Monday, January 11, 2010

Affordable Transaction Economics

I'm always looking for more scientific ways to spend money on marketing, as people who consistently read this blog  know.  I spend a lot of time looking at Return on Marketing Investment (ROMI), for example.  Lately, I've been dealing a lot with pipeline marketing strategy, and I stumbled upon something that is probably fairly obvious, but I thought I'd outline it formally. 

My friend and mentor Tim Furey wrote a book in 1999 called The Channel Advantage.  It was a great book, and its simple premise was "match the transaction to the channel that can afford to handle it."  There were other key ideas, but this was the one that stuck.  In other words, rebuy channels go through e- and tele-channels, big new servers through face-to-face.  The reason, simply, is that it costs $10 to take an inbound phone order, and $250 (at least) to drive out to someone's office.

I wanted to take this concept and apply it to a more dynamic problem, the pipeline, specifically nurturing leads.  When you think of a lead, it has a "born on date" and then you continue to do "stuff" to it that costs money.  Every time you do "stuff" the acquisition cost has increased.  So, a key metric for lead nurturing has to be "cumulative marketing dollars spent."  That's the basis for affordable transaction economics (ATE) applied to lead nurturing.

In other words, affordable transaction economics (ATE) is simply a way to optimize pipeline marketing activity at every stage of the relationship. The one premise is “don’t spend more cumulatively on a lead than we forecast the lead to contribute to our operating profit.” ATE depends heavily on a lead scoring model, ideally one that can forecast the total value that will result in a lead.  Say at day 1, my forecasted lead value is $10. That means that I should have spent no more than $10 on acquiring and nurturing that lead. But, on day 2, we get a lot more information from that lead, and the forecasted lead value goes up to $200. Now, I can afford a telephone call and more. This continues on and on. A case example of how ATE can be used to guide spending on lead nurturing is outlined in the table below.

The constraint of spending no more cumulatively than the forecasted operating profit is an outer limit, by the way. There should be some percentage of revenue that marketing targets for acquisition cost—say, 10%. This target will usually be lower than operating margin.

What does this mean operationally?  For marketers who own the upstream end of the pipeline, it means creating two new metrics, cumulative spend per lead (CSPL) and forecasted affordability per lead (FAPL).  When CSPL > FAPL, this metric should turn red.  These KPIs are nice because they can flow from the individual lead level all the way up to a line of business.  To do this, we need to think about what affordability is (how much should I spend per dollar on acquisition?) and we need a good lead scoring model that look at eventual lead value.

ATE can also be used very effectively as a planning framework for designing lead nurturing campaigns.  Essentially, the marketer can now plan the mix for a $1 lead, a $10 lead, a $100 lead, and a $1000 lead.  This simplifies thinking considerably around what can be very hairy process flows.

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