Why CRM Investments makes Sense -WhitePaper[1]

Marketing Automation Why CRM Investments Make Sense A SAS White Paper Table of Contents Introduction ....................................................................................................................1 Customer Focus .............................................................................................................2 Increased Response Rate Equals Cost Savings..........................................................4 Cost Savings and Increased Revenue .........................................................................5 Action Steps and Resources: What can be done today? .........................................5 Customer-Focused Goals and Strategies ....................................................................5 Maintenance .................................................................................................................6 Retention ......................................................................................................................6 Delivery Timing and Media ...........................................................................................7 Challenges of Being Customer-centric........................................................................7 Meeting the Challenge ...................................................................................................8 Controlling Marketing Processes Through Marketing Automation ...............................8 Data Management ........................................................................................................9 Analytic Management ...................................................................................................9 Campaign Management .............................................................................................10 Cost Management ......................................................................................................10 Reducing Business Planning Risk..............................................................................11 CRM Results .................................................................................................................11 Results Example: Telemarketing...............................................................................11 Extended Results........................................................................................................12 Measurable ROI: Why CRM Investments Make Sense ............................................13 Analytical Models........................................................................................................13 Campaign Management .............................................................................................13 Productivity .................................................................................................................14 Reduced Business Risk..............................................................................................15 Worksheet...................................................................................................................16 Modeling Impact......................................................................................................16 Campaign Management..........................................................................................16 Productivity..............................................................................................................17 Reduced Risk..........................................................................................................17 Total Impact ............................................................................................................17 Conclusion ....................................................................................................................18 Appendix .......................................................................................................................19 Marketing Automation: Why CRM Investments Make Sense Introduction There has been a significant shift in business focus, from product sales and profits to customer profitability and customer retention. As a result of this shift, there has been a corresponding shift in how businesses measure profits and the investments which support or even drive these profits. A standard profit and loss statement shows revenue, expense and profits. In this type of model, marketing communication costs are an expense. Measuring the expense of marketing communication in the context of customers, promotions and results provides a model for treating the expense as an investment. Specifically, linking revenue and gross profits to the investment provides a clear picture as to the return, providing ample justification for and an opportunity to improve the return. Within this framework an organization can effectively focus efforts on reducing marketing communications costs and improving revenues. Positive results in these areas in turn improves the return on investment (ROI) and the profitability of the business. This model also suggests specific strategies and tactics to be pursued which will reduce the cost of marketing and improve revenue. While there are also significant business challenges in pursuing such goals, particularly in relation to infrastructure, there are proven methods which successfully meet these challenges — methods whose results can have a dramatic impact. This paper focuses on the opportunity represented by marketing and specifically marketing communications, in improving customer profitability and retention. 