Clv For Cpg Script The Market Research Event October 20 2009

MASBMASB Copyright MASB 2009

CLV Roadmap for CPG

The Market Research Event

October, 2009

Rick Abens,

Foresight ROI, formerly at ConAgra Foods,

Board Member Marketing Accountability Standards Board

1

Measuring and Improving the Long-term Impact from

Marketing for Fast Moving Consumer Goods

CLV Roadmap for CPG, isn’t that a nice title . . . Isn’t that a nice use of acronyms? There are too many acronyms and I start and end my title with one. Aren’t acronyms confusing ? -- because not everyone knows the same acronyms. My wife is in health care, and they have their own set of them, or the military. In the military CO can mean chief officer or company. Militarywords.com has a list of 150,000 acronyms. I googled CLV and got constant linear velocity. My point is that because I have already used two acronyms, I should explain myself. CLV is customer lifetime value. It represents is the present value of the future cash flows attributed to the customer relationship. In this case the customer, is the end customer or consumer. So it’s the future value coming from consumers to the retailer and to the manufacturer. Measuring and Improving the Long-term Impact from Marketing for Fast Moving Consumer Goods. Wow, isn’t that a long title? I had to practice saying it a few times. The point here is that we are talking about the long-term impact from marketing. Customer lifetime value is a long-term metric. In this case, it is the value, coming from the end-customer. The metric is expressed in net present value, value to the P&L, value of both revenue and profit. We want to improve it, so that’s in the title. To improve you have to know what is working, so you have to measure. Then I change it from CPG to FMCG. They are the same in this case. So I don’t want to confuse you. The point is that it’s the Fast Moving and the consumer goods that is the news here. CLV has been around for quite a while -- banks and direct mail for example. Those industries are data rich, which gives them the luxury of good metrics. In CPG, we now have more data than ever, and we are starting to use it well – like Kroger and dunnhumby for example. Now the CPG industry has the data. Then we just need the tools. The tools exist because CLV has been practiced and evolved for quite some time. The tools, though, had to be modified for the Fast Moving part. So we are going to talk about applying an old process to a new industry. We are talking about tools; we are talking about the P&L value from the end customer, the consumer to the retailer and to the manufacturer.

MASBMASB

Marketing Accountability Standards Board

Non-profit industry organization of CMOs,

CFOs, Researchers, Academics

Purpose is to raise the influence of

marketing in the board room

Conducts projects for industry

advancement and education

2

Some of you might be wondering what is MASB? The Marketing Accountability Standards Board is a relatively new non-profit organization that was founded to increase the status of marketing in the boardroom. The mission is to establish (issue, improve and promote) marketing measurement and accountability standards across industry and domain for continuous improvement in financial performance and for the guidance and education of business decision makers and users of performance and financial information. One of the projects MASB has sponsored is CLV for CPG. On this project, we have some of the top academics, Nielsen, ConAgra and Kimberly Clark involved. This is the tool that I will talk to you about today.


Customer Lifetime Value marketing can help with key

marketing issues for consumer packaged goods companies

How do we drive long-term growth with

marketing?

How do we develop customer acquisition and

retention marketing strategies that are impactful?

How do we match the right offers to the most

responsive customers?

3

In the era of marketing accountability, we are posing some tough questions to ourselves. One of them is how do we drive long-term customer loyalty with our marketing? We measure the short-term impact of our marketing well – which helps us manage the short-term results. But our CFOs are asking for more. No longer are they satisfied with answers like: we are building awareness, getting our message out, differentiating ourselves from the competition. This is all important to the brand and the business, but they are not acceptable for accountability standards. We need to link our marketing directly to the P&L – that is all of our marketing, not just the short-term impact For those of you in businesses that have formal relationships with your customers – like banks and companies that sell subscriptions – you know who your customers are and who your prospects are. Tell, me do you market to your current customers the same as you market to your prospects? Of course not, when you have a customer, you already know something about their needs and your job is to retain and build loyalty by satisfying their needs. You cross-sell, up-sell or try to speed up frequency. In the CPG world, almost all of the marketing impact work is measuring short-term lift because those are the tools that we have. But the measurement doesn’t differentiate between an acquisition strategy – getting new buyers – vs. a retention strategy. An example of an acquisition strategy might be advertising in a low penetration market or product sampling. Advertising, sampling and coupons are good tactics for acquisition strategies. The channels for retention strategies are exploding allowing us to target who we want to reach – e-mail, direct mail, and banner ads targeted to customers with specific purchasing behavior. In CPG, the average brand looses 40% of its customers every year, so the upside of retention is huge. This is one reason dunnhumby has been so successful at Kroger – by matching the right offers to the right customers – many of which are current brand buyers.


