Large, Large Segments

I read in DM News on Friday about a presentation at the New England Mail Association given by Peter Grebus who is in charge of Williams Sonoma's Customer Information Management group. I found it interesting since its not very often that we can read some strategic details about the mix between direct marketing statistical models and retail sales.

The complete text is here and, of course, he talks about the economy, but here's what interested me:

Already, the company has been mailing deeper into its file with smaller versions of the catalog in geographic regions such as Texas, where it thinks a significant portion of recipients are driven to retail stores via a catalog. The company “has seen great success” with this strategy, Grebus said.

I've met the Williams Sonoma statisticians and they are top rate - it is interesting that their model is either being beat or over ruled by something as simple as a state segmentation.

Usually, statistical models can beat the pants off segmentation. If you aren't familiar with it, segmentation is the direct mail strategy of breaking customers into groups (segments) and making mailing decisions based on that. For example, Peter says that Williams Sonoma has 200 million customers - of course it doesn't make sense to mail everyone every catalog.

Assume the circulation for the next catalog is 2 million - who do you mail? Traditionally, direct marketers use RFM - recency, frequency, and monetary value - to make segments. An RFM segment may be customers who have purchased at least 3 times, made their last purchase 14 months ago, and have spent at least $500.

RFM works great. It helps answer what your best customer is, but it gets complex very fast. Would you rather have a customer who spends $2000 once every 2 years or a customer who spends $50 every month? This complexity is where a statistical model can really help.

Statistically, every customer is its own segment and when you have the process fine tuned, you are able to rank every customer from good to bad. And when you need to mail 2 million people, you query the top 2 million - done.

When I first finished grad school, I was convinced that geographers were needed to help businesses discover and understand spatial relationships. One day, while working at the bank, I was talking with an MBA who managed the Seattle Seahawk credit card - and I suddenly understood that everyone is a geographer since somethings are so basic... Of course the Seattle area has more Seahawk credit card holders than any place else - duh!

So, it is shocking to me that the Williams Sonoma direct mailing models are being beat by a state segmentation. Any segment of 20-30 million is too large against individual customer data - RFM will be able to wiggle within Texans to show that Texas customer A is better than Texas customer B since A purchased $1000 more than B in the past year.

So, what's up? Perhaps Peter isn't using a model. Perhaps the retail and direct folks aren't talking to each other. I kinda doubt these - Peter mentions that they are mailing smaller catalogs to drive retail sales which means that this is a well coordinated strategy - not only are store operations involved, but the catalog folks are deciding who gets the big or the small catalog - and certainly, a model of some sort is helping them.

Assuming that Peter is using states to beat the model and nothing fishy is going on, then the challenge is likely in the data itself. RFM is probably just at the direct level and perhaps at the corporate level - thus, the model cannot figure out the differences between channels. Meaning the model can't differentiate between customers who only shop at retail. or only shop direct, or shop both.

Or confusion may exist in the definition of success. For all the statistical model bragging, they are only as clever as they are told to be. If the model is directed to only focus on direct success, then the model will have troubles with retail sales. This could make sense - the catalog folks are trying to optimize their activities, which are very measurable (each catalog has a code to track sales from) and retail sales tend to be anonymous.

Of course, it is hard to say, but it is fun to ponder...