by Jim Lenskold
Our high-impact processes for becoming more customer-centric and creating innovative strategies will be valuable only if we can effectively deliver on these profitably.
Marketing return on investment (ROI) techniques allow us to understand the profitability dynamics across a broad range of strategies.
How do our targeting, offers and quality of touchpoints affect the customer value generated? How do our choice of contact channels and timing in the customers’ decision process impact our ability to positively change buying behaviors? What modifications to our customer-centric strategies can improve our ability to generate profitable relationships?
An ROI analysis is critical, but also challenging, when assessing the impact of improving our focus area of customer insight. Capturing intelligence from customers requires an investment that can generate returns in real time or in subsequent contacts.
In this third article of the four-part series, we now progress on our journey to Phase 3 of building customer centricity with increased customer insight.
As a reminder, our process involves the following four phases:
This article series has now taken you through a strategic understanding of customer centricity and an assessment of your customer insight potential and through the inventive process of identifying new opportunities to capture and leverage customer insight.
With several ideas for bringing customer insight into your organization, your next step is to assess the ROI potential of the top set of solutions to refine the profit potential of each and prioritize your resources.
The final article, next week, covers Phase 4, involving the critical steps of preparing your organization to deliver on these solutions.
Before we get into the five steps in Phase 3 and applying them to the case example, we must first understand the key factors that will drive profitability for customer insight initiatives.
During the innovation stage, the objective was to creatively generate new sources for capturing intelligence from customers and creating insight that could enhance the way we communicate and sell to customers.
As you learn more from customers about their needs and preferences, you have the opportunity to better target your marketing messages, offers and channels, which ultimately leads to reduced marketing expenses and increased conversion rates.
The key factors that will drive the profitability of customer insight initiatives include these:
The marketing ROI equation, where NPV represents Net Present Value, is as follows:
The Gross Margin is primarily made up of the incremental profits generated from the customer insight investment beyond the baseline profits that would have otherwise been generated. It is dependent on the number of customers for which intelligence is captured and used, the increase in sales conversion and the value of the sales generated.
Incremental profits are also generated as the costs of goods is reduced, either through a decrease in the product or service costs or a decrease in servicing customers. This provides a higher profit margin for the same level of sales and is applicable for certain types of customer insight that identify service and delivery gaps.
Efficiency gained through reduced marketing costs, such as when customer insight identifies a set of customers that should not be targeted, shows up when the ROI analysis is run for the marketing program with and without the impact of the customer insight program (the cost reduction shows up as a decrease in the marketing investment).
Of course, the total investment amount required to capture and apply the customer insight will drive the ROI as well. Certain strategies will require minimal incremental cost, and others will require a more substantial change.
The ROI assessment steps are these:
The first two stages of the process established our business priorities and used innovation techniques to develop our top strategies to address those priorities. At this stage, Midwest Telecom is considering three customer insight initiatives:
A five-step marketing ROI analysis is then used to unlock the full profit potential of each strategy.
The ROI assessment must be guided by financial parameters that align with the established business objectives. These financial parameters are applied to the strategies developed in the innovation sessions to drive modifications and will also be used in the prioritization and selection process.
Financial parameters can include these:
In our Midwest example, the company set an initial budget for establishing the customer insight process at $200,000. It decided to allow a six-month testing period, after which a larger budget would be provided to grow the selected initiative and test other customer-centric strategies. The company planned to assess the impact of increased customer profitability over a three-year period using an annual discount rate of 15%.
The change in share of customer and research on competitive preference over the initial six-month trial would be used to project the three-year impact. Strategically, Midwest placed a higher importance on profits generated from customer retention, since there was a reasonable chance that customer defection rates could increase.
Typically, your choice of market segment to target has the most significant influence on the profit potential. The profit potential is primarily driven by the spending patterns of the customers targeted and the incremental impact (or net conversion rate) that can result from the marketing initiative.
