Cost Per Click In Multichannel Retail

SpyFu is a website that helps users understand how much various businesses spend on online advertising.

Having insider information about accuracy of the data at several multichannel retailers, I can tell you that SpyFu is at best, directionally accurate.

That being said, one can summarize and classify the information. By doing so, many of the numerical inaccuracies are mitigated.

The attached image classifies apparel and shoe multichannel retailers into nine cells. Among these thirty-seven businesses, I use SpyFu data to determine if the retailer spends a lot, or very little on online advertising. Next, I use SpyFu data to determine if the average Cost per Click is inexpensive, average, or expensive.

The best place to reside in this image is in the upper right cell. In this cell, spend is huge, while Cost per Click is low. If these clickers convert at an acceptable rate, there is significant efficiency in the online marketing efforts of retailers in this cell. Interestingly, only Zappos meets this criteria.

Of course, SpyFu data does not have access to online or retail conversions. In other words, a customer might search for denim. The customer clicks on J. Crew in the paid search section of Google, views an item on the website, drives to the store, and purchases the item. Whether the item is purchased online or in a J. Crew store, SpyFu cannot see the conversion.

Many of the businesses in this table sell far more in their retail channel than in their direct channel. Some of the more sophisticated multichannel retailers already link paid search to estimated retail conversions. While it is important to look at cost per click, it is much more important to measure variable operating profit across all channels. This concept certainly isn't new, and has been documented many times in Database Marketing literature (this is frequently called a "matchback" analysis).

The table at the end of this post looks at multichannel profit, obtained by spending $100,000 on a paid search program. Notice how important it is to at least be able to estimate the retail conversions driven by online advertising.

In this example, the multichannel retailer generates $33 of profit for every conversion. Also notice that the multichannel retailer generates $1.49 profit per click, in this example. If these metrics were negative, the multichannel retailer would have to conduct a lifetime value analysis, to see if future sales offset short term losses.

Amount Spent, Paid Search	100,000
Cost per Click	0.75
Number of Clicks	133,333
Online Conversion Rate	2.5%
Estimated Retail Conversion Rate	2.0%
True Conversion Rate	4.5%
Online Average Order Size	225.00
Retail Average Order Size	175.00
Online Demand	750,000
Retail Net Sales	466,667
Online Profit to Demand Ratio	23.0%
Retail Profit to Net Sales Ratio	27.0%
Online Profit	172,500
Retail Profit	126,000
Less Online Advertising Expense	100,000
Net Profit	198,500
Return on Investment (Profit/Expense)	1.99
Profit per Conversion	33.08
Profit per Click	1.49

Multichannel Retailers and Conversion Rates

Pundits spent a lot of time telling us that multichannel customers are the most valuable customers. This finding has become largely unusable.

The concept of multichannel customers becomes very interesting, when explored via conversion rates online.

When you get to work on Monday, try this exercise.

Step 1: Segment your online visitors, from February 1, 2006 to January 31, 2007. Segment them into the following classifications:

• Those who purchased online, in catalog, and in stores during that time period.
  
• Those who purchased online, and in catalogs during that time period.
  
• Those who purchased online, and in stores during that time period.
  
• Those who purchased in catalog, and in stores, during that time period.
  
• Those who only purchased online during that time period.
• Those who only purchased via catalog during that time period.
  
• Those who only purchased via stores during that time period.
  
• Those who had not purchased, but had visited the website multiple times during that time period.
• Those who had not purchased, but had visited the website just one time during that time period.

Step 2: For each of the nine segments listed above, calculate the following metrics:

• Number of Households.
• Number of Households who visited the website during February 2007.
• Average Number of Visits per Household Visiting, during February 2007.
• Total Number of Visits, during February 2007.
• Percentage of Households Purchasing Online During February 2007.
• Percentage of Households Purchasing In Catalog During February 2007.
• Percentage of Households Purchasing In Stores During February 2007.
• Percentage of Households Purchasing, Any Channel, During February 2007.
  
• Online Conversion Rate (Total Online Purchases / Total Online Visits), February 2007.

The magic of this type of analysis is that the multichannel executive gains an understanding of who is visiting her website, how her customers use the website, and how much more effective the multichannel retailer's website is at converting online customers.

Even better, the multichannel executive will learn that the website is frequently used as the research tool for offline purchases. We hear that customers use our websites in this way all the time --- this reporting is a first step in understanding how different customer segments utilize the site to purchase merchandise.

Multichannel CEOs and CMOs: We spent a lot of time integrating purchase data across channels during the past decade. Integrating clickstream data with multichannel purchase data is another logical, important, and necessary step in the evolution of mulitchannel marketing.

Web Analytics Experts: This is a really good time to expand your skillset beyond clickstream and funnel analysis. Your future depends upon being able to segment customers at one point in time, and then measure customer performance over a future period of time.

