Customer Development
By Tim Young
Marketers everywhere are being pushed to come up with ways to help drive incremental business for their organization. And with the development of sophisticated tools and software products, marketers can not only track their customer’s behavior but predict what is most likely to happen next. With this information they can create highly targeted incentives and personalized communications.
But what is the best course of action to take?
Well, many marketers are focused on the action that will drive the most incremental sales. So with all that “Big Data” and fancy math, how do you define and then measure incremental?
Here are two answers I’ve heard in the past:
- “We were able to get someone to buy something they were not going to buy.”
- “We were able to get someone to buy more than their normal quantity of an item.”
My questions would be “how do you know they weren’t going to buy it, and how did you know how much they were going to buy?”
But don’t you work for a predictive analytics company? Yes I do.
And we can make some very accurate predictions about customer behaviors – some of the best in the industry. But I have yet to see anyone predict with 100 percent certainty what any particular customer is going to buy on her next trip. We can predict what she is more likely to buy and less likely to buy, and if you compared our ranked list to the actual shopping trip, we would be very accurate at predicting what ended up in the basket. But even if we are 80 percent or 90 percent correct, it means we missed something.
And when you get down to deciding what offers to give someone to drive incremental sales, you can’t just go with the overall performance; you have to know if each product is incremental. So if you go with the above definitions, you have to be able to predict what they are “going to buy anyway.” And then avoid giving them offers on those products because you wouldn’t want to waste margin on something that was going to happen. Right?
Hold up just a second. What if in your awesome accuracy of 90 percent you missed the 1 or 2 items that actually really matter in determining where she shops? What if your competition provides an offer on those items the same week and she chooses to shop there instead? What if she then fills up her basket with everything she was going to buy anyway but just not in your store?
That is why the two definitions lead marketers down a trap that ends in disaster. While they were incenting incremental behavior, they forgot to appreciate the behavior that was already taking place but might not in the future.
“So how would you define incremental, Mr. Young?” you ask.
Incremental is getting more customers to shop, which results in selling more product. More customers are comprised of two groups of customers: new customers and repeat customers. And the more repeat customers I have, the more additive the new customers are, versus having to find new customers to replace the customers who don’t repeat.
How do you measure that?
If you work with an analytics or insights team that has a mature test-and-learn environment, they will undoubtedly pull out a formula that requires a holdout group as the control so they can perform a double delta calculation. This allows them to understand all the differences between the test and control groups. They can then measure the promotional and non-promotional impact of the marketing.
With marketing campaigns, you don’t always get the luxury of having a control group to measure against. So instead you need to have a baseline of KPIs (key performance indicators) for your business that act as your compass as to whether your marketing actions are having the right impact. These include:
- customer frequency
- customer consistency
- breadth of shopping pattern
- average units per month
- marketing response
- promotional mix of sales
When tracking these metrics they will point to whether your business is growing or shrinking based on the strength of your ability to engage and create customer relationships that eventually develop customer loyalty.
When your customers repeatedly choose you, they will also spend more with you over time. That is where your incremental will come from. And the best part is the incremental didn’t come at a discount.
