Measuring The Unmeasurable: Facebook, Twitter, Loyalty

Have you ever wondered if all those hours you team spends "engaging" customers on Facebook or Twitter pay off?  Or have you ever wondered what the ROI of a loyalty program might be?

There are methods for quantifying the impact of these activities.

Here's one of the easier ones.

Freeze your database as of a certain date, say August 1 of 2010.  Freeze customer attributes on that day ... historical spend, recency, membership in a loyalty program, that kind of thing.

Let's use a loyalty program as an example.  Create a simple segmentation strategy, then measure average spend per customer from 8/1/2010 to 7/31/2011:

				Next
	Historical	Loyalty		12-Month
Recency	Spend	Member		Spend	Increase
0-3 Month	Low	Yes		$63.00	6.8%
		No		$59.00
	Medium	Yes		$106.00	7.1%
		No		$99.00
	High	Yes		$152.00	4.1%
		No		$146.00
4-6 Month	Low	Yes		$32.00	6.7%
		No		$30.00
	Medium	Yes		$41.00	7.9%
		No		$38.00
	High	Yes		$49.00	4.3%
		No		$47.00
7-12 Month	Low	Yes		$19.00	5.6%
		No		$18.00
	Medium	Yes		$23.00	4.5%
		No		$22.00
	High	Yes		$27.00	-5.3%
		No		$28.50
0-3 Month		Yes		$107.00	5.6%
		No		$101.33
4-6 Month		Yes		$40.67	6.1%
		No		$38.33
7-12 Month		Yes		$23.00	0.7%
		No		$22.83
	Low	Yes		$38.00	6.5%
		No		$35.67
	Medium	Yes		$56.67	6.9%
		No		$53.00
	High	Yes		$76.00	2.9%
		No		$73.83
		Yes		$56.89	5.0%
		No		$54.17

Overall, those in the loyalty program spent 5% more, $2.72 per customer, than other customers.

Now, I realize that I oversimplified an awful lot, I had to in order to make the point.  You get to see how high-dollar customers were not impacted as much (on a percentage basis) as low-dollar customers, suggesting that the loyalty program helped low-dollar customers more.  In addition, recent customers were impacted more than non-recent customers.

If you're a statistician, use a GLM-style model to estimate if the differences are statistically significant.

If you're in Finance, you can run a quick profit and loss statement.  Say you have 100,000 customers in this program.  Say that 35% of demand flows-through to profit. Say that your loyalty program costs $125,000 a year to administer, between program costs and perks and discounts.

• Profit = 100,000 * $2.72 * 0.35 - $125,000 = ($29,800).
• You lost $29,800 on the program, or $0.30 per customer.

Again, most analytically minded folks and CFOs will find many ways to poke holes in this methodology ... I'm stating the methodology this way for illustrative purposes.  Be creative, enhance the methodology, and come up with your own ideas.

This methodology does a reasonable job of "measuring the unmeasurable" ... you can't execute a test where loyalty members, Facebook Fans, or Twitter Followers are not allowed to engage with you.

Ok, time for your thoughts.  What methods have you used to measure issues like the issue outlined in this post?

Dear Catalog CEOs: Politics

Dear Catalog CEOs:

No, I'm not talking about Republicans and Democrats.  That's pointless.

Instead, I'm talking about the politics that happen at your company.

I'm reminded of my time at Eddie Bauer, back in the late 1990s.  After pocketing a couple hundred million dollars of profit in 1996 and 1997, we took a financial drubbing in 1998.  It became obvious just a few months into 1998 that we weren't going to make fiscal magic.


And when it becomes obvious that you're not going to make fiscal magic, people take sides, politics become the name of the game.

• Marketing says that the merchandise stinks.
• Creative says that marketing isn't targeting the business to the right demographic.
• Merchandising strongly believes that the Creative Director is destroying the brand, creating long-term harm.

