January 28, 2013

Attribution Beyond Catalogs

Yesterday, I outlined the methodology I use to perform catalog attribution (click here please).  The article got good numbers, and generated questions.  This is the theme of the most commonly asked question.

Question:  You only care about catalogs.  We live in an omnichannel world.  How do I account for paid search, you moron?

Paid Search is the most complicated case, simply because we have to also ascertain the click-through rate within catalog / email driven searches.

First, we need to have both catalog and email holdout test results available.  You have email holdout test results available, right?  Right?  Because if you're going to do attribution work, you're going to apply real science, not just hokum-based guesses used by other practitioners.  Promise me that you have catalog and email holdout results.  If not, don't go further, you're just guessing, and that's really dangerous.

Here are the results from a sample catalog holdout test.



And here are the results from a sample email holdout test.



We only need a few additional pieces of information to identify the profitability of paid search.

First, in the catalog test, we learn that 50% of paid search demand is catalog-driven.  In other words, if we took catalog marketing away, 50% of paid search demand disappears.  Therefore, half of paid search demand is immediately allocated to catalog marketing.

Second, in the email test, we learn that 10% of paid search demand is email-driven.  In other words, if we took email marketing away, 10% of paid search demand disappears.  Therefore, 10% of paid search demand is immediately allocated to email marketing.

Let's say that our paid search program possesses the following metrics.
  • Total Budget = $1,000,000.
  • Total Clicks = 2,000,000.
  • Conversion Rate = 2%.
  • Average Order Value = $100.
  • Total Demand = $4,000,000.
  • Flow-Through Rate to Profit = 40%.
  • Total Profit = $4,000,000 * 0.40 - $1,000,000 = $600,000.
Here's where things get a little bit messy.  You need to know the conversion rate of clicks attributed to catalog marketing, and to email marketing.  Few people possess this knowledge.  Go talk to your analytical gurus, vendors, or Google Analytics ninjas, and have them derive this number for you.

Let's pretend we know this number.
  • Catalogs and Email Paid Search Conversion Rate = 2.5%.
Ok, we're making progress now.  Let's calculate the conversion rate for non-catalog and non-email clicks.  First, we know that 60% of paid search demand is caused by catalog and email marketing.  So we subtract that out of the equation.
  • $4,000,000 * (1 - 0.60) = $1,600,000.
In other words, $2,400,000 paid search demand is catalog and email driven.  We know that the average order value is $100, we know that the conversion rate is 2.5%.  Therefore, we can calculate catalog/email driven clicks:
  • $2,400,000 demand / $100 AOV = 24,000 orders.
  • 24,000 orders / 0.025 = 960,000 clicks.
If 960,000 clicks are catalog/email driven, then 1,040,000 have to be paid search driven.
  • 2,000,000 - 960,000 = 1,040,000.
Let's run the profit and loss statement for catalog/email driven clicks.
  • Total Clicks = 960,000.
  • Total Budget = 960,000 * $0.50 = $480,000.
  • Conversion Rate = 2.5%.
  • Average Order Value = $100.
  • Total Demand = $2,400,000.
  • Flow-Through Rate to Profit = 40%.
  • Total Profit = $2,400,000 * 0.40 - $480,000 = $480,000.
By simple subtraction, we can calculate the impact of paid search, outside of catalog/email.
  • Total Clicks = 1,040,000.
  • Total Budget = 1,040,000 * $0.50 = $520,000.
  • Conversion Rate = (1,600,000 / $100) / 1,040,000 = 1.54%.
  • Average Order Value = $100.
  • Total Demand = $1,600,000.
  • Flow-Through Rate to Profit = 40%.
  • Total Profit = $1,600,000 * 0.40 - $520,000 = $120,000.
There you have it.  You just attributed paid search driven orders to catalog and email marketing, and you know what remains.  What remains is still profitable, though it converts at a much lower rate.

Now, you have yourself a dilly of a pickle here.  It's not terribly easy to identify a customer as a catalog/email driven visitor to Google, then make separate decisions based on that information.

Because of that, some of the attribution talk is nonsense.

Let's pretend that the non-catalog and non-email clicks were unprofitable.  You have to have a working relationship with Google that allows you to tell Google, at the time somebody visits Google, that the visitor is catalog or email driven - and if not catalog/email driven, don't pay for the click.

So if you can do that, then the attribution exercise is actionable.

If not, then the attribution exercise is done for knowledge, but is not actionable.

This process, of course, is repeated for all advertising channels.  Demand/Expense are allocated to catalogs and email marketing, with the remainder allocated to each individual marketing channel.

If the remaining marketing channels are shared, most would just allocate fractionally, based on pre-determined rules.  This, of course, is largely hokum, but there is a market where people are willing to pay for hokum-based research, so be it.

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