Subsidy Costs in Intra-Company
# 65: 3 / 2006
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention, Loyalty, Defection
Get the Drilling Down Book!
In This Issue:
# Topics Overview
# Best Customer Retention Articles
# Subsidy Costs in Intra-Company Promotions
Hi again folks, Jim Novo here.
I have a "stretch" issue for you this month, where we go
out closer to the edge and take a look at some more
"challenging" ideas. Often these are topics that you
don't have to deal with in your business right now, but as you get
deeper into this customer marketing thing, they are going to come for
ya. Better to put in a little effort now and be prepared for the
From allocating sales to the correct marketing source when there is
no source code, to driving online sales with behaviorally
targeted offline marketing, to preventing the different
divisions of a company from stealing each other's best customers and
losing money in the process, we've got a lot to go through.
So let's get to the Drillin'!
Best Customer Retention Articles
challenge - better decisions through integrated tracking
March 12, 2006 Multichannel Merchant
So how good are you at tracking order source across your multi-channel
view? This is an excellent article on advanced methods for
sourcing orders back to origin. Beware, there is math
involved...and you should learn it. Fear not, you can do it with
March 23, 2006 Multichannel Merchant
The off-liners are making great progress with integrating online
marketing, but what about you onliners? Do you know how to drive
profits with offline marketing sources? This is a pretty
comprehensive look at one way to go about it. If you use
for retention, you'll love them for acquisition.
Questions from Fellow Drillers
Subsidy Costs in Intra-Company
Q: Hi Jim,
Our company has 8 divisions and we completed the integration of all
the customer databases a couple of years ago. We have the 360
degree view of the customer, at least as far as sales transactions,
across the entire company in one database.
A: Congratulations! However, I note not joy, but
some kind of concern in you voice. I'm just waiting for the
Q: The database services group I am part of is under
IT. We respond to requests from the different divisions for
customer analysis and the creation of promotional lists for email,
direct mail, and telephone campaigns. It's interesting because
our group is finally directly involved with increasing the
profitability of the business and we have some input, which makes the
job more rewarding. I picked up your book because I thought
reading it might increase our ability to contribute.
A: Well, again, congratulations! But I'm still
getting that nagging feeling from your tone. Still waiting for
Q: I've got a two part question for you:
1. What I am seeing is the different divisions promote to
"best customers" of the company as a whole, or even try to
target best customers of another division for their campaigns. It seems to me that contacting these same people over and over from
the different perspectives of the divisions is not optimizing customer
value, and might actually be irritating to the customers (I know it
would be irritating to me).
The contact frequency across all divisions to the same customer can
reach 4 - 6 times a month through various media (phone, mail,
e-mail). Also, there is no customer retention effort going on that I
am aware of, it appears it is all acquisition oriented but the main
targets are customers of other divisions.
A: Oh boy, the database marketing pendulum has started
swinging the other way, from "we don't know what to do with all
this data" to "we're really maximizing that database
You are correct to be concerned about this issue. Talk about
"push marketing"... the intent of each division is
"pull" because of the targeting but the result is
"push" because of the volume and "noise" created
at the customer level. Too much too fast.
2. It is very difficult to communicate these marketing
concerns to the various divisions and we of course don't have any
authority in this area. It's our job to respond to requests for
producing these lists, not point out what we think might be
problems. But what we are seeing is response rates for all
promotions are falling, which then causes the marketers to become more
targeted, which results in even more communications from the 8
divisions to even fewer people to meet sales numbers.
A: Triple "Oh Boy". You've served up a
heap o' trouble here. The good news is that you (and hopefully others) are reaching the
next level of sophistication in database marketing. And by the
way, I am totally not shocked that an analyst / IT person got to
thinking along these lines before the marketing people in the
divisions. It just makes sense, because you "see it
all" and they see only their division.
The bad news is when divisions of the same company start trying to
steal share of wallet from each other, there is always waste and
sometimes out-and-out losses. The potential for subsidy cost
problems (spending more money to generate a sale that would have
happened without the added spending) in a model like this are huge,
and these activities have to be measured and managed from a
This issue is generally addressed in the trade press as
"managing touch points", though I have never read advice from
anybody who is specific on the "how to manage" side of
Let's take a specific, simple example.
A retailer of office supplies has 3 divisions - retail, catalog,
and web. The 3 divisions are supported on a "universal
database" where customer purchase records from all three
divisions are consolidated. The records are tagged with the
source of the customer.
Each division wants to increase their profits, and the database
tracks customers who do business with one or more divisions. Each division aggressively uses the database to generate more business and increase profits
for itself. However, by using control groups and analyzing the profitability of
programs it is found that increasing the profits in one division decreases the profits in another, and the "net net" of all this activity is a
decrease in overall company profits. How can this be?
Let's say the catalog division generates $4 in sales for every $1 it spends. The retail division decides to target best customers of the catalog
division with a promotion, and gets $2 in sales for every $1 it spends - without driving any
incremental sales at the customer level. The customer
simply swaps channels to take advantage of the promotion but buys the
same amount of stuff they would normally buy - but at a bigger discount.
So every marginal dollar in sales that moves from the catalog division to the retail division decreases the profitability of the company as a whole.
The customer buys the same total amount of stuff, but at a higher cost to the company, since
the same sales occurred but at a higher discount - a subsidy cost.
This happens all the time, but people simply don't or can't measure it.
The divisions are "stealing share" of each other's best customers, but doing it at an expense level that is higher
than would have occurred without the promotion.
