How to Account for Costs in Data Driven Marketing
When setting up a customer-profitability framework using data driven marketing, the revenue side is relatively simple. You know what products you’ve sold and at what price. As long as this information is attached to individual customers, you’re golden. Even in industries like banking, which have a more complicated revenue stream, the revenue side isn’t that hard to get your arms around.
Fees and interest paid as well as the balances that drive interest income all appear on the customer’s monthly statement. The harder part is taking costs into account. You have to work closely with your finance and accounting folks to do this in a way that accurately differentiates the costs associated with servicing different types of customers.
Your accounting folks have a pretty good idea of the profit margins on each of your products. But these margins often don’t take customer behavior into account. How the customer bought the product, online versus from a store, can affect the costs related to that particular customer.
How to allocate customer-specific costs in data driven marketing
Many costs can be directly associated with particular customers. The cost of a database marketing campaign can be directly linked to the customers who received it. Shipping costs for an item purchased online can be linked to a particular customer. The fees you pay to credit-card companies when a customer puts a purchase on a card can also be tied back to the customer.
Many business face similar setup costs. Phone and cable service providers make an investment in equipment when they initiate service. Many cellphone service providers offer free or steeply discounted phones. All these costs can be tied back to individual customers.
Customers also require different levels of service. Catalog retailers often offer free shipping on returns. Customer A may buy a given product and love it. Customer B may try one or even several products and return them before settling on the same product purchased by customer A at the same price. But the extra shipping costs may make the second purchase unprofitable.
There are also costs related to the failure of customers to pay their bills. People default on credit cards, mortgages, and auto payments. But even outside the financial services industry, payment can sometimes be a problem. People write bad checks. They refuse to pay for services after they have been rendered. These payment (or more accurately nonpayment) related costs are tied to individual customer behavior.
Combined with their spending levels, transaction-related costs are key to understanding customer profitability. Transaction-related behavior varies widely from one customer to the next, as does spending. These two variables help you usefully differentiate profitability among customer segments.
How to allocate infrastructure costs based on usage in data driven marketing
You know that you gave your customer a free phone to sign up for your company’s cellphone service. But how do you allocate the cost of building and maintaining your cellphone towers to individual customers? And what about the cost of the home office, the call center, and even your own salary?
These questions about infrastructure and other fixed costs are the questions that cause the most headaches in developing a customer-profitability framework. They simply don’t have clear-cut answers. Before you even start these discussions, get explicit agreement from everyone involved about the purpose of your customer-profitability calculation. Knowing in advance what you do and don’t want to do with it makes answering these sticky allocation questions much easier.
In the banking industry, there is a great deal of discussion surrounding how to allocate the cost of brick-and-mortar branches to individual customers. It somehow doesn’t seem fair to burden customers who only used online banking and ATM machines with the same costs as customers who went to the branch three times a week. Why should bank teller payroll count against the profitability of customers who never see them?
And it’s not just a matter of fairness. Different channels have different costs. That ATM network and the online banking infrastructure are far less expensive to maintain than the branch network. A key corporate initiative in one bank was to move customers into lower-cost channels and the bank wanted to reward our profitable customers for being profitable.
The approach taken was to allocate costs based on usage. This was done not at the individual customer level, but by grouping customers together. The bank defined low-, medium-, and high-volume customers in each channel and then allocated those channel costs differently for each group.
How to tie data driven marketing cost back to the product
Sometimes it’s not a matter of how much a customer uses your infrastructure, but whether they use it. It doesn’t make sense to allocate executive salaries in the mortgage company to customers who only have a credit card, for example.
Manufacturing costs for consumer goods belong at the product level. Some products are more expensive to produce than others. In the case of retailers, wholesale costs — the price that the retailer pays for a particular product — also depend on the particular product.
In both cases, it’s relatively straightforward to assign cost to individual products. It’s then a simple matter to subtract this cost from the sales price to get a net profit for each product. These profits can then be assigned to customers based on what products they buy.