Multichannel Cannibalization: Here's How It Happens

We don't like to talk about cannibalization. It's a bad word. I once had a CEO tell me "Don't ever mention that term again. Cannibalization suggests we're eating our young, and that's not what we do in marketing, is it?"

So in Multichannel Forensics, we almost never mention the term "cannibalization", using "Equilibrium" and "Transfer" to suggest that the analyst look into the topic of cannibalization.

Here's how channels inspire cannibalization.

Let's take a look at a catalog brand, back in 1990. This brand mailed a dozen catalogs a year. Here is a demand and expense profile for an average customer segment.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$72.00	$13.20
Targeted Catalogs
Organic Online Demand
E-Mail Marketing
Search Marketing
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$12.00	$72.00	$13.20

Catalog brands expanded in the early 1990s. They increased targeted mailings and remails and any other mailing strategy to increase demand. The profit and loss statement changed as a result.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$63.00	$10.05
Targeted Catalogs	$6.00	$30.00	$4.50
Organic Online Demand
E-Mail Marketing
Search Marketing
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$18.00	$93.00	$14.55

The new mailings cannibalized the old mailings. However, total demand and total profit increased. Sure, the customer was contacted fifty percent more often, but as long as profit increased, nobody complained.

Then folks invented this internet thing, and the world changed forever. Now customers generated organic demand --- they no longer needed to be marketed to, but would spend money anyway. Though matchback algorithms allocated demand back to catalogs, those who executed mail/holdout tests knew better --- they knew that demand was cannibalized from catalog advertising to e-commerce (and we surmised that demand was cannibalized from retail to e-commerce).

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$51.00	$5.85
Targeted Catalogs	$6.00	$24.00	$2.40
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing
Search Marketing
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$18.00	$110.00	$20.50

Notice how the base catalogs are being marginalized as customers shift behavior.

As marketers, we capitalize on this behavior. We add e-mail marketing, tossing 52 e-mail messages at a customer.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$49.00	$5.15
Targeted Catalogs	$6.00	$22.25	$1.79
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$7.50	$2.47
Search Marketing
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$18.16	$113.75	$21.66

From a profit standpoint, this is sort of the peak --- right around the turn of the century we maximized profit.

And then we really started diving into online marketing, thinking we could take full advantage of search/Google.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$46.75	$4.36
Targeted Catalogs	$6.00	$20.75	$1.26
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$6.50	$2.12
Search Marketing	$3.00	$10.00	$0.50
Online Marketing
Social Media
Mobile Marketing
Grand Totals	$21.16	$119.00	$20.49

We continue to cannibalize other channels, still increasing demand (and this can be argued, too, based on the mail/holdout tests I've seen across the industry, but let's assume here that there are increases).

We still need to grow, so we add portal advertising and affiliates and shopping comparisons. We keep pushing the envelope.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$42.00	$2.70
Targeted Catalogs	$6.00	$19.50	$0.82
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$5.00	$1.59
Search Marketing	$3.00	$10.00	$0.50
Online Marketing	$3.00	$10.00	$0.50
Social Media
Mobile Marketing
Grand Totals	$24.16	$121.50	$18.37

Demand continues to increase (again, verify via mail/holdout groups in catalog and e-mail), but we are so heavily cannibalizing total demand that profit is decreasing. We're wobbling now. The traditional channels (catalogs and to a lesser extent, e-mail) are seriously cannibalized as demand flows out of those channels, into the new channels. Also notice that the new channels just aren't able to generate a lot of volume. All of the channels need to be there to keep demand growing.

Now we add social media into the picture, with customers trusting other customers more than they trust marketers, further cannibalizing marketing channels.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$41.00	$2.35
Targeted Catalogs	$6.00	$18.50	$0.48
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$5.00	$1.59
Search Marketing	$3.00	$9.00	$0.15
Online Marketing	$3.00	$9.00	$0.15
Social Media	$0.00	$4.50	$1.58
Mobile Marketing
Grand Totals	$24.16	$122.00	$18.54

And now we're adding mobile marketing to the mix, being told that it is the "next big thing". For now, however, it isn't big --- and the business we get is frequently generated by our best customers, causing more cannibalization among existing advertising channels.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$38.00	$1.30
Targeted Catalogs	$6.00	$17.50	$0.13
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$5.00	$1.59
Search Marketing	$3.00	$8.75	$0.06
Online Marketing	$3.00	$8.75	$0.06
Social Media	$0.00	$4.50	$1.58
Mobile Marketing	$0.50	$4.50	$1.08
Grand Totals	$24.66	$122.00	$18.04

After adding a ton of channels to the marketing mix, we find that the traditional channels are no longer very productive. Base catalogs, once responsible for driving $72 of volume, now drive just over half that total. And targeted catalogs are basically a break-even proposition.

Good leaders can trim expense, so we kill the targeted catalogs we used to mail. Now, demand flows out of those catalogs, back into the base catalogs, improving the profit and loss statement.

	Ad Spend	Demand	Profit
Base Catalogs	$12.00	$47.00	$4.45
Targeted Catalogs	$0.00	$0.00	$0.00
Organic Online Demand	$0.00	$35.00	$12.25
E-Mail Marketing	$0.16	$5.00	$1.59
Search Marketing	$3.00	$8.75	$0.06
Online Marketing	$3.00	$8.75	$0.06
Social Media	$0.00	$4.50	$1.58
Mobile Marketing	$0.50	$4.50	$1.08
Grand Totals	$18.66	$113.50	$21.07

This is how multichannel marketing works. We add channels at faster rate than we reduce spending in traditional channels --- cannibalizing old channels and sub-optimizing profitability.

Our job is to react much faster to micro-channel and multichannel cannibalization. But that's hard to do, isn't it? Instead, it is easier to focus on the fact that customers use all of these channels, and use of all channels is a good thing, which it is.

Another element of this deal is that very few customers use all channels. Most Multichannel Forensics projects suggest that customers are very loyal to one, and at most, two advertising channels. It's just really hard for us to isolate individual customer behavior --- so instead we watch large groups of customers, segments, and notice that segments seem to use a lot of channels.

When we get good at segmenting customers based on predicted future channel activity, we help generate a lot of profit for the companies we work for.