Mixing Your Marketing in Real Time Ross Link, President, Nielsen Marketing Analytics Josh Kowal, Senior Vice President, Nielsen Marketing Analytics

MARKETING MIX CHALLENGE: DECLINING DOLLARS / GROWING PLATFORMS 2002 2006 2012 TV PRINT MOBILE SOCIAL MEDIA PAID SEARCH 80% 60% 40% 20% 0% 100% ONLINE VIDEO BUDGET MEDIA CHANNELS The continued proliferation of media channels make it more challenging today than ever before to find the right marketing mix to reach the right consumers at the right time and at the right place to deliver profitable ROI. To add to that challenge, marketing budgets are increasingly being questioned especially because of the economic realities of the last several years. To top it off rising media costs means you are always getting less bang for your buck

MEASURING SUCCESS REQUIRES FACT-BASED LEARNING QUANTIFYING MARKETING RETURNS IS NOT SIMPLE DIGITAL GRANULAR • TACTICAL TRADITIONAL MASS • REACH SOCIAL MEDIA Marketers need to justify where to put marketing dollars by quantifying the ROI. But measuring success requires fact-based learning and insight across all media platforms for all sales channels. Measuring requires not only the right methodology but also the right data. Traditional media has some long trusted standard sources of data, but new media data is very inconsistent and requires diligence to collect it in such a way that it is at the appropriate level of granularity for analysis and can still answer the key questions at hand. Common problems are: New media data that is robust for analysis but is too aggregated to be impactful in a meaningful way (i.e. total digital that is the summation of many different tactics such as Search, Display, Video, etc) Tactic level data that is not enough to move the needle individually, is highly aggregated across time (i.e. monthly or quarterly) or moves in perfect lock step with other tactics making it impossible to measure separately

THE SOLUTION MARKETING MIX IS STEP 1 GRANULAR DATA + COSTS + CLIENT DETAILS = FORWARD-LOOKING, PRESCRIPTIVE OPTIMIZATION MAGNITUDE OF RESULTS ARE SURPRISING

REI – A UNIQUE CORPORATE CULTURE BIKING KAYAKING SKIING ECO-FRIENDLY CUSTOMER SATISFACTION

FACT-BASED INSIGHTS = OPTIMAL RESULTS ROI 59% 1 2 3 While REI has a great internal analytics department that among other things does some great work on test and control studies for its Direct Mail and email campaigns, it needed a partner to help measure the incremental impact of its marketing spend outside of DM and Email. Besides obvious questions that needed to be answered like the total ROI of each vehicle, REI wanted to know when is the best time of year to utilize each marketing tactic and what impact each marketing channel was having on each of its sales channels (retail stores and online stores). Starting in the Spring of 2009 Nielsen Marketing Analytics and REI started to partner to help address these important business concerns. Initially it was supposed to be annual evaluation of past performance and an optimization of the upcoming media plan by tactic, week and DMA but after the initial results came out it was quickly changed to twice a year evaluations and optimizations. Once the optimized media plans were executed in market, the results were stunning with annual year over year growth for the last three updates being 11.7%, 15.2% and 13.2% It got to a point in the 2H of 2010 when growth was so large and unexpected that they could not fully implement the optimization recommendations because they did not have the inventory to meet all the demand.

MEASURE EVERY TACTIC IN A MEANINGFUL WAY NON-BRANDED BRANDED PAID SEARCH DIGITAL TV RADIO PRINT PAID COMPARATIVE SHOPPING ENGINE A primary reason we were able to have success was we were able to measure every tactic in a meaningful way that we were able to take action on. REI is always testing new marketing channels and variations within existing channels. First, we made it a priority with our agency partners to collect data at the most granular level possible. Ultra granular data is not always needed but it is easier to aggregate data than disaggregate data. Then based on the data that we had, we worked with NMA to find out what was able to measured maximizing both precision and actionability. UNPAID

MEASURE ALL SALES CHANNELS BOTH TRADITIONAL AND ONLINE COMPLETE TACTIC PERFORMANCE TRADITIONAL DIGITAL RETAIL STORE SALES REI.COM SALES BY DMA An important dynamic that also had to be captured is the impact of all marketing channels on all sales channels. This means that the lift of traditional marketing (TV, DM, Radio, Print, etc) must be measured not only on retail locations but also on online sales in each DMA and the lift of new media (email), Display, Paid Search, Facebook, etc) must be measured on online sales but also on retail locations. To ignore this would severely misrepresent the ROIs for REI marketing channels. While online shopping is fairly common for books or electronics, for outdoor gear it is slightly different. Seeing a Paid Search ad for REI may cause you to go to REI.com and shop for a kayak or a pair of hiking boots, for example, but those are items that many people like to try on before purchasing so it will require a trip to a retail location for the incremental purchase (due-to Paid Search) to be made.

