answered, "I'm on a treadmill."
The problem was simple: Sidell felt he was spending all his days searching for new customers to keep California Cosmetics growing. And it was driving him nuts. "I'm as greedy as the next guy, but this had to stop."
At first blush, it is difficult to understand why he would complain. Sales at the mail-order company, by any measure, were phenomenal. In their first full year of operations, Sidell and his partner, Paula Levey, logged $1.6 million in revenues. By 1987 it was $4 million, and last year sales of their SilkSkin line of cosmetics came within an eyelash of $12 million.
And the only thing better than the sales were the profits. California Cosmetics made money from the start, with net margins hitting 12.5% last year.
Sure, the numbers were fine, Sidell says with a shrug, but at what cost? Keeping up the phenomenal growth meant he had to keep searching out new customers. His ad budget kept growing -- by last year it represented nearly 16% of sales -- and so did his product line. After all, the more items in your catalog -- and by late last year California Cosmetics was offering 21 -- the better your chance of having something someone would like.
But each new product meant more inventory. Adding inventory meant cash flow went down, while packaging costs and payroll went up. Not only did Sidell have to find bigger warehouses to hold the ever-increasing number of products, but he also needed to hire more people to fill orders. That in turn meant more data-entry people to take the orders, and more supervisors for both. And so it went, on down the line.
"It was ridiculous," Sidell says, sitting in his office in Chatsworth, Calif., near Los Angeles. "We had to get off the treadmill."
Here's how he did it. Instead of continuing to court new customers, Sidell decided to convince those he already had to send him more money.
The advantage to this marketing approach is simple. You don't have to spend money -- in Sidell's case, an average of $150,000 per product -- adding to your line. Instead, you concentrate on getting existing customers to buy more of the things they like and/or to buy products already in stock.
By dealing with existing customers, your margins should increase because you have eliminated -- or at least have greatly reduced -- the cost of finding new customers. Sidell is projecting that net margins for 1989 will climb 25%. And this strategy makes it easier to grow. Sidell's average customer spent about $30 last year. So it took 400,000 customers to produce 1988's $12 million in revenues. The goal for 1989 is to hit $16 million. If Sidell continued to do business as he did in the past, it would mean he'd need to find another 133,000 new customers. But if he can just get his existing customers to spend another $10 a head, he'll reach the $16 million without the costs and headaches associated with finding new customers.
Is it really possible to do business this way? Yep, says
Sidell, who discovered by accident just how easy it could be.
Sidell's sales typically fall off in summer. And last summer, more out of idle curiosity than anything else, he had his service reps call 10 customers who hadn't ordered in a while to find out why. "Eight placed an order right there," says Sidell, still incredulous a year later. "They had meant to give us a call but had gotten busy. Or they had misplaced the catalog." (Unlike most direct-mail companies, whose brochures arrive as predictably as the full moon, California Cosmetics customers receive catalogs only with their orders.) "But as soon as someone asked them to buy, they did. You don't have to kick me in the head for too long for me to realize something. We were missing a golden opportunity."
As are thousands of other companies. In your quest for growth, it's easy to take old customers for granted.
Sidell was guilty of that. But the casual survey of those 10 customers convinced him there was a lot of money to be made by changing his ways. But how? He could send out catalogs more often, of course, but that wouldn't give customers the right feeling. He wanted to reward them for being loyal, not just hector them for more business. The question was, how to do it?
Fate supplied the answer. Sidell's order takers routinely asked the birth dates of the customers who called in. The company used the information to compile a demographic database. But it also gave Sidell a potential marketing advantage. Since he knew when they were born, Sidell could send his customers birthday presents. And who doesn't like to get presents?
The gift wasn't anything fancy, just a set of three small makeup brushes that cost Sidell 45¢. With the brushes he enclosed a $5 gift certificate and a birthday card, of course. The whole package -- including postage -- cost him $1.
"I don't know if they were grateful or felt guilty, but 40% of the people who got birthday presents immediately placed an order with us," Sidell says. That's a 40% repeat rate, compared with the 12% he had been averaging.
Clearly, Sidell was on to something here. Customers like to be remembered -- and rewarded.
Well, if you can reward them for being customers, could you also reward them for sending you their friends? It turns out you can.
California Cosmetics sells inexpensive knockoffs of well-known perfumes such as Opium, Passion, and Obsession. Sidell promised his customers the knockoff of their choice for free if they'd just supply him with the names of three people who might like his cosmetics. About 20% of his customers took him up on the offer, and for every three new names he gets, one places an order. In the direct-mail business, if three people out of 100 who get your catalog become customers, you're a superstar. A 33% conversion rate is unheard-of. But Sidell says his results should not be surprising.
"First, we are getting qualified leads. The people recommending us usually believe that their friends will like our products. Second, they generally tell their friends why they like doing business with us. That makes it easier to convert them."
Convinced this is the best way to go, Sidell and Levey plan to focus virtually all their marketing efforts in coming years on satisfying existing customers.
"Other than our products, service is really the only thing we have to offer," says Levey, 38, who ran her own mail-order vitamin company before teaming up with Sidell. "By concentrating on our existing customers, we're just trying to figure out how to give them more service."
Here's one way. "For what it costs us to run an ad, we could put out a monthly newsletter that gives customers tips on applying makeup," Sidell says. The newsletter -- which of course would include product descriptions and ordering information -- is also a less-than-subtle way of reminding customers to buy.
And there is a plan that would make reminders unnecessary: a cosmetic-of-the-month club.
The details are still sketchy, but it may work like this. Customers who routinely order moisturizer, for example, will be given the choice of having a two-month supply come to them automatically six times a year. The cream will keep coming until the customer says no, much as the Book-of-the-Month Club sends its main selection without fail unless you reject it in advance. As an inducement, customers will be given a 20% discount on each product they sign up for.
"None of these programs by itself is going to produce the kind of explosive growth we have had up until now," Sidell says. "But what they do is ensure that the customer base is much more solid. And by following these programs we will be better able to control our growth."
They have the added advantage of keeping Sidell off the treadmill.
Ways to keep your customers coming back
Robert Sidell hasn't invented anything. Cross-selling is the fancy name for what he's doing at California Cosmetics, and it's something big companies have known about for years. For example, American Express has reported that it gets 10% of its earnings by selling additional products to its current customers. Think about the bill stuffer that came with your last American Express statement, or the phone call you got from a broker at Shearson Lehman Hutton Inc. (an American Express Co. subsidiary).
But while cross-selling isn't new, it is effective. Here's how Sidell went about exploiting an underutilized asset, his customer base:
* Know your customers. The first thing may be the hardest. You have to figure out who your customers are and what they are, and are not, buying from you.
* Reward them. Once you have identified your customers, reward them. The reward doesn't have to be elaborate. This is really a case where it is the thought that counts.
* Offer them more of what they buy, or something compatible. You can even do this when you send out the presents. Your message: "Here's a little something to thank you for letting us work for you. And, by the way, we noticed you buy a lot of pencils. Do you need any paper?"
* Make an offer they can't refuse. The additional product should be priced so low that there is no way your customers can say no. You can afford to cut prices here, because your marketing costs are less.
* Give them a reason to tell a friend. Word-of-mouth advertising is still the best. Sidell rewards his customers for giving him leads.