1 Marketing Automation: Why CRM Investments Make Sense Customer Focus The current industry focus is on developing a customer-centric strategy for improving customer relationship management (CRM). This focus represents a shift from: · · · · Mass to individual. Acquisition to retention. Product to customer. Product function to customer experience. Why does this make sense? The traditional profit and loss statement recognizes only revenue and expense. Improving profits and profitability in this view involves increasing prices or unit sales, or reducing product cost, marketing expense or overhead. Profit Loss Statement Gross Revenue Returns Net Revenue Product Cost Gross Profit Variable Marketing Expense Advertising Expense Overhead $000,000 109 9 100 45 55 % 8% 92% 45% 55% 11 11 25 11% 11% 25% Net Profit 8 8% The annual investment in promotional efforts and advertising is viewed as “Marketing Expense.” In isolation, of course, this investment is an expense, and profits could be improved simply by increasing prices or reducing marketing expense. But where can you reduce expense without losing customers? Marketing is customer communication, intended to drive purchasing. Measuring success requires relating customers and customer purchases to the expense. 2 Marketing Automation: Why CRM Investments Make Sense For example, the table below adds three components of marketing expense (usually associated with direct marketing expense): volume of communications (circulation), the number of responses and the average value of each response. Variable Marketing Expense Cost 11,000,000 Circulation 10,000,000 Response 750,000 Value $ 50.00 Cost Per 000 Response Rate Return On Invest. $ 1,100.00 7.5% 241% Cost per thousand is the cost of communications divided by the total volume of circulation: $11 million / 10,000,000 = $1.10 or $1,100 per thousand This represents the average actual cost for each individual communication. From this promotional effort the expected value per response is $50.00 profit. Thus, the break even (BE) response rate can be calculated as: %BE x $50.00 = $1,100/1,000 or 2.2% In the above example, the ROI is 241%: ($50.00 value x 750,000 response) - $11 million cost / $11 million cost = 241% This approach, if expanded in detail down to the individual campaign level, would provide a clear method of comparison for each campaign, which in turn provides an intelligent approach to reducing, or even increasing, campaign costs. It provides the basis for identifying where returns are least and most favorable, particularly where some campaigns may be operating at below BE levels. The above example focuses on variable marketing expense. Comparing this example to advertising or new customer acquisition could provide an interesting measure of the relative value of both. 3 Marketing Automation: Why CRM Investments Make Sense For example, comparing the two tables below indicates the return on Variable Marketing expense (marketing to current customers) significantly outweighs “advertising” (new customer acquisition), 241% to 59%. Of course, this does not suggest that efforts to acquire new customers should be abandoned. Instead, it stresses the importance of retaining customers. Retention Focus Variable Marketing Expense Cost 11,000,000 Circulation 10,000,000 Response 750,000 Value $ 50.00 Cost Per 000 Response Rate Return On Invest. $ 1,100.00 7.5% 241% Acquisition Focus Advertising Expense Cost 11,000,000 Circulation 100,000,000 Response 350,000 Value $ 50.00 Cost Per 000 Response Rate Return On Invest. $ 110.00 0.4% 59% Having established a model for evaluating the return on marketing investments, referred to in this paper as the Return on Promotional Investment (ROPI) model, an appropriate supporting infrastructure can be developed to facilitate the management of that investment. Increased Response Rate Equals Cost Savings Are there other benefits available in this model view? The total cost ($11 million) is the product of the cost per thousand for the communication itself and the volume. It is unlikely you can affect the average cost per communication without changing the mix between channels, but what about the circulation? What would be the impact of reducing circulation by not sending promotions to people who are unlikely to respond? 20% Circulation Reduction Variable Marketing Expense Cost 8,800,000 Circulation 8,000,000 Response 750,000 Value $ 50.00 Cost Per 000 Response Rate Return On Invest. Net Profit $ 1,100.00 9.4% 326% 28,700,000 30% Circulation Reduction Variable Marketing Expense Cost 7,700,000 Circulation 7,000,000 Response 750,000 Value $ 50.00 Cost Per 000 Response Rate Return On Invest. Net Profit $ 1,100.00 10.7% 387% 29,800,000 Variable Marketing Expense Cost 11,000,000 Circulation 10,000,000 Response 750,000 Value $ 50.00 Cost Per 000 Response Rate Return On Invest. Net Profit $ 1,100.00 7.5% 241% 26,500,000 In the above example, assuming the predictions are 100% accurate, the return has grown from 241% to 387%, based on first a 20% reduction in circulation and then a 30% reduction. If the $3.3 million cost savings could be invested in a similarly responsive promotion, incremental profits of $12.75 million could be generated: ($3.3 million / $1.10 per customer) x 10.7% response x $50.00 value - $3.3 million cost = 12.75 million 4 Marketing Automation: Why CRM Investments Make Sense Cost Savings and Increased Revenue Looking further at this business model, if response could be increased, revenue would possibly increase. Perhaps more targeted communications, aligned with customer interests, could generate an improved response rate. 30% Reduced Cost +10% Response +20% Response Variable Marketing Expense Cost 7,700,000 Circulation 7,000,000 Response 750,000 Value $ 50.00 Cost Per 000 Response Rate Return On Invest. Net Profit $ 1,100.00 10.7% 387% 29,800,000 Variable