Integrity as a modeling variable

The direct marketing magazines are loaded with articles on the benefits of better understanding your customers. Especially in difficult economic times, these suggestions get paraded out. Rarely is much detail offered, especially about how many or what kinds of customer variables are most beneficial. Usually geodemographic clusters are alluded to, sometimes specific demographics and most talk about Recency, Frequency and Monetary (RFM). My experience suggests that only another two or three hundred are important in getting a complete picture of your customers' behavior. Even then, they never seem to quite match what you're looking for. You might guess that soccer moms probably drive SUV's since lots of them do in your neighborhood... but is it worth getting vehicle type when it will only match on 5% of your customers. I never cease to be amazed at how difficult it is to get just what you're looking for. In fact, I have a theory that there are an infinite number of possible variables about each one of your customers. Now, I'm also pretty certain that most of them aren't worth building, like how far is customer X from the center of the sun. Or, how many witches per capita live in each ZIP code. Now its not impossible that those be relevant... on the other hand, we should attempt some kind of a theory to create a variable. But that isn't really the topic of discussion. The variable I'm interested in is not in the customer database... it is in the modeler.

After decades of successes in modeling, I have run across my share of defeats as well. Thankfully, most of those were handed to other modelers. There was a simple pattern in most of them. We beat them because we built more variables, did more models and validations... I guess we out worked them. Which brings me to perhaps the most important variable missing in most marketing databases - integrity.

Integrity basically means doing what you say. But in modeling, its so easy to stop with ‘good enough'. Its so easy to pack up at 5 pm and hope it works fine. Tonight, we will be working through the night on a complex triple model. We found out yesterday that our client had mis-specified the deadline - its due tomorrow, not a week from now. Believe me, it is very easy to tell yourself - this is good enough - but we follow our regular procedures - which means probably two dozen validations - a count review and finally three separate pulls. Most importantly, we will continue to look for interesting connections - ways to make our client's project more successful.

The RFM Trap

How is all this data going to help me increase the bang for my marketing buck?

(click to enlarge)


A friend sent me the above chart and asked me what I thought of it. The author suggests, “Shaded cells reflect that 80,495 customers reside in those cells that received a 2% or more response rate. So about 80.5% of the mailing went to customers who had 2% plus response rate. To the right of the sales grid, you will notice that the sales generated from these customers were $4,062,183 or about 97.3% of the total sales for the event. Hey, that means 97% of the sales were generated from 80.5% of the cost. Why would I mail to the other 19.5% of the mailed file? If we had known in advance which of the cells would have generated less than 2% response rate, we probably would not have mailed them. Wouldn't it be nice to know in advance which cells will generate the most sales.” He claims that if he took the top 86% and mailed it twice, he could have increased revenues 72%.

Sounds magical right? This is classic RFM (Recency, Frequency, Monetary) analysis. But each time he applies the same analysis, he will have to cut another 20% to make his scheme work.

The largest publisher of children's books used to send them out before collecting the money. Their CFO suggested that they should cut out the highest non-paying ZIP codes. Sure enough, their bad debt plummeted. It worked so well, that they did it again next year. By the third year, their warehouse was getting larger than necessary and sales dropped dramatically.

Everyone wants to cut wasted spending. Retail pioneer, John Wanamaker said, “Half my advertising is wasted... I only wish I knew which half.” Few companies SHRINK to greatness.

Dick Cabela's in his common sense wisdom said, “I don't want to know that I can cut 20% of my mailing and only lose 5% of sales, tell me how to grow my circulation, not shrink it.”

You cannot grow circulation with RFM. It is the worst possible strategy for anything but the shortest term. Followed for the long haul, it will DESTROY your company.

Miglautsch Marketing has been helping companies GROW their circulation for decades. Give us a call and we can offer you positive, understandable alternatives to RFM.

Thoughts on "Junk Mail"

I've been calling myself a "Junk Mail Expert" for years (decades?). One night I was at the head table with Dr. Gene Del Polito. After introducing myself, I explained that people feel empowered when I use the term. We are actually giving our recipients the right to throw away our beautiful (or not) creativity, GUILT FREE.

Lest you think that trivial... tell me what else fits? Even the spoilage in the fridge lets us know that we bought too much, didn't cap the bottle or haven't cleaned regularly. Only junk mail can be tossed aside with no thought that "I might need this some day." No worries, more will come! This is the foundational basis for the Supreme Court allowing us to directly intrude peoples' homes. "The distance from the mailbox to the trash can is sufficiently short not to constitute an invasion of privacy."

