• by Michael Haydock , January 26, 2012

Large retailers can spend well north of half a billion dollars on marketing each year. That’s a lot of money -- but still, most marketing departments don’t have a good handle on the return they get for their investment.   

It's not for lack of trying. Merchants employ all sorts of methods to understand how marketing and advertising drives sales, especially whether a campaign is stimulating purchases that would not otherwise have occurred. They use techniques that attempt to describe the “average” consumer who may have been exposed to a mass media advertisement. This is regressed against sales performance to attempt to estimate the response generated by an ad or marketing campaign.   

The problem is that television, radio commercials and inserts -- while still amazingly powerful ways to reach a consumers – are notoriously difficult to map to sales results using traditional methods. It’s a bit easier with digital media, which in some cases can be tied to specific customers.   

But both media types, traditional and digital, are confronted by the same challenge -- saturation, the point beyond which additional marketing investments will not yield additional sales.   

It’s a big challenge. Think of the marketing budget as the scarce resource. Ineffective marketing program expenditures can lead directly to lost revenue opportunity, wasted promotion dollars, and declining market share. The objective is to put the dollars to work in the most effective way, mapping media types to customers who have a better-than-average chance of responding to that media type. 

Retailers often miss the customer dimension in their media mix allocations. Most large companies perform basic analytics to understand the effectiveness of their marketing. But they usually look at the media independently of how their customers actually behave and their customers’ preferences for being reached via a particular media method. 

Recent advances in analytics now enable retailers to do so much more. They can gauge how effective the direct mail pieces are -- say, with customers in Chicago who only shop the store during sales. Or how the television ads are working with the most loyal customers in Miami. Studying the customer data can lead the marketer to a type of marketing mix matrix with, for example, the media types as rows and the customer types as columns. The intersection of each row and column should provide the resource allocation for that media type and customer combination. 

Look across a row, and you have the sum total that should be spent on any media type in your advertising arsenal.  Follow down a column and you have the optimal mix for that customer type, providing the highest probability of maximizing sales. 

Once a company understands which techniques (or combination of techniques) work with which customer sets, it can tease out crucial facts -- for example, that a particular ad is effective against one competitor but not another. It can recommend a robust defensive strategy aimed at maximizing revenue, such as running a print campaign aimed at a specific set of customers in a specific market. Ultimately, it can put a plan in place for maximizing the return it gets from marketing spend. 

Modern analytics are especially useful in the burgeoning field of targeting interactive ads delivered to shoppers' smartphones and other portable devices. The immediacy of those ads -- their ability to spark impulse purchases -- can be very powerful. 

But to be really successful, the ads must be personalized -- the right ad aimed at the right customer at the right moment. A sophisticated analytics system can do just that by considering -- in real-time -- each customer's preferences, past purchases, and habits, along with a wealth of other factors. 

Such analytics techniques are increasingly prevalent in all aspects of business and life. Analytics help health officials understand the spread of food-borne illnesses and enable financial institutions to better manage risk. Physicians use analytics to help diagnose diseases. 

It’s time that retailers embraced these sophisticated new methods. Retail marketing will never be a science, but science can give marketers the tools they need to better understand the amazingly diverse and complex ecosystem that their customers inhabit. That’s great news for both customers and retailers.