Marketing Expense Cost 7,700,000 Circulation 7,000,000 Response 825,000 Value $ 50.00 Cost Per 000 Response Rate Return On Invest. Net Profit $ 1,100.00 11.8% 436% 33,550,000 Variable Marketing Expense Cost 7,700,000 Circulation 7,000,000 Response 900,000 Value $ 50.00 Cost Per 000 Response Rate Return On Invest. Net Profit $ 1,100.00 12.9% 484% 37,300,000 In the above example, response has been increased first by 10% and then by 20%, with the final example contributing an incremental $7.5 million profit. With this model in hand, it is appropriate to discuss how a strategy can be developed to improve response results while reducing cost. A customer-focused strategy simultaneously establishes both of these goals, increasing response (revenue) while reducing the cost of communications. Action Steps and Resources: What can be done today? Exploiting the opportunities provided by the marketing investment model requires a plan which integrates customer-focused goals and strategies with the infrastructure required for realizing and maximizing potential returns. Customer-Focused Goals and Strategies You can accomplish two seemingly inconsistent goals, increasing revenue while reducing cost, through a customer-focused strategy. The strategy takes three logical forms: · · · Customer maintenance, inducing larger and more frequent purchases. Retention, maintaining the relationship longer. Expanding wallet share, capturing more of the customer’s purchase activity. 5 Marketing Automation: Why CRM Investments Make Sense Communication tactics, such as offers and promotions, in pursuit of these goals can be categorized into four types: customer segmentation, offer personalization, timely delivery and media selection. Customer Segmentation Preferred Customers Lapsed Customers New Customers Old Customers Offer Personalization Up-sell and Cross-sell Market Basket Special Offers Product Offers Channel Offers Timely Delivery Seasonal New Products Response Non-Response Trigger Events Media Selection Direct Mail Email Telemarketing Website Sales Force Channel Sequence Maintenance The fundamental premise in maintaining current customers is activation and continued activation, the ability to increase purchase frequency and purchase value. This tactic first requires an understanding of current customer segments and purchase patterns. Let’s consider an example where the first activation statistic identified for a campaign was 1.5 million people who had not purchased in a year, yet who continued to receive the same mailings on the same schedule as more active customers, at an annual cost of $6 million. In this example, the next step would be to develop unique and creative messages and offers which would uniquely appeal to such groups, particularly those who have not purchased. In the case of the 1.5 million people identified above, a reactivation promotion and discount offer turned out to be very successful. It can be just as effective to target the most likely to respond with a higher frequency of promotion. Rotated offers include market basket, cross-sell and up-sell approaches as attempts to capture higher purchase value and wallet share. Retention Retention can provide a significant incremental source of revenue. Retention is also reasonably easy to identify and quantify, through statistics such as cancellations, account closures or policy non-renewals. However, retentive actions, to be cost-effective, involve predictive modeling. Behavior patterns must be evaluated for signals indicating loss of interest or interest displaced by a competitor. Timing of response offers must also be evaluated, primarily through testing incrementally shorter periods between promotions. For example, a group of recent account closures could be selected for account resumption, and response correlated with number of days since account closure. Results can be retested periodically. 6 Marketing Automation: Why CRM Investments Make Sense Delivery Timing and Media Further opportunities exist to modify and take advantage of when and how communications are directed to customers. Fundamental timing opportunities include seasonality, new product introductions and customer life events (“new movers” is a classic life event category). Other, more recent opportunities include promotions based on usage patterns, response and non-response, follow-up, and particularly trigger events. Trigger events are particularly effective because of the closer association offered between the event and the promotion (cross-sell opportunities related to a recent purchase, for example). Techniques are being developed to refine both the sequence of communication and the timing interval, for example identifying customers who respond best to a combination of channel communications offered in a specific sequence. Challenges of Being Customer-centric While all of the tactics discussed above represent excellent opportunities for improving the customer experience as well as company profits and profitability, the increase in complexity and demands on resources within the company are significant. The table on the previous page identifies four categories and at least five possible variations of communication in each category. We could add combinations of these items, as well. Fundamentally, the CRM approach results in a much higher volume of communications to smaller customer segments. Managing the planning and delivery of such an increase in the volume of marketing communications, or campaign management, becomes a significant challenge. Foremost in emphasis is rapid access to customer-specific information, in sufficient detail to provide an understanding of how customers are relating with the company. Beyond simple consistency of information between