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Subsidy Costs in Intra-Company Promotions
Drilling Down Newsletter # 65: 3 / 2006

Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention, Loyalty, Defection

Get the Drilling Down Book!

Prior Newsletters:

In This Issue:

# Topics Overview

# Best Customer Retention Articles

# Subsidy Costs in Intra-Company Promotions

Topics Overview

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 future, right?

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

Multichannel 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 your spreadsheet!

Pulling the Trigger
 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 triggers for retention, you'll love them for acquisition.

Questions from Fellow Drillers

Subsidy Costs in Intra-Company Promotions

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 "But..."

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 the "But..."

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 asset". 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 company-wide perspective.

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 things.

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 intra-company.

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 divisions.

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 and promotions.

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 pretty.  

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.  If you like the newsletter, please forward it to a friend!  Subscription instructions are top and bottom of this page.

Any comments on the newsletter (it's too long, too short, topic suggestions, etc.) please send them right along to me, along with any other questions on customer Valuation, Retention, Loyalty, and Defection here.

'Til next time, keep Drilling Down!

- Jim Novo

Copyright 2006, The Drilling Down Project by Jim Novo.  All rights reserved.  You are free to use material from this newsletter in whole or in part as long as you include complete credits, including live web site link and e-mail link.  Please tell me where the material will appear. 

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