Many retailers and suppliers have introduced personalization programs, to elevate customer experience and increase customer lifetime value. Personalization comes at a cost, and when done right, multiplies every dollar spent. But how do we measure and fine-tune these efforts? Read on.
Getting the most ROI on your personalization investment is all about understanding KPIs and utilizing them properly. Before we get to what those are, let’s scan through some important elements:
- First and foremost, calculating personalization ROI: this is done by dividing the incremental turnover by the personalization (coupons) cost.
- In most cases, improving ROI is done by increasing the incremental turnover, rather than decreasing the coupon cost.
- Some parameters to consider for optimal personalization campaign ROI results and higher incremental turnover include optimized offer bank, effective communication channels, amount of offers per customer, optimized offer mix, optimal discount level.
Personalization campaigns are indeed complex, but analyzing such campaigns regularly leads us to some practical insight: There are 2 KPIs that have direct correlation with the ROI of a personalization campaign, and monitoring them closely is a must in order to understand results and fine-tune activity accordingly:
1.Offer Bank Coverage: This KPI represents the total value sales of the offer bank’s coupon products out of the total sales during the campaign period. The offers in the bank should be relevant to as many customers as possible. That’s even truer when using product-level coupons, in which case retailers should aim to reach 25% coverage or above.
ROI is highly correlated with this KPI for a very simple reason. To make an impact on customer behavior, retailers should generate customer engagement with the personalization program. The offer bank, then, has to include enough offers to be relevant to a significant portion of the customer base. In many cases, we see a very clear threshold for minimum coverage for good ROI results. True, the same offer bank can get various results, depending on the number of offers per customer, levels of discount, and effectiveness of the product. That said, keeping a sufficient offer bank coverage threshold will guarantee positive results.
2.Effective Discount Level: This KPI measures the mass promotions in the store for the duration of the campaign. It shows the percentage of overall discount amount out of the total gross sales. It is evident, that running a personalization campaign in periods of deep and heavy promotional events, will cause its value to blur and its ROI to decrease.
An ongoing trend of a higher effective discount rate in the store may reduce your personalization program’s ROI results over time, even if you did not change anything with your program.
The below chart shows a real example of the correlation between personalization’s ROI and these two KPIs.
In this chart, we measured the ROI of ten sequential weekly campaigns. For all ten campaigns, we used the same target audiences, sent the same number of offers to customers, through the same communication channels. As you can see the ROI (ratio of incremental turnover and coupon cost) was changed in the range of 6.1 to 2.5.
When analyzing the reasons for the reduction in ROI, and specifically in weeks 5 and 6, we quickly noticed the change in these two KPIs. The Offer Bank’s Coverage went down from 20%+ to below 15%with a lower participation level. At the same time, the Effective Discount Level increased from approximately 10% to 20%. What caused the personalization program to become less attractive?
There might be good reasons for these two changes but the clear conclusion is that we must be able to align the personalization program to other marketing activities if we would like to keep the desired level of ROI.
Personalization is complex and dynamic. It takes strategizing and planning, and then measuring and fine-tuning to get the most ROI for personalization efforts. But even within this intricate mechanism, two KPIs are simple to monitor, and their effect is clear. To improve your personalization campaign ROI, look into offer bank coverage and effective discount level.