CONCLUSIONS PAPER

From Growing Pears to Growing ConnectionsThree keys to cultivating customer relationships at Harry & David

SAS Conclusions Paper

Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Three Keys to Cultivating Connections . . . . . . . . . . . . . . . . . . . . . . . . . 2

Key 1. Organize Your Strategic Planning Around a Customer View . . . 3

Strategic and tactical advantages of the customer-centric approach . . . . . . . . 3

Key 2. Segment Your Customers for More Appropriate Treatment . . . . 4

Strategic and tactical advantages of customer segmentation . . . . . . . . . . . . . . 6

Key 3. Measure the Effectiveness of Marketing Programs Over Time . . 6

Closing Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

About the Presenter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

For More Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1

From Growing Pears to Growing Connections

IntroductionWhen you visit the Harry & David website, you immediately notice three things .

One: You’re suddenly hungry for rosy-golden pears, chocolate truffles and Moose Munch®, the gourmet flavored popcorn that goes where Cracker Jack never dared to venture.

Two: You notice the website offers customer-friendly ways to shop – by product, by category or by price, even by special occasion – and it’s all so appealing that you want to send yourself a gift basket.

Three: You notice that for product after product – across all categories – user reviews average five stars out of five, or pretty darn close.

Not bad for a company that grew from a 240-acre orchard in southwestern Oregon in the early 1900s . Sam Rosenberg’s sons Harry and David, both trained in agriculture at Cornell University, took over the fruit business in 1914 . They chose to specialize in a pear variety that grows well in the Rogue River Valley . Innovative marketers, they convinced business partners in Seattle, San Francisco and New York that their “Royal Riviera” pears made excellent corporate gifts . In the process, they pioneered the concepts of selling fruit by mail order and by “Fruit of the Month Club” subscriptions .

In spite of the quality and popularity of its products, the company suffered during the economic downturn that began in 2008 . Gourmet food and gifts are the proverbial canaries in the coal mine . After several years of double-digit decline in sales and customer file, the company filed for Chapter 11 bankruptcy in March 2011 .

The company was at the peak of its crisis when Paul Lazorisak was deciding whether to leave a certain very prestigious retailer in Freeport, ME, to head up customer marketing at Harry & David . “You can imagine the conversations I had with my wife, as to why I went with Harry & David, and then during the bankruptcy period, why I decided to remain with Harry & David .” It did look like a serious gamble .

“What I didn’t see at Harry & David reassured me that we would turn the company around . I didn’t see a company whose customer base had deserted them . I didn’t see a company whose product was irrelevant . And I didn’t see a company in a death spiral and going into bankruptcy for sure reasons . What I saw was opportunity to work on the basics – people management, data management, analytics and getting the company focused again on the most important thing that had made us great in the past – and that was the customer .”

As one of the oldest direct mail companies in the country, Harry & David lives or dies by its customer base . In this multichannel age, the company sells through catalogs, email, social media, its website – optimized for desktops, smartphones and tablets – and through affiliate programs, such as its new relationship with Amazon . The challenge for Lazorisak was to get a handle on customers across all those channels – who they are, how they buy, how best to appeal to them, and where to focus to deliver best results .

2

SAS Conclusions Paper

Initially, the data infrastructure to support the necessary holistic customer view just wasn’t there . The company was in survival mode . “At the time, it was a company of systemic triage, where everybody was just turning the cranks to get the next campaign out the door to get more sales, just to keep the lights on,” Lazorisak recalled . “There was an aging infrastructure and little budget to invest in people and technology . The culture was one of ‘subject matter expert fiefdoms’ – where feudal lords held the institutional knowledge .

“It was all about protecting their jobs by limiting access to information stored in disparate systems and disconnected data sets . So there wasn’t a clean flow of information . Analysts spent 80 percent of their time on operational processes and 20 percent of their time on actually analyzing data .”

Given the limitations of its information processes, how did Harry & David turn it around?

