Marketing Optimization An Introduction

A SAS White Paper

Table of Contents

What is optimization?.................................................................................................... 1
Prioritization, rules and optimization a comparison of methods......................... 1
Prioritization ................................................................................................................. 2
Rules ............................................................................................................................ 3
Optimization ................................................................................................................. 4
The SAS approach to marketing optimization............................................................ 4
Organizational considerations ..................................................................................... 6
Standard reports and sensitivity analysis .................................................................. 6
Extending optimization with business intelligence ................................................... 7
Balancing suppression rules and constraints............................................................... 7
Success with SAS Marketing Optimization............................................................... 7
Summary......................................................................................................................... 8
About SAS ...................................................................................................................... 8
 Marketing Optimization An Introduction

What is optimization?
The complexity of direct marketing has expanded rapidly in recent years, particularly with the
growth of electronic marketing channels. Companies today have to make difficult decisions about
targeting the right customers with the right offers while staying within budget and channel
capacities, all without cannibalizing future sales or saturating customers with too many messages.
That is a lot to manage, particularly when multiple campaigns from one company might also be
competing for customers attention.

Optimization is a process that resolves these complex issues by looking at problems in a holistic
fashion that balances the constraints of an organization with the need to improve key metrics.
Unlike traditional business-rule methods for allocating campaigns to customers, optimization
allows marketers to gain critical knowledge about factors that affect the success of marketing
campaigns, such as the impact of adding a new channel, the probable results of reducing a
budget or the consequences of instituting a strategic contact policy.

The best way to explain the differences between traditional approaches and optimization is
through example. This paper will provide an example to show the value associated with this new
approach to direct marketing, to discuss organizational challenges common when implementing
optimization and to detail the SAS approach to marketing optimization.

Prioritization, rules and optimization a comparison of methods

The following example attempts to illustrate problems that arise when companies execute
customer-based campaigns where there are limits on which customers are eligible to receive
offers. In cases where one customer only qualifies for one offer, the problem is simple the
customer gets that offer. The problem becomes more challenging, however, when there is a
group of customers that qualifies for more than one offer. Figure 1 shows this situation.
Overlapping sections in the diagram represent customers who qualify for multiple offers. If
optimizing across time periods, the overlap can increase exponentially. What makes offer
allocation decisions even more important is that customers who qualify for more than one offer
are often the most valuable customers. Poor decisions about campaign allocation could
jeopardize that value.

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Marketing Optimization An Introduction

Figure 1: Overlapping sections represent customers who qualify for multiple offers.

Companies approach this problem in different ways. In the following example, three approaches
will be compared: prioritization, rules-based and optimization. The first thing many companies do
when attempting to make a decision about offer allocation is to develop model scores that reflect
the probability of response for given customers and given campaigns. These model scores, in
addition to other values such as the expected revenue from a response, make up an expected
value. Table 1 shows the expected values for each customer-campaign combination. Execution of
this campaign also has two constraints:

Each campaign can be sent, at most, to three customers in the list.

Each customer can receive only one campaign.

Prioritization
Prioritization is the most common approach database marketers take to solve this problem. Put
simply, prioritization assigns an order of priority for each campaign being considered within the
same time period. For example, it may have been determined that Campaign A is the best
performing campaign available. Therefore, it will get its first choice of customers and will choose
customers 1, 7 and 9 because they offer the highest expected values available. Campaign B will
get the best customers remaining, and Campaign C will get the rest. Table 1 shows the results of
the prioritization method. Shaded cells mark the customers chosen to receive each campaign.
Using this approach, the company can expect $655 in profit for the three campaigns.

By looking carefully at the customers chosen for each campaign, there is clearly room for
improvement. Specifically, it is logical to think that Customer 1 should have received Campaign B,
which would have resulted in an improvement of $20. Campaign selection based on this type of
reasoning is described below.

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 Marketing Optimization An Introduction

Customer Camp. A Camp. B Camp. C

1 100 120 90
2 50 70 75
3 60 75 65
4 55 80 75
5 75 60 50
6 75 65 60
7 80 70 75
8 65 60 60
9 80 110 75

Table 1: Results of the prioritization method.

Rules
Based on what we learned about prioritization, the logical question becomes: Why not give each
customer the offer that will result in the most revenue? This question describes the rules-based
approach. This approach establishes rules that look at each customer in order to determine the
appropriate campaign for that customer.

In our example, Customer 1 will get Campaign B, Customer 2 will get Campaign C and so on.
This seems like a major improvement over prioritization, and in some cases it is. However, the
drawback of this approach is that if revenue opportunities exist further down the list of customers,
the marketer may not be able to target them because of constraints. Remember that each
campaign can go to a maximum of three customers. Because of this constraint, Customer 9
cannot get Campaign B, even though it would be a better choice. The rules-based approach
would result in a $715 profit for this organization.

