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Add Value to Channel Management

Most businesses struggle with the challenge of optimally using channels to communicate with their customers. Each business seeks to minimize costs while achieving adequate revenue and profit growth. The challenge is even greater for business-to-business organizations where the more costly field sales channel is often used. The challenge can be addressed with a well-planned, value-driven approach to channel management.

Many companies that use database marketing are often already equipped with the data they need to help solve the channel management puzzle. The trick is unlocking the information in that data.

At the root of the information-driven approach to channel management is economics. Customers need to be viewed as assets and should be contacted by a means that produces the best results in the most efficient manner. Savvy organizations will invest more in those customers who can produce greater value. For example, customers with greater revenue potential might be contacted by a salesperson while those with lesser revenue potential might be contacted via telephone.

Determine customer value and set the channel strategy. To implement channel management, companies must first determine the expected value of each customer. In an ideal world, an estimate of lifetime value would be generated and would provide a foundation for channel decisions. Unfortunately, data availability and uncertainties around long-term customer attrition patterns typically prohibit the calculation of reliable LTV estimates. Besides, most marketing organizations don’t plan more than a year ahead. Therefore, shorter horizons for determining customer value – typically one year – often are more appropriate for driving your channel allocation decisions.

Using predictive modeling is an effective way to get an estimate of customer potential value. A two-stage model couples predicting the likelihood that the customer will produce revenue (purchase) with the level of spending (how much). The result will produce an expected spending score that represents the customer’s revenue potential over the next period. The next step is to segment the customer base using the revenue potential scores. Customers are similar within each segment in terms of their revenue potential, but revenue potential varies across segments.

With the revenue potential segments created, the organization can then set its multichannel strategy. The table below characterizes the customer segments of a business-to-business company and also describes the recommended channel coverage strategy given the segment characteristics.

At one extreme, the most valuable customers can generate very high revenue. Because of this, these customers warrant the more expensive (and more effective) channel. On the other end, the least valuable customers possess very limited revenue potential and may warrant only limited and inexpensive coverage in the form of direct mail. A computer manufacturer will not send a highly compensated sales rep to visit a customer who only needs to purchase a printer cable. Conversely, the company would want to have one of their best reps visit a customer who is in need of a multimillion dollar mainframe system.

Moreover, channels should be used collaboratively to efficiently drive sales. For example, by no means should the most valuable customers be the exclusive domain of field sales. Targeted telesales and direct mail can and should be used to generate and qualify leads and help set up the sales rep’s visit as well as a follow-up communication vehicle after the visit.

Much of this can be considered common sense, but it’s not until you know the value of each customer that you can implement a value-driven multichannel strategy.

Consider channel preferences. In addition to knowing the customers’ value and the most efficient channels for coverage, channel preferences should be captured and recorded in the database. For example, customers who prefer communications by direct mail should be removed from telesales coverage and receive direct mail instead. This way, the customer is kept happy and the company incurs a smaller marketing expense.

Tracking and sustaining success. Organizations adopting the value-driven approach to channel allocation need to track and measure its benefits. This can be accomplished by comparing sales and marketing ROI under this approach to that obtained under the status quo approach. To do this, hold out a random sample of customers and assign channels the old way while applying the value-driven approach with other customers. Then compare the relationship between sales (or preferably profits on sales) to the sales and marketing expense for both approaches. The difference represents the net benefit or improvement in ROI achieved. The revenue potential model should be rescored or recalibrated periodically since customers can migrate between segments over time and new customers are being added.

Adopting a value-driven approach to channel allocation provides a consistent, quantitative and measurable means of managing communications with customers and rationalizes the sales and marketing investment strategy.

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