August 12, 2014 ben salmon

Marketers Need To Measure The Effect, Not The Response

The rise of digital marketing and the resulting improvements in response attribution means marketers can now identify which customers responded to which offers. But is this enough? If the sale is only the start of the customer journey, should we be measuring when a customer has a positive impact on the business?

We live in a world where marketers are continually under pressure to deliver, and deliver they do. However, are they measuring the right thing?

We have struggled over the years with response attribution and digital has made a lot of that pain easier. Less inferred response and more direct response attribution has meant we are now able to identify which customer has responded to what offer. However, while only some organisations are measuring beyond a click through to sales completion, for many organisations the sale is only the start of the customer journey.

Surely we need to be measuring when a customer has a positive impact on the business? For some businesses this is a straightforward exercise.

Take e-commerce for example. We can see what traffic came to the website via which source. We can see the number of visits before a purchase was made and we can see the order value. From here, we can look at what we paid for that visitor to get them to the site and therefore understand the cost per acquisition (CPA).

Calculating Return on Investment

So using the standard approach to calculating Return on Investment (ROI) we take our revenue/order value, minus the CPA and then dividing this by the CPA we effectively get the return on investment (ROI), with the formula below.

ROI = Revenue – CPA / CPA

However is this a true and accurate measure for all businesses? Take insurance for example with their 14 day cooling off period. Do these organisations look further and identify those consumers who have gone beyond the 14 days into live customers and reward their marketing department based on this number? Maybe not and potentially it might be contentious, as the marketers might not have control of that period.

 

break even point insurance

 

Pay-As-You-Go Problems
There is an even more worrying case when looking at pay-as-you-go (PAYG) mobile customers, who have no commitment and great offers to join up, only to last one or two months as customers.

Let’s look at the business case then if we got PAYG customers onto a longer term contract.

If we had 10m PAYG customers of which we managed to convert only 0.5% to a 12 month contract, at £10 a month we would have instantly guaranteed £6m to the telecoms company.

Yet we are rewarding ourselves based on converting a web visitor to registration. Surely we need to be measuring customers who signed up and are still paying customers after 12 months?

Is There An Answer?

Looking at these examples there is potentially another metric against which we can measure marketing success. Could we look at the break-even point at which customers start making us money rather than leaving beforehand?

Let’s use a charge card company to illustrate where the break-even point is for customer profitability. They make their money on every transaction, so it’s in their interest to keep customers using their service and increase the amount they spend on their card.

Break even point

 

In this example let’s say:

  • The cost of recruiting a new customer is £150
  • The average household spend per month is £1500
  • The average revenue per month per customer is £75 (based on a handling fee of 5%)
  • The break-even point would be two months in.

The calculation might look something like this: Cost / Monthly Revenue = Break Even Point (months)
Now if only 60% of customers reached the point of “break-even” where they have covered their cost of acquisition and are positively adding to the organisation’s business, what impact have the remaining 40% – who have cost the organisation money – had on the business? If the cost of recruitment is £150, 100 customers would have cost the organisation £15,000. 10,000 customers would have cost the organisation £1.5m which potentially a risky acquisition exercise.
So the key question is: are we really being rewarded for meeting recruitment targets when 40% of customers were negatively affecting the business? And is this really a pragmatic way to think about marketing, given the challenges around access to data, attribution and ability to report the results in an accurate and timely manner?

Addressing The Break-Even Point

For those organisations who are able to measure beyond a click-through to a sale, it certainly is worth exploring whether a break-even point exists for their customers. And if so to address it by:

  1. Targeting the right audience, focusing on quality not quantity
  2. Welcoming new customers to ensure they reach that critical break-even point
  3. For early lapsing customers, communicating or incentivising them to reach the break-even point (where budget allows and is appropriate)
  4. Reactivating those customers who exhibited the right behaviour of a loyal customer but didn’t reach the break-even point.
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