Customer Camp. A Camp. B Camp. C

1 100 120 90
2 50 70 75
3 60 75 65
4 55 80 75
5 75 60 50
6 75 65 60
7 80 70 75
8 65 60 60
9 80 110 75

Table 2: Results of the rules-based approach.

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Marketing Optimization An Introduction

Optimization
The use of operations research techniques enables the best allocation of customers to
campaigns. This method takes opportunity cost into account with the knowledge that extending an
offer to any particular customer could prevent a better offer from being presented. Evaluating all
combinations simultaneously will result in the best possible solution. In this case, a profit of $745
was achieved using the same customers and the same campaigns. This represents an
improvement of more than 13 percent over the prioritization method.

Customer Camp. A Camp. B Camp. C

1 100 120 90
2 50 70 75
3 60 75 65
4 55 80 75
5 75 60 50
6 75 65 60
7 80 70 75
8 65 60 60
9 80 110 75

Table 3: Results of mathematical optimization.

While a detailed look at the mathematical methods for optimization is not within the scope of this
paper, it is important to note two things. First, this simple example does not reflect the enormity of
typical marketing optimization problems. Many companies face similar situations with millions of
customers, dozens of campaigns, complex constraints and sophisticated contact policies. When
the scale of the problem increases, so does the opportunity for improvement. Many large
organizations have seen improvements of greater than 25 percent.

Second, the computational power necessary to solve such complex problems traditionally has
been a bottleneck. Intensive research by a team of operations research scientists and domain
experts has yielded a breakthrough algorithm that solves large-scale problems efficiently. Due to
these innovative approaches, SAS allows marketers to solve these problems in a timeframe that
is reasonable and flexible enough to fit the objective.

The SAS approach to marketing optimization

As mentioned above, any optimization exercise will consist of an objective, a set of constraints
and a contact policy. SAS Marketing Optimization allows marketers who know nothing about
optimization techniques to construct a scenario with these three components and then optimize
campaigns for execution.

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 Marketing Optimization An Introduction

Objective The objective for a marketing optimization problem can be defined in many ways,
depending to the overall goals of the campaign. If the overall goal is to increase profitability, the
marketer can choose profit as the metric to be maximized. SAS provides flexibility in the goals of
the campaigns so that the optimized value can be the result of an equation of two or more
metrics. In other cases, the marketer might set an objective to minimize, such as risk or cost.

Constraints Constraints enable marketers to specify key marketing limits such as minimums
or maximums for spending. Constraints can also be set at the customer segment level. Such
constraints can involve:

Budget. Set the budget constraints for any or all campaigns. In addition, budget constraints
can be created at the individual communication level.

Cell size. Very often campaigns need to be a certain size to be worth executing. Marketers
can create constraints that reflect the real nature of the direct marketing world through
minimum or maximum cell sizes.

Channel capacity. Outbound and inbound channels often have limits, whether in terms of
the total hours a call center can handle or the number of pieces a mail house can send out.

Custom. Constraints can be constructed such that they enforce a variety of specific
limitations. For example, geographic constraints may dictate that a certain number of
customers are contacted within a certain region. There may be additional constraints that
ensure a proper ratio of high value to low value customers are contacted across campaigns.

ROI. All campaigns can have an additional constraint that drives toward a threshold so that a
certain ROI is targeted across the campaigns.

Contact policy Contact policies are important for planning the number of allowable touches
that the overall campaigns or brand can have on each individual customer. These can be set in a
variety of ways:

Maximum contacts. A limit can be placed on the number of touches per customer for the
overall cycle. For example, an organization might say that each customer can be contacted
only twice per cycle. This can be maintained at the overall level or the individual customer
level.

Group/subgroup. Contact policies can be constructed so that they allow certain types of
communication more leeway. A credit card company may want to limit the amount of a
certain expensive offer, for example.

Time period. It is important also to optimize across time. A contact policy can be constructed
that limits the number of offers in any given time period. So, a customer could be restricted to
three communications in January and two in February. A rolling time period can limit that
same customer to, for example, four communications over any two-month period.

As marketing organizations mature, they may start with a simplistic contact policy, such as an
overall limit on all customer contacts, and then graduate to a more sophisticated strategy. It is
critical to consider capabilities that will allow the most flexibility. In addition, customer-level contact
policies, when applied, add more complexity to the underlying algorithm, making it critical to have
an optimization engine that can handle this load.

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Marketing Optimization An Introduction

Organizational considerations
Despite powerful technology for solving complex marketing optimization problems, sometimes the
hardest part is overcoming the organizational challenges associated with implementing
optimization techniques. There are some difficult questions to be asked. Product or campaign
managers are often rewarded for the performance of their product or campaign rather than the
performance of the entire organization. So, in the example used above, Campaign A has a higher
profit using prioritization than using optimization. If the campaign manager for Campaign A is
rewarded based on the performance of only that campaign, there will be resistance to change.
The overall profitability of marketing activities needs to be aligned and communicated effectively
for an optimization process to be successful.

