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Marketing ROI: Estimating Your ‘Reachable' Market Potential

Copyright Jeffrey Geibel, All Rights Reserved

I met recently with one of the savvyist entrepreneurs I've known in almost two decades of consulting. This individual had built a business from three people to 30, decided not to built it to the next level but instead sold it, and became the division manager under the new owners. After eight months, he cast out on his own again with a new (but related) venture. It was six months into his new tenure when we spoke.

What he has found is that many of the tried and true marketing tools that had worked in the past - just don't work in today's climate. He related how a 7,500-piece direct mail drop had zero responses. A colleague of his did a 27,000-piece direct mail effort - and got all of seven responses. He cancelled his telemarketing effort - "It was costing me $15 per hours to leave messages on voice mail - they just can't get through."

The rules of marketing have changed in today's climate. Each marketing tool must be evaluated for effectiveness, and each marketing expenditure evaluated for the marketing return. With much more emphasis placed on this return on invstment for marketing expenditures, the discussion of marketing ROI again takes center stage.

Measurement of ROI for marketing has always been an elusive quest - many marketing activities are not direct cause-and-effect, and in many cases they are indirect, or have extremely long lead times (such as ‘branding' activities, public relations, etc.) In today's tough climate, many of the long-lead activities are increasingly regarded as ‘not now' luxuries.

Before attempting to begin the measurement of return on marketing activities, there is a measurement that should be taken before marketing tasks are even chosen: that measurement is the determination of the size of your reachable market. By ‘reachable' - we mean the size of the market that your marketing activities can ‘reach' in the following four quarters (12 calendar months.) The markets you can ‘reach' are the ones where you can effectively compete. In other words - your marketing should be closely tied to your sales effort.

The reason that the market estimate should be ‘reachable' is quite simple: any attempt at the measurement of an effort to attain an unrealistic objective is a waste of time.

For this reason, market estimates that are the type generated by many research firms - such as five year market estimates in the billions - are worthless for building marketing ROI metrics.

In addition to determining your reacheable market - there are two additional marketing ROI fundamentals - segmentation and competition.

Segmentation of the market is simply the process dividing your reachable market into groups, based on some criteria, usually buyer characteristics (size of sale, purchasing authority, length of sales cycle) or nature of the purchase (specific characterisitics of the product or service.) Usually markets can be divided into at least three segments (enterprise, middle market, small customers), and preferably they should be mutually exclusive, but there is often some overlap in the segments.

The reason for segmentation is that it permits the more accurate targeting of marketing messages, and the more appropriate salection of marketing activities to reach the decision makers or influencers in each segment. Messages that may be appropriate, for example, for middle-market prospects may be totally inappropriate for ‘C-level' (CEO, CFO, COO, etc.) buyers and influencers. There are also different marketing tools available to reach these different segments, with vastly differ rates of effectiveness. The more accurate this stage of your segmentation of your market is, the more accurate the marketing ROI measurement will be.

Another aspect of segmentation is the nature of the sales process (direct, telesales, etc.) The nature of the sales process will greatly influence the selection of marketing tools used to support that sales process. For example, sales collateral that is specifically designed to support a direct sales call is ineffective in a telesales operation. Conversely, attempting to create collateral that supports both sales methods greatly reduces its effectiveness it either arena.

Competition is third aspect of determining the reachable market, and the probability of success in that market - which is the very performance that marketing ROI is attempting to measure.

Competition will determine several aspects of the selection of marketing activities. If there is a great deal of competition, then the noise level in the market will be very high, and developing competitive distinction will be more expensive and the probability of success much less than in a less-cluttered market.

Another dimension of competition is the development of standards and customer expectations in the market. For example, in many technical product markets, there has evolved certain standards (Windows-compatible in an obvious one, the ability to use certain common databases or perhaps wireless capabilities are others). The ability of your product to compete in these kinds of standards-driven markets will affect your probability of success.

Customer expectations are a form of standards (mostly for services, but also for product performance.) For example - until very recently, dropped calls were accepted as the norm for cellular service - regardless of the carrier. Now, the competitive environment is such that a perceived excessive amount of dropped calls (or poor coverage) will result in lost customers - very quickly. Customers expectations also change as a market matures, and your offerings have to stay current with those expectations. An example of this not happening is the loss of market share by the Netscape web browser. Once the dominant browser, they gradually lost the features upgrade race to Microsoft's Internet Explorer, which led to more market share for IE, which led to web-page standardization on the IE interface, which resulted in a much more difficult competitive environment for Netscape (poor management helped along the way.)

Developing a realistic marketing ROI starts with the accurate determination of your reachable market, segmenting that market by characteristics, and then determining the competitive environment in each segment. A realistic look at these factors can highlight profit-poor markets that are masked by apparently large prospect numbers. This is an added benefit - a hard look at the market segments helps you to select the areas of the market that will give you the highest potential for profitable sales, and hence a good ROI - before you even budget a single marketing dollar.

© 2002, Jeffrey Geibel, All Rights Reserved

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