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The Customer/Prospect Ratio
Customer Development or Customer Acquisition?
How Direct Marketing Budget Allocation will Change 2003 - 2005
Introduction
Marketers seek to achieve a balance between winning new customers and developing existing customers. New customer acquisition will remain vital, since no retention strategy will entirely stem customer defection. However, many industries are experiencing unacceptable levels of customer churn, and are urgently focusing on keeping the customers they already have, in a bid to attain net growth in the customer base. Moreover, increasing attention is now paid to selling more products to existing customers in order to improve profitability. The marketer’s shorthand term invented to describe this process is “share of
How Direct Marketing Budget Allocation will Change 2003 - 2005
Introduction
Marketers seek to achieve a balance between winning new customers and developing existing customers. New customer acquisition will remain vital, since no retention strategy will entirely stem customer defection. However, many industries are experiencing unacceptable levels of customer churn, and are urgently focusing on keeping the customers they already have, in a bid to attain net growth in the customer base. Moreover, increasing attention is now paid to selling more products to existing customers in order to improve profitability. The marketer’s shorthand term invented to describe this process is “share of
customer”.
It is in the midst of this business climate that Pitney Bowes Document Messaging Technologies releases its Customer/Prospect Ratio research report. This report identifies the proportion of direct marketing budget that industries are committing in order to develop relationships with existing customers and, conversely, the proportion of spend that is being directed towards prospecting activity.
Understanding the balance of investment between customer acquisition and customer development, and how that varies across different industries, provides an essential yardstick for marketers in their strategy development. The activity of one’s peers helps identify the trends in marketing consensus, as well as helping strategists to differentiate profitably from the norm.
The report provides an insight into the battle-plan of key UK industries and indicates a definite about-face in the balance between customer acquisition and customer development. On average, whereas 43.5% of direct marketing budgets are spent on developing existing customers, this is expected rise to some 50.6% by the end of 2005.
Certainly, patterns of consumer spending and brand loyalty have changed. We even have a situation in the deregulated utilities industries where the regulator is actively suggesting consumers regularly shop around for a better deal!
Additionally, in the last two years the honeymoon period for Customer Relationship Management (CRM) has waned. Difficulties associated with measuring ROI from these expensive ‘solutions’ caused many companies to question their investment. Even now, as products emerge offering ROI measurement techniques, the cloud of suspicion hanging over CRM to deliver remains.
Key Findings
• Marketing to existing customers currently accounts for 43.5% of the budget of UK direct marketers
• The Credit card industry will increase its marketing spend to existing customers more than any other sector by the end of 2005 – a percentage points growth of 14.7
• Next biggest growth will come from the banking sector (12.4) and the retail sector (12.3)
• By the end of 2005, an average of 50.6% of budget will be spent on marketing to existing customers – a percentage points growth of 7.1
• The mail order industry currently devotes more budget than any other industry to marketing to existing customers. However, the mail order industry is also the only vertical sector whose budget for marketing to existing customers will decline by the end of 2005.
• The Publishing sector currently devotes the least amount of budget to communicating with existing customers
UK marketers believe that each of the major vertical direct marketing industries (apart from the mail order industry – see Vertical Sector Analysis) will increase their spend on direct marketing to existing customers by the end of 2005.
Clearly, any uncertainty currently surrounding CRM has not impacted on the level of direct marketing that businesses will conduct with existing customers. Results indicate that there is to be no shift away from the customer-centric mindset that currently predominates. However, exactly how successful CRM solutions are proving to be in contributing towards truly tailored campaigns is a moot point. Recent Pitney Bowes research suggests that companies are still failing when it comes to translating the sophisticated segmentation of customer and prospect data into personalised customer communications. The problem has been a lack of investment at the despatch stage, where out-dated technology has been unable to physically deliver these finely tailored campaigns without resulting in substantial time and cost penalties. Until companies recognise this stumbling block and make the relatively small investment into updating mail and messaging technology, the full potential of CRM solutions will continue to be lost.
Customer Focus
Several factors have undoubtedly contributed to the trend away from customer acquisition – whether by design or default.
Restricted electoral register
When electors apply to register they are now given the choice of "opting out" of having their name appear on the edited electoral register. This edited register is available for sale to anyone for a variety of purposes, including direct marketing.
The introduction of the opt-out option (November 2001) has limited the ability of large companies to conduct mass prospecting campaigns. Approximately 20% of electors chose to opt-out. Prospecting is hugely reliant on data volume and any reduction in the quantity of data places increasing pressure on marketers to achieve the same (or improved) level of response from a smaller pool.
Email opt-in
From October 2003, new regulations will make it illegal to target consumers with email marketing messages without the consumer first opting-in to receive the message. Importantly, this opt-in ruling only applies to prospecting activity. Any existing customers will be governed by the opt-out ruling.
