A firm foundation

The value of a good marketing database is incalculable, but organisations must think hard about who should pay for it, and about whether to outsource or keep operations in house. By David Reed.

How many lines are there in your marketing budget for a database? The answer could be none, if it is not identified as a standalone resource, through to hundreds. Even at the top end of expenditure, it may still be possible that not all the costs are included.

Marketing databases require hardware and software, which the marketing department may not pay for directly. User training is another cost, which may be funded by human resources.

Costs directly attributed to marketing are likely to be data capture, data cleaning and enhancement, and possibly the wholesale outsourcing of the database to a marketing services provider. This is usually done to reduce overall costs.

The range and complexity of these costs is daunting. In the world of software developers, total cost of ownership has become a benchmark for assessing how much licence fees, hardware, maintenance and training will add up to.

Should marketers be applying the same budgetary principles? How easy would it be to identify every line of the cost? And would it be reasonable to expect marketing to pay for this resource in its entirety?”Total cost of ownership is a very moot point,” says ClarityBlue customer intelligence partner Tony Mooney.

Service Charges
IT departments will typically hold the budget for new hardware and software systems, although marketing may have a discretionary budget for data counting and mining. If the marketing database is run in house, there may be arrangements for cross-billing on the basis that IT provides a service.

But this is unlikely to cover the full overhead. “There is often a people cost. That is one of the most challenging items for a business to really understand,” says Mooney.

The growth of customer insight units has added a layer of complexity. Analysts extract value from a database, but are expensive to recruit and retain, even if they are often not paid for directly out of marketing budgets.

Fusion, Experian’s database solution developed with ClarityBlue, offers an iTunes-style service for direct marketers, with a hosted database and analytical application paid for on annual subscription, plus pay-as-you-go data.

Like a cat among pigeons, this has stirred up the mid-market for both software vendors and database bureaux. By making the cost base both transparent and highly controllable, it removes the sense of uncertainty around the true cost of a marketing database.

Outside Help
Tony Lamb, consultant and chairman of the Direct Marketing Association’s Data Council, says this is why so many client organisations outsource their marketing database. “It is not just software and buying in data, you have got the cost of hardware, support, the environment it is hosted in, electricity, peripherals. When you look at that, the benefits of outsourcing should be accepted,” he says.

A marketing services provider will manage all of these components, often within a single line of budget, usually paid for monthly. This takes a fixed cost off the balance sheet and replaces it with a variable one, something financial directors are very keen on.

Even so, the best solution for clients is not always to outsource. “There is a risk to organisations. Look at banks where information is sensitive and where they have had a negative press for outsourcing call centres to India,” he says.

With growing concerns about data security and regulations that may require companies to report any breaches – and provide remedies to customers affected – these considerations may start to outweigh those of cost. The fact that few businesses have ever assessed the total cost of owning a marketing database may help to tip the balance in favour of “insourcing”.

Lamb believes the argument is not a simple one, however. “You need to look at your core skills and the value they offer the organisation. Perhaps you want to be coming up with ideas, but get somebody else to manage and run them,” he says.

One of the main reasons why marketing databases have been outsourced to third parties has been the complexity of name and address management. Database bureaux have built bespoke systems using their knowledge of this data. Many also build in data enhancements and dynamic feeds as part of the service. This has been difficult and expensive to replicate in house.

But with the arrival of a new generation of applications and the availability of address data and cleaning services via the Web, even this picture has started to change. Depending on the scale of the database, the cost base may not be so different between in-house and outsourced solutions – not that you will hear many suppliers accepting that fact.

Rest Assured
“It is now available to any organisation to be able to hold a marketing database with a degree of certainty and cleanliness,” says David Murray, sales director at The Software Bureau, which sells the “bureau in a box” Cygnus application.

He believes the equation is simple – existing customers are cheaper to sell to than new ones, giving investment in marketing databases a positive payback. “In the charity sector, for example, cold direct mail is doing well to get a 1% response. If it is a warm campaign, you get over 15%,” says Murray.

The same, straightforward mathematics applies to the cost base of suppression and data cleaning – lines in the marketing budget which are often argued over and can sometimes be struck out. With 10% of the population moving house each year and 450,000 deaths, a database that is representative of the entire UK will be 15% out of date from January to December.

Add to that changes to the postcode carried out by Royal Mail to reflect development and new buildings, and it soon becomes obvious that, whatever the cost of keeping data clean, the cost of using dirty data is higher. “If you do a mailing at 40p per pack four times a year, that soon stacks up. There is also the brand damage,” he says.

Few marketers have to account for the potential impact of such soft factors, yet they do ultimately cost the organisation. For every customer alienated by a poorly targeted mailshot, marketing has to acquire a new one.

Paying for prospect data is a major area in which marketers have been bridling at costs. There has been continuous downward pressure on list prices even as the direct marketing industry has argued for more accurate targeting. Yet the leaders in the business are those who are adopting a different mindset.

“Clients don’t really consider us on cost. The advantage of being a sponsor on our surveys is that they are not paying their own people to ask questions on the phone,” says The Data Partnership director John Pooley.

To build the kind of prospect database that delivers warm “lead-to-purchase” information using in-house resources would be prohibitively expensive. Buying from a source that has identified prospects within the last 48 hours is much more efficient.

Warm-up Act
“The best way to spend your marketing budget is on individuals who have opted-in to receiving information. For example, on behalf of a telephone company, we can ask, ‘would you be interested in changing your supplier?’. If they say ‘yes’, we can get the company to follow that up and provide a quote,” says Pooley.

Underneath all the concerns about the cost base of direct marketing and its declining response rates, this new model has steadily been emerging.

The model does require payment of a premium for warm, pre-qualified leads, which often means a substantial shift in how campaigns are budgeted. But it also opens the possibility that some of the investment made into a marketing database may be entirely unnecessary, since commercial alternatives are available off the shelf.

R-Cubed managing director Jon Epstein believes that omission, not commission is the real measure of cost. “If you don’t do direct marketing well, it costs more than if you didn’t do it at all. And most organisations don’t do it well,” he says.

Data costs for targeting have to be set against sending bulk, untargeted mailings. Marketing database costs have to be compared to treating all customers like strangers. It may be costing more than you realise. But could you really do without it?”People don’t really want to think about the database, they want to think about their marketing plans,” says Epstein. “It is like a car – its purpose is to drive you somewhere.”

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