The James Group

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New Customer Value Method Drives Marketing

by James Connor, CEO The James Group and
Dawn Norris

Align method dramatically reduces customer acquisition costs

In business, all is forgivable except wasted marketing dollars. With many businesses crashing on the rocks of marketing overspending and a tougher economic environment, reducing marketing expenses is a priority for nearly every business. However, these same businesses want to keep customer acquisition targets high. Today’s emphasis, more than ever, is on finding a method to create greater return on investment for marketing dollars.

In business, there still is much confusion on how to best allocate marketing expenses to create return on investment. Many traditional models for marketing plans have proven ineffective. A new approach, the Align Method, developed by The James Group, is showing remarkable promise and has reduced customer acquisition costs as much as 84% for clients.

The dream of every marketer is to get the most number of customers. The dream of every business is to do it at the lowest possible cost. Align combines the best of both worlds to create integrated marketing plans that significantly lower cost.

The premise for Align is that marketing expenses can never exceed the value of the customer. More interesting still is that expenses should never exceed the net present value of a customer. This ensures the most effective use of capital and factors in the time value of money to a business.

Five C’s for Success
Align is a fairly simple five-step process capable of producing dramatic results. Steps one through four require analysis of four key inputs: current situation, customer value, company goals, and capital resources. Step five is the creation of the most cost effective integrated marketing plan.

In this process, steps one and two are purely empirical and historical. Steps three, four, and five are aligned based on analytics and marketing insight. Collectively, these steps are the five C’s for successful management of marketing resources.

How Align Works
The goal of Step One is to get an accurate picture of the current situation. Key questions include: How many customers do we have; how much did it cost to get them; and what has our growth rate been over the last six to twelve months or longer if available. This provides a good baseline to find what’s working and what’s not.

The goal of Step Two is to understand what a customer is worth to a company’s bottom line. This is determined by understanding both the number of years a typical customer stays with the company as well as the average amount spent by a customer in a given year. The Align formula multiplies these two factors by the company’s gross profit margin and then discounts it to present value.

In Step Three, the company lays out its customer growth targets. What amount of growth will be considered marketing success? In Step Four, the company outlines what resources it believes are available.

In Step Five the marketing plan is developed. This includes a mix of print, direct mail, radio, tv, outdoor advertising, public relations, telemarketing, Internet marketing, guerrilla marketing, partnerships, referral programs or any other tactics that can drive customers. In some cases this may mean focusing on only two or three tactics.

As the plan is developed to reflect customer growth targets and desired budgets, conservative response rates are applied to estimate the number of customers attained from each campaign tactic. Questions concerning the break-even in relation to customer value as well as lowest customer acquisition cost are used to select and prioritize the marketing mix. Anything that exceeds the value of a customer is eliminated from the marketing mix.

At the same time, using this approach, the customer growth targets in Step Three and the marketing budget in Step Four are aligned to reflect tangible projections in Step Five. Sometimes the marketing budget is larger than what is necessary to achieve a company’s desired goals and less money can be spent. Other times the growth targets are unrealistic for the budget, causing one or the other to be realigned.

The Align method provides guidelines and builds safety checks into the campaign planning process. However, there is no exact formula for determining the perfect marketing mix. These decisions must be made on a brand by brand basis. There are many factors that go into that decision such as the visual power of the brand and the audience’s preferred medium.

The final outcome is a month by month table of customer acquisition numbers that can be used to measure if the marketing effort is ahead or behind schedule. The marketing agency can then figure out which tactic is working best or not working. Align is about creating a road map to reach a goal‹then reinforcing success, while eliminating failed tactics.

The Align Advantage
Analytics to estimate marketing performance and return on investment are not new to marketing. Traditionally, there have been two approaches that determine marketing spending: Response-based marketing and Cost-based marketing, each with inherent dangers. With the Align Method, The James Group offers Value-based marketing, an alternative approach based solely on the value of a customer.

Response-based marketing
Response-based marketing involves setting a marketing budget driven by customer acquisition goals and average response rates for certain advertising and media vehicles. The key danger here is that the budget set to reach a target acquisition number may be widely inappropriate for the actual value of the customer. The unfortunate tendency of this approach is to overspend on marketing and use expensive media vehicles which hurt the profitability of a company. The most important question of ³should we even be using a particular medium² can go unasked.

Cost-based marketing
Cost-based marketing involves setting a marketing budget as a percentage of overall operating expenses. The key danger here is that a budget determined as a percentage of overall expenses may not accurately reflect the value of a customer or the market opportunity. The unfortunate tendency with this approach is to use benchmarking of like businesses as the determining factor for spending. Thus an avenue for competitive advantage either by spending more or spending less is lost.

Value-based marketing
(Align Method) Value-based marketing involves understanding the life-time value of a customer at net present value. The key safety here is that marketing budgets are set to reflect profitable contribution to a company’s bottom line.

Many business school marketing courses teach the traditional value of a customer model. The conventional approach to lifetime value of a customer simply multiplies the number of years by the revenue per year and gross profit margin. The James Group’s Align process takes this one step further, factoring in a ³discount rate² based on the cost of capital for that particular business or industry to determine life-time value at net present value. When you know the present lifetime value of a customer, you have the true measure for how much you would or should be willing to invest to acquire a customer. This provides the real understanding to creating profitability.

Case Study for Success
The Align Method has generated dramatic results. One such case involves The James Group’s marketing of ClickableOil.com, an energy company specializing in heating oil. Using Align, The James Group was able to reduce customer acquisition costs to 81% lower than the industry average and turn ClickableOil.com into a self-sustaining, profitable business eight weeks after launch.

Early in the strategy for ClickableOil.com an important discussion occurred. The prevailing thought in the heating oil industry is that advertising does not work and the only way to grow a heating oil business is to acquire other heating oil businesses. The practice in the industry is to purchase a customer at $1,050 or roughly $1 per gallon.

The key problem here is that the net present value of a customer held for three years in ClickableOil.com’s business model is $435. Clearly a traditional approach to customer acquisition would bankrupt the business.

The James Group looked closely at the case and outlined a strategy that could acquire customers and create profitability for ClickableOil. Tactics included guerrilla marketing, an ecommerce referral engine, small scale print advertising in local papers, direct mail, a short video to distribute to news stations, and press releases. The resulting campaign acquired 1016 customers with a media customer acquisition cost of $83.

The lowest cost tactic at $62 per customer proved to be sending actors and actresses to rail stations dressed in ClickableOil uniforms to pass out refrigerator magnets. The highest cost media tactic at $178 proved to be 60 second radio spots. The low media, service-intensive campaign yielded $86 per customer in agency fees, bringing the total marketing customer acquisition costs to $169 per customer. This is 84% below the industry average.

Using the Align chronology, ClickableOil also kept pace with the monthly targets and by the end of February was already into April numbers.

“The James Group exceeded our expectations for customer acquisition costs,” said Nick Cirillo, ClickableOil CEO. “They have been tremendous in making this a self-sustaining business.”

With an emphasis on creating profit and the old business school frameworks of revenue minus expenses for creating value as true as ever, the Align Method looks promising for companies seeking to reduce customer acquisition costs.

If you’d like to discuss the Align method or how it can help your company, call The James Group at 212-243-2022.

This entry was posted on Monday, April 27th, 2009 at 11:27 am and is filed under White Papers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.