The opt-in legislation will make it more difficult for companies to conduct prospecting activity via email marketing simply due to the fact that the requisite data will be harder to obtain. The ruling will also undoubtedly serve to push up the price of third-party opt-in marketing lists.
However, compared to the cost of a direct-mail prospecting push, inflated opt-in email lists will still represent considerably better value. Email marketing has also been proven to deliver better response rates than direct mail and relies less on data volume to achieve these results.
So email marketing is both powerful and economic – if the consumer’s permission can be obtained to use this channel. However, as the use of email becomes (quite properly) more highly regulated, direct mail remains the most reliable method of communicating with the full range of customers and prospects alike.
Already, the most astute marketers have combined email with conventional direct marketing to great effect. As the EU directive takes effect, this should continue.
Dusty Data
Prospecting using lifestyle data lists relies on the quality of those lists to produce results. There have always been question marks over the accuracy of contributed data - albeit with little hard-evidence to back up this suspicion. Today, however, it is the tired nature of lifestyle lists that is causing marketers to pause for thought.
Recently, lifestyle list owners have concentrated on refreshing the data held on existing contributors rather than attempting to grow the lists to provide more prospects. Only 15-18 million people have filled in questionnaires – less than half the UK adult population. As one might imagine, these people are highly mailed and less and less receptive – let alone responsive - to marketing messages.
Survey results would indicate that marketers are already placing less faith in lifestyle lists and are unwilling to commit budget to prospecting activity until both the reach and the recency of these lists is improved.
Loyalty schemes
The continued growth in loyalty programmes is also an obvious indicator of a more customer-centric approach. The development of these programmes has been progressive, from air-mile schemes, to store-card initiatives to online click-and-earn programmes.
The most recent loyalty market moves have seen major offline players group together to form consortiums, offering customers point-earning opportunities across a vast range of products and services. The rapid take-up of schemes such as the Nectar programme show the power of this approach.
For the companies involved, this consortium approach makes perfect sense. Operating costs for each participant are reduced whilst market reach is effortlessly extended.
Affinity Marketing
Similar benefits are afforded by affinity marketing schemes - partnerships between non-competing organisations for mutual gain. Here, a company uses a commercial partner’s brand and customer base to provide a ready market for its own product or service.
The advantages are numerous - costs are reduced, new channels to the consumer are opened to either party, and complementary brands can attract responses from the consumer that neither party could achieve stand-alone. In most cases, affinity marketing allows a shift into new markets without the infrastructure or costs of adding value to the customer experience.
Click to see the Figure showing the Proportion of direct marketing budget spent on existing customers
Credit Card
Currently, the Credit Card industry apportions 34.5% of its direct marketing budget to communicating with existing customers. This figure is expected to rise to 49.2% by the end of 2005 – the biggest percentage point growth (14.7%) of any of the vertical market sectors.
This growth represents a considerable re-evaluation for an industry saddled with a (justified) reputation for blanket mailing and is undoubtedly a major boost for the image of direct marketing as a whole.
The Credit Card sector has been affected more than any other by regulations controlling the electoral register. With restrictions in place, the industry has recognised that a blanket mailing approach is no longer guaranteed to deliver satisfactory response rates. Some areas of the country have an electoral register opt-out rate of around 50%. Further, the majority of opt-outs are amongst the wealthy and highly educated – i.e. those with the greatest cross/up-selling potential for the Credit Card industry.
A more customer-focused direct marketing approach may result in the return of loyalty schemes for this marketplace – an initiative first tried in the 1990’s with rather limited success. Rather than operating on a Point-earning basis, these schemes could perhaps be based around the offer of special deals and exclusive offers for cardholders.
In turn, the credit card industry now has new products to push – notably in the form of loan products – which may develop into an important revenue generator. Here, loyalty programmes and tailored customer communications will play a key role in the cross-selling of such products.
Banks
The banking industry currently spends 50% of its direct marketing budget communicating with existing customers. This is expected to rise to 62.4% by the end of 2005 – a percentage greater than that predicted for any other vertical sector.
The banking industry was a pioneer of customer value management techniques and has invested heavily in CRM solutions. The retail banking industry is a beneficiary of low customer turnover (<10% per annum Group 1 Software survey, 2003) and can therefore afford to concentrate on customer development. Indeed, given this extremely low customer defection rate, one might argue that banks should be dedicating even more of their direct marketing budget to existing customers.
Banks have not been particularly successful in persuading customers to take-up richer product packages. Instead, those that differentiate competitively on service (e.g. HSBC’s award-winning mortgage service) have gained the headlines and subsequent kudos.
Targeted, intelligent direct marketing will contribute to this overall drive towards improved service provision.
Retail
The retail industry currently spends 41.8% of its direct marketing budget communicating to existing customers. By the end of 2005, this figure will rise to 54.1%.
