June 25, 2007

Expanding Upon Multichannel Business Models

We really lit up the readership meter yesterday when we discussed Multichannel Business Models. Monday was one of the top five traffic days in the history of the blog, that post was the most read post of the day by a wide margin.

I'll take that as affirmation that multichannel business models are of interest to you, the loyal MineThatData reader. Let's expand upon yesterday's discussion.

A common question I hear is "How do I, with the data I have available to me, determine which business model my brand is classified in?" Good question! Let's explore each business model, and some of the things you're likely to see. We'll explore each business model by looking at results from mail/holdout tests, comparing dollar per customer metrics.


Model #1 = Simple Online Presence

Incremental Value Of Catalog Marketing









Other



Catalog Catalog Online Retail Total

Demand Demand Demand Volume Volume
Mailed Segment $3.00 $7.00 $0.25 $0.00 $10.25
Holdout Segment $0.00 $8.10 $0.05 $0.00 $8.15
Increment $3.00 ($1.10) $0.20 $0.00 $2.10






Incremental Results: $2.10 / $3.00 = 70.0%
Matchback Analysis: $3.00 + $0.25 = $3.25

Notice that almost no online demand is generated by the mailing of the catalog. Also, if the catalog is not mailed, virtually no online sales occur. This clearly tells you that the website is just "there", customers are not really using it to order merchandise.


Model #2 = Online Order Form: Check out the differences in this table:

Incremental Value Of Catalog Marketing









Other



Catalog Catalog Online Retail Total

Demand Demand Demand Volume Volume
Mailed Segment $2.00 $7.00 $2.00 $0.00 $11.00
Holdout Segment $0.00 $8.10 $0.10 $0.00 $8.20
Increment $2.00 ($1.10) $1.90 $0.00 $2.80






Incremental Results: $2.80 / $2.00 = 140.0%
Matchback Analysis: $2.00 + $2.00 = $4.00

Notice how different this table looks. In this business model, demand is driven to the online channel when the catalog is mailed. Notice that almost no online demand occurs in this scenario. So, the catalog drives orders online, but the online channel is not yet capable of generating its own incremental volume. The online channel is a glorified order form.


Model #3 = True Catalog Multichannel Model

Incremental Value Of Catalog Marketing









Other



Catalog Catalog Online Retail Total

Demand Demand Demand Volume Volume
Mailed Segment $3.00 $7.00 $3.00 $0.00 $13.00
Holdout Segment $0.00 $8.10 $1.50 $0.00 $9.60
Increment $3.00 ($1.10) $1.50 $0.00 $3.40






Incremental Results: $3.40 / $3.00 = 113.3%
Matchback Analysis: $3.00 + $3.00 = $6.00

Notice the significant differences in this business model. If the catalog is not mailed, half of the online demand occurs anyway. This is a view that many catalogers are missing these days, due to an over-dependence upon matchback analyses. In this case, $3.40 of demand per customer were generated. However, the matchback analysis indicates that $6.00 of demand per customer were harvested. If the cataloger goes with the latter, the executive team will significantly over-circulate catalogs, causing profit to be sub-optimized. This is probably the most significant analytical error happening in our industry these days --- our list processing, compiled list vendors, industry experts and and paper representatives have unknowingly pushed us down this path, and we let it happen. Nobody is to blame, it's simply our responsibility to do a better job of analyzing the business models we manage.


Model #4 = Retail Business, Catalog Heritage

Incremental Value Of Catalog Marketing









Other



Catalog Catalog Online Retail Total

Demand Demand Demand Volume Volume
Mailed Segment $3.00 $6.00 $3.00 $3.00 $15.00
Holdout Segment $0.00 $7.00 $2.00 $2.00 $11.00
Increment $3.00 ($1.00) $1.00 $1.00 $4.00






Incremental Results: $4.00 / $3.00 = 133.3%
Matchback Analysis: $3.00+$3.00+$3.00 $9.00


These results are interesting. In a true multichannel version of a catalog business model, volume is spread across other catalogs, the website, and retail stores. Typically, the catalog will drive modest amounts of volume online, and to stores. Notice that online and store channels still get a ton of volume, even if the catalog is not mailed. In these cases, matchback analyses are flat-out wrong --- much care needs to be taken to accurately read matchback analyses in a retail environment of this nature.


Model #5 = Online Business, Retail Heritage

Incremental Value Of Catalog Marketing









Other



Catalog Catalog Online Retail Total

Demand Demand Demand Volume Volume
Mailed Segment $1.00 $4.00 $5.00 $20.00 $30.00
Holdout Segment $0.00 $5.00 $4.00 $19.00 $28.00
Increment $1.00 ($1.00) $1.00 $1.00 $2.00






Incremental Results: $2.00 / $1.00 = 200.0%
Matchback Analysis: $1.00+$5.00+$20.00 $26.00

These business models are also fascinating. Notice that catalog advertising plays a very small role in influencing business results. Online demand and retail volume are barely moved by the mailing of a catalog. Yet, in total, the catalog is twice as effective as source code reporting would indicate.


There's no need to talk about online pureplays, as catalog dynamics are not part of that equation.

Given what has been shared over the past two days, what are your thoughts? Does this framework make sense? What are you seeing in the business models you manage? Do you agree that matchback analyses are frequently in error, sometimes significantly in error, when measuring the incremental value of a catalog?

3 comments:

  1. Anonymous4:10 AM

    Kevin,
    In model 2(order form) and model 3(multichannel) how much are online reorders over time driven by initial catalog mailing? Meaning, how do you measure customer introduced by catalog to company and website, say in spring campaign, who continue to order online throughout year without a catalog campaign prompting them?
    Can you convert a catalog customer to solely online and maintain that customer in the new channel without expense of catalog? If so, how does that fit into your models? And how does matchback analysis track that?
    K

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  2. There's nothing wrong with saying that the "original" source of the customer is catalog.

    However, catalog does not get credit for all future orders. This is another source of error created by catalogers and matchback vendors.

    What must get credit is the marketing activity that drives sales today. In many cases, that activity is not a catalog. Maybe it is Google. Maybe it is the fact that the website is bookmarked as a "favorite".

    If we expand upon that logic, then in business models four and five, we need to give the retail store credit for original source, since in many cases, those customers came from stores.

    If we go to that extreme, then catalogs get little credit, and as a result, we'd never mail any catalogs.

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  3. One more point ... you ask "how do you measure customer introduced by catalog to company and website, say in spring campaign, who continues to order online throughtout the year without a catalog prompting them?"

    The tables I illustrated point that fact out. The difference in the dollar per customer between mailed and holdout groups in the "online" column illustrate the amount the catalog truly drove.

    In model three, mailing the catalog drove $3.00 - $1.50 = $1.50 online. Matchback analyses would errantly attribute $3.00 online.

    In other words, the catalog drove half of the online volume ($3.00 - $1.50), whereas customers themselves (or other online marketing activities) drove the remaining $1.50 online.

    This fact is poorly understood by most catalogers, and causes catalogers to significantly over-circulate, losing a lot of money.

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