A PAYTRONIX BRIEF: EXTRACTING CUSTOMER INSIGHTS FROM BIG DATA. Why cannibals are killing your marketing ROI

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1 A PAYTRONIX BRIEF: EXTRACTING CUSTOMER INSIGHTS FROM BIG DATA Why cannibals are killing your marketing ROI

2 A PAYTRONIX BRIEF: EXTRACTING CUSTOMER INSIGHTS FROM BIG DATA Why Cannibals Are Killing Your Marketing ROI When customers respond to an campaign, is each response worth the same to your company? Probably not. You ll end up motivating incremental spending from some subscribers while unnecessarily providing discounts for others, cannibalizing full-priced sales. Yet brands often send the same message and offer to every subscriber they can reach. Let s take a look at why this is the case. When past purchase behavior is taken into consideration, three types of customers emerge. First, there are those who can be motivated to come in for an extra visit. Second, there are those whose visit patterns have not yet been established or that are erratic enough that predicting future behavior yields as many right answers as wrong. The third type consists of those who are likely to purchase with a simple reminder or none at all. When an offer is extended to the third customer type, full-priced sales are sacrificed. Customers in this segment will use the offer you send them, but since they would have happily paid full price, we refer to these as cannibalized visits. Let s compare two campaigns Setting clicks, opens, and redemptions aside, what matters most at the end of the day is the ROI of your campaigns. Profits sustain the vitality of your business over the long run. Consider the revenue generated by the two campaigns in the graph below. Side-by-Side Campaign Comparison of Revenue $0 CAMPAIGN A CAMPAIGN B REVENUE 1

3 Campaign B was the undisputed champion at producing revenue. But let s include another important element: the cost of the campaign, which determines profit. Side-by-Side Campaign Comparison of Profit $0 CAMPAIGN A CAMPAIGN B REVENUE COST OF CAMPAIGN PROFIT With profit added to the picture, it s clear that Campaign A was more successful than Campaign B. The challenge with Campaign B was cannibalized sales, which we see all too often. Getting to know your guests If you were able to line your guests up from least frequent to most frequent, and the measure the cumulative ROI of a campaign. The result would look something like this: LESS FREQUENT MORE FREQUENT The discount that brought in guests who would not have visited otherwise was money well spent. However, the discount given to those who would have come in anyway was the polar opposite. 2

4 Let s see this in an actual campaign Below are the results of an campaign run by a fast-casual restaurant chain. The marketing team developed a compelling campaign that motivated guests to come in more frequently, and the lift was impressive. After the campaign, we segmented the target audience into one of five RFM groups. Here they are in order of value to the organization: lapsed, bronze, silver, gold, and platinum. As you can see in the graph below, the campaign produced a positive ROI for lapsed and bronze members. But that s where the positive returns stopped. The silver, gold, and platinum members took advantage of the offer as well, which resulted in cannibalized visits. Campaign Incremental Profit CUMULATIVE PROFITABILITY LAPSED BRONZE SILVER GOLD PLATINUM At the peak of the results, the campaign reached $217,000. However, after accounting for cannibalized sales, the ROI was reduced to $120,000. Imagine if this brand had only sent the offer to lapsed and bronze guests. Not segmenting the data cost this brand nearly. And that s just on one campaign! 3

5 About the Author What should your brand do? The answer should be clear. First, get to know your customers. That means compelling them to identify themselves with the purchase and there are many ways to do so. Our clients leverage information about rewards programs, online ordering identification, reservation identification, credit card transactions, and more to shed light on a large proportion of the past and predicted future behavior of their guests. Once you have all of the data flowing to a central place, make sure you have the tools you need to segment, test, and modify your campaigns. Oneto-one marketing is more of a science than an art. Approach each campaign with a hypothesis, conduct testing, and then improve upon the status quo. When your marketing investment is highly productive, you and your brand win. Lee Barnes leads the Data Insights team and is a selfconfessed data geek who can often be found engaging with his team members and digging into all kinds of data. His undergraduate degree in mathematics and MBA from Harvard Business School give him the unusual ability to both execute complex analyses and translate the results into ideas that business leaders can use. Lee came to Paytronix from CVS Caremark, where he uncovered millions of dollars in revenue-expansion and cost-saving opportunities through Big Data analytics. He did so by leveraging a combination of in-house transaction data, data from the CVS ExtraCare loyalty program, real estate data, retail industry data, and data provided by CPG brands. In addition to conducting deep-dive analytics on how to better engage guests and sell more product within the aisle, Lee studied which products to stock in which stores, how much inventory to carry, where to place products on shelves, and which promotional vehicles and offers were the most effective. His work resulted in a complete makeover of the aisle across 7,500 locations in order to lift sales and reduce costs. He also worked for L.E.K. Consulting s Retail & Consumer Products practice, where he advised clients on issues that included M&A activity, global expansion, and operational turnaround. Before L.E.K., Lee worked at Capital One, a well-known leader in leveraging large-scale data analytics to make business decisions , EXT. 5 4