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OVERVIEW Total Cost of Ownership: Not just for accountants anymore |
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| Historically, the Total Cost of Ownership (TCO) philosophy was primarily used in the IT sector to evaluate purchases of hardware and software (CIO Update: To Control TCO, It Must Be Measured and Managed, Bill Kirwin, Gartner Research, April 2003). The primary practitioners of this art were usually affiliated with the Finance or Accounting functional areas. While using Total Cost of Ownership to evaluate a given unit of hardware, software or other capital expenditure is commonplace, up until now it has not been a common business practice to apply TCO to evaluate the marketing value chain. By using this process to evaluate internally what is truly delivering business value to consumers, companies can gain a much better understanding of how to both extract costs out of their existing model, and improve revenues through greatly increasing the speed to value of their marketing programs. | ||
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What is TCO? |
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| TCO is an asset based philosophy, and its focus is to provide an understanding of both direct and indirect costs related to a specific purchase or program. For example, the TCO of a car isn’t only the price paid for the car. It includes the gas, maintenance, and insurance fees over the period of time the car is in use. For a marketing program, it is very important to thoroughly evaluate both direct and indirect costs when looking at an overall marketing program. In almost every case there are hidden people costs that impact the profitability and effectiveness of the overall program. | In almost every case there are hidden people costs that impact the profitability and effectiveness of the overall program. | |
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TCO and the Marketing Value Chain |
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When discussing TCO and the Marketing Value Chain, the purpose is to consider each activity
in marketing, from front end activities such as market research and segmentation/targeting,
through traditional back end activities such as response analytics. Ideally every marketing
program functions like a continuous feedback loop. In this fashion companies learn which
strategies and tactics proved most successful, and theoretically can use the results of prior
campaigns to adjust and make intelligent decisions for future marketing initiatives. The power
of tools such as response analytics are well documented, very recently in the January 2006
issue of Harvard Business Review in an article titled “Competing on Analytics” (Competing on
Analytics, Harvard Business Review, January 2006).
No matter what industry you are in today, it will be an ongoing challenge to gain the correct answers to the following questions about your current marketing program:
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The snowflake effect |
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| Each company’s marketing value chain can vary widely based upon industry, size of organization, overall business strategy, product mix, and distribution to name a few. Contrary to popular belief, there is no one size fits all software or toolset that can single handedly lower the overall TCO of your marketing efforts. Only a focused, concerted effort to gain a true holistic picture of the entire marketing process can lead to a major impact on both sides of the revenue/expense equation. However, once the TCO exercise is completed once, it is much easier to maintain for the long term. Properly applied, the approach can deliver a very strong competitive advantage in the marketplace. |
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Challenges of the Marketing Value Chain |
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| From our experience at Raine Media in applying the TCO approach with our clients, we have observed several common trends that prove to be hurdles in removing cost. |
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The “mystery of the arrows” |
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| In order to answer the customer retention and acquisition questions raised in the first part of this document, there must be an understanding of how each component of the marketing program is adding value. Mapping out the current business process is the first critical step, but it isn’t the problem. It’s the arrows between the individual processes and how each task connects to the other critical tasks that pose the greatest challenge. There are too many different ways to do the exact same task, and the integration of each system or process is convoluted at best, if it works at all. Value is being lost due to the “mystery of the arrows,” because no one can efficiently tie the pictures together. Until the “mystery” is solved, it will be difficult to determine not only the total cost involved, but will also cloud the picture of what pieces of marketing infrastructure can be either replaced at a cheaper cost or are no longer necessary. |
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Infrastructure duplication |
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A company’s marketing infrastructure must be analyzed to determine where and how much
redundancy exists, and how each component of the infrastructure is adding value to the
marketing organization.
