The purpose of marketing campaigns is to maximize the ROI. To accomplish this, strategists must answer three important questions:
- Which customers should the Ads be sent to?
- How many customers should be targeted?
- What discount rate, if any, should be offered?
The answers to these questions are often difficult to compute because they use complicated predictions of marketing spend, revenue, and customer behaviour. Many times, companies will base their decisions on manual calculations that are prone to error. In other cases, companies will simply target their most valued customers.
Choosing the Right Measuring Stick
The biggest challenge in evaluating the performance of a promotional campaign is the ability to measure its ROI. At a first glance it seems simple, we would look at the revenue generated as a direct result of the campaign, and subtract the cost of the product and derive the profit or loss.
In practice, our clients found this approach to have serious flaws. The initial bump in revenue incentivized by a hefty discount is often followed by slump in sales by the same customers in the months to come. Old school segmentation methods like the RFM model target the shop’s best customers, offer them a hefty discount, and rejoice at the immediate returns. When we consider that these loyal customers may have made the same purchase without the discount, we see that the measuring stick should be Uplift instead of Revenue.
Revenue ✘
How much Gross Revenue was generated by customers who used my Discount Code or Promotion?
Uplift ✔
What will be the future Lifetime Value (LTV) of my customers who used my Discount Code, and what would it have been had they not received the discount.
