Incremental Sales Modeling Primer

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A quick primer for incremental sales modeling

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Incremental Sales Modeling Primer

  1. 1. Incremental Sales Modeling<br />Concepts in Marketing Program Measurement<br />
  2. 2. August 8, 2011<br />Improve performance, predictability, and sustainability<br />Copyright (C) 2011 The Bryden Group, LLC<br />Why an Incremental Model?<br /><ul><li>Incremental models help...
  3. 3. Evaluate opportunity cost among marketing investments
  4. 4. Identify cost structures that impact profitability
  5. 5. Evaluate offers and creative techniques that drive behavior
  6. 6. Evaluate categories that drive performance
  7. 7. Assess trends in customer behavior</li></li></ul><li>Basic Building Blocks<br />Steps to building a model:<br />Strategic profit model – align your company P&L model to the campaign model<br />Metrics – define and standardize what and how to measure campaigns<br />Incremental Sales – measuring the lift in sales over a control group<br />Segmentation – the process of sorting, selecting and suppressing customers<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  8. 8. Simplified Retail Profit Model<br />Understanding your company strategic profit model is key to aligning direct marketing efforts to overall business results<br />Gain buy-in from finance to “bless a model”<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  9. 9. Direct Marketing Profit Model<br />With buy-in from finance, direct marketing results can be tied to company performance<br />The direct marketing profit model is the first step to validating marketing returns<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  10. 10. Metrics<br />Define all metrics and how they are measured to begin the model<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />Incremental Sales<br />ROI<br />Discounts<br />Incremental Spend<br />Click Thru<br />Gross Sales<br />Bounce Rate<br />UPT<br />Returns<br />Return Rate<br />Cancellations<br />AUR<br />Response Rate<br />Incremental Traffic<br />Response<br />AOV<br />Net Sales<br />
  11. 11. Sample Metrics<br />Mail (m) vs. Control (c)<br />Response Rate (R): Buyers/Customers<br />Return Rate(RR): Returns/Gross Sales<br />Discount Rate(DR): Discounts/Gross Sales<br />Average Order Value(AOV): Orders/Gross Sales<br />Units per Transaction(UPT): Items/Orders<br />Click Thru(CT): Responders/Customers<br />Gross Sales(GS): Top-line sales volume<br />Net Sales(NS): Top-line sales less discounts and cancels<br />Net Sales of Returns(NOR): Net Sales less returns/exchanges<br />Cancellations(CN): Canceled sales before shipping<br />Discounts(DT): Full-value of discounts tied to buyers<br />Returns(RT): Full-value of returns tied to buyers<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  12. 12. Incremental Metrics<br />Incremental Sales per Customer: NOR/C(i)<br />NOR/C(i) measures the incremental sales associated with stimulus on a per customer basis to enable segment performance comparisons<br />NOR/Customer(m) – NOR/Customer(c)<br />Total Incremental Sales: NOR(i)<br />NOR(i) is the measure of incremental sales generated by the marketing stimulus across all segments or on a segment by segment level<br />NOR/C(i)*Customers(m)<br />Incremental Traffic: T(i)<br />Incremental performance comes from more shoppers or shoppers spending more. T(i) measures how many additional BUYERS come to your site due to your stimuli<br />[R(m) – R(c)] * Customers(m) <br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  13. 13. Incremental Metrics<br />Incremental Sales from Traffic: NOR(iT)<br />NOR(iT) measures what portion of total incremental sales are due to bringing additional buyers to your store. This metric can be taken at a segment level or campaign level or both<br />T(i) * [NOR(m) / R(m)]<br />Incremental Spend per Responder: NOR/R(i)<br />The other source of incremental performance is getting a customer to spend more and this metric covers that performance for responders<br />[NOR/C(m) / R(m)* Customers(m)] – [NOR/C(c) / R(c) * Customers(c)]<br />Incremental Sales from Spend: NOR(iS)<br />NOR(iS) measures the portion of incremental sales that are due to heightened customer spend associated with the stimulus<br />NOR/R(i) * [[R(m) * Customers(m)] - NOR(iT)]<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  14. 14. An Incremental Example<br />Campaign Results<br />Incremental Buyers (Ti): 1,860<br />Incremental Spend per Buyer NOR/R(i): $3.31<br />Incremental Sales from Incremental Buyers NOR(iT): $107,438<br />Incremental Sales from Incremental Spending Behavior NOR(iS): $9,523<br />Total Incremental Sales NOR(i): $116,961<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  15. 15. Sort, Segment, Suppress<br />The final key to success is to be able to sort, segment and suppress customers so that you can get an accurate read on the effect of your marketing campaigns<br />Control groups receive no stimuli, do they?<br />Your campaign can have multiple controls and each level of control can serve a purpose for understanding marketing ROI<br />Campaign, Offer, Seasonal, Annual Controls<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  16. 16. Basic Segmentation: RFM(x)<br />One of the oldest forms of segmentation is using Recency, Frequency and Monetary values of your customers<br />Recency – used as a proxy for satisfied customers, unsatisfied customers would not be shopping with you<br />Frequency – used as a proxy for loyalty,customers don’t shop multiple times if they do not like your brand<br />Monetary – used as a proxy for discretionary spending ability – the more, the merrier<br />(X) – what trait do you think will add to your understanding of behavior an predict response?<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  17. 17. August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />What a simple RFM Segmentation Might Look Like<br />A 3 Criteria 3 Node Scheme yields 27 Segments <br />Recency (R)<br />1: Last Purchase <90<br />2: Last Purchase >90 <180<br />3: Last Purchase >180<br />Frequency (F)<br />1: 4+ Orders <br />2: 2-3 Orders <br />3: 1 Order <br />Monetary (M)<br />1: Spend > $300 <br />2: Spend > $150 < $300 <br />3: Spend > $0 < $150 <br />
  18. 18. Basic Segmentation<br />Segmentation allows you to match stimulus customers against non-stimulus customers to determine lift in performance<br />Simple statistical techniques can ensure that the stimulus customers and control customers are similar (sampling)<br />Segmentation also allows you to predict response when your data includes previous response behaviors<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  19. 19. Incremental Modeling <br />Success in direct marketing is linking performance to commonly understood business metrics, measuring ROI and alternative investments using a strategic profit model, and targeting customers to increase response.<br />Hopefully you will find these concepts useful for your business and you can apply them in a complex multi-channel environment. <br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />
  20. 20. The Bryden Group, LLCIncremental Sales Modeling<br />Chris Daly<br />Founder, CEO<br />chris@thebrydengroup.com<br />www.thebrydengroup.com<br />August 8, 2011<br />Copyright (C) 2011 The Bryden Group, LLC<br />

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