Marketing Automation ROI: Wishful Thinking?

In the emerging field of marketing automation, the most prolific marketing automation provider barely had two dozen customers to its credit as recently as a few months ago. But the list of adopters is growing, and serious money is being spent on these projects.

So, just what sort of measurable returns are companies seeing on their investments in marketing automation-and how can such a thing be measured?

Even those companies responsible for some of the most successful implementations to date, held up as exemplars by software vendors and the press alike, are at a loss to show real bottom-line results. They look solely at cost savings or shrug off the issue and say they're focusing on the mechanics first and the accounting later.

"But you can cut off an entire arm of your business and save money," snipes Laurie Orlov, senior analyst with Forrester Research. Sooner or later, marketing is going to be held accountable for that expensive marketing automation project-right?

Maybe not. "Marketing has to spend all of its marketing budget or else they don't get the same budget next time," says Orlov. There may be a cultural allergy to accounting and bottom-line accountability in the marketing departments across America, because they've been shielded from the microscope for so long.

"Marketing is probably the only part of the enterprise that has not been re-engineered," says Brad Braddock, vice president of product marketing for e-marketing vendor Prime Response. "A lot of software office applications in the back-office space were preceded by massive re-engineering efforts. Management consultants would come in, find a lot of excess cost and inefficiency, clean up, and the software packages were logical ways of enhancing those new processes."

The marketing automation revolution, on the other hand, seems to be one from within, and without that imposed process revolution, there is still resistance. ROI measurements for old-world marketing processes were admittedly sloppy. But change is coming, for two compelling reasons. Marketing automation, when implemented correctly, makes accurate, individual customer-based ROI very possible, even practical. And the ability to finally show marketing as a serious contributor to revenue will be too compelling for many vice presidents to pass up.

"Sales is capacity limited. It's not clear that handing them more stuff is going to make them happier."

Integrate, Integrate, Integrate
Rule No. 1 for measuring marketing automation effectiveness: Integrate as many of your CRM systems as possible. "You've got to be able to integrate with your sales tool or your back-office system. If you can't do that, it's very hard to derive specific ROI," says Russ Henry, vice president of marketing for MarketFirst. "If you can't say who you sold to, it's very difficult to know if you marketed to them."

Fortunately, that job is becoming easier. "The beautiful thing about an ROI calculation in the Web-enabled world is that the transaction can be attached to the individual," says Orlov. With the right customer tracking, you know exactly what campaigns they were exposed to, how they reacted, and how many sales you closed as a result.

It's equally important to establish a baseline for marketing operations before adopting an automation project. From the total amount of effort expended in account acquisition, including time and expenses, to the average cost per new customer acquired, skipping this step means that one of the fundamental points of an ROI calculation-change over time-is lost. "If you don't have that baseline, you're not going to be able to separate cost savings from upside," says Braddock.

Developing a baseline concept of lifetime customer value is also important. Greg Gretch, vice president of electronic marketing for Kana Communications, a marketing automation software publisher, advises that such a metric is based on "the expected cashflow from the customer: gross revenue, or margin contribution to revenue, based on what customers have purchased in the past."

Experts don't agree on any single magic formula to measure marketing automation ROI. Most of them concede that in the short term, calculations will have to be oversimplified. Hard marketing-return data is only just becoming available for most firms adopting marketing automation systems, robbing them of the ability to make meaningful historical comparisons. Also, most vendor-supplied ROI calculations conveniently leave out the cost of implementing their solutions, leaving you to amortize that on your own.

Braddock suggests three major areas for measuring marketing automation ROI:

• Cost savings/process efficiency: Put simply, getting through the marketing cycle-from lead collection to qualification to setting up the sale-in less time and/or with less money spent per prospect.
• Revenue upside: A better return per campaign or per interaction.
• Doing the right job: A somewhat nebulous residual. In a well-designed marketing automation project, marketing staff should spend less time on tedious issues, such as securing printing and fulfillment for campaign collateral, and more time "to do what they do best: match offers to customers or prospects," says Braddock. Thus, their salaries pay for more marketing time than ever before.

There are a number of metrics to choose from to approximate marketing automation success. The short and sweet formulas don't usually provide a complete picture, but they do have the advantage of being accessible in the short term. The more in-depth metrics should be your ultimate goal.

The first thing to remember is to avoid the facile. Scott Nelson, vice president and research director at the Gartner Group, observes that many people miss the point entirely when projecting gains from marketing automation. "They say, `If we do this right, customers should be more satisfied, and more satisfied customers are more profitable,' but there's not really any proof that that's the case." (See "Return on Satisfaction," in this article, for a suggestion on how customer satisfaction can be meaningfully interpreted in a marketing context.)

Similarly, using a flurry of marketing campaigns just to put more prospects in the pipeline is not a gain. Jeffrey A. Lusenhop, president of Norstan Consulting, a marketing automation services firm, says that his firm gauges success in part on increased sales call volume, indicating that sales staff is spending less time creating opportunities and more time closing, and more opportunities generated per period.

"There are two or three years where you can gain advantages because competitors aren't used to this. You might not see 15 percent in the future [but] over time, that advantage will thin out a bit."

However, it can be difficult to isolate marketing's role when looking solely at opportunities and closed sales. And there's another problem. "Sales is capacity limited. It's not clear that handing them more stuff is going to make them happier," observes Orlov. Indeed, the Snap Division of hard-drive giant Quantum rated their automated Web banner marketing campaign a success precisely because it generated fewer, but higher quality, leads than previous methods. What really matters for ROI calculation? "It's the leads-to-orders conversion rate," she concludes.

