Five steps to assess marketing channel profitability

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By: Wise Marketer Staff |

Posted on June 28, 2006

Consumer companies such as CPGs, telecom providers, ISPs, credit card issuers and other financial institutions dedicate vast budgets to their various marketing channels. But the value of those channels can be deceptive, according to a report by management consultancy DiamondCluster, which suggests five steps to effectively evaluate marketing channels.

DiamondCluster recently conducted a profitability analysis of one key marketing channel deployed by a major consumer services company. The analysis found that 86% of the US$30 million being invested annually in that company's channel partner programme was poorly spent because proper measurement was missing from the equation.

The firm's latest white paper, entitled Profitable Channels: The Right Metrics Make All the Difference, explains how to conduct an effective marketing channel check-up and recapture lost marketing budget from both direct and indirect opportunities.

Get the right data
According to Bill Abbott, a partner in Diamond's telecom practice who spearheaded the analysis, "Sometimes the data executive's need to evaluate marketing channels and negotiate deals is easier than they think. But often executives fall short of leveraging the information they have because they lack the knowledge or tools to make the necessary linkages."

Getting the right information doesn't necessarily require a vast, expensive CRM system - or even IT department involvement - according to Abbott. In one case, DiamondCluster used a simple spreadsheet and data from various sources within the company to generate three key calculations:

  1. True channel and acquisition costs, including human capital and other indirect costs;
  2. Costs of service and customer support;
  3. Accurate estimates of retention curves and monthly revenue from services, advertising and other sources.

Unprofitable partners?
It may sound harsh or even radical, but dropping unprofitable partners can immediately generate significant cost savings. In the case of the consumer services company, DiamondCluster found that only 10 of the 74 partnerships were contributing value to the firm - an insight that quickly led to an increase in net channel value of some US$6 million per year.

The quality of customers generated by partners can vary as much as 40%, according to the white paper. For example, a communications company can easily account for subscription revenue of a new customer but overlook additional advertising revenue generated by that customer.

Five step check-up
To identify any failing marketing partnerships, the criteria used for evaluation should go beyond simple measures of profitability, the company suggests. Not accurately and comprehensively measuring direct as well as indirect costs (such as the cost of human capital to recruit and retain partners and to launch and manage campaigns) can distort data. In addition, gross averages of customer value can also be deceptive.

DiamondCluster suggests the following practical ideas for an effective marketing channel evaluation:

  1. Reassess the traditional measures of channel performance
    Gross additions, average customer value, or quarterly revenue reports won't reveal an entire picture of profitability.
  2. Revisit assumptions about channel costs and CLV
    Aggressive competitors, new efficiencies and shifting channel partner performance are just some of the factors that can impact original assumptions.
  3. Recalculate the real costs of your marketing efforts
    Accurately measure both direct and indirect costs or your contribution calculations can be way off the mark.
  4. Refine your channel evaluation process
    Break down your analysis of aggregate and trends data to generate incremental, actionable recommendations.
  5. Reallocate assets to the highest performing areas
    Convert the findings from your channel check-up into a detailed game plan. Find ways of better leveraging your high-performance channels, repair those with untapped potential, and abandon those programmes or relationships that aren't contributing to the bottom line.

Prime candidates
Companies in a number of industries are prime candidates for a channel partner check-up, the white paper warns, including (among others) the following:

  • Financial services institutions
    Banks use every marketing channel at their disposal from branch offices to broadcast TV. A true picture of channel profit contributions usually resides in operational silos, which hampers company-wide assessments.
  • Credit card issuers
    Credit card companies invest millions in acquiring prospect lists, launching direct mail campaigns and telemarketing initiatives and purchasing brand advertising without any method for measurement.
  • Insurance firms
    Insurers can cull a wealth of data about agents in innovative ways to identify who is securing profitable clients and those who are simply draining resources.
  • Telephone service providers
    This industry, and particularly the mobile sector, suffers from tremendous customer churn which stifles profitability. Astronomical customer acquisition costs can keep companies in debt for years.
  • Consumer packaged goods manufacturers
    CPG companies can apply channel measurement strategies to gauge the true productivity of the marketing supply chain from retail to wholesale promotion programme partners.

According to Abbott, "One key to unlocking the full value of any company's marketing investments is conducting regular, rigorous analyses of the all the activities of within each specific channel."

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