This implies that the retail sector will continue to focus on data capture and 1-to-1 marketing at the expense of above the line techniques (at least at a national level). The sector recognises the need to compile data on individuals, their purchasing patterns and buying preferences in order to inform store stocking, in-store marketing and promotions, new product development and general store management.
Increasingly, stores are becoming more recreational – for example the trend for coffee bars in bookshops. Here, customer footfall remains the main objective. Appropriate offers, tailored to the individual’s personal range of needs or interests, are most effective at attracting regular footfall. In-store promotions then serve to maximise impulse spend.
Most of the major retailers now have a web presence but relatively few have opted to make their entire range available online (a move designed to ensure that footfall remains consistent). The important factor for all is to ensure that there is a consistent approach and single customer view across all channels. Targeted direct marketing can help to provide this level of consistency.
Insurance
The insurance industry currently devotes 40.9% of its direct marketing budget to communicating with existing customers. This figure is set to rise to 51.5 by the end of 2005.
The insurance industry generally remains organised around product lines rather than around customer profiles. Investment into CRM has been slow, perhaps because the industry has not traditionally generated a huge amount of correspondence with customers (averaging just 3 communications per customer per year). Yet CRM investment would surely make sense when one considers the importance of profiling for underwriting purposes.
Marketing standards are polarised between the extremes of best and worst practice. In many cases, policy renewals marketing to existing customers remains unsophisticated, often amounting to little more than a request to renew, with no attempt at putting a value proposition to the customer. Policy cross-selling is also a rare phenomenon. Yet there are a few notable examples of customer-centric marketing, including imaginative and well-constructed loyalty schemes.
The industry is still very highly intermediated and better integration between underwriter and the channel is vital in today’s competitive multi-channel climate. Insurers will use direct customer e-communications to make direct personalised offers, but will then feed sales enquiries back through to their channel partners, providing opt-in laws are adhered to. In this way, active cross-selling or retention initiatives can be pursued direct with the customer, while at the same time being seen to measurably support the intermediary community.
Telecoms
The telecoms industry currently allocates 47.9% of its direct marketing budget to communicating with existing customers. This figure will rise to 55.4% by the end of 2005. Given the massive levels of customer churn prevalent in the industry, it is arguable that customer development budgets should be considerably higher in order to stem defection and nurture profitable customers.
Now fully deregulated – including the “last mile” - the telecoms marketplace is fiercely competitive. Debt incurred through 3G licence costs continue to hang like a spectre over the mobile markets. Tariff price wars have been proved to be ineffective in capturing long-term customers, and attention has turned to bundled service package and sheer customer service levels as the key differentiators.
However, we would contend that the culture of telecoms marketing remains too firmly focused on prospecting. Bundle deals seem primarily aimed at attracting new customers, rather than retaining existing ones. Loyalty initiatives are underdeveloped and tend to concentrate simply on vanilla discounts against the existing core service. Affinity activity concentrates mainly on piggy-backing other brands (prospecting again), rather than attracting brand partners to enrich the existing customer’s experience with the telecoms provider.
Charity
The third sector currently spends 38.8% of its direct marketing budget communicating to existing customers. This will grow to 45.6% by the end of 2005.
Since 1995 there has been a decline in the number of UK households making charitable donations. The public has become more cynical about the actual destination of donated funds. The sector faces a battle to reverse this trend.
Charities have been reluctant to embrace new technology in order to reduce the cost of prospecting programmes. A Telecom Express survey estimates that the sector has lost out on around £221 million in donations through not embracing techniques such as automated call handling. Yet there are signs that this head-in-the-sand attitude is changing. A report conducted by the Charities Aid foundation in 2002 found that “…e-marketing is three to four times more successful in conversion rates than other traditional forms of marketing.”
The third sector faces two tasks: to reduce the cost of attracting initial (low value) donations; and to systematically and intelligently reapproach low value donors to ask them to increase their donation level. Those who have adopted such step-by-step customer development strategies have been scoring singular success. Significantly, they have managed to alter their customer:prospect budgeting ratio to around 60:40.
In a society where the whole culture of charitable giving stands in need of revival, developing existing donors has to take priority over the expensive business of attracting new ones.
Travel
Current spend on marketing to existing customers: Travel – 52.1%. Spend by end of 2005: Travel – 57.1%.
Airlines were one of the pioneers of loyalty schemes in the US, UK and Europe. Yet these early loyalty initiatives tended to focus simply on discount redemption against the core product – air travel. As such, they managed to reveal very little about the lifestyle and motivations of customers, and therefore offered only fleeting insights as to why the customer chose to fly with a particular airline, or take their holiday in certain resorts. A number of third party data companies have created significant businesses filling this ‘knowledge gap’.
The threat of international terrorism, coupled with a slow economy in Europe, has made the travel and holidays market very difficult. We predict that the winners in this marketplace will be those who bravely take the opportunity to invest in improved customer knowledge and thereby gain a better understanding why their customers buy the travel and holiday products that they do.
