June 29, 2014

Incremental Value

The experts are telling you that if you are not omnichannel, if you are not diving head-first into mobile, your business is "dead".

It's a bold prediction, of course, and it is not based on data.

Well, let me take that back, it's based on faulty data.

The popular line of thought suggests that when a customer purchases from an additional channel (mobile, e-commerce, retail stores, or any e-commerce-centric advertising channel like email or search), the customer instantly becomes more valuable.

The query is terribly flawed. Thought leaders analyze customers who bought from two channels, sum spend, and then compare spend to customers who bought from one channel. Of course, anytime you run a query as pathetic as that query, you're going to "prove" that customers who buy more often are more valuable than customers who purchase less often. Woo-hoo!!

Where possible, try to focus on incremental value. Let's pretend that you are an e-commerce-only brand. You probably have a segment of customers who purchased two times in the year ending December 31, 2013. Split that audience by those who purchased using a tablet/phone and purchased via desktop/laptop, and compare it to those who only purchased via desktop/laptop, and compare it to those who only purchased via tablet/phone. Then, measure average spend per customer through the first six months of 2014.
  • Desktop/Laptop Only = 30,000 customers, average future spend = $30.
  • Tablet/Phone Only = 6,000 customers, average future spend = $28.
  • Desktop/Laptop + Tablet/Phone = 3,000 customers, average future spend = $30.50.
In this query, we learn that:
  • Single Channel Buyers = (30+28)/2 = $29 future spend.
  • Multi-Channel Buyers = $30.50 future spend.
  • Incremental Value = $30.50 / $29.00 = +5.2%.
Your omnichannel initiatives, in this instance, yield a 5.2% increase among those possessing the behavior.

Since only 3,000 of 39,000 customers possessed this behavior, we can calculate the incremental benefit to the business:  5.2% * (3,000 / 39,000) = 0.4%.

Have you ever wondered why businesses that are the "best" at omnichannel don't grow much faster than businesses that are "terrible" at being omnichannel? This is why. The incremental benefit is rather tiny.

Now, would you rather work terribly hard to align all channels around an omnichannel initiative in order to get a 0.4% sales increase, or would you rather work on finding merchandise that customers love, a strategy likely to gain you 10% or 15% in annual sales?

Discuss.