facebook and look-alike modeling: a short primer

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Look-alike modelingHow to dial in your customers

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P2

Look-Alike Models are used to build larger audiences from smaller audience segments to create reach for advertisers. They reflect similar characteristics to a benchmark set of characteristics the original audience segment represents, such as in-market kitchen-appliance shoppers.

Look-Alike Modeling




P3

Look-Alike Models are used to build larger audiences from smaller audience segments to create reach for advertisers. They reflect similar characteristics to a benchmark set of characteristics the original audience segment represents, such as in-market kitchen-appliance shoppers.

Look-Alike Modeling


Generally, the higher the marketer's tolerance for loosening the model, the larger the segment can become.



P4

Let’s say that a certain demographic is more likely to purchase than another. For example a household with income over $100,000 per year, own their own home and have children. Let’s say that they are 50% more likely to purchase than the average. This segment would index at 150%.

Demographic Segmentation




P5

Let’s say there is another group of single males living in apartments and they are 33% less likely to purchase than the average. This segment would index at 67%.






P6

Index: +150%

224% better response

Index: +67%



Let’s say there is another group of single males living in apartments and they are 33% less likely to purchase than the average. This segment would index at 67%.




P7

No segmentation (Base):Let’s say the total market size is 10,000,000. To reach these 10,000,000 at 75cents per piece costs $7.5M. Let’s say we sell a product for $275 each.If the average response rate is 1%, then it would cost $7.5M for 100,000 conversions. ROMI = $275 * 100,000 / $7.5M = 3.7

The Math


Revenue (Base):$275 per unit* 100,000 units= $27,500,000

Costs$0.75 per piece* 10,000,000 units= $7,500,000

ROMI (Revenue ÷ Cost)$27,500,000$7,500,000 = 3.7



P8

No Segmentation (Base):Let’s say the total market size is 10,000,000. To reach these 10,000,000 at 75cents per piece costs $7.5M. Let’s say we sell a product for $275 each.If the average response rate is 1%, then it would cost $7.5M for 100,000 conversions. ROMI = $275 * 100,000 / $7.5M = 3.7

Example 1If the size of the household group were 33% of the total or 3,300,000, then the cost to reach these would be $2.5M, with a conversion of 1.5% or 49,500. ROMI = $275 * 49,500 / $2.5M = 5.4

The Math




ROMI$27,500,000$7,500,000 = 3.7

Revenue (Ex.1):$275 per unit* 49,500 units= $13,612,500


ROMI$13,612,500$2,500,000 = 5.4



P9



Example 2If the size of the solo apartment group were the other 67% of the total or 6,700,000, then the cost to reach these would be $5M, with a conversion of 0.67% or 44,890. ROMI = $275 * 44,890 / $5M = 2.5

The Math




ROMI$27,500,000$7,500,000 = 3.7



ROMI$13,612,500$2,500,000 = 5.4



ROMI$13,612,500$2,500,000 = 2.5



P10



Example 2If the size of the solo apartment group were the other 67% of the total or 6,700,000, then the cost to reach these would be $5M, with a conversion of 0.67% or 44,890. ROMI = $275 * 44,890 / $5M = 2.5

The Math




ROMI$27,500,000$7,500,000 = 3.7



ROMI$13,612,500$2,500,000 = 5.4



ROMI$13,612,500$2,500,000 = 2.5

Targeting marketing investments away from underperforming segments and towards better performing segments can significantly improve marketing effectiveness



P11

Index: +225%

10+ yrsHypothesis #1

But a sub-segment within the male apartment dwellers could be very lucrative




P12

Index: +225%

Hypothesis #2

Index: +275%

Demographics and behavioral micro-segment

10+ yrsHypothesis #1

But a sub-segment within the male apartment dwellers could be very lucrative




P13

Demographics and behavioral and mass media micro-segment

Hypothesis #3Index: +275%

325%

Further micro-segmentation




P14

Demographics and behavioral and mass media micro-segment

Demographics and behavioral and mass media and seasonality micro-segment

Hypothesis #3Index: +275%

325%

Hypothesis #4

Index: +275%

325%

395%%

Further micro-segmentation




P15

Hypothesis #1:Let’s say the total market size is 3,300,000. To reach these 3,300,000 at 75cents per piece costs $2.48M. Let’s say we sell a product for $275 each.If the average response rate is 2.25%, then it would cost $2.475M for 74,250 conversions. ROMI = $275 * 74,250 / $2.475M = 8.25

The Math


Revenue Hypothesis 1:$275 per unit* 74,250 units= $20,418,750


ROMI (Revenue ÷ Cost)$20,418,750$2,475,000 = 8.25



P16

Hypothesis #2If the size of the household group were 17.5% of the total or 1,750,000, then the cost to reach these would be $1.3M, with a conversion of 2.75% or 48,125. ROMI = $275 * 48,125 / $1.3M = 10.1



ROMI$13,234,375$1,312,500 = 10.1

The Math


P17

The Math



Hypothesis #3If the size of the household group were 10% of the total or 1,000,000, then the cost to reach these would be $0.75M, with a conversion of 3.25% or 32,500. ROMI = $275 * 32,500 / $0.75M = 11.9



ROMI$13,234,375$1,312,500 = 10.1


Costs$0.75 per piece* 1,000,000 units= $750,000

ROMI$8,937,500$750,000 = 11.9



P18

The Math




Hypothesis #4If the size of the household group were 7.5% of the total or 75,000, then the cost to reach these would be $56,250, with a conversion of 3.95% or 2,963. ROMI = $275 * 2,963 / $56,250 = 14.5



ROMI$13,234,375$1,312,500 = 10.1



ROMI$8,937,500$750,000 = 11.9Revenue Hypothesis 4:

$275 per unit* 2,963 units= $814,825

Costs$0.75 per piece* 75,000 units= $56,250

ROMI$814,825$56,250 = 14.5



P19

The Math




Hypothesis #4If the size of the household group were 7.5% of the total or 75,000, then the cost to reach these would be $56,250, with a conversion of 3.95% or 2,963. ROMI = $275 * 2,963 / $56,250 = 14.5



ROMI$13,234,375$1,312,500 = 10.1



ROMI$8,937,500$750,000 = 11.9Revenue Hypothesis 4:

$275 per unit* 2,963 units= $814,825

Costs$0.75 per piece* 75,000 units= $56,250

ROMI$814,825$56,250 = 14.5

Targeting marketing investments away from underperforming segments and towards better performing segments can significantly improve marketing effectiveness



P20

Facebook will now begin to offer this same capability for their fan pages and advertising.

This will yield a significantly higher targeting opportunity, improved marketing ROI and better response. There will be much less marketing wastage in Facebook


P21

The conclusion generally: the increase in marketing effectiveness is significant.

Based on the best hypotheses, the ‘budget’ can be spent much more effectively.

In this case we improved the ROMI from 5.4 to 14.3

There is however a cost to look alike modeling. The analytics and potentially now from Facebook, the cost of targeting these micro-segments will be higher than targeting the overall segments. The marketer simply has to weigh the incremental cost of look alike modeling against the incremental response and effectiveness

The marketer than tests/simulates different hypotheses against the data to determine best and most effective micro-targeting campaign investments. The best campaigns are chosen, best to worst until the budget is fully allocated.

Look-Alike Modeling Conclusion



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Guy R. PowellPres. ProRelevant

www.Marketing-Calculator.com

www.ROIofSocialMedia.com

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Guy R. Powell

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facebook and look-alike modeling: a short primer

Marketing

piece costs

romi revenue cost

segmentation base

revenue base

total market size

demographic segmentation

household group

original audience segment