Short-term ROI marketing mix assessment covers the

smallest and least profitable sales volume

4

Baseline

Advertising

Promotion

TradeS-T ROI measures

incremental sales

Baseline volume

60% of sales

unmeasured

Sources of Sales Volume

CPG Industry Average

What is a baseline sale and where does it come from? (ASK) The typical definition is the sales that we would have gotten without this year’s marketing. There is a lot of interest in what is driving base volume because it is big and the most profitable piece of the business. Then where does it come from? Is base volume a direct result of all of your previous marketing? -- Distribution, brand equity from advertising, and product satisfaction. These previous marketing efforts have gotten the brand to where it is today. It’s your brand equity, your loyal buyers who come back to the brand even if marketing was cut temporarily. It is an accumulation of all past marketing, your distribution, your product satisfaction and WOM. Base sales also represent the long-term health of your brand, because these are sales that you don’t have to incent your customers to get. Measuring and managing base sales is one of the two components of CLV we will discuss. Some of the sources of base sales we have some understanding – like distribution increases or new skus and judgmentally we know if we increase advertising, we will see a positive base sales impact. But we don’t know enough to be predictive or be able to manage base sales effectively – especially when we have to cut spending. We cut spending without knowing the long-term impact on the business. In an MMA presentation for one brand, we saw an unexplained increase in base sales. We investigated every possible cause – additional competitive pullback, consumer trends, better copy – we traced it back to the lag effects from an increase in advertising last year. So baseline sales are the long-term impact from previous marketing.


Sources of Growth

1. Acquire new customers

2. Retain more customers

3. Increase purchase size

5

One way to look at growth is from the three sources. You can either gain new customers, retain more of your current customers – plugging the leaky bucket, or increase the amount each customer purchases. We will examine these metrics because they are the basis of CLV. When you are able to predict customer behavior in this way you will know the future value of each of your customers. I use the term customers in the broadest sense – in B2C, your end customer is the consumer and that is the behavior you will want to understand how your marketing affects consumer purchasing behavior.


Looks like these businesses are growing

driven by new customers

0%10%20%30%40%50%60%70%80%90%

100%

Healthy Choice

(annual)

Maxwell House Coffee

(annual)

PG Tips Pyramid Tea Bags

in UK (annual )

Toyota in UK (next

purchase)

NBC News

(weekly)

Soap Opras

(weekly)

% of Previous

Customers

New Customers

6

Customer churn is a problem It’s good that these businesses are attracting new customers and at first the results look impressive. The truth is that all of these businesses are basically flat. Yes they attracted 30 to 60% more customers to the brand franchises, but they also lost the same amount of their current customers. So, each brand had to acquire a substantial number of new buyers, just to stay flat.


The new customers only replaced the lost

ones instead of driving growth

0%10%20%30%40%50%60%70%80%90%

100%

Healthy Choice

(annual)

Maxwell House Coffee

(annual)

PG Tips Pyramid Tea Bags

in UK (annual )

Toyota in UK (next

purchase)

NBC News

(weekly)

Soap Opras

(weekly)

% of Previous

Customers

New Customers = Lost Customers Retained Customers

7

The new customers gained only replaced those that were lost – this is customer churn. There are a few ways to look at this data. One way that these businesses are very successful at attracting new customers and they just need to attract even more new customers to grow. That takes much more marketing effort than retaining your new customers – up to 13X. Or they can plug the leaky bucket. Of course we all want to do that– it’s a matter of how not whether we should or not. The point here is that we need to start measuring marketing impact on customer behavior instead of on brand sales.


Driving the right B2C customer behavior is key to

growth

Impact of a one-week 30% price reduction

8

Source: Dominique M. Hanssens and Shijn Yoo (2008)

0%

1%

2%

3%

4%

5%

Short-term Lift

CLV Lift

Heinz Ketchup

Customer (consumer) behavior impact

Own customer purchase

acceleration

Increased purchase size

and category usage

0%

1%

2%

3%

4%

5%

6%

Short-term Lift

CLV Lift

Hunt’s Ketchup

Here are some results from a customer lifetime value study for some CPG brands. The results are fascinating – especially when you look at how marketing is influencing the purchasing dynamics. Here we are looking at the impact from a one-week discount of 30% for two ketchup brands. Both brands got a good short-term lift over the next 13 weeks. While Heinz had a smaller percentage lift, the actual volume lift for Heinz was much greater than Hunt’s because it is a much bigger brand. However, the short-term lift for Heinz did not last so it had no impact on the CLV of the brand. What we found was that the incremental purchases were from current Heinz customers who moved up a planned purchase to take advantage of the deal. Their customers are trained to know when Heinz is on sale. The discount for Hunt’s did generate a long-term improvement in the brand’s CLV because customers stocked up on ketchup. Pantry-loading in this case translated to a faster use-up rate which actually grew the category and the brand.