When strong office politics exist, you can avoid all semblance of accountability.  Everybody is right!!!  I mean, how do you ever prove/disprove that the Creative Director is causing irreparable harm to the brand?  How do you ever prove/disprove that Marketing is targeting the wrong demographic?  How do you prove/disprove that a Merchandising team that pocketed a couple hundred million dollars of profitable sales suddenly lost their ability to sell apparel when they're selling the same stuff they've sold for the past eight years?


My job was to "parse" accountability.  In other words, when I was creating the sales plan for the Direct channel for Fall 1998, I had to plan a sales increase, and I had to parse the sales increase according to the amount that Merchandising would deliver, the amount that Creative would deliver, and the amount that Marketing would deliver.  I'd estimate that we'd generate a 4.9% sales increase in 1999, with 2.2% coming from Merchandising, 1.8% coming from Marketing, and 0.9% coming from Creative.  

You didn't want to be the low woman on this ranking scale!  All of a sudden, Creative was signing up for a 2.9% increase instead of a 0.9% increase, without any plan to account for where the 2.0% increase would come from ... Creative simply wasn't going to be accountable for not "pulling their weight".


Then Marketing would turn up the heat, adding 20% off plus free shipping to customers who last ordered 24+ months ago, causing Marketing to sign up for a 2.8% increase instead of a 1.8% increase.


Then Inventory would buy to the newly projected 2.2% + 2.9% + 2.8% = 7.9% sales increase.

Six months later, the Liquidations team would froth at the opportunity to clear merchandise when we'd achieve a 0.0% sales increase, causing us to miss plan by about eight percent.  This drove down profitability, which meant that Merchandising, Marketing, and Creative had to sign up for bigger increases in 2000 to generate the profit necessary to drive the business.  The weight of missing plan by 8% (mind you, business was roughly similar to the prior year, but we planned a big sales increase and then bought to the sales increase) held you down, day after day, every day ... you felt like a failure.


The cycle repeated itself.  In 1999, I learned that if you teamed with the Inventory Director, and didn't purchase the sales increase that you were projecting, you didn't have to liquidate merchandise and you could achieve record profit on flat sales.  Oh boy!!


Office politics allowed all departments to point the blame at each other.  Office politics supported an environment that allowed teams to sign up for sales increases without the tactics necessary to actually fuel the sales increases.  Office politics created an environment where the math behind the increases was more important than the strategy required to create sales increases.  I had an entire team of number crunchers who massaged spreadsheets to make sure that all departments had their sales increases flow through to the bottom line in an accurate manner, tying into Inventory and Financial systems.  Almost never did we actually create a strategy ... the goal was to deal with office politics in a manner that appeased as many people as possible.


Undoubtedly, you have situations where office politics trump logic and/or strategy.


When that happens, you can revel in the drama.  Or, you can refocus the team to try to work together to generate sales increases, without the need to blame each other.  Focus on the customer!

Understanding What Drives Search

A lot of industry knowledge around search marketing involves understanding investment and response to various keywords.


There's more to learn!


Have your e-mail marketing team conduct a holdout test, for thirty days, among 5% of your e-mail list.  At the end of thirty days, measure search demand per customer in the mail group, and measure search demand per customer in the holdout group.  The difference (mail minus holdout) is the demand that e-mail drives to search.  This allows you to see how much of your search program is caused by e-mail marketing.


If you are a catalog marketer, conduct the same test, over a three month period of time.  The difference (mail minus holdout) is the demand that catalog drives to search.


A lot of folks learn that between 20% and 50% of their search program is caused by other marketing activities ... in other words, other marketing activities cause customers to research product (or to type a keyword into Google to get to your website).  When this happens, search becomes an important complement to other marketing activities ... without search, conversions in email and catalog marketing may disappear.


So do this simple analysis, and learn how search complements traditional marketing channels!

