Monthly Archives: January 2007

Lab Store: Managing Customer Experience

Analytical Culture, Lab Store, Marketing thru Operations

When Ron wrote this great post on Marketing’s responsibility for managing customer experience (more on process improvement from me here), I thought I would relate this simple example from the Lab Store.

We sell some exotic pet food that is meant to be a continuity item – the customer buys it every 3 months or so.  This product offering is, of course, designed to extend the Customer LifeCycle.  The food is a “staple” meaning it is generally kept in the cage at all times to supplement the fresh foods fed to the animal.  This food is not as appealing to the anlmal as say, fresh fruit, but it’s an important part of a well rounded diet for the animal.  The feeding instructions on the web site are extensive – portion size relative to fresh food, when to feed, amount to feed, etc.

So we start analyzing the repurchase rate of this staple food that is supposed to be our “back end” and it is dismal relative to expectations.  Why?  Have the customers switched to a different, cheaper source?  Are they not feeding the diet plan we suggest?  Is this even a “marketing problem”?  Well, in the Lab Store, anything related to customer behavior is a marketing problem.

So we grab a sample of the customers who passed the re-order point Tripwire of 3 months without ordering again and ask them, Why aren’t you ordering the staple food?  And the answer is “The critters don’t like it”.  Really?  That’s a surprise; we know the animals generally eat the food.  So we ask about portion size, are they following the diet plan?  And they say, “Not really, when they didn’t eat the staple food, we thought they would be hungry and so we gave them more fresh food.  They never ate any of the staple food”.

And there you have it.  We don’t need to ask any other questions.  The animal is not going to eat the boring staple food when they are being overfed the fresh food.  This is like asking a kid if they would rather have spinach or candy; one is good for them, the other tastes better.  And the customer isn’t going to buy staple food the animal will not eat.

The problem is, this “fresh food only” diet is unhealthy for the animal; they are not going to get critical nutrients they need from the staple food.  But, this exact feeding scenario is covered on the web site; we’re already communicating this issue to the customer.  So it’s not a marketing problem, right?

Wrong.  That is the marketing problem - the information is on the web site.  We started including a package insert with the staple food containing the very same info as on the web site, except now, of course, it was “contextual”; delivered in exactly the right place and at exactly the right time – when the customer opened the staple food package.  And magically, the repeat purchase rate on the staple food increased 32%.

The point is, if we had been off “marketing” and not paying attention to the Potential Value of the customer by setting up the Tripwire, we’d have never found this flaw in the process.  And by fixing it, we increase the return on all the acquisition marketing we do, because the LifeCycle of the customer has been extended.

Marketing Productivity, indeed.  More Lab Store tales to come.

Lab Store: Background & ROMI Formula

DataBase Marketing, Lab Store

Many of you in the blog audience might not know I have been writing about both offline and online Marketing Productivity since late 2000 on my web site through articles, an e-mail newsletter with about 7,500 double opt-in subscribers, and a blog-like database marketing article review section. Anyway, back in 2000 it was pretty hard to get people to listen to Marketing Productivity ideas because there was just too much money sloshing around.  Who cares about Productivity when you have unlimited budgets? 

So to prove out some of the concepts I was talking about, I started my own online store for under $1,000, all costs in.  Those of you who have seen me speak at Search Engine Strategies or the eMetrics Summit on customer retention know this web site as the”Lab Store“, which has turned into a large enough business on that same $1,000 infrastructure my wife now runs it as her full time job.  The Lab Store is a great resource for online marketing research and testing because I control everything (unlike most client situations) and perhaps more importantly, I don’t have to ask permission to release results.  So from time to time, I pull analysis out of the store operation I think will be interesting to other people and provide it for your review. 

That said, I’m not linking to the Lab Store site because I’m not fond of the idea that our competitors might use this blog to improve their business. Lab Store Analysis Examples will link back to this post to provide context for new subscribers.

ROMI – Return on Marketing Investment

When we execute different tactics designed to increase customer value in the Lab Store, we measure the results using an incremental flow-through model I call ROMI (to differentiate from the extremely lightweight ROAS).  We define ROMI in online retail this way:

Sales – Cost of Product = Gross Margin
Gross Margin – Variable Overhead Cost = Gross Profit
(Gross Profit – Marketing Cost) / Marketing Cost = ROMI

where Variable Overhead Cost is basically the cost to process, pick, pack, ship, and service the incremental orders generated by the marketing, service, or operational initiatives.  ROMI answers the question, “For every $1 I spend on a marketing, service, or operational effort, how much cash flows through to cover fixed costs?  What do I get back, after all variable costs, including the cost of the effort?

Examples of how this works with efforts other than Advertising:

New Customer Kits
Managing Customer Experience

Overview of Lab Store stats and metrics can be found here.  Pics here.

**** Market Share Goal versus Profitability Goal

DataBase Marketing

Some interesting studies from The Wharton School on the negative correlation between “Competitor-oriented objectives” such as market share goals and ROI.  I can’t tell you how many times I have had this conversation with people, including those that base online advertising spend on some theory of “share”.  “We have to be in the top paid search position to accomplish our brand objectives” etc.  Even though being in the top position can result in negative ROMI.  “But that’s just the cost of being #1, advertising costs money”.  And that’s where I lose them, because even if you are a big fan of brand-oriented  / share-oriented marketing strategy, do you walk into those ad buys knowing you are going to “lose money” on them?  I don’t think so; there has to be a least some perceived positive benefit.

According to the article, lab experiments with MBA students indicated they tended to choose strategies that maximized competitor-oriented objectives rather than profitability.  Is there really a whole generation of folks out there that think marketing is basically a “sunk cost” so it doesn’t matter if it is profitable?  That’s insane.

So let me get this straight.  We’re starting to turn the corner on the marketing accountability issue; we now try to measure the profitability of marketing.  But when faced with an unprofitable campaign, there’s still a giant “fear of failure“ safety hatch called “market share”?  Please tell me how you explain that to the CFO.  No wonder customer retention and LifeCycle Marketing ideas can’t get any traction if this is how people think.

If you’re more interested in profits than market share with PPC marketing, see these excellent guidelines.