Travel and holidays is a highly intermediated market – like the insurance industry – and, as such, direct customer activity needs to drive business through the resale channel, rather than directly compete with it.
Marketing to existing customers must be both intelligent and relevant to succeed. Already we have anecdotal evidence of travel and holiday companies putting as much as 65% of marketing budget into re-contacting existing customers. We believe that this kind of balance will be the hallmark of success for travel and holiday companies.
Hotels, Restaurants
Current spend on marketing to existing customers: Restaurants – 36.8%; Hotels – 48.2%. Spend by end of 2005: Restaurants – 42.6%; Hotels – 51.2%.
The transactional information available to hoteliers gives even less of an idea about customers’ motivations and interests than that available to travel and tour operators. The fact that someone has stayed or eaten at an establishment gives no insight into why they have chosen this experience.
Larger organisations – of which there are an increasing number owing to industry consolidation - are now beginning to address their audiences and catchments using direct marketing techniques to attract and develop customers in an organised fashion. Smaller, independent hotel and restaurant companies are also taking advantage of affordable database marketing solutions and increased government support to develop their marketing skills.
Customer satisfaction and intelligence surveys have to be combined with third party datasets in order to identify customer profiles. Customer research and profiling is an essential first step both for customer retention/development and to identify potential new customers.
We therefore predict that this sector, although (in the case of restaurants) some way behind the other sectors we studied, will devote increasing attention to database marketing and customer development as the relative importance of UK custom grows in the current tightened market.
Publishing
Current spend on direct marketing to existing customers stands at 31.8%. This will increase to 34.5% by the end of 2005.
The publishing industry remains dominated by the mentality of the news-stand. Although our figures indicate a modest change in this attitude, ingrained attitudes evidently remain predominant.
Nevertheless, some major players in the publishing market are recognising the importance of reader value over reader volume. The new buzz-words are ‘reader communities’, ‘interactivity’ and ‘alternative income streams’.
A number of players are introducing affinity partners into their publications, offline and online, in order to enrich the ‘reader experience’. These affinities go well beyond temporary reader offers, and now extend to a variety of information services, clubs, discount arrangements, and so on, available to readers of a given publication. We are also seeing a two-tier approach which offers greater privileges to subscribers over news-stand purchasers.
The importance of news-stand sales will remain. However, many publishers are being held to ransom – especially by the increasingly powerful grocery multiples – over the cost of newsstand presence. The modest move that we have observed towards reader community development we believe marks the early stages of a fight-back from the publishing community.
Mail Order
The mail order industry is the only vertical sector predicted to be spending less on communicating with existing customers by the end of 2005. Current spend to existing customers equals 56.1% - the highest of all sectors. This figure is expected to drop to 52.9% by the end of 2005.
This industry is one of the bastions of direct mail – as current customer communication figures indicate.
In recent years there has been unprecedented industry growth and the market is now more crowded and competitive than ever. In this climate, prospecting activity will undoubtedly take on more significance.
Despite the small drop in communications to existing customers, the percentage will remain high. Mail order companies are coming to terms with the challenges of multi-media communications and are recognising that employing multi-media is not an either/or argument. Quite simply, multi-channel communications enable mail order companies to reach as many customers and prospects as possible.
Different media may well be employed to fulfil prospecting activity and customer communications. For example, the cost efficiencies of email may encourage mail order firms to prospect via this medium (although opt-in laws will need to be strictly adhered to). Direct mail will continue to be used in order to deliver brochures and catalogues. Certainly, online presentation of catalogues would be more cost-effective but customers still appreciate the look and feel of published material. Indeed, any costs saved through online prospecting could be channelled back into brochure production to further differentiate on quality.
Existing customer communications such as bills and statements will also be utilised by the most savvy mail order marketers. These communications are already being despatched, so, by adding marketing messages to these documents, marketers can cross sell to customers at little or no extra expense.
Conclusion
UK businesses are becoming increasingly committed to developing relationships with existing customers. Every industry, bar the Mail Order industry, is expected to increase the proportion of marketing budget spent on developing existing customers.
This is an about-face from recent years where prospecting activity was given precedence and market-share dominated the thoughts of marketers from all industries. Certainly, customer retention is a major issue, with consumers being encouraged to be more mobile in their choice of supplier in the growing movement to escape from a ‘rip-off’ society.
Today, it is an accepted mantra that attracting new customers costs more than retaining existing customers. The CRM industry has boomed on the back of this statistic and CRM solutions have been widely adopted across British business.
Factors affecting prospecting activity have undoubtedly contributed towards this increased customer focus:
- Restrictions to the electoral register have reduced the volume of prospecting data available, rendering blanket mailings less effective.
- New opt-in email marketing legislation will make it more difficult to conduct prospecting online since consumers will need to give their permission to be contacted.
- Available third party datasets are becoming tired, causing marketers to place less faith in available lists.
