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Optimizing customer returns

November 29, 2009

Here’s a thought. We believe those organisations that arm themselves with a clear view of the value and returns they get from their customers will have a better potential to survive and thrive, whatever the economy.

Why do we believe this? Because such organisations are not only talking about putting customers at the heart of their business, they are acting on it. By understanding their investment returns at a customer level, they are giving themselves a major competitive advantage because it is unlikely their competitors are doing so.

Before we get into this, take a few minutes to consider the following questions:

1. Do you segment your customers based on value measures?

2. Do you know how many customers you retain each year and how retention rates vary by segment?

3. Do you know how much it costs to serve your customers?

4. Do you measure customer satisfaction, or even better – customer commitment?

5. Do you know what share of wallet you have with each of your customer groups?

According to Professor Frances Frei of Harvard Business School “your customer is your most powerful asset”. Most organisations generate revenue from customers.

As obvious as this may appear, while companies expect to know how many products they sell, how much revenue each product line generates and how much capital they have invested in machinery or property, they are often unable to quantify anything beyond the most basic information about their customers. For example, just 12% of organisations are able to measure cost to serve according to QCi (State of the Nation IV: 2005.) A survey by Genroe in Australia further supports this, revealing that only 9% of organisations reported on comprehensive customer information in the way they would other ‘business assets’.

Unfortunately, without a view of current and potential value, customer reporting can be highly misleading. According to analysis by Unity UK, up to 60% of customers are typically unprofitable. In fact, they found that just 5% to 15% of customers generate 100% of profits in the organisations in the study. They also found that some 25% to 55% of company resources are consumed by unprofitable customers. Results from our own analyses support this. We commonly see situations where over 40% of customers will lapse before ever breaking even.

This information has a dramatic implication for those using return on investment (ROI) criteria to support decision making.

ROI assessments: Are yours giving your organisation the right steer?

A basic campaign ROI calculation multiplies response and contribution, and divides the result by the cost of activity. So a campaign that costs $100,000, delivered 6,667 customers each contributing $150, gives an ROI of 10:1 ($10 revenue resulting from each $1 spent.)

Now consider this example: Two acquisition campaigns each cost $100,000, each deliver a cost per acquisition of $15 with customers acquired spending $150. So the ROI is equal? What we don’t see is that customers from Campaign A are retained at the rate of 50%, whereas for Campaign B that same rate is 85%. In this scenario, after 3 years Campaign B would deliver $822,500 more revenue and retain 3,150 more customers.

Basic ROI calculations give you a steer on short-term tactical activity at best. However, they are lacking when it comes providing strategic direction.

To get a clear picture of ROI, it is our view that Customer Life Time Value (CLTV) segmentation is a pre-requisite. In simple terms, CLTV is “today’s value of all future profits you predict you’ll get from a customer” (Martha Rogers, Peppers & Rogers Group).   It takes account of the current value of a customer to the organisation, but vitally it factors in a probability around the potential value .   This can even inform prospecting as each prospect has a probability, however slim, of becoming a customer, and therefore can also be assigned a value.

Armed with a CLTV derived view of ‘customer return’ for the organisation, ROI calculations can move beyond the short-term hit and accurately support strategic decision making.   Instead of looking at immediate contribution, such an approach assesses returns based on the change to CLTV that results from that activity.

CLTV in action

 

In this example – based on a real scenario from Twenty’s archive – Lifetime Value is calculated by adding current value of a customer (income v cost of acquisition and maintenance) to tenure and potential value of future income.

The first part of this analysis looked at the relationship between costs and revenue to provide a steer on current value and customer breakeven.

That old chestnut ‘not all customers are created equal’ quickly became obvious. This work has very much highlighted the importance of targeting and recruiting the right type of prospects – those with a high probability to become profitable.

Unsurprisingly, one of the biggest factors in profitability is media. While certain media look much more cost effective on paper in terms of cost per contact and reach, they proved to be among the weakest at delivering profitable high-value customers.

Understanding the effects acquisition channels have on the subsequent behaviour and profitablity of customers is a clearly a huge asset in terms of media strategy as well as customer management.

Customers: Still the lifeblood of business.

It is customers that provide your organisation with most if not all its revenue – not products, services or capital investment. So treat them like a valuable business asset, and evaluate their worth. Understand not just what value you get from them but the value you provide to them. Then leverage this information to improve total customer returns, aligning your organisation, marketing investment and other resources to better meet your customer needs.

