Channel Challenges

A number of years ago, I was in a kickoff meeting for a large database management project focusing on multi-channel order management. The goal was to integrate data from different channels to arrive at a 360 degree picture of the firm's customers. Participating in the meeting was one of the smartest and most knowledgeable direct marketers I have ever met. He was the primary client contact and person responsible for bringing the project to life. His industry experience spanned close to a quarter century, including senior executive positions with large and respected firms.

We opened the meeting by discussing project objectives. This individual mentioned the goal of identifying new ways to encourage single-channel customers to order from additional channels. He referenced an internal analysis that had uncovered the fact that multi-channel customers are far superior to those who have only ordered from a single channel.

The Conventional Wisdom

Most database marketers would agree with this project objective, and with its underlying justification. The general industry consensus is that, because multi-channel customers are superior, it is important to find creative ways to encourage single-channel customers to tap into additional channels.

To select just one representative example of the conventional wisdom, a prominent database marketing pundit informs us in an article titled, "How to Profit from Multi Channel Marketing" (Database Marketing Institute, that:

[C]ustomers that make purchases on two or more channels spend more per year than single channel shoppers. Early research in this field was done by Sears Canada. They learned that Canadians who bought both in retail and through the catalog spent almost twice as much as those who bought goods on only one of those two channels. The same thing can also be true of customers who use the web plus retail or phone ordering.

With this in mind, the author wraps up his article with the following advice:

Find out what percentage of your customers are multi channel. Quantify their annual purchases as compared to your single channel customers. They will be significantly higher. Next, develop some strategies to shift more of your single channel customers to multi channel using your analysis to support your programs. Result: increased retention, sales and profits at little expense.

My point is not to pick on this particular pundit. I could have selected for quotation any number of industry luminaries. The conversion of single-channel customers to multi-channel customers is widely used as a primary justification for the significant effort and expense required to create a comprehensive view of one's customers. Although we at Wheaton Group are enthusiastic supporters of the cost-effective benefits to be gained from multi-channel order management, we question the widespread industry focus on encouraging customers to order from additional channels.

Clearly, multi-channel customers are superior to single-channel customers. However, the key question is whether we as database marketers should care. In other words, it is important to ask whether database marketers should buy into the conventional wisdom that: 1) Multi-channel customers perform better than single-channel customers. 2) Therefore, the intrinsic interest of single-channel customers in a company's products or services will increase if they are coerced into purchasing from additional channels.

The conventional wisdom is flawed because multi-channel customers are inherently different from single-channel customers. There are two reasons for this, which we will discuss shortly. The superior performance of multi-channel customers is explained by these underlying differences, not by the fact that they order from multiple channels. Therefore, it is naïve to think that prodding single-channel customers to order from additional channels will increase their intrinsic interest in a company's products or services.

The First Reason that Multi-Channel Customers are Different

Multi-channel customers, by definition, are multi-buyers. In order to have ordered from multiple channels, a customer has to have ordered at least twice. The same cannot be said for single-channel customers.

As any direct marketer will tell you, multi-buyers generally are much better customers than single-buyers. Multi-buyers tend to be more loyal, with higher average order sizes, and "by extension "larger long-term values.

Far fewer single-channel customers are multi-buyers compared with their multi-channel brethren. Therefore, they will not "all other things being equal "match the subsequent overall purchase volumes of those who have ordered from multiple channels. And, there are no CRM strategies or tactics that will change this reality.

This is the mistake that was made by the senior executive referenced in the first two paragraphs of this article. Remember, he mentioned that an analysis had uncovered the fact that multi-channel customers are far superior to those who have only ordered from a single channel. However, subsequent probing revealed that the analyst had arrived at his finding by dividing customers into those who had ordered from multiple channels versus those who had ordered from just one. Unfortunately, he had not controlled for the number of lifetime orders. Hence, the comparison was meaningless, and the conclusion about the superiority of multi-channel customers was spurious.

