Online Marketing Simulations: Merchandise Growth

Open your spreadsheet (contact me for your copy), and take a look at cells J19 - N19.

Cells J15 - N27 illustrate simulated/projected growth in different merchandise divisions during the next five years. Remember, this is a business that is forecast to shrink significantly over the next five years.

But the merchandise division in cells J19 - N19 is forecast to grow!

In fact, this isn't the only merchandise division forecast to grow in the next five years. Look at J23 - N23.

When a business is struggling, there is often data available, data that shows the Executive a path to a profitable future. You just need the tools to demonstrate the profitable path to the future.

Click here to buy the book on Amazon.com ... or have me build an OMS spreadsheet for you by clicking here.

Online Marketing Simulations: The Secret!

Recently, we worked through a spreadsheet exercise (e-mail me for a copy of the spreadsheet) that illustrated how hard it was to make sure that good customers stay good customers.

In fact, it is very, VERY hard to keep a customer for life. Customers evolve and change. You enjoy every moment the customer wishes to share with you, then you let the customer go and find a new one to replace her.

Just look at how important customer acquisition is in the spreadsheet. Enter "0.00" in cells C6 - G6 ... by year 5, a $63,000,000 business becomes a $28,000,000 business.

In other words, you can focus on customer retention until the cows come home, but it is customer acquisition that, for all businesses except maybe Wal-Mart, Target, McDonalds, and Starbucks (and other businesses of their scale), fuels the future success of the business.

Almost nobody talks about finding new customers. This means that few people have discovered "the secret" to a healthy business. Why can't you apply "the secret" to your business, before others discover it?

Find new customer sources that have positive traits:

• Customers who purchase multiple items on a first order.
• Customers who purchase from multiple merchandise divisions on a first order.
• Customers willing to pay full price on a first order.
• Customers willing to pay for shipping.handling on a first order.
• Customers who buy expensive, not discounted items.
• Customers who are likely to purchase again in the next twelve months.
• Customers who are likely to buy from another advertising micro-channel in the next twelve months.
• Customers who buy from your brand (i.e. your website) and not from your brand via another brand (i.e. Amazon, Affiliates).
• Use Online Marketing Simulations to identify these traits in new customer acquisition sources, and grow your business!

Click here to buy the book, "Online Marketing Simulations". Click here to hire me for your OMS project!

Open Your Spreadsheets: Customer Quality

Time to open up your Online Marketing Simulation worksheets (click here to have me send you a copy, buy the book here).

In the spreadsheet, enter "0" in cells B101 - B188, and enter "0" in cells B190 - B580. This means that we are going to analyze just one segment of customers, a segment that is at a grade of "B" on an "A / B / C / D / F". Recall that I grade all customers in Online Marketing Simulations, so that I can measure where these customers migrate over time.

Ok, 7,062 customers with a grade of "B" don't stay as "B" customers for long, do they? At the end of five years, the majority of customers slump to grades of "D" and "F". In other words, good customers don't stay good customers forever. Here's what we see in our simulation:

• Grade of A = 436.
• Grade of B = 503.
• Grade of C = 695.
• Grade of D = 1,202.
• Grade of F = 4,226.

Now, marketers think they can "fix" this problem. By initiating a loyalty program, or by simply dazzling the customer with outstanding marketing programs, we're told that marketers and vendors can "retain" your best customers.

So, let's assume that you can do a better job of retaining these customers. In cells C5 - G5, enter the value "1.30". This means that we're going to do a 30% better job of retaining customers, due to a loyalty program that does a spectacular job of retaining customers. What does the distribution of customers look like after five years?

• Grade of A = 1,047.
• Grade of B = 742.
• Grade of C = 756.
• Grade of D = 1,110.
• Grade of F = 3,406.

If you can develop a loyalty program that somehow increases retention rates by 30% per year for each of five years, you can make a difference.

Good luck with that!

It is more common that new marketing efforts, as long as existing programs are being executed reasonably well, will lift retention rates by maybe 5%. So plug the value "1.05" into cells C5 - G5. Now take a look at how customers migrate over time:

• Grade of A = 510.
• Grade of B = 543.
• Grade of C = 717.
• Grade of D = 1,199.
• Grade of F = 4,093.

Look at that! You improve retention rates by 5% a year, every year, and you basically get nowhere, do you? A 30% increase by year, every year, makes a significant difference, but is virtually impossible to achieve.

