April 16, 2008

Multichannel Customers: The Multichannel Purchase Index (MPI)

We're told that multichannel customers are the best customers. And from time to time, we hear about somebody who increased their base of multichannel customers.

But how do we know if we're doing a good job of increasing our customer base? Or how do we compare with other companies? Is it good to have 5% of the twelve-month file purchasing from multiple channels? Should 35% of the twelve-month file be purchasing from multiple channels?

One of the problems we face when understanding multichannel customer behavior involves purchase frequency. Take two brands. One brand has a customer base that purchases five times a year. Another brand has a customer base that purchases two times a year. Which brand needs to take multichannel marketing more seriously?

Yup, you guessed correctly! The brand with customers purchasing five times a year needs to take multichannel marketing more seriously than the brand with customers purchasing two times per year. The customer buying five times a year is more likely to bump into more channels than the customer buying two times a year.

Next time you see your Business Intelligence staffer hanging out by the water cooler, ask her to run this query for you. This query assumes you have two channels (online & retail or online + telephone).
  • Step 1 = Retrieve all customers who purchased in the past twelve months.
  • Step 2 = Calculate the average number of purchases per customer in the past year (assume 2.0 for illustrative purposes).
  • Step 3 = Calculate the percentage of customers purchasing from multiple channels in the past year (assume 7% for illustrative purposes).
Now, plot these two components against the line in this chart:



If you are above the line, you are, on average, outperforming peer companies. Your customers are more "multichannel" than peer company customers are. This doesn't mean, of course, that you are doing a good job of multichannel marketing. It simply means your customers are purchasing across channels at a greater rate than at peer companies.

If you prefer, use the following equation to calculate the Multichannel Purchase Index (MPI):

(PERCENTAGE OF 12 MONTH FILE BUYING FROM MULTIPLE CHANNELS LAST YEAR) divided by (0.00559 + 0.05536 * LN (AVERAGE PURCHASE FREQUENCY LAST YEAR)).

In our example, this equation equals (0.07) / (0.00559 + 0.05536*LN(2)) = (0.07) / (0.044) = 1.59.

This equation works for 2-channel companies. If the resulting index is > 1.00, your customers are more "multichannel" than at peer companies. If the resulting index is < 1.00, your customers are less "multichannel" than at peer companies.

Let our readers know what you find out when you calculate the Multichannel Purchase Index (MPI).

Thanks,
Kevin

3 comments:

  1. Can someone please tell me what 'LN' stands for in the equation?

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  2. LN stands for "natural log". There should be an "LN" key on a calculator, or you simply use the LN function in Excel!

    ReplyDelete
  3. Thank you. It's been too long since I've encountered an Algebra problem!

    ReplyDelete