Mini-Catalogs and On-Demand Catalogs

I wonder how long it will be before retailers try out a concept that I call a "mini-catalog". This might be an eight page PDF document (see DMNews and their Outlook 2007 for a media-version of the concept), featuring a number of top-selling items. The objective of the mini-catalog is to get you to print it on your color printer, and then use it as a guide for your in-store shopping experience.

The mini-catalog could be downloaded via a weekly e-mail campaign, an RSS feed, or could be featured on a key landing page of the website. In addition, these "mini-catalogs" could be developed to improve natural search results.

Even better, the retailer could allow the customer to cobble together ten or twenty favorite items, which could be assembled into an on-demand catalog that the customer prints on their home or work printer. The on-demand catalog is just a fancy version of the shopping cart, a place customers store mechandise that they might be interested in purchasing at a later date.

The concept of the on-demand catalog is something that retailers and catalogers are bound to begin exploring in 2007 and 2008. The on-demand catalog allows the customer to assemble the products and services s/he is interested in. The multichannel retailer gets to identify items that are of interest to these highly engaged customers, and use that information to personalize e-mail, print and RSS campaigns.

Mini-Catalogs and On-Demand Catalogs. Expect to see multichannel retailers explore these ideas in 2007 and 2008.

A/B Test Design And Incremental Multichannel Campaign Performance

Never before has the traditional "A/B" test been as important as it is in our multichannel ecosystem. Such a simple concept, the "A/B" test is uniquely designed to measure the incremental performance of marketing activities.

As an example, assume a multichannel organization mails a catalog to a housefile list of 1,000,000 names. The database marketer chooses the best 1,100,000 households, and randomly splits them into two groups. The "A" portion of the test are the 1,000,000 households who receive the catalog. The "B" portion of the test are 100,000 households who will not receive the catalog.

Maybe a month after the in-home date, the database marketing analyst is prompted to analyze the results. Within each group, the 1,000,000 who received the catalog, and the 100,000 who didn't receive it, the analyst calculates the average net sales within the catalog/telephone channel, the online channel, and the retail channel.

Here are sample results:

	Quantity	Telephone	Online	Retail	Totals
Received Catalog	1,000,000	$6.00	$8.00	$21.00	$35.00
Did Not Receive Catalog	100,000	$2.50	$7.00	$19.50	$29.00
Incremental Lift		$3.50	$1.00	$1.50	$6.00

In this example, the catalog drove an incremental $3.50 per customer to the catalog/telephone channel, $1.00 per customer to the online channel, and $1.50 per customer to the retail channel, for a total of $6.00 incremental sales per customer.

Because we mailed 1,000,000 households, the total net sales attributed to this mailing is 1,000,000 * $6.00 = $6,000,000.

Some vendors advocate a different methodology --- they advocate allocating any online and retail order generated during the time the catalog was active to the mailing of the catalog. This results in a gross over-estimation of the importance of the catalog. Please don't go down this path.

A similar methodology can be used to test multiple marketing activities at the same time. Assume an e-mail campaign was mailed to the opt-in portion of this audience. Within this audience, you randomly assign customers to one of four test segments. Here are some sample results.

	Quantity	Telephone	Online	Retail	Totals
Catalog + E-Mail	400,000	$5.50	$8.50	$21.25	$35.25
Catalog Only	50,000	$6.00	$8.00	$21.00	$35.00
E-Mail Only	50,000	$3.00	$8.10	$18.65	$29.75
No Catalog, No E-Mail	50,000	$3.50	$7.00	$18.50	$29.00

Tests like these yield interesting and intriguing results. Notice that the best strategy for the catalog/telephone channel was to mail only a catalog. The best strategy for the online channel was to mail a catalog and an e-mail. The best strategy for the retail channel was to mail both a catalog and an e-mail.

Statisticians can assist with significance tests, if you feel that is appropriate. It is more important to simply execute tests of this nature, and learn how all of your marketing activities interact with each other. What you learn about how marketing activities and channels interact with each other within our multichannel ecosystem may surprise you.

Piperlime: A Multichannel Diversion

A month ago, Gap launched an online shoe business called "Piperlime". This business competes against multichannel shoe retailers and online pureplays like Zappos. You might enjoy some of the comments about this new business from various bloggers. And the end of the blogger section, I'll ask for your opinion.

Styledash --- might take business from Zappos.

Celebrity A-List stylist Rachel Zoe and guest editor for Piperlime, from Soles4Souls.org, an organization that uses donated shoes to help the world.

Brief discussion of some of the brands Piperlime carries.

From the Second City Style blog.

More important, what do you think of a multichannel retailer launching an online-only "pureplay" brand? Does this fly in the face of what pundits tell us about how we should executive multichannel retail strategies? What do you think? What chance does this startup have of succeeding? Is Gap crazy, or brilliant?