MIGRATING FROM ROI TO

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MIGRATING FROMROITO
ROM I
TODAYS MARKETING CHALLENGE
Brazil Alumni Event

• By
• Peter J. Rosenwald
• CONSULT PARTNERS
• São Paulo, May 2006

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CONTENTS

• Migrating from ROI to ROM I
• The Marketplace is changing
• The Marketing Continuum
• The Brazilian Market
• Accountable Marketing
• The Allowable Cost Per Order and how you
  determine it
• Discovering the Average Consumer
• The Power of Data
• Segmentation Is It Really Worth the Money?
• Customer Relationship Management (CRM) Fact or
  Costly Fantasy
• ROM I at the Center of all Accountable Marketing

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QUESTION 20 YEARS AGO FROM THE CEO OF ONE OF THE
WORLDS LARGEST ADVERTISING AGENCIES...

• IF DIRECT MARKETING IS ACCOUNTABLE ADVERTISING
  WHAT DOES THAT SAY ABOUT GENERAL ADVERTISING?

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FAITH IN TRADITIONAL ADVERTISING IS WANING
The faith of big-spending marketers in the power
of traditional advertising is waning The most
worrisome findings indicate that companies are
increasingly skeptical of the power of
advertising to boost sales. Wall Street Journal
Fonte Winterberry Group, NY
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KEY FINDINGS FROM WINTERBERRY STUDY

• Changing consumer demographics decrease the
  influence of traditional mass media
  (one-size-fits-all) marketing messages.
• Widespread marketing clutter diminishes the
  impact of commercial messages that dont address
  specific and individually relevant consumer
  needs.
• Growing effectiveness of multi-channel campaigns
  reinforce demand for tactics that establish
  one-to-one relationships between marketers and
  consumers.
• Heightened client pressure to deliver
  quantifiable values forces marketing services
  providers, especially agencies, to re-evaluate
  services platforms

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MAKING ONE THINK...
Martin Sorrell, CEO of WPP Group saidhe would
like WPP to expand in marketing services, with
traditional advertising, which now represents
about 48 percent of the business, falling to
one-third in the coming years.
Clever clients will turn increasingly to the
Internet, direct marketing and other
quantifiable types of marketing. Fonte
International Herald Tribune 5 Feb. 2004
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THE MARKETING EVOLUTION
A little bit of history Marketing evoluindo .
. . .

• The neighbohood marketing

• Mass marketing

• One-to-one marketing

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THE MARKETING CONTINUUM

• Creates Awareness
• Creates Personality
• Builds Brand Values

• Drives Action
• Builds Sales
• Supports Awareness
• Can Create a Marketing Database
• Can Use Marketing DB for Additional Sales Activity

• Provides Opportunities to Enhance Customer
  Relationships
• Builds long-term customer loyalty
• Allows Allocation of loyalty spend on
  Individual Customers depending on their purchase
  histories
• Allows promotional use of targeted incentives

• Allows Segmentation of Customers and
  Identification of Prospects
• Drives Additional Sales Activity
• Used DB to Inform Media Purchases
• Provides MIS

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SOME IMPORTANT BRAZILIAN STATISTICS

• Data driven marketing to Brazilian consumers is
  growing fast and will continue to grow.
• Service Revenue reported by ABEMD has gone from
  R 7.5 billions in 2000 to R 12.8 billions in
  2005
• Growth rate is greater than 11.3 per annum
  compared to US growth rate is only 5.4
• In the US, each dollar spent for consumer DM
  returned 9.54

• More than 870,000 Brazilians are employed as a
  result of consumer direct marketing
• The average US household receives more than 300
  direct mail pieces per year compared with 30 for
  Brazilian households

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THE SURPRISING REASONS MANY MARKETING EXECUTIVES
AVOID ACCOUNTABILITY, DIRECT MARKETING CRM
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EACH CUSTOMER IS DIFFERENT
If You Could Differentiate Between
Your Highest Value Customers
Your Medium Value Customers
Your Low Value Customers
WOULD YOU SPEND YOUR MARKETING MONIES THE WAY YOU
DO TODAY?
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MIGRATING FROM ROI TO ROM I
TRADITIONAL PARADIGM
NEW PARADIGM
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THE ROM I BOTTOM LINE

• The Cumulative Discounted Net Contribution Value
  is sum of the Net Contributions for each sale
  The revenue less all the costs including
  promotion and uncertainty discount.

