Managing a performance marketing business function requires highly honed management skills: short- and long-term planning, organization, direction, and control and measurement of the work effort to ensure that your objectives get accomplished. What you, the business-to-business marketer, should know about managing financial resources and budgeting is reviewed in detail in this short guide.
Lead Generation, Complex Sale or Sales Support Performance Marketing Management
The management of sales support performance marketing, which uses direct response media, general media and telemarketing to reach its objectives, normally comes under the responsibility of a sales support staff department such as advertising, marketing, marketing services or marketing communications.
The manager may have a title of performance marketing director or manager. Or the performance marketing responsibility may be handled by a Chief Marketing Officer who wears many hats.
Since managers of performance marketing have the responsibility of using it cost effectively, they must be well versed in its principles, applications, techniques, and procedures in both the creative and administrative aspects.
These managers must have a firm understanding of the marketplace, how to use customer and prospect databases as well as traffic sources, and how to determine if a long-range lead-generation program is feasible for the sales force.
Managers of sales support performance marketing must plan and work in concert with those who manage other functions in the marketing mix, since advertising, sales promotion, trade shows, product publicity, public relations, as well as telemarketing, all have basically common sales goals.
These managers must also have sufficient knowledge of the concept of the prospect and customer database and sales analytics to know how to use them or get them proposed and implemented in ways that improve sales performance.
Direct Sales / Immediate Sale / “Mail Order” Performance Marketing Management
Business-to-business marketers promoting products or services that are sold directly (with no sales department support; these are generally non-complex goods) in a multichannel company assign this performance marketing responsibility to a marketing manager, usually with the title of manager of performance marketing.
In essence, such marketing managers run individual business units. Yet, the problems and opportunities they have in managing their profit centers are very similar to those of a CEO of an independent business-to-business specialty company selling directly.
Managing a direct sales profit center requires a sense and knowledge of financial planning tools, such as profit and loss statements, contribution to selling and profit figures, and customer life value analyses. These managers are responsible for bottom-line profits, short and long term.
An in-house telemarketing operation, because it can more readily support a B2B marketing program, often becomes a separate function under the umbrella of performance marketing management. However, many of these in-house telemarketing operations sell their services to sales support groups within the same company.
Marketing management’s effectiveness is in direct proportion to the depth and sophistication of its analytic, IT and customer knowledge resources. These open up many new marketing opportunities every day. If you wish to be a successful manager you must use these resources more efficiently to track competition, predict trends, set objectives, and allocate budget dollars.
The strategic plan for any performance marketing operation must focus on building and maintaining the organization’s most important asset – the prospect and customer database. The database is so fundamental to this selling channel that performance marketing is referred to by some practitioners as database marketing.
As a performance marketing manager you should be concerned with an analysis of potential markets, products, and competitive activities not only at the outset of the venture but on a continuing basis. Finding out qualitatively how decision makers perceive a product offering is a very critical aspect of this.
Researching the marketplace by asking the right questions means finding out what influences decision makers, what determines the strengths and weaknesses of your product, and who your potential customers are. Focusing on buying behavior of the decision makers will help you make a correct analysis of your best prospects.
Experienced performance marketers know that making a performance marketing plan for a whole market can be wasteful and ineffective. Management’s job is to make sure the right segments are targeted. Learning where customers may be heading in the future, communicating with them, and getting feedback on products and services will provide you valuable insights.
And since the objective of the performance-based business is to get repeat orders from multi-buyers and avoid the one-time customer, you must be continuously research and test improved products and new products.
Managing Financial Resources in a B2B Performance Marketing Organization
Financial planning for performance marketing objectives must be long-range because making a one-time sale, whether or not it is made with the help of a salesperson, is not a profitable marketing strategy for most marketers.
Financial resources for any type of performance marketing must also be organized and managed so as to make the best use of the various service functions needed to meet individual objectives. How these financial resources are managed tests the mettle of those who control them.
Financial Planning for Direct Sales Performance Marketing Efforts
Business-to-business direct sales performance marketers have precise numbers to look at when analyzing whether a promotional strategy has paid off or whether a particular product, price, or market is desirable.
It is easy to track the number of prospects contacted, the number of responses, and the exact cost of the promotion. By evaluating costs and results, you can determine a promotion’s profitability and the break-even point. Achieving break-even or various levels of profitability is dependent chiefly on response, which is contingent on your offer and how it is presented and promoted as well as other factors.