So, if you want to add an additional 500 customers at a Grade of "A", how are you going to do it? Your thoughts?

Open Your Spreadsheets: Increased Advertising

Let's get overly simplistic here, but let's do so in order to prove a point. Open your spreadsheet! (contact me for a copy).

In the old days of cataloging, if you didn't advertise with a catalog, you didn't get sales. In the modern world of e-commerce, if you don't advertise, you still get sales. This is called the "organic percentage", the percentage of business that happens regardless whether you advertise or not.

Let's assume that 50% of the retention rate of existing customers happens regardless whether you advertise or not.

Now, let's say that you want to increase your overall advertising budget by 20%. In old-school marketing, there's a rule of thumb ... a 20% increase in advertising yields a 10% increase in business.

If half of the business is organic, then we can only impact the other half of the business with marketing. So a 20% increase in marketing to existing buyers yields a 10% increase in business on the half of the business impacted by advertising, yielding a 5% increase in volume.

So, open your spreadsheet, and look at demand over the next five years.

• Year 1 = $75.9 million.
• Year 2 = $70.4 million.
• Year 3 = $66.7 million.
• Year 4 = $64.4 million.
• Year 5 = $62.9 million.

Now, let's increase the advertising budget for one year by 20%. We need to change cell C5 from 1.00 to 1.05. If we only change our advertising strategy for one year, we see the following outcome:

• Year 1 = $79.0 million.
• Year 2 = $72.0 million.
• Year 3 = $67.8 million.
• Year 4 = $65.1 million.
• Year 5 = $63.4 million.

You get a $3.1 million dollar improvement in year one, and you get an additional $3.9 million in improvement in years two through five.

This is one of the things you simply cannot see with your standard web analytics package or sales attribution model or matchback algorithm.

Online Marketing Simulations can help you see the short-term and long-term impact of your marketing decisions. Don't you think your CEO (or CFO or CMO) wants to know this information? These are the kind of projects I routinely work on for CEOs, CFOs, and CMOs.

Exercise For You: Increase retention for five years by 5% ... type 1.05 into cells C5 - G5. What is the impact of spending more in advertising across five years?

Empty Calories: Open Your Spreadsheets!

Pull out your spreadsheets, folks (e-mail me for a copy).

Please enter the value "0" in cells B101 - B580.

Now, enter the value "10,000" in cell B397. These are new customers that are acquired via low price points. In this simulation, we acquire 10,000 customers per year at low price points.

Next, enter the value "10,000" in cell B395. These are new customers that are acquired via higher price points. Look at how your new business evolves in a manner that is quite different than when you are exclusively acquiring customers from cell B397. You have far more "A" customers, you have customers who purchase at higher price points, you have a $3.8 million dollar business instead of a $2.8 million dollar business.

Direct marketing has become a game of promotions and discounts. We seek to optimize our business based on conversions, and in order to maximize conversions, we have to offer 20% off or free shipping or gifts with purchase or great deals on inexpensive items.

These two simulations illustrate how these "empty calories" impact the business, over time. We're much better off putting veggies in our bodies than snack foods and cookies.

Buy the book, Online Marketing Simulations, on Amazon.com!

Change In Metrics: Open Your Spreadsheets!

Online Marketing Simulations are designed to illustrate to the marketer the long-term impact of short-term decisions.

So, let's open up our spreadsheets (e-mail me for your own copy).

Take a look at cells G10 - G25. This is the forecast for the business in Year 5, given current projections. Let's look at a few key cells.

• G16, Orders per Buyer = 1.615.
• G17, Items per Order = 2.424.
• G18, Price per Item = $65.80.
• G21, Customers With Grade Of 'A' = 58,417.

Now, let's make one small change. Let's assume that for just one year, in Year 1, customer retention improves by 20%. Enter the number 1.20 into cell C5. Now look at how all of the metrics change, in Year 5.

• G16, Orders per Buyer = 1.629.
• G17, Items per Order = 2.424.
• G18, Price per Item = $66.58.
• G21, Customers With Grade Of 'A' = 60,480.

Four years after the improvement, key metrics are, in many cases, changed.

Now, what do you think will happen to your business, long-term, when you give away the farm with free shipping and 25% off of every order?

Run your own Online Marketing Simulation to find out. Buy the book at Amazon.com!

Customer Acquisition: Open Your Spreadsheets!

Let's run another simulation, one similar to the one we ran last week when evaluating customer loyalty.