Getting under the skin of the customer returns will have a major impact on the way you approach the business of marketing. It takes vision and commitment, but applied well it will lead to strategically more robust decisions and deliver a real competitive advantage.

 

Mark Wilson is a founding partner and director of Twenty. As Director of Insight, he is responsible for driving the analytics division of the agency, with clients as diverse as CourierPost, Pace, ChildFund, Fisher & Paykel Finance and BMW. As well as being a judge for major industry awards, his own work has been highly recognised with numerous top Nexus awards over the years.

Economic Recovery: Are we there yet?

November 29, 2009

“Media owners have provided a great deal of additional value during the past six to nine months but we’re now entering a more ‘normalised’ environment. So trading will have to return to contracted levels.” TVNZ Head of Sales Dave Walker, quoted in Planit (14 October 2009)

MediaWorks CEO Brent Impey was similarly bullish at the TV3/C4 New Season launch, reporting that business has really picked up over the last eight weeks; and more money has been booked on television with MediaWorks in the last seven days than ever before in its history.

So — back to business as usual then, at least for television?

Alas, if only it were that simple. As we’ve learned from past “economic corrections”, the fourth quarter of each year is always a time of hope, when those marketers who have held back during the earlier part of the year spend what pennies they can scrape together, hoping for at least some Christmas sales to offset what’s been for most an annus horribilis.

Much as we’d like to believe that those “green shoots” of economic recovery spotted by optimistic observers will blossom forth and bear sumptuous harvest (if we may be forgiven for threshing the metaphor) — we fear that this new growth spurt won’t last past Boxing Day.

We’re not just being cantankerous. Despite the well-documented restoration of consumer and even business confidence, in our opinion it’s only skin-deep; the underlying realities suggest a slow recovery. As Reserve Bank Governor Alan Bollard observed recently, “we expect the economy to begin growing again toward the end of [2009], but the recovery is likely to be slow and drawn out. It could also be erratic. To many households it may not feel like a recovery at all, with lower employment, house prices and wage increases into next year.”

Businesses will be starting to plan now (or soon) for 2010/11 financial years starting in April or July 2010. Based on current trading conditions, company finance directors are unlikely to approve significant marketing budget increases for next year — green shoots may look pretty in the garden but they don’t stand up too well under the harsh spotlights of the boardroom.

As a result, we don’t expect marketing budgets to show much improvement until 2011. Consumers and businesses may well be telling researchers that they expect conditions to improve over the next twelve months — but that’s largely expressing an expectation that things won’t get any worse, not that they’ll suddenly turn absolutely fabulous.

Even Christmas 2009 may not provide the boost that business is anticipating. The latest Kiwi consumer credit figures (to August 31) show a 4.6% slump in borrowing; and Kiwis are saving just 0.2% more than they were twelve months ago. Philip Borkin, economist at ANZ National Bank, summed up the challenge we all face: “A lot of people are paying down debt, and until we see the credit numbers improve, we’re not expecting much to change. For retailers this is a critical time – if we don’t get a pick-up then this could be a very challenging time for them.”

Economists’ cautions are supported by other indicators. Jasons Travel Media recently asked Kiwis what they’re planning to do for the Christmas and summer holidays. A staggering 60% of respondents are changing their plans from the norm this summer – opting to spend their time somewhere other than where they have gone for summer holidays in the past. When asked, there were a plethora of reasons for the break from traditional plans including ‘better deals on accommodation elsewhere’, ‘decided to go somewhere close’ and ‘money is a bit tight this year’. In those Clintonesque words, “It’s the economy, stupid”.

It’s not just us, of course. The latest news from the land of (former?) Hope and (lost?) Glory suggests that parsimony rather than plenty is a global reality these holidays.

The just-published Holiday Forecast Consumer Behaviour Report from PriceGrabber.com finds that this holiday season American consumers will NOT be buying Christmas goodies for:

* Acquaintances, 57%
* Co-workers, 53%
* Service providers (eg parking attendant, housekeeper), 44%
* Extended family (sorry auntie), 42%
* Friends, 31%

Other Holiday Trends from the PriceGrabber.com survey of 2,018 online consumers, conducted from Sept. 24, 2009 to Oct. 12, 2009:

Consumers are more price-sensitive than ever
More than ever, comparison shopping is on the forefront of consumers’ minds, with 70 percent of consumers doing more research and comparison shopping online, compared with 38 percent last year. And fifty percent of consumers are planning to shop at discount or outlet stores this year, while only 43 percent did so last year.