Another advantage of using optimization in marketing is that it can serve as an impassionate

arbitrator among campaigns. Optimization doesnt play favorites when deciding which campaigns
will get the best customers, but the organization needs to be committed to letting the numbers
speak for themselves. This approach is consistent with the overall trend toward more analytic
methods in marketing.

SAS can help in this collaborative process through the use of an information delivery portal. As
optimization scenarios are run, the results can be viewed through this Web-based portal. In fact,
as a best practice it is valuable to explore many different scenarios before putting the results of
the optimization into the finished campaign. The portal summarizes and aggregates results by
campaign and communication to ensure that key objectives are being met and that key
stakeholders are aware of the potential impact of campaigns.

Standard reports and sensitivity analysis

Another important aspect of using optimization is the ability to gain insight into each constraints
impact. Upon running an optimization scenario, SAS Marketing Optimization generates a set of
reports that includes an objective summary report, campaign/communication summary reports
and graphs, a constraint summary, and a sensitivity analysis. With the constraint summary, the
user can identify which constraints are limiting the overall objective and by how much. An
opportunity cost of five dollars for budget constraint, for example, would tell the user that
increasing the budget by one dollar would increase the overall objective by five dollars. Once this
sort of information is available, the marketer then needs to determine how much to increase the
budget. Sensitivity analysis helps with this determination, since it can show the appropriate range
for which constraint summary information is valid. So, for example, if the budget was $100,000,
the marketer may be able to increase the budget to $125,000 before the incremental benefit
becomes negligible. Again, there is tremendous value associated with creating multiple scenarios
and experimenting with the outcomes of different configurations of budgets, constraints and
contact policies.

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 Marketing Optimization An Introduction

Extending optimization with business intelligence

In addition to these standard reports, SAS Marketing Optimization can take advantage of the
enterprise reporting capabilities of the SAS9 platform. These include such capabilities as ad hoc
reports, Web-based reports and an information delivery portal to distribute reports to
stakeholders. SAS also recognizes that Microsoft Excel is the de facto standard for many
marketing analysts and has built a seamless integration between SAS and Excel, so those users
can stay in the environment most comfortable for them.

Balancing suppression rules and constraints

Given the enormous value that optimization provides, should organizations be optimizing every
offer? At one extreme, the organization would let optimization decide all offers; all eligibility and
contact policy rules would be left completely up to mathematics. At the other extreme would be to
let all decisions be made arbitrarily, based on gut feel or business rules. The ideal situation, of
course, lies somewhere in the middle of these extremes. The exact balance depends on the
organization. There will always be occasions for which the predictive model was not designed
(optimization would not work in those cases), and there will always be value that can be added
with more embedded analytics. An intelligent integration between SAS Marketing Optimization
and the predictive modeling, campaign scheduling and campaign management capabilities of
solutions such as SAS Marketing Automation can help achieve this balance.

Success with SAS Marketing Optimization

SAS has experience using marketing optimization to solve the unique business problems in a
number of different industries. For example:

A North American catalogue retailer wanted to focus on being smarter about how it
managed the cost structure of its different channels. Having multiple call centers, direct mail
and e-mail channels available, the retailer did not know how to spread offers, or combinations
of offers, across these various channels. By leveraging an existing modeling effort using
SAS, the company was able to exploit the knowledge it had derived about these different
channels for significant campaign performance improvements.

A North American financial services institution wanted to move beyond standard

solutions for database marketing to lift returns from marketing campaigns. This company has
worked with SAS to combine predictive modeling with SAS Marketing Optimization to create
the best multichannel offer selection and targeting solution in the industry. Using SAS the
company increased expected ROI for a recent campaign by 50 percent and has analyzed
more than 70 offers all at once for a variety of products and more than three million
customers.

A European telecommunications company had established complex business rules for

prioritizing cross-sell offers. This process of prioritization was largely inefficient and led to a
suboptimal offer allocation. By combining business rules and constraint-based optimization,
this organization has dramatically improved the prioritization process.

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Marketing Optimization An Introduction

Summary
SAS Marketing Optimization can efficiently help marketers determine who to contact with which
campaigns in a complex marketing environment where customers could qualify for multiple or
competing offers. Through the use of advanced analytics, SAS solves this problem in a manner
that is superior to traditional prioritization or rule-based systems. An interface designed for
marketers makes it easy for users to enter objectives, constraints and contact policies. The
resulting information is readily available for what-if analysis and can be executed seamlessly
when integrated with a campaign management application such as SAS Marketing Automation.

About SAS
SAS is the market leader in providing a new generation of business intelligence software and
services that create true enterprise intelligence. SAS solutions are used at more than 40,000 sites
including 96 of the top 100 companies on the FORTUNE Global 500 to develop more
profitable relationships with customers and suppliers; to enable better, more accurate and
informed decisions; and to drive organizations forward. SAS is the only vendor that completely
integrates leading data warehousing, analytics and traditional BI applications to create intelligence
from massive amounts of data. For nearly three decades, SAS has been giving customers around
the world The Power to Know.

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