You have to know the number of orders needed to break even on any promotion. Adding up the costs of getting and filling an order is your first step. By preparing a pro forma profit and loss statement, you assemble a detailed record of costs and sales, and calculate the response needed to break even at various levels of profitability for each promotion and for each product.
To measure the profitability of a direct sales performance marketing program, you need to know the contribution to promotion costs and profit. The total costs of the product, including an overhead allocation, are subtracted from the average selling price to get the contribution to selling cost and profit. And this is usually calculated for each unit sold or for average order handled.
Then by taking the total cost of your promotional campaign, and dividing that by the contribution, you determine your required number of orders to break even. As costs fluctuate, so will break-even. If the program sells only enough products to break even, of course, you have no profit.
Your development costs will vary and should be budgeted separately from standard costs that determine break-even. Some of the fixed costs of creating response advertisements include copy, graphics, photography, IT / web development work, tools and systems.
These fixed costs stay the same regardless of the size of your campaigns. However, the more campaigns go out or the more ads you place, the more these fixed costs get amortized. Variable costs, such as traffic and media buys or telemarketing follow-up, change in proportion to the size of your promotional campaign.
Performance marketers – depending on traffic source or medium – may have to pay more for short runs or low volume traffic, so a print ad for a new product placed in regional editions rather than national editions for one time only, a limited-audience niche webinar rather than a general audience webinar – a typical testing method – will generally command a higher rate (e.g. CPM-wise).
Therefore, you should should evaluate results of test efforts on the basis of projected lower costs when the program is rolled out. Then you can establish standard costs and budget for each campaign or response effort based on quantities typical of ongoing programs.
Financial performance of a promoted product or service varies with response for every campaign. And since variation in response can cause big differences in your profit, you have evaluate response. Experienced performance marketers base their projections on the standard error of response, especially when testing or when small campaigns are made.
This statistical range gives the error limits in which you can expect response to fall when making a campaign. You should continuously test promotions designed to produce new buyers who will become profitable future customers.
- You may have some prospect segments that in the past have produced orders only at the break-even point or near it. If the response falls within the statistical error limits, you can try these segments or traffic sources again in small test quantities.
- But you should remember that the more campaigns there are with a response rate close to the break-even, the greater your risk of having an unprofitable program. Your financial plan of a campaign should strive for response rates that will be greater than the break-even level.
- Some traffic sources will not always produce good enough response rates or large enough orders. So your profit, as well as the break-even figure, may be different for each product or landing page and for each traffic source or prospect database. A performance marketer selling through an ecommerce site must determine the break-even for all the products or landing pages and also calculate the probability that response will fall within the response limits.
Computing the Recency, Frequency, Monetary Ratio for Your Prospect/Customer Database Needs
Since no performance marketer will place the same potential sales value on all customers in the database, the simple recency, frequency, monetary (RFM) value ratio in one form or another has come to be the preferred method of evaluation.
With this technique you evaluate each customer on when the last order was placed (recency), how often orders are placed (frequency), and the monetary value of the orders (monetary). You assign a weight for each of the three factors. This can vary widely among different marketers and markets.
Some consumer performance marketers feel recency is the most relevant factor and rate it equal to the other two combined (recency 50 percent, frequency 30 percent, monetary value 20 percent). These ratios will differ in business-to-business products and services buying because, as a rule, these marketers receive more dollars per order, have fewer merchandise returns, and are subject to the particular business buying patterns of the product or service sold.
- You can assign recency rating points, for example, for an order received within the past three-month period and then a lesser rating for each preceding period. A frequency rating can be assigned on the basis of number of orders received each quarter on a value scale similar to that used on the recency rating.
- Another method of establishing the frequency rating you can use is to assign a point value to be multiplied by the number of orders received during the measured time frame. Monetary value is usually based on a value scale – the larger the order, the higher the points assigned.
- Another method is to award a point value equal to a given percentage of dollar orders. In each method a maximum value is built in.
An example of how the RFM formula can help you maximize the value of the customer database is illustrated in the following table:
|Maximum Assigned Rating Points||Customer A||Customer B||Customer C|
Here the maximum rating points established by the marketer for the recency factor is 26. Frequency is 15 and the monetary value is 9.
