Subsidy Costs and Halo Effects – Measuring True Marketing Profitability

Jim answers questions from fellow Drillers
(More questions with answers here, Work Overview here, Index of concepts here)

Topic Overview

Hi again folks, Jim Novo here.

Got a couple of top shelf questions this issue from the more experienced side of the customer retention biz. As I’ve said before, the Drilling Down method works whatever size your business is. The tools used are different, not the ideas driving their use. For example, a small business may be using MS Excel or Access to keep track of customers, and a large business would be using a CRM app or rules-based engine. Doesn’t matter, works for both. So, hey little guys, don’t let the experts hog the spotlight, send your questions in!

These two questions from Drillers make a nice pair; they are related features of customer buying behavior!

Q:  Jim, I still don’t get Subsidy Costs.  I get the idea of using control groups, but how can a response to a marketing campaign be bad?

A:  Most response is good, of course.  Subsidy costs refer to a hidden cost primarily in best customer programs, where customers have a high probability of making a purchase anyway.  When you promote to these people and offer discounts, you run the risk of spending money and margin you did not have to spend to generate the sale.

Think of it this way.  You have a specific purchase in mind.  The catalog / web site / shopping network mails or e-mails you pretty frequently (you’re a best customer), so you are waiting intently for a communication to arrive before you make the purchase in case there’s a discount available. Communication arrives, and low and behold, has a “20% off” coupon.

You go ahead with the planned purchase and spend 20% less than you intended.  That’s a subsidy cost.  Great for the customer, bad for business. Why care? You can measure these subsidy costs, and create promotions that financially cover the subsidy costs they create.  Or, a better alternative might be to intentionally design the promotion to minimize subsidy costs. For example, make discount good only on orders over a customer’s average purchase size, meaning customer generates more than average margin, hopefully covering the subsidy cost.

Q:  Hi Jim.  Is there any way to tell what the best length of time is to look for Halo Effects?

(If you have not read the Drilling Down book:  Halo Effects occur when people respond to a promotion outside of business tracking procedures and are “not counted” as having responded.  For example, you send a discount and the customer loses it but makes a purchase anyway because you “reminded” them of a need they had. Again, control groups can be used to measure these effects – which is why learning how to use them properly is so important.)

A: Not really.  You have to look for them at different time intervals and discover the right length of time for your business and products.  In B2C, I would be very surprised if there were significant Halo Effects after 60 days.  In long sales cycle B2B, it could be 6 months, maybe a year.  Try looking at 30 days, then 60 days, then 90 days, you’ll see the Halo Effects slope off and approach zero.  When they approach zero, you should cut off your measurement.

Generally, the better the customer, the *less* the length of time will be.  If you are doing a one-time buyer conversion promotion, you could look out a bit longer, probably as far as 6 months.

Hope that answers your question!

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