Monday, December 05, 2011

New Workbook: Estimating the Cost of Marketing Automation

We released two more vendor selection workbooks last week, both sponsored by Eloqua and available for free on the RaabGuide Web site. One is about estimating the cost of a marketing automation system and the other is about evaluating vendor services.

The cost workbook was a particular challenge because the subject is so complex. After much thought, I came up with four cost categories:
  • direct system costs: the actual price paid for the marketing automation software itself. This is where most buyers focus their analysis, but it’s a tiny fraction of the value at play.  Background research for the workbook suggested that automation costs are from 1% to 5% of an average marketing budget. This means that the direct system cost is pretty much insignificant compared with the marketing budget it will help to manage. To put it another way: even a small improvement in the other 95% to 99% of marketing costs can easily pay for a marketing automation system.
    • operations costs: other costs related to running the marketing automation system, such as staff time and costs of related systems. Most of these are marketing operations costs, and there may be others in sales and IT.  You’re already incurring many of them, so the analysis has to identify how much they’ll increase or decrease as a result of marketing automation. This is really hard since it takes a detailed understanding of your current processes and how they'll change.  But the stakes are high: operations costs are about 25% of a typical marketing budget.
    • marketing program costs: the expenses for specific marketing programs, such as advertising, trade shows, email, etc. These are the other 75% of the typical marketing budget. Marketing automation can reduce these costs substantially, both through reduced waste and through shifting funds to more effective programs.
    • revenue: many marketers shy away from building revenue gains into their marketing automation calculation, but revenue is ultimately the reason for their investment. From an analytical perspective, it’s important not to double-count revenue gains (assuming the same marketing budget) and cost savings (from a lower marketing budget).  It's also important to recognize that revenue isn’t 100% profit. The workbook describes how to do this.  To keep things in perspective: marketing costs are under 10% of revenue at most firms, meaning that direct marketing automation are under 0.5% of revenue.

    Analyzing all four items in depth is a big job. The good news is you don’t usually need to assess them all at once. 
    • building a business case for marketing automation needs only a rough estimate for direct system costs, since they’re so small compared with the revenue, marketing program costs, and operations.  
    • comparing marketing automation systems lets you focus on the system costs and changes in marketing operations costs, since those may vary considerably from one product to another. The impact on program costs and revenues should be about the same unless you're considering systems with widely different capabilities.  But hopefully you identified your needs earlier in the process, so you'll only be comparing similar systems once you reach the final evaluation..

    It's useful to understand these cost categories, but the real work is gathering the details for each component.  This is where the workbook comes in: it lists of specific items to consider, so you have a framework to help ensure your analysis is complete. This is important: to take a real-world example, one of my consulting clients recently received quotes from two marketing automation vendors, one of which included email delivery and one of which did not. Recognizing the difference made it easy to prepare a true apples-to-apples comparison, but we could have easily missed it until later the process if we had not used a formal framework.

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