Open your spreadsheets (e-mail me for your own copy). Using the customer acquisition index row (C6 - G6), enter increases in customer acquisition that yield a business that is generating $80,000,000 in sales in Year 5.

There are many solutions that get you to the same answer. Share your simulated results in the comments section of this post.

And if you want to purchase the book, click here!

Customer Loyalty: Open Your Spreadsheets!

Here's one for those of you who have been following along with your own spreadsheet (e-mail me for your copy).

Quiz: Using the customer retention index line (cells C5 - G5), figure out how much you have to increase customer retention in order for this business to hit $80,000,000 in Year 5.

Use the comments section of this post to outline your solution. There are many different solutions that get you to the same answer.

Buy the book here, if you are so inclined!

OMS and Ad Curves

By now you are using Online Marketing Simulations (book, kindle, digital download, contact me for a free spreadsheet, or hire me) to understand how customer behavior evolves over time. You are probably excited about some of the unique ways that customers behave, and you probably know a lot more about how to grow your business for long-term success.

Now, you probably want to know how much you should invest, in order to maximize your opportunity, right?

Here's where "Ad Curves" come into play. Click here for a brief article about Ad Curves.

When I am working with a CEO, CFO, or CMO, I combine the results of an Online Marketing Simulation with Ad Curves, yielding the optimal strategy necessary to yield profitable long-term success.

If you are managing e-mail marketing, paid search, or print marketing campaigns, you'll appreciate the insights gained by combining Online Marketing Simulations with Ad Curves!

OMS: Decomposing A Disaster

Time for everybody to pull out their sample OMS worksheets for an exercise (e-mail me for a copy)! And if you haven't secured your copy of Online Marketing Simulations (the book is a perfect Holiday stocking stuffer), you can buy the book via three sources:

1. Via Amazon.com, $19.95.
2. Via Amazon Kindle, $4.99.
3. Via Digital Download at Lulu, $4.99.

Now, back to our regularly scheduled discussion. Open up your copy of the spreadsheet, and take a look at cells C18 - G18. What do you observe?

The average price that a customer is paying, per item, is decreasing over time. In fact, during the next five years, the average price trend is forecast to decrease by about 9%. This accounts for half of the reason why sales are dropping like a rock.

Look at cells C16 - G16. Even though prices are dropping, customers are not ordering more often. One might intuitively think that as prices drop, customers would become more "loyal", right?

Look at cells C17 - G17. Even though prices are dropping, customers are not ordering more items per order. One might intuitively think that as prices drop, customers would be willing to buy more items.

These are simple concepts ... prices, items, orders. And yet, combining simple concepts with Online Marketing Simulations allow you to see a forth-coming catastrophe.

So, I ask you the following question. Can you use Omniture, Coremetrics, Webtrends, Google Analytics, or any other software application to provide you with a five-year view of where your business is heading? If not, give me a holler!

Ripple Effects and Cyber Monday

One of the reasons we run Online Marketing Simulations (Book, Kindle, Digital Download, Hire Me) is because we want to understand what I call "Ripple Effects".

We're all familiar with Ripple Effects, right? Our economy collapsed based on the actions of a relatively small number of players, folks who did things that rippled through our economy, one domino at a time.

You'll use Online Marketing Simulations to understand, for instance, how Cyber Monday discounts and promotions ripple through your customer ecosystem.

Say you offered customers 15% off plus free shipping during Cyber Monday 2008. You now have one year of data to plug into your simulation. You'll get to see how customers who took advantage of this generous promotion behaved.

• Did these customers ever purchase full-price merchandise again?
• Did these customers ever pay for shipping and handling again?
• Did these customers ever purchase anything again?
• Did you convert full-price customers to discount hounds?
• Did you change the type of merchandise that the customer now prefers (i.e. low-price-point items)?

And you will get to see how changes in customer behavior ripple through your ecosystem. If your Cyber Monday promotions converted customers to low-price-point items in the future, then you'll see that high-price-point items are not selling as well, resulting in changes in merchandising strategy, changes that impact gross margin in the future, requiring more items to be sold, requiring more promotions to move items, further lowering gross margin ...

You get the picture!

You can simulate all of these things. You can plug in a smaller number of full-price buyers on Cyber Monday instead of a high number of promotional Cyber Monday buyers, and then see how this ripples through your business over the next five years. Pay close attention to the merchandise that sells in the future. Pay close attention to the discounts and promotions you'll have to give away in the future.

This is a great way to use an Online Marketing Simulation!