October 02, 2007

Results From The E-Mail Marketing Budget Post

Each week, I am pitched by e-mail vendors, folks asking for access to my client base, or asking me to blog about their services to you, the loyal reader.

These e-mail marketers, researchers, and vendors are hopeful that corporations will increase their e-mail marketing budgets, so that vendor products and services might be considered.

A little over three days ago, after another week of pitches, I gave the vendor community an opportunity to discuss how a hypothetical corporation might increase their marketing budget, and to quantify the sales impact of various strategies.

Here is a link to the challenge:

How many comments did I receive from the vendor community?

Zero.

One way to impress the client-side of the vendor/client relationship is to offer useful and actionable thought leadership. Given the number of pitches I receive, vendors, researchers and marketers missed an opportunity.


In this example, the e-mail marketer generated $10,400,000 demand per year by blasting a million e-mails per week, 52,000,000 per year. I asked folks to offer strategies that might increase demand, profit and ROI, quantifying the impact for my readers.

Let's talk about a few topics.


E-Mail Frequency: In this example, the corporation chose to send one campaign per week. Here is a table that illustrates the expected demand, profit and ROI based on number of contacts:

Annual E-Mail Return On Investment By Frequency (in 000s)













Demand Cost Profit ROI $/E-Mail






1 Contact Per Month $5,200 $250 $1,570 628.0% $0.43
1 Contact Per Week $10,400 $1,000 $2,640 264.0% $0.20
2 Contacts Per Week $14,708 $2,000 $3,148 157.4% $0.14
3 Contacts Per Week $18,013 $3,000 $3,305 110.2% $0.12
4 Contacts Per Week $20,800 $4,000 $3,280 82.0% $0.10
5 Contacts Per Week $23,255 $5,000 $3,139 62.8% $0.09

Companies that do thorough e-mail contact strategy testing have learned several interesting facts. Notice that it is possible to start losing money as e-mail contact frequency increases. Increased frequency dilutes demand per e-mail --- so that even at a very minimal cost per e-mail contact, profit begins to decline after three e-mail contacts per week (in this example --- your mileage may vary).


E-Mail Targeting: Targeting strategies can effectively increase demand per e-mail. Many companies in my industry have an e-mail list where between ten percent and fifty percent of the list have no customer information appended to it. In other words, all you know about these folks is their e-mail address. You're not going to improve performance via targeting with these individuals.

With the remaining individuals, you might get a 30% increase in demand by executing e-mail targeting strategies. The weighted average of these two populations results in a conservative increase in demand of, say, 20%. The following table overlays the 20% increase in performance, adding the marginal cost required to execute the targeting strategy.

Annual E-Mail Return On Investment By Frequency (in 000s)













Demand Cost Profit ROI $/E-Mail






1 Contact Per Month $6,240 $269 $1,915 712.7% $0.52
1 Contact Per Week $12,480 $1,075 $3,293 306.3% $0.24
2 Contacts Per Week $17,649 $2,150 $4,027 187.3% $0.17
3 Contacts Per Week $21,616 $3,225 $4,341 134.6% $0.14
4 Contacts Per Week $24,960 $4,300 $4,436 103.2% $0.12
5 Contacts Per Week $27,906 $5,375 $4,392 81.7% $0.11

Let's say your Chief Marketing Officer doesn't want to "spam" customers ... so the CMO allows you go to from one e-mail campaign per week to two targeted e-mail campaigns per week, each targeted campaign having five creative versions sent to customers based on past purchase history, past clickstream behavior, and past website preferences. Let's compare the expected results, current program vs. proposed program.


Current Program: 1x Per Week, Same Version To All Customers
  • Demand = $10,400,000.
  • Marketing Cost = $1,000,000.
  • Profit = $2,640,000.
  • ROI = 264.0%
  • Demand per E-Mail = $0.20.
Proposed Program: 2x Per Week, Customer Receives One Of Five Possible Contacts
  • Demand = $17,649,000.
  • Marketing Cost = $2,150,000.
  • Profit = $4,027,000.
  • ROI = 187.3%
  • Demand per E-Mail = $0.17.

