The Long and Short of It

Pity the marketer sitting in room 1A21 during the recent DM Days New York Conference & Expo. In one morning session, he learned about measuring customer engagement through online interactions. In the one that followed, he received a tutorial on bottom-line-focused lifetime value calculations.

Both speakers presented their version of The Truth About Key Marketing Metrics. But the real truth is that each offered only part of the answer.

First up was Daniel Neely, CEO of Networked Insights. Neely clearly favors the softer metrics of engagement and influence which revolve around monitoring how consumers interact with each other, what they say and whether the consumer is an influencer or one being influenced.

As Neely put it, marketing is no longer controlled by marketers. And campaigns don't merely begin and end; consumers are inclined to seek information on a product in their own time and on their own terms.

Here's how this works: A sporting-goods dealer creates a lifestyle site — around fishing, let's say — and includes a forum for enthusiasts to register and share information. The firm learns from discussions on the site what the content should be, and participants can opt in for relevant offers.

Neely calls this the listen-and-respond method of advertising, as opposed to the shout method.

His firm offers a system that monitors and evaluates registered consumers' behavior. Those who read or rate online content are considered moderately engaged. People who share the material or invite friends to the site are judged to be more enthusiastic.

All this leads to tangible results. Studies show that approximately 60% of the consumers who join an online community have never visited the sponsoring company's Web site, Neely said. Sales conversions reach up to 8% and average order revenue is nearly double that of other methods, he added.

Moreover, marketers can track engagement levels.

Influence? Engagement? Online communities? Kenneth G. Kraetzer, a vice president at marketing services firm CBSI, took a different approach during his talk. His was based less on involvement and more on hard numbers.

Kraetzer presented a fictional credit-card campaign to illustrate how long-term profit and loss are calculated. In it, a marketing effort generated 1,000 enrollments. Acquisition costs were $100, and the company racked up another $135 in expenses for services, goods and write-offs. Total outlay for the first year: $235.

But it paid off (at least theoretically). The firm generated $280 during the year from annual fees, monthly income from transaction charges and ancillary revenue from cross-sales. The margin for the 1,000 customers was $45.

Predictably, 30% of the cardholders defected during the second year. Since acquisition costs were covered at the outset, expenses dropped to $80.

Income was down as well, but not as dramatically — the people who stayed tended to have deeper relationships with the card issuer. The yearly margin jumped to $125, or $170 over the two-year life of the customer.

And the third year? Another 200 cardholders dropped out, and expenses fell to $60. Margin decreased to $105. The cumulative profit for that group of customers now stood at $275.

Going forward, Kraetzer doubles third-year revenue and expenses to fuel his calculations for the fourth year and beyond. (This should be modified based on a company's particular buying cycle, he said.) According to these projections, the cumulative lifetime margin would be $485.

Then Kraetzer added a twist: Because of inflation, a dollar earned three years from now will not have the same value as one earned today.

To figure out what it will come to, Kraetzer assigns a 6% depreciation, compounded annually. By this formula, last year's dollar is worth only 94 cents in today's money, and will amount to 89 cents next year.

The result is that the $485 mentioned above will net down to $385.

Kraetzer's calculations will work well for any firm that bills customers at regular intervals. Neely's are more useful to companies that rely on intermittent purchases. But there's no reason why Neely's strategy of building and measuring engagement can't be married to Kraetzer's bottom-line valuations. Doing so likely would cut attrition and boost margins.

Someone should get these guys to talk with each other.

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