• The Desired Profit/Contribution is the minimum we
  want to earn on the bottom line, in this case
  10.

• The difference is the Allowable Cost Per Order.

• The ROM I is roughly 3.5 times the allowable.
  Obviously, if the actual promotion expense is
  less than the allowable, the ROM I should be
  calculated on the actual and would increase
  accordingly.

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CALCULATING THE ROM I THE RETURN ON MARKETING
INVESTMENT
CUMULATIVE DISCOUNTED NET CONTRIBUTION VALUE OF A
CUSTOMER
ROM I
DIVIDED BY
ALLOWABLE COST PER ORDER/CUSTOMER
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IS THE ROM I ONLY FOR DIRECT MARKETERS?
NO WAY, JOSÉ
THERE IS A WHOLE NEW BALL GAME IS CALLED
MULTICHANNEL MARKETING. EVERYONE WILL BE PLAYING
AND MEASURING IT

• Successful and strategic multichannel integration
  allows you to
• Increase the number and variety of purchases per
  customer
• Deliver a unified brand experience for prospects
  and customers across all media
• Strengthen customer relationships through
  additional interactions
• Create a more robust database by collecting
  unique data from each channel
• Measure campaign success, marketing ROI, and
  customer lifetime value

Fonte US Direct Marketing Association
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A BRAVE AND CHALLENGING NEW WORLD FOR MARKETERS
Direct Marketing and TV are in the process of
converging
Soon there will be Internet TV Channels and
marketers will be able to bid for a channel in
the same way that today they bid for search words
on Google or Yahoo

There could be a puzzle channel with content
related to puzzlesor a fly fishing channel
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THE ROM I METHODOLOGY CAN IMPACT ALL PARTS OF THE
CONTINUUM
VALUE OF INCREASED LOYALTY BY CUSTOMER SEGMENT
INCREASED AWARENESS MEASURABLE SALES
MEASURED MARKETING COST OF ACQUISITION SALES
MEASURED UNIQUE SALES VALUES AGAINST TARGETS
METRIC
VERY HIGH
VERY HIGH
ACCURACY
MEDIUM
HIGH
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THE ROM I IS THE FIRST STEP IN ACCOUNTABLE
MARKETING

• What is Accountable Marketing?
• It is marketing for all marketers
• That begins from sound economic foundations and
  builds the marketing edifice directly upon them
• Uses new tools and theories to help marketers
  plan and measure their marketing initiatives for
  greater marketing success
• Demands a measurable ROM I -- an increased return
  on each marketing investment
• Always puts the customer at the center of the
  equation

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ACCOUNTABLITY BEGINS WITH THE MEDIA, NOT WITH THE
MESSAGE
THE 250 SOLUTION

• Value of Media 100
• If we are not marketing to the right people, it
  doesnt matter what we are offering. The better
  the segmentation, the better the result.
• Value of Offer 100
• If we dont have an offer and benefits that
  appeal to the prospects, we dont have a
  proposition at all.
• Value of Creative Execution 50
• Great creative helps any proposition but without
  the right media and offer, it is close to
  meaningless.

Fish Where The Fish Are
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WHATS NEW ABOUT ACCOUNTABLE MARKETING?

• That depends on whether or not
• You are currently building and using your own
  economic planning tools rather than relying on
  guesswork
• Your marketing initiatives are part of a total
  consumer lifetime value view or simply
  opportunistic one-shots
• You have the discipline to do the hard work and
  the courage necessary to make accountable
  marketing work for you
• You are dedicated to getting more out of every
  Real spent on marketing.