channels, required information includes channels they use, what products they purchase through which channel, to what promotions are people responding or not responding. This information provides a basis for segmentation as well as personalization. In addition to access to information, it must be recognized that increasing profitability in campaigning is of little benefit if it can only be achieved through increasing costs in personnel, hence the need to focus on improving productivity, particularly the productivity of the most knowledgeable marketers and database marketers. Increasing the volume of communication also increases the risk of inconsistent or redundant communications. Sophisticated functionality must be provided to identify conflicting communications and assign a priority or a limitation on the total volume over time. With more communication taking place over multiple channels, it is more difficult to optimize the volume or frequency and the sequence. Lastly, the increase in volume of communication poses a risk for increasing complexity in marketing, database development, information technology (IT) and operations. With the new tools available for analysis of campaign activity, some of which can help identify most and least profitable opportunities, there is the corresponding requirement to measure performance at the individual communication level which introduces a new level of complexity for the infrastructure. 7 Marketing Automation: Why CRM Investments Make Sense Meeting the Challenge Improving information access and the consistency of communications, while tracking performance of an increasingly complex customer marketing process is a daunting challenge, yet many companies have met this challenge through the introduction of specific capabilities which are discussed below. Controlling Marketing Processes Through Marketing Automation Marketing automation is a marriage of business processes with information technology, using data management technology to facilitate and improve marketing strategy planning. Business Process: Marketing strategy planning. Customer targeting. Campaign execution. Marketing communication evaluation. Closed-loop feedback. Information Technology: Data management. Analytics. Campaign management. Business rules. Channel management. Marketing automation provides the fundamental components which enable a business to control the entire marketing process, from extraction and integration of relevant customer data from multiple operational data sources, to development of appropriate analytical and summary tables, to management of campaign and campaign response information, and finally to measurement of marketing effectiveness over time. Marketing automation accomplishes these objectives through data management, predictive analysis, campaign management and response management, including email delivery. By controlling the process, improvements in productivity and cost management can be achieved. Sophisticated functionality can be provided while retaining ease of use for effective time-to-market. Ease of use provides ongoing productivity by empowering marketers with the ability to devise and execute more effective, and more complex, marketing communications. Utilizing marketing automation tools lets you successfully plan and deliver increasingly targeted campaigns, in higher volumes, while simultaneously providing significant productivity and information benefits. This is how the customer-centric challenge can be overcome. 8 Marketing Automation: Why CRM Investments Make Sense Data Management Controlling information flow from multiple customer touchpoints. Building a customer-centric view requires integrating information from multiple locations within the company (sales force, call center, Web and so on) and bringing this information together on a timely basis, with suitable transformations to ensure one consistent view of the customer throughout the company. Software which manages the extraction, transformation and loading (ETL) process must not be limited in the scope of what data and platforms can be accessed, particularly where the data could be located on legacy systems, whose replacement cost is far too expensive. Providing data cleansing to ensure one complete view of the customer. Before deciding which customers to target effectively, a clean view of customers and customer attributes is necessary. The customer-centric view is fundamental to the application of effective analytics, beyond the cost savings associated with eliminating redundancy. It is essential to enforce consistent standards in the ETL process, particularly through data cleansing and standardization. Managing the metadata environment for maximum effectiveness in building customer knowledge. In data warehousing, SAS has incorporated extensive use of metadata and visual icons on a development workbench. Behind each icon is code generation technology, creating rapid development capabilities as well as more effective documentation of the processes. Managing the evolution of the customer-centric data warehouse. A successful data warehouse lasts for years, evolving in capability as well as complexity over time. Customer specific information leads to segmentation of customers which leads to historical views of segments over time. Web-based viewing tools create the opportunity for online drill-down analysis based on underlying multi-dimensional online analytical processing (OLAP) tables. New channels, such as the Web and email, drive a requirement for source data marts, expanded contact history and new summary tables for evaluating results. Analytic Management Integrated response information. As noted above, trigger events represent a key opportunity to closely align promotions with customer events such as purchases. For this to be at all possible requires timely integration of customer activities, purchases and inquiries, into the data warehouse. Integrating customer-driven events also provides the opportunity for more effective and more up-to-date models. Integrated analytic and campaign management information. Similarly, integrated response, as well as campaign management information, provides the unique opportunity to differentiate communications between responders, non-responders and the campaigns themselves. In turn, models based on response can be integrated into the campaign environment, further refining the target audience and improving the revenue to cost ratio. 