March 02, 2008

An Example Of The Direct Marketing Customer Continuum

This one comes up all the time. Take a look at catalog performance, over a four year period of time.

Evolution Of Segment Performance

HHs Phone Online Total Profit Change
2004 Catalog Only 10,000 $5.00 $0.20 $5.20 $0.81

Catalog + Online 3,000 $2.00 $2.00 $4.00 $0.45

Online Only 2,000 $0.05 $1.75 $1.80 ($0.21)

Total Segment 15,000 $3.74 $0.77 $4.51 $0.60

HHs Phone Online Total Profit
2005 Catalog Only 9,000 $5.00 $0.20 $5.20 $0.81

Catalog + Online 3,500 $2.00 $2.00 $4.00 $0.45

Online Only 2,500 $0.05 $1.75 $1.80 ($0.21)

Total Segment 15,000 $3.48 $0.88 $4.35 $0.56 -3.4%

HHs Phone Online Total Profit
2006 Catalog Only 8,000 $5.00 $0.20 $5.20 $0.81

Catalog + Online 4,000 $2.00 $2.00 $4.00 $0.45

Online Only 3,000 $0.05 $1.75 $1.80 ($0.21)

Total Segment 15,000 $3.21 $0.99 $4.20 $0.51 -3.5%

HHs Phone Online Total Profit
2007 Catalog Only 6,000 $5.00 $0.20 $5.20 $0.81

Catalog + Online 4,000 $2.00 $2.00 $4.00 $0.45

Online Only 5,000 $0.05 $1.75 $1.80 ($0.21)

Total Segment 15,000 $2.55 $1.20 $3.75 $0.37 -10.8%

Again, I see this one all the time. Traditional RFM performance illustrates a segment that is "dying", performing progressively worse over time.

What is actually happening is quite different. Customers are shifting their status along the Direct Marketing Customer Continuum.

Catalog-Only customers require advertising. Notice that their performance hasn't changed over time.

Catalog + Online (those vaunted Multichannel Customers) are in the middle of our continuum, using advertising and search and word of mouth to buy merchandise. Notice that their performance hasn't changed over time.

Online-Only (customers that are self-serve customers, not needing advertising, have not changed their performance over time.

So the three key segments that multichannel brands track are all performing the same, over time. Yet in total, the performance of the total segment is dropping like a rock.

What is happening is that customers are moving along the continuum. Look at the number of households in each segment, from 2004 to 2007. Customers are shifting from needing advertising to not needing advertising.

Yet, while customers shift their behavior, the multichannel brand continues to do the same thing (mail catalogs), then wonders why productivity is dropping.

Simple solution: Take your RFM segment, and split them out by recent (not lifetime) purchase behavior --- catalog-only, catalog+online, online-only. If you see this phenomenon occurring, your problem is solved. Mail fewer catalogs to the online-only and multichannel audience, and improve the profitability of your brand.

Honestly --- for most multichannel brands, it isn't more challenging than that. And for those of you who are more advanced, go ahead and do the incremental mail/holdout tests we talk about all the time, you'll see different results than you see in your matchback reporting.

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