CHALLENGING “BEST PRACTICE”
Rhenania BuchVersand was founded in 1946 by journalist Franz Albert Kramer and publisher Peter Josef Stein. Originally a news service and a printing and publishing business, it first moved into mail order in the early 1960s. By the late 1970s it was supplying customers throughout Germany from its headquarters in Koblenz, and by the mid-1990s it was mailing well over two million catalogues and other materials to the names on its proprietary database. It was also in trouble. In 1996 its trajectory was one of falling sales and tumbling profits. Three of its rivals had cornered more than half of a domestic market characterised by an unpromising combination of maturity, stability-cum-stasis and low margins. Rhenania was still a top-10 player, but this was anything but a guarantee of sustainability. What particularly puzzled senior management was that the firm was experiencing an alarming downturn in spite of following best practice. The accepted approach in the mailorder industry was to send catalogues to clients only if expected revenue was higher than the cost of the merchandise, the fulfilment of the order and the mailing itself. In short, Rhenania was following the standard heuristic of trying to ensure marginal
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IMPACT | AUTUMN 2015
sales would exceed marginal costs – and yet the business was failing. Enter new marketing director Ralf Elsner, who, with his background in economics and his experience in quantitative methods, was seen by his superiors as someone who could provide the sort of innovative solution so desperately needed. The urgent task was to augment Rhenania’s customer base and profitability. Elsner would not disappoint those who expected radical thinking; but his vision would also prove divisive.
RALF ELSNER
At the heart of his proposal was a devastatingly straightforward contention: “best practice”, he argued, was actually nothing of the sort. The long-held, universally employed ethos of optimising individual mailings was in truth suboptimal even in the medium term, because over time it led to a shrinking base of active customers and reduced profitability. Using mathematical modelling, Elsner showed that in the long term
it would pay to mail to clients who might be deemed unprofitable from an orthodox, short-term standpoint. “Even though the modelling I used was quite simple, what I was advocating went against all conventional thinking in the mailorder business,” he recalls. “In essence, I was saying that even customers who haven’t ordered for a while or have placed only small orders can contribute to a company’s bottom line. Shortterm losses from low-valued customers can be more than compensated for in the long run, because those very same formerly lapsed or now reactivated customers are more likely to order again in the near future. In addition, more mail volume generates economies-of-scale effects.” The argument was too contrarian for some – foremost among them Rhenania’s then CEO, who flatly refused to implement Elsner’s concept. As a result, perhaps predictably, the downward spiral continued. Rhenania sent 20 catalogues a year to each of its active customers, its faith in established optimisation strategies so complete, so resolutely unshakable, that managers did not even bother to evaluate whether such a level of frequency was genuinely ideal. At the time the firm had the capacity to contact as many as 400,000 customers, yet its rigid adherence to the purported prudence of the traditional approach condemned it to contact only half that number. In tandem, although overall market volume was growing by around 5% annually, Rhenania was losing approximately 10% in sales volumes every year. It was not until 1998, when a new and more open-minded CEO, Frederik Palm, was appointed, that Elsner was finally given his chance. Like his long-
Image © Rhenania BuchVersand
Tradition, though, must inevitably have its limits, as Ralf Elsner demonstrated when he joined German mail-order firm Rhenania in 1996. Elsner’s use of O.R. would transform Rhenania’s processes and fortunes – but only after a hard-fought battle against scepticism, conventional wisdom and common knowledge.