Contact Strategy Optimization

Many of us avoided determination of an optimal contact strategy by simply taking a hatchet to customer acquisition marketing, helping us improve profit in the short-term.

Rest assured that there is a lot of profit to be had by creating tests that identify an optimal contact strategy.

So much of the work I do with clients is in this realm. We design a test that spans catalog marketing and e-mail marketing --- testing different combinations of catalogs and e-mails.

Most of the tests are conducted on a quarterly basis. There is a general fear of withholding marketing from customers for more than three months, so we generally stay away from longer-term testing. That being said, all of the fascinating findings are identified in longer-term tests. I learned that lesson back at Lands' End, in 1993-1994 when we conducted holdout tests that spanned a twelve-month period of time. Customer behavior really changes when the tests are that long.

In the test illustrated above, three catalog strategies (0, 3, 6) were tested against three e-mail strategies (0, 6, 12).

Pay close attention to the results.

The control group --- 6 catalogs, 12 e-mails, generated $35.05 demand and $9.51 profit.

No marketing at all --- 0 catalogs, 0 e-mails, generated $25.00 demand and $9.38 profit.

In other words, among the housefile customers tested here, it is just as profitable to do no marketing as it is to execute eighteen campaigns across three months.

Nobody in our industry wants to hear that news. And yet, I see this over and over again in the Multichannel Forensics projects I analyze. In this case, the organic percentage is reasonably high ... ($25.00 / $35.05) = 71%. Seventy-one percent of the sales volume happens without catalog and e-mail marketing.

The most profitable tested strategy is 3 catalogs and 12 e-mails, yielding $33.80 demand and $10.84 profit.

This is the kind of testing that all of us must execute this fall. Our job is to design and execute the tests in Fall 2009, so that we can greatly improve profitability in 2010.

Catalog And Retailer Differences In Matchback Strategy And Contact Strategy Optimization

There's this huge shift in multichannel marketing strategy in recent years, with catalog matchback algorithms playing a significant role in the shift.

Fashion retailers (Neiman Marcus, Saks, Bloomingdales, Nordstrom) either eliminated traditional catalog marketing programs, or are in the process of significantly reducing circulation. Folks at Williams Sonoma are significantly trimming circulation.

When I talk to some of you, you tell me that these folks can cut circulation because they are retailers --- the retail channel somehow generates brand awareness that fuels a brand in a way that minimizes the need for advertising. You might be right, we simply cannot test your hypothesis.

Mechanically, retail brands are better at developing a testing discipline.

Here's an example. We randomly sample twenty customers, ten receive a catalog, ten do not, and measure performance across channels during the three weeks that a catalog is active. Here's what we observe:

Mailed			Holdout
Cust 1	Buy Store		Cust 11
Cust 2			Cust 12
Cust 3			Cust 13	Buy Online
Cust 4			Cust 14
Cust 5	Buy Phone		Cust 15
Cust 6	Buy Online		Cust 16
Cust 7			Cust 17
Cust 8			Cust 18
Cust 9	Buy Online		Cust 19
Cust 10			Cust 20	Buy Online

Here's the fundamental difference between the retailer and the catalog brand.

The retailer will compare the mailed group and the holdout group. In the mailed group, four out of ten customers responded --- in the holdout group, two out of ten customer responded. The retailer calculates response as (4 - 2) / 10 = 20%.

The cataloger does not execute the test. Instead, the cataloger takes the mailed group, identifies the four responses, matches the responses back to the mail file, and calculates response as 4 / 10 = 40%.

Again, notice the significant difference in response, using the two methodologies.

• Retailer = 20% Response Rate.
• Cataloger = 40% Response Rate.

In this comparison, the organic percentage is 20% / 40% = 50%. Half of the demand would happen without any advertising.

This fundamental difference in approach causes a shift in strategy.

• Retailer = Cut Circulation, Re-Allcoate Marketing Dollars Elsewhere, Learn!!
  
• Cataloger = Maintain Circulation, Ask For Additional Funding For Online Marketing, And Significantly Over-Spend In The Catalog Marketing Channel, Driving Down Profit.
  

This problem is systemic across the catalog industry. Matchback vendors aren't trying to rip you off, they simply aren't. But there isn't an incentice to create a "best practice" that accounts for the differences that retailers observe when executing contact strategy testing and what catalogers measure via matchback analytics.

A simple solution for catalogers is to execute a test similar to the one designed above. Do not tell the matchback vendor about the holdout group. Have the matchback vendor run the control group through the matchback algorithm, and see how many orders are allocated to the holdout group. Subtract the results of the holdout group from the results of the mailed group, and you have true incremental demand as illustrated in the retail example at the beginning of this post.


Hillstrom's Contact Strategy Optimization: A New E-Book.

Hillstrom's Contact Strategy Optimization On A Budget

Hillstrom's Contact Strategy Optimization On A Budget is a new e-book and spreadsheet available from the MineThatData Store at Lulu.com.

Contact Strategy Optimization is not a new concept. During my time at Lands' End in the early 1990s, we worked with a team of IBM researchers on an optimization solution that formed the embryonic version of the solutions offered by Decision Intelligence.

During the past two weeks, many of you told me that you don't want to spend tens or hundreds of thousands of dollars on black box algorithmic solutions that optimize the number of catalog contacts to various customer segments. That being said, you told me you want a solution ... one that can be implemented by Business Leaders, Analysts, and Managers ... one that can be implemented on a budget.

So I wrote this e-book, outlining a reasonably simple approach to identifying the most profitable combination of catalog mailings and e-mail marketing messages to different customer segments.

What Do You Get, What Will You Learn?

• You'll learn that matchback algorithms over-state the importance of catalog marketing, causing us to mail too many catalogs to our customers.

• You'll learn that the "organic percentage" is the most important metric to understand when considering an appropriate contact strategy.

• You'll learn that contact strategy testing is critical to understanding multichannel customer behavior.
  

• You'll learn how cannibalization between catalog mailings and e-mail marketing messages directly influence a profitable contact strategy.

• You'll apply versions of the "square root rule", identifying profitable strategies.

• You'll receive access to a URL where you can download a spreadsheet that allows you to play "what if" games using your own assumptions and your own customer segment performance.
  

This is not meant to be an elegant or mathematically perfect solution. This e-book and spreadsheet are written for you, the Executive or Analyst who has to come up with solutions on a limited budget.

Do you not have a quarter of a million dollars to spend on an optimization solution, but have access to $79? If so, purchase "Hillstrom's Contact Strategy Optimization On A Budget"! For those of you who criticize me for giving away too much information, you'll be happy, because the contents of this e-book will not be made available on this blog.

$79 is a fair price, considering you'll be given tools that could result in hundreds of thousands of dollars of annual profit, don't you think?

So visit the MineThatData Store on Lulu.com, and download this e-book for the nominal fee of $79.