Letter To The Editor

This letter is pretty common these days:

Dear Kevin,

Hi, my name is Dirk Middleton, I am the CEO of Widgets.  I think something is amiss with my business

Ten years ago, we were a $20,000,000 catalog brand.  In the following five years, we built out our multi-channel strategy, capitalizing on our strong online brand, our search capabilities, e-mail marketing, and other online activities.  By 2007, we were at $24,000,000, with 35% of our business online.  

When the economy crashed, we made tough decisions.  We moved all of our catalog customer acquisition to just one popular co-op.  At the same time, we temporarily cut back on prospecting and customer reactivation.  Even though the economy marginally recovered, our business did not recover.  Today, we are a $21,000,000 business, and our expense structure continues to increase at an inflationary rate, or greater, putting tremendous pressure on our profit and loss statement.

We learned something unsettling when analyzing our customer base.  Since 2006, the average age of our customer increased, from 55 years old to 59 years old.  Worse, we cannot grow our online market share, with only 45% of our sales captured online.  We tried social media, it did not work, our Twitter presence only has 939 followers, and they only buy when we offer merchandise at 40% off or more.  We have a mobile app, but only a few hundred customers have ever purchased using it, and again, we have to offer 40% off to get those customers to order.  We even printed QR codes in magazine ads, but to-date, we've only had 880 website visits and 31 orders, all coming with free shipping.

Can you tell us why our business is floundering?  How do we use the catalog to grow?

Thanks,
Dirk Middleton

CEO, Widgets

We spent the past decade pursuing a "multi-channel" agenda.  Unfortunately, the hypothesis that being "multi-channel" would lead to unfettered profits never materialized.


The "multi-channel" agenda pushed us in a different direction.  

We decided that the catalog was the cause for online orders.  We decided that we preferred co-ops over list organizations.  Co-ops "optimized" customer lists via algorithms.  It turned out that the customers in those optimized lists were largely 55+, rural shoppers.  One can argue for hours about the "chicken and egg" proposition surrounding 55+, rural shoppers (did the co-ops cause the problem, or are catalogs so old-school that only 55+, rural shoppers buy from them?).


Most of us work for businesses with annual repurchase rates under 40%.  When you fall into this category, there's a whole bunch of problems that happen when catalog customer acquisition is outsourced exclusively to the co-ops.  Over the course of just three years, 75% of your twelve-month file will be populated by customers acquired for you by the co-ops.  And those customers are largely 55+, rural customers.  Ultimately, the co-ops "are" your business, they determine your customer base for you.  That can be good, that can be not-so-good.


So, our "multi-channel" agenda really morphed into a co-op infused customer acquisition strategy, one that pushed us toward algorithmically optimized names that are in the top-half of the Baby Boomer generation.  Without any intention of doing so, we chopped off the bottom half of the customer file, where a fertile generation of 25-44 year olds reside.


Do this for a half-decade or more, and you have the problem outlined in the e-mail message from Dirk Middleton.


That's what we've done to ourselves.


Now we have to chart a course to the future.

This is like playing poker.  We have outs.


We can decide that we're going to own the Baby Boomer generation, riding it from recession to retirement.  Somebody should decide that this is their strategy.  I don't hear many folks talking about this as being a viable strategy.  I think it is a viable strategy, if you put your chips all-in.


Or we can decide that we're going to "get younger".  This is easier said than done, because the 25-44 audience doesn't respond well to catalogs (there are exceptions) ... if it did respond well to catalogs, your co-op would be feeding you a veritable plethora of 25-44 year old prospects.  If you're going to go this route, you have at least two choices.

1. You transform your brand to appeal to a younger audience (hard to do).
2. You create a new brand that appeals to a younger audience, and you funnel the profits from a declining catalog business to the start up (risky, low probability of success).

Here's what is obvious ... we can't keep doing what we've been doing, because that's not working too well.

