Shocking Multichannel Profitability Findings

The blogosphere tells us we're supposed to use compelling subject lines if we want to get your attention.

You should run this query against your own customer information. You probably won't find this information on your corporate customer information dashboard. Click on the image to enlarge it. Here's how we obtain the data necessary to run the query.

Query, Step 1: Identify all customers who purchased during 2006.

Query, Step 2: Sum 2006 demand/sales, sum 2006 channels purchased from, for each customer.

Query, Step 3: For the customers in Steps 1-2, sum 2007 demand/sales, also sum 2007 advertising expense allocated to each customer.

Query, Step 4: Bucket each 2006 customer into one of five quintiles, based on 2006 spend.

Query, Step 5: For each combination of total channels purchased from in 2006, and demand/spend quntile in 2006, calculate the average 2007 demand/sales for that segment, average advertising spend, and average profit.


What Do The Trends Suggest?

Learning #1: Multichannel customers are not the best customers. Would you rather have a customer in the second quintile who bought from one channel, or a customer in the third quintile who bought from three channels? Historical multichannel activity is not nearly as good an indicator of future demand/profitability as is historical spend.

Learning #2: Multichannel customers are not necessarily the most profitable customers. Why? Because each additional channel a customer purchased from in 2006 resulted in an incremental increase in advertising to that customer in 2007. In fact, take a peek at the information. Customers from 21% to 60% (40% of last year's customer file) are less profitable in 2007, in spite of having purchased from more channels in 2006. Many multichannel marketers over-advertise to the "best" customers, actually reducing corporate profitability.


Recommended Strategy: If your brand has customers who exhibit this behavior, this requires a re-think of your multichannel marketing strategy. Do you send catalogs, postcards, e-mail campaigns, RSS feeds etc. to the same multichannel customer, announcing the same sales event, or do you cut back on your ad-spend across this audience, focusing on finding new customers that generate future sales? I recommend the latter.


If you don't believe what is illustrated here, run the query against your own customer data. See if you identify similar trends. If you don't host your own customer database, have the co-op or database organization that hosts your database run this query for you.

Tell us what you learn!

Multichannel Customers And Advertising

Please click on the image to enlarge it.

The most popular question asked of me is "When can I stop advertising to or reduce advertising to a segment of customers?"

Often, catalogers and retailers are unwilling to execute tests that will answer this question, opting instead to maximize short-term sales.

If you fall into that camp, try this:

• Identify any customer who purchased from your brand in the past twelve months, and purchased at least ten times (since the first purchase).

• Sum how many of the ten most recent purchases occurred, by channel.

• Graph the frequency of occurrence, using one channel as the x-axis.

In the image at the start of this post, there are three distributions.

• The U-Shaped Distribution occurs when your customer prefers shopping from one channel. Almost all customers buy from, say, the online channel, or the catalog channel, and tend to purchase in equal rates. When this happens, nearly half of your audience is eligible for a reduction in advertising, as nearly half of the audience buys online, and may be in the habit of shopping online without the need for catalogs.

• The Bell-Shaped Distribution occurs when customers swap back and forth, between channels, not exhibiting a preference for any one channel. In this case, you probably need to continue catalog advertising.

• The Skewed-Shape Distribution happens when customers generally shop in just one channel, and show a clear preference for just one channel. This frequently happens in online/retail situations, where customers inevitably shift their preference to the retail channel.

If you want to reduce advertising (catalog advertising in particular), you don't want to see the bell-shaped distribution. When customers switch back and forth between channels, they are likely to be semi-dependent upon catalog advertising. Instead, you want to see a lot of customers who are 100% or nearly 100% loyal to the online channel. This is the audience that could stomach a reduction in advertising, without adversely impacting the top line.