Two week ago I wrote about the importance of Marginal Value when thinking about marketing. Last week I expanded on the concept by looking at the impact of fixed and variable costs when you are calculating your true marginal costs of incremental marketing. Today we will flip the story from costs to revenue and try to measure incrementality.

Incrementality is fundamentally tied with attribution (in fact I cover it briefly in my book chapter on Attribution). Once you attribute a customer (or revenue) to a channel you need to realize that you may not have got it exactly right. If you got it 100% right then it is 100% incremental. It is possible in theory, but it rarely happens in practice. The next step is estimating how incremental you believe the revenue is.

I like to think of incrementality as being a percentage. If a channel is 100% incremental then you know that every customer you get from that channel is an additional customer to your business. One way of thinking about it is if you turned that marketing channel off, you would lose all of those customers.

If a channel is 50% incremental, it means half the customers you are getting from that channel you would have got anyway from a different channel. If you turned the channel off you would only lose 50% of the customers you are claiming to that channel. When a channel has <100% incrementality we say it is cannibalizing other channels (i.e., when it grows, part of its growth is incremental and part of it is stealing – cannibalizing – other channels)

If a channel is 200% incremental, it means that for every customer that channel generates, it generates an additional customer in a different channel. If you turned a 200% incremental channel off you would lose all of that channel’s customers, but you would also lose the same number again in other channels. When a channel has >100% incrementality it is synergistic (i.e., when it grows it also grows the other marketing channels around it).

Different marketing channels have fundamentally different incrementality rates.

An example of a very incremental channel is Brand TV advertising. A sophisticated business will estimate the customers generated from brand advertising. They usually look at when the TV spot airs and correlate it with website traffic  that spikes at the same time. They create some sort of decay curve on that spike so that they still give the TV spot credit for those web customers hours (or even days) later. But even with these methods, the attribution fundamentally under-values the TV advertising. Let’s make a short list of the impact of that TV spot that you are not giving it credit for:

• Web traffic that comes to the website weeks or months later (GoDaddy has a Superbowl ad. They see a traffic boost for years as their recognition goes from zero to the stratosphere)
•  Non-web customers that you can’t tie back to TV
• Improved CTR on your paid search ads (Which drives up quality score, and decreases your CPC)
• Better SERP results for the SEO (as Google sees more type-in traffic and increases your Panda score)
• Business Development opportunities – people reaching out to you
• Higher conversion rate on recruitment (and people coming to you)
• Improved B2B relationships (or leverage in negotiations)

I’m sure you could think of other effects of TV. I’ve rarely seen a company try and model all these effects. Instead they measure a few of them and then accept that there are significant synergies that they cannot fully measure. Those synergies are >100% incrementality.

Cannibals!

The reverse of television advertising is coupon sites. Have you ever got to  the end of a checkout and seen a field: “Enter a Coupon Code”. What?!? I can get a discount?!?

The first thing I do is go back to Google and search for “Company Name + coupon” or +discount or +code. Every now and then you find a coupon site. You click on the coupon site, get a code and enter into your checkout. You have just given that coupon company attribution for the sale. But it is very clear you would have purchased anyway without the coupon. The coupon site just cannibalized the original channel that brought you to the site.

Every marketing channel is cannibalistic sometimes. Even a super-synergistic channel like television will have cannibalization. Some people who see the ad and act on it (and you measure them – say with a phone number on the TV spot), would have come to you anyway, through one of your other marketing channels. In the case of TV, the synergistic effects far outweigh the cannibalization effect.

Every channel is synergistic sometimes. Someone may be shopping on the coupon site. They see your company but forget to copy the coupon. The next day they come to your site through Direct Type-In and convert. You give the credit to DTI, but the real driver was the coupon site. The coupon site was synergistic in that particular case, but overall it is still a cannibalistic channel.

When Cannibals Matter

If you only had one marketing channel, then you don’t need to worry about cannibalization. If all your marketing is free, you also don’t need to worry about cannibalization. Cannibalization matters in three cases:

1. When a marketing channel isn’t profitable, but you think it is

Coupon sites are a very good example of this. Let’s say the coupon site is only 20% incremental (i.e., 80% of those customers you would have got anyway if you didn’t have a presence on the coupon site). Let’s say you are paying the coupon site $20 for every $100 they generate. And let’s say the coupon is a 10% off coupon. (And your business is 100% fixed costs – so 100% margin on that $100).

Spending $20 to make $90 ($100 – 10%) sounds great. Until you look at the incrementality. If the coupon site is only 20% incremental, then $80 out of the $100 is revenue you would have got anyway, even if the coupon site did not exist. So you are really spending $20 to make $20. But then you are giving a $10 discount. So you are spending $20 to make $10. You can’t make that up in volume…

These situations happen all the time. (It’s a related story to the selection effect in Loyalty Programs I wrote about a month ago)

2. When a more expensive channel cannibalizes a cheaper channel

Imagine Amazon had 100% market share of all book sales online. All of the customers were coming to Amazon through Google Paid Search. Amazon was profitable, but they were giving away dollars to Google (Let’s say $0.50 of every $1 they make in profit). Then Amazon introduces an email program. The program is 0% incremental. It is completely cannibalistic. All it does is steal sales from the paid search channel and give it to the email channel.

But that’s okay.

Every $1 sale that moves from paid search to email is saving Amazon $0.50. It doesn’t matter that it’s cannibalistic, as long as the cheaper channel is cannibalizing from the more expensive channel

3. When You aren’t spending enough due to attribution

Using the last example, once Amazon launches email they may start seeing Paid Search as less effective. There are two scenarios on how email could be cannibalizing paid search.

In the simple scenario once email launches, people stop searching and come direct to Amazon. In that case #2 applies.

A more complicated story is that people still search, but then Amazon hits them with an email. When they buy Amazon attributes the sale to Email.

In both scenarios email has cannibalized paid search, but in fundamentally different ways. In the first example, email did all the work. If search did not exist it wouldn’t matter one iota. In the second scenario it’s hard to say which channel did the most work. But Amazon is just choosing to attribute the sale to email. When that happens the rational thing for the paid search manager to do is to reduce Amazon’s Paid Search spending (since Amazon had to pay for that click, but paid search got no credit for the sale)

If it turns out that the customer needed both channels to convert, you need to be careful when the cheaper channel cannibalizes credit from the more expensive channel.

Next Week: I will put attribution to the side for week or two while we dive into how customer life time value fits into all this.