Yesterday I was helping a friend work on a marketing plan for her business.  While she is an excellent hair stylist, she has not put any effort so far into monitoring metrics in her business so she can determine how to affect them, nor has she yet conducted any formal advertising, having relied exclusively on word of mouth.  We’re working on changing that.

The first thing I suggested is that she build a simple spreadsheet to log, backwards and forwards, who are her clients, when they are coming in by month/date and how much they are spending.  When completed, she can then make some important calculations.

I have been her client for nearly 14 years, but I don’t know if this is common for her.  In fact, my devotion to her talents may be an outlier that skews her average.  Therefore, we want to first calculate the mean (average) and median (middle figure) in the number of months that her customers have been with her.  Excel makes it really easy using the formulas: =average(starting_cell:ending_cell) and =median(starting_cell:ending_cell).  If the average is much higher than the median, then we know that the results are being skewed.  For a more visual representation, we can create a scatterplot by using Excel’s Chart Wizard tool.  Highlight all the months, click the Chart Wizard, select Scatter, hit Finish and voila!  A helpful chart that lets you see outliers at a glance.

Let’s say that the results of her analysis shows that the majority of her customers are with her for 20 months.  We then have to connect that value with the amount they are spending.  By adding a second column next to the months for dollars spent, we can do similar calculations to derive average and median dollar values.  Taking a look at my own spending with her, on average I’m seeing her every 6 weeks and spending $60 each time.  I’m getting my hair done about 9 times per year, which means over nearly 14 years, I’ve spent $7,560.  So for every new customer that spends $60 a visit, she now knows that’s $540 over a year’s time.

However, that’s not entirely true.  Another thing she has to look at is how much she’s spending to acquire and keep her customers.  If she spends $200 a month on advertising, she has to deduct those costs of $2,400 in the first year towards those clients’ acquisition costs.  Additional monies in subsequent years spent on mailings to encourage those clients to come back will also reduce her profit per customer in those years.  Then there’s the product costs – color, gels, hairsprays, shampoos and conditioners, scissors, scissor sharpening, brushes, blow dryers – which adds up.  Those costs have to also be applied to each client.  Some of those costs can be spread out over all clients using an average and some she may want to do on a more granular level, e.g. color products she may want to apply on a per-person basis since longer/thicker hair requires more product.

Then there’s the cost of inflation to consider.  My $60 paid today is worth less than the $60 given to her nearly 14 years ago.  Using the inflation rate calculator I can see from January 1996 to September 2009 (the most recent month provided), inflation rose 39.88%.  So therefore, my $60 can buy $23.93 less than it did in January 1996 (=60 x 0.3988).  For each of her current customers, she can calculate on an annual basis how much to adjust for inflation.

A really nifty spreadsheet from Harvard Business School makes doing all this pretty easy: Download the Lifetime Customer Value Calculator tool. Clicking on the “Basic Model-Assumptions” tab, I can input:

• Time between purchases.  Every six weeks would be =1.5/12.
• Retention Rate or likelihood that a customer will buy again in the next period.  Let’s use a guesstimate of 80%.
• Average Purchase value.  Let’s use $70.
• Net Profit Margin.  Assuming product costs of $15 per visit and 9.25% taxes, Net Profit After Taxes = $48.53 ($70 – $15 – ($70 x .0925)).  $48.53 divided by Revenue of $70 x 100 = 69.33% Net Profit Margin.
• Profit Per Purchase is calculated for you at $48.53.
• Discount Rate is currently 0.75% as of November 8, 2009 (it rounds to 1%) – think of the discount rate as a forward-looking inflation rate.
• Product (or Service) Inflation Per Year.  Using the inflation rate calculator again, we can see the inflation rate from September 2008 to 2009 has actually decreased -1.29% (it rounds to -1%).
• Cost of Reaching a Potential Customer.  As she plans to spend $2400 a year to reach potential customers, targeting 10,000 customers, her cost per potential customer is $0.24  ($2,400 / 10,000).
• Response Rate.  This is the percentage of respondents to her advertising efforts.  Let’s say 2% until we know for sure.
• Cost of Attracting a Customer is calculated for you at $12.
• Coupon or Other One-Off Costs.  This is the cost to obtain that particular customer, for example, a 10% off coupon for first visit.  The cost to her would be $7 ($70 x 0.10).
• Total Customer Acquisition Cost is calculated for you at $19.

Having inputted these values, I now click over to the “Basic Model-Calculations” tab and see that the Net Present Value of Acquiring a Customer (taking into consideration the stream of a customer’s income, ongoing costs, and cost of acquisition) is $221.

