January 28, 2008

Contact Strategy: A Starting Point

Those of us in the multichannel catalog and retail world like to "optimize marketing spend".

If you're a cataloger, you become obsessed with "incremental" or "cannibalization" rates. If you're an online marketer, you love comparing CPA's across various marketing activities. Retailers ... well, it's a lot harder to accurately measure the incremental impact of various retail marketing activities, isn't it? Not impossible, but harder.

There are a few ways to think about optimizing marketing spend. If you have deeper-than-average pockets, you might work with the folks at Decision Intelligence. You'll get your money's worth from the mathematical wizardry they offer.

For those of us looking for a simpler solution, let's think in the most basic of terms. Let's offer a starting point for thinking about contact strategy management.

Catalog-Only Customers: On average, these folks won't buy unless they are advertised to. Via mail/no-mail tests, it is a straightforward exercise to figure out the right amount of advertising spend per customer segment.
  • No Advertising = 5% Repurchase Rate.
  • 50% Advertising = 41% Repurchase Rate.
  • 100% Advertising = 50% Repurchase Rate.
  • 150% Advertising = 56% Repurchase Rate.
Online-Only Customers: These folks will buy without advertising. We are frequently misled by these customers, thinking our e-mail and catalog marketing activities "caused" them to purchase. In reality, we have to divide spend into "organic" spend that happens without advertising, and spend that only occurs when the customer is advertised to. We only learn this by executing tests, or we estimate it via a Multichannel Forensics simulation.
  • No Advertising = 28% Repurchase Rate.
  • 50% Advertising = 36% Repurchase Rate.
  • 100% Advertising = 40% Repurchase Rate.
  • 150% Advertising = 43% Repurchase Rate.
Catalog + Online Customers (aka "Multichannel" Customers): Easily the most flummoxing segment of customers on the planet. Catalogers think their marketing activities drive 85% of the activity with this segment. E-mail marketers believe they manage the customer relationship with this segment. Search marketers feel they drive increases in sales and profit. The reality, however, is that the customer "combines" none/some/all of these activities when buying merchandise. As a result, you feel like you're stuck mailing the catalog, delivering multiple e-mail campaigns, and paying for various keywords in order to facilitate a purchase. Are you?
  • No Advertising = 41% Repurchase Rate.
  • 50% Advertising = 58% Repurchase Rate.
  • 100% Advertising = 65% Repurchase Rate.
  • 150% Advertising = 70% Repurchase Rate.
Your starting point is to figure out the baseline repurchase rate, spend per repurchaser, and revenue (repurchase * spend) for each customer segment.

Next, you estimate (using relationships like the square root rule, or better yet, using test/holdout results) what happens when you advertise at 50%, 100% or 150% of normal ad-dollars (and increments in-between).

Once you estimate the optimal spend level, identify the most effective marketing activities. In many cases, this requires a decent amount of testing (e-mail and catalog contact strategy testing). Among "multichannel buyers", carefully analyze how many marketing channels are combined in each purchase, when various marketing activities are withheld from the customer.

At some point, you obtain a baseline of knowledge that allows you to do one of three things.
  1. Try your own contact strategy optimization.
  2. Hire experts like the folks at Decision Intelligence.
  3. Go halfway, using tools like Multichannel Forensics to simulate the long-term impact of short-term ad-spend decisions.
Most important is the starting point, folks. Segment the customers, understand that "organic" demand occurs for many customers, and estimate if you are over/under spending.

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