Payback time

Marketers are used to arguing for investment. Every campaign has to be cost-justified within the overall marketing budget, with evidence that the planned activity is the best option. Payback is usually calculated within the lifetime of each campaign, making for a quick turnaround of the cash.

When it comes to more substantial investments, however, marketers sometimes struggle. The marketing budget is generally assumed to be structural, with the argument being about how it should be spent, not why it should be spent. In reality, it is a discretionary item and a solid business case should be made as to why money spent on marketing would not be better spent on building a new factory, hiring more staff, or any of the other options available.

With the current interest in customer relationship management (CRM), some of these weaknesses in making a business case are being exposed. CRM requires long-term investment and support, and involves new IT systems, changing business processes, and retraining staff. Marketers may be a focal point of this shift, since they determine how customers should be interacted with, but they may not be adept at leading that change.

For this reason, understanding what needs to go into proving return on investment (ROI) should be high on marketers’ learning agendas this year.

Sybase managing director Sean Kelly says ROI is relatively simple: “There are only two kinds of tangible benefits that accrue from an information technology investment – increases in revenue and decreases in costs.

“It should be borne in mind that the vast majority of CRM-oriented data warehouses are justified on the basis of defending and increasing revenue rather than reducing costs.”

CRM’s soft benefits – which can’t be valued in monetary terms, such as increased customer satisfaction – may also support ROI, but Kelly admits that these are generally less compelling. However, he adds that “in every case where a data warehouse investment is considered, the zero option – that is, do nothing – should be included in the analysis.”

One variation of this analysis is to outline the consequences of a competitor developing a CRM capability in the same market. This is what concerns many organisations more than the opportunity to maximise their own customer revenues. That is why CRM investments usually have to be justified on a company-wide basis, not on the grounds of how each separate touchpoint with the customer will perform.

Alterian managing director David Eldridge says: “In attempting to justify individual investments, many organisations fail to understand the bigger picture.

“They see call centres as a fast way to deal with enquiries without generating huge amounts of paper, for example. Or they see data analysis and mining tools as a way to generate interesting reports for management, not as a way to drive customer interaction strategy.”

With this approach, the all-important investment decisions do not stack up. Call centres are often easy to cost-justify based on savings elsewhere. But Eldridge warns: “Stop worrying about call duration and start worrying about customer satisfaction and capturing important information.”

Given that IT underpins so many of the CRM projects being pursued, it is logical that a company should turn to vendors to provide evidence of the ROI to be expected.

Paul Hawkes, director of strategic business consultancy Abram Hawkes, says: “Ideally, you should get a lot of case history information from the vendor, which should show that revenue before implementation was x and after was y, and that the increase was down to CRM. But the big problem is that very few companies know those figures.”

Problems can arise because of internal rules about accounting and payback periods. According to Hawkes, some organisations insist on seeing a return within a year, and make all their budget decisions in January.

Since the million-pound investments required by CRM will directly impact on the company’s bottom line, there is likely to be a conflict between short-term goals to make the figures look good and long-term business objectives.

As a result, many organisations are seeking to justify CRM in dramatically shortened time frames, or by looking at isolated areas of activity. This is especially true of the marketing automation components, where improvements to marketing activity – through increased response rates and lower mailing costs – are often required to support infrastructure investments.

Allen Swann, president, international, for leading CRM application vendor Prime Response, says that basing ROI on campaign returns is perfectly justifiable, since the income to expenditure ratio within marketing is often already the subject of major financial debate.

Returns from marketing

He cites one of his company’s clients, Bank West, in Perth, Australia, where campaigns were previously showing a cost-to-income ratio of 104 per cent – in other words, marketing was a cost to the bank. Having implemented the prime@vantage.com software, this changed to 40 per cent – so every Aus$40 of marketing investment returned Aus$100 of income. Swann also argues that “the typical payback period for our clients is less than a year”.