In turn, consortium loyalty programmes and affinity marketing initiatives continue to develop. Such schemes have captured the imagination of marketers, providing an extremely cost-effective means of broadening brand appeal and attracting response.
Consumers are no longer mono-mediac. Any business attempting to conduct its marketing across a single channel will flounder. And whatever the medium used, neither customers nor prospects will tolerate poorly-targeted, compromised campaigns.
Ultimately, marketers will continue to deliver a combination of customer and prospect campaigns. The key to success will be how the balance is managed across today’s numerous marketing channels.
*Survey Sample – Marketers from the UK’s top 1000companies
It is in the midst of this business climate that Pitney Bowes Document Messaging Technologies releases its Customer/Prospect Ratio research report. This report identifies the proportion of direct marketing budget that industries are committing in order to develop relationships with existing customers and, conversely, the proportion of spend that is being directed towards prospecting activity.
Understanding the balance of investment between customer acquisition and customer development, and how that varies across different industries, provides an essential yardstick for marketers in their strategy development. The activity of one’s peers helps identify the trends in marketing consensus, as well as helping strategists to differentiate profitably from the norm.
The report provides an insight into the battle-plan of key UK industries and indicates a definite about-face in the balance between customer acquisition and customer development. On average, whereas 43.5% of direct marketing budgets are spent on developing existing customers, this is expected rise to some 50.6% by the end of 2005.
Certainly, patterns of consumer spending and brand loyalty have changed. We even have a situation in the deregulated utilities industries where the regulator is actively suggesting consumers regularly shop around for a better deal!
Additionally, in the last two years the honeymoon period for Customer Relationship Management (CRM) has waned. Difficulties associated with measuring ROI from these expensive ‘solutions’ caused many companies to question their investment. Even now, as products emerge offering ROI measurement techniques, the cloud of suspicion hanging over CRM to deliver remains.
Key Findings
• Marketing to existing customers currently accounts for 43.5% of the budget of UK direct marketers
• The Credit card industry will increase its marketing spend to existing customers more than any other sector by the end of 2005 – a percentage points growth of 14.7
• Next biggest growth will come from the banking sector (12.4) and the retail sector (12.3)
• By the end of 2005, an average of 50.6% of budget will be spent on marketing to existing customers – a percentage points growth of 7.1
• The mail order industry currently devotes more budget than any other industry to marketing to existing customers. However, the mail order industry is also the only vertical sector whose budget for marketing to existing customers will decline by the end of 2005.
• The Publishing sector currently devotes the least amount of budget to communicating with existing customers
UK marketers believe that each of the major vertical direct marketing industries (apart from the mail order industry – see Vertical Sector Analysis) will increase their spend on direct marketing to existing customers by the end of 2005.
Clearly, any uncertainty currently surrounding CRM has not impacted on the level of direct marketing that businesses will conduct with existing customers. Results indicate that there is to be no shift away from the customer-centric mindset that currently predominates. However, exactly how successful CRM solutions are proving to be in contributing towards truly tailored campaigns is a moot point. Recent Pitney Bowes research suggests that companies are still failing when it comes to translating the sophisticated segmentation of customer and prospect data into personalised customer communications. The problem has been a lack of investment at the despatch stage, where out-dated technology has been unable to physically deliver these finely tailored campaigns without resulting in substantial time and cost penalties. Until companies recognise this stumbling block and make the relatively small investment into updating mail and messaging technology, the full potential of CRM solutions will continue to be lost.
Customer Focus
Several factors have undoubtedly contributed to the trend away from customer acquisition – whether by design or default.
Restricted electoral register
When electors apply to register they are now given the choice of "opting out" of having their name appear on the edited electoral register. This edited register is available for sale to anyone for a variety of purposes, including direct marketing.
The introduction of the opt-out option (November 2001) has limited the ability of large companies to conduct mass prospecting campaigns. Approximately 20% of electors chose to opt-out. Prospecting is hugely reliant on data volume and any reduction in the quantity of data places increasing pressure on marketers to achieve the same (or improved) level of response from a smaller pool.
Email opt-in
From October 2003, new regulations will make it illegal to target consumers with email marketing messages without the consumer first opting-in to receive the message. Importantly, this opt-in ruling only applies to prospecting activity. Any existing customers will be governed by the opt-out ruling.
The opt-in legislation will make it more difficult for companies to conduct prospecting activity via email marketing simply due to the fact that the requisite data will be harder to obtain. The ruling will also undoubtedly serve to push up the price of third-party opt-in marketing lists.
However, compared to the cost of a direct-mail prospecting push, inflated opt-in email lists will still represent considerably better value. Email marketing has also been proven to deliver better response rates than direct mail and relies less on data volume to achieve these results.
So email marketing is both powerful and economic – if the consumer’s permission can be obtained to use this channel. However, as the use of email becomes (quite properly) more highly regulated, direct mail remains the most reliable method of communicating with the full range of customers and prospects alike.