Now I click over to another handy Harvard Business Screen tool, the Customer Lifetime Value Calculator, which does something a bit different than the downloaded one.  First, I clicked in the top right side Reset Inputs to Zero.  I then entered my inputs:

• Average Spend Per Purchase = $70
• Average Number of Purchases Per Year = 9
• Direct Marketing Costs Per Customer Per Year = $0.24 ($2,400 / 10,000 mailing) + $7 coupon = $7.24.
• Average Gross Margin = 69%
• Average Customer Retention Rate = 80%
• Annual Discount Rate = 1% (rounded from 0.75%).

In summary of the below grid:

• The cost of acquiring a new customer is $362 = (cost of mailing / response rate) = $7.24 / 0.02.  What this doesn’t allow me to do is change the mailing costs where in the first year they receive the 10% coupon and in subsequent years they don’t, so I will assume they receive an annual coupon.
• Expected Net Present Value in the 6th year is only $132 because it looks at the value of a dollar today compared to the value of that same dollar in the future, taking inflation (based on the discount rate) and returns into account.  If the NPV is positive, it should be accepted.
• The cumulative Net Present Value (taking into consideration expected inflation, based on the discount rate) of a new customer in the 6th year is $1,171.
• The cumulative Retention Rate shows that in the 6th year, with an 80% retention rate, there is only a 33% chance of making another appointment.  The longer they are a customer the more likely they are to “expire.”

Lastly, those things that she can affect to increase Lifetime Customer Value:

• Work to improve retention rate above 80%.  Be on top of how often her customers come in.  Call customers a week in advance of their normal scheduling to ask if they are ready to make an appointment.
• Send welcome and thank you cards.
• If a customer leaves, be sure to find out why and work to improve those areas she can (if someone moves away, there’s not much that can be done).
• If a customer is not coming in due to financial reasons, make a discount offer for their next session to keep them on schedule. The longer someone is away the more likely they are to look for someone else to do their hair next time.  They will appreciate her understanding their situation and become a more loyal customer.
• Get creative in her approach in obtaining new customers.  For example, she could evaluate the least she could charge someone and still maintain profitability.  She could then offer this discounted rate to the unemployed as a “get back to work” special.  As long as they show her evidence of unemployment, such as a recent pink slip or unemployment income receipt, they can receive their discount.  When they do get back to work, she can then raise her rates to normal and have a new loyal customer.
• Offer a loyalty card, such as buy 9 get the 10th haircut free (color, highlights and other services not included).
• Ask for referrals, which eliminates much of her acquisition costs.
• Offer a discount for purchasing several sessions in advance.
• Survey her customers to better understand who they are, what’s important to them, how satisfied they are, and areas she can improve.  Follow up with calls and letters.
• Segment her customers by lifetime value group.  Conduct different marketing programs designed for each segment.
• Monitor inflation and adjust prices accordingly.
• Reduce product costs where she can, and charge more for people who require more products.
• Offer additional services that bring in higher-paying customers.
• Sell products that will increase her revenue per customer.
• Improve response rate on mailings with messaging that better resonates with potential customers.
• Test mailings’ response rate with and without the 10% coupon.  If she receives a similar response rate without the coupon, eliminate it for cost savings.
• Test different advertising vehicles to determine which provides a better response rate, then focus on those with the highest return and provide unique audiences.
• Determine if other promotions instead of a 10% coupon would yield a better response rate, such as bring a friend with your first booking and receive half off (on the cheaper service of the two).  The LCV of the friend would cover the upfront cost on the other person.
• Don’t just focus on the response rate, but also on the return received (number of new customers times lifetime value) for the advertising investment made. Suddenly she may find she can justify a much greater promotion investment when looking at returns in this way.
• Advertise in higher-income neighborhoods where she can command a better price.  If this is outside where she works, she can make an arrangement with another salon to rent a chair on an as-needed basis when she obtains customers in that area.  She can schedule appointments in that area together to minimize travel and chair-rental costs.
• Use as many free advertising vehicles as she can, such as LinkedIn, Facebook and Myspace.
• Conduct co-operative advertising with related businesses such as spas and nail shops in her area, to reduce advertising costs.

Anyone else have suggestions I can pass on to my friend to improve her LCV?  And if you’re in the Venice Beach, California area and are looking for a great stylist, please call Sondra at 310.780.0290 to make an appointment.

