July 23, 2015

The Omnichannel Customer Value Query

When a customer purchases for the first time, the customer has a whopping total of one purchase. This means that the customer cannot have purchased from more than one channel.

When a customer purchases for the second time, the customer may elect to use the same channel (an affiliate), or the customer may use a different channel (email). If you are a credible marketer, you probably encouraged the customer to sign up for email marketing messages, so it is very possible that you nudged the customer into a second purchase via a second channel ... even if the customer was going to purchase anyway.

At this time, an Executive may ask an analyst to run a query.
  • "Please measure how many times customers who purchased from multiple channels (affiliates, email) purchased, and compare the metric against customers who only have purchased from one channel."
The result of the query is stunning.
  • Customers who purchased from multiple channels purchased 4.3 times.
  • Customers who purchased from a single channel purchased 1.4 times.
This query is used by many, many folks who are selling products/services related to omnichannel marketing. It is lauded as proof that omnichannel marketing works.

Can you see the flaw in the query?

When a customer purchases for a first time, which segment does the customer reside in? In other words, is it possible for the first-time buyer to place multiple orders via multiple channels, and therefore, to be considered omnichannel?

No.

The query is not measuring "omnichannel" success. The query is essentially measuring loyal buyers vs. first-time buyers. The first-time buyer cannot, by definition, be in the omnichannel segment.

If you really want to see the value of an omnichannel buyer, run this query:
  • Take all customers with five life-to-date purchases, through December 31, 2014, with a recency of three months. Measure how many channels the customers purchased from, life-to-date.
  • Segment the customers ... 1 / 2 / 3 / 4 / 5 life-to-date channels.
  • Measure spend from January 1, 2015 through today.
  • Measure the profit generated by customers who bought from 1 / 2 / 3 / 4 / 5 life-to-date channels, from January 1, 2015 through today.
In this query, customers are largely equalized (5 purchases, at least one purchase 0-3 months ago ... run regression models that factor in more variables if you so desire). The impact of channel activity is mostly isolated.

What do you learn, when you run a query like this?
  • 1 Channel = $80 future value.
  • 2 Channels = $83 future value.
  • 3 Channels = $85 future value.
  • 4 Channels = $87 future value.
  • 5 Channels = $88 future value.
Now, you see that the customer who purchased from 5 channels is worth 10% more than the customer who purchased from 1 channel. That's good, but that's now what you are told the impact of multiple channels is, now is it?

Ok, now that we are armed with this data, let's run a p&l on spend over the next six months.
  • 1 Channel = $20 future profit.
  • 2 Channels = $21 future profit.
  • 3 Channels = $20 future profit.
  • 4 Channels = $19 future profit.
  • 5 Channels = $18 future profit.
Oh.

Here's what happens. Customers who purchase from multiple channels also tend to be more avid users of discounts/promotions, and tend to use channels that charge tolls (Google, Facebook, Affiliates). As a result, the marketer pays more money for multiple-channel purchases, and harvests less profit due to the discounts/promotions.

Those who are not discount/promo centric frequently see modest profit increases, so long as there isn't some sort of expensive loyalty marketing effort to force customers across channels while costing the business profit ... I see this happen all-too-often.

The two tables illustrated here explain why the best omnichannel marketers seldom make healthy sales/profit progress. We honestly are not creating omnichannel buyers ... rather, by accident, loyal buyers touch all channels eventually. The omnichannel community claims credit for the hard work of the merchandising team. The Apple store is pointless without iPhones, iPads, Macs, and the Genius Bar.

Make sense?

The most valuable customer is a customer who craves your merchandise ... the customer who cannot wait for your next email message ... the customer who must visit your website daily. This customer, by sheer accident via probability theory, will touch all of your channels.