Kevin Hillstrom: MineThatData

This is what happens if you don't give AI a copy of what our friend, The Lemonhead, looks like. It leverages creative expression to do whatever the heck it wants.

I mean, technically that is a lemonhead ...

I have no idea why there is an airplane in the image.

Anyway, this week we'll talk a bit about loyal customers. There is a secret to developing a loyal customer base, and the secret is likely to annoy you, because it has little to do with anything you've been taught.

        

Which of the three jobs would be to your preference (click here)??

        

They're as old as the Bible.

This book (click here) is a classic from the dot.com era. The authors explain how industries evolve and change. Think about catalog marketing, once dominated by the likes of Sears and JCP and Montgomery Wards among others. Everything consolidated to a handful of gatekeepers. Then "specialty catalogers" ... the Lands' End and LL Beans of the world, they took away market share. There were thousands of small (and some large) catalog brands. Eventually the large catalog brands expanded into retail/malls (i.e. marketplaces).

Then ecommerce came along. Thousands or tens of thousands of small companies erupted, taking market share from catalogers. Catalog brands folded. Ecommerce ultimately rolled-up into large marketplaces (Amazon ... Shopify ... Etsy etc).

What do we think happens when we transition from ecommerce to something that is AI-inspired? Do you honestly think that Amazon will be the big winner? Or do you think that something comes up, something we didn't expect, and that "something" does "something new" better than incumbents?

It's likely to be the latter.

This is more about what happens to "brands". They grow, they thrive, they struggle, they die. It's unavoidable.

Your "boutique brand", however, can adhere to a different set of rules. That little Italian restaurant on the corner has been around for three decades. They've survived all changes. How did they do that? Why do you keep going there?

Yes, there are going to be grifters that sink the economy as they try to force their version of AI upon us. We've seen an endless supply of grifters in the last quarter century ... the Enrons, the Mortgage Backed Security purveyors, and in the past decade politicians. It's going to be an awful experience in ecommerce to wade through the grifters. But we'll do it. Everybody always does it.

Your "boutique brand" doesn't have to adhere to the migration from the marketplaces that dominate the 2020s to the marketplaces that will be created for the 2030s. Plan accordingly, and have a vision for what is best for your customers.

        

There are (too) many digital marketers who, when you talk to them about profit, say that they don't measure profit. "I don't need to measure profit, I measure ROAS, ROAS is a best practice".

The fun part of the comment is that the digital marketer IS measuring profit, s/he just doesn't realize it.

Here's a table for a digital marketing initiative, broken down into deciles for the sake of illustration.

We see total results on the left - I converted the results to incremental outcomes by decile. In this example, deciles 7/8/9/10 lost money, they were unprofitable.

Now look at Incremental ROAS on the far right. An approximate Incremental ROAS of $2.25 is unprofitable. Anything below that is unprofitable.

If you have the discipline to keep incremental activities above a 2.25 ROAS, you're generating profit. Good for you!

        

Non-catalog readers, take the day off.

Once again, I share these images to show you just how wonked-up AI actually is. Spelling errors. Missing legs. If it's this wonked-up with a simple cartoon, imagine what else the gurus are trusting that in reality is completely borked?

But I digress.

Last week a member of the #printisback community on LinkedIn decided that #brands need to go back to 1996, as if J. Peterman were about to publish the Urban Sombrero on the cover.

The root of the lie being told to you is called "Matchback Reporting". Matchbacks ignore incrementality. Those who believe in Matchback Reporting ignore reality.

Time for a parable. Remember when I told you a member of the retargeting community took me to lunch, and for the cost of a Caesar Salad wanted me to convince the Management Team at a large retail brand that because 95% of ecommerce customers saw at least one of his ads he deserved credit for 95% of ecommerce orders (over $300,000,000 in annual sales) and he wanted a percentage of each transaction. If he presented those facts to you, a smart cataloger, you'd say "hey, Goober, get out you Lemonhead." Then you'd go back to your cubicle, pull out your Matchback Report, and perform the EXACT SAME ANALYSIS AS GOOBER DID and treat it as Gospel. You'd think that Goober was an idiot, you'd view you as a savvy marketer. And yet? You're the same person, doing the same thing, sans Caesar Salad.

Let's assume that your catalog is active across a four-week period. Let's assume you were going to mail your entire twelve-month customer file. You randomly select 50,000 customers to be in the mailed segment, you randomly select 50,000 customers to be in your no-mail / holdout segment.

You then sum all demand across all marketing channels for the four weeks when the catalog is active. Compute an average (i.e. divide each sum by the 50,000 customers in the segment). You'll produce a table that looks like this:

This is the way test results generally look. If you don't mail a catalog, your call center is quiet as 78 year olds cannot call you if they don't have a catalog in their hand. Website / Direct Load is where most demand happens, most of the demand will happen if you don't mail the catalog. Email Marketing is usually not impacted by catalogs, though your mileage will vary. Search is a channel that is clearly impacted by catalogs - catalogs cause customers to search for competing products (both a strength and a weakness of catalog marketing because your dumb catalog drives your smart customers to the competition). Social is almost never impacted by catalogs - completely different audiences.

The magic in the table happens in the Total Demand column.

Your matchback reporting takes full credit for the $5.65 of total demand. It ignores what would have happened if the catalog were never mailed. If the catalog were never mailed, the $5.65 total becomes $4.25 ... not $0, but $4.25.

Here's what the p&l might look like for the $5.65 figure.

Everything looks good here ... you appear to generate $1.54 profit per catalog/book ... in modern parlance you generate a ROAS of 7.53. It's the 7.53 figure that the #printisback community on LinkedIn like to refer to ... it's a much higher number than that 3.88 figure you get for paid search or 2.97 for paid social or ... wait ... they never quote email marketing because email marketing has the best ROAS, period.

Remember - your holdout group did $4.25, not zero. Take the control / holdout group average ($4.25), divide it by the mailed group average ($5.65), and you get 75%.

This means that 75% of what is outlined on the matchback report is a lie. A fabrication. It would have happened had the catalog not been mailed ... and you know this is true because in the table YOU DIDN'T MAIL THE CUSTOMERS IN THE HOLDOUT GROUP!!!!

We cannot run the p&L on the $5.65 that is likely reported in your matchback report. We have to run it on the incremental total ... $1.40 ... which is (1 - 75% = 25%) of the $5.65 total.

The p&l changes, friends.

This is where things get really dicey. The incremental outcome (a loss of $0.18 per catalog) is REALITY. The matchback-reported totals column of $1.54 profit is FANTASY.

On LinkedIn, the #printisback community communicates FANTASY results to you, misrepresenting the outcome as reality.

It's pretty obvious why they'd do this.

• $5.65 per book / $1.54 profit = Best ROI, which means you should hire them.
• $1.40 per book / ($0.18 profit) = It might be time to shut down your catalog division.