Marketers have always had three major challenges to successfully executing marketing investment strategies:

1. Revenue Attribution: Which marketing event or events gets credit for a particular customer purchase?
2. Revenue Cannibalization: How much incremental revenue is generated from an individual marketing campaign?
3. Budget Allocation: How is the marketing budget allocated across marketing channels and customer segments for future planning?

All three are requirements for accurate campaign reporting, precise performance forecasts, and proper investment spending that lead to an optimal customer contact strategy. Each process can be addressed independently to attain great value. Each can support the others. Together their value is greater than the sum of the parts in achieving corporate growth and profitability goals.

Revenue Attribution

Nothing is more difficult, or more important, than knowing which marketing events caused a customer’s purchase. Revenue attribution refers to the process of assigning credit to the marketing sources of a customer purchase. It answers the question: Which marketing events gets credit for the order?

The cause and effect link is fundamental to measuring the effectiveness of past marketing events, forecasting the performance of future events, and capturing the marketing preferences of customers — all necessary to accurately make future select decisions. This is necessary and sufficient to optimize the contact strategy of an isolated marketing event; however, today’s marketer faces multiple customer touch points impacting one another, thus the need to build upon revenue attribution with revenue cannibalization and budget allocation processes.

On a more strategic level, revenue attribution enables marketers to assess the overall productivity of marketing channels or media. Again, this is useful information, but not sufficient to design an optimal future contact strategy for each customer.

Revenue Cannibalization

Understanding the incremental demand generated from each marketing event in the context of other events adds precision to circulation decision-making. Revenue cannibalization is the impact to the performance of one marketing event from that of another. It answers the question: How much revenue degradation occurs for a marketing event when another is sent to the same customer?

Understanding this cannibalization effect lets marketing make each incremental circulation decision for a customer in concert with all previous circulation decisions. In the above example, the revenue of the second contact is reduced by 15% if the same customer also receives the first contact (10% reduction for third contact and no reduction for the fourth).

As shown in the diagram above, with each potential customer contact the marketer knows the incremental revenue and profit impact of adding or removing it. If done well, this enables marketing to derive the best contact strategy for each customer — one that maximizes the profit contribution by removing any redundant, ineffective contacts.

Besides making the optimal circulation decisions, it can adjust revenue forecasts by redistributing the revenue of dropped, redundant contacts amongst the surviving contacts. You get a circulation and revenue plan for every customer and event.

For planning purposes, revenue cannibalization enables marketers to alter their contact strategies to be more effective and efficient. Good accounting of the redundancy between marketing events leads to smarter decisions and more efficient marketing.

Budget Allocation

The third process allocates marketing budget dollars across the customers, channels and marketing contacts to optimize the return on future investment. Budget allocation is the process of finding the optimal distribution of future marketing expenditures to produce the best corporate bottom-line. It answers the question: What is the right amount to spend and where should I spend it?

Most companies consist of customers, media, and channels with a variety of optimization objectives. Each of these ‘asset classes’ is its own optimization with a unique objective. A prudent mix of short and long-term profitability targets is healthy. The budget allocation solution recommends the right spending mix by asset class (media, channel and customer groups) to meet the multiple financial goals.  Prudent spending of marketing dollars leads to smarter decisions and more productive marketing.

Three Independent Processes

Each of the above are best described as marketing analytic processes demanding continual attention for steady improvement. Any gains made in one will certainly benefit the tactical and strategic decisions made by marketing. Each shares some affinity with the others; however, they have their own best practices. Solving one does not depend upon the other for its success. There is no natural sequence associated them, or any natural overall priority. They are independent processes; all valuable for effective and efficient marketing.

Three Related Processes

While they are three independent processes, there are affinities and interconnections. Each has its part in answering the ultimate question: Which contacts are best for each customer?

The revenue attribution and revenue cannibalization algorithms are unique, but do share driving factors.  For example, two marketing events with similar in-home timing and content will compete for the credit to a past customer purchase (revenue attribution) and cannibalize each other’s revenue for common customers (revenue cannibalization).

The revenue cannibalization and budget allocation processes have a symbiotic relationship. Each can help solve the other. Knowledge of the revenue cannibalization between contacts enables marketing to create the ‘advertising productivity curve’ which reflects the probable incremental revenue generated at each spending level. This curve built for each unique asset class provides an excellent way for budget allocation to find the optimal spending across customers, media, channels, and time.

In turn, the optimal budget allocation is used to set dollar or contact limits for each customer. A customer’s contact strategy is derived from an iterative process of choosing the most profitable contact, applying revenue cannibalization adjustments, and recalculating the next most profitable contact.

Behind it all is revenue attribution with the all-important cause-effect relationship of marketing event and customer purchase. Both revenue cannibalization and budget allocation benefit from this linkage.

Together They Are Greater

Every marketer should have procedures to attribute revenue, estimate cannibalization, and distribute budget dollars — all to make smarter tactical select decisions and guide strategic planning. Continual investment aimed to improve each is wise. The best marketers have these under scrutiny, if not control, even though they can never be absolutely solved. The right offer, channel, timing, and customer are every marketer’s goal. These three processes independently contribute to more effective and efficient marketing. In concert their value compounds.

About Richard Hodges
Richard Hodges is a database marketing veteran and is Clario’s Vice President of Customer Insight Solutions since 2010. Richard has over 20 years’ experience on the business side of database marketing and has implemented, reporting solutions, migration models and customer value analyses for a number of customer-focused retailers.