Do You Use Algebra In Your Everyday Life? How About Multichannel Forensics?

You probably recall your teacher telling you that you'd use algebra in your everyday life. That seemed like a stretch, especially when trying to solve the equation 4x - 3 = 13.

Kids and adults may feel the same way when taught Multichannel Forensics. Yet, there are all of these interesting things happening in our everyday lives that are well explained by this framework.

Circuit City: You're responsible for selling compact disks. Not many people buy these things anymore. Are customers transferring sales to other departments in your store? Do they still purchase other products in your store? When is the transfer so great that sales per square foot drop below acceptable levels? The same theory can be applied to non-HD 27" tube-based televisions.

Toyota: Are Corolla customers in equilibrium with Hybrid cars? And if so, is the rate increasing to the point where customers will transfer out of one category, into Hybrids? Is there a price point ($5.00 gas) that accelerates transfer?

Safeway: When a customer purchases organic merchandise, how does behavior change? Does that customer exist in equilibrium with traditional brands, or does the customer isolate herself in organic foods? And if the customer isolates herself in organic foods, what does that mean for the products she used to purchase, especially if more customers transfer out of traditional brands?

Comcast: Within the course of ten years, many Americans chose to trust Comcast with HD, Digital and Basic Cable, a DVR, their Telephone Service, and Broadband Internet. Can Comcast forecast a five year sales trajectory by product line, and are there enough new customers available to sustain long-term growth?

The Marketing Digital Divide And The Catalog Industry

In the first quarter of 2007, sales of music compact disks declined by twenty percent verses last year, as consumers continue to abandon album-based compact disks in favor of ala-carte purchases/sharing of digital music files.

The music industry strongly believes that free file sharing is responsible for the decline in CD sales. The labels are flexing their muscles where they can, to maintain their system of monetizing music even if it means heavily penalizing a new channel where music fans are enjoying music.

The crash of television and radio, the ascension of the internet, and the convenience of the iPod changed the music industry forever. Multichannel Forensics suggest that consumers "transfered" their behavior from CDs to MP3s during the late 1990s through the past few years.

Once consumers landed in a new world of music, they stayed there. In Multichannel Forensics, we call this "isolation". No matter how hard the music industry tries to bring consumers back to the old method of monetized music, the effort is futile. Consumers have moved on.

As consumers, we have a unique, God-given ability to identify trends in the marketplace. We can literally see the future, and react accordingly.

As business leaders, we have a unique, God-given ability to identify trends in the marketplace. We can literally see the future. However, we don't react accordingly. Instead, we dig in our heels, and demand that consumers and business partners come back to our way of thinking.

My beloved catalog industry falls into this category. Our customers can see the future, and are anywhere between 20% and 80% of the way toward evolving their behavior. At this time, customers are generally in "equilibrium" --- the state where they go back and forth between channels. They use catalogs and purchase over the telephone. They use catalogs and purchase on our websites. They ignore our marketing activities, use Google, and purchase on our sites. The combine our marketing activities with Google, and purchase on our sites.

Google recognizes this, and gobbles up properties that allow them to have an end-to-end marketing relationship with our future customers. Their version of an end-to-end marketing relationship does not include paper.

Over the next five years, our catalog customers will leave "equilibrium" mode, shifting to "transfer" mode. They will define a new way of interacting with brands, a new way of shopping. When that happens, what will become of what has been known for more than a hundred years as "the catalog industry"?

We can dig our heels in, and continue lauding the importance of sending paper to our customers as a way of generating sales. In this process, we must fight postal reform.

We can also give up. We can sell our businesses, getting out before big changes happen.

Or we can build a five-year plan for the future of our industry. We can be like a pilot, who takes an airplane down from 30,000 feet to a gentle landing. We can work with our customers as we reduce our dependence upon catalogs, building an infrastructure that allows customers to pull information from us.

We must thoroughly evaluate how Zappos, Endless, Piperlime, Blue Nile, and Amazon drive sales without paper. We need to emulate what they do well. We need to use our experience to capitalize on what they don't do well. We must chart a path to the future.

Folks in the music industry are actively talking about a path to the future. It's our turn to do the same. It will require a leap of faith, right over that pesky Marketing Digital Divide.

Cannibalization in the Online Channel

Earlier today, we discussed cannibalization in the catalog and e-mail marketing channels.

Cannibalization is easy to detect in advertising channels. Cannibalization is more challenging to detect in the online channel.

In e-commerce, few business leaders are willing to sacrifice sales by shutting down a website, or various merchandise divisions within a website.

As a result, we need a different tool-set for detecting if cannibalization is happening in the online channel. One way to do this is by using Multichannel Forensics.

Let's assume you sell hardware on your website. You carry three drill brands, Milwaukee, DeWalt and Skil. Management decides to carry a fourth brand, Makita. Management is concerned that Makita may cannibalize the sales of the existing brands.

One way to see what is happening, early in the process of selling Makita drills, is to look at clickstream data.