In poker, when you are short-stacked, pressure is constantly applied by the blinds ... eventually, you have no chips left.  In catalog marketing, pressure is constantly applied by inevitable postage increases (think +5% to +10% each of the next 2-3 years coupled with 3-5 day delivery), inflationary cost increases, and an aging customer base.  Either we go all-in, and attempt to dominate an aging Baby Boomer audience, or we fold our hand and begin anew with a new brand targeted to a new audience.


When you want to begin the process of charting a path to the future, contact me (click here), and I'll profitably save you a boatload of ad dollars that you can pocket, or you can invest in the future.  

Honestly, it's time we all decided how we will deal with the future of catalog marketing.

In Defense of E-Mail Marketing

If you look at a marketing department, you'll frequently find an understaffed e-mail marketing team.  That's too bad, because e-mail marketing is one of the few disciplines where customers clearly ask you to push messages to them!


Sometimes, our view of opens/clicks/conversions blinds us to the actual value the program generates.


For instance, consider this business ... one with an e-mail marketing list of 500,000 customers, sending one campaign per week to all customers who subscribe.

• Open Rate = 20%.
• Click-Through Rate (of those who open) = 30%.
• Conversion Rate (of those who click-through) = 5%.
• Average Order Value = $100.
• Total Program Sales = 10% of Company Sales.

When measured this way, it's hard to see the impact the program has on the total business.


Let's look at the results, on an annual basis:

• Annual Sales = 500,000 * 0.20 * 0.30 * 0.05 * 100 = $7,800,000.
• Annual Variable Profit = $7,800,000 * 0.40 (profit factor) - $500,000 (program cost) = $2,620,000.
• Total Company Sales = $78,000,000.
• Total Company Variable Profit (before fixed costs) = $11,500,000.

When viewed this way, e-mail marketing is responsible for 10% of company sales, and 22.8% of company variable profit.  That's a good deal!


Then you look at the resources committed to e-mail marketing in your marketing department, and you probably observe that fewer than 1 in 5 of marketing person-hours are spent on e-mail marketing, right?!


In other words, this is probably a marketing channel that warrants increased investment.

Dear Catalog CEOs: Order Starters

Dear Catalog CEOs:

We've talked about this before, but it bears repeating.  The first twenty pages of your catalog are pretty important, especially among the 55+ rural audience that spends a lot of money when catalogs are mailed.


If your customer database is calibrated in a way that allows you to conduct the analysis in this manner, be sure to do this:

1. If an item appears in the first row of an order, it is the "order starter", it is the item the customer wanted most in the order (yes, this is an assumption).
2. Rank-order each item based on the ability of the item to "start orders".
3. Look at the items featured in the first twenty pages of your catalog, this year vs. last year.  If your catalog is not performing terribly well, is there a change in "order starters"?

Frequently, catalogs (and e-mail campaigns) perform well when the catalog is front-loaded with order starters.  E-mail campaigns can work well when the items featured are those that are known to start orders.


So have your analytics team give this analysis a try ... see what has changed in your business!

More Arguments Against MineThatData

Earlier this week, I discussed The Arguments Against MineThatData.

Apparently, there are plenty more, gotta love a minority of individuals in the vendor community!  So, we "pick up the conversation" from Tuesday with a new list, some of which were forwarded by the esteemed @amyafrica, so thanks to her, and some of which were forwarded by others of you kind enough to add your $0.02.

Issue:  Don't buy his books.  One of his books has 70 pages of computer code, who wants that?

• The folks who want that book are the folks who like to compare code, so that they can implement that type of work in their own environment.  There was also a link to the code, so that it could be copied into your environment.
• I thought I was being nice to include the computer code that I spent close to a year writing, all for the low cost of $7.95 via Kindle.  You get a year of work for $7.95.

Issue:  Kevin doesn't favor a channel, and that's not good for catalogers.

• I always favor the customer, and I favor profitability.
• I favor the survival of your company.
• I favor an honest assessment of your business.

