Economics of CRM Modeling

These are several conversations I have had with many marketing leaders; maybe you can relate?


Conversation 1

Marketing Manager: If we get $2 in incremental sales per customer mailed, we should be able to increase our list by 10,000 and then make an additional $20,000 in incremental sales, right?

Me: Customer response and incremental sales are not linear!

Conversation 2

Marketing Manager: If you build a model, it will drive incremental sales, right?

Me: We’re already mailing nearly all of our customers.

Marketing Manager: Right, but if you build a model, it will drive more sales, though, right?

Me: No, that’s not quite how it works…just a sec…here (comes back with handy-dandy economic CRM diagram)



Here’s the PDF, for people who like PDFs.

I built this little diagram to bring all the key metrics into a single place that I can then use to demonstrate the relationships between cost, file size, incremental sales, ROI, and even more importantly the NET CONTRIBUTION. Here, I define [NET CONTRIBUTION] = [Incremental Sales] – [Cost].

Many leaders get caught up on ROI, but again, ROI is not a linear thing. Once the model is built, if we invest more in going deeper in the mail file, we cannot expect to maintain the same level of ROI.  ROI might be fantastic for the first decile, but the marketing manager needs to also consider, “will I get enough volume of incremental sales from this tactic at this depth to even make the ROI worth it?”

I like this  graph because it also emphasizes that there exists some “arbitrary incremental sales ceiling.”  In other words, if we mail EVERYONE in our entire CRM database, we will probably generate a lot of incremental sales, but it will probably be at an even GREATER expense…which is why net contribution (and ROI) is nearly zero at the full size of the file.

The goal, then, of marketing analytics is to optimize on maximum net contribution. Maximum ROI will likely only be a few records translating to minimum incremental sales, and Maximum Incremental Sales will be the whole file (which will probably also be super-high cost).  So, maximum net contribution is where the focus should be.

Once our “customer selection model” is established, we can use other models that “choose offers, choose times, or choose creative” to send our targeted customers in order to improve response or incremental sales for that group. For example, these types of models could include offer or product propensity models, lifecycle modeling, or creative/behavioral segmentation.  In other words, a customer selection model that chooses “who” to target won’t necessarily increase incremental sales from one campaign to the next (if circulation depth is held constant),* but an offer, timing, or creative model might be able to improve incremental sales because the “right message” and “right time” principles are addressed.


*Hey, I know there’s an argument to be made for improving models for customer selection and uplift modeling, etc. (which would boost incremental sales slightly on the same circulation), but that’s another discussion, mm-kay?