ROI is Good. But is ROC better?

Data Strategy Online January 2010 | By David Reed

If you wanted to sum up marketing during 2009, it would only require three words - return on investment. Forget soft benefits, intangible results and even brand building, what financial directors demanded from the marketing budget was a demonstrable impact on sales in the same quarter.

Perhaps this is only to be expected in a year when many companies simply needed to get in the cash in order to survive. It has also benefited data-driven marketing with its ability to show outcomes in an accountable way. Yet even as marketing has enjoyed a strategic renaissance of its scientific aspects, this same development may in itself only deliver a short-term benefit.

Don Peppers, co-founder of Peppers and Rogers, explained the problem at a SAS/HP event in London late last year. “ROI is a good metric, but it may not be the only way to look at the outcomes,” he said. To demonstrate, he outlines two campaigns which a company might consider running with the budget to do one or the other, but not both.

The cost per customer for campaign A is £5 and for campaign B it is £10. The profit delivered per customer by A is £10 and by B £16. Evaluated on their ROI, campaign A shows 100 per cent, while B shows 60 per cent. “In practice, most people would choose to do A because it has higher ROI and lower investment,” he noted.

That logic holds when viewed on a campaign basis. But Peppers asked how the company would choose if it only had one customer. Looked at this way, the profit from A is £5, while the profit from B is £6 making it the more likely to be pursued. Even if the company has one million customers to market to, Peppers argues that looking at return on customer will always lead to the second choice.

ROI only looks at the extent to which marketing has delivered short-term value. By taking both shot and long-term values into account using Peppers’ Return on Customer metric, both values are measured. This is done by adding immediate profit on the customer to any change in their lifetime value and dividing by the original lifetime value. “That calculates the efficiency with which marketing is creating value for the company,” points out Peppers.

Francois Laxalt, head of marketing intelligence at Neolane, warns that this may reveal unwelcome outcomes: “What we see when we talk to clients is that too often the campaigns which are delivering in the short term are destroying some customer value and are not focused on customer lifetime value. The short term approach is not as effective as it could be.” The downside risk of a new customer-oriented metric is no greater than with a ROI-driven perspective, since individual campaigns already often fail to deliver the expected results. It is unlikely that every marketing activity would generate a negative ROC. Instead, the upside for marketing is to be able to prove that not only is it helping the business in its short-term trading goals but is also laying down strong foundations for future revenue.

Laxalt argues that the bridge between these two approaches is through personalisation of communications within a cross-channel, integrated framework. “If you are sending relevant, one-to-one campaigns following customer preferences by channel and content, you can increase short-term response rates without destroying CLTV,” he says.

At the moment, 80 per cent of chief marketing officers admit that they are just segmenting to five or six groups in their campaigns. With only 10 per cent of consumers telling Forrester Research that the direct mail they receive is tailored to their needs - and just 7 per cent saying the emails they get are relevant - there is plenty of scope for improvement.

Moving towards a ROC-based metric might also help to relieve the pressure which marketing departments are under. Laxalt point to research carried out by Xerox in 2008 in which 75 per cent of CMOs claimed that marketing has a positive impact on the bottom line, but that they could not prove it.

“That is the point,” he says. “It is not just about being able to personalise the messages and tailor them to customer needs and channel preferences, it is also about having a proper way to measure the impact.”

A product-centric approach only considers whether sales of the particular product being marketed in a campaign have increased. That ignores the potential breadth of a relationship which a customer might have with a multi-product company. Short-term sales of one item may lead to higher defection rates in another. By taking an holistic view of the customer, it becomes legitimate to run marketing activity which is not immediately high return, but which can yield far better customer value later on.

During the recent phase, these two approaches may have been seen by finance as being at odds with each other. What smart marketers have been doing, however, is to use the opportunity to implement the technology and data integration required for one-to-one marketing in order to improve short-term results while laying the path towards ROC.

G2 Data Dynamics is to launch a new proposition during the course of 2010, originally developed by its Spanish office, based around true one-to-one marketing. The aim is to enable companies to tie together customer activity across channels and instantly respond with relevant marketing messages.

“As an example, if somebody is in a shirt store and pulls out a credit card to pay, you can set up a trigger in the marketing database that pulls up a segment code and financial attributes, such as payment history and credit line, then applies business rules before deciding to send a SMS at point of sale offering an option to spread payment,” says Alan Thorp, director of business solutions at G2.

The company can then follow up with a phone call to the customer to confirm their choice. A Spanish bank has already deployed the system and discovered a strongly positive customer reaction. “It brings down the barriers between operations, services and marketing in a way that has not been done before,” says Thorp.

