December 10, 2008

Examining data to make circulation decisions

Does the sun revolve around the Earth or the Earth orbit the sun? This question challenged scientists centuries ago. A similar puzzle faces direct marketers today: Do circulation decisions begin with the catalog or the customer?

Since the first direct marketer faced the decision of whom to mail or not mail, circulation managers have lived in a catalog-centric, or vertical marketing, world. In this world, marketers are forced to choose which subset of customers should receive a particular catalog and then repeat the process for each subsequent catalog. Marketers who utilize this strategy consider their catalogs “the center of the universe.”

This approach worked fine for decades, but it no longer provides satisfactory — and certainly not optimal — circulation decisions. Customers can simultaneously have catalogs with the same brand/title on their coffee table, while receiving e-mails with similar offerings. This proves that vertical circulation approaches don't adequately measure the interrelationships between catalogs and e-mails.

Marketing analysts have been unsuccessful in modeling revenue cannibalization between catalogs and across e-mails. Catalog and e-mail circulation decisions are not truly independent, and they should be considered together when making circulation decisions. If you extend this concept to high volumes of catalogs and e-mails active at the same time, especially during the busy holiday season, it is easy to see how a customer-centric, or horizontal marketing, perspective can add value to the decision making process.

With the advent of CRM initiatives, more attempts have been made to place the customer as the rightful center of the universe.

There have been several new developments to help marketers make horizontal marketing decisions. Customer profit scoring has become a common performance metric to compare customers both within and across catalogs and e-mails. Another advance is the revenue cannibalization model, which estimates the revenue impact of mailing similar content catalogs or e-mails in close proximity to the same customer. Additionally, the advertising saturation model has been created to show marketers the relationship between marketing spending and revenue. These tools allow marketers to make decisions that will have the greatest benefit to their company.

Going beyond vertical and horizontal marketing approaches is known as matrix marketing. With matrix marketing, all customer and offer combinations are considered for their incremental profitability. When using this model, decisions on which combinations to mail are derived after considering every combination of customer and offer.

Moving from vertical or horizontal to matrix marketing is not easy without the right consulting and tools. Fortunately there are tools available to take you into horizontal marketing and eventually matrix marketing. Marketers can now use tools that allow them to search through customer, catalog and e-mail data to examine each possible decision and then execute its selection criteria. Utilizing matrix marketing tactics will allow marketers to remove wasteful circulation, make better circulation choices, and properly balance investment and profit-making decisions. Better circulation decisions begin with both customer and offer, not one followed by the other.

Randy Erdahl is president of Decision Intelligence Inc., a marketing analytics firm. Randy can be reached a randy.erdahl@dii-online.com.