Multichannel Investment Options

In most multichannel businesses, there is one person responsible for combining all advertising investment opportunities.

At traditional catalogers, this person was the Director of Circulation. These days, the person could be the Director of Circulation, it could be the Director of Online Marketing. This person plays a critical role, one of the most important in any multichannel business.

Each organization has an annual budgeting process. This process is usually initiated by the finance division. The finance folks determine key dates when information is to be shared within the organization, with the executive team, and with ownership/board-level individuals.

In most companies, this investment process drives a series of discussions that can be exhilarating for some and frustrating for others. For most, the discussions are "circular" in nature.

The Circulation/Online Marketing Directors go through a process where they use internal analysis tools to forecast what they think sales will look like next year, for the marketing strategies they are accountable for.

In catalog circulation, changes in online/catalog customer files are measured, catalogs to be offered are determined, circulation cutoffs based on short-term and long-term profitability are established, resulting in a set of "rules" that are followed. A series of spreadsheets are crunched, resulting in a sales total across all channels, and profit estimates based on the investment totals.

A similar process occurs within the online marketing advertising channel. Traffic forecasts, conversion rate estimates, average order size guesses, keyword bidding projections, online marketing costs and affiliate strategies result in an estimated number of purchasers, yielding a sales total across all channels, and profit estimates based on the investment totals.

Catalog and online figures are combined, and presented to the executive team.

This is where things go haywire!

In most situations, the estimates yield sales and profit totals that are not acceptable to the executive team.

The executive team will immediately question the accuracy of the work done by the circulation/online marketing experts.

Assuming that the work was done accurately, a new series of questions arise. "What happens if we spend more money in e-mail marketing? What happens if we spend more money on paid search? What happens if we decrease portal advertising? What happens if we increase affiliates from 1,000 to 1,500? Are the catalogs driving more or less business to our online channel? What happens if your circulate to a -10% profit cutoff level verses break-even? What happens if you shift catalog acquisition out of Abacus names, into list rental and exchange names? What happens if we have six targeted versions of an e-mail instead of three? What happens if we no longer offer free shipping?

These questions set off a round of chaos that is very frustrating to the foot soldiers who do the actual work. Typically, the questions are answered in a sequential fashion.

In other words, the executive team learns what happens if free shipping is dropped. Then, they learn what happens if six targeted versions of an e-mail are offered instead of three. Then they learn what happens if all remail catalogs are dropped from the plan. All choices are explained in isolation.

As a result, there is a ton of busy work done by the foot soldiers, and a ton of anxiety felt by executives. The teams work together on an iterative process that ultimately results in one sales plan for the next year. Often, this sales plan is the result of a time deadline ... in other words, the plan must be completed by, say, November 25th. All work done by November 25th is put into the plan, scenarios not completed by November 25th are excluded.

One way to start getting out of this rut is to provide your executive team "options".

In other words, if you are the online marketing director, you can present five different options, based on different investment scenarios. This gives the executive team something to think about. The executive team can center their questions around one or two options that seem to yield the best outcome.

Similarly, the catalog marketing director can offer five different investment options. There can be scenarios with deep cutoff levels, scenarios with shallow cutoff levels, scenarios with a lot of customer acquisition, scenarios milking the top of the customer file with remails.

These scenarios are advantageous for many reasons. Maybe most important is the fact that the foot soldiers get to see which scenarios the executive team like best. Next year, the budgeting process will be smoother, because the foot soldiers know what the executive team want to see.

Multichannel investment options are an area you seldom hear about in trade journals or vendor-based publications. Yet, when you talk to executives, directors and analysts, you continually hear this as being an area of frustration.

Over the next five years, you will see a continued focus on improving the annual budgeting process. Online marketing leaders who invest time honing skills in this area will have a great opportunity to move into C-level management positions.

Optimal Online Marketing Budget

We've previously discussed the importance of the "square root" rule in analyzing marketing campaigns, when solid test-based data is not available to the analyst.

Assume you spent $20,000 on an online marketing campaign, yielding $60,000 net sales, and a net loss of $2,000 (assuming 30% of sales flow-through to profit). You want to know what might have happened, had you spent more or less than $20,000.

Square Root Rule --- Assume you wanted to only spend $10,000. Sales will change by the following factor: ($10,000 / $20,000) ^ 0.5 = 0.707. Net Sales of $60,000 will change by 0.707, or $60,000 * 0.707 = $42,426. Profit = $42,426 * 0.30 - $10,000 = $2,728.

Again, if you don't have good test-based data to make comparisons with, use this rule as a quick shortcut.

The table below illustrates different spend levels, associated sales, and profit.

Spending Level	Net Sales	Estimated Profit
$10,000	$42,426	$2,728
$12,500	$47,434	$1,730
$15,000	$51,962	$588
$17,500	$56,125	($663)
$20,000	$60,000	($2,000)
$22,500	$63,640	($3,408)
$25,000	$67,082	($4,875)
$27,500	$70,356	($6,393)
$30,000	$73,485	($7,955)

Setting Your Online Marketing Budget

Undoubtedly, many of you are putting the finishing touches on your online marketing, e-mail marketing, or catalog marketing budget for 2007. Oh, the excitement!

Is there anything more enjoyable than sitting across from your Chief Financial Officer, having to defend why it is important to advertise with a certain affiliate at a time when expenses need to be trimmed by ten percent?

CFO's demand rapid, financially-based answers to questions. The humble Chief Marketing Officer or Online Marketing Executive needs to be able to respond in a credible, but timely manner.

Most of the time, when asked a random question, you don't have the appropriate data with you to answer the question quickly. This is where the "square root" function comes into play.

Frequently, sales generated by advertising follow a "square root" function. In other words, if you had the opportunity to increase your marketing budget by twenty percent, your net sales would increase by the square root of 1.2. This number is (1.2 ^ 0.5) = 1.095. In other words, a twenty percent increase in marketing spend yields a 9.5% increase in net sales.

This becomes important when the CFO makes a random statement like,"Please reduce your marketing budget by ten percent, you have no choice in this, everybody must share in the pain."

Look at this example, where the online marketing budget is reduced by ten percent:

High-Level Online Marketing Scenario
		Reduce Ex-	Incremental
	Base Case	pense by 10%	Sales Lost
Orders	90,909	86,244	4,665
Average Order Size	$110.00	$110.00	$110.00
Cost per Order (CPA)	$22.00	$20.87	$42.87
Net Sales	$10,000,000	$9,486,833	$513,167
Gross Margin @ 40%	$4,000,000	$3,794,733	$205,267
Marketing Cost	$2,000,000	$1,800,000	$200,000
Pick/Pack/Ship Expense @ 13%	$1,300,000	$1,233,288	$66,712
Variable Operating Profit	$700,000	$761,445	($61,445)
Profit as a % of Net Sales	7.0%	8.0%	-12.0%
Ad to Sales Ratio	20.0%	19.0%	39.0%

Notice how the profit and loss statement changes. In this case, the CFO may have a good suggestion, as the incremental advertising dollars are not yielding a sufficient return on investment. Conversely, the numbers might work out in your favor, giving you the ammunition to actually ask the CFO for more money!

Not every business follows the "square root" rule. Your analyst can help you figure out which relationship makes the most sense to build the scenarios around. But in a pinch, go with the square root function. And then ask your CFO to quickly cost-justify some of her investments!!