Issue:  Kevin hates search, e-mail, and all forms of modern marketing like mobile/social, have you ever read his comments about social?  He's biased in favor of catalog marketing.

• This comes up a lot.
• This is exactly opposite of the issue just mentioned.
• I always favor the customer, and I favor profitability.
• I will say this, I hate open/click/convert as the measurement technique for e-mail, as it is almost always wrong, when compared with the more accurate method of using mail/holdout tests to measure e-mail.
• I have no idea where people get the idea that I don't like search marketing.

Issue:  Don't work with Kevin, he makes fun of catalogers with that stupid Gliebers Dresses series, and he doesn't even know how to use an apostrophe for crying out loud.  Oh, and he thinks everybody owns a Kindle, which is just stupid.

• If you've read the Bible, for instance, you already know that parables are used to explain issues without specifically taking issue with an individual.  
• Gliebers Dresses is a parable.  It is a series meant to teach in an entertaining manner.
• The apostrophe is missing, in deference to Lands' End, where the apostrophe was incorrectly printed incorrectly in the early days of the brand, causing the owner to use the mistake strategically.

Issue:  Kevin doesn't like discounting, he either doesn't understand the business model or he blasts discounters while praising his former company when it discounts merchandise.

• Allow me to make my stance very clear.
• I don't have a problem with discounts/promotions being the core "strategy" of a brand.
• I don't have any problem with events, activities where you create a reason for the customer to purchase.  If you have three sale events per year, every year, well, again, that's a strategy, isn't it?
• Having sale events 30 out of 52 weeks is not a strategy, it is not an event.  I am against this.
• I have a huge problem with measuring promotions only during the promotion period, because that seriously overstates promotion performance, causing folks to offer more promotions.  Ask yourself why you offer promotions all the time now, and you didn't back in 2000, and your annual retention rate is still the same, and orders per buyer are still the same, and you're struggling to acquire new customers??
• Offering 20% off plus free shipping randomly because business is bad is not a strategy, and I am against that, unless you have no other way to clear inventory.
• Offering free shipping 24/7/365 is a strategy, and I support that.
• I am against Cyber Monday, a concept developed by a trade organization.  Add your total sales two weeks prior, and two weeks after, for the past ten years, does the holiday boost actual sales?
• In other words, I support a strategic approach to discounts and promotions.
• And, yes, you can sell merchandise at full price.  Marketers feel like they don't have a job if they don't add frosting (discounts/promos) to the cake, take your ego out of the equation and get busy selling merchandise, not selling your fancy promotions!

Issue:  Don't work with Kevin.  He pimps his books to the #measure community on Twitter, that's not ethical, #measure is "all about the community".

• The very people who are angry with me are people who either work for companies that promote themselves in that community, or they actually promote themselves within that community.

Issue:  Don't work with Kevin, his activities are outside the best practices established in our industry.  Work with people like me instead, people who execute proven and classic direct marketing tactics.

• A competing consultant, a classic direct marketer, left this comment on my blog.  Geez.
• Again, my methodology delivers an average of $1,000,000 profit per year for a $100,000,000 catalog brand.  
• And yes, my methodology is not an industry-standard best practice.

Issue:  Kevin's ideas only work with companies that have unique product and add 30% new product each year.  His ideas do not work with companies that sell the same crap as everybody else.

• How could you, the person who said this to an individual, possibly know this?  Be honest, how could you know this?
• I've worked with companies that sell the same stuff as everybody else.  The issue isn't the merchandise, the issue is how your customers respond to advertising.

Issue:  Kevin doesn't know B2B marketing, don't work with him.  B2B marketing is a special discipline requiring special people.

• I'll be the first to say that I know more about B2C than B2B.
• That being said, B2B isn't rocket science.  You mail catalogs, you send e-mail messages, customers respond.
• Furthermore, in the projects I've worked on in B2B, the organic percentage is usually higher than it is in B2C, allowing the B2B brand to cut even more catalogs.  Yes, that's accurate.  Often, the organic percentage is 85% or greater, and your vendors are greatly over-stating the value of catalog marketing to your business ... when vendors do this, it benefits the vendor, not you.