FIND THE TRUE SOURCE OF AN INCREMENTAL PURCHASE AND OVERCOME THE “FALLACY OF LAST TOUCH” EXAMPLE #1 EXAMPLE #2 Marketing mix models would correctly give credit to TV Assigning credit by tracking click thru patterns would incorrectly give credit to Search Marketing mix models would correctly give credit to Display Because there is no way to directly track clicks from display to retail, credit would be “lost” KEY Marketing mix models help to overcome the “fallacy of last touch” which is a common problem when using traditional online metrics. In the kayak shopping example just mentioned, Paid search ROI will be underreported if you relied solely on cookie tracking. The marketing mix model however will properly give “credit” to the Paid Search ad that prompted the incremental sale at retail. The other potential issue with using traditional online metrics is it underreports traditional media effects on online sales. An example of this would be a TV ad that causes a shopper to go online who clicks thru a Paid Search offer and then makes a purchase. Using traditional online metrics, Paid Search would incorrectly get credit instead of the TV ad. PROPERLY CREDITED IMPROPERLY CREDITED

3-STEP PROCESS TO ANALYZE CURRENT BUSINESS PERFORMANCE MARKETING MIX MODEL- METHODOLOGY STEP 1 SALES DIRECT MAIL So how does marketing mix work? Step 1. Align sales with marketing tactics and any other factors(economy, pricing, competitive activity, etc) that could be causing fluctuations in sales Step 2: Run a sophisticated regression that will measure how much a lift in each marketing tactic will cause an increase in sales. We can then “assign” how much sales were due-to each marketing tactic Step 3: Analyze the results. Common cuts of the data include sales decompositions (5% of sales is driven by Online Video), what caused year over year changes (i.e. a 7% increase in TV spend let to a 10% increase in sales versus year ago) and of course ROIs While we are savy marketers at REI we do not need masters/phd’s to understand and use NMA’s presentations and data TV TIME

3-STEP PROCESS TO ANALYZE CURRENT BUSINESS PERFORMANCE MARKETING MIX MODEL- METHODOLOGY STEP 2 SALES DIRECT MAIL So how does marketing mix work? Step 1. Align sales with marketing tactics and any other factors (economy, pricing, competitive activity, etc) that could be causing fluctuations in sales Step 2: Run a sophisticated regression that will measure how much a lift in each marketing tactic will cause an increase in sales. We can then “assign” how much sales were due-to each marketing tactic Step 3: Analyze the results. Common cuts of the data include sales decompositions (5% of sales is driven by Online Video), what caused year over year changes (i.e. a 7% increase in TV spend let to a 10% increase in sales versus year ago) and of course ROIs While we are savvy marketers at REI we do not need masters/phd’s to understand and use NMA’s presentations and data TV ATTRIBUTE SALES TO ACTIVITIES OCCURRING WHEN SALES INCREASED Direct mail Core Online Print TV

3-STEP PROCESS TO ANALYZE CURRENT BUSINESS PERFORMANCE MARKETING MIX MODEL- METHODOLOGY STEP 3 So how does marketing mix work? Step 1. Align sales with marketing tactics and any other factors (economy, pricing, competitive activity, etc) that could be causing fluctuations in sales Step 2: Run a sophisticated regression that will measure how much a lift in each marketing tactic will cause an increase in sales. We can then “assign” how much sales were due-to each marketing tactic Step 3: Analyze the results. Common cuts of the data include sales decompositions (5% of sales is driven by Online Video), what caused year over year changes (i.e. a 7% increase in TV spend let to a 10% increase in sales versus year ago) and of course ROIs While we are savvy marketers at REI we do not need masters/phd’s to understand and use NMA’s presentations and data ANALYZE RESULTS EXPLAIN CHANGE VS. YEAR-AGO CALCULATE ROI

CUSTOM OPTIMIZATIONS IDENTIFY BEST POSSIBLE INVESTMENT MARKETING MIX MODELS OPTIMIZED PLAN MARKETING COSTS AND PRODUCT MARGINS TV PRINT ONLINE BY ACTIVITY BY WEEK BY BRAND BY CHANNEL BUSINESS RULES