9 Marketing Automation: Why CRM Investments Make Sense Campaign Management Campaign management captures and improves much of the process of planning, developing and executing campaigns. Campaign Process Review campaign time line. Define campaign and communications. Define audience. Review audience (analysis). Prioritize. Split cells. Define export template. Execute campaign (scheduler). Evaluate results (reporting, analysis). Marketing Automation Opportunity Improve campaign planning. Improve tracking. Improve selection targeting. Improve productivity Improve communication. Increase personalization. Improve delivery reliability. Capitalize on opportunities. Improve communication timing. Each step in the campaign process is a marketing automation opportunity, from providing campaign information in one central location, to enabling campaign prioritization, to delivering results in a consistent, easily available form. These capabilities provide fundamental as well as sophisticated functionality required to successfully pursue aggressive communication strategies which are at the root of effective customer relationship management. Cost Management The first section of this paper was devoted to a detailed description of the financial model behind a successful CRM effort. Essential to success is the ability to capture, store, manage and recall campaign attributes and performance metrics in a database, referred to here as the ROPI database. This database is the foundation of an organization’s ability to differentiate successful and less successful communication efforts. If organized appropriately as a hierarchy, including campaign month and channel, the database will also provide a source for immediate performance variance analysis. The database will not only track specific campaigns, but it will also provide tracking of June performance versus prior year June, telemarketing current year-to-date versus prior year-todate, comparison of channels, creative offers and promotional offers. If this hierarchy is stored as a multidimensional table, Web-based drill-down functionality can be provided, creating a flexible, easy-to-use tool for marketing analysts to evaluate variances in performance, such as higher response but lower revenue or profits. If the same hierarchy includes relevant business plan metrics, financial business analysts will have an equally valuable tool for determining variances to the business plan, tracking budgets and performance to budget. 10 Marketing Automation: Why CRM Investments Make Sense The comprehensive aspect of the database will provide the opportunity to optimize spending allocation between channels, lists, vendors or products. Appropriate attributes for every campaign include campaign identification, hierarchical positioning, media, month, creative, promotional offer, product, customer segment, as well as campaign costs, response and value (revenue and profit). Reducing Business Planning Risk Integrated Business Planning Information. This often overlooked result of improved information availability fundamentally contributes to minimizing business risk. The consolidation of campaign planning and response information provides a resource for more effective business planning. The rich detail of actual expenses and response information, together with customer segmentation information, can provide a more detailed and realistic business plan. This can improve executive understanding of ongoing performance and provide an early warning when response departs significantly from the business plan, in time for corrective action. CRM Results Implementing a CRM strategy which focuses on maximizing customer value and optimizing promotion expense can have a dramatic impact. · · · · · · Data cleansing — 3% to 5% impact on cost. Time to market — from weeks to days. Reduced promotional cost. Improved response and revenue. Reduced customer attrition. Better visibility into results and customers. Results Example: Telemarketing As an example, consider the telemarketing program of a well-known direct marketing company. The initial program was based on identifying customers who had not purchased in the past four months and sending this entire list to telemarketing service companies on a quarterly basis. The program had to be quarterly due to the massive volume: over 750,000 names in a typical list. After a year or so of this brute force effort, a test program was developed based on three days of modeling effort and list selection. 110,000 names were selected as the most likely to respond. Within a few days, the list was telematched and being actively called. Within 30 days the response was stunning: $250,000 in incremental profits, based on a 61% response rate from the customers who were actually contacted. 11 Marketing Automation: Why CRM Investments Make Sense In addition, this list of people was easier to contact than prior, un-scored lists. 