• Step 1 = Identify which customers viewed Milwaukee, DeWalt, Skil and Makita drills during the first month that Makita drills are available. In a spreadsheet, create four columns, one for each brand. Put a "1" in the cell if the customer viewed that brand of drill, otherwise, put a "0" in the spreadsheet.
• Step 2 = Repeat Step 1 for the second month that Makita drills were sold.
• Step 3 = Instead of looking at Repurchase Rates, look at "Revisit Rates" --- in other words, what percentage of customers who viewed a brand last month viewed different brands this month. Use the tools and techniques in the Multichannel Forensics PDF file to compute the appropriate calculations.

Let's assume your table migration probability table looks as follows:

Repurchase Index Portion of the Migration Probability Table
	Milwaukee	DeWalt	Skil	Makita
Milwaukee	88.0%	52.0%	16.0%	8.0%
DeWalt	33.0%	79.0%	18.0%	11.0%
Skil	14.0%	23.0%	83.0%	31.0%
Makita	10.0%	14.0%	36.0%	74.0%

Remember, there are three modes we want to understand.
*** Isolation = Repurchase Index Between 0% and 19.9%.
*** Equilibrium = Repurchase Index Between 20% and 49.9%
*** Transfer = Repurchase Index Greater or Equal To 50%.

Transfer is the most likely situation to indicate that significant cannibalization is occurring.

Let's analyze the table. Milwaukee drills are in equilibrium with DeWalt, and are in isolation with Skil and Makita. The Makita brand is not cannibalizing Milwaukee drills.

DeWalt visitors transfer viewership to Milwaukee, and are in equilibrium with Skil. The Makita brand is not cannibalizing DeWalt drills.

Skil visitors are in equilibrium with Makita. This means the potential exists for Skil customers to defect to Makita.

Makita visitors are in equilibrium with Skil. We conclude that there is competition for the customer's wallet between Makita and Skil.

After several months, the analysis would switch from an analysis of visitors, to an analysis of purchasers. Any situation where transfer occurs suggests the potential for cannibalization.

In e-commerce, we need to look at visitation and purchase data, and infer cannibalization via use of Multichannel Forensics. There are other ways to do this, however, Multichannel Forensics provides a good framework for considering whether cannibalization is truly happening.

When Businesses Die

I always find it fascinating to watch what happens to businesses that are on the decline.

Viewed differently, there are four ways that customers interact with products, brands or channels.

• Isolation Mode. Customers stay loyal to this business mode, not opting for other products, brands or channels.
• Equilibrium Mode. Here, customers are likely to try out other products, brands or channels. Usually, customers purchasing from one product area (MP3 players) are likely to purchase from another product area (computer accessories), and vice versa.
• Transfer Mode. This occurs when customers are actively switching out of one product, brand or channel (dial-up internet access), migrating to another product, brand or channel (broadband internet access).
• Oscillation Mode. While rare, customers can switch back and forth between products, brands or channels, on an alternating basis. For instance, a customer purchases a new car, and deals with the sales department. Then, the customer switches to the service department. Eventually, the customer switches back to the sales department, for a new car. The customer is 'oscillating' between channels.

Life is very interesting when businesses are stuck in or slip into 'transfer mode'. How businesses respond to this situation largely determines their success or failure.

For instance, AOL customers transfer out of dial-up internet access, but did not transfer their allegiance to AOL's broadband product. AOL management evaluates the situation, and decides to figure out new ways to monetize their business via the loyal audience they possess.

Other business models attempt different ways to combat transfer. Network television represents an interesting take on this situation. As television customers migrate out of network television to cable, and then from cable to the internet, network television counters the loss of customers by increasing how much they charge advertisers.

Some businesses aggressively recruit new customers, to make up for the customers lost via transfer. As long as new customers can be recruited in a cost-effective manner, and at a rate that is greater than the rate which customers are transferring out, the business can be successful.

Other businesses pass the cost of a failing business on to the remaining set of loyal customers, further accelerating transfer to other businesses. Airlines charge $7 for a small sandwich, or professional basketball teams charge $100 a seat to sit in the lower bowl to help recoup out-of-control salaries. When implementing these strategies, the business must be mindful that there is a ceiling, and once the pricing strategy breaks through the ceiling, the remaining loyal customers will not come back.

At the end of the day, there are a small number of things products, brands or channels stuck in 'transfer mode' can do.

• Create new products and services that customers prefer.
• Acquire more customers than are transferring out of the business.
• Change the business model and associated revenue generation strategy.
• Require existing customers to increase their spend in order to offset customer transfer.
• Reduce expenses by reducing quality, outsourcing capital, or reducing capital expenditures.
• Sell the business.
• Close the business down.

What are your thoughts on this? Are there businesses you enjoy following as they deal with the transfer of customers to other products, brands or channels? Are there examples of what businesses can do that I failed to include in my list? What are your thoughts?