How Many Customers Should Receive My Retail Catalog?

If you are lucky enough to work in a retail environment that gives the database marketing professional the autonomy to determine retail circulation depth, you're probably using mail and holdout groups to aid your decision.

Here's how many folks approach the subject.


Step 1: Review last year's mail and holdout results. Let's assume you had a holdout group of 100,000 (yup, I said a big number like 100,000 ... if your customer buy more than three times a year, you'll end up needing a big holdout group). Compare performance between the mailed group and the holdout group.

• Mailed Group: Total = $15.00. Retail = $9.00, Online = $4.00, Phone = $2.00.
• Control Group: Total = $12.00. Retail = $7.00, Online = $3.00, Phone = $2.00.
• Incremental Lift: Total = $3.00. Retail = $2.00, Online = $1.00, Phone = $0.00.

We usually look at the incremental lift, in dollars, to decide if the mailing made sense or not. This time, we're going to look at the fractional change, and apply the fractional change to each of our segments.

• Fractional Change = $15.00 / $12.00 = 1.25.

Step 2: Apply the fractional change to each segment. Now, you're likely to have a half dozen statisticians tell you the twenty-nine assumptions you're violating. And they're right. But we're not managing clinical trials for Vioxx, are we? No, we're dealing with something less serious. So, we jump into Excel, and we look at what each segment is expected to spend during the three weeks this retail catalog is active. Once we have the estimate, we apply the fractional change to each segment. Then, we subtract the difference, yielding our expectation for the mailing.

• Segment 1 Expected Spend = $20.00.
  
• Fractional Change = $20.00 * 1.25 = $25.00.
• Expected Catalog Performance = $25.00 - $20.00 = $5.00.

• Segment 2 Expected Spend = $12.00.
• Fractional Change = $12.00 * 1.25 = $15.00.
• Expected Catalog Performance = $15.00 - $12.00 = $3.00.

• Segment 3 Expected Spend = $4.00.
• Fractional Change = $4.00 * 1.25 = $5.00.
• Expected Catalog Performance = $5.00 - $4.00 = $1.00.

Step 3: Run a profit and loss statement against each segment. Depending upon the cost of the catalog, and your flow-through rate from sales to profit, it is likely that only segment one, and maybe segment two, will be profitable.


Step 4: Apply your file forecast to each segment. Multiply performance by file counts. Now, you have a sales and profit forecast for your retail catalog!


Step 5: You can use the relationships in Step 1 to allocate expected sales by channel.


Again, statisticians will have your hide for using such a sloppy sales forecasting process. They'll criticize your assumption that each segment performs at the same level of fractional change. If you and your statistician disagree, go ahead and test within individual segments --- though my experience suggests this strategy isn't fruitful.

Retail Catalog Marketing

Retail catalog marketing is an inexact, imprecise science.

Let's assume that a major American retail brand sends you a catalog on April 1. Let's also assume that your small business purchases from this major American retail brand on the 15th of every month, regardless of marketing activity.

Did the catalog cause you to purchase merchandise?

The answer is probably "no".

The catalog may have influenced the merchandise you purchased. The catalog may have caused you to spend more than you normally would have. The catalog may have caused you to spend less than you normally would have.

But you would have purchased merchandise anyway, no matter what. You always buy something from this brand on the 15th of the month.

Now let's pretend you are the Database Marketing Executive at this major American retail brand. Your job is to measure the effectiveness of this retail catalog marketing effort. Using the tools and techniques available to the database marketers, let's see if you would decide to mail this sample customer future catalogs.


Methodology = Mail And Holdout Groups: Do Not Mail This Customer A Catalog

This is a classic direct marketing strategy, practiced for more than a century (and maybe for centuries). When measuring effectiveness by mail and holdout groups, we'd learn that this customer would purchase regardless of catalog marketing. Therefore, the segment this customer belongs to is not considered a "responder".


Methodology = Pattern Detection: Do Not Mail This Customer A Catalog

Pattern detection suggests that this customer buys on the 15th of every month. The database marketing executive learns that marketing doesn't influence this customer. Therefore, this individual customer would not be considered a responder.


Methodology = Matchback Analytics: Mail This Customer A Catalog

Matchback analytics, the kind offered by major list processing corporations, co-ops, and data compilers, match purchases within a window of time to a marketing activity. Let's say that the matchback window is three weeks (oftentimes, the matchback window is something silly, like ninety days or six months). Any retail purchase within three weeks of the catalog mailing is attributed to the catalog mailing. Therefore, this individual customer would be considered a responder. Here's a little secret. Matchback analytics grossly over-state the effectiveness of most retail activities. You've been warned!!


Methodology = Brand Marketing: Mail This Customer A Catalog

All too often, retail catalog marketing falls into the brand marketing arena. In other words, a budget is set, say $1,000,000. The database marketing team is asked to mail a million customers, to use up the entire budget. The database marketing team executes the strategy. In this case, if our sample customer buys every month, the customer is a "good" customer, and will receive this catalog. This is the most common scenario in retail catalog marketing --- the CMO determines a budget, the CMO determines the marketing tactics that will be employed, and the database marketing executive picks the best customers for any given strategy. In some instances, rogue database marketers set up tests to determine if the strategy actually worked or not. I've executed this rogue strategy myself --- I wanted to understand how much money my company was losing. For the most part, however, the effectiveness of the mailing isn't even measured.


Retail catalog marketing is an inexact, imprecise science. The corporate culture, the quality of information captured in the customer database, and the measurement technique used by the database marketing team determine whether you will receive a retail catalog from your favorite American retail brand.

How does your company execute measurement of retail catalog marketing activities?