Already, the most astute marketers have combined email with conventional direct marketing to great effect. As the EU directive takes effect, this should continue.
Dusty Data
Prospecting using lifestyle data lists relies on the quality of those lists to produce results. There have always been question marks over the accuracy of contributed data - albeit with little hard-evidence to back up this suspicion. Today, however, it is the tired nature of lifestyle lists that is causing marketers to pause for thought.
Recently, lifestyle list owners have concentrated on refreshing the data held on existing contributors rather than attempting to grow the lists to provide more prospects. Only 15-18 million people have filled in questionnaires – less than half the UK adult population. As one might imagine, these people are highly mailed and less and less receptive – let alone responsive - to marketing messages.
Survey results would indicate that marketers are already placing less faith in lifestyle lists and are unwilling to commit budget to prospecting activity until both the reach and the recency of these lists is improved.
Loyalty schemes
The continued growth in loyalty programmes is also an obvious indicator of a more customer-centric approach. The development of these programmes has been progressive, from air-mile schemes, to store-card initiatives to online click-and-earn programmes.
The most recent loyalty market moves have seen major offline players group together to form consortiums, offering customers point-earning opportunities across a vast range of products and services. The rapid take-up of schemes such as the Nectar programme show the power of this approach.
For the companies involved, this consortium approach makes perfect sense. Operating costs for each participant are reduced whilst market reach is effortlessly extended.
Affinity Marketing
Similar benefits are afforded by affinity marketing schemes - partnerships between non-competing organisations for mutual gain. Here, a company uses a commercial partner’s brand and customer base to provide a ready market for its own product or service.
The advantages are numerous - costs are reduced, new channels to the consumer are opened to either party, and complementary brands can attract responses from the consumer that neither party could achieve stand-alone. In most cases, affinity marketing allows a shift into new markets without the infrastructure or costs of adding value to the customer experience.
Click to see the Figure showing the Proportion of direct marketing budget spent on existing customers
Credit Card
Currently, the Credit Card industry apportions 34.5% of its direct marketing budget to communicating with existing customers. This figure is expected to rise to 49.2% by the end of 2005 – the biggest percentage point growth (14.7%) of any of the vertical market sectors.
This growth represents a considerable re-evaluation for an industry saddled with a (justified) reputation for blanket mailing and is undoubtedly a major boost for the image of direct marketing as a whole.
The Credit Card sector has been affected more than any other by regulations controlling the electoral register. With restrictions in place, the industry has recognised that a blanket mailing approach is no longer guaranteed to deliver satisfactory response rates. Some areas of the country have an electoral register opt-out rate of around 50%. Further, the majority of opt-outs are amongst the wealthy and highly educated – i.e. those with the greatest cross/up-selling potential for the Credit Card industry.
A more customer-focused direct marketing approach may result in the return of loyalty schemes for this marketplace – an initiative first tried in the 1990’s with rather limited success. Rather than operating on a Point-earning basis, these schemes could perhaps be based around the offer of special deals and exclusive offers for cardholders.
In turn, the credit card industry now has new products to push – notably in the form of loan products – which may develop into an important revenue generator. Here, loyalty programmes and tailored customer communications will play a key role in the cross-selling of such products.
Banks
The banking industry currently spends 50% of its direct marketing budget communicating with existing customers. This is expected to rise to 62.4% by the end of 2005 – a percentage greater than that predicted for any other vertical sector.
The banking industry was a pioneer of customer value management techniques and has invested heavily in CRM solutions. The retail banking industry is a beneficiary of low customer turnover (<10% per annum Group 1 Software survey, 2003) and can therefore afford to concentrate on customer development. Indeed, given this extremely low customer defection rate, one might argue that banks should be dedicating even more of their direct marketing budget to existing customers.
Banks have not been particularly successful in persuading customers to take-up richer product packages. Instead, those that differentiate competitively on service (e.g. HSBC’s award-winning mortgage service) have gained the headlines and subsequent kudos.
Targeted, intelligent direct marketing will contribute to this overall drive towards improved service provision.
Retail
The retail industry currently spends 41.8% of its direct marketing budget communicating to existing customers. By the end of 2005, this figure will rise to 54.1%.
This implies that the retail sector will continue to focus on data capture and 1-to-1 marketing at the expense of above the line techniques (at least at a national level). The sector recognises the need to compile data on individuals, their purchasing patterns and buying preferences in order to inform store stocking, in-store marketing and promotions, new product development and general store management.
Increasingly, stores are becoming more recreational – for example the trend for coffee bars in bookshops. Here, customer footfall remains the main objective. Appropriate offers, tailored to the individual’s personal range of needs or interests, are most effective at attracting regular footfall. In-store promotions then serve to maximise impulse spend.
Most of the major retailers now have a web presence but relatively few have opted to make their entire range available online (a move designed to ensure that footfall remains consistent). The important factor for all is to ensure that there is a consistent approach and single customer view across all channels. Targeted direct marketing can help to provide this level of consistency.
