It’s one of the great mysteries of modern multichannel marketing: Where are the customers and orders really coming from? If we as multichannel merchants knew the answer, we could build optimal contact strategies, spend our budgets in the most-efficient ways, produce the greatest returns with the perfect marketing mix, and eliminate wasted efforts in the face of ever-rising costs. But we don’t know the answer. We think we know, but every day more and more complexities muddy up the waters.
An order’s an order… why does it matter?
In many ways, it doesn’t matter where an order came from, as long as, at the end of the year or the end of a season, customer counts are where they need to be, orders and sales are where they should be, and profits are where they have to be. The argument can be made that as long as return on investment is acceptable and the business is growing as it should, the origin of the order is irrelevant.
Still, direct marketing is a numbers game; each campaign a justification of its own existence. A catalog is mailed, orders come in, and sales are generated. What’s the response rate? What happened to average order value? What was the contribution per order? These were the questions of the day just five or six years ago.
Today the typical multichanneler likely pushes at least a half-dozen e-mail campaigns over the “active life” of a given catalog mailing. Efforts are made daily to improve search engine placement and to target pay-per-click advertising efforts. Affiliate programs, space advertisements, and retail point-of-purchase offers each drive incremental awareness and, hopefully, orders. If business decisions regarding the mailed catalog were made solely on the basis of “tracked orders,” campaigns would be cut left and right. The catalog is no longer a stand-alone component; it’s the nucleus of the multichannel marketing mix.
There are literally dozens of individual analytics that can be performed on marketing and response data across the various marketing channels used by today’s multichannel marketers. Each requires stringent data capture. For now, rather than focus on matchbacks and response analysis and order-level analytics, let’s look at three pieces of higher-level analysis that every multichannel marketing company should be monitoring across all channels: contribution per order, customer retention, and customer migration.
Contribution per order
For multichannel marketers, contribution per order is, quite possibly, the über metric. It’s so powerful because of its all-encompassing nature. No other metric accounts for response rate, average order value, margins, and advertising cost in a single datum point. It’s also easily compared with other key benchmarks regarding required profitability, and when negative, it doubles as cost to acquire or reactivate a customer.
The term “contribution” in this metric generally specifies contribution to overhead and profit, though it can be made to represent any form of contribution you desire. Once this figure is established, you can compare the figure with average order value to indicate a “contribution percentage,” the percent of each order that is being contributed to overhead and profits, on a per-order basis. Then you can compare this percentage to the income statement as a measure of program or campaign profitability against corporate goals.
Contribution per order is based on contribution to profit, which is calculated as:
- net sales
- minus cost of goods sold
- minus shipping and handling expenses
- plus shipping and handling revenue
- minus advertising costs
- minus overhead and G&A costs
- equals contribution to profit
To get the contribution per order, all you have to do is divide the contribution to profit by the total number of orders.
And by dividing the average order value by the contribution per order, you get a contribution-per-order percentage that you can compare with the income statement and overall profitability goals. Based on your business model, different segments of the buyer file will likely be required to produce different levels of contribution for different campaigns and promotional channels.
Contribution-per-order analysis becomes especially powerful when it is conducted both overall and at the individual channel levels and is used as a benchmark for future campaigns. Based on your income statement, what percentage contribution do you require to cover the variable costs, to pay for overhead, and to meet your profitability goals? Next look at your annual overall contribution per order. Now how do your seasonal campaigns index against that annual mark? What do e-mail campaigns produce? And catalog mailings?
Contribution per order also aids in driving customer acquisition and customer reactivation decisions. If a segment or campaign produces a loss instead of contribution, you can look at that investment in terms of an allowable acquisition or recapture expense. If you know you can afford to spend $10 to acquire a customer by catalog mailings this year and have him pay back the initial investment in 12 months, a negative contribution or loss per order not exceeding $10 would be acceptable. But knowing how much you can spend on acquiring a customer is a function of retention analysis.
Customer retention and migration
Getting to an acceptable acquisition cost requires an understanding of how many customers are repurchasing over a specified period of time, generally 12 months, in addition to how much they are spending on average and how many times they are being contacted.
Retention analysis answers two important questions: 1) are the customers you’re acquiring good ones (meaning they stay customers for a long time), and 2) is the contact strategy you’re using maximizing the maintenance of your customer file (in other words, are you contacting your customers enough)?
Migration analysis pays particular attention to how customers interact with your business over the course of time. Once a catalog buyer, always a catalog buyer, and only a catalog buyer? Maybe, but probably not. Migration analysis aims to examine how customers interact with your business over time and should be examined in conjunction with an analysis of the overall contact strategy.
The goal is to gain insights into customer behavior and to then overlay that behavior with a communication plan. Many multichannel merchants today believe that customers acquired online don’t need print catalogs. They may be right — but they also may be leaving significant revenue on the table. They can’t know for sure without comprehensive testing. The pinnacle of this analysis is to link a communication plan to a set of customer behaviors by channel and to increase retention by communicating with customers in the right channel with the right message at the right time.
Setting up a retention and migration table shouldn’t be difficult but may be somewhat time consuming. The chart at the top right of the page is an example of one such table.
To conduct the analysis, identify all of the customers from period A, the prior period, by channel. Your choices could include catalog, Web, retail, and multichannel, for example, but should represent the customer’s purchase(s) only in the prior period. From that customer set, tap into your database to identify the customers who have come back in period B, the current period, and in which channel(s) they purchased. For the current period you’ll also want to include columns for new-to-file customers, reactivated customers who hadn’t purchased in the prior period, and inactives, who had purchased in the prior period but not the current. Each cell in the table should include two pieces of data: number of customers and total sales dollars.
Once complete, this table illustrates how well your contact strategy performed at bringing back your most recent customers or how well you retained your active buyer file. (For the sake of benchmarking, the average business-to-consumer cataloger will see about 40% of its 12-month file return the following year.) Also, you’ll see how your customers migrated from channel to channel and the spending habits that were associated with the shifts.
Using the big three to build a better plan
The greatest challenge isn’t in compiling the data; it’s in using the data. As with all other analysis, the payoff comes when a complete view is taken of the information.
Conduct the contribution-per-order analysis on all campaigns in all channels with as much available, trackable, and allocated data as possible. Know what each campaign produces individually, and then set out to create a contact strategy that maximizes annual or seasonal contribution per order, increases overall customer retention, and fosters multichannel migration. Testing communication plans is a long-term venture, but the benefits cannot be denied. With discipline, every multichannel marketer can build the optimal set of contact strategies for its various customer segments.
And ultimately, even as order source is more and more difficult to determine, the overall effectiveness of a marketing campaign can still be highly profitable.
Steve Trollinger is executive vice president of J. Schmid & Associates, a Mission, KS-based direct marketing agency and consultancy.