First, the different types of partnerships:

• One type, which I’ve been seeing a lot of lately, isn’t a true partnership.  It’s when someone tries to sell you something and they sugar-coat it as a “partnership.”  If it were truly a partnership, the company would be putting up their time, product/service, experience, effort, and/or money, while your company also takes some of these risks, in order for both to achieve increased revenue.  Instead, these “partnership opportunities” involve you putting up all the risk by purchasing their product/service, while they put up zero risk.  This faux proposal seems to me that the company doesn’t have enough faith in what they are selling to talk straight: “I want to partner with you” just sounds nicer than “I want to sell you something.” Granted, by buying what they’re selling, you may increase profitability for your customers, improving their ROI, and/or you may be lowering your overall costs, improving your ROI.  Call it a partnership if it makes you feel better, but I call it a sale.
• However, in the above example, should the selling company align their success to the performance of their client, i.e. they make money in a shared-reward revenue model, they could then call themselves a partner without me griping as much, as they would then have a vested interest in their client’s success.
• In the press release WPP and Omniture launch partnership to improve marketing ROI, a true type of partnership is highlighted.  The first company (Omniture) stands to gain significantly from the second (WPP) by offering its business clients greater ROI, and the second company (WPP) buys a significant amount of stock in the first (Omniture).  Thus, both take on risk and are equally committed for the partnership to work.  They then collaborate on sharing information, best practices and services to develop joint solutions for mutual clients.  In this situation, the companies share employees, with some from the first company (Omniture) going to work within the second’s offices (WPP), and training is conducted of the second company’s (WPP) employees in the first company’s (Omniture) products/services.  The second company’s (WPP) technologies, data, and products are integrated into the first company’s (Omniture) platform, thus the second company (WPP) can now deploy the first company’s (Omniture) solutions to clients with their add-ons.
• Even simpler, another type of partnership blends two or more company’s product/service offerings, with neither investing in the other, so together they can provide a greater solution to current clients, or reach a new or wider audience.  In this type of arrangement, partners are primarily finding a new way to market their products/services in a cooperative arrangement without changing what each are doing day-to-day.  The investment typically required in this case is to verify that the arrangement works and there is a market for it, as well as develop co-marketing materials.
• Another type of partnership is the Affiliate partnership, where one company simply refers business to a second company through their marketing efforts and receives a commission.  Affiliate partners typically will look for companies (Merchants) who are managing an Affiliate program, and apply to be their Affiliate through third party sites like Shareasale.com.
• There’s a special type of partnership that we’ve all heard about, the Sponsorship.  If one company can know enough about the other company’s demographic audience and can deliver it to them via a channel, such as an event, there may be an opportunity for a Sponsorship.  In BusyEvent’s Growing sponsorship revenue through brand partnership it is stated, “Real creativity is required…Simply placing logos on stuff isn’t going to fit into shrinking marketing budgets.  The emerging trend is to gather better data before, during and after the event so you have something tangible to show a brand to obtain their involvement in your event(s).  We use…reward-focused program[s] to know as much about a group of people as we can without anyone feeling manipulated.”
  • As an aside, the company that I work with, C.A. Walker, can assist with online surveys to segment audiences and measure emotional engagement to brands, intercepts during events for feedback, and “brand fit” studies to ensure the Sponsor and Brand are a good alignment that enhances the Sponsor’s image.
• The last type of partnership involves distribution, where two companies collaborate to sell and distribute the products/services of one of them.  This is also called a channel partnership.  There are various types of channel partner arrangements:
  • Partner sells products and/or services and deliver services.
  • Partner sells products and/or services but doesn’t deliver services.
  • Partner doesn’t sell products or services but delivers services.

The following is recommended in a true partner support program to increase and measure partnership profitability (from 2009 TSW Support Partner Program Best Practices – note: the PDF opened for me after downloading but not in my browser):

• Have at least four trained support staff per product, with recognized certifications and specific partner training.
• Offer 24x7x365 support for partners, with case tracking and reporting.
• Conduct initial and ongoing partner audits, with quarterly reviews.
• Conduct third-party quarterly customer satisfaction surveys, which is part of the partner’s overall scorecard tied to their income agreement.  Customer satisfaction is as critical in acquiring and retaining partners, as it is customers.
  • As an aside, if you need assistance administering customer or partner satisfaction surveys, C.A. Walker also provides this service.
• Create automated reporting of necessary metrics, reports and partner scorecards.
• Offer Web-enabled tools for partners to provide customers, and a partner portal.
• Put in place appropriate metrics, such as:
  • Quarter over quarter and year over year, revenue, net profit margin, return on assets and return on equity (new accounts established).
  • Track customer satisfaction measures over time.
  • Track partner satisfaction measures over time.
  • Track customer renewal/repeat purchase behaviors.
  • Establish and track cost per case and case resolution times (i.e. customer complaints) per million of total revenue.
  • Measures of product quality and reliability improvements (i.e. customer complaint case deflection).
  • Measures of ease of doing business with partners.