In the first two phases of the outlined process, strategic assessment and innovating solutions, there is certainly a focus on high-level segments—our Midwest example defined some key high potential segments as defecting customers, customers with service problems and customers with low repeat purchase behaviors. In this third phase of a financial assessment, the assumptions to gauge customer profit potential must get more precise.
You must consider the following:
When Midwest Telecom assessed the profit potential for each of the three initiatives under consideration, it produced the following conclusions:
Option A: Capture intelligence in acquisition channels for better cross-selling
Option B: Online survey on service problems for proactive response
Option C: Identify vulnerable customers in contact channels for retention marketing
This initial understanding of the profit drivers and dynamics helps concentrate the ROI analysis on those initiatives that are viable.
Using rough assumptions, an ROI analysis is run for each initiative using the initiative costs, the expected impact and the average profit per customer. Any initiative that does not meet the company’s ROI threshold must be eliminated or modified.
With a customer-insight initiative, caution must be taken to run the ROI analysis accurately. Collecting customer intelligence does not generate increased profits on its own—it requires additional investment in customer-centric marketing programs that will retain, grow and acquire additional profits.
There are two primary approaches to projecting and measuring the ROI for this type of initiative. You can run an Incremental ROI analysis to determine the incremental returns that are generated from investment into the customer insight process. For example, market testing can be used to assess the retention rate of a program with and without the customer insight captured.
The second approach is to run an Aggregated ROI analysis, which assesses the total investment into both the customer insight program and the subsequent marketing activities that leverage the insight to drive results.
As presented in the following table, the Midwest Telecom ROI analysis shows that Option A is too costly to show a positive ROI. Option B has a high ROI but a small profit based on its limited size. Option C has a positive ROI that is not as high as B but shows larger total profits.
The objective is to maximize profits and not ROI, so the first run of the analysis points to Option C as the top choice.
For help in understanding how the ROI was constructed, a simplified calculation is shown below. The actual ROI analysis over a three-year view is more extensive and includes an analysis retention rates by various customer-value segments, the timing of retention and customer save rates on a monthly basis, and the impact of applying customer insight to multiple marketing initiatives.
You can see in the example analysis that the ROI of the customer insight analysis is run aggregated with the core marketing program as well as incremental. The incremental analysis shows that the $1.2 million investment into customer insight has a significant impact over the current program and leads to very positive financial returns.
Once the ROI analysis is run, you have the opportunity to easily run alternative scenarios. Slight variations in the strategies developed can have significant impact on the profit potential. Consider how the following types of strategic modifications to any customer-centric initiatives can improve the ROI potential:
Alternative strategies were assessed in our Midwest Telecom example. For Option A, the problem area was in the acquisition targeting. The ROI scenarios supported the need to target the right customers with lower defection rates. In addition to the target shift, compensation for the sales team had to be partially based on long-term customer value to reduce the high churn and low cross-sell among new customers. Until the core strategy for Option A was completed, there was no need to consider this for a customer insight program.
Since Option B had high profit potential but low total impact, the modifications considered for this program consisted of exploring alternative channels to reach more people with service problems. For the highest-value customer segments, outbound retention calls to assess the quality of their service was found to not only uncover unreported service problems but also influence retention with a positive interaction and serve as an opportunity for capturing even more customer intelligence.
The ROI analysis in step 4 provides financial intelligence that will feed into the prioritization and selection of the best strategy.
The tight integration between the various phases in the overall process is critical for surfacing the ideal strategy:
The ROI assessment process for Midwest Telecom showed that Option C offered the highest profit potential and should therefore be selected for the pilot program. Still, the company is aware that Option B is very profitable and should be pursued for market trial as soon as budget becomes available.
Meeting the business objectives and ROI criteria, however, is not enough. The often-overlooked stage is understanding whether your organization is prepared to deliver on the proposed strategies. This is especially important when you are innovating new strategies that will require new processes and multi-functional project teams.
In the next article of this series, Pamela Harper presents Phase 4 in the process that consists of a structured methodology for anticipating and avoiding barriers to success.
The article series was a collaborative effort of Michael Lowenstein, Jeff Mauzy, Jim Lenskold, and Pamela Harper.