Associate Partner Optima Partners
Share this content

How to reprioritise customer-facing spend when your budget is cut

If you are facing the need to operate on a much reduced budget, here is a structured six-step approach to reduce customer management expenditures so that you survive the recession without damaging long-term potential.

1st Jun 2020
Associate Partner Optima Partners
Share this content
scissors cut spend
istock

If you were asked to cut your budget by 10%, 20% or even more, how confidently would you go about it?

Business confidence and budgets are plummeting at a rate last seen during the financial crisis when marketing expenditure fell by over 40%. So it is becoming increasingly likely that CEOs will be asking chief marketing officers (CMOs), chief customer officers (CCOs) or chief experience officers (CXOs) to make deep spending cuts, if they haven’t already done so.

The last recession was twelve years ago, so this will be the first time that many customer-facing leaders have needed to do more than trim a little fat from their budgets. And much of the advice written at that time seems dated in the light of the digital developments since then. But for those of us with long memories there are lessons that can be learned from the recessions of the early 1990s, the aftermath of the dot.com boom and the 2008-9 financial crisis and applied using modern data and analytics technology capabilities. 

The first lesson is that making significant budget cuts requires sharper prioritisation than in normal circumstances. You can’t just take 20% off every item of expenditure – some may need to be cut by 60%, some by 10%, some may even need to be increased. The second lesson is that sharp prioritisation requires detailed understanding of the relative returns from different activities.

Good decision-making is always underpinned by data and analysis, but in downturns that analysis needs to be more rigorous than ever with returns calculated on contribution and profit rather than top line measures such as customer numbers or revenue. This is where advances in data and analytics over the last ten years can make a big difference.

This article provides a structured six-step approach to reducing customer management expenditures. The priorities, optimisation opportunities and analyses outlined are illustrative – the reality will vary from business to business. However if you are facing the need to operate on a much reduced budget, taking the steps outlined to create a dedicated map for your business that encompasses all the elements required will help you re-prioritise so that you survive the recession without damaging long-term potential.

1. Rebalance your priorities

Senior leaders such as CMOs, CCOs and CXOs need to balance three financial priorities – cash, costs and growth.

In buoyant economic conditions, the priority is growth which requires investing rather than maximising cash flow and experimenting with new offerings and new channels, with cost control being relaxed. But in downturns, this prioritisation needs to be reversed.

Cashflow costs

Figure 1: Priority Objectives for Customer Management Leaders

Priority 1: Protect cashflow.  When revenue is falling, reducing discretionary spend (for example, marketing campaigns that are not subject to an existing contract) to protect cashflow is critical. Identifying the relative profit contribution delivered by different types of discretionary expenditures enables them to be ranked so cuts start with those with a track record of delivering the least incremental value. Running out of cash creates an immediate threat to business survival so protecting cashflow needs to be the number one priority.  

Priority 2: Reduce costs to serve. Reducing the operational costs of serving customers (for example, the costs of processing transactions and handling customer queries) takes longer to achieve.  But increasing efficiency in customer-facing processes – for example by migrating customers from physical to digital channels and increasing automation – delivers a sustainable benefit in the form of increased scalability, increased flexibility and reduced operational risk, (a recent example being the upheaval of having to move support staff from call centres to working from home). Cutting discretionary spend may protect the business for a few months but reducing non-discretionary costs of serving customers becomes critical beyond that for recovering profitability and protecting competitivity.

Priority 3: Sustain potential. While surviving is the short-term priority, thriving remains the longer-term goal.  So sustaining the potential of the business to grow once the economy recovers needs to be kept in mind with the lifetime value of customers considered alongside profitability. Sustaining potential can be used as an argument to support every form of current expenditure. So again it requires sharp prioritisation – what are the one or two investments that you are prepared to protect because you believe they will be critical to long term success.

As suggested by Figure 1, these three focuses are not mutually exclusive with initiatives that sit in the areas of overlap offering the greatest return.

2. Identify your optimisation opportunities

With priorities rebalanced, the next step is to identify the areas of expenditure and revenue generation you are seeking to optimise.

In broad terms there are five areas to consider – campaign management, product management and pricing, customer strategy