63% of the calls were completed compared to less than 50%, and 74% of the calls were to the right person, compared to less than half this volume in the previous lists. The scored list provided a much more effective sales rate, resulting in lower cost per completed call. Figure 1: Telemarketing Response Results — 159% ROI Extended Results In the subsequent year the program was expanded significantly by this company, resulting in multi-million dollar profits. The customer-centric data warehouse provided the rapid information access and performance required to provide on going monthly selection and scoring of approximately 500,000 customers every four weeks, following the weekend data refresh. Of this group, approximately two thirds would have a response score sufficiently high to merit a telemarketing call. A data mart was created in turn to provide weekly response reporting, by segment and by vendor. The latter dimension provided ongoing monitoring of vendor by vendor performance. The best vendor was always used as a benchmark for the others. Continual back testing confirmed the level of sales cannibalization forward, as well as providing feedback on the model performance. From September, 1999, forward, the company accomplished the following: · · · · · Bi-monthly selection of 350,000 accounts. Multiple vendors maintained and monitored. Fiscal targets achieved in six months for a $4 million profit. ROI of 800% over warehouse investment. Second year performance of over $10 million profit and data mining fully integrated with operations. 12 Marketing Automation: Why CRM Investments Make Sense Measurable ROI: Why CRM Investments Make Sense The foregoing capabilities are available today through such marketing automation suites as SAS Marketing Automation. Such far-reaching capability requires an investment, and the following discussion demonstrates how important it is to make this investment, based on the significant potential return. Analytical Models The process of analysis involves segmentation or differentiation of the customer population into groups with some commonality. One dimension common to these groups is their propensity to respond to promotions. Based on previous promotions and response information, predictive models may be able to identify customers more likely to respond to a promotion. From these predictive models, groups less likely to respond can be eliminated from a promotion, representing a cost savings. Some campaign costs can be reduced by 20% to 30% while sacrificing less than 5% of the responders. Analysis can also support the differentiation process itself, in being able to identify potential churners or recipients more likely to respond to an up-sell or other offer. The key here is that without the application of analytics, a campaign would have to be directed at all or most customers, and may be unlikely to be profitable with that broad a distribution. Hence, analytics provide an opportunity for both cost reduction and new campaign opportunities. Campaign Management Campaign management provides many benefits as described earlier. The following list summarizes most of these benefits as they would apply to investment justification. Most of these opportunities increase response through improved targeting — the right message to the right person at the right time using the right media. Other capabilities provide the ability to increase the number of campaigns by managing: · · · More frequent communications to smaller groups. More effective choice of communication channel, improving response. More complex communication timing based on scheduling and automated delivery, including trigger-event scheduling and delivery based on response or non-response. All of the above should contribute to a more effective, and longer, relationship with the customer. One method for quantifying this impact is to assume an overall increase in purchase volume, based perhaps on a nominal 5% or 10% increase in customer lifetime purchases in the next time period. 13 Marketing Automation: Why CRM Investments Make Sense Thus, campaign management should provide increased revenue through higher purchase frequency, higher purchase value, increased volume of campaigns and lower cost relative to purchase. It is perhaps worth noting that business growth can be initiated through improved response: as response and customer lifetime value improve, so too does the return on the initial customer acquisition investment, thereby justifying an increased outlay in new customer promotions. Productivity The keyword in marketing automation is obviously automation. While automation of communication delivery provides an opportunity in and of itself, it also facilitates the planning and execution process, removing manual, time-consuming actions and maximizing the productivity of key analysts and managers. These individuals are then free to evaluate and pursue new revenue opportunities. In data management, warehouse administration and automated ETL processes maximize the reliability, availability and timeliness of information. This is the information which drives the analytical and campaign management processes but which also drives delivery of lists and content to service providers, such as letter shops, call centers, Web sites and email servers. Automating the process of analysis and model development is very challenging, as much of the activity takes place in the mind of the analyst as he or she develops samples of the customer database, analyzes variable distributions and tests a variety of modeling approaches. SAS recognizes the key steps in the process (Sample, Explore, Modify, Model and Assess) as well as the underlying actions. SAS captures these processes in the form of icons, which can be applied to an analytical workbench or palette. While eliminating the need to write code altogether, the environment is still very flexible, allowing