July 05, 2007

Does Online Marketing Truly Increase Net Sales For Multichannel Retailers?

Online Marketing. For some businesses, it has been a revolutionary marketing tool that drives incremental sales and profit. Many online businesses thrive, using online marketing techniques like paid and natural search, affiliates, and portal advertising. A business like Zappos grows exponentially using online marketing strategies.

Our metrics seem to indicate that online marketing works. We've spent a lot of money installing software on top of our websites, and the software indicates that we get incremental traffic, conversion, and sales as a result of our marketing efforts. We see this in real-time, so it must be true.

Multichannel businesses often have different challenges than online-only business models. Multichannel businesses use traditional advertising, catalog advertising, and physical presence (retail stores) to drive sales.

Many multichannel businesses are seeing diverging trends, trends that lead to frustrating conclusions.
  • The amount of money spent on marketing is increasing, when you add catalog, traditional and online advertising together.
  • Annual retention rates, when measured across channels, are generally flat.
  • The rate at which new customers are added to the business is generally slower than the rate at which investment in new customers is increasing.

For multichannel businesses, this suggests that increases in advertising expenditure are not yielding an overall positive return on investment. Any one advertising activity, when measured in a silo, appears positive. But the lump sum of advertising activities, and the increase in advertising over time, are not yielding a positive return on investment.

Just for fun, do a comparison. Look at your customer file in 1994, 2002, and 2006. Back in 1994, look at your ad-to-sales ratio, in the pre-internet era. In 2002, look at your ad-to-sales ratio, pre-search era. In 2006, look at your ad-to-sales ratio post-mass-media-collapse.

Similarly, look at your annual retention rate, and your annual purchase frequency, in 1994, 2002 and 2006.

If you see that your annual retention rate is flat or decreasing, your annual purchase frequency is flat or decreasing, or your ad-to-sales ratio is increasing, it suggests several possible challenges.

First, you might have to spend more on advertising today, because our customers are being carpet-bombed by competitors at every angle.

Second, there is one thing that fundamentally changed between 1994 and 2006 --- the internet! If ad-to-sales ratios are increasing, while retention rates or purchase frequency has remained flat, it suggests that online marketing has not fundamentally moved the needle at increasing customer loyalty, or cultivating new customers.

Third, if online marketing has not fundamentally moved the needle, it may mean that traditional advertising or catalog advertising needs to be trimmed-back in order to optimize the ad-to-sales ratio, and ultimately, profitability.

One way to evaluate online marketing is to see what percentage of those who respond to online marketing are truly "new-to-file" ... in other words, does online marketing truly drive new customer acquisition? Many multichannel organizations are observing that online marketing drives "existing" customers toward a purchase more than it drives "new" customers toward a first purchase. This could be a positive trend, in that online marketing rescues a customer about to defect.

More likely, this is a negative trend --- it simply means we've trained the customer to shop a certain way, and we spend additional money to achieve the same result. We calibrate our metrics to reflect that this is a "good" decision, when in reality, it isn't.

In conclusion, take a look at your advertising metrics, and your customer file information from 1994, 2002 and 2006. Are you spending more, as a percentage of sales? Are your annual retention rates increasing, flat, or decreasing? Are your annual purchase frequency metrics increasing, flat, or decreasing? This represents the starting point toward understanding if all the money multichannel marketers are now spending on online marketing are truly generating a positive return on investment.