Incremental Sales Week: Attribution

There are a lot of really smart people out there who do attribution work. They use complex statistical models to try and tie orders back to the advertising that drove the order.

But attribution models have one fatal flaw ... they incorrectly attribute orders that would happen organically (i.e. without advertising) back to advertising activities, causing us to spend way too much money on marketing activities.

If you agree with me that we're over-attributing orders to marketing activities ... then give this presentation a read, where I'll share with you a mail/holdout methodology for properly assigning attribution rules.

Incremental Sales Week: Merchandise

It is not uncommon for merchandising teams to introduce new product lines. In fact, merchandising teams have to introduce new product lines, without new product, a business will die a slow and painful death.

But new product lines do not always yield Incremental Sales.

Let's say you have an e-commerce business that generates $2,000,000 sales a month, and you are expecting sales this month to be distributed as follows:

• Merchandise Division #1 = $700,000.
• Merchandise Division #2 = $500,000.
• Merchandise Division #3 = $300,000.
• Merchandise Division #4 = $300,000.
• Merchandise Division #5 = $200,000.
• Total = $2,000,000.
  

Your merchant team adds a new division, #6, to the fold. After one month, your sales look like this, by Merchandise Division:

• Merchandise Division #1 = $600,000.
• Merchandise Division #2 = $500,000.
• Merchandise Division #3 = $300,000.
• Merchandise Division #4 = $300,000.
• Merchandise Division #5 = $200,000.
• Merchandise Division #6 = $200,000.
  
• Total = $2,100,000.

An interesting thing happens in companies. Business leaders with sales decreases "feel the pain". Business leaders with sales increases "get rewarded".

In this case, total sales increased by $100,000. This is the level of "Incremental Sales" that we want to credit to the business. Merchandise Division #6, the new product line, generated $200,000 sales. Therefore, 50% of what Merchandise Division #6 generated is "incremental", 50% is "cannibalized" from the rest of the business ... in this case, cannibalized from Merchandise Division #1.

There is an art involved in analyzing a business. All of our real-time metrics suggest "truth". Reality is different, however. In this case, Merchandise Division #1 didn't necessarily "fail", rather, it was the victim of business evolution, and that is ok as long as everybody understands that the business evolved with the addition of a new Merchandise Division.

Incremental Sales Week: Free Shipping

Let's say that you have a business that generates $2,000,000 of sales in a normal month.

This month, you want to "drive sales", you want to increase business. So you offer customers a promotion ... free shipping if the customer enters promo code "FREESHIP" during his/her order.

At the end of the month, you have the following facts:

• You did not execute a test to identify the incremental sales generated by free shipping.
• Total monthly sales were $2,250,000.
• 70% of sales were attached to a "FREESHIP" promo code.
• 12,600 orders had a "FREESHIP" promo code.
  
• 40% of sales convert to profit.
• Each order that had a "FREESHIP" promo code lost $10 of shipping and handling revenue.

Ok, armed with this information, we can estimate profitability. First, we have to identify incremental sales, sales that would have been generated above-and-beyond normal circumstances. In our case, that amount is $2,250,000 - $2,000,000 = $250,000. Even though 70% of sales were attached to a "FREESHIP" promo code, sales only increased by $250,000, so that is the amount of incremental sales we perceive to be generated by the promotion.

Next, 40% of the $250,000 converts to profit, so $250,000 * 0.40 = $100,000 of contribution.

Third, there were 12,600 orders that received free shipping, those orders lost an average of $10.00 shipping/handling revenue, for a marketing cost of $126,000.

Finally, profit is calculated as $100,000 - $126,000 = a loss of $26,000.

Too often, we attribute all 12,600 orders to the sales line, causing us to believe that the promotion was profitable.

Instead, we have to have some marketing discipline. We can only take credit for the incremental sales we generated. We must take credit for all expenses caused by the promotion.

The result is a loss. Our marketing activities caused us to lose money, the exact opposite outcome desired by a marketing activity.

Incremental Sales Week

The least understood concept in Direct Marketing (and Retail for that matter) is the concept of Incremental Sales.

Incremental Sales are sales that are generated above-and-beyond what would normally be expected. For instance, you have an e-commerce website that generates $2,000,000 a month. If you maintain the same marketing strategy you maintained previously, you need to do something to create additional sales. The additional sales, above-and-beyond the $2,000,000 you expected, are Incremental Sales.

Why are Incremental Sales important?

Because nearly everybody wants credit for sales that would have happened anyway.

This "lust for credit" causes us to be less profitable than we could be. Our "optimization culture" can do an amazing job of not yielding an optimal outcome!

Tomorrow, we'll begin to explore this important topic.