A sampling of three customers from the database shows:
- Customer A getting 26 recency points because of placing an order within the most recent quarter. (Recency point scale: 26 points, first quarter; 22 points, second quarter; 17 points, third quarter; 12 points, fourth quarter; 6 points, fifth and sixth quarters.)
- Customer B ordered in the third quarter and customer C in the fifth quarter.
- Customer A ordered three times within the measured time period. The frequency was given an assigned point value of 3 by the marketer, which, when multiplied by the number of separate orders, gave a rating of 9.
- Customer B ordered one time for a 3 rating and customer C ordered three times for a 9 rating.
In the example, a point value of 1 is assigned for every $500 of sales; $2,500 in orders is received from customer A during the measured time period for 5 points. Customers B and C spent $4,000 and $1,000 respectively.
Point values of the totals determine the performance marketing activity each will receive in the future. Prime buyers who continue to place substantial orders often will get the highest ratings and the most attention from the marketer.
Those who cannot meet the predetermined minimum rating points may be moved to non-active database segment and get special treatment there with appropriate reactivation campaigns.
Using current information and future projections, good estimates of future revenues from each customer can give you an indication of future profits. These profits, discounted back to the present, indicate the lifetime value of the customer.
One medium or traffic source will produce buyers who may have characteristics that are quite different from those of another medium. Any new group of customers must have their lifetime value calculated. As you acquired new groups of customers, you can match their performance with the control group.
Budgeting for Sales Support, Complex-Sale or Lead Generation Performance Marketing
The non direct sales business-to-business performance marketing budget is almost always a subset of a much larger advertising or promotion budget dedicated to promote a product or service, and in some cases, a corporate objective.
Since sales support performance marketing has the same or similar sales and marketing objectives as other general marketing and promotion activities, you compete for the available dollars.
When performance marketing is one element in a larger budget, it is often treated as being as efficient, no more or less, than the other items in the budget. This becomes apparent when the marketing budget gets increased or decreased. Just about all elements end up with a similar percentage change.
This assumes all are equal producers and all elements have equal spending levels. Yet performance marketing may return 50 cents on the dollar, compared to 10 cents for institutional, image-based advertising, or 15 cents for trade shows.
Higher spending levels should be appropriate for those elements in the mix that can justify the greater potential contribution to the objectives. You must prove, however, that the programs planned for in the next budget period have greater value when compared to others.
You can usually achieve this because the results of lead generation and prequalified prospect penetration programs can be measured by return on investment. This built-in accountability gives performance marketing a better chance of proving its value than the other elements in the communication mix.
Sales Maintenance Approach to B2B Marketing Budgeting
Many marketing budgets use the sales maintenance approach. Typically, the marketer calculates the average advertising to sales ratio for all firms in the industry or all products or product categories. Then the previous year’s sales or next year’s estimated sales are multiplied by this ratio to determine the size of the budget.
This method of budgeting is popular because it is easy and can be defended by the advertising manager or the agency when getting marketing management’s approval. The rationale is that by matching the competition, sales will be maintained. If sales decline, the budget can easily be scaled back. But if sales go up, management can be assured that increased revenues will offset any sales support performance marketing budget increases.
This is the easy approach and sales support performance marketing expense will never be excessive. But it is obvious that this approach will not maximize your financial return from the performance marketing investment. A superior method is the management by objectives approach where you match the budget to potential gross profit rather than sales.
“Top Down” Approach to B2B Marketing Budgeting
Another method used by many B2B companies today employs the arbitrary budget guideline handed down from the division or executive office that says the you can budget for a given percentage increase over the past plan period if it can be justified.
Anything beyond that figure requires extra special justification. Under this system, too many managers play it safe. They have become so intimidated by the constant pressure from finance managers, and by upper management’s steel grip on the dollars, that they have become timid about proposing great new promotional ideas that include more than the allowable guideline budget increase. Obviously, this approach discourages new high-impact approaches.
When you think only as far as the allowable guideline, you never get to identify all that may be needed, much less assess performance marketing’s value to your company. Yet management should be encouraged to think big about proposing new programs or expanding successful current programs.
If you believe more dollars for a lead-building effort or a reinforced-selling campaigns will increase your company’s market share, you should build a case and go for it. In fact, if you do not, someone upstairs may be wondering why not.