Consumers are cutting back
Fifty-three percent of consumers are planning to spend less than they did last year. Of the consumers who are planning to spend less this Christmas, 48 percent reveal that one of the reasons that they are spending less is due to an increase in prices (necessities, gas, etc.), 45 percent cite lack of confidence in the economy, and 38 percent indicate making less money as a reason for spending less.

Shopping has started earlier, to ease the impact of holiday spending
In past years, Black Friday (the day after Thanksgiving, late in November) has been the unofficial start of the American holiday shopping season. This year, US consumers are planning to start their holiday shopping long before Black Friday, with 22 percent of consumers starting their holiday shopping in October and 29 percent starting in November.

In New Zealand, retailers have been in Christmas shopping mode for some time. The ubiquitous Cameron Brewer, chief executive of the Newmarket Business Association, warned in late September that “for better or worse consumers can expect to see Christmas decorations and displays popping up in some New Zealand shops over the next few weeks.”

Kiwis usually do their shopping somewhat ahead of the Christmas rush anyway. A 2007 study by AMP Capital Shopping Centres found that:

* 25% of Kiwis have begun their Christmas shopping by September 25, three months out from Christmas
* 16% start shopping in October
* 21% hit the malls in November
* 33% wait until the last fortnight before Christmas
* 7% of us (three-quarters male, inevitably) leave Christmas shopping until the last minute
* Meanwhile an impossibly virtuous 3% head to the Boxing Day sales with vim and vigour, buying their gifts for the following year 364 days early.

Gift lists are trimmed down to manage budgets
When it comes to holiday spending this year, 36 percent of US consumers expect to spend between $100 and $499, 28 percent plan to spend $500 to $999, and 30 percent anticipate a holiday spend of $1,000 or more.

We don’t have any recent NZ data for Christmas spend levels, but a five-year-old study by UMR Research on behalf of Visa International found that:

* More than 50% of Kiwis expected to spend less than $300 on Christmas gifts
* 16 percent intended to spend less than $100
* One in twenty said they were planning to “splash out” and spend more than $1000
* Credit card holders were more likely to expect to spend over $500 than non-cardholders (22 percent compared with 12 percent)
* Men generally planned to spend slightly more than women
* The most profligate age group was 30-44 year-olds.

Add a few dollars for five years of moderate inflation, deduct as required for economic downturn du jour, season to taste.

THAT’S THE CONSUMER, WHAT ABOUT BUSINESS?

The biggest declines in Year On Year reported advertising expenditure (according to Nielsen Media Research data, Jan-Aug 2009 vs Jan-Aug 2008, at ratecard values) are:

* Automotive (down $20.1 million)
* Investment/Finance/Banking (down $17.8 million)
* Government (down $11.8 million)
* Home Improvements (down $7.7 million)

In terms of individual advertisers, Telecom has had the biggest drop in reported spend, down by 32% ($10.7 million) YOY. 16 of the top 20 advertisers would seem to have recorded YOY expenditure increases, but we suspect this has more to do with better deals being negotiated in recessionary times rather than extra dollars squeezed out of corporate coffers.

Are we likely to see any of those lost ad dollars return in 2010?
We don’t expect the Financial sector to dip into its battered piggy banks in the near future. As we’ve already seen, consumer borrowing remains down as we pay off our debts (just in case). The housing boom is over so we won’t be desperately seeking mortgages every six months; and our memories of the financial sector meltdown are all too fresh, so the non-bank financial intermediaries are rather less likely to advertise just now.

The Government? Officially on a fiscal diet. We’ll see a splurge of local body activity in Local Election Year 2010, especially as the SuperCity emerges from its chrysalis, but that doesn’t usually translate into big dollars.

Automotive? Well, you know what’s been happening offshore. Within New Zealand, if we look at how many Kiwis say they’ll be buying a new car within the next six months, that number’s dropped from 41,000 in July 2008 to 24,000 in July 2009 (Roy Morgan Single Source data).

