Analytical Engine

As the US and the world economies encounter a downturn and firms look to scale back, Marketing is often one of the first places to face budget cuts.  Forrester reports that many companies expect to cut their marketing budgets by 3%.  But how do you maintain or grow your customer base and revenues when consumers are spending less and your message isn’t getting into the marketplace as loudly?

We think the use of online coupons deserves a harder look.  Emailing your customers and prospects with newsletters, product updates, and coupons is certainly nothing new, but it’s now well-positioned for even greater success:

• Companies are getting good at it. After dabbling in techniques like SEM and direct email, firms have gotten better at driving profitable growth from these methods, and many are increasing their focus on online advertising as a cheaper way to spend their marketing dollars. 
• Consumers want more of it. During these uncertain times, consumers plan to increase their use of coupons to save some money.  Sending these options straight to their inbox or mobile phone accomplishes that goal and positions you as a preferred provider.
• Consumers who use it are attractive prospects. Compared with consumers who only use offline coupons, Forrester reports that users of online coupon tend to have higher incomes, shop online, like to try new products, and influence peers.  Younger consumers also use coupons, and they can be a good avenue to get the word out about your product.
• More data is available to help you win at it. More firms sell marketing lists (or can help you run campaigns to get new lists), segmentation data helps you understand consumers’ preferences and desires, and syndicated data helps you understand purchase behavior.  Combining this data gives you incredible insight into consumers to tailor unique marketing messages.

You don’t just want to throw promotion dollars at existing customers to give them discounts on things they were already going to buy; rather, you likely want to use those dollars to deliver positive returns and achieve business goals - such as acquiring new customers, increasing market share, or increasing wallet share.  Doing this requires targeting offers to customers based on their stage of the customer life cycle:

1. Acquire. Coupons can be a good tool to help consumers overcome the risk associated with trying a new product; if a new product is cheaper than the one they normally use, the savings might be worth trying.  You can use them to attract entirely new customers to your firm, or to get your existing customers to try a new product line.  Targeting early adopters can also help generate buzz, as they will influence friends and family to buy the product as well.
2. Grow/Stimulate. Once you’ve acquired a customer, you want them to maintain or increase their purchases.  Two ways of stimulating usage are encouraging them to try a different variety (e.g., color, size, flavor) or showing them new uses for the same product (e.g., using Q-tips for craft projects in addition to hygiene).  In this stage, the focus should be on the marketing message, the coupon being used to help seal the deal and drive the customer to the store.
3. Manage. In this stage, your customers are steady-state users, and couponing may not be required to retain them. However, these consumers present a good opportunity to test new offers on an already loyal customer base and measure the response before using them on the general public.  You might test them using different demographics, layout, or wording, perhaps even running controlled experiments to determine which of two offers is more effective.  We’ve done some research on the use of Behavioral Economics to improve offer design, which might be helpful in performing this testing.
4. Reclaim. If customers reduce their consumption or begin to try competitors’ products, you can use targeted offers to reintroduce your product and retain them as customers.  However, depending on their needs and your product pipeline, you may otherwise opt to move back to the beginning of the life cycle and acquire them as customers of another of your products.

This strategy requires a high level of customer insight to understand preferences and stages in the life cycle.  You can gain this insight by applying segmentation schemes to your lists of customers and prospects, and by analyzing your customers’ history of purchases and coupon redemption.  Applying a rigorous testing approach will help you identify the most effective offers for each customer and stage.

Applying this framework to understanding your customers and targeting coupons will deliver several benefits, including:

1. Strong ROI potential.  Campaigns that are more effective and lower-cost, targeted at attractive customers, have a stronger potential to deliver a positive ROI.
2. Better data to analyze results. Results of online campaigns are easier to track and measure than traditional campaigns, particularly if your coupons lead customers to purchase from your own website.  Analyzing results from campaigns that involve multiple partners may require a different approach, as Vishal outlined in his earlier post on trade promotions.
3. Better customer relationships. You can use the insight you’ve gained about your customers’ behaviors, preferences, and purchase history to continually develop targeted offers.  This level of personalization will help you deliver the right offers to the right customers at the right time, and ensure that your promotion dollars are spent most effectively.

It appears that utilizing ATMs as a sales channel is not even a near future thing as we thought it was, it has already arrived.
Last Friday on my way home, I decided to withdraw some cash from an ATM of one of the larger private banks in India. When I was almost done with the transaction and was about to collect the money, there was a surprise waiting for me in the screen! The ATM offered me a reasonable amount of home loan and requested me to click a radio button written - if I want to avail or click a radio button with instruction of reminding me later if I want to think about it later or click - in case my answer was an outright no.
But then neither am I the only one, nor India the only country where it’s happening. One of our blog readers, a few continents away from my city, has already come across and availed one such offer from Chase!
Things surely are fast nowadays!

How many times one has deleted that email offering that free gold credit card or a pre-approved loan? How many times one has curtly disconnected the phone call from another tele-caller with a pre-approved check for that awesome holiday in Hawaii? In a market, where retail banks have exhausted almost all the channels to reach the target customers, ATM machines can be a powerful alternative for cross-selling.  ATM machines also provide the opportunity to reach out to the otherwise difficult to reach customers such as expats. 