Three Keys to Cultivating ConnectionsHarry & David not only emerged from bankruptcy but gained double-digit file growth and demand growth and became a $300 million to $400 million retailer . The thriving company has more than 3,400 acres of pear and peach orchards, makes more than 105 million pieces of candy and 5 million pounds of Moose Munch popcorn, and bakes more than 300,000 cheesecakes a year, just for starters . These products go into gift baskets and gift towers, hand-assembled and hand-packed for lucky recipients, mostly at holidays .

The key to this turnaround was to excel at the fundamental mission shared by marketers across all industries: Create more demand . For a direct marketing company, that means:

• Youhavetogetmorepeopletoorder.

• Whentheyorder,youhavetopersuadethemtoputmoreitemsintheircart.

• Andwhentheyaddthoseitemstotheircart,itwouldbegreatiftheycouldchoosehigher-priced items .

Improve any of these metrics – customer counts, order frequency or shopping cart value – and you will be inching toward your revenue goal . Easy enough – conceptually .

Improving performance on those metrics requires three keys, said Lazorisak:

1 . Organizing your strategic planning around a customer view .

2 . Segmenting customers to develop more meaningful relationships .

3 . Measuring your effectiveness over time .

The trick is in doing these things across channels, products and organizational units, and doing it in a credible, scalable and repeatable way . In a webinar hosted by SAS, Lazorisak shared some of his experiences putting these keys in place at Harry & David .

3

From Growing Pears to Growing Connections

Key 1. Organize Your Strategic Planning Around a Customer View

“The first step to customer-centricity is a mindset,” said Lazorisak . “At Harry & David, we look at our business as having customers to whom we market our products; we don’t look at our business as having products we market to customers . That’s a subtle but important distinction . For us, success depends on developing deep customer insights through analysis, modeling and profiling, so we can communicate with our customers at the right time, with the right message and the right offer . Product is extremely important to us, but it’s not the top of the pyramid . The customer is at the top of the pyramid .”

That mindset is hard-coded into demand planning that takes both a top-down and bottom-up view . Lazorisak showed a sample of this approach using hypothetical figures . The report stratifies customers by recency of their purchases – 0-12 months, 12-24 months, 24-36 months . Organized in this way, it becomes clear how much demand is generated by each group . “When we begin to think about demand planning – and what we have to do to drive more sales – we look to this top-down view to tell us how many customers we have, what recency buckets they fall in, and how they can drive our objectives .”

1 2 3 4 5 6 7 8 9 10

Customer (RF) Segment

Customer Count (000's)

Buyers (000's)

Orders (000's)

Units (000's)

Sales (000's)

Retention Rate

Orders per

Buyer

Units per

Buyer

Sales per

Buyer

Total Year 12,260 2,904 6,209 14,761 538,818$ 2.1 5.1 186$

Recent Buyers (12 Months)A 2+ LT Purchases 2,540 1,317 3,186 7,666 301,733$ 52% 2.4 5.8 229$ B 1 LT Purchase 421 69 113 246 9,291$ 16% 1.6 3.6 134$

Active buyers (13 - 36 Months)C 2+ LT Purchases 3,214 585 986 2,139 84,620$ 18% 1.7 3.7 145$ D 1 LT Purchase 796 68 100 205 7,729$ 9% 1.5 3.0 113$

Lapsed buyers (36+ Months)E 2+ LT Purchases 3,661 182 268 556 22,277$ 5% 1.5 3.1 123$ F 1 LT Purchase 1,629 67 95 192 7,318$ 4% 1.4 2.9 110$

NEWG New To File 616 856 1,822 69,559$ 1.4 3.0 113$ H Unknown 605 1,935 36,290$

Figure 1: A hypothetical, top-down demand planning view, stratified by recency and lifetime (LT) frequency of purchase (not actual results).

The real value, though, comes when this view is combined with sales and behavior metrics and customer counts by recency bucket . For example, of those who purchased within the last year, you can see how many were repeat buyers, how many times they ordered, average items and dollars for each order, and cumulative orders and dollars for a customer recency bucket . You can then see how those figures change as you move from very recent buyers to not-so-recent buyers to very lapsed buyers . You would expect all the sales metrics to fall off, but by how much, and where is it worthwhile to focus some marketing efforts?

