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.

I’m not clear on the Chief Customer Officer concept…

DataBase Marketing, Marketing / Tech Interface

I don’t have any problem with the direction Jeanne Bliss provides regarding how to become the “customer champion” in your company, especially the idea of aligning with the CFO and CIO.

What I’m trying to figure out is why this is not Marketing’s job; seems to me the CMO should be the Chief Customer Officer, complete with the ultimate responsibility for Customer Service.  Otherwise, it seems like this CCO position is just an excuse for people keeping their heads in their own silos and letting somebody else worry about cross-functional processes, customer experience, and defects.

In other words, do we really need a unique exec to be able to create / enforce / enable cross-silo functionality on the “soft” side (marketing, service, some fulfillment) of the business?  After all, the CIO and CFO operate across all the silos, why can’t the CMO?  As Ron said in his excellent piece What Marketers Should Learn From IT, the CMO now needs to get involved in the whole business and act cross-functionally to be successful, as the folks in IT have learned.

I guess the answer is probably that “Marketing” has been redefined over the years and has somehow lost the strategic seat at the table, morphing downward into “MarCom”.  This has not happened at all companies – I can tell you at most truly data-driven companies, the CMO is the Chief Customer Officer, because these folks / the company understand how the totality of the customer experience affects Marketing Productivity.

Perhaps the answer to Kevin’s question on what happens to the Marketing folks in the catalog business as the web takes over is this: they become Chief Customer Officers or consultants to them like Jeanne Bliss, formerly of Lands’ End.  After all, they already know how to do the Chief Customer Officer job.

Is Your PPC Incremental?

Analytical Culture, Web Analytics

Something that analytical folks talk a lot about is “the incremental”.  In customer marketing, it’s not enough to get response, what we want to know is how much of the response was above and beyond what we could be expected had the test or promotion not been done.  Typically incrementality is measured using control groups – people just like the people you are sending the campaign to who do not receive the campaign.  Then you compare the profitability of the people who received the campaign versus the profitability of those who didn’t.  The difference is the true, incremental profitability of the campaign.

Kevin over at the MineThatData blog relates that Blue Nile has decided to lower prices as opposed to chasing rising ad costs.  I don’t know enough about their business model to really comment on that action, but I do know one thing – they (and many, many other companies) are wasting Pay-Per-Click spend on non-incremental clicks.

Check out this shot.  Search for Blue Nile in Google, you get a Pay-Per-Click ad for Blue Nile, and Blue Nile has the fiirst natural listing:

Search: Blue Nile

 

 

 

 

 

 

Now someone, somewhere, back in the beginning of PPC probably had a conference speech that told everybody to buy the search for your company’s brand name, maybe for “branding” or “exposure” purposes.  But almost every web site ranks first in the natural rankings for their own brand name.  So I ask you, is there any incremental here?  What are the chances, if the PPC ad was not there, that the visitor searching “Blue Nile” would not click on the first natural listing?

What do you suppose the volume of this search is, and how much money is being wasted by people clicking on the paid ad who would have clicked on the natural link anyway?  I asked the same question back in 2003, and though the structure of the test wasn’t as pure as most hard core test & control folks would like to see, the results were so dramatic that you can’t really argue much with the methodology.  A few percentage points here or there and you still get to the same place.

In this particular test, on a high volume PPC phrase for a site that also had a top 3 natural ranking, 77% of PPC sales were non-incremental – stolen from the natural side – and would have happened anyway without the PPC link.

I will be the first to say that results are going to vary a lot by the type of site, the phrase, the target audience, the search engine, and so on.  But Golly Gee folks, has anybody else ever questioned the wisdom of “railroading” a top natural listing with a paid listing – and especially for your own brand name?  I bet a lot of analytical folks have, they just couldn’t convince the marketing folks to test it.  After all, addressing / fixing this by taking down the PPC ad means:

1.  There will probably be a few lost sales, perhaps from people who for whatever reason, always click on paid ads (newbies?)  However, profits will increase.  Some folks will not believe in this idea, it’s that whole analytical culture problem.  You have to trust the numbers, not fear them.  Unless, of course, you have been specifically told to grow sales and not profits.  Rare, but it does happen.

2.  Then there is the whole “How could you not know this was a bad thing and continue doing it for so long?” problem.   That’s more analytical culture stuff.  Failure is a learning experience in the analytical culture, not a cause for whippings and firings and demotions.  The question is not how much money was lost, the question is how much will be saved going forward.  Right?

3.  Potentially, some PPC budget will be reallocated to other, more profitable marketing activities.  This could be a problem if there is “ego spend” involved in the management of PPC.  I wouldn’t move the money out of PPC, I would just find better ways to use the existing budget.  But the potential exists for losing it for a higher and better purpose that is proven out by the numbers.  Just optimizing the system, no hard feelings, right?

PPC Marketers, if you’d like to free up budget for something else, ask your web analytics folks if they can track this test for you.  Locate a high volume search phrase that you buy PPC for ads for where your web site naturally ranks as #1 or #2 for the same phrase.  Try shutting the PPC for that phrase off.  How much click volume do you lose versus the cost of the clicks when PPC is tuned on, and what does that translate into in terms of increased profit?

And I am really not picking on Blue Nile here – search any brand name, online or off.  Go ahead.  What do you see?

Would you fail to click on the organic link if the paid link was not there?  Really?  If you think you’d miss the organic link if the PPC link wasn’t there, send me a pic of the example.