Why it should be "target & test", not "test & target"
Here is a small nugget from the Feb 5th Webinar with Josh Manion and Bryan Eisenberg. I touched on this in my little intro during the webcast because it is the source of a fascinating disagreement. It is also in the Multichannel Metrics book in chapter 3.
When an online and an offline direct marketer discuss their approach to outbound marketing, this is the one that they disagree about. I am talking about email or SMS channels for the online marketer and direct mail, telemarketing, or direct sales for the offline direct marketer.
Say that you want to cross-sell brokerage accounts to customers who have nothing but a checking account at your bank. This will grow the wallet share that you have with customers and make them less likely to leave to competitors. You design an attractive offer with appealing creative.
But who should you send that offer to? Everybody for whom you have contact information and permission to market?
Certainly not, says the offline direct marketer. The table below shows different sizes of mailings and their effect on your profits. Click the table to expand it in a separate window.
The big apparent difference between online and offline is that offline marketing has a higher variable cost per contact, e.g. call center costs, postage and production fees for mailings or direct sales costs. In contrast, sending an extra email or SMS or serving an extra banner, mistakenly, seem close to free.
Therefore, the offline direct marketer has to take these costs into account from the beginning.
The cost per contact is the economic pressure for targeting before testing.
- Look at column 1 of the table, This is the untargeted and untested campaign. Since the target group has been selected too broadly, you will have no chance to break even. The campaign is simply too costly and typical conversion rates these days are too low.
- Column 2 is after applying super star testing. We now increased the conversion rate to 1%, a whopping five-fold increase!!! Yet, the untargeted campaign still loses money because it is too costly.
- This is why the offline marketer has been obsessed with improving conversion rates by targeting the most promising segments. Column 3 shows that. Reduce the campaign to the most interested 10%. Costs go down and conversion rate for this segment goes up. Now we have a profit.
How to Target?
Various ways of targeting campaigns range from predictive analytics at the high end to simple common sense list selections, suppression rules, etc at the minimum end of the spectrum. There is a lot to be said about the data to use for better targeting. May I recommend a new whitepaper on just that subject: Making Web data personal.
What’s it to me, says the Email and SMS marketer
Having a negligible cost per contact for email and SMS, the default approach online has widely been to ignore targeting, especially predictive analytics.
But there is a hidden cost that we have too often ignored online, namely the opportunity costs inucrred by spamming audiences and wasting our future permission to market.
In the sense that Peppers and Rogers emphasize in their recent books we incurr a real cost when we spam. Namely, the future potential purchases by a prospect become a little less likely since they aren’t listening to us. Peppers and Rogers would say that our expected life time value probably goes down for those recipients who feel spammed.
If the online marketer takes that cost into account, the economic pressure is now very similar to offline marketers. There now is a real variable cost per contact to reckon with.
Therefore, the calculation in the table above is just as relevant to the online and shows why targeting has to come before testing.