“It’s a very easy report to run,

and a good one to keep in your

back pocket to see what types

of customers you have in the

file and who is going to

generate the demand for

you going forward.”

Paul Lazorisak Harry & David

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SAS Conclusions Paper

Strategic and tactical advantages of the customer-centric approach

“When you look at this customer-centric view, the pathway to success begins to become illuminated,” said Lazorisak . “It becomes obvious which customers will drive sales going forward and which ones you need to reactivate to continue to drive future sales . You will probably target the high-value segments, of course, but that focus alone isn’t going to be sufficient to get you where you want to be .”

Here’s where it gets interesting . This top-down view is compared with the bottom-up demand plans from the marketing programs – the Internet team, catalog team, email team, etc . These groups come to the table with their demand forecasts, which are then validated against the high-level demand planning view . Will the program-level plans meet the company’s strategic objectives? Viewed in this context, it becomes clear where action needs to be taken .

“An object at rest stays at rest unless acted upon by an equal and opposite force,” Lazorisak noted . “Apply that universal law to customer metrics, such as re-buy (retention) rate, frequency of purchase or shopping basket value . These metrics will not change unless you put programs and investments in place to move them . What customer relationship management strategies are you going to put in place to move the metrics?” And are they realistic? It’s fine and well for the marketing teams to say they’re each going to drive more orders, but it could all add up to a projection that more than 100 percent of customers will make repeat purchases – and that isn’t going to happen .

“So it becomes a give and take, using this high-level, top-down view of the customer to say, ‘These are our customers, and these are the metrics they represent . If you’re coming to the table saying you can drive $10 million, $20 million or $50 million more by entering the Amazon marketplace, or by launching a wine product, or by mailing the catalog to additional names on the files, which of these metrics are you going to influence, so we can figure out whether or not these goals are achievable?’ It’s a very low-tech way of pressure-testing our plans in many ways .”

For one, when people request investments in technologies or other initiatives, you can pressure-test their assumptions against the customer file and determine whether their recommendation is likely to produce the result they claim – or if viewed at the holistic level, it’s unachievable . Once the top-down customer view is created and demand is assigned to it, marketing teams and the company overall can be held accountable to the bottom-up metrics that fed into it . You can compare reports year-to-year, identify trends and investigate the causes .

“This simple report also helps to guide some board-level conversations and financial-level disclosures,” said Lazorisak . “Investments do not just result in increased sales, they result in additional buyers . Additional buyers result in perpetual revenue streams, which are far more exciting to investors .”

Key 1. Customer-Centric Strategy Strategic Benefits

• Illuminates the pathway to success

• Drive balanced scorecard metrics

• Guide board-level conversations /financial disclosure

• Force a multiyear perspective

Tactical Benefits

• Helps quantify macro-level events and price elasticity

• Provides historical, annual, seasonal, campaign-level performance

• Predictive: Long-range planning model

5

From Growing Pears to Growing Connections

Key 2. Segment Your Customers for More Appropriate Treatment

The top-down view grouped customers according to recency, a basic segmentation point of view . To deliver the right message to the right customer at the right time via the right channel, marketers need a more granular segmentation . Where the earlier view sliced the customer horizontally, now we’ll slice the customer file vertically, segmenting by behavioral and attitudinal attributes that indicate customer value and loyalty . We can then begin to look at the DNA of customers in each segment to understand what motivates them and how best to speak to them .

“We do all sorts of statistical modeling to determine who is the best customer to contact in a specific time period, but that’s only about half of the equation,” said Lazorisak . “The other half of the equation is how are we going to have that conversation? That’s where the segmentation comes in . It’s extremely important that those segments are integrated into campaigns . It determines which versions of emails, catalogs and promotional offers we’re going to send .”

Lazorisak showed behavioral segmentation visualized as a bubble diagram, with customer loyalty on the x axis, customer value on the y axis, and the size of the bubble representing the size of the cohort . At the upper right-hand corner are the most loyal and high-value customers . At the lower left corner are the lowest-value customers .