Insurance
The insurance industry currently devotes 40.9% of its direct marketing budget to communicating with existing customers. This figure is set to rise to 51.5 by the end of 2005.
The insurance industry generally remains organised around product lines rather than around customer profiles. Investment into CRM has been slow, perhaps because the industry has not traditionally generated a huge amount of correspondence with customers (averaging just 3 communications per customer per year). Yet CRM investment would surely make sense when one considers the importance of profiling for underwriting purposes.
Marketing standards are polarised between the extremes of best and worst practice. In many cases, policy renewals marketing to existing customers remains unsophisticated, often amounting to little more than a request to renew, with no attempt at putting a value proposition to the customer. Policy cross-selling is also a rare phenomenon. Yet there are a few notable examples of customer-centric marketing, including imaginative and well-constructed loyalty schemes.
The industry is still very highly intermediated and better integration between underwriter and the channel is vital in today’s competitive multi-channel climate. Insurers will use direct customer e-communications to make direct personalised offers, but will then feed sales enquiries back through to their channel partners, providing opt-in laws are adhered to. In this way, active cross-selling or retention initiatives can be pursued direct with the customer, while at the same time being seen to measurably support the intermediary community.
Telecoms
The telecoms industry currently allocates 47.9% of its direct marketing budget to communicating with existing customers. This figure will rise to 55.4% by the end of 2005. Given the massive levels of customer churn prevalent in the industry, it is arguable that customer development budgets should be considerably higher in order to stem defection and nurture profitable customers.
Now fully deregulated – including the “last mile” - the telecoms marketplace is fiercely competitive. Debt incurred through 3G licence costs continue to hang like a spectre over the mobile markets. Tariff price wars have been proved to be ineffective in capturing long-term customers, and attention has turned to bundled service package and sheer customer service levels as the key differentiators.
However, we would contend that the culture of telecoms marketing remains too firmly focused on prospecting. Bundle deals seem primarily aimed at attracting new customers, rather than retaining existing ones. Loyalty initiatives are underdeveloped and tend to concentrate simply on vanilla discounts against the existing core service. Affinity activity concentrates mainly on piggy-backing other brands (prospecting again), rather than attracting brand partners to enrich the existing customer’s experience with the telecoms provider.
Charity
The third sector currently spends 38.8% of its direct marketing budget communicating to existing customers. This will grow to 45.6% by the end of 2005.
Since 1995 there has been a decline in the number of UK households making charitable donations. The public has become more cynical about the actual destination of donated funds. The sector faces a battle to reverse this trend.
Charities have been reluctant to embrace new technology in order to reduce the cost of prospecting programmes. A Telecom Express survey estimates that the sector has lost out on around £221 million in donations through not embracing techniques such as automated call handling. Yet there are signs that this head-in-the-sand attitude is changing. A report conducted by the Charities Aid foundation in 2002 found that “…e-marketing is three to four times more successful in conversion rates than other traditional forms of marketing.”
The third sector faces two tasks: to reduce the cost of attracting initial (low value) donations; and to systematically and intelligently reapproach low value donors to ask them to increase their donation level. Those who have adopted such step-by-step customer development strategies have been scoring singular success. Significantly, they have managed to alter their customer:prospect budgeting ratio to around 60:40.
In a society where the whole culture of charitable giving stands in need of revival, developing existing donors has to take priority over the expensive business of attracting new ones.
Travel
Current spend on marketing to existing customers: Travel – 52.1%. Spend by end of 2005: Travel – 57.1%.
Airlines were one of the pioneers of loyalty schemes in the US, UK and Europe. Yet these early loyalty initiatives tended to focus simply on discount redemption against the core product – air travel. As such, they managed to reveal very little about the lifestyle and motivations of customers, and therefore offered only fleeting insights as to why the customer chose to fly with a particular airline, or take their holiday in certain resorts. A number of third party data companies have created significant businesses filling this ‘knowledge gap’.
The threat of international terrorism, coupled with a slow economy in Europe, has made the travel and holidays market very difficult. We predict that the winners in this marketplace will be those who bravely take the opportunity to invest in improved customer knowledge and thereby gain a better understanding why their customers buy the travel and holiday products that they do.
Travel and holidays is a highly intermediated market – like the insurance industry – and, as such, direct customer activity needs to drive business through the resale channel, rather than directly compete with it.
Marketing to existing customers must be both intelligent and relevant to succeed. Already we have anecdotal evidence of travel and holiday companies putting as much as 65% of marketing budget into re-contacting existing customers. We believe that this kind of balance will be the hallmark of success for travel and holiday companies.
Hotels, Restaurants
Current spend on marketing to existing customers: Restaurants – 36.8%; Hotels – 48.2%. Spend by end of 2005: Restaurants – 42.6%; Hotels – 51.2%.
