Let's face it: we just can't handle anything that is free. Whenever something appears to be free, e.g. all-you-can-drink soda, the environment, healthcare, or email, we over-consume and abuse it.
Only when consumption has a price do we start to ponder what the optimal amount is that we want to consume.
Well, that observation has been at the heart of a disagreement between online and offline direct marketers. Offline direct marketers have always had to calculate a cost for contacting prospects with a direct mail or tele sales. But for online marketers the cost of an extra email, or banner, or SMS is negligible.
That difference has led to a different approach to marketing between online vs. offline marketers.
Facing the economic pressure of significant variable costs, offline direct marketers have been forced to reduce their contact list by predicting the top deciles that are most likely to care about an offer at hand. Click to expand the table below if you are unfamiliar with this. (this example is from my Multichannel Metrics book [1])
[2]
- Look at column 1 of the table, This is the untargeted and untested campaign. Since the target group has been selected too broadly, you will have no chance to break even. The campaign is simply too costly and typical conversion rates these days are too low.
- Column 2 is after applying super star testing. We now increased the conversion rate to 1%, a whopping five-fold increase!!! Yet, the untargeted campaign still loses money because it is too costly
- This is why the offline marketer has been obsessed with improving conversion rates by targeting the most promising segments. Column 3 shows that. Reduce the campaign to the most interested 10%. Costs go down and conversion rate for this segment goes up. Now we have a profit.
What’s it to me, says the Email and SMS marketer
Having a negligible cost per contact for email and SMS, the default approach online has widely been to ignore targeting and contact the entire list instead.
But there is a hidden cost that we have too often ignored online, namely the opportunity costs inucrred by spamming audiences and wasting our future permission to market.
In the sense that Peppers and Rogers emphasize in their recent books [3] we incurr a real cost when we spam. Namely, the future potential purchases by a prospect become a little less likely since they aren’t listening to us. Peppers and Rogers would say that our expected life time value probably goes down for those recipients who feel spammed.
If the online marketer takes that cost into account, the economic pressure is now very similar to offline marketers. There now is a real variable cost per contact to reckon with.
Therefore, the calculation in the table above is just as relevant to the online and shows why targeting has to come before testing.
The Achilles heel of this argument
Nice theory! "But how would you calculate that opportunity cost", I was rightfully challenged by blogger Jacques Warren [4].
(It is telling that Peppers & Rogers get the exact same objection to their recommendations in regards to their emphasis of the need to carefully manage customer life time value)
We all agree that this opportunity cost exists. But if it cannot be calculated (or even estimated) we are likely to continue ignoring it.
So in order to force better online marketing practices, especially on the dawn of mobile marketing coming to the US, it would be extra important that we figure out how to estimate this opportunity cost.
It can be estimated
Author and blogger Jim Novo [5] pointed me to an article [6] that suggests to me we can estimate this cost after all.
The article describes the extreme case of a company that went from 5 emails per month to 15. Yes, revenues went up. But they measured their rates of unsubscribes and undeliverable emails within their list. And they found that these rates shot up so that they they lost almost 50% from their list on an annual basis.
The article also uses the cost of acquiring a new prospect into the list as a factor. This is a whopping $14 in the case of the company in the article! So, in my opinion the opportunity cost formula that we are looking for is:
Number of lost prospects x cost of acquiring a prospect
More specifically, as the article shows, one needs to compare the normal rate of lost prospects vs. the increased rate after unwanted marketing contacts.
The morale
While this post examined marketing practices vs. targeting, the same thought should also apply to business practices vs. customer experience. Would you be a better business if you calculated the cost of undesirable customer experiences? And how would you do that?