March 24, 2008

Multichannel Customers And Advertising

Please click on the image to enlarge it.

The most popular question asked of me is "When can I stop advertising to or reduce advertising to a segment of customers?"

Often, catalogers and retailers are unwilling to execute tests that will answer this question, opting instead to maximize short-term sales.

If you fall into that camp, try this:
  • Identify any customer who purchased from your brand in the past twelve months, and purchased at least ten times (since the first purchase).
  • Sum how many of the ten most recent purchases occurred, by channel.
  • Graph the frequency of occurrence, using one channel as the x-axis.
In the image at the start of this post, there are three distributions.
  • The U-Shaped Distribution occurs when your customer prefers shopping from one channel. Almost all customers buy from, say, the online channel, or the catalog channel, and tend to purchase in equal rates. When this happens, nearly half of your audience is eligible for a reduction in advertising, as nearly half of the audience buys online, and may be in the habit of shopping online without the need for catalogs.
  • The Bell-Shaped Distribution occurs when customers swap back and forth, between channels, not exhibiting a preference for any one channel. In this case, you probably need to continue catalog advertising.
  • The Skewed-Shape Distribution happens when customers generally shop in just one channel, and show a clear preference for just one channel. This frequently happens in online/retail situations, where customers inevitably shift their preference to the retail channel.
If you want to reduce advertising (catalog advertising in particular), you don't want to see the bell-shaped distribution. When customers switch back and forth between channels, they are likely to be semi-dependent upon catalog advertising. Instead, you want to see a lot of customers who are 100% or nearly 100% loyal to the online channel. This is the audience that could stomach a reduction in advertising, without adversely impacting the top line.

2 comments:

  1. I gather that your recommendation to eliminate multichannel marketing to those who buy 100% online is based on actual experience.

    In other words, when you dropped other media contact with the 100% online buyers, you saw NO drop in profits. In fact, you saw an INCREASE in profits by spending less for the same sales to this customer segment.

    When faced with this data, some marketers might conclude that 100% online purchase does not preclude the idea that such customers spent more and more often because of the synergistic effect of other media.

    Your recommendation counters what most direct marketers have experienced.

    I would recommend that any marketer set aside a control cell to test this concept for their company and industry before adopting it.

    I know that you would recommend testing it thoroughly before rolling out your proposal?

    Ted

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  2. I wouldn't share the findings unless the results were validated via test/holdout panels.

    For most of the folks in the catalog industry, internet customers could go from being contacted 17x per year to 7x per year ... they'll see a 15% drop in sales, with a significant increase in profit.

    If desired, the ad dollars are reinvested in online marketing, resulting in a net increase in total sales, and a net increase in total profit.

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