Drill Down To Bring Profits Up

I remember when I was young I often heard the statement "If you build a better mouse trap the world will beat a path to your door." Over the years I have witnessed this axiom come true countless times. From inventions as simple as the Rubik's Cube to more complex inventions such as the cell phone, the axiom still holds true today. But, while that is one way to have the world beat a path to your door, it isn't the only way. For multichannel direct marketer Fingerhut, the best way to have the world beat a path to your door is by scanning the globe for all the inventors of better mouse traps (or George Foreman Grills) and becoming a distributor for their products. Like most enterprising goals, however, they aren't realized without their share of obstacles. For Fingerhut, like any catalog retailer, the challenge has been to break down hundreds of thousands of products into niche catalogs with the goal of targeting consumers with the appropriate products. A niche catalog serves two purposes: first, it saves the retailer money on shipping costs; second, it gives customers quicker access to the things they are interested in buying. But even the best of plans can go awry. Prior to changing its business practice, Fingerhut was unintentionally sending some of its customers as many as 60 catalogs per year. Considering that the retailer has 7 million active customers in its database, one can see how this could translate to millions of wasted catalogs, which translates to millions of wasted dollars.

"Because of the saturation of material we were sending our customers, we were only realizing $.55 profit from every marketing dollar spent," says Randy Erdahl, director of business intelligence at Fingerhut. Part of the problem was that Fingerhut didn't have the right tools to see the big picture of its marketing strategy. Its 100 catalogs, each overseen by a different manager, were looked at individually instead of as part of a whole. Once Erdahl and his marketing team realized that the mindset of more catalogs shipped equals more profits was compromising its relationship with its customers, things began to change.

From More Catalogs To More Business Intelligence
As a first step in the solution, Fingerhut's IT department, in conjunction with IBM Global Services, created a sophisticated program it coined MSO (mail stream optimization). The MSO program was a compilation of several CRM (customer relationship management), BI (business intelligence), and knowledge management solutions that would enable Fingerhut to capture enormous amounts of data and streamline its catalog marketing campaign. "Our goal was to reduce money spent on excess catalogs and shipping costs without compromising our customer-generated revenue," says Erdahl.

At the heart of Fingerhut's solution is a data warehouse, which hosts the 1,400 individual pieces of information the company keeps on each of its 7 million active customers. "Our system captures customer data ranging from demographics and buying and payment histories to product interests, anniversary dates, and birthdays," says Erdahl. Fingerhut's data warehouse runs on an AIX operating system and uses an IBM RS/6000 SP multiprocessor platform. Within the MSO package are several integrated CRM and BI software solutions. First there is the SPSS (Chicago) CRM software solution with forecasting functionality. Second, is the SAS (Cary, NC) e-intelligence solution. Third, there is the ANGOSS (Toronto) KnowledgeSEEKER knowledge management solution. "The reason we have so many tools is that they each have their own special function," says Erdahl. "For instance, the SAS modules allow us to use regression techniques to determine formulas for our customers' habits. SPSS, on the other hand, enables us to analyze sequences of events, such as the steps a customer goes through before making a buying decision." Fingerhut's latest CRM initiative comes from Quadstone (Boston). The Quadstone data mining solution helps Fingerhut determine which customers should be contacted, how often, and via which marketing medium. For instance, some customers prefer the traditional catalog mailings while others may prefer mailer cards announcing special sales, and others may prefer e-mail notification. Additionally, the Quadstone software enables Fingerhut to make better use of data gathered by some of the other solutions by further breaking down the data into subcategories, such as customer age groups.

Two Steps Forward, One Step Back
When Fingerhut's IT department and IBM consultants tested the solution before going live, it ran into a glitch which nearly shelved the whole project. The enormous size of the catalog retailer's customer database, coupled with its 100 catalogs, placed an overwhelming burden on the MSO system. Because of all the possible scenarios of customers and catalogs, the MSO system was burdened with the task of processing more than 1 trillion combinations before it could provide Fingerhut with the optimal mailing program. "Our calculations estimated that it would take 22 days to run the MSO application," recalls Erdahl. "Because of the high volume of mailings that we do on a daily basis - as many as a million catalogs - the longest we could wait was 72 hours." This setback nearly stopped the whole plan. IBM Global Services did its homework and arrived at a solution from Torrent Systems (Cambridge, MA). Torrent Systems' flagship product - Orchestrate - is designed to enable software applications to run more efficiently by separating data and streamlining it across multiple processors. In layman's terms, this enabled Fingerhut to trade in its Ford Fiesta for a Ferrari Testerossa while also changing its driving terrain from a school zone to the autobahn. "After installing the Orchestrate application, we were able to cut the system's calculation time down from 22 days to under 10 hours," says Erdahl. Overall, Fingerhut's MSO program has helped the company cut its catalog mailings (advertising dollars) by 7% and boost overall profits by $3.5 million in its first year of implementation. "This solution has gone above and beyond our expectations," says Erdahl. "By cutting out millions of catalog mailings that were more than 80% redundant, we only lost 1% in revenue and were able to realize a net profit gain of 2%." Prior to implementing its mail stream optimization program, Fingerhut was spending $600 million annually in catalog advertising, printing, and distribution costs. By shaving that number by more than $42 million, the MSO program easily paid for itself within the first year.

Forging Ahead With e-Commerce, EAI, And Nearline Storage
Even though the catalog retailer is very pleased with its recent CRM accomplishments, it by no means plans to rest on its technological laurels. Right now there are three primary areas it is focusing on to cut costs and increase profits. The first area is the Internet. Even though Fingerhut's online sales approached $175 million last year with 400,000 online customers, the company sees this as the tip of the iceberg for its e-commerce potential. "Our plan is to cut back on some of the catalogs our Internet customers receive and substitute the catalogs with less expensive postcards that point to Web sites," says Erdahl.

Fingerhut's second initiative involves sharing its data with sister companies and subsidiaries. Being a subsidiary of Federated Department Stores, Inc., Fingerhut has connections to sister retail entities such as Macy's, Bloomingdale's, Lazarus, and The Bon Marché. Additionally, Fingerhut has its own subsidiaries such as Arizona Mail Order and Bedford Fair Industries, catalogers of women's apparel, as well as Figi's, a specialty food and gift catalog company, and Popular Club Plan, a membership-based general merchandise cataloger. "Our plan is to install EAI (enterprise application integration) software that will enable us to share the data we gather with our sister companies and subsidiaries," says Erdahl.

Another cost-saving initiative in the works at Fingerhut is in the area of enterprise mass storage (see Storage Sound Byte on page 60). Because of the vast amount of data the company collects on each of its customers, enterprise storage becomes very costly to maintain. Fingerhut is taking its 10-plus TB of data that it stores on an EMC RAID (redundant array of independent disks) and migrating a portion of the less-accessed data to less expensive nearline storage. With the cost savings derived from storing data nearline vs. online, Fingerhut will be able to save at least $1.9 million within the first year of migrating 5 of its 10 TB to a nearline environment.

From apparel to sporting goods, and just about everything in between, you can find it at Fingerhut. One may think that this is all the proof you should need that you don't have to build a better mousetrap yourself to be successful - or to have the world beat a path to your door (or your portal, your warehouse, etc.). But before you make that call, don't forget about the retailer's MSO behind the scenes... and think again.