Mega-Metrics: Migration Mode

When we evaluate how customers are migrating between micro-channels, we need to calculate migration modes for each micro-channel. Here's how we do that.

Step 1: Take a calendar year (2007), or any twelve month period of time. Create an indicator (1 = yes, 0 = no) whether the customer purchased from a micro-channel during that timeframe.

Step 2: Take the next calendar year (2008), or any subsequent twelve month period of time. Create the same set of indicators (1 = yes, 0 = no).

Step 3: Take any one indicator in Step 1 (say the customer purchased because of Google Paid Search), and store those customers in a file.

Step 4: For all customers in Step 3, calculate the percentage of customers who.

1. Purchased in the dataset in Step 2.
2. Purchased from any of the indicators in the dataset in Step 2.

Step 5: For each of the indicators in Step 4, take the percentage buying from an indicator, and divide it by the total repurchase rate.

Step 6: Classify each index on the basis of the following criteria.

• Isolation Mode = An index between 0.00 and 0.20.
• Equilibrium Mode = An index between 0.20 and 0.50.
• Transfer Mode = An index greater than 0.50.

Isolation Mode is important, because it happens when a customer becomes loyal to a product, brand, or channel. I see this all the time with Google. Yahoo! and MSN searchers are in Equilibrium Mode with Google, but Google searchers are in Isolation Mode with Yahoo! and MSN. In other words, once the customer becomes loyal to Google, the customer stays with Google.

Equilibrium Mode is where all of the subtleties of a business happen. In social media, we've seen the slow leak from blogging to micro-blogging, as users migrate away from blogs to their own Twitter page. For catalogers, there has been a decade-long leak from customers ordering over the telephone to customers ordering via websites. For online channels within retailers, you'll see that customers rarely stay loyal to the online channel ... often, the customer slowly leaks back to the retail channel.

Transfer Mode happens when there is a mass exodus from a product, brand, or channel to another product, brand or channel.

Work with the good folks at Coremetrics or Omniture to have these metrics generated for you, there's no reason they cannot calculate these metrics, at a micro-channel level, to assist you in understanding how customers are interacting with micro-channels. For you catalogers who partner with Unica, they certainly have the skills necessary to do this, just ask them! And for those of you lucky enough to have a SQL/SAS/SPSS programmer, this is brutally easy to do!

Multichannel Forensics A to Z: Migration Mode

At its core, Multichannel Forensics (book, study) is all about migration.

Will the customer who trusts Amazon.com when buying books also trust Amazon.com when buying electronics? If the customer doesn't trust Amazon.com to buy electronics, can Amazon.com obtain new, unique customers who prefer electronics?

And if the customer trusts you enough to buy something from a different product line, will the sale cannibalize something that would have already been purchased?

Too often, we create a new product line, eagerly anticipating customer response. And sure enough, the new product line works well! But then, after a bit of time, we notice that customers don't seem to like the core merchandise assortment as much as they used to like it. Our ad-to-sales ratios appear to be increasing.

This is when we run the Migration Probability Table. We need to see who, specifically, is buying from the new merchandise line. We need to understand if the new product line appeals to best customers, marginal customers, infrequent customers, or new customers. Then, we evaluate the long-term trajectory of our product lines, trying to understand how one line impacts the other.

Customer migration is at the core of this process.

Multichannel Forensics: Calculating Migration Mode

Before we go into various studies, we need to know how to calculate the migration mode of each product, brand, or channel.

Here's an example for the online channel of a multichannel retailer.

Step 1: Calculate the annual repurchase rate for online customers, across all channels. Answer = 55%.

Step 2: Calculate the annual purchase rate for online customers within each channel.

• Total Company = 55%.
• Catalog Channel = 5%.
• Online Channel = 35%.
• Retail Channel = 30%.

Step 3: Calculate the purchase index for each channel, measured as the channel purchase rate divided by the total company purchase rate. Though we will calculate the metric for the online channel, we're only interested in the metric as it relates to the catalog and retail channels.

• Catalog Channel = 5% / 55% = 0.091.
• Online Channel = 35% / 55% = 0.636.
• Retail Channel = 30% / 55% = 0.545.

Step 4: Classify each metric into isolation mode, equilibrium mode, or transfer mode (oscillation mode occurs when two channels transfer to each other).

• Isolation Mode = Index between 0.00 and 0.20.
• Equilibrium Mode = Index between 0.20 and 0.50.
• Transfer Mode = Index greater than 0.50.

• Catalog is in Isolation with the Online Channel.
• The Online Channel Transfers customers to the Retail Channel.

Given the dynamics of this business, customers ultimately migrate from the website to retail stores.

Multichannel Forensics: The Building Blocks

We'll start our Multichannel Forensics series with a quick refresher course.

There are three loyalty modes for every product, brand or channel.

• Retention Mode: When at least 60% of prior year customers purchase again this year (if your business doesn't support a twelve month repurchase period, use a timeframe that is appropriate.

• Hybrid Mode: When between 40% and 60% of prior year customers purchase again this year.

• Acquisition Mode: When fewer than 40% of prior year customers purchase again this year.

We need to classify each product, brand or channel into one of these three modes, so that we can understand the primary way that growth will happen. So many brands are in "Acquisition Mode" and don't realize it, depending heavily on customer acquisition for long-term health.

There are also four Migration Modes that each product, brand or channel fall into.

• Isolation Mode: This happens when the customers in a product, brand or channel do not migrate to other products, brands or channels. For instance, customers who purchase Mens apparel are unlikely to buy Womens apparel. Mens apparel buyers are in "Isolation Mode".

• Equilibrium Mode: This happens when the customers in a product, brand or channel are willing to try other products, brands or channels. For instance, customers who purchase Womens apparel might purchase Mens apparel for their spouse. Womens apparel buyers are frequently in "Equilibrium Mode". This mode is common, and is responsible for all of the interesting dynamics that occur when customers shift from one product line (DVD Players) to another (Blu-Ray DVD Player).

• Transfer Mode: This happens when the customers in a product, brand or channel are actively switching loyalty. Over the next decade, automobile purchasers will actively transfer loyalty from gas-guzzling cars to hybrid cars and other technologies. CEOs need to recognize this mode, and react in a positive way in order to protect jobs.

• Oscillation Mode: Sometimes, customers switch back and forth between products, brands or channels. This is known as "Oscillation Mode". Computer buyers purchase software and peripherals, then switch back to buying a new computer, then switch to software and peripherals, resulting in "Oscillation Mode".

The combination of Loyalty Mode and Migration Mode yield the unique situation a product, brand or channel resides in.

Maybe you are a catalog CEO. If your catalog channel is in "Acquisition/Transfer" mode, your job is to scale back on catalog advertising over time, as your customers won't allow you to grow this channel anymore.

Maybe you are a Merchandise EVP. If your product is in "Retention/Isolation" mode, you thoroughly control your merchandise line. Your customers are loyal to your products, and do not switch loyalty to another merchandise line. You have the potential to be a rock star.

Maybe you are the General Manager of the Online Channel of a Multichannel Brand. If your channel is in "Hybrid/Equilibrium" mode, you have a very interesting channel to manage. Your customers want to shop your store channel, but aren't avid store customers. Strategically, you can influence your customers by the marketing techniques you use. Do you want your customers to shop online, in stores, or anywhere? In many ways, you get to decide!

This week, we'll look at several case studies, examples that help CEOs understand how to manage multichannel complexity!