Companies have great opportunities in this economy to develop new partnerships that will enhance their market position.  So get out there and make some noise!

The upside for consumers:

• Earn 100 CREDITZ points for signing up, 100 points for taking their survey,  and an unknown amount for referring friends and family.
• Manufacturers may provide digital coupons for their products.
• CREDITZ contributes 15% of their transactional revenue to widows and orphans because of aids, and micro-loans to entrepreneurs in developing countries.
• Purchase gift cards from retailers.
• Send CREDITZ to friends and family, even if they don’t have an account.
• Combine household member purchases into one account for a one-time $10 fee, as long as you have more than 10,000 points combined.
• At brick-and-morter retailers, look for the “GET PAID HERE” CREDITZ sticker on site.
• “CREDITZ Digital Currency may be inherited through a valid legal will.”

The downside for consumers:

• If you don’t read the below carefully, you may think that you earn 10 CREDITZ for every 10 cents that you spend, but that is not the case.

How long before I can start spending my CREDITZ?
Your initial redemption of CREDITZ is a minimum of 500 or more. Thereafter, you can spend any amount of your CREDITZ on goods or services at participating merchants and online sites.
10 CREDITZ = 10 Cents ––100 CREDITZ = $1.00 – – 1,000 CREDITZ = $10.00 ––10,000 CREDITZ= $100.00

• The Ts&Cs state, “Merchants will typically pay you one (1) unit of CREDITZ Digital Currency for every one or two dollars that you spend with them, after discounts and before taxes.”  Not only that but, “Each unit of CREDITZ® Digital Currency has a digital currency value of 0.01 of a US Dollar when you spend them.”

So what does this mean?  If you spend $100 before taxes, you may earn 50-100 CREDITZ according to the Ts&Cs.  Taking the conservative figure, 50 CREDITZ, if you try to spend them right away you can’t.  You have to have earned a minimum of 500 points (for your first spend only) to start using CREDITZ points to shop…meaning that you have to spend $1,000 before taxes to use your first $5 in CREDITZ.  That’s conservatively a 0.5% return for your money and effort.

• When registering, they ask for all kinds of personal information: the kind of phone you own, who your carrier is, who your Internet provider is, what kind of pets you have, do you give your pets Christmas gifts (?!), what kind of music you listen to, what types of movies you like, where you buy books, what is your favorite color (seriously!), and it goes on and on.
• There are spelling errors all over the site, which irks me.

More from the Ts&Cs…

• “Merchants will determine the conditions under which they will permit you to obtain CREDITZ Digital Currency and may change those conditions at any time and without notice.”
• CREDITZ is “not responsible if a Merchant delays or fails to make [a CREDITZ payment].”
• “No CREDITZ Digital Currency will be issued for the following: tobacco, lottery tickets, specific concessions and/or other items specified as exclusions.”
• “You may spend your CREDITZ Digital Currency either in-store or through other distribution channels made available by the Merchant, such as over the telephone, online, through wireless devices, etc. [but] participating Merchants have [no] responsibility for failure to accept CREDITZ Digital Currency at the particular point-of-sale that you choose to make your purchase.”
• “[CREDITZ] may immediately cancel your Account, forfeit all CREDITZ Digital Currency you have accumulated and permanently restrict you from participating in the System if…it is determined that…,in the case that you move, you fail to provide CEO with your new address within six months of your personal information changing; or your Account remains inactive for more than two years.”

