September 18, 2007

A Simple Example Of Multichannel Forensics

A quick way to get started with Multichannel Forensics is to measure three different factors that influence whether your business will grow, or not.

Let's assume you manage an e-commerce business.

Step 1: How many 2005 buyers did you have?

Step 2: What percentage of those buyers purchased again in 2006?

Step 3: How much did these buyers spend during 2006?

Step 4: How many other customers purchased in 2006?

Step 5: How much did these customers spend during 2006?

With these five steps, you have the components to do a very simple, high-level Multichannel Forensics analysis --- an analysis of one channel!

Here is one scenario.

Step 1 = 100,000 customers purchased in 2005.

Step 2 = 35% of these customers purchased again in 2006.

Step 3 = These customers spent $200 each.

Step 4 = 55,000 other customers purchased during 2006.

Step 5: These customers spent $100 each.

Total volume = 100,000 * 0.35 * $200 + 55,000 * 100 = $12,500,000.

Total buyers to start 2007 with = 100,000 * 0.35 + 55,000 = 90,000.

There are two key metrics to pay attention to. First, in Step 2, we notice that the annual repurchase rate is 35%. This means that the online business is in Acquisition Mode. Anytime fewer than 40% of last year's customers are retained, the business is in the business of constantly finding new customers.

There is nothing wrong with a business being in Acquisition Mode. However, notice that the business lost 65,000, and only replaced those customers with 55,000 new customers.

The business starts 2007 with 90,000 customers, ten thousand fewer customers than it started 2006 with.

Let's assume that 2007 repurchase rates and new customers are the same as in 2006. What is our demand forecast for 2007?

Forecast = 90,000 * 0.35 * 200 + 55,000 * 100 = $11,800,000.

If everything goes as forecast, the business will shrink from $12,500,000 in 2006 to $11,800,000 in 2007.

Let's assume the same trends hold in 2008. We'd start the year with 90,000 * 0.35 + 55,000 = 86,500 customers.

Forecast = 86,500 * 0.35 * 200 + 55,000 * 100 = $11,555,000.

In other words, this business will contract, unless one of three things happen.
  • The annual repurchase rate increases from 35% to maybe 40% or 45%.
  • Purchasers spend more money, on an annual basis.
  • The business significantly invests in new customer acquisition.
Businesses that are in Acquisition Mode typically struggle to dramatically increase annual repurchase rates. These businesses need to focus on new customer acquisition, in order to keep growing.

Many online businesses are going to fall into this scenario over the next 3-5 years. Once the shift of customers from traditional direct marketing to e-commerce abates, online businesses will focus on carefully managing new customer acquisition counts.

This simple example of Multichannel Forensics illustrates the power of the methodology. The business leader can see into the future, understand how sales are likely to change, and then know which levers need to be pulled to grow the business. Individual tactics (e-mail marketing, online marketing, catalogs) can be employed to achieve the objective.

Give it a try, see what it tells you about your business!

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Focusing on Tiny Things

Sometimes on LinkedIn you'll see "all the good stuff" from the CEO. An image of twelve people sitting inside a restaurant, gla...