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It is a process of thought which informs
DATA DRIVEN ONE-TO-ONE MARKETING IS A PROCESS
NOT A SERIES OF TECHNIQUES

• Promotional Activity
• Allowable spend on customer or segment of
  customers
• Media Selection
• Sales Promotion
• Customer Communications and CRM

It is a process that is almost always accountable
with metrics to evaluate every aspect of the
process
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A FEW TOUGH QUESTIONS THAT NEED HONEST ANSWERS
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HOW DO YOU PLAN YOUR MARKETING CRM ECONOMICS
TODAY?

• Just decide what you want to do and go for it

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DO YOU KNOW OR CAN YOU DETERMINE?

• How much you can afford to spend to acquire a new
  customer?
• The Allowable Cost Per Customer or Order (ACPO)
• How much you can afford to spend in CRM to retain
  a customer?
• Are some customers better dropped than kept?
• How much you can afford to Re-activate, Up-sell
  or Cross-sell to your current customers?

Together with the ROM I, the Allowable Cost Per
Order is the most important economic equation
in Marketing CRM
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IF YOU DONT KNOW WHERE YOU ARE GOING, YOULL
HAVE A DIFFICULT TIME GETTING THERE
The Accountable Marketing Roadmap Begins With
Establishing How Much You Can Spend for any
marketing initiative to achieve a stated
objective. Its the first step in establishing a
better ROM I .
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ESTABLISHING THE NET MARGIN THE ALLOWABLE COST
PER ORDER (ACPO)
REVENUES PRODUCT COSTS

• All products or services have revenues and
  product costs.
• Revenues
• 2 units of 60.00 each giving us 120.00 as our
  revenue.
• We charge back our postage cost of 3.50.
• Product Costs
• Product costs are 15.00 for each unit for a total
  of 30.00.
• Gross Revenue
• Revenue less product costs provide a Gross
  Revenue of 93.50.

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ESTABLISHING THE NET MARGIN THE ALLOWABLE COST
PER ORDER (ACPO)
NON -PRODUCT COSTS

• In addition to product costs there are
  non-product costs
• Sales and other taxes,
• Fulfillment
• Bad Debt
• Returns of product
• Premiums
• Miscellaneous
• The Non-product costs may be greater than the
  product costs

• Notice that Profit or Contribution is taken as a
  cost
• All too often we forget that if we have not
  reserved the expected profit, it can be eaten up
  in the marketing money we spend
• And we can end up with a lot of work for no profit

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ESTABLISHING THE NET MARGIN THE ALLOWABLE COST
PER ORDER (ACPO)

• The Net Margin Before Promotion is the difference
  after considering the Profit or Contribution
  Objective

• It is the amount you can afford to spend in
  marketing to achieve your profit objective

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WHY THE ALLOWABLE IS SO IMPORTANT?

• The Allowable Cost Per Order conditions every
  aspect of the marketing process
• To determine it, you need to know or make
  educated assumptions on all aspects of revenue
  and costs
• You need to take the profit or contribution as a
  cost because what you are always trying to
  determine is how much can I afford to spend in
  marketing to acquire the customer/ make the sale,
  etc. and make at least a designated profit
• You need to let the ACPO inform all your media
  choices and not use media where the cost per
  order is likely to exceed the allowable.

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WILL THE AVERAGE CONSUMERS IN THIS ROOM KINDLY
RAISE THEIR HANDS?
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WHERE ARE THE AVERAGE CONSUMERS?
The companies that will prosperwill be those
that switch out of lowest-component-dominator
mode and figure out how to address niches The
Economist May 7th 2005 quoting Chris Anderson,
Editor of Wired on the long tail
THE MOST DANGEROUS WORD IN MARKETING TODAY IS THE
WORD
AVERAGE!
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WHATS THEIR AVERAGE NET WORTH?

• 10 men are sitting in a bar each is drinking a
  beer
• Five each have a net worth of 200,000
• Five each have a net worth of 300,000
• What is the average net worth of the men in the
  bar?