OPTIMIZATION: SAME BUDGET, BETTER RESULTS Current Spend Optimal Spend Cut $500k Lose 2,500 units SPEND IN CHANNEL 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 INCREMENTAL IMPACT 250 500 750 1000 1250 1500 TV Online 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 250 500 750 1000 1250 1500 TV Online INCREMENTAL IMPACT Here is a simple example of how an optimization works. Let’s say there were two tactics: TV and Online. This optimization will start by looking where each tactic is on its diminishing returns curve. TV is currently on the flat part of its curve while online is on the steep part of its curve. The optimization will then shift $500K from TV to Online because the gain due-to the additional $500K to online outweighs the loss due-to the $500K to TV. The result is an overall ROI increase from $1.25 to $1.42 despite spending the same amount of money on marketing. Add $500k Gain 12,000 units SPEND IN CHANNEL ROI = $1.25 ROI = $1.42 #C360

CONTINUOUS IMPROVEMENT = IMPROVED PERFORMANCE REFINE MODELS MORE GRANULARITY Even though REI has gone through six optimization cycles, REI continues to improve its marketing efficiency each update One reason is because REI is always testing new marketing tactics and wants to measure their performance based on the initial test and then improve the performance of that tactic going forward with the optimization. REI is always looking to gain further insights on existing media tactics as well. This has been done by either by getting more granular data that allows the models to measure new differences (example brand vs. non-brand Paid Search) or by implementing new changes to existing tactics.(example – using a branding message for the first time on Radio and Newspapers) REI has also managed to collect quality data to measure the impact of owned media tactics such as Natural Search or Facebook activity NEW TACTICS

MAKE STRATEGIC SHIFTS IN YOUR TIMING By understanding the ROI of each program during key times of the year, REI was able to make strategic shifts in marketing to support specific events. For example, Anniversary Sale (which is the biggest event of the year during May) is no longer supported by TV – other programs have a much higher ROI during this event so TV dollars were shifted to those other marketing tactics. Conversely, TV is a big part of the Holiday media mix because its ROI during that time of year justifies it.

MAKE STRATEGIC SHIFTS IN YOUR MARKET RADIO MARKETS DIGITAL MARKETS TV MARKETS ALL TACTICS MARKETS CHICAGO MADISON MILWAUKEE SAN FRANCISCO BOISE AUSTIN BOSTON ATLANTA SAN DIEGO SEATTLE SALT LAKE CITY MINNEAPOLIS Not only have tactics been measured and adjusted to improve marketing efficiency but where each tactic is used is also optimized as well. For example, in some DMAs radio works best, in others it is Newspaper and for others it is TV. Some markets get support from all three. And one of the advantages of the custom optimization is that we can “override” the math to make sure some strategic goals are met. For example, when we want to enter and grow a new market we may dictate the optimization not to drop below a minimum amount of GRPs to achieve our awareness goals. Another custom business rule that we provide is minimum thresholds of activity required for each newspaper to make sure our media buyers are able to take advantage of volume discounts.

ACCOUNT FOR DIFFERENCES ACROSS SALES CHANNELS (8.7%) 2.9% BUDGET REVENUE (2.5%) 14.7% RETAIL SALES ONLINE SALES The analysis also allowed REI to understand the differences across sales channels and how optimizing sales may mean a decline in one sales channel at the expense of another. For example, one optimized media plan that was created for a budget decrease of 15% resulted in an overall revenue increase of 2%. However, looking at the underlying sales channels the shifting in spend across weeks, tactics and DMAs given the business rules specified resulted in an increase in online sales by 9% but a decline in retail sales by 2%. Knowing the sales channel impact allowed for proper planning, setting of expectations.

HOW TO IMPLEMENT KNOW NOT ONLY WHERE MARKETING DOLLARS WENT, BUT WHERE THEY SHOULD GO INCREASE PRECISION WITH MORE GRANULAR DATA AND MAKE MORE SUCCESSFUL STRATEGIC DECISIONS CONTINUOUSLY REFINE/IMPROVE BASED ON THE CHANGING ENVIRONMENT Key takeaways: Important to evaluate past performance and use that information to optimize the future Continuous improvement is essential – regular evaluation, new tactics, improvement of existing tactics, new markets, etc Granular data is needed.