Home Improvements? According to Roy Morgan Single Source, 706,000 Kiwis say they plan to refurbish or redecorate their home in some way (such as replacing curtains, carpet or wallpaper) in the next year – well down from 830,000 twelve months ago. And just 367,000 (was 460,000) are planning to spend more than $5,000 renovating or extending their homes in the next twelve months. With fewer consumers willing to pimp their homes, competition’s going to be fiercer than ever for the Home Improvement dollar.

THE MULTINATIONAL EFFECT

As a small country far out in the uncharted backwaters of the unfashionable end of the Western Spiral arm of the Galaxy, New Zealand is at the mercy of global forces in a number of ways, not least the dark and mysterious menace known as the multinational balance sheet. As each quarterly reporting deadline looms in the financial capitals of the world, global CFOs swoop on allocated but unspent marketing budgets from the tiny, farflung outposts of their empires in a futile botoxian effort to tart up the numbers.

Given the current economic woes in most of the countries to which our multinational branches report, local marketing budgets won’t be doing anything but shrinking in most 2009/10 financial years — which takes us to October or November 2010 (based on typical multinational financial years) before any fiscal relief is even theoretically possible.

In other words, multinational marketers (the biggest spenders in our mass media) won’t be driving any Kiwi advertising recovery any time soon. Don’t batten down the ratecard just yet.

MEDIA FORECASTS FROM ELSEWHERE

Our global counterparts aren’t expecting much from 2010. World Advertising Research Centre (WARC) media inflation forecasts for the year ahead (just released) don’t inspire much optimism unless you live in the emerging economies of China, India or Russia. Projections for media inflation (2010 vs 2010) for three of our key indicator markets:

Australia:

* Television up 1.6%
* Newspapers up 0.6%
* Magazines no change
* Radio up 0.5%
* Cinema up 0.8%
* Out of home up 1.1%
* Internet up 5.5%

United Kingdom:

* Television down 3.3%
* Newspapers down 0.6%
* Magazines down 2.4%
* Radio down 2.0%
* Cinema down 0.5%
* Out of home down 0.8%
* Internet down 5.8%

USA:

* Television down 5.0%
* Newspapers down 4.5%
* Magazines up 1.0%
* Radio down 5.0%
* Cinema up 2.0%
* Out of home down 1.0%
* Internet up 0.5%

Not much there to encourage embattled media owners.

SO ARE WE THERE YET?

We’ve seen the feathers, we’ve heard the tweets, but so far no actual sighting of the first cuckoo of a new economic spring. Our consensus view at this point is for a seasonal uptick till Christmas, then slow simmering during 2010. Sorry.

This article is drawn from the presentation MEDIA 2010: A Sneak Peak At What Lies Ahead. If you’re a Media Counsel client, please talk to your TMC team about scheduling a time for us to present MEDIA 2010 to you and your colleagues.

Glenda Wynyard

Australian agencies predict a 7% rise in marketing budgets in 2010.

October 27, 2009

US Agency Hourly rates – interesting reading

October 4, 2009

From Ad Age

Top New York Advertising Creatives Charge $750 per Hour
4A’s Labor Billing Survey Shows Little Geographic Variability for Most Industry Positions — Except for Heavy Hitters

Posted by Rupal Parekh on 10.01.09 @ 07:00 PM

NEW YORK (AdAge.com) — Chief creative officers at large U.S. agencies, on average, billed $964 an hour to clients in 2008, while top account and media executives billed an average of $533 and $478 an hour, respectively.

Those are just a few of the enlightening figures contained in a soon-to-be widely available 117-page survey conducted by the 4A’s that details labor billing practices at ad agencies around the country.

In the past, the trade group has compiled and distributed such information for its membership, but never shared it broadly. Tom Finneran, exec VP-agency management services at the 4A’s, said the decision to spread the data comes partly because the organization has been inundated with requests for information about labor billing rates. It also wants to provide credible benchmarks for these fees — which, for all the talk of value-based models — are still the predominant form of agency compensation today.

“Everyone is seeing requests for proposals more and more ask for rate comparison data … clients are looking for ways to do their due diligence and to have some kind of market-based information,” said Neal Grossman, chief operating officer at TBWA/Chiat/Day in Marina Del Rey, Calif., who also serves as chair of the 4A’s large-agency finance committee. At the same time, agencies are increasingly under pressure to show that the labor rates they charge are competitive with the marketplace, as clients’ procurement departments play a bigger role in selecting agency partners.