Issue:  Kevin doesn't know the gift industry, don't work with him.  He only knows apparel marketing.

• This one comes up a lot.
• The only fundamental difference for a gift business is the seasonality of purchasing, coupled with "ship-to" activity ... very easy to account for.
• I can promise you that I've delivered above-average results for gift marketers.

Issue:  You need a consultant who has too much work to do.  Kevin spends all day writing books or tweeting, so he probably doesn't have any clients.

• I've worked with 63 brands in the past 53 months.
• I limit my clients to 2 per month, maximum, to give each client maximum attention.  In other words, there are times when I am turning business away or deflecting it to later months.
• Allow me to teach you something about how I do my job.  I write computer code ... about 6,000 lines (+/-) of code per consulting project, about 84,000 lines of computer code per year.  
• In other words, I type a lot faster than the average person types.
• The computer code is used to re-shape and analyze customer transactions.
• In an average project, I'm analyzing about 10,000,000 customer transactions.
• When I run a program, it takes anywhere between thirty seconds and thirty minutes for the program to run.
• While a program is running on my laptop (yes, I do all of this on a laptop), I'll write a blog post, or I'll tweet something to the 3,000+ folks following on Twitter.  In other words, activity is happening concurrently ... the computer is running a 10 minute program while I write several pages in an upcoming book, for example.
• I work about 13 hours a day, six days a week.  My wife is ok with this, my dog resents my utilization of time.
• All of this leads to an average of $1,000,000 annual profit for the $100,000,000 brand that hires me.

Issue:  Kevin spent too many years working for big brands.  He doesn't understand how hard it is to make things work at a $50,000,000 catalog brand.  Kevin only knows fancy, big-company solutions that don't work at small companies.

• My median client has annual sales of $50,000,000.  About 20% of my client base is above a billion dollars a year.  About 20% of my client base is under $20,000,000 a year.
• I have many clients in many different life-stages. 

Issue:  Kevin knows nothing about social media.  Look at Victoria's Secret, they've got a million fans on Facebook.  Simply put, it works.

• FYI, from 2007 - 2010, 70% of my projects were sourced from my blog (that's social media, right)?
• In 2011, 45% of my projects are sourced from my blog.
• Social media works for individuals and small businesses.
• For large brands, go find a single 10-Q or 10-K statement where the Management team attributes even 3% of total annual net sales to social media.  Go ahead, I'll wait right here.

Issue:  Kevin doesn't know anything about mobile.  Work with a web analyst, those folks know mobile.

• 95% of analysts struggle to measure the way channels interact with each other.
• My specialty is measuring the way that channels interact with each other.  I will tell you how mobile customers interact with the rest of your business.

Issue:  Kevin focuses on comp-segment performance as a key customer metric, while best practices suggest that campaign performance is the best indicator of marketing effectiveness.  Don't listen to him when he starts talking about geeky comp-segment measures.

• If campaign performance was a leading indicator of solid business performance, then why have we increased campaigns across all channels by about 1,000% since 2000, and yet, our annual customer retention rate remains constant?
• When your annual retention rate is bound by a 10% range, over the course of a decade, then comp-segment performance is a very solid indicator of actual customer behavior.

Issue:  Kevin only knows how to deal with loyal customer behavior.  We'd all like to have customers like Nordstrom has, customers who repurchase at a 75% rate and buy seven times a year.  Kevin knows nothing about companies with 30% annual repurchase rates, and that's why he's always saying those business need to acquire new customers.

• 50% of my client base has an annual repurchase rate of 38% or lower.  I know a little bit about managing these situations.

Ok, that's the latest list.  Go ahead and forward the complaints and arguments offered to you by the vendor community and by consultants who compete with me, I'll continue to address them for you.