Insider’s Corner with Peter Rosenwald: Penny Wise – Pound Foolish?

Our Insider’s Corner marketing guru, Peter J. Rosenwald, offers a cautionary tale about cost saving.

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Penny Wise – Pound Foolish

The Brits have a pithy expression for it. They say when you make an economy that seems to save you money but in fact causes increases in costs or decreases in productivity down the road, it’s a ‘penny wise and pound foolish’ act.

That’s worth remembering when the cost-cutters are running around with their hatchets swiping away at every cost they don’t understand. As one manager I know yelled in frustration at a cost-cutting consultant: “I can cut costs to zero. Just fire everyone and close the ******* (Expletive deleted) company.”

That is perhaps a bit extreme. But we see examples of the ‘cut first: ask questions later’ all the time. Running a tight efficient marketing ship is essential but as a cost-saving measure, eliminating the relatively highly paid experienced navigator and replacing him or her with an entry-level trainee, can have a titanic effect and land you directly on an iceberg. It is not a recommended action.

The Hidden Costs of Cost Saving

Let me give you an actual example.

Not long ago I was invited to consult with a service company which offered small businesses which couldn’t afford their own computer ‘techy’, a service that guaranteed 24/7 computer technical support. Their promise was that if they couldn’t solve your computer problem on the telephone in one hour, they would send one of their technicians to you who would stay at your office until the problem was solved.

Direct mail, e-mail and modest ads in business publications invited small business owners and executives to telephone for more information. When they did, they were given a sales pitch which offered a visit by a specialist to assess the prospect’s needs and, of course, try to sell a subscription to the service. These visits had a close rate of greater than 50% on an average $2,800 initial one-year sale. Renewals certainly added to the lifetime value.

When George, the owner was giving me a tour of the premises and explaining the business, we came to the room where a group of young people answered the ad driven incoming calls and sought to make appointments for the ‘consultants’. George told me very proudly that he had discovered that he could save a lot of money by using very low paid students to convert the calls to appointments. What was the rate of appointments generated by incoming calls, I asked? “About 15%” he answered.

Blinded by his imagined cost savings, George didn’t see that only a small increase in the percentage of appointments to calls would have an enormous ‘profit dynamic’, positive leverage, far better for the company than the ‘penny wise’ savings. When it was tested, even using an expensive professional to convert these calls, the appointment rate more than doubled and the profit per customer rocketed up.

Perhaps this is a long way of saying that anyone can figure out ways to reduce marketing costs. But unless you look carefully at the direct and following economics of each step in the customer journey from the top to the bottom of the funnel, you could, like George, be making little mistakes with big implications.

George should have known better but because he had a relatively small business which he managed personally, he didn’t have CEOs or CMOs breathing down his neck for growth and profit. Even so, he didn’t see the micro financial picture, how much each aspect of the sale was costing him and what might be the effect of changing what can best be called the ‘profit dynamic’.

Go Small or Go Home

One of the biggest problems plaguing fast growing enterprises is that the ‘C Suite’ tends to focus on the ‘macro’ economics at the expense of the ‘micro’ data. What are the big numbers; total or divisional revenue, operating costs, marketing and sales costs, etc.? We all know, or should, that however essential, these can be very misleading.

There is no question that the big picture is important. But all macros are the sum of lots of little micros and especially the health of data driven marketing businesses is determined by the optimization of each of these micro details. When they are summed together they produce averages and it is no secret that average is the most dangerous word in all marketing, especially our data-driven kind.

Ten Men Walk into a Bar

Imagine ten men sitting at a bar having a beer. The net worth of five of them is $250,000 and the net worth of each of the other five is $350,000. It is easy to calculate that $300,000 is the average net worth of the men in the bar. But now another thirsty fellow comes in and orders a beer. His name is Bill Gates and his net worth is measured in billions. Now what’s the average net worth of the men in the bar? And would you market to it? Of course not.

It is perhaps a silly example but if you are a marketing professional, it is a good example of the danger of the ‘average’.

Now imagine an expensive test mailing of four packages, one of which totally bombs. At the macro level, if the cost of the failed package is averaged in with the ones that succeeded, the CPO for the total mailing will obviously be substantially increased. That would be a distortion, possibly endangering the roll-out of the most successful package. Would your management or clients understand and make provision for this? Would they accept that ‘average’ CPO was not a reliable metric? That’s ‘penny wise’ if often ‘pound foolish’ as well.

It would be valuable to hear arguments, pro and con, about this issue. I’d be grateful if you would send them to me at insiderscorner@infocore.com.