Notice the difference in results between the current program and the proposed program.

Demand increases by 69%.
Marketing expense increases by 115%.
Profit increases by 52%.
ROI DECREASES.
Demand per E-Mail DECREASES.


My guess is that your CFO will be happy with you if you demonstrate that you'll double your e-mail budget, while delivering a 52% increase in profit and a 69% increase in demand.


What Did We Learn?

First, e-mail marketing is a lot like catalog marketing. There are simple ways to quantify the impact of frequency and targeting. Go ask the catalog marketer down the hall to help you, if this type of work is a challenge for your organization.

Second, once we quantify the impact of these strategies, investment in e-mail marketing is self evident. You'll quickly find the optimal contact strategy, one that yields an increase in demand and profit. The investment quickly cost-justifies itself.

Third, the outcome of the analysis points to areas where you may need help. You'll probably need help developing a targeted e-mail scoring algorithm. I've created many of these, I'm sure your e-mail vendor does a great job as well. The targeting algorithm is where the benefit occurs. I baked those costs into the example.

Fourth, you'll probably benefit by having a campaign management software tool to integrate the scoring algorithm with your selection criteria. If you're a cataloger, you are probably using Unica Affinium for catalog campaign management. Simply apply Affinium (or your campaign management tool or even use SAS/SPSS), and send the list with targeted versions by e-mail address to your e-mail vendor for blasting purposes. I baked these costs into the example.

Fifth, start demanding more of your e-mail vendors. Fluffy pitches and glowing articles mean little. In this example, ROI (as catalogers know) actually decreases! Yet, demand and profit increase. ROI doesn't pay the bills --- actual profit dollars pay the freight, keeping you employed.

Sixth, while not included in this analysis, you'll want to monitor opt-out rates as frequency increases. At one company I worked with, we noticed that if we went past "x" e-mail campaigns per week, too many people opted-out, causing us to lose all the profit we gained via the targeting strategy.

Ok, your turn. What strategies would you recommend, and what would the increase in demand and profit be after implementing these strategies?

3 comments:

  1. Hi Kevin,

    Good points here. Another thing to consider is how the more targeted approach affects opt-outs (how many people let you know they don't want your emails any longer)and open rates. Low opt-out rates and high open-rates can mean better results over the long run if the audience is finding value in the communications, even though they may not buy right away.

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  2. Kevin – you ask, what should the e-mail marketing investment be, what are the tactics, and what the financial benefit would be. It’s great to see this kind of discussion.

    No doubt that email is a powerful marketing tool when executed correctly. Plus it is very attractive when you consider rising printing and postage expenses. However, any discussion of the marketing budget should include the cost of promotional programs.

    You state, “The program typically offers free shipping as a purchase incentive.” Let’s say you continue to offer free shipping on email orders. As more and more customers migrate from print to e-mail, you could see , as we have with several clients, a chipping away at a major profit center (Shipping & Handling).

    What is offering free shipping actually costing you? Can you turn that cost back into profit? This sounds like a candidate for an impact test, where you test the incremental rate of one campaign versus another.

    We’ve done some work in this area and could post some additional thoughts, including a scenario projecting the results when this multichannel cataloger tests the shipping offer if anyone’s interested (let me know). This analysis paints the picture that S&H could be a valuable profit center.

    I think this all comes down to your goals? Drive top line demand, improve retention, reduce costs, increase profit, maybe all of the above? It’s tough to answer the questions you posed in your post, without discussing these significant aspects of marketing strategy.

    -Mike Knight

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  3. 90% of folks would report lost profit if they don't do free shipping/handling with a healthy hurdle. That's one of the big disadvantages of multichannel marketing ... many marketers ruined online ordering in the late 90s and early 00s with free shipping. Now customers expect it, making profitability more challenging.

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