user-developed processes to be easily incorporated in a model. Improving the productivity of modelers and analysts provides more time to improve existing selection models as well as pursue additional models which are the root of new campaign opportunities. Such models can transform otherwise unprofitable opportunities into profitable ones. Similarly, the marketing processes incorporated within campaign management provide a wealth of productivity benefits such as: · Concentrating information in one location instead of distributed on emails, spreadsheets and marketing documents. Providing re-usable campaign templates, selection rules and export templates. Facilitating incorporation of models in line with the selection process. Automating execution of selection rules and campaign execution. · · · 14 Marketing Automation: Why CRM Investments Make Sense These benefits facilitate campaign development, empowering marketers to focus on more and more effective campaigns. Finally, many analysts spend an inordinate amount of time pursuing, repackaging and delivering information, such as campaign performance and segmentation analysis. Automating the reporting process, including Web delivery as well as reformatting data storage for OLAP capabilities, provides the opportunity for these individuals to pursue new campaign opportunities. The effect of improved productivity on a business is directly visible in the volume of additional campaigns and improved analysis available, not in the savings associated with headcount manipulation. The true value of increased productivity is the new and incremental opportunities which marketers and analysts are able to pursue to completion, each with the potential to net results many times their cost. This clarification is precisely the reason that productivity enhancements are targeted toward the top performers in a business: their knowledge of the business, their perception of customer needs and their understanding of customer behavior provides them the ability to best qualify and capitalize on opportunities more quickly and more effectively. Productivity also means the same amount of work in less time, which translates twofold: improved time to market means faster recognition of the revenue stream. It also means that more opportunities can be pursued in the same time frame with the same resources. Reduced Business Risk Integration of information improves the budgeting process, performance reporting, and the organization’s ability to respond to changing economic situations. Another view of the same process is provided by the link between productivity and improved access to business-relevant information: reduction of business risk. However, the same information and processes which have been discussed here in the context of more effective and profitable marketing in turn can be exploited to provide better understanding of the business itself, thereby reducing risk. A hypothetical business may have a profit goal of $25 million, against which a risk of achievement is estimated as 10% or $2.5 million. By improving the systems and process infrastructure, as well as enhanced productivity of marketers and analysts alike, such a risk could be mitigated by 20% or $500,000 or more. 15 Marketing Automation: Why CRM Investments Make Sense Worksheet Combining these elements together into a single spreadsheet may provide a more effective summary of the potential impact of an investment in marketing automation. NOTE: The spreadsheet discussed below and included in the appendix is intended to provide a guide for those evaluating the merits of a CRM investment. You should apply your own experience and campaign figures in deriving potential results specific for your company. Assume a hypothetical company delivers approximately 200 unique communications per year to its customers through multiple channels. There are an average of 484,000 people in each campaign, as this company utilizes high volume email campaigns. On average, the response rate is 3.6% (note the channel mix), and the value (gross profit) of a response is $73.00. Each campaign can be expected to generate $1.3 million gross profit, less campaign costs of $1,710.00 per thousand or a net contribution to overhead of $439,000 per campaign (average). For this company, gross profit before marketing costs totals $251 million, based on 200 campaigns multiplied by $430,000 profit (net) per campaign. Modeling Impact The foremost expected benefit of modeling is to reduce the total circulation volume without undue impact on response. Experience demonstrates that some models can achieve 30% to 40% reduction in total volume while retaining 95% of the total response. This is rarely true for all campaigns, of course, hence a more conservative approach might be to assume a 20% reduction in volume for one in four campaigns. In the above example this would represent a savings of $8.3 million. Modeling may similarly be able to identify new opportunities which otherwise would have been unprofitable. These would be relatively lower total response possibilities, hence the incremental impact might be half that of a normal campaign, or $215,000 per campaign. Four such opportunities might be assumed in any year, for an incremental contribution of $860,000. Campaign Management Experience has shown that personalization including channel selection can achieve an incremental response, and a 5% lift on half of existing promotions might not be unreasonable. This would provide $2.1 million incremental profit (net). 