So how do you rationalize this mess and get beyond it? The
company has to set up some rules regarding "ownership" of the
customer, set up financial accountability for their divisions, then enforce communication guidelines.
The customer owner division is usually the division that acquired
the customer into the company, that generated the first financial
transaction. In a more sophisticated model, it can also be the
division that the customer first contacted, even though the actual
first sale happened in another division. The customer generally
views the company through the lens of this first
purchase or first contact division, so it makes sense that division
should control access to the customer. This approach also aligns
with any "source tracking" you might have in place already.
Once "ownership" of the customer is created, you move to
financial accountability. There are generally two ways to do
this: through fiat and through market forces.
1. Through fiat. If the organization is strong enough,
the CEO simply declares that this is a problem; that all intra-company
promotions will be analyzed for incremental profitability, and
promotions that are not profitable from a company-wide view are
"banned". Activity found to be simply moving money
from one pocket to another at a discount will not be supported and
database access not granted for these promotions.
The challenges to this approach stem from the organizational
structure of the analytical personnel. If the financial analysis
of promotions is conducted in the Divisions as opposed to in a
centralized unit reporting directly to the CIO, CFO, or CEO, this
model is probably not going to work. The divisions will all
engage in "data spinning" to prove what they are doing is
incrementally profitable to the company and you get the same mess only
with a trail of "facts" to support it.
The great thing about this model is it does not stifle creativity
and encourages learning. Divisions can share information on what
works with intra-division promotion and can actually work together to
maximize the company-view value of the customer.
Often, there is a "natural sequence of relationships"
that maximizes value and so as customers "defect" from one
division they can become "new customers" of another
division instead of defecting from the company completely.
Understanding how this all works and encouraging it through the
marketing plan is one of the most profitable macro-level programs a company can implement.
It's what CRM wants to be when
it grows up.
Under this scenario, your team - the people that actually manage
list pulls and so forth - would become part of this rolled-up
analytical unit reporting to the C level. This is essential to
the idea of not repeating promotions that are found to be unprofitable
2. Through "market forces". The co-mingled universal database
is considered a corporate asset (it
is, right?) and the divisions compete with each other for access
to it. For any customers a division "owns" as defined
above, the division always has free access to them. But if a
division wants access to customers "owned" by another
division, it has to "bid" for the access against other
Let's say Division A has best customers and know they can generate
$.50 in incremental profits per customer with promotions to these
customers. If they were going to rent this list to Division B
for a promotion, it would make economic sense from them to charge at
least $.50 per customer, and if Division C also wanted to rent the
list, they might bid higher than Division B. Promotional
"cycles" are established for each customer segment to make
sure the company-wide contact frequency is not too high, and the
Divisions bid for access against each other each cycle.
If the Divisions are "rational" from an economic
perspective, they are not going to bid more than they can make in
profits on a promotion, and they are much more likely to be
"honest" in their profitability analysis when they have
financial skin in the game. Over time, this model optimizes
itself as Divisions find out what profits are and bid
accordingly. Those Divisions who are the smartest or best
at generating profits can afford to pay higher rates and rise to the
top. It's the Darwinian approach to intra-company list rental
The downside to this model is probably obvious - it creates
administrative overhead and an artificial "profit center" in
the management of the corporate database. Also, there may be
legacy issues (example: size of the division relative to others) that
make a "pure play" market unfair. So adjustments may
have to be made. However, it does "force" a real value
on the use of the database and can also justify / pay for the overhead
of data operations.
I've operated under both models, and the first is by far the
best. But the organizational challenge of consolidating the
analytical groups out of the silos into one master group reporting to
the C level are not trivial.
So what typically happens is the org starts with Model #2, sees the
value being created, and wants to optimize this value by moving to
Model #1, taking out the overhead of managing the bidding process and
intra-company payments. And they can now do it successfully,
because there is now a fairly comprehensive (and pretty honest) data
trail related to the success and value of intra-company promotions.
Why make the move to Model #1 then?
Model #2 stifles true creativity because it does not include the
sharing of intelligence that you get with a consolidated analysis
group. For example, the key info required to map out
intra-company migration of customers as a retention plan is all still
in the silos, untapped. Only when this information is
consolidated and shared by the analysts can you map out such a plan
for holding on to customers longer.
You have unearthed the underwater base of the iceberg that leads to
the eventual consolidation of the analytical group. If I was
you, I might see if you get any response to these ideas by pushing
them up your own ladder - a food for thought kind of thing.
One thing I am sure of: in 3 to 5 years this is going to become a
big issue as analytics infects the corporation. Many companies
that live and die by the analytics have already seen the problems and
consolidated the analysts.
And from experience, I can tell you this change in perspective is a
lot prettier when it comes from the bottom up. When it comes
from the top down - generally due to some massive meltdown with
conflicts between Divisional or silo reporting - it is not
For example, I was in a meeting where "key metrics" were
being discussed by the 5 operational heads of a company and the
"base" of all of these metrics was number of
customers. When the CEO found out that the number of customers
each ops head was using differed by as much as 8%, he got very
angry. When it became obvious the definition of
"customer" was modified in the silo to make the silo metrics
look better, he imploded.
Save yourself the pain, start the conversations about these ideas
while you have open minds and not a corporate edict to execute.
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That's it for this month's edition of the Drilling Down newsletter.
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'Til next time, keep Drilling Down!
- Jim Novo
Copyright 2006, The Drilling Down Project by Jim Novo. All
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