Gene got up to give his speech... somewhere in the middle he was overcome with uncharacteristic passion... He pounded the podium looking straight at me..."How are we going to be taken seriously and get decent rates... when even WE call it 'JUNK MAIL'"?

Like it or not its here to stay... if I'm not in the market for a car, then all the dealership mail is junk... if that little red light starts blinking those same mailers are carefully evaluated. It isn't about us... we work harder than ANY medium to be relevant. It is market's core dynamic that there are more prospects than buyers. "Junk mail" is a tongue-in-cheek reminder that it is OK to market, that we are not communistic, that free enterprise is alive and well... God Bless America!!!

"Statistics are no substitute for judgment." Henry Clay

Why is it that statistics have such a hold on our brain? In the '80's businesses could lure investors simply by displaying their data on computer generated graphs. In the classic book, How to Lie with Statistics, by Darrell Huff, W.W. Norton & Co., New York, 1954 (reissued in 1982 and 1993), we gain some insight into the way our minds interpret data.* The book is really more about how we hear and see the portrayal of data.

Boiling it down, our eyes make judgments about the light that is hitting them. Have you ever been driving down the interstate, not paying particular attention to the cars passing by in the opposite direction. Suddenly, you spot a police car. You weren't looking for one and perhaps you weren't even speeding. But, through life, you have programmed your eyes to alert you when a vehicle arises with little lights on the top. You may have had the same experience only to find that it was a car with a ski or bike rack on the top. So, we have perception filters which, while generally helping us also often unconsciously shape our reality.

Statistics tend to be a short-hand for important information. They also tend to be numeric, so that they are easily portrayed with graphs and charts. So, when trying to magnify the difference between numbers, rather than using a line or even a bar, use a three dimensional object, because we 'see' images as objects. After all, we never really 'see' anything but images, though we infer a 3D world around us.

Whenever attempting to interpret summary information (and it is not generally possible to understand any amount of raw data) remember to ask yourself these three important questions.

What is the point? The graph is included to make a point. Make sure you understand the point before you look at the illustration of that point. Ask yourself if there are considerable reasons to think the point might be correct, before you look to the supporting data.

Who wins? Always ask, who is going to substantially benefit, should this point be correct.

Who wants what? Motives (especially unexamined) always shapes interpretation of data, never assume that scientists or statisticians are without motives, even corrupt ones.


* For a quick summary of the types of information in the book

There are three kinds of lies: lies, damned lies, and statistics.

I still remember my first seminar on modeling. I was shown how, with proper statistical techniques, done by a Ph.D. Statistician, one could find the top 20% of the customers who produced 80% of the profits in a mailing. Neiman Marcus ran the tests and the graphics were impressive. However, questions arose in my mind, I raised my hand. "You show very dramatic improvements over your control mailing, what customer segmentation method did you use for comparison?"

"A random sample." was the brusk reply. The answer, coming from a Dr. of Statistics probably went right by most of the audience. I knew, on the other hand, that just selecting the most recent 0-3 month buyers would probably generate similar if not better results. Adding segments of 3-6 and 6-12 would have ruined the beautiful presentation.

And those many years ago, I learned a very valuable lesson. It isn't just about testing, it is about test design and integrity. Direct Marketing does offer the possibility of learning. But it also offers the opportunity for manipulation and statistical deception. Next time you are listening to a public presentation about the magic of statistics or database segmentation or offer personalization, remember, if the numbers are detailed the client probably isn't present, if they are not detailed the testing was probably not valid.

We have been told for decades about how we can make money with data - the truth is, it is not such a simple truth.


An excellent article on the problems with digital data http://www.lewrockwell.com/giles/giles22.html

The Basis of Direct Marketing

What mystified me about direct marketing was its science. "We can produce measurable results." I was told. "We can know what is working!" And to a large extent that is true. I was told that you could make your own way in this world, as long as you could "beat control". Since I have much more training in the philosophy of science than in marketing, so it seemed a natural fit.

Sharper Image began with a runners watch. The first ad done all by itself, made money. Richard Thalmeier, the founder, tried more ads... kept track and away he went. And back in the '80's, my business was mostly in teaching non-direct marketing companies the basics of measurement and testing. It worked best when it was kept simple... and then the claims of the Direct Marketers started expanding....

Getting Started in Direct Marketing

The question of Direct Marketing has gone through several evolutions. I remember when I was young, the national association was the Direct Mail Marketing Association. Direct mail went back into the 1800's, it was the proven, measurable and testable.

More than a few years ago, I was in a ad agency... I was the 'direct mail' guy. They asked me, "What is the difference between what we do and direct marketing?" So I wrote an article, Why Direct Marketing is Misunderstood. Excellent, check it out.