Dear Dr. pROfIt
By Kevin Hillstrom
About Kevin
Kevin Hilstrom is president of MineThatData, a consultancy that helps CEOs understand the complex relationship between advertising, customers, products, brands and channels. His clients include billion dollar retailers, international direct marketers, publishers, catalog brands and online pure-plays.
Prior to founding MineThatData, Kevin spent nearly 20 years in multichannel retailing at some of the most well-known brands in the U.S., including Nordstrom, where he was the vice president of database marketing, Eddie Bauer and Lands’ End. Kevin is also author of numerous books, including his most recent, “Online Marketing Simulations,” available at Amazon.com.
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Track E-Mail Marketing's Unique ROI
Marketers can spend a lot of time debating whether or not e-mail has the best return on investment of any marketing channel.
Clearly, e-mail marketing has a very low incremental variable cost. It might cost 50 cents to send an incremental catalog to a customer; it usually costs far less than a penny to send an incremental e-mail to a customer.
As a result, ROI is a very different discipline in e-mail marketing. While there's nothing wrong with measuring ROI using traditional metrics (open, clickthrough and conversion rates), you can use mail and holdout tests to obtain a realistic view of the long-term impact of e-mail marketing.
Below are the results of a sample test. This particular marketer randomly sampled customers and placed them into one of three test groups. The first group received a weekly e-mail campaign. The second group received two e-mail messages per month. The third group didn't receive any e-mail messages during the month. This test was conducted over the course of three months.
Group 1: 12 Messages: Total demand = $30; Incremental demand = $3; Opt-out rate = 10 percent
Group 2: 6 Messages: Total demand = $28; Incremental demand = $2; Opt-out rate = 4 percent
Group 3: 0 Messages: Total demand = $27; Incremental demand = $0; Opt-out rate = 1 percent
The methodology allows marketing analysts to understand two key aspects of e-mail marketing. First, we view the column labeled "Incremental Demand." Notice there's a law of diminishing returns occurring. Going from zero to six campaigns yields $2 of demand. Going from six to 12 campaigns yields $1 of incremental demand.
Second, we notice that the opt-out rate increases at an exponential rate. Additional contacts mean more customers become frustrated.
The test results are used to predict future volume.
Group 1: 12 Future messages = $3 demand x (1 – 0.10 opt-out) = $2.70 future demand
Group 2: 6 Future messages = $2 demand x (1 – 0.04 opt-out) = $1.92 future demand
Group 3: 0 Future messages = $0 future demand
This exercise allows us to see the impact of incremental demand and incremental opt-outs. Going from zero to six campaigns yields $1.92 of future demand. Going from six to 12 campaigns yields 78 cents of future demand. Each metric is converted from demand to profit via your standard P&L equation.
Many companies find that they can mail two or even three e-mail campaigns per week, based on this style of analysis. Other companies find a limit where the cost of incremental opt-outs exceeds the future value derived by responders.
By doing long-term e-mail testing, you clearly see how incremental contacts impact both demand and opt-out rates. This gives you a cleaner view of the ROI of your e-mail marketing campaigns.
Kevin Hillstrom is president of MineThatData, a database marketing consultancy. He can be reached at kevinh@minethatdata.com.