• Another thirsty man now enters the bar and orders
  a beer

• His name is Bill Gates and his net worth is
  50,000,000,000

• Now whats the average net worth of the men in
  the bar?

Answer 250,000
Answer 4,545,454,545
In planning your marketing, how would you use the
average net worth of the men in the bar?
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66,000 RETAIL CUSTOMERS HOW MUCH CAN WE AFFORD
PROMOTING THEM?
Should we promote to the average ?
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DATA IS POWERThe More You Have,The Stronger
Your Position
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WAYS DATA YOU HOLD CAN BEUSED FOR MARKETING
PURPOSES

• To drive additional sales from specific customers
  at the right time with the right message?
• To profile customers for your services as a means
  of acquiring new customers and identifying and
  attacking new target markets
• To sell product line extensions and other add-on
  products
• To target relevant promotions to specific
  customers to drive action at the retail level or
  direct
• To build loyalty
• To provide enhanced customer service and help

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THE ECONOMIC EFFECT OF USING THE MARKETING
DATABASE
Lets analyse each segment
Allowable CPO R 265,00
Cut off at the ACPO
Cut off at the average ACPO
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THE ECONOMIC EFFECT OF USING THE MARKETING
DATABASE

• If we had eliminated all but those whose CPO was
  less than R 265
• We would have had 707 less subscribers, a
  shortfall of 35 but...
• We would have spent R 248.294 instead of R
  571.628, a saving of R323.334 (56)

Allowable CPO R 265,00
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IS SEGMENTATION REALLY WORTH ITS COST?

• The basics of an un-segmented 250,000 mailing
  with a 1.6 return for a cost per order of 63.75
  producing 4,000 orders

• As we add segmentation elements and cost, the
  response rises and the cost per order and total
  cost declines.

• The percentage saving on the promotion cost is
  substantial.

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CUSTOMER RELATIONSHIP MANAGEMENT (CRM) TODAYS
FAVORITE BUZZ-PHRASE
The Good News
a five percent increase in current customer
business can translate into as much as a 50
increase in the bottom line. (fonte Jack
Schmid Alan Weber Desktop Database Marketing)
Your share of loyal customers not your share of
market creates profit. (fonte Lester Wunderman)
The Bad News
Customer loyalty is a contradiction in terms
an oxymoron... If there were ever any customers
who would never abandon you for a competitors
productthey are nowhere to be found today.
Companies that have committed to complicated
schemes for customer loyalty management dont
have much to show for it. (fonte Portfolio
Magazine)
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CRM STATISTICS LOOK GOOD
BUT DO WE KNOW HOW TO PLAN AND MAKE CRM
ACCOUNTABLE ?
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BRAZILIAN COMPANIES CRMLIP SERVICE OR REAL
SERVICE?
Research Survey in March 03 Issue of Consumidor
Moderno shows

• Impressive percentages of Brazilian Companies
  investing in programas de fidelização de
  clientes
• But many are in the primeiro estágioof their
  activities
• They are just beginning to collect age, sex,
  buying habits and other data for segmentation

But will they have the discipline to build on
this good start?
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EACH CUSTOMER HAS A LIFETIME VALUE

• Customer Lifetime Value (LTV) determines the
  amount you can afford to spend to maintain and
  enhance that value.
• Calculating that value can inform all aspects of
  your marketing and CRM activity.

Migrating From Low Value to High Value

• Each customer has specific characteristics and
  reasons for having made a first purchase
• A particular interest
• A particular promotion
• Identify these and you have the key to
  effectively selling additional goods and
  services, because
• You have established a relationship
• You know his interests
• You know what motivated him in the first place

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DETERMINING HOW MUCH YOU CAN (AND SHOULD) INVEST
IN CRM

• STEP 1 The process begins with
• The allowable acquisition cost of acquiring a
  customer
• The actual cost of acquiring that customer
• An assumption of the average order value and
  number of orders during the customer lifetime
• The estimated percentage of Contribution or
  Profit
• The result is the customer Lifetime Contribution
  or Profit without any CRM program

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DETERMINING HOW MUCH YOU CAN (AND SHOULD) INVEST
IN CRM

• STEP 2 Some further assumptions are required
• If a CRM program is initiated, how many
  additional orders will be generated and how much
  extra value will be added to the original orders?