Task Method Approach to B2B Marketing Budgeting
The task method of B2B marketing budgeting is the purest approach. You link sales and marketing objectives to the optimum incremental revenues that can be realized from the various sales support performance marketing strategies and tactics. Assessment of all the opportunities to use the sales support performance marketing discipline makes the task budgeting approach valuable.
And, of course, this is true even though a percentage ceiling may be and usually is arbitrarily imposed. The task method is important because it lets upper management budget approvers know what the performance marketing specialist says it will take to get the job done and conversely what programs will be missing in their marketing plan if the dollars are cut back or cut out.
No company today can live precisely within a calendarized budget projection over a 12-month period or even a 6-month period because business thrives in a dynamic marketplace. It is continuously in flux. You must react to opportunities as they occur. If a new prequalified prospect-penetration campaign is needed to help attain a new objective within the plan period, you should go for the discretionary dollars for a well-thought-out program.
B2B Marketing Budget Planning Process
There are three basic steps in the task budget planning process:
- Determine the performance marketing tasks that can cost effectively support marketing, sales, and advertising objectives.
- Cost out programs based on the tasks to be accomplished.
- Back up a budget plan with well-documented details, convincing proposals, and recommendations that spell out how the dollars will be invested and what your company will get back in return.
This bottom-up top-down approach recognizes the fact that every profit center has a cap on sales support expenditures put there by the head risk taker. The job of the manager responsible for sales support performance marketing is to recommend plans that have a high likelihood of success that can be measured.
The more specific the details of the plan, and the more quantified the objective, the better the chances of getting the budget approved.
For instance, you may come up with a proposed program to direct mail six packages bimonthly, including Facebook and LinkedIn precision targeting, during the plan period to 5,000 bank presidents with an objective of pulling a 1 percent response from each mailing to get 300 inquiries. Telemarketing can qualify 150 of those as sales leads. Salespeople in turn will convert 50 of these leads, generating a total of $6.5 million in sales.
If you request a sizable increase in a performance marketing budget, as a one-line entry in a preliminary budget plan with the idea of filling in the details later, chances are it may get cut before the final budget session three or four months later.
You should begin budget planning with a presentation of a formal plan, including details and quantitative objectives, very early in the budgetary process, well before the formal budget sessions begin. Six or nine months may not be too early. In this way the stakeholders will have had time to consider the proposal, and later when the one-line entry in the preliminary budget is seen, there will be a better chance that it will get approved.
How well sales support performance marketing budgets are planned and implemented is a reflection of how well you handle one of your most important functions – financial responsibility.
Four basic cautions should keep you on track:
- Never overspend the approved budget. Additional spending requires an authorized overrun.
- Never promise anything that cannot be delivered within the approved budget limit.
- Never overbudget or request more dollars than cannot be backed up with successful accomplishments at year-end.
- Never underspend the approved budget without “reason-why” back-up.
- Personnel in charge of business-to-business performance marketing resources require high-level management skills regardless of the performance marketing functions.
- The sales support performance marketing function is fully accountable even though its budgets may be less clearly defined than the budget for direct sales performance marketing efforts. Those in charge work in concert with other sales support groups who relate to the same sales goals.
- In direct sales performance marketing the manager is accountable for profits whether the operation is run as an independent specialty business or a business unit of a multichannel company.
- Effective management of the analytics and IT has become the key to performance marketer’s success. Analysis and accountability are the basis for successful marketing efforts.
- Financial planning attempts to measure the profitability of each program and attendant risks. Among the planning and evaluation tools used by direct sales performance marketers are:
- Profit and loss statement
- Contribution to selling costs and profit analysis
- Calculation of break-even
- Back-end performance analysis
- Life-time value of a customer
- The three major factors that affect direct sales performance marketing profitability are unit contribution, selling cost, and response rate.
- Sales support performance marketing competes for budget dollars with other support activities that have similar objectives, yet it has an advantage since it is more measurable and can be held more accountable.
- Of the three popular budgeting approaches, sales maintenance, arbitrary “top-down” guideline, and task, the latter, with its preliminary assessment of opportunities, is the best approach.
- Presenting sales support performance marketing programs well in advance reduces budget plan rejections later.