The transactional information available to hoteliers gives even less of an idea about customers’ motivations and interests than that available to travel and tour operators. The fact that someone has stayed or eaten at an establishment gives no insight into why they have chosen this experience.
Larger organisations – of which there are an increasing number owing to industry consolidation - are now beginning to address their audiences and catchments using direct marketing techniques to attract and develop customers in an organised fashion. Smaller, independent hotel and restaurant companies are also taking advantage of affordable database marketing solutions and increased government support to develop their marketing skills.
Customer satisfaction and intelligence surveys have to be combined with third party datasets in order to identify customer profiles. Customer research and profiling is an essential first step both for customer retention/development and to identify potential new customers.
We therefore predict that this sector, although (in the case of restaurants) some way behind the other sectors we studied, will devote increasing attention to database marketing and customer development as the relative importance of UK custom grows in the current tightened market.
Publishing
Current spend on direct marketing to existing customers stands at 31.8%. This will increase to 34.5% by the end of 2005.
The publishing industry remains dominated by the mentality of the news-stand. Although our figures indicate a modest change in this attitude, ingrained attitudes evidently remain predominant.
Nevertheless, some major players in the publishing market are recognising the importance of reader value over reader volume. The new buzz-words are ‘reader communities’, ‘interactivity’ and ‘alternative income streams’.
A number of players are introducing affinity partners into their publications, offline and online, in order to enrich the ‘reader experience’. These affinities go well beyond temporary reader offers, and now extend to a variety of information services, clubs, discount arrangements, and so on, available to readers of a given publication. We are also seeing a two-tier approach which offers greater privileges to subscribers over news-stand purchasers.
The importance of news-stand sales will remain. However, many publishers are being held to ransom – especially by the increasingly powerful grocery multiples – over the cost of newsstand presence. The modest move that we have observed towards reader community development we believe marks the early stages of a fight-back from the publishing community.
Mail Order
The mail order industry is the only vertical sector predicted to be spending less on communicating with existing customers by the end of 2005. Current spend to existing customers equals 56.1% - the highest of all sectors. This figure is expected to drop to 52.9% by the end of 2005.
This industry is one of the bastions of direct mail – as current customer communication figures indicate.
In recent years there has been unprecedented industry growth and the market is now more crowded and competitive than ever. In this climate, prospecting activity will undoubtedly take on more significance.
Despite the small drop in communications to existing customers, the percentage will remain high. Mail order companies are coming to terms with the challenges of multi-media communications and are recognising that employing multi-media is not an either/or argument. Quite simply, multi-channel communications enable mail order companies to reach as many customers and prospects as possible.
Different media may well be employed to fulfil prospecting activity and customer communications. For example, the cost efficiencies of email may encourage mail order firms to prospect via this medium (although opt-in laws will need to be strictly adhered to). Direct mail will continue to be used in order to deliver brochures and catalogues. Certainly, online presentation of catalogues would be more cost-effective but customers still appreciate the look and feel of published material. Indeed, any costs saved through online prospecting could be channelled back into brochure production to further differentiate on quality.
Existing customer communications such as bills and statements will also be utilised by the most savvy mail order marketers. These communications are already being despatched, so, by adding marketing messages to these documents, marketers can cross sell to customers at little or no extra expense.
Conclusion
UK businesses are becoming increasingly committed to developing relationships with existing customers. Every industry, bar the Mail Order industry, is expected to increase the proportion of marketing budget spent on developing existing customers.
This is an about-face from recent years where prospecting activity was given precedence and market-share dominated the thoughts of marketers from all industries. Certainly, customer retention is a major issue, with consumers being encouraged to be more mobile in their choice of supplier in the growing movement to escape from a ‘rip-off’ society.
Today, it is an accepted mantra that attracting new customers costs more than retaining existing customers. The CRM industry has boomed on the back of this statistic and CRM solutions have been widely adopted across British business.
Factors affecting prospecting activity have undoubtedly contributed towards this increased customer focus:
- Restrictions to the electoral register have reduced the volume of prospecting data available, rendering blanket mailings less effective.
- New opt-in email marketing legislation will make it more difficult to conduct prospecting online since consumers will need to give their permission to be contacted.
- Available third party datasets are becoming tired, causing marketers to place less faith in available lists.
In turn, consortium loyalty programmes and affinity marketing initiatives continue to develop. Such schemes have captured the imagination of marketers, providing an extremely cost-effective means of broadening brand appeal and attracting response.
Consumers are no longer mono-mediac. Any business attempting to conduct its marketing across a single channel will flounder. And whatever the medium used, neither customers nor prospects will tolerate poorly-targeted, compromised campaigns.
Ultimately, marketers will continue to deliver a combination of customer and prospect campaigns. The key to success will be how the balance is managed across today’s numerous marketing channels.
*Survey Sample – Marketers from the UK’s top 1000companies
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