Valu

e

Loyalty

Figure 2: A bubble visualization clarifies the value and loyalty of each customer segment.

Lazorisak focused his attention on the second-tier group he calls the Santa’s Elves . “They will only buy during Christmastime, but when they buy at Christmas, they buy a lot . If you like Harry & David products, befriend one of Santa’s Elves, because you’re guaranteed to get a Harry & David product every Christmas – you and all your relatives .

“By overlaying attitudinal

characteristics on top of the

segmentation, we can begin to

look at the DNA of customers

within each segment to

understand what motivates

them and how best to speak

to them.”

Paul Lazorisak Harry & David

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SAS Conclusions Paper

“But if we try to have a conversation with them about Mother’s Day, they usually respond negatively by opting out of our communications . These customers have told us repeatedly that they love us, but they only love us during Christmastime . They don’t care to hear from us at Mother’s Day . They don’t care to hear from us at Easter . We are not their source of gift giving for those holidays . But during Christmastime, they want to learn about all of our new products, they want to know what we have to offer, and they’re more than willing to purchase from us .”

This group is already loyal, year after year, so increasing the value of this group isn’t going to be a retention effort . Success will come from being very effective in communicating with them during the short window of opportunity for Christmas purchases . “We have to be extremely accurate and diligent when speaking to these customers within that small window, making sure the messaging and promotions are right for them, and we’re making Christmas as easy and enriching as possible for them .”

What about the big bubble of customers at the lower left quadrant – the low-value, infrequent buyers? This group includes many one-time buyers, perhaps those who got a great deal through Living Social or a discount offer . Should a retailer ignore them? No, says Lazorisak . “While they might not have high-value activity on my file, they might have high-value activity on somebody else’s file .” Do your detective work with credible sources of external data . Don’t just focus your efforts on collecting demographic data . Find out things like transactional behavior – share of wallet, recent purchases, Web engagement and so on . Some of those apparent low-value customers could become high-value, if you make the right moves .

Strategic and tactical advantages of customer segmentation

With good customer segmentation, you can focus your conversations, promotional strategies and resources more precisely . You won’t waste resources promoting Easter baskets to Santa’s Elves . You will develop long-term relationships with your valued business accounts and assign them their own sales representative . You will make sure your best customers get priority treatment in the call center and access to co-browsing and chat features when they visit your website .

In short, with proper segmentation, you can be more timely, relevant and appropriate for customers’ needs and wants . And since gourmet foods and gifts are more want than need, Harry & David works hard at getting this right .

Key 3. Measure the Effectiveness of Marketing Programs Over Time

So, you create a top-down view of demand planning, stratified by customer purchase recency – and you validate bottom-up marketing plans against that view . You use behavioral and attitudinal indicators to develop a richer view of customers and segment them for more appropriate and relevant treatment . How do you know you’re getting it right?

Key 2. Customer Segmentation Strategic Benefits

• Drive value to the company and customers .

» Focusing the customer conversation .

» Focusing promotional strategy .

» Focusing resources .

Tactical Benefits

• Prioritize services in contact center/Internet .

• Improve customer targeting .

» Monetize Facebook .

» Optimize display advertising .

» Target media buys .

• Optimize communication cadence .

7

From Growing Pears to Growing Connections

You’ll have a good idea if you are moving customers ever upward on the value scale . You see one-time buyers become repeat buyers become repeat high-value buyers – if you’re good . Lazorisak presented a visualization showing the maturation of a cohort of new customers after one, two and three years . Using the categories defined in the earlier bubble plot, he illustrated how effective the marketing organization was at migrating this group of new customers from low to high value . By simply looking at many of these cohorts next to one another, it’s easy to see whether marketing has improved its ability to increase customer value .