Customer Lifetime Value for

CPG

9


Getting to CLV with metrics and processes

10

CPG Currently

Direct Mail

Credit Cards

CPG Aspiration

Auto Manufacturers

Kroger with Dunnhumby

Customer

Churn

Management

Target

Marketing

ROI

Mass

Marketing

CLV

Target

Marketing

Product Customer

Long-

term

MMA

Short-

term

MMA

Pro

ces

se

s

Metrics

Two things we have to do differently to get us from our current state of ROI marketing to CLV marketing. • Start measuring our marketing with customer metrics so we can learn how our

marketing works among our target segments. Product metrics, for example, are: units sold, share, sales lift, ROI. Customer metrics are: who bought, whether an acquisition or retention purchase, purchase frequency, and amount a customer buys. These metrics help us to a better understanding of how our customers are responding to our marketing and allows us the better meet their needs with our marketing.

• Start measuring and managing both the short-term and the long-term impact from

marketing. Managing the long-term impact is managing customer loyalty – it’s measuring the baseline sales.

ROI Mass Marketing is model most of us in CPG are following. We’ve got darn good

product metrics. We know if we have a sales plan gap, we know how much trade funds or advertising is needed to fill it. For example, if we were short $.5MM in revenue, one Kroger trade deal can fill that gap. Our decisions tend to be more short-term focus, because that is what we can predict – the short term effect. What we don’t know is how long the sales lift will last, whether we are attracting new customers or servicing the needs of our core target.

The CLV targeting world may look more like this: our brand sales are expected to be soft next period because our new advertising is not working as well with our core target. We have some P&L leeway because we are projecting to over deliver on our EPS to Wall Street. So we can add some more advertising targeted specifically to our core target. This fills the gap next period and sets us up with higher base volume in the future.

A different situation may lead to a different solution. If the P&L was tight and short-term

efficiency was important, we might choose to do a trade deal might be more efficient in the long run and sacrifice the long-term effect.

This is the type of control we want from our marketing impact.

MASBMASB

Choices for marketing long-term impact

Distributed Lag

11

Markov Brand Equity

Impulse Response Function

There are many ways to measure the long-term impact of marketing – all of them have some advantages and some shortcomings. One of the most popular with the modelers is a distributed lag, which is an attempt to figure out how the lag effects of advertising perform relative to the short-term effects. The distributed lags are an input into the model, not an output. The typical example of a distributed lag is an advertising half-life -- a two week half life would mean that 50% of the advertising effect is still present after two weeks and 25% is left after four weeks. The method works pretty good at estimating the medium-term effects since it usually gets to be pretty low after 13-weeks. Markov is a brand switching approach, which can predict the long-term share of a brand by predicting consumer brand switching behavior. These models have been accurate at predicting the long-run impact of advertising and pricing but it doesn’t tell you how long it will take or what programs to get there. There are many “brand equity” metrics which can tell us what consumers are thinking about our brand and decompose brand equity into many useful components. Clearly these metrics are related to long-term brand health and thus are predictive. The predictive capabilities can be a little weak on the cause & effect, which is important for marketing planning. We have to know what levers work and how well they work. An impulse-response function is an output of a dynamic system as a result of a change or impulse. The term dynamic is important because the one change may cause a chain-reaction of changes. When we run a feature ad in a grocery store a number of effects happen. The store manager may realize that demand will increase and more

inventory is needed. So he installed displays to store that inventory and provide some help to make the feature ad work harder. The competitor is locked out of the feature ad and display that week causing lost share and sales gap in their business plan. That competitor intervenes with an incremental trade deal. This impulse response function is a typical shape of a trade deal. A big sales spike the first two weeks, then sales ease as more consumers make a purchase taking them out of the market until the next time they need the product. Then sales return to normal or sometimes below normal when purchases are pulled forward like with Heinz ketchup. Then we will see a small bump as the new buyers we acquired return to our brand the next purchase occasion.