The Second Reason that Multi-Channel Customers are Different

Multi-channel customers generally differ from single-channel customers in other important ways. The earlier-quoted author alludes to this when he notes that, "Those responding to multi channel marketing are different from single channel customers. They tend to be more affluent." In fact, this increased affluence explains the author's subsequent observation that, "Multi channel customers buy higher priced options, [and] are less price sensitive ..."

The interesting question is why multi-channel customers would be more affluent. Much of this has to do with the demographics of the Web channel. Traditionally, those with Internet access have displayed fundamentally different demographics than the balance of the population. For one, they have tended to be more affluent. The same is true about access to broadband compared with dial-up, which of course facilitates Web-based promotions and commerce. These differences in demographics have been shrinking but are still significant.

These demographic differences between multi-channel and single-channel customers are an inherent condition that cannot be altered by any CRM strategy or tactic "no matter how innovative. Therefore, focusing energy and expense on coercing single-channel customers to purchase from additional channels will be a fruitless expenditure of energy and resources.

Supposed Evidence for the Conventional Wisdom

We have reviewed much of the supposed evidence supporting the contention that it is beneficial to encourage customers to order from additional channels. Frankly, they are riddled with logical flaws. Consider the following three examples:

Example #1 "Members of Internet clubs generally purchase much more frequently than non-members. However, this is hardly incontrovertible evidence that an additional channel "the Internet "has had a positive effect on loyalty. Instead, it is more likely to be a reflection of self-selection bias. Generally, those who sign up for a club, or who take advantage of a club when membership is automatic or universal, are those who are most interested in the underlying product or service in the first place.

Example #2 "A test panel of customers that receives e-mails on top of catalogs over a period of time generally will purchase more than a control group that receives only the catalogs. However, this definitively proves only that increased promotional contacts result in increased sales, something that direct marketers have always known. The better question is whether incremental e-mails are more cost effective than other types of promotions at stimulating additional interest.

Example #3 "Offering one-click ordering over the Web generally boosts retention and annual revenue compared with standard control groups. However, the only thing this is guaranteed to prove is that the easier we make the ordering process across channels, the more revenue we generate. Again, direct marketers already know this. But, it says nothing about whether encouraging customers to order from channels that they might not have chosen on their own does anything to increase their overall incremental interest in a company's products or services.

A Contrarian Point of View

We at Wheaton Group think that the industry should stop obsessing about the number of channels its customers have ordered from. Instead, the focus should be on inducing repeat purchases regardless of channel, while ensuring that all available channels are well publicized and operating smoothly and efficiently.

Evidence for the Contrarian Point of View

Wheaton Group did an after-the-fact analysis for a client that operates through both direct and retail channels. The goal was to "tease out of the data" the effects of multi-channel behavior above and beyond the standard multi-buyer effect. Customers with two purchases over the previous twenty-four months were broken into two groups: 1) those who had purchased both times through the direct channel and, 2) those with one direct and one retail purchase. Then, the performance of both groups over the subsequent twelve months was compared.

Although not a definitive "looking forward" test, we found no compelling evidence of multi-channel superiority for this client. The two groups displayed different patterns of channel usage over the subsequent twelve months. The multi-channel customers ordered a bit less through direct, and a bit more through retail. However, aggregate performance across both channels was pretty much the same. In short, it did not appear that customers who had self-selected to purchase from multiple channels were superior to those who had self-selected to purchase from a single channel. So, by extension, why should we assume that coercing the use of additional channels will result in better customers?

With this in mind, it did not make sense to spend time and money attempting to convert single-channel customers to multi-channel. Instead, the decision was made to focus on inducing repeat purchases regardless of channel. Wheaton Group's recommendation was to concentrate on giving customers ample reason to order again, and make it as easy as possible to do so by improving the accessibility and efficiency of each channel. In other words:

Multi-channel customers may be superior, but you need to focus elsewhere on ways to grow your business.