Marketing in Crisis: why profit-based ROI is key

This blog was written by Anton Bucher, Marketing Strategist at Front Foot Marketing - one of Australia’s leading customer marketing advisory agencies. View their StudioSpace profile here.

Budgets are tight, consumer spend is patchy, economic outlook cloudy. Marketers must be smarter than ever before! How?

By measuring what matters. By spending on the audiences and channels that deliver a return on behaviour. A return on investment.

This is differential marketing. Based on knowing and understanding that not all consumers (and customers) are equal.

Marketers must now measure what matter most: profit-based return on investment.

It’s no surprise to open this post by saying that marketing is tough these days.

Media is fragmented. Technology investment continues to confuse. Business distrust and consumer cynicism is high. And cost-of-living pressures continue to rise for most consumers. Impacting spending patterns, customer loyalty, and ultimately bottom-line profit figures for most businesses.

However, it’s not all doom and gloom.

There is a solution that leading marketers are turning to, to help navigate through these choppy waters.

It’s the concept that not all consumers are created equal. And that whatever your brand position, whatever the size of your customer base, there’s a more effective way of thinking.

It’s the concept of differential marketing.

80/20

Pareto’s rule of 80% of the value of a business comes from 20% of its customer base has never been truer.

By identifying your most profitable customers based on previous and current purchase patterns, you can protect your business against most market shocks.

The key is to identify the value of your customer base from a profit per customer perspective, and not just sales revenue. This allows you to treat your consumer segments differently based on their profit contribution to your business. And take a return-on-investment (ROI) approach to marketing that your CEO and CFO will endorse.

We recently worked with a major Australian retailer to understand the value of their 1M+ customer base across 10 different value deciles. From highest value to lowest. To identify which segments were exponentially more profitable.

The next step was to identify what caused the differences. We discovered the cross-category and product purchase patterns, channel choice combinations, redemption rates, household structures and location trends for the different segments.

This profit-based value segmentation and profiling approach quickly revealed a clear story.

We discovered a super high value cohort of customers. With 2.5x the average customer shopping frequency. And 3x the average customer value (CV). Then we identified a series of cohorts that were the next best potentials. And then the long tail of customers that were of minimal value or unprofitable.

Embed return on investment (ROI) calculations

This gave the retailer a significant opportunity to think differently about loyalty marketing and their loyalty program as a customer value driver.

There was a clear opportunity to define a new approach to loyalty marketing, and look at where best to focus marketing efforts and budget allocations. Rather than use short term behavioural targeting techniques.

In short, by embedding a ROI calculation based on incremental profit shifts at an individual customer level, we gave the retailer the opportunity to create different targeting strategies and test activity against the different value segments.

Profit shifts became the output measures, but not the strategy. Strategies incorporated recognising best customers as VIPs – rather than discounting; building in random acts of kindness for key milestones; and enticing more frequent activity and behaviour based on far greater relevance.

The bottom line

Whilst this sounds obvious – focus where the profit is - we find that most businesses don’t have this fundamental approach embedded into their way of working.

One of the keys to make this new approach successful is to identify and prioritise the most relevant customer data variables, rather than drown in too much data.

If we can leave you with one tip. It doesn’t have to take months. And it doesn’t have to cost hundreds of thousands of dollars. A customer value segmentation can be done in weeks, and generally, with resources that already exist in your business.

It’s all about agreeing the right framework and then looking for the biggest trends.

Then you can unearth data-led insights to help prioritise areas of focus, and clearly articulate the value this will create for your business.

It can not only protect your business against market dynamics, but ensures you’re focussed on measuring what matters most.

Too many marketing teams are caught up in reporting on vanity and engagement metrics. There aren’t too many CEO’s and CFO’s that are interested in email click rates, likes, or media engagement.

At the end of the day, a profit-based ROI is the ultimate measure of success.