Database Marketing and Measuring Return on Investment
Measuring ROI for Relationship Marketing
With more focus than ever on budgets and program expenditures, it is crucial that marketers show a positive return on investment for their efforts. Unfortunately, many of the traditional marketing success measures typically used by marketers are not relevant to the corporate finance people down the hall. To sell relationship marketing internally, marketers must be able to convey to management how their relationship marketing strategy is going to help the company. The key to achieving this is in the way you measure, and more importantly, how you present that data to senior management.
The Pitch to Management for Relationship Marketing
“We have a 3-year plan for Relationship Marketing. We want to spend 20 million dollars, and we’re going to send X pieces of mail and get Y hits on our website.”
“How does that help the company?”
Well, how does that help the company? More importantly, how do we communicate to management how it helps the company?
Measuring Along the Loyalty Continuum
The goal of relationship marketing is to move customers along the Loyalty Continuum towards advocacy for our brands. As we execute our campaigns, our competitors are doing the same, working to pull these customers back towards advocacy for their brands. How do we know when we are winning? How do we know when we are losing? How do know our efforts provide value to our brand and company? To answer these questions, we must measure the effectiveness and efficiency of the programs targeted to customers along the continuum.
As we work to measure the effectiveness of our Relationship Marketing campaigns, we are primarily interested in people. Do people recognize our brands? Are they willing to try our brands? Can we incent people to use our brands more than our competitors?
For relationship marketing campaigns, the 2 key ingredients in measuring effectiveness of our campaigns are custom research and a comprehensive customer database system.
Custom research allows us to benchmark customer attitudes, usage patterns and acceptance rates of our programs. This research will provide the basis for customer segmentation strategy and will help shape the specifics of our campaigns.
A comprehensive customer database solution enables us to track customer positions along the loyalty continuum on an individual basis. The database is updated constantly, and customers are moved seamlessly from one campaign (such as awareness & trial) to another (such as conversion) as updated information dictates.
At each step along the continuum, the combination of research/survey methods and data captured on your customer database will lead to a clear understanding of how your relationship marketing programs are performing:
- Awareness & Trial: Pre- and post-program controlled research will give you insight on your brand’s awareness while response data on your database will tell you who accepted your customer-specific trial offers (acceptance rates).
- Conversion: Again, pre- and post-program controlled research will allow you to calculate key measures such as conversion rates, and response data on your database will identify those customers who are moving towards regular usage.
- Retention: Research will reveal your customer turnover (or “churn”) rate. Individual customer response to retention offers as well as branded and unbranded surveys will reveal which customers you are keeping and—more importantly—which ones are slipping.
- Advocacy: Research and survey data will answer the “magic” advocacy question—“would you recommend this brand?”, and response data will show who is recruiting customers for you via member-get-member types of programs.
Measuring success at each of these steps will allow us to continuously improve our campaigns and more effectively respond to our customer’s needs and desires—making us better marketers.
The Pitch, Revised
“We have a 3-year plan for Relationship Marketing. We want to spend 20 million dollars, and we’ll generate a 30% awareness and trial rate, and from that, we’ll generate a 25% conversion rate, and from that we’ll generate 10% advocacy rate.”
“OK, we’ll get back to you. We have other projects and budget concerns to consider.”
Show Me the Money
Unfortunately, our senior management and finance departments are not going to be particularly interested in the metrics we put forth to show what great marketers we are. They are going to use measures with names like Net Present Value and Internal Rate of Return. It is important for us as marketers to understand how to apply these metrics; if not, the finance department will do it for us, and they will use their own assumptions if we cannot supply the data to fill the variables.
We have two main challenges when comes time to work with our colleagues down the hall: translating our marketing metrics into dollars, and helping management and finance understand the interconnected nature of our relationship marketing programs.
We’re going to have to translate the results of our campaigns into language that is meaningful to management—and to the company. This means translating customers into dollars, and getting comfortable with evaluating our programs against these business metrics.
The most basic financial measure is profit. Profit is simply revenues minus cost, so fully understanding the cost of our relationship marketing programs is crucial. Data needed to fully realize the cost of our programs is found in our database. Equally crucial, however, is understanding the revenue generated by our programs. Our research will give us the information needed to calculate program incremental revenue—revenue our company would have missed if not for our efforts.
Payback, like profit, is another basic measure. Payback measures the amount of time it takes for the cash benefit of a program to become equal to the cost of a program. Because we are tracking our customer relationships and brand interactions over time, and we have done our research to determine consumption rates and frequencies of our brands, we can accurately calculate how much we’ve invested in relationship marketing, and how much we’ve returned. This allows us to monitor and adjust our programs in order to satisfy the payback requirements set forth by management.
For large and long-term expenditures of company funds, managers and financial planners are going to use Net Present Value and Internal Rate of Return as tools to evaluate whether or not to approve a particular initiative. Both are fairly complicated measures, but a basic understanding of how they are utilized is helpful to us.
Net Present Value (NPV) measures the value (in dollars) of an investment or project over time. NPV takes the projected cost and the projected benefit of a program over time, with a discount rate applied. The discount rate represents the amount of return (or opportunity cost) we could expect if the investment were applied elsewhere. If NPV is positive, the project will add value to the company. If NPV is negative, the project will not add value to the company.
Internal Rate of Return (IRR) utilizes a project’s forecasted costs and benefits to measure the effective return rate (as a percentage) over the course of a project. If the IRR is greater than the discount rate (opportunity cost) of the investment, then the project has a positive IRR.
NPV measures the magnitude of benefit of a project; IRR measures the efficiency of the project. The key to both is fully representing project cost and benefit.
Understanding the Nature of Relationship Marketing
It’s not going to be enough to understand the measures by which our programs will be evaluated; we must also help management understand that relationship marketing programs are inter-related campaigns—each with unique requirements and objectives. If we want to run a brand conversion campaign, we have to start with awareness and trial, and we can’t skip ahead to advocacy to avoid the investment in customer relationship building.
The problem we run it to is this: on its own, an awareness/trial relationship marketing campaign will likely not be ROI-positive in the eyes of management, regardless of which financial measure we apply. In fact, it might look like we are “giving away the store”. Short-term budgetary views (such as current quarter or fiscal year) will limit thinking; we have to avoid viewing relationship marketing as an a la carte menu of campaigns to sift through looking for value or cost savings. If the financial decision makers don’t understand the dynamics of relationship marketing, our programs will get cut in favor of initiatives that offer short-lived gain but little lasting value.
Where It All Comes Together: Customer Lifetime Value
Fortunately, we have the measure that represents the long view of relationship marketing and its benefit to the company—Customer Lifetime Value.
If we could answer the question “How much is a customer worth over X amount of time?”, we could use that to determine how much we were willing to spend to recruit, convert and retain each customer—assuming we could track the cost to recruit, convert and retain each customer.
Relationship Marketing programs are designed to do exactly that—recruit, convert and retain customers on a one-to-one basis.
For every customer in our Relationship Marketing program, we know his or her position on the loyalty continuum—this is because our customer database is constantly updated and monitored. For every customer, we also know how much we’ve spent; we’ve tracked this in the customer database. From our research, we can calculate how much each customer at each stage of the loyalty continuum is worth because we’ve asked the right questions.
As Relationship Marketers, we are in possession of the data needed to accurately populate the cost and benefit variables of profit, payback, NPV and IRR models. We are in the position to present—and execute—programs that add real value to our organization.
The Pitch, Optimized
“We have a 3-year plan for Relationship Marketing. We want to spend 20 million dollars, but we’ll return 50 million dollars.”
“When can you start?”