Their current registered retailers are a bit thin as well:

Apple iTunes
Beauty.com
Blinds.com
Camping World
Cars Direct
CCS
Championcatalog.com
Computers 4 Sure
Davids Cookies
Enterprise Rent A Car
eToys
Fashion Bug
Fingerhut Direct Marketing, Inc.
Florsheim
Flower.com
FlowerStore.com
FragranceNet.com
Fujitsu Computer Systems Corporation
Fuller Brush Company
Gaiam.com, Inc.
GiftBaskets.com, Inc.
GigaGolf, Inc.
Guthy Renker Corporation
HearthSong
Hotwire
ICE.com
InternetFlorist.com
JewleryWeb.com Inc.
Just Because Baskets
KB Toys
Lane Bryant
Lillian Vernon Online
Limoges Jewlery
McAfee, Inc.
Monterey Bay Clothing Company
Mrs Fields Gifts, Inc.
Netflix, Inc.
Office Depot, Inc.
Officefurniture.com
Onehanesplace.com
Overstock.com
Paul Fredrick MenStyle
PetSmart
Pitney Bowes, Inc.
ROOTS Direct
Sierra Club
SkyMall, Inc.
SpeedGear.com
SwissOutpost and Swiss Knife Depot
Tactics.com
Tech Depot
Textbookx.com
Thrifty
TigerDirect
Time Life.com
Toshiba
Veterans Advantage, Inc
Vision Direct
WalMart.com USA,LLC
Waterford
Wirefly
Wireless from ATT
Zales

What do you think?  From a consumer perspective, would this rewards program increase your brand loyalty to participating stores, or make you want to purchase at these retailers if you never have before?

So what is channel development?  Channel development is about creating partnerships upline and downline that bring greater influence, strength and sales to those participating.  Channel marketing is creating propositions to potential partners, marketing to them, and then motivating/incentivizing them.  Channel Marketing Partners are typically vendors, manufacturers, distributors, resellers and retailers, working in cooperation.  They start with a deep understanding of their specific target market. They identify the customer’s business issues and develop an approach to addressing those issues, cooperatively building programs from the ground up. They then assemble the necessary pieces and package them into a solution. The goal is to get customers to buy into the total vision of the Channel Partners.

Designing a system that can manage the complex relationships in channels is no small feat.   In 2004,  CRM Today said that most PRM (partner relationship management) tools out there were like “putting wings on a bus.”  They tried to re-purpose the CRM and it simply did not work.   They share why:

“CRM is fundamentally designed to manage direct sales engagements between a sales representative and a buyer. This mode revolves around collecting and sharing data throughout the customer lifecycle.  PRM, on the other hand, is designed to manage a complex ecosystem comprising legally independent partner organizations. This one-to-many model revolves around aligning business processes across the entire value chain, from vendor, to partner, to customer.”

Today, there are a number of PRM options that are much more sophisticated and designed from the ground up to work for channel managers.  And somewhere along the way, PRM became TPM (trade promotion management) and the term “trade funds” became used for co-op marketing.

A 2008 study by the Consumer Goods Technology group finds that “While only 52 percent of companies in 2008 evaluated trade spending, more and more companies are attempting to implement trade promotion management (TPM) applications to improve TPM analysis in 2009.”  The reason that more companies haven’t taken on a TPM application is due to their complexity and cost.

Oh, and did I mention cost?  NewsFactor suggests that “Because trade promotion spending can reach 20% or more of sales, a very minimal percentage of improvement [from a TPM] can justify an entire project without reaching too far.”

They then go on to detail ways to lower the cost:  Roll it out slowly and to those who can benefit most, first. Get sales buy-in and usage early in the process. Use an SaaS.  Build real metrics. Eliminate your desire to build unique processes into the system.  Talk with other companies (i.e. software vendor user groups and references) who have implemented a TPM and learn from them. Don’t wait until it’s too late and you make mistakes.

“Many growing CP manufacturers can quickly get inundated with unexpected deductions or make poor decisions about promotions due to a lack of centralized visibility. Many growing manufacturers start facing challenges associated with managing trade promotions when they reach a dozen or more SKUs, or when they start negotiating with their first national retailer, or when they surpass the $10M mark in sales.”

Here are several offerings by TPM vendors to get you started:

• Purplewire’s ChannelSUITE
• Adesso Solutions’  TradeAdvantage™
  
• The Synetics Group’s TPM
• The MEI TPM
• The SAP TPM
  

The Channel Champion recently attended a TPMA conference (trade promotion marketing association) and found that the key metrics to evaluating channel effectiveness are:

• Budget to spend
• Net incremental sales
• ROI – consumption or shipment based
• ROI – variable and fixed margin
• Incremental spend

Add to that list those NewsFactor recommended:

• Promotion effectiveness
• Lift improvements
• Reductions in stock-outs.

As an aside, the company that I work with, C.A. Walker, can support marketing’s efforts in channel development in the following ways:

• Profile partners to identify new contract opportunities
• Measure partner “brand fit,” awareness, satisfaction, usage
• Test partner communications, incentives and promotions

I look forward to learning more about channel marketing developments and sharing them with you here.

trade promotion management (TPM)