Audit Businesses with Multiplicative Decomposition
Marketers are awash in data, yet making sense of it often feels like navigating a stormy sea without a compass. In “The Customer-Base Audit” by Peter Fader, Bruce Hardie, and Michael Ross, the authors provide marketers with a powerful tool to break down and understand customer behavior: the “multiplicative decomposition” of customer metrics.
This concept has parallels to Coca-Cola’s “PITA” model, that we have described before which emphasizes People, Incidence, Times, and Amount. Though they use different naming conventions, both frameworks converge on the same fundamental insight. They acknowledge that business performance is driven by the interaction of distinct, underlying, and measurable components. By dissecting these components, marketers can identify what opportunities or threats exist, providing actionable clarity.
What Is Multiplicative Decomposition?
At its core, multiplicative decomposition is about breaking down overall performance into its component parts. For instance, the total revenue of a given cohort of customers can be expressed as:
Each element in this formula represents a distinct lever of business performance. Instead of focusing solely on top-line metrics like total revenue or market share, multiplicative decomposition prompts marketers to ask questions like:
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- Are we attracting enough new customers?
- Are we maintaining penetration levels within the customer base?
- Are existing customers purchasing frequently enough?
- Are those customers spending enough per transaction?
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By isolating these components, businesses and their brands can pinpoint the exact areas that need attention—whether it is driving acquisition, improving retention, or increasing basket size.
The PITA Model: Coca-Cola’s Approach
Coca-Cola’s PITA model is strikingly similar. PITA stands for:
People: The number of unique customers able to buy the product.
Incidence: The actual customers purchasing the product.
Times: The number of occasions when the product is consumed.
Amount: The volume or spend per purchase occasion.
This framework has been a cornerstone of Coca-Cola’s strategic thinking, helping the company dissect its business performance and find incremental growth opportunities. For example, Coca-Cola might focus on increasing incidence by encouraging customers to consume their products at new times of the day or drive higher amounts by promoting larger pack sizes.
A Comparison: Multiplicative Decomposition versus PITA
While the naming conventions differ, the underlying logic of these models is nearly identical. Both frameworks recognize that total business performance is a multiplicative function of distinct components. Here is how the two map to each other:
The PITA model’s component of “Times” reflects Coca-Cola’s emphasis on consumption occasions, a critical driver in the beverage industry. However, this distinction is more about granularity than a fundamental difference in methodology.
Why Marketers Should Adopt These Frameworks
Whether you choose to use multiplicative decomposition or the PITA model, the key takeaway is that breaking down performance into component parts provides clarity and direction. Here are three reasons why every marketer should embrace this approach:
Data-Driven Diagnostics: Instead of speculating about the causes of a performance slump or growth plateau, you can pinpoint which specific lever—acquisition, frequency, or spend—needs adjustment.
Strategic Focus: By understanding which component offers the most significant growth opportunity, you can allocate resources more effectively. For instance, if purchase frequency is lagging, promotional efforts might be better spent on retention campaigns rather than acquisition.
Actionable Insights: Decomposition naturally lends itself to actionable strategies. If the average spending level per purchase is low, bundling, or upselling strategies could help. If customer acquisition is weak, improving your targeting or messaging might be the solution.
Final Thoughts
In today’s competitive landscape, marketers cannot afford to rely on surface-level metrics. Frameworks like the multiplicative decomposition and Coca-Cola’s PITA model offer a structured way to dive deeper into the mechanics of business performance. By adopting these approaches, marketers can transform overwhelming data into clear, actionable insights, helping them navigate their businesses toward sustainable growth.
The next time you are reviewing your business performance, ask yourself: Have I audited the fundamental components driving my results? If not, it is time to embrace the power of multiplicative decomposition or its equally effective cousin, the PITA model.
Middlegame is the only ROMI consultancy of its kind that offers a holistic view of the implications of resource allocation and investment in the marketplace. Our approach to scenario-planning differs from other marketing analytics providers by addressing the anticipated outcome for every SKU (your portfolio and your competitors) in every channel. Like the pieces in chess, each stakeholder can now evaluate the trade-offs of potential choices and collectively apply them to create win-win results.
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