Impact Analysis: Relationship Modeling
Before you can do an impact analysis, you need to understand how the different parts of your business are related. There are many parallels to Systems Engineering, which is an engineering discipline that seeks to understand how the different parts of a mechanism or structure relate to each other. In both cases, your goal is to create a relationship (or system) model that outlines all of the process’s parts and how they relate.
For example, the following is a relationship model for an online advertising campaign (cost-per-click):
Cost-per-click online campaigns have 4 major metrics:
- Ad Impressions: How many times is the ad viewed?
- Ad Clicks: How many times did a user click on the ad?
- Sessions: How many visits were driven to our site by the campaign?
- Ad Spend: How much does the campaign cost?
Advertising is well understood so the relationships are clear: Ad Impressions drive Ad Clicks because you can’t click on an ad you never see. Ad Clicks drive Sessions because those clicks bring users to your website. Ad Clicks also drive Ad Spend because the more clicks, the most the advertising campaign costs. Some of these relationships have defined relationships, such as Click-Through Rate (CTR) – the percentage of Ad Impressions which result in Ad Clicks – and Cost-Per-Click (CPC) – how much each click costs. Assuming you don’t have website errors, every ad click should result in a Session, so the conversion rate there should be 100%.
As you can see, having such a relationship model makes it easy to understand the cause and effect nature of your metrics and understand the impact of changes. In our example, the only ways to drive more clicks is to increase the number of impressions or to increase the CTR. If you want to reduce the amount of your Ad Spend you will need to reduce the number of Impressions or the CPC.
Impact Analysis would be easy if we had relationship models for all parts of our business! Unfortunately, building this relationship model is the hardest part of Impact Analysis. Tomorrow we’ll start covering ways to build these models, starting with Historical Testing.
Quote of the Day: “A life is not important except in the impact it has on other lives.” – Jackie Robinson