Wednesday 7 September 2011

What train prices can teach you about Optimisation

As a Swansea City fan living in Hertfordshire, getting back to watch games is a relatively lengthy process with myriad options involving car, train and bus.

In terms of optimal solutions if you had an unlimited amount of time and wanted to minimise costs then you could walk or cycle, if you had unlimited budget and wanted the quickest time possible between the two points you could charter a helicopter.

In this blog I look at the pricing structure of train fares between London and Swansea as an example of how there are potentially hundreds of possible solutions and the difference in cost between a simple and an optimised solution.

If we look at the prices of day returns on a Saturday between London and Swansea, for just one mode of transport, one journey and one train operator there are 512 different combinations of train tickets to get between the two stations (e.g., Paddington-Cardiff-Swansea, Paddington-Reading-Cardiff-Swansea etc.,).

When looking at the price matrix the main thing that is apparent is the sharp drop in cost to travel to Swansea from Swindon onwards compared to stations closer to London.
e.g. Paddington-Swansea is £69 and Paddington-Swindon-Swansea is £63.20 (£39+£24.20).

Breaking down the Paddington-Swindon part of the journey even further, this can be reduced from £39 to £37 by breaking the ticket at Reading (or £30.70 if also breaking the ticket at Didcot Parkway, with the proviso that only every other train stops at Didcot Parkway, limiting your options).

In short you can pay £69 for London-Swansea or pay £61.20 for exactly the same service by splitting the journey into several tickets (without having to get off the train) or £54.90 if you get on trains that stop at Didcot Parkway.

“So what?” you may say, but if a business could get the same results but for 10-20% less spend then it could transform their fortunes.

What does all this have to do with Marketing? Well, if you consider your starting station as where you are now with your business and the end station as where you want to get to e.g., 1,000 sales in the next month, all the relative journeys you could take to get there could include one or multiple marketing channels each with their own levels of ROI and points at which that ROI dramatically starts to flag.

For example, from previous experience you find it costs £5,000 to get 100 sales via Direct Mail or £4,000 to get 100 sales via email. Notwithstanding the fact that not all new sales are made equal, at face value you’d say you should put your money into email marketing.

In reality there’s likely to be a point at which the cost per sale is far above the average £40 that you’re getting from email marketing at which point you should be sending people your brochure in the post.

With optimisation you can make things as complicated as you like with the number of channels, constraints on who gets targeted when (and how often) etc., but the key thing is the more you understand about who responds well to what the smarter your targeting will become.

On our website we talk about the ‘binary thinking’ that often prevails e.g., “We tried email marketing and it didn’t work”, “Door Drops are too expensive” etc., and how the mix of right medium and right message will outperform a one size fits all policy.

Dan Barnett

Director of Analytics


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