Marginal Costs and Cannibalisation in Marketing Effectiveness

Curio #40

Morning!

In a recent interview on Uncensored CMO, Les Binet explained how years of low inflation took away the healthy fear that brands should have of price promotions.

He goes on to explain that years of crunching econometrics data show that price promotions eat into your bottom line, even when it doesn’t seem like it.

And price promotions don’t create new demand either. In most cases, a promotion is likely to take away a future sale at the regular price.

Because you suddenly don’t start brushing your teeth 5 times a day just because you purchased an extra tube of toothpaste.

Sales promotions, seen in isolation from future demand, brand image, and sales margins give an incomplete picture.

Last time we left off at how incrementality analysis work.

And where digital attribution modeling can struggle to measure the incremental impact of marketing efforts, Econometrics can help measure it by comparing outcomes in the presence and absence of marketing activities

Today we’re diving into marginal costs and avoiding cannibalisation.

What are Marginal Cost and Advertising Cannibalisation?

Your marginal cost is the additional cost of acquiring one more customer.

Depending on the channel, competition, and seasonality the average cost of acquiring every additional new customer might increase.

Let's say you're running ads on Meta for a new product, and you spend 1 000 € on the campaign. Over the course of the campaign, you gain 100 new customers who purchase your product.

In this scenario, your marginal cost of acquiring a new customer would be 10 €. (Divide how much you invested in the campaign by the number of new customers gained.)

Analysing your marginal costs can help you find channels that offer stable or decreasing marginal costs as you scale your marketing efforts.

As this article points out, “Finding that delicate balance can be tricky, and the ability to acquire more customers without rapidly increasing your marginal costs is known as scale. The goal is to find advertising channels that perform well and offer scale, also known as stable marginal costs.” (emphasis added)

Cannibalisation happens when one channel ‘steals’ a conversion that would have happened anyway.

Incrementality and cannibalisation have a direct impact on your marginal costs.

When cannibalisation is high, incrementality is low, and you end up spending more on advertising to customers who would have made a purchase anyway.

And when cannibalisation is low, incrementality is high. That’s when you’re spending money on finding customers who wouldn’t have made a purchase without seeing the ad.

As a rule, we want to keep cannibalisation low but in today’s media environment, you can’t remove it entirely. That’s why we need econometrics, experimentation, and attribution modeling working together.

I started today’s email borrowing wisdom from Les Binet, so it’s appropriate to end it with one of my favourite quotes from the godfather of effectiveness.

The most important metrics to look at first are financial and business metrics… If you got a strong brand, you will see it in the financials. If you’ve got a weak one, you’ll see it in the financials.

Les Binet

Have the best week!

Aliyar