April 14, 2008

Shocking Multichannel Profitability Findings

The blogosphere tells us we're supposed to use compelling subject lines if we want to get your attention.

You should run this query against your own customer information. You probably won't find this information on your corporate customer information dashboard. Click on the image to enlarge it. Here's how we obtain the data necessary to run the query.

Query, Step 1: Identify all customers who purchased during 2006.

Query, Step 2: Sum 2006 demand/sales, sum 2006 channels purchased from, for each customer.

Query, Step 3: For the customers in Steps 1-2, sum 2007 demand/sales, also sum 2007 advertising expense allocated to each customer.

Query, Step 4: Bucket each 2006 customer into one of five quintiles, based on 2006 spend.

Query, Step 5: For each combination of total channels purchased from in 2006, and demand/spend quntile in 2006, calculate the average 2007 demand/sales for that segment, average advertising spend, and average profit.

What Do The Trends Suggest?

Learning #1: Multichannel customers are not the best customers. Would you rather have a customer in the second quintile who bought from one channel, or a customer in the third quintile who bought from three channels? Historical multichannel activity is not nearly as good an indicator of future demand/profitability as is historical spend.

Learning #2: Multichannel customers are not necessarily the most profitable customers. Why? Because each additional channel a customer purchased from in 2006 resulted in an incremental increase in advertising to that customer in 2007. In fact, take a peek at the information. Customers from 21% to 60% (40% of last year's customer file) are less profitable in 2007, in spite of having purchased from more channels in 2006. Many multichannel marketers over-advertise to the "best" customers, actually reducing corporate profitability.

Recommended Strategy: If your brand has customers who exhibit this behavior, this requires a re-think of your multichannel marketing strategy. Do you send catalogs, postcards, e-mail campaigns, RSS feeds etc. to the same multichannel customer, announcing the same sales event, or do you cut back on your ad-spend across this audience, focusing on finding new customers that generate future sales? I recommend the latter.

If you don't believe what is illustrated here, run the query against your own customer data. See if you identify similar trends. If you don't host your own customer database, have the co-op or database organization that hosts your database run this query for you.

Tell us what you learn!

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