So, how would it work? Almost every bank has pre-approved offers for certain customers.  The bank can load the offers for some of the pre-approved customers to the server that interacts with the ATM machines.  The moment the ATM recognizes a preapproved customer, it can show her the pre-approved offer through a blinker or an additional screen at the end of the transaction. If the customer is willing to go ahead with the offer, all she needs to do is to press “Y”.  The moment she presses “Y”, the bank gets notified and can track the lead through different mechanisms. For example, an SMS can go to the sales manager nearest to that ATM with the customer detail, who can take up the matter further.

Surely, it’s not as easy as it sounds. While the technology for such a process is available in the market, it’s still a challenge to implement it. Prediction accuracy is another big challenge.

·         It is not feasible to upload the entire set of pre-approved offers to the server.  And hence the need for a model, which can forecast with high accuracy the probability of a customer visiting a cash machine.

·         Each ATM screen on an average takes 5-7 seconds, which includes the time taken to interact with the server.  So, the time to pitch the offers must be chosen judiciously, especially for locations with long customer queues.  But restriction of timing will in turn affect the prediction accuracy.

·         The ATM cannot close the sell. The completion of the process depends on further integrations of channels.

Nevertheless, ATMs can still be used as an excellent channel and in the near future itself, with the advent of technology, it can be expected to be one of the primary channels.

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One of the classic studies on advertising effectiveness has been conducted by Erwin Ephron and Gerry Pollak, using a database compiled by MMA, a marketing-mix modeling firm.

They study the one-year ROI (short-term contribution) of advertising campaigns across various industries and media channels and conclude that in the short term advertising does not have a positive ROI. CPG companies are the worst performers averaging only 54 cents of payback for a dollar spent in advertising. The non-CPG brands studies return 87 cents which is a bit better, but still not positive. Of the 25 CPG brands studied, only one is able to achieve break even and have a positive ROI

Among other findings:

• Television as a media channel had the lowest payback for both CPG and Non-CPG brands. Magazines performed substantially better.
• ROI correlates directly with brand size. Larger brands have on average higher ROI.

As the authors note:

There is good evidence that first-year payback more than doubles over time through heightened awareness, saliency and repeat purchase. Yet the idea that you plant today to reap tomorrow is far less satisfactory than earn-as-you-go. It leaves advertising as an easy cut when dollars are tight.

As CPG companies like Kraft increase their advertising spend to gain market share (subscription required), it is key that they start putting together the right analytical skills and a ‘test and learn’ culture to evaluate the advertising ROI and ensure that their dollars are spent wisely

Hat tip: Alan Rimm-Kaufman

CPG companies spend a lot of advertising dollars to build and maintain their brands both in traditional media and increasingly in the online world. Directly measuring the effectiveness of such brand building efforts is challenging and companies default on sales volume as a proxy metric, knowing fully well that there are myriad other effects which influence sales. Other than that, survey based brand recall studies are also used to indirectly determine the effectiveness of advertising.

Online channel lends itself very well to measurement and CPG companies can exploit that fact. CPG companies should geographically segment (by DMA) their website traffic and correlate it with that particular market’s mass media spend to determine whether advertising is creating interest in their products. Media spend and mass market campaigns have a correlation with greater online activity and web analytics provides a way to measure the effect. The online activity metric also provides a real time campaign tracking ability to companies. Proper setup of test and control markets will provide insights into effectiveness of various forms of media spend (online only, online and print, only television etc.) for different geographies.

Setting up such a capability requires, a good understanding of baseline metrics of the website and also a solution which will help to link the IP address of the website visitor to a particular DMA.

While this method is also not full proof as it tries to measure effectiveness in terms of activity on the online channel (that too only on company’s own website), it provides a view from a channel where at present, activity is not systematically measured and very seldom correlated with cross channel initiatives and overall business metrics.

Not many of us think about Amazon’s free shipping offer as a rewards program. That is exactly the point Jack is making as he classifies Amazon’s free shipping offer as a continuous reinforcement schedule. He uses a schedule of reinforcement framework proposed by psychologist B.F Skinner and applies it to rewards programs.

A continuous reinforcement schedule is dangerous. At best, the promotion shows a little lift in the short term and a huge decay in the long term (doing nothing in terms of real loyalty). At worst, you unintentionally create new business rules for your company. When those rules inevitably change, you alienate people who migrated to your company because of them. You even risk teaching users new behaviors that are bad for business

Apart from continuous reinforcement, the other reward categories are:

• Fixed ratio (SUBWAY’s “buy 12 feet, get one foot free”) and variable ratio rewards (lottery)
• Fixed interval (Restaurant happy hours) and variable interval rewards (radio contests that grant prizes “sometime this hour”)

It is an interesting framework to generate hypotheses for rewards programs, which need to be then quickly tested in the market and analyzed to determine the most financially positive program structure.

We earlier wrote about some recent academic literature on customer loyalty and highlighted the importance of a good market testing and campaign management capability to determine the optimal rewards program structure.

“When making a purchase, a consumer has a choice between using frequent-flier miles, cash, or some combination thereof. Which will he or she choose? Another consumer has an opportunity to participate in a special program to get a free car wash after paying for a certain number of washes. What’s the best way for the car-wash owner to motivate the customer to participate?”

Here is a very good summary of the latest in the area of customer loyalty in academics. Article and associated papers talk about efficacy of ‘combined currency’ (dollars and miles) programs, ‘artificial advancements’ and ’status’.

As marketers use more complex loyalty schemes and techniques, the importance of testing marketing campaigns becomes very important. Proper campaign management processes and governance structure within the marketing department helps the companies to structure test and roll out the most profitable marketing campaigns to the customer base.