Stewart Vassie, vice president of Exchange Applications, supplier of the other leading CRM application Valex, agrees that the marketing department is likely to find itself in the limelight when it comes to making a business case. “Many people feel the big benefit of marketing automation is that it is the best opportunity to show the ROI from CRM,” he says.

While sales, customer service, e-commerce and the company as a whole may want CRM, it could be down to marketing to prove the viability and value of doing it.

Fortunately, the introduction of automation into marketing has allowed costs to fall and revenues to rise. As a result, Vassie claims that his “clients say they have achieved complete ROI in as little as three months. The results are extraordinary.”

New channels are a major area of interest for many companies, especially developing an online presence. Credit Suisse group financial services provider Winterthur adopted software vendor Hatton Blue’s Vectus CRM application, which enabled it to launch its Promise online re-mortgaging service last year, without having to implement a new back-office processing system. This saved it &£500,000.

With the remortgaging process involving 40 separate steps, being first to market demanded that a single system be used.

Promise operations director Kieran Hedigan says: “The software has the ability to turn what is normally a complicated legal and financial transaction, involving many third parties, into something which can be completed quickly and simply. It automates most activities and drives call-centre agents to cut out bottlenecks and ensure nothing slips through the net.”

Expanding through CRM

For other companies, CRM may be the only way to achieve growth, because their core markets are limited, saturated or tightly regulated.

Thames Water was looking at increasing its customer revenues by cross-selling non-regulated products and services, since water and sewage prices are controlled by law. It implemented Intrinsic’s customer management software to identify the best prospects.

Its first foray into diversified services and products was the direct selling of top-of-the-range water softeners costing &£900. Thames Water research and database manager Gary Eastwood says: “Obviously, that’s a lot of money for the average person to spend at once, and not everyone would be able to afford it.”

By using the new system to target its mailing to prospects, response rates rose 12-fold compared with an untargeted control mailing.

Other organisations are adopting new marketing processes which are based on customer value and which show a return from aligning marketing offers with this measure. Express Gifts specialises in Christmas-related products and gift ideas. It introduced IBM Global Business Intelligence Solutions’ horizontal marketing tool.

Valuing all customers

This changes the focus of marketing from which customers to select for a catalogue mailing, to which catalogues are appropriate for each customer. Customer relationships are viewed as an asset in which marketing spend is invested according to the value of each customer to the client.

Express Gifts tested a 48-page Kitchen and Household Bargain Bonanza catalogue in March 1997. Working with an IBM project team, a customer selection model was developed, based on the knowledge gleaned from the customer segmentation which had been carried out as a first step.

This model enabled customers to be ranked according to their likelihood to respond to a catalogue, based on factors such as product preference and seasonality of purchase.

Initially the 800,000-customer base was halved, with one group mailed using traditional mail order selection techniques based on recency, frequency and monetary value (RFM), and the second group mailed using the new selection model. The test mailing reduced marketing costs by 20 per cent and delivered an additional &£20,000 in profit, compared with the mailing using traditional RFM techniques. Having proved the value of CRM, a new customer database, holding 350 data attributes on each customer and a five-year trading history, has now been introduced.

Express Gifts has not stopped at marketing automation, but is embracing CRM fully. The marketing department has been restructured so that managers are responsible for the development of particular customer groups, rather than the implementation of individual marketing campaigns.

IBM GBIS vice-president Mike Haydock says: “It has been stimulating to work with a smaller, more nimble business such as Express Gifts, which enabled us to prove the concept. The best thing is that Express has already started to realise some important benefits.”

Clearing up confusion

There is considerable confusion within the marketing industry and beyond about what constitutes CRM. Marketers therefore struggle to make a strong case for the investments it requires.

But the bigger picture of CRM’s benefits is becoming more recognised as companies focus on one area, such as marketing automation, and prove the returns possible from better campaign performance. This year, marketers may well find themselves moving out of the back room and into the show room.

David Reed is the author of Practical CRM Implementations, published by Business Intelligence.