MASBMASB

Vector Auto Regressive approach represents the

dynamics of marketing effects

Developed in the 1980’s as an economic

application to account for:

Co integration of variable drivers

Interdependencies of independent

variables

Dynamic lag effects and variable

evolution

12

Vector Autoregression is a specialized type of regression model which helps to estimate these impulse response functions from changes in marketing or changes in the environment. Regression models are the most popular market mix assessment tools used today. They were adopted from economics in the 1980s who used regression models successfully since the 1940’s. As marketers were discovering regression, economists were advancing their methods. They realized that the economy is much more dynamic than can be represented in a single regression equation. What was missing was synergistic effects from multiple drivers simultaneously. For example, what happens when unemployment and interest rates rise? The two together produce a different outcome than each of them separately. They realized that there are chain reactions – when consumers slow their spending, we need to produce less and fewer workers are needed. In January 1980, Dr. Christopher Simms published "Macroeconomics and Reality“, which introduced the world to Vector AutoRegression. Now it has replaced single equation regression analysis in economics and is the main cause and effect tool for the Federal Research Board to manage the economy. Marketers are now discovering its benefits also.

MASBMASB

What is VAR?

Systems of equations

Explains the evolution of a set of variables

as a function of their past evolution

(Vector)

Branch of regression analysis where

independent variables are all previous

values in a time series (Autoregression)

13

Vector autoregression is a special branch of regression modeling that uses a system of equations to capture the dynamics between the driver variables and over time. While a typical single-equation regression model may predict sales as a function of base sales, advertising sales, promotion sales and discounting. VAR predicts sales as a function of all of the driver variables combined working together over time. Variables and coefficients are allowed to evolve as a result of their own evolution and cause & effect relationships between other variables. It uses all of the independent variables across the time-series simultaneously as the variables to predict sales. The bottom line is that the approach is more reflective of how a marketing system works just like it is more reflective of how an economy works.

MASBMASB

VAR system reports marketing results in terms

of consumer behavior

VAR Inputs

Variable synergies and causalitiese.g. Coupons + Merchandising

e.g. Advertising effects on dist.

e.g. Lag effect of advertising

e.g. Seasonality–marketing

synergies

All other synergies and causalities

Marketing DriversDistribution

Advertising

Coupons

Discounts

Merchandising

Other tactics

Environmental DriversCompetitive

Seasonality

Weather

Other factors

Time

1 2 3 4 . . n

Purchase ResultsAcquisition

Retention

Purchase size

VAR Results

Variable Dynamics

Here is an example of what a VAR model looks like. The marketing and environmental variables are combined to account for the synergistic effect. In this case, we have multiple dependent variables. So instead of just predicting sales, we can predict future acquisition, retention and purchase size – which are the major components to CLV. It also tells you how your marketing is working. Are you attracting new buyers or just pulling purchases forward that you would have gotten anyway.

MASBMASB

Applications: Long-term growth

Cut advertising in 2005

Marketing mix analysis

predicted volume loss for

one year

Unexpected sales losses in

2006 and 2007

15

Ok, let’s move off the modeling speak and on to practical applications. Here is a business situation I was in a few years ago. We were able to witness the long-term consequence of our decision. In 2005, management did not like the advertising copy so advertising was cut. Our models accurately predicted the lost sales for one year, but the business took three years to recover because of the long-term effect from the advertising that we could not measure. Had, we known, perhaps we would have made a different decision.

MASBMASB

Applications: Customer Retention

Heavy buyers eat 56 steaks

per year

Indispensible ad campaign

Growth turnaround and

Ogilvy advertising award

16

Here is an example of customer retention marketing. When Kraft Foods bought the A1 Steak Sauce brand, whose sales have been sliding for years. Consumer research revealed that consumers either like A1 and use it or don’t like it, so we felt it was more prudent to go after our users who like the product. The heavy users ate an average of 56 steaks per year but did not always use A1. Since we felt we couldn’t get them to eat more steaks, we developed the “Yeah it’s that important” campaign to communicate the indispensability of A1 – that you can’t have steak without it. The business turned around immediately.

MASBMASB

Applications: Targeting

Kroger stock down 20%

2001 - 2004

Dunnhumby targeting

system implemented in

2004

Kroger stock up 40% 2004

– 2009, though WMT flat

17

dunnhumby

The best practice of targeting in CPG is at Kroger with the help of dunnhumby, who uses e-mail and direct marketing to send the right offers to the right consumers. The result has been that Kroger has outperformed every other food or mass merchandise retailer on nearly every metric including stock returns since it was implemented widely in 2005.

MASBMASB

Benefits

Manage long-term and short-term growth

More control over acquisition, retention

and purchase size strategies

Develop targeted integrated programs

that create synergistic effects

18

More tools are becoming available to help us better control the impact we get from our marketing. The CLV approach and tools we just discussed is one of many approaches available to marketers today. It provides you with a method to control the long-term impact from marketing to develop more loyal customers. It allows you to implement successful acquisition and retention strategies and better understand how to layer integrated marketing elements to create synergies. MASB is educating the industry with these types of tools. I would encourage you also to do so. MASB is at www.theMAB.org. Thank you.

Clv For Cpg Script The Market Research Event October 20 2009

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