March 18, 2008

Profit Week: Using Zip Codes To Improve Profit

I was introduced to zip code models in 1992. Since then, I noticed that fewer than ten percent of the companies I work with use this free technology.

Yes, free. It doesn't cost anything to create a zip code model. And the methodology generates profit for you. What could be better than that?

Step 1: Sum total sales by zip code for your business in the past twelve months.

Step 2: Identify the population in each zip code. There are many internet resources available to obtain population by zip code, or if you have a few dollars to spend, obtain the data from the Census Bureau, or get it as part of a mapping tool like Microsoft MapPoint.

Step 3: Divide total sales by total population. This yields sales per person. This is the most important metric.

Step 4: Sort your file by sales per person (descending order). Place your zip codes into grades ... best = 'A', next best = 'B', worst = 'F'.

That's it. Yup, it is that easy to create a zip model. Now if you have a statistician on-board, this person will want to jazz-up the model. Let her do that. But for the 97% of us who don't have access to a statistician, just follow steps one through four.

There are many uses for zip models. Let's review a few.


Enhanced Segmentation: Take any segment or list that does not meet your profit criteria, and mail only the individuals in the best zip codes.


Entire List Best 40%






Demand $2.00 $2.25
Net Sales $1.60 $1.80
Gross Margin $0.88 $0.99
Less Marketing Cost $0.75 $0.75
Less Pick/Pack/Ship $0.18 $0.20
Variable Profit ($0.05) $0.04

When business is as bad as it is for many multichannel marketers, this is a tool that opens up numerous lists and segments ... and did I mention that the tool is free?


Zip codes offer uses that go beyond traditional cataloging.
  • E-Mail Marketing: Identify the zip codes that are in urban, suburban, and rural areas. Folks in rural areas receive free shipping offers, folks in urban areas receive free sales tax on in-store purchases.
  • Retail Trade Areas: Few things are more fun than using zip codes to outline retail trade areas, especially pre/post store opening. If you want to see how your online sales are impacted by a store opening, this is a great way to do that.
  • Merchandise Analysis: At Lands' End, we followed swimsuit purchases by month by zip code. Northern zips performed well in February and March (vacations), southern zips performed well in April and May (warm weather), northern zips performed well in June and July (summer!).
It won't cost you anything but time to run a query that aggregates sales by zip code. Why don't you give it a try?

2 comments:

  1. If you're mailing catalogs, divide by total circ into zipcode in step 2, rather than US population in zipcode.

    Cheers --

    Alan

    www.rkgblog.com

    ReplyDelete
  2. That works too, if the cataloger mails more than a few hundred thousand catalogs per drop.

    Good recommendation!

    ReplyDelete