Integrating the business is critical if marketing is to become integrated itself, although it is a much bigger project than just looking to optimise campaign results. Only by bridging gaps between departments can a customer-centric view emerge, which is why regulated business which are being required to get an overall view of their customers, such as banks, are the most likely to adopt the new solution.

Even in non-regulated companies that have been very focused on ROI, there is a growing mood among marketers to adopt a more rounded perspective. If they can understand better how their activities deliver against the bottom line, both now and later on, then it takes marketing budgets out of the firing line for cuts.

“Taking a ROC approach forces us to reassess underlying questions, like what does success look like for the customer aa well as ourselves and how long is needed to achieve it?” says Simon Steel, head of insight at Eclipse Marketing.

“Success for the customer may be receiving fantastic customer service and, as a consequence, success for the supplier may be positive word of mouth. But fantastic customer service doesn’t result from a one-off communication - it comes from multiple interactions over the longer-term,” he says.

His agency does a lot of work with clients in the automotive sector where purchase cycles can be lengthy, but retaining loyalty and consideration is critical. Steel points out that this can make metrics difficult to set up for long-term loyalty marketing programmes.

“If someone receives a mail piece for a new car model, then goes on buy the car a year later, should some element of this purchase be reflected in the ROI for the original DM campaign and, if so, how much? It could be that the customer never opened the mailing and, even if they did, it may not have registered or be remembered,” he notes.

Supporting the move towards ROC is clear evidence of the service-satisfaction-profit chain which demonstrates that company profitability is impacted when it takes steps to improve the customer experience. For any marketer trying to argue for alterations to operational matters, this is important data.

Retail Eyes has established the principle within the High Street retailing, leisure and hospitality sectors. It carries out 16,000 mystery shopper visits every month, tracks customer satisfaction and net promoter scores and maps it against customer spending. A key finding is that there is a threshold for customer satisfaction which companies need to cross to see the financial benefits and fall below at their peril, as can be seen in the graph based on 31,000 aggregated visits.

“Our findings demonstrate that retailers will fail to get a positive net promoter score until they are delivering 70 per cent service,” says Simon Boydell, marketing manager at Retail Eyes. “So when a retailer asks, ‘what should our service level be?’, the answer is 70 per cent.”

How a specific retailer goes about reaching that level will depend on its specific proposition and resources, but the basis is consistent. Using a research tool can help to identify where this investment should be made. “We work to identify questions that affect customer advocacy so retailers can identify the attributes they need to improve,” says Boydell.

As marketers start to look forward to economic recovery and a return of consumer spending, this intelligence will become critical, not least because shoppers have become saturated by sale offers. Based on research carried out by Boydell’s company among 6,522 consumers last October, 72 per cent say they would be willing to pay more for a product or service if they received better customer service. Conversely, 56 per cent said they had left an outlet before making a purchase due to poor service.

The retail sector can see the benefits of service improvements rapidly because of the short space between the experience and the purchase. For marketers in other sectors, there is a lag which needs to be born in mind. So even the ROI being looked for can be in the mid-term, which creates a space in which new metrics might flourish.

Rebecca Bucnis, director of customer managed solutions at Teradata, says that having ROC in mind can even allow marketing to flip an argument which many finance directors have been making - that unprofitable customers should be axed. “Given the cost of acquiring any new customer, you never want to fire an existing one simply because they are costing too much,” she says.

The answer might lie instead in adjusting the pricing of a service they use or in migrating them to a different, lower cost channel. It is inherent in the ROC metric that customer value reflects the cost to serve, so by reducing the latter you can increase the former.

Challenges that need to be faced to become customer-centric should not be underestimated, nor should the way in which events can derail carefully laid plans. Bucnis points to Best Buy, a Teradata client in the US, which decided to become customercentric three years ago.

“It aligned its store types by the profile of customers using understandable segments like Soccer Mom, Dunky Jed and so on. It had a strategy to drive overall customer value by assorting the store around customer segments and store sales were mapped according to what happened in those segments,” she says.

Come the recession, however, the chief executive said that the business needed to focus on each quarter’s results just to survive. So the customer-centred marketing and incentives for managers were ditched. “As a concept, it is the right way to go, even if there is also a big, but not insurmountable challenge to work out your cost to serve,” says Bucnis.

That is a piece of heavy data mining and modelling which many marketers prefer to avoid, not least because it demands that they ask other functions for key pieces of information. Companies that have become more data literate find this easier, however, and if the executive supports it, then it can be done.

So can the move towards marketing metrics that have a long-term view as well as a short-term one? With many marketing campaigns struggling to demonstrate an immediate hit, this offers hope for maintaining budget in the face of poor results. More positively, ROC starts to prove that marketing is building for the future, not just dwelling in the present.