By Tim Young
One of the trickiest parts of my job is convincing retailers that they should shift some of their mass promotional investment to personal incentives. Instead of having 50-100 deals that everyone can take advantage of, they should reduce the number of mass offers and then give each customer an additional mix of offers that are personalized and highly relevant at a particular point in time.
Many questions come out of these conversations:
- What determines relevancy for each customer?
- Can you use predictive analytics to tell me what they will buy without an offer?
- How do you avoid margin erosion and cannibalization?
Ultimately, after some back and forth and disagreement on philosophical approach, those that are intrigued will ask “What is the ROI?”
If at that point your answer is complicated, you have lost. You need to be able to explain in simple terms how you measure success and are able to prove the ROI is positive.
This is where performance metrics collide with KPIs (key performance indicators).
Promotions are investments, or as I would have labeled them when I was a finance professional, expenses. They are used to drive sales of the product being promoted and of other products the retailer hopes the customer will add to the basket when they visit the store.
To measure ROI, most people start off by measuring the expense versus the margin generated during the campaign. Hopefully they have a control group to get a true comparison but many times it is compared against last year or the previous campaign. This can give you directional information but it falls short of understanding the full impact of the promotional strategy.
Promotions are part of an overall marketing strategy and usually not a standalone event. So you need to expand your scope of measurement to identify the impact your promotional strategy is having on the sales and margin over time.
I've found that customers respond in greater number and more consistently when the offers are relevant. The more often they respond the more often they choose your store. And the more often they choose your store, the more opportunity there is to sell more products.
In other words, the impact of personalized offers is not that they can create a bigger spike at a single point in time; instead it's that they will increase the consistency of customers choosing your store which increases retention of customers. And the longer a customer is engaged with a store the more they tend to spend across the store. The performance outcome of increased sales and margin is achieved over time in a very sustainable way.
The performance metrics I recommend to our clients are Annual Retention, Sales per Retained Customer and Margin Rate of Retained Customers.
Okay, but how do you prove that out without having to test for an entire year? Or once implemented how do you know you are on track and don’t need to make adjustments to the strategy?
KPIs (Key Performance Indicators)
After you have identified the performance metrics, the next step is to determine what drives those metrics. If you are going to drive higher retention and an increase in sales per retained customer with a higher margin rate, there are key customer behaviors that will increase across the year compared to what they were -- or even better, versus a control group.
Customers who are more likely to shop with you in the future display these behaviors at a higher rate than those that are going to churn:
- Frequency of shopping
- Consistency of buying consumables
- Items in the basket per trip
- Breadth of categories shopped
- Participation in the promotional program
Those five measures can be taken on a regular basis, and trends will indicate future performance of the annual performance metrics. This is confusing for many people because they fail to understand the difference between KPIs and Performance Metrics. But once you understand KPIs provide insight into future performance you can properly identify the impact your promotional strategy is having on your annual business performance. And then you can compare mass offerings with personal incentives and decide which is going to create a better ROI. In as little as three months, you should be able to see separation in your KPIs for your test group versus your control group, which will give you confidence in deciding which promotional strategy is right for you.