• How much it would cost to acquire a Replacement
  customer? (For this example we have said it would
  be the same as the original customer.)

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DETERMINING HOW MUCH YOU CAN (AND SHOULD) INVEST
IN CRM ?

• STEP 3 A single further assumptions is required
  
• The amount of the incremental profit you wish to
  invest in a CRM program

• This will derive the amount available for CRM
  The sum of,
• The difference between the Actual and Allowable
  Cost Per Customer, plus
• The amount of Incremental Profit to be used for
  CRM

• As we can see, with the CRM program, revenue and
  profits rise but the percentage of profit goes
  down

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DETERMINING HOW MUCH YOU CAN (AND SHOULD) INVEST
IN CRM ?

• SENSITIVITIES
• Depending on the amount we commit for CRM, we can
  decide whether it is better to,
• Devote resources to the CRM program
• Use these resources to acquire a new customer
• If all customers are not equal, benefits in a CRM
  program should not be either. They should be
  segmented to reflect the individual customer
  value. The more valuable the customer, the
  greater the benefit.

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ATTRITION EATING THE LIONS SHARE OF THE PROFITS

• Attrition is the enemy of customer value and
  profits
• When we lose a customer or the buyer of any
  sequence of products, the rest of the buyers have
  to absorb all the costs
• Its rather like having to pay an increasing
  share of the Condominium expenses as tenants
  leave
• The economic effect is dramatic

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ESTABLISHING SUSTAINING LOYALTY IS A DELICATE
BALANCE

• Customer can feel he is recognized and important
• Incentives can be appropriate to his needs and
  desires
• Courtesy to the customer
• Anticipation of problems and avoidance of them.

• Belief that a loyalty program is in itself a
  solution to all problems
• Creation of inappropriate incentives
• Treating the loyal customer just like you would
  treat a prospect
• Making good on mistakes.

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HOW MUCH SOPHISTICATION DO WE NEED FOR CRM ?

• Do you think a Lamborghini is a good way to get
  you from point A to point B in São Paulo?
• Can you drive it fast?
• Will you be safe?
• Is there a positive cost/benefit relationship?

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CRM IS NOT ABOUT TECHNOLOGY
THATS LIKE HAVING SEX
CRM IS ABOUT CARING
THATS LIKE MAKING LOVE
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TECHNOLOGY
Using the Right Data At the Right Time To
Provide Recognition Of the clients Unique Value
Needs Rewards Where Appropriate Fixing things
when they go wrong And Serving Them Better Than
Could Be Expected

• Getting the Right Data Fast
• Delivering the Right Information
• To the Right Person
• At the Right Time
• In the Right Format

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THE CRM BOTTOM LINE

• CRM demands
• The same careful economics used in attracting the
  customer in the first place the certainty of an
  acceptable ROM I
• An unrelenting customer focus
• The same sensitivity and courtesy we practice in
  our daily interactions
• The recognition of the individuals importance
• Regular and surprise rewards for loyalty
• Putting things right when they have gone wrong
• A sincere respect for the customers privacy
• CRM is accountable and should be treated that way.

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THE ROM I LIES AT THE CENTER OF ALL ACCOUNTABLE
MARKETING
Recency, Frequency Value of Customer
Interactions (RFV)
How often the customer has purchased
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THE DIRECTION OF MARKETING TOWARDS ROM I AND
ACCOUNTABILITY SEEMS CLEAR. IT IS AN EXCITING
CHALLENGE FOR ALL OF US!
OBRIGADO!
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TIME FOR YOUR COMMENTS AND QUESTIONS
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AND NOW THE COMMERCIAL
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