February 24, 2007

Cannibalization in E-Mail Campaigns

Here's a quick question for those of you who are e-mail marketing experts. Can you articulate the incremental value of your e-mail campaigns?

Oh sure, you can easily articulate the open rates, click-thru rates, conversion rates, and demand per e-mail that you drive to your online channel.

But can you actually determine if the sales you are saying you drove actually happened because of the e-mail campaign, or would they have happened anyway, if no e-mail campaign occurred?

Here's something for you to try.
  • Take a random sample of e-mail subscribers.
  • Divide that sample in half.
  • The first half receive all of your e-mail campaigns for a month.
  • The other half receive no e-mail campaigns for a month.
At the end of a month, produce the following table:

Received All Did Not

E-Mail Blasts Receive E-Mail
Customers 100000 100000
Total E-Mails Sent 400000 0
Open Rate 25.0% 0.0%
Click-Thru Rate 35.0% 0.0%
Conversion Rate 3.0% 0.0%
Average Order Size $125.00 $0.00
E-Mail Demand $131,250 $0
Non E-Mail Demand $175,000 $250,000
Total Monthly Demand $306,250 $250,000

This is an analysis that must be done for all e-mail marketing programs.

This analysis suggests the following:
  • When you send e-mail campaigns to this customer segment, you'll get $131,250 of e-mail demand, and $175,000 of non e-mail demand, for a total of $306,250.
  • If you do not send any e-mail campaigns, customers increase their non e-mail demand from $175,000 to $250,000.
  • Therefore, e-mail campaigns did not truly drive $131,250 of demand. Instead, e-mail campaigns actually drove $131,250 - ($250,000 - $175,000) = $56,250.
  • Only $56,250 / $131,250 = 43% of the e-mail demand you are recording in your reporting is truly incremental. The remainder of the demand is being cannibalized from all of the other online orders you would generate.
Few e-mail pundits take their analyses to this level. They harp on the relationship-building value of e-mail campaigns, the value of click-throughs and conversions.

Our industry needs to incorporate analytical discipline to e-mail marketing strategies. By taking a page out of the catalog analyst's tool-kit, we can better understand the true value of our e-mail marketing activities.


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  2. I agree with the approach, determining the true incrementality of email is worthwhile.

    Email is a little different than other marketing vehicles, such as a catalog, due to its small cost. Nonetheless, it is still important to understand the revenue driven by email, perhaps not to justify the email's cost in the P&L, but to ensure you aren't overspending on a catalog or other vehicle.

    Kevin - what about email's impact in relation to a catalog? Would you test the incremental impact of email over the catalog (traditional) or the catalog's incremental impact over email (argument being that we'll always keep sending emails, its inexpensive.)

  3. I don't see any problem with testing the combination of e-mail and catalog. It's always a good idea to test combinations of media, to understand if they interact in a positive or negative manner.

    E-mail is one of those tools that pundits like to tout as having high ROI. Occasionally, sending an e-mail drives no true incremental sales --- what it actually does is re-direct the customer to the merchandise featured in the e-mail. The customer clicks on the e-mail, goes to the site, and buys something.

    Had the e-mail not been sent, the customer may have purchased anyway. So, testing e-mail isn't critical, when it comes to measuring ROI, since it is essentially free. However, e-mail is important to test, to understand if you can change customer behavior, and understand if that change results in a true increase in sales, or a re-allocation of sales from the customer's true intent to what the marketer wants the customer to do.