Migration of cohort Comparisons of Cohorts

2008 Cohort ’08-’10

Figure 3: A year-over-year comparison of customers by value cohort

“We look at a three-year view when we’re doing this,” said Lazorisak . “Due to the cyclical nature of our business, we find that a cohort of new customers matures after three years . By and large, the people who are going to become high-value customers achieve that status within the three-year time period, and the people who are going to be low-value, low-loyalty customers are pretty much there within three years . There’s very little movement from that point forward, with the exception of natural attrition . By looking at the last several years of new customer cohorts, we can get a sense of how effective we are as a marketing organization . If we are getting fewer customers up the ladder, we need to know why . Did we acquire a disproportionate number of customers from lower-value sources? Did we acquire customers more loyal to a specific product than to our brand?”

The bar visualization enables marketers to see how well they’re doing overall in moving customers up the value chain, but there’s more to this self-assessment . “We can dive deeper and investigate the factors that drive performance within the cohort,” said Lazorisak .” For example, when the company significantly cut catalog list rentals in the lean years, it lost good sources of high-value prospects and brought on more low-value customers through less expensive Internet sources . This customer migration view would have revealed that unintended consequence and justified the investment in list rentals .

Key 3. Measuring Effectiveness Over TimeStrategic Benefits

• Focuses attention on long-term growth via customer nurturing .

• Measures marketing’s effectiveness versus spending .

• Foundation for developing loyalty strategies .

Tactical Benefits

• Helps assess acquisition sources based on subsequent value .

• Foundation for understanding customer life cycle and attrition .

“When you bring new

customers on file, your number

one job is to figure out who’s

going to be your next high-value,

high-loyalty customer, and

who’s going to be your

next low-value, low-loyalty

customer – and focus your time

and efforts accordingly.”

Paul Lazorisak Harry & David

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SAS Conclusions Paper

Closing Thoughts“The top-down customer planning view is a low-tech, high-value way of illuminating the pathway to success,” said Lazorisak . “When you look at the customer file, and you apply sales, orders and units metrics to that, you can begin to figure out what you need to do as a business – what metrics you need to invest in and change – to grow the company .”

Whether the goal is to attract more customers or get more value from the ones you’ve got, good segmentation enhances the conversation and focuses company resources in the most productive way . Finally, you can determine if those efforts are on track by studying the migration of new customers into higher-value categories over time, and use that information to improve acquisition and nurturing strategies for long-term growth .

That is how you bounce back from bankruptcy to become a $300 million to $400 million success story .

About the Presenter

Paul Lazorisak Harry & David, Vice President of Customer Relationship Marketing

Paul Lazorisak is the premier direct marketer of fruit and gourmet gifts . Over the past few years, Lazorisak has brought transformational change to this organization by redefining how data is accessed, organized, analyzed and acted upon . His current responsibilities include overseeing the business analytics, customer relationship management and direct marketing teams .

For More InformationDownload related SAS white papers:

A Marketer’s Guide to Analytics: sas.com/apps/sim/redirect.jsp?detail=SIM95125_3021

Argyle Conversations: Building a Marketing Analytics Culture: sas.com/reg/wp/ca/58290

For more details about customer intelligence solutions: sas.com/software/customer-intelligence

To read more thought leader views on marketing, visit the SAS Customer Intelligence Knowledge Exchange: sas.com/knowledge-exchange/customer-intelligence

To get fresh perspectives from marketing practitioners on the SAS Customer Analytics blog: blogs.sas.com/content/customeranalytics

Twitter: @SAS_CI

Key Takeaways• The top-down customer

planning view is a low-tech, high-value way to illuminate the pathway to success .

• Use behavior- and attitude-based segmentation to enhance the customer conversation and focus company resources .

• Study the migration of new customers into subsequent value categories to improve acquisition and nurturing strategies for long-term growth .

About SASSAS is the leader in business analytics software and services, and the largest independent vendor in the business intelligence market . Through innovative solutions, SAS helps customers at more than 65,000 sites improve performance and deliver value by making better decisions faster . Since 1976, SAS has been giving customers around the world THE POWER TO KNOW® . For more information on SAS® Business Analytics software and services, visit sas.com .

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