Six actionable metrics and numbers

Oct 01, 2008 9:30 PM  By

It’s amazing just how over-the-top some companies are able to get with numbers. Numbers to explain marketing, numbers to justify merchandise, numbers to detail finance, numbers to explain the Web, the catalog and so on.

Sure, numbers are critical in the multichannel marketing environment; they are paramount in dictating the direction of the business. But “analysis paralysis” is a real concern for many companies.

So whether yours is a company with so many numbers you can’t decide where to start, or a business that is pulling whatever data is available and “making it work,” here are six metrics beyond response rates and average order value that you should consider for evaluating the performance of your multichannel business.

  1. Contribution per…

    PERHAPS THE MOST IMPORTANT SINGLE METRIC in multichannel marketing, contribution per “X” accounts for circulation quantities, response rates, orders, average order values, sales, margins, fulfillment and ad costs. It is among the most comprehensive metrics in the multichannel environment and, as such, is extraordinarily robust at several different levels.

    Often, contribution analysis will get a multichannel marketing company very close to understanding EBITDA at a variety of levels. EBITDA — earnings before interest, taxes, depreciation and amortization — are the profits upon which all business successes are judged. In longhand, contribution calculations determined by subtracting all costs (cost of goods, returns, cancellations, advertising costs, shipping costs, markdowns and discounts) from all revenue (sales and freight or shipping income collected).

    And once you build the calculation, you can apply it to a variety of levels within a business, including contribution per order (contribution for every order processed), contribution per customer (contribution for every customer who ordered), or contribution per piece mailed (contribution for every catalog or e-mail circulated).

  2. Acceptable acquisition cost

    WORKING HAND-IN-HAND WITH CONTRIBUTION PER X is acceptable acquisition cost, which is a metric you have to understand in today’s environment where there are so many different acquisition methods to choose from. Ultimately, the marketer should strive to understand acceptable acquisition cost at the individual channel level.

    For instance, acceptable acquisition cost for most marketers is based on a 12-month payback period, meaning that any new customer acquired should pay off his or her acquisition by the end of the first 12 months of marketing as an existing customer. If your data is reliable enough, you can start by pulling all of the customers who, say, ordered for the first time ever two years ago.

    Next, look at the purchase activity of that group of new customers the following year. What percent return? What is the average response rate per campaign they are circulated? How much do they spend on average when they do return? What’s the average annual orders per customer when they come back in year two?

    With this data, your objective is to calculate the average contribution per customer (not order, we’re looking at what we can spend to get a customer in this case) last year for all of the original customers acquired two years ago.

    If your business acquired 1,000 new customers two years ago, and after one full year of marketing efforts they produced $10,000 in contribution to overhead and profits, then you made $10 per customer in the first full year of marketing. A 12-month payback requirement would say that you could spend $10 to acquire that customer in the first year and have them be profitable after the first campaign year.

  3. Online order conversion

    SIMPLY PUT, WHAT PERCENT OF VISITS TURN INTO ORDERS? Beyond the simple calculation, though, is an understanding of conversion at a deeper level.

    Looking at overall site conversion and using it as a baseline against which you can index specific areas of the site is where the value lies. Paying attention to how e-mail campaigns, product pages, affiliate referrals, search programs, banners and specific landing pages convert vs. the overall average conversion is key to understanding whether certain products, promotions, messages and programs are producing the most economical results.

    Taken a step further, analysis that looks at the value of the “next purchase” from converted customers can also tell you not just which vehicle most efficiently produces the most initial customers, but also which vehicles, promotions, products or category pages are producing the “stickiest” customers.

  4. Comparison of two proportions

    THE NEXT TIME SOMEONE LOOKS AT YOU IN DISBELIEF as you explain how your test offer of $2 shipping outperformed free shipping at bringing in new customers, smile when you pull this statistical test out of your back pocket. Comparison of two proportions allows you to understand the significance in the difference between two proportions, or percentages, between two samples.

    While there are statistics available to look at comparisons of more than two proportions, it is often important to know the difference between the response among the best and second-best, or best and worst efforts in head-to- head tests. There are a variety of resources on the Web for how to run the statistical test.

  5. Item winners

    GENERALLY, ITEM WINNERS ARE ANALYZED as a part of the square-inch analysis, or merchandise analysis process. Item winner status is calculated by dividing the contribution-to-overhead-and-profit figure discussed earlier at the item level into the net sales for that item.

    This number would then be compared to your company’s contribution requirements for reaching EBITDA goals. If your company requires 15% contribution to cover 8% overhead and 7% profits, then an item would need to produce 15% contribution to be considered “a winner.” You may want to adjust the requirements for new items but the principles are the same.

    Once the figure is calculated at the item level, you can roll up data to look at category performance, price point performance, vendor performance and more, always shooting for a 70% to 80% winner percentage within a grouping. If, for example, a category produces 85% winners, the data is suggesting that you can add items to the assortment within that category, and so on.

  6. Items per thousand orders

    IN THE CATEGORY OF SMALL BUT MIGHTY, items per thousand orders (or IPTO for short) is the number of items sold in a category, price point, etc. per thousand orders processed. Using numbers: If you sold 5,000 widgets this year on 200,000 orders, your IPTO would be 25.

Big deal, right? The power of IPTO shows up when you begin to compare year-to-year stats. Many marketers have cut product that has “lived its life” because they see in the numbers that units are decreasing over time. But an eyeball approach to unit trends can be troublesome because pure unit measures don’t consider circulation changes that can have drastic effects on sales.

As a general rule, a circulation cut will produce fewer orders. Consequently, one would assume that fewer orders would produce fewer overall units. This is where IPTO comes in. Let’s say that last year you mailed 50% more catalogs and sold 6,000 of those widgets we talked about earlier. At first blush, you’d think widget sales were plummeting; nobody likes your widgets anymore!

But what if you knew there were 300,000 orders last year? Suddenly, those 5,000 units this year are looking pretty good. Why? Because at 25 IPTO this year, you’re selling 25% more widgets per thousand orders than the 20 IPTO last year. Instead of cutting that item, you should be focused on understanding why it’s gaining in popularity and figuring out ways to get more items like it.

There you have them: Six key metrics that will give you a solid pulse on your business. With these you’ll understand what you’re making, what you can spend, what produces the stickiest customers, which offers work best, which items work best, and whether or not your merch is really doing better or worse.

Steve Trollinger is executive vice president of J. Schmid & Associates, a catalog consultancy based in Mission, KS.