Marketing Leverage: Make Small Changes, Get Big Results
"Do you know what the difference between batting .250 and .300 is?" he asks in a classic, inebriated moment. "It's 25 hits. Twenty-five hits in 500 at bats is 50 points, OK? There's six months in a season -- that's about 25 weeks. That means if you get just one extra flare a week -- just one -- [or you get] a gork, you get a ground ball, you get a -- a ground ball with eyes, you get a dying quail, just one more dying quail a week -- and you're in Yankee Stadium."
What he's talking about has a direct application to marketing: The difference between success and failure, between business mediocrity and game-winning profitability, often is just a tiny improvement at the edge of what you're doing. Change your stance, change your grip, choke up on the bat a little, and suddenly you're a force at the plate.
Why is this the case? From a theoretical point of view, it has to do with leverage -- that is, of knowing where the fulcrums or turning points in your marketing campaigns are. Once you do, exerting tiny pressure on one end of the equation can have an inordinate influence on the return on investment (ROI) end of the equation.
Here are three examples of what I mean, in order of increasing complexity.
Don't beat up on your creative team. A mailed package costs $100,000 to produce (printing, letter shop, etc.) and $20,000 to create (copy writing, design and layout). It generates an incremental contribution of $126,000. The ROI is a ho-hum 5 percent ($126K/$120K). So you need to go berate your creative team about why it costs so much to get a few crummy words into a decent-looking mail package, right? Wrong. Yet, most often, that's exactly what people in marketing will concentrate on. But even if you got your creative team to cut its costs by 20 percent, that extra $4,000 would raise your ROI to only 8.6 percent. Still not Yankee Stadium.
If the members on the creative team are good, leave them alone. They're worth the lousy $20,000. Go after the production. Choose a less expensive paper. Find a region of the country where printing is cheaper (the Midwest is notorious for this). Ask your designer to work toward an efficient in-line design. Because if you can reduce your production costs by even a measly 10 percent, the resulting ROI would have been 14.5 percent (from $126K/$110K), or nearly triple your original 5 percent.
Boost the second step of your two-step. Complex products or high-involvement purchases often require a two-step marketing approach. Mail package No. 1 to generate the lead, then mail package No. 2, with more complete information and an application, to all the leads. Mail-and-call protocols essentially are the same thing: Generate the lead, then follow up. Repeatedly, as an observer of the marketing scene, I see practitioners concentrating on the first step -- generating more leads -- to the neglect of the second -- doing a better job of converting the leads you get into customers. Yet, it's the second step that will give your results bounce, as well as create a more effective use of your marketing dollars.
At first glance, you might think it doesn't matter whether you focus on the response rate (RR) or the conversion rate (CR). After all, the equation (in which Q is your initial outbound quantity) is: QxRRxCR = Number of Customers. Since it's all multiplication, you'll get more customers whether you boost your response rate or your conversion rate. The question is, which costs more? And usually, in the second step, the attempt to convert the lead through a telephone call from a service rep, an in-person sales call or a second, fatter outbound mailing with considerably more information and an application costs more.
Thus, it's generally more productive, and less expensive in terms of customer acquisition, to work on boosting your conversion rate -- the second step. Not only does the math bear this out, but it makes sense intuitively: Work on getting more of that smaller group who already have expressed interest in your product to actually buy, rather than striving to stimulate more individuals from larger groups of people to get interested in the first place -- and run the risk of generating unqualified leads that are impossible to convert!
Don't market to the losers in your house file. Inevitably, there are going to be "customers" in your database who will never buy from you again. The best predictor of that? They haven't bought from you in a long time. Take the time to find out who they are and make the effort to communicate with only those people who still are talking to you. This is leverage par excellence. Let's take an example, again keeping the numbers relatively simple.
Assume you have a house file of 100,000 purchasers. Assume that you could divide it into thirds of top, middle and bottom customers by purchase recency (in general, the more tiers the better, but we don't want you to have to use your calculator here). Finally, assume reasonably that there's bound to be some error in your methodology -- say, 10 percent, since if it's more, you owe it to yourself to find a new database modeler. Even allowing for that degree of inaccuracy in your estimate of who's most likely to buy, you're generally still better off not marketing to the losers -- the bottom third.
If you were expecting a 4 percent response rate from the whole, unsegmented 100,000, then you'd have 4,000 re-purchasers. If you shed the bottom third of the file, but you're only 90 percent accurate, then you'll unfortunately lose some 400 re-purchases (10 percent) from people wrongly assigned to the bottom third. But now you have 3,600 re-purchasers on 66,667, or a 5.4 percent response -- a 35 percent improvement! In fact, no matter what response rate you were expecting, the tactic as outlined here will always provide a 35 percent lift (because 0.90/0.6666=1.35). If you can achieve 98 percent accuracy, the lift begins to approach 50 percent (0.98/0.6666=1.47), assuming no one in your bottom third would ever buy again.
It can be even better from an ROI perspective -- in fact, depending on your average contribution, the ROI impact could be huge. You're going to get 90 percent of the revenue for only 66 percent of the expenditure -- OK, actually a bit more than two-thirds of the original cost, since you'll have to bear a nominal database modeling expense. But, still, for that tight marketing budget that everyone seems to face, here's a real solution you can definitely bring to the boss!
Sometimes we concentrate on the wrong things: in the three examples above, fixed costs instead of variable, leads instead of sales, mere coverage instead of response and profits. Yet, the well thought out execution of the changes that matter -- often small things at the margin -- can make all the difference.
Peter Drucker said it well more than 25 years ago: "Concentrate on those very few areas where a relatively minor increase in efficiency will produce a major increase in economic effectiveness." ("Managing for Business Effectiveness," HBR, May-June 1963). But I prefer Crash Davis' more folksy phrasing: Try to find a way to get as little as one more hit a week and you'll find yourself in the major leagues.
Michael Paladini is vice president of marketing services at Berenson, Isham & Partners Inc., Boston. His e-mail address is firstname.lastname@example.org.