October 08, 2008

Catalog And Retailer Differences In Matchback Strategy And Contact Strategy Optimization

There's this huge shift in multichannel marketing strategy in recent years, with catalog matchback algorithms playing a significant role in the shift.

Fashion retailers (Neiman Marcus, Saks, Bloomingdales, Nordstrom) either eliminated traditional catalog marketing programs, or are in the process of significantly reducing circulation. Folks at Williams Sonoma are significantly trimming circulation.

When I talk to some of you, you tell me that these folks can cut circulation because they are retailers --- the retail channel somehow generates brand awareness that fuels a brand in a way that minimizes the need for advertising. You might be right, we simply cannot test your hypothesis.

Mechanically, retail brands are better at developing a testing discipline.

Here's an example. We randomly sample twenty customers, ten receive a catalog, ten do not, and measure performance across channels during the three weeks that a catalog is active. Here's what we observe:

Mailed

Holdout
Cust 1 Buy Store
Cust 11
Cust 2

Cust 12
Cust 3

Cust 13 Buy Online
Cust 4

Cust 14
Cust 5 Buy Phone
Cust 15
Cust 6 Buy Online
Cust 16
Cust 7

Cust 17
Cust 8

Cust 18
Cust 9 Buy Online
Cust 19
Cust 10

Cust 20 Buy Online

Here's the fundamental difference between the retailer and the catalog brand.

The retailer will compare the mailed group and the holdout group. In the mailed group, four out of ten customers responded --- in the holdout group, two out of ten customer responded. The retailer calculates response as (4 - 2) / 10 = 20%.

The cataloger does not execute the test. Instead, the cataloger takes the mailed group, identifies the four responses, matches the responses back to the mail file, and calculates response as 4 / 10 = 40%.

Again, notice the significant difference in response, using the two methodologies.
  • Retailer = 20% Response Rate.
  • Cataloger = 40% Response Rate.
In this comparison, the organic percentage is 20% / 40% = 50%. Half of the demand would happen without any advertising.

This fundamental difference in approach causes a shift in strategy.
  • Retailer = Cut Circulation, Re-Allcoate Marketing Dollars Elsewhere, Learn!!
  • Cataloger = Maintain Circulation, Ask For Additional Funding For Online Marketing, And Significantly Over-Spend In The Catalog Marketing Channel, Driving Down Profit.
This problem is systemic across the catalog industry. Matchback vendors aren't trying to rip you off, they simply aren't. But there isn't an incentice to create a "best practice" that accounts for the differences that retailers observe when executing contact strategy testing and what catalogers measure via matchback analytics.

A simple solution for catalogers is to execute a test similar to the one designed above. Do not tell the matchback vendor about the holdout group. Have the matchback vendor run the control group through the matchback algorithm, and see how many orders are allocated to the holdout group. Subtract the results of the holdout group from the results of the mailed group, and you have true incremental demand as illustrated in the retail example at the beginning of this post.


Hillstrom's Contact Strategy Optimization: A New E-Book.
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