16 Marketing Automation: Why CRM Investments Make Sense Most businesses have long recognized the significant benefit of keeping customers longer. The problem has been just how to go about doing that. As noted earlier, campaign management provides the opportunity for higher levels of personalization as well as automated delivery, for a more effective customer communication dialogue. Measuring the impact of an improvement is another issue. Assuming incremental sales of 5% over four years might not be unreasonable. The impact in this example is $4.3 million annually. Incremental campaign opportunities exist in automation of delivery, the ability to generate follow-up responses and the increased frequency afforded through the tools themselves. If these incremental opportunities are combined, it might be reasonable to assume 5 to 10 incremental campaigns, a relatively mild 3% to 5% increase over the current annual total of 200. This could generate an additional $2 to $3 million. Productivity While some increase in productivity would be necessary to achieve the above incremental campaign results, it has been noted that productivity is a benefit in and of itself. Thus, it would seem reasonable to add one or two incremental campaigns based on increases in marketing staff productivity. Reduced Risk As noted above, improved information and access to that information should provide a more certain planning environment. If uncertainty is reduced to 1% of the gross profit of this company, the impact would be $2.5 million. Total Impact All told, the combined impact of applied analytics, campaign management, information access, productivity and reduced risk is $20.5 million (see Appendix). From this example, it is clear that the upside potential of improved process and improved access to information and productivity can be very dramatic, from a sequence of small adjustments in several areas. 17 Marketing Automation: Why CRM Investments Make Sense Conclusion This paper demonstrates that the comparatively recent shift in business focus, from product focus to customer focus, represents a significant opportunity for businesses to improve profits and profitability. To capitalize on this opportunity requires adopting a financial model which relates customer profits to the marketing investment. Adopting such a model and performance metrics empowers the business to identify and further exploit positive promotional opportunities. In so doing, a dramatic increase in communication complexity will arise, a complexity which will require improvements in the data management as well as the analytic and campaign management infrastructures. Improving the infrastructure by adopting efficient marketing automation strategies creates an opportunity for improving customer knowledge, managing more frequent and more complex campaigns, and significantly increasing productivity. The boost in sophisticated functionality and productivity will translate directly to an increased frequency of campaigns, campaigns which are more customer focused and which increase the likelihood of higher response, profits and profitability. The resulting improved information will further enhance business planning, improving the likelihood of achieving plan goals and resulting in a corresponding reduction in business risk. These factors make investment in CRM-enabling capabilities a distinct business opportunity. 18 Marketing Automation: Why CRM Investments Make Sense Appendix EMA Impact Analysis Spreadsheet (All Figures Based on Annual Estimates) Company specific figures entered in Gross Profit Customers Marketing Budget Marketing Channels Number of Channels Campaigns Per Channel Circulation per Campaign Total Circulation 96,800,000 250,000,000 20,000,000 100,000,000 Direct Mail 4 1 54 800,000 43,200,000 44.6% 1.25 165,350,000 3,444,000 0.17 54,000,000 2.0% 864,000 35 251,340,000 30,240,000 these boxes All other figures are derived/calculated Telemarketing 1 28 150,000 4,200,000 4.3% 2.40 10,080,000 5.0% 210,000 45 9,450,000 Email 1 94 500,000 47,000,000 48.6% 0.01 470,000 3.0% 1,410,000 65 91,650,000 Direct Sales 1 24 2,400,000 2,400,000 2.5% 42.00 100,800,000 40.0% 960,000 125 120,000,000 Cost Per Contact Total Cost (Mktg Budget) Response Rate Total Response Response Per Customer Value of Response (Profit) Total Value (Profit) (Ties to Gross Profit) Avg Annual Contacts Total Unique Campaigns 4.8 200 Per Campaign Averages Circ Per Campaign Cost Per Contact Response Per Campaign Value Per Response Response Rate Net Profit Per Campaign $ 484,000 1.71 17,220 73 3.56% 429,950 ROPI 52.0% Analytics Reduced Circulation Cost Addtl Opportunities $ 8,267,500 Campaign Vol 859,900 Addt'l Campaigns 50 Reduction 4 Effectiveness 20% 50% Campaign Mgt Personalization/Channel Attrition Impact Automated Delivery Followup Response Increased Frequency $ $ $ 2,149,750 Campaign Vol 4,305,000 Life Time Value Years 859,900 Addt'l Campaigns 644,925 Addt'l Campaigns 429,950 Addt'l Campaigns 100 Increase 100 Increase 4 Effectiveness 3 Effectiveness 2 Effectiveness 5% 5% 50% 50% 50% 4 Ann'l Purchasers 3,444,000 Productivity Additional Campaign $ 429,950 Addt'l Campaigns 2 Effectiveness 50% Reduced Risk 2,513,400 % of Gross Profit 1% TOTAL BENEFIT Percent of Gross Profit 20,460,275 NET ANNUAL Contribution to Overhead 8.1% Percent Increase in Gross Profit 19 Marketing Automation: Why CRM Investments Make Sense 20 Marketing Automation: Why CRM Investments Make Sense 21 World Headquarters and SAS Americas SAS Campus Drive Cary, NC 27513 USA Tel: (919) 677 8000 Fax: (919) 677 4444 U.S. & Canada sales: (800) 727 0025 SAS International PO Box 10 53 40 Neuenheimer Landstr. 28-30 D-69043 Heidelberg, Germany Tel: (49) 6221 4160 Fax: (49) 6221 474850 www.sas.com SAS and all other SAS Institute Inc. product or service names are registered trademarks or trademarks of SAS Institute Inc. in the USA and other countries. ® indicates USA registration. 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