At Raine Media we have seen infrastructure duplication a common problem facing our clients. During one client engagement we uncovered the fact that over forty “marketing” databases existed in various corporate silos within the organization, which were all primarily serving the same purpose. While this is an extreme example, many companies have a number of software packages in their organization that perform the same function. Whether homegrown or purchased, these systems have an associated cost. A large part of the TCO process is determining how much overlap exists, then track how much is being spent to keep all of these systems running. |
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Lack of focus on the big picture |
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| A marketing department must have a holistic view of the entire marketing value chain in order to maximize the possible efficiencies. This includes not only the functional areas within a given company, but also all of the vendors that play a large part in the marketing process. Marketing departments sometimes lose sight of the big picture because everyone is focused on their area of expertise in order to implement pieces of the value chain. These areas of expertise (such as market research, brand marketing, direct marketing, database marketing, data analytics, print and fulfillment specialists) are critical to an organization’s marketing success. The TCO approach creates an understanding of how all the individual pieces work together to add value to the consumer. | A marketing department must have a holistic view of the entire marketing value chain in order to maximize the possible efficiencies. | |
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People, process and technology |
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| Companies are often surprised at how many people it truly takes to run a viable marketing program, as well as how many hours are hidden in tasks that have become routine to the people actually doing the tasks. However, people are many times both a companies most valuable and expensive resources. The amount of time the person spends on a task that could be automated translates directly into dollars. A very detailed TCO approach begins to tell a story of what portions of a particular plan can be automated as well as provide the economic profile of all areas of marketing. | ||
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Data here. Data there. Data everywhere |
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| The data about ones customers is one of the most strategic assets for an organization because it cannot be duplicated by a competitor. With the decreased cost of data storage over the past several years, an abundance of data has been stored away. The amount of data available is not the problem. However, the ability to transform data into actionable knowledge is a much more complex task. Without the infrastructure components in place to learn from prior marketing campaigns and events, the marketing department is severely handicapped and unable to leverage this strategic asset. While many companies understand that this is indeed a problem needing to be fixed, these same companies need help to execute. They understand the “Why,” but the “How” is the area that can befuddle even the most experienced marketing professionals. | ||
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Lack of data strategy |
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| The companion challenge to data everywhere is the lack of a data strategy. Collecting data from disparate systems into a single view is a sizable piece of the puzzle. For a discipline such as response analytics to work, a concerted effort must be taken to think about which pieces of data are truly the most relevant from a strategy perspective. The TCO approach helps to identify the high cost of not having a strategy in place to learn from prior marketing campaigns or events. | ||
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Steps Towards TCO Aproach |
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| If you decide to perform TCO on your company’s Marketing Value Chain, the following section outlines recommendations that will help prepare your organization to begin to take a fresh look at the marketing process. |
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Isolate each existing process |
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| Before trying to connect all of the dots of your existing marketing infrastructure and begin to attack the “Mystery of the Arrows,” you must first understand where all the dots are. It is very important to take the first step in understanding what currently exists, as well as the associated cost structure. This exercise led many of our clients to realize they had several software packages doing essentially the same thing. Companies have been able to reduce 30% or more of their ongoing cost structures by eliminating redundancy through this exercise. | ||
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Cost modeling |
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| By evaluating existing cost structures and utilizing modeling approaches, such as optimization models and strategic outcome models, it becomes easy to complete scenario planning to determine the best of numerous strategies to lower costs while increasing results. | ||
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Create a continuous feedback loop |
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| Becoming more cost effective in serving existing customers, targeting prospects, and continually building customer loyalty is the name of the game. An important piece in creating a continuous feedback loop is integrating response analytics or other techniques such as data profile analysis into your marketing strategy. In addition to some of the standard approaches such as predictive modeling, cutting edge techniques such as neural net modeling, econometrics, and multi-attribute utility theory are now being brought onto the marketing playing field (Competing on Analytics, Harvard Business Review, January 2006). Where your company falls in the marketing maturity stage will determine which technique adds the most business value, but having a way to learn and gain actionable knowledge from each marketing interaction with consumers is key to building customer loyalty in a cost effective way. | Where your company falls in the marketing maturity stage will determine which technique adds the most business value. | |
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Consider creating vendor collaboration tools |
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The importance of strategic vendor relationships has never been more important in
today’s business environment. With supply chains spanning across the globe, numerous vendors
play key roles in any organizations marketing success. Integrating vendor interaction into
a common platform improves information flow and increases the speed of which
actionable knowledge is acted upon.
For example, Raine Media created systems that connected a marketing agency, a call center, the client’s direct marketing team, and the print and fulfillment vendor in a single application. Because the application was a role based system, each vendor was only able to see the parts of the marketing value chain that impacted their business. However, the client’s marketing team was able to see across the entire value chain with a few clicks of a mouse. Digital Marketing Dashboards were put in place to translate the data into actionable knowledge, which greatly increased the speed of decision making. As a side effect, because activities were open to the marketing department, much more collaboration between vendors was now possible. The marketing department was able to take full advantage of this compression of the marketing supply chain to lower their TCO. |
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Create a value map |
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| How each activity within your organization adds value to how you serve customers is important to understand. This can also lead to understanding what components could be either eliminated to cut costs, or supplemented for potential revenue impact. | ||
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Evaluate frequently |
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| Once completed, it is important to evaluate the TCO of your marketing efforts periodically, at a minimum of once per year. By placing processes in place to lower the chances of inefficiency being introduced into the program, the ongoing investment of time is relatively low. | ||
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Use the TCO approach to consider another perspective |
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| In order to create a large market opportunity, you must take a look at non-customers and look for needs unmet by existing product or service offerings (Blue Ocean Strategy, Kim and Mauborgne, Harvard Business School Press, 2005). By utilizing a data strategy and segmentation approach, you can gain the benefit of better understanding of your existing customers. You also gain perspective on prospects and begin to form hypothesis of why certain prospective customers aren’t responding to your offering. This is exactly why continuous learning is so important to a marketing organizations success. | ||
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Conclusion |
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Make no mistake, utilizing a Total Cost of Ownership approach to your marketing value
chain is not always for the faint of heart. In order to capitalize on the possible costs savings
and efficiency gains, many times an initial investment is required. However, with careful
consideration of both direct and indirect costs, a true competitive advantage can be
gained, which will consequently contribute to a healthy bottom line for years to come.
If you would like to know more about the TCO approach or would like to share your experiences, please contact Raine Media Inc. We have Solution Consultants who can provide expertise in all areas of your marketing value chain. |
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Raine Media is a management consultancy specializing in helping its clients achieve market differentiation by building effective customer information strategies. Raine leverages its research and analytical capabilities, data technology resources, and its detailed knowledge of a wide number of industries to build and deploy innovative solutions to solve business performance challenges. For more information, please visit rainemedia.com |
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