Perhaps the most basic measurement is "doing more for less"-or the same amount if one believes that marketing budgets are always fully spent. Can more campaigns be run for the same amount of money? Or can the same (or better) quality response be gathered for less money? In this vein, Quantum also concluded that its automation solution, in cutting out expensive steps from the lead qualification process, would have been a winner on cost alone even if the quality of campaign was constant.

MarketFirst's Henry points out that marketing software enables campaigns to be run from templates more than ever before. "Virtually every time I've created a marketing campaign in the past, I created it from scratch," he says. "In software, it's easy to replicate results." Most marketing automation software stores the details of any campaign for easy modification and relaunch, eliminating the need to spend time reinventing the campaign process. These sorts of time-allocation benefits fall into Braddock's residual category.

One of the major potential gains in marketing automation is accelerating the sales pipeline. Annuncio Software relates that one customer in the telecommunications field used Annuncio Live's online marketing campaigns to cut customer response times from one month to two or three days and shorten the sales cycle from six months to just one. Velocity is a wonderful thing: Basic accounting says that a dollar today is worth more than a dollar tomorrow. But to paint a more complete picture, velocity gains should be tempered against the rate of new customer acquisition.

Incremental new revenues or improved cross-selling can be worked into your ROI calculation. "The problem with these metrics is that they're an old way of measuring an old way of marketing," says Nelson. "The real ROI should come from the lift in your marketing process, in particular the fact that less customer-related activity should fall through the cracks."

That lends credence to Orlov's "leads-to-order" measurement. But Nelson points out that it's equally important to get the leads that marketing organizations-trade shows in particular-usually fumble on and accurately eliminate unprofitable leads through advanced qualification. Marketing automation allows one to see not only which customers have closed, but also how far each prospect went in the pipeline. If a deal consumed marketing resources even though it was never likely to close, that's a cost that needs to be weeded out of the process but included in the ROI measurements.

Counting Your Losses
Marketing automation makes tracking the upside of efforts much easier, but it also exposes previously obscure costs and even marketing losses.

On the surface, e-marketing mistakes don't seem to be very expensive. "In the old offline world of interacting with the customer, if you screwed up, it was very expensive. Now, people are so focused on e-mail and Web campaigns that the cost of messing up is more of an opportunity cost than anything else," says Braddock. In other words, by cutting printing and postage out of the equation, a poorly designed campaign is a learning experience at worst.

But others in the industry are taking a serious look at the long-term impact of sub-optimal marketing and coming to a very different conclusion because the concept of customer lifetime value comes into play. Kana's Gretch says printing and postage are dead concepts whether a company is online or not. "The true cost is attrition-it's losing that customer, having that customer unsubscribe from your lists."

Consider a company whose prospects have an average lifetime value of $100. Marketing launches an e-mail campaign using an in-house customer list and in-house mailer software, so the marginal cost per e-mail is negligible. However, the campaign alienates 100 customers who ask to be removed from the marketing rolls. "That campaign cost you $10,000," says Gretch.

One of the biggest causes of alienation is oversaturation. Marketing automation might enable a marketing department to run 40 or 50 campaigns in a month, whereas only one or two were possible before, but just because it's possible doesn't necessarily mean it's the best plan. "People say, `I got 3 percent clickthrough running one campaign a week, so I'll do two a week and get even more!'" says Gretch. "But what you see is the attrition rate going up."

Forrester's Orlov identifies the problem succinctly. "If customers get an e-mail that completely misunderstands them, they'll never come back. They don't have to."

How Much Is Too Much?
The temptation to crunch numbers down to every last e-mail and water-cooler trip increases when there's precise insight into costs and revenues. Obviously, the key is consistency. If you start measuring concepts like customer lifetime value and campaign opportunity cost, apply those metrics to the sales and support organizations as well. Resist the temptation to overcompensate for the previously hazy bottom-line view.

Kana's Gretch recommends sticking with an ROI metric for as long as it seems practical. "You want to make sure you maintain the old model so that you can compare apples to apples," he says.

His plan: Build a picture of marketing performance during several quarters using the same exact criteria. As the marketing automation system is integrated with other business units and more data becomes available, resist the urge to toss new data into the old formula, because it will make previous readings meaningless. Instead, as the new data rolls in, start building and testing a new model in parallel. Then, when a team feels comfortable with the analysis from the first phase of the project, cut over to the new metric and enjoy more refined analysis going forward.

Although it's considered good practice, some marketing organizations do not rigidly perform control-group comparisons when evaluating their effectiveness. It can be complicated to pull out a representative random sample of customers from a campaign and is often unattractive because of the economies of scale in direct mail. But with tools available to finely segment the customer base and a motivation to show some restraint in e-marketing touches, this is no longer too much to ask. "Control groups allow you to ask: Was this sale just happenstance? Or was it directly related to the campaign?" says Braddock.

Looking Forward
"It's going to be difficult right now to use the new metrics to try to justify these systems," says Gartner's Nelson. "If companies try to do that, they're going to tie themselves up in knots. If they can't justify them with traditional metrics, then the organization probably isn't ready for marketing automation anyway."

He advises that companies should look for ROI gains in more than one area. "Justify this on the basis of a number of tactical improvements, not just one strategic home run. If they're tactical, you can justify the improvements on a short-term investment basis, then turn your attention over time to the long-term strategic value," he says.

Robert Mirani, CRM Research Director for Yankee Group, says that there is also a first-mover bonus return to be collected if firms can move to online marketing before their rivals. "There are two or three years where you can gain advantages because competitors aren't used to this," he says, pointing to the tremendous response rates of 15 percent or more being enjoyed by online marketers. "You might not see 15 percent in the future [but] over time, that advantage will thin out a bit."

With a little careful planning and observation, the marketing automation advantages of the present and the future will stand out plainly on the bottom line.