The 4A’s culled data for the report from its members between May and August 2009, asking them about hourly rates billed to clients in 2008 for some 130 positions across 14 service departments, such as creative, media services, account planning, research and print production.

Bigger picture
Over 230 marketing agencies of varying sizes, geographies and specialties responded to the survey, though the majority netted out to be full-service shops. Among the ones represented in the study: BBDO, TBWA/Chiat/Day, Crispin Porter & Bogusky, McCann Erickson, Digitas, MediaVest, JWT, Y&R and Carat.

It’s important to note that the rates reflected in the survey are what agencies quote on their “rate cards,” and the rates actually negotiated by clients may come in lower. Still, it’s a pretty comprehensive snapshot of how much marketers are paying for agency labor. It offers data points for four different regions of the country, average labor-billing rates and mid-range data for rates (kind of like Olympic scoring, it knocks off the 20% of the highest rates and 20% of the lowest rates).

The survey reveals just how much geography can affect billing differences for highest-level positions, though that doesn’t seem to make much of a difference for mid-level or junior positions.

In 2008, a director of client services in the New York Metro area billed an average of $453 an hour compared toh $260 an hour at agencies in the middle part of the country, while an account supervisor billed clients between $140 or $150 on average, no matter where they were located in the country.

Some other geographical differences: An executive director of account planning in the New York Metro area billed $545 vs. between $315 to $355 in other parts of the country. Research directors in the South made about $277 per hour vs $520 in the New York Metro area last year.

With a top creative, the disparity in billing rates is huge: A chief creative based in the New York Metro area billed an average of $751 an hour last year — more than double what a chief creative in other parts of the Eastern U.S. or in the South billed, at $319 an hour. In the central part of the country, a head creative billed an average of $420 an hour, and in the West, an average of $461.

Not typical
David Beals, president-CEO at industry consultancy Jones Lundin Beals, estimates that “very senior positions at large agencies are rarely billed out for more than a percent or two of the person’s time … if a person at this level bills more than 25 to 50 hours of time to a given client, it would be rather unusual for most of the agency’s client relationships.”

Based on the 4A’s survey, that nets out to a minimum of more than $18,000 billed to a client for a top creative in the New York Metro area.

For all the talk about media agencies becoming a more valued partner during the recession, they’re not compensated nearly as much as other positions: An executive media director at a media agency bills a mid-range high of $500 and low of $281, while a media buyer makes a mid-range high of $100 and a low of $65.

According to Mr Beals, the numbers track with agency labor-compensation trends for several years: “Typically, the creative folks make the most money on a per-hour basis — though sometimes a really good strategic planner will be right up there too — followed by account services, then media services tend to be the lowest paid.”

As digital talent continues to become more sought-after, the trend is probably more in a state of flux, Mr. Beals said. In 2008, the range of hourly billing rates at digital specialist agencies was between about $400 an hour for the senior-most roles and $85 an hour for the most junior.

TVNZ’s decision announced. Industry-wide changes to come?

September 25, 2009

TVNZ has announced its decision to reduce the commission paid to agencies by 10%, effective from 1 January 2011.  These changes differ from proposed plans and have been reached after consultation between TVNZ and Industry Associations (including NZMA, ANZA – and led by CAANZ).

The New Zealand Marketing Association (NZMA) stands in a unique position, with a broad and diverse member base including agency, media and client-side organisations, and must work to represent all parties fairly. For more information on the NZMA’s perspective, visit the NZMA’s website.

Full details on TVNZ’s announcement are also available here.  Your feedback is important, so post your comments here.  The NZMA will also be sending out a survey soon to find out how these changes are likely to affect you.

TVNZ Poll

September 1, 2009

Personalisation questions

August 31, 2009

Are there any case studies out there to show how using people’s FIRST NAME (only) in DM increases response rates.
Whether it’s just throughout the letter, or funky personalization of outers etc. We are specifically interested in comparing results to when full names are used eg “Daryl” vs “Mr Purdie” or “Mr Daryl Purdie”

If anyone has any links to white papers, or favourite sites I could research  (either national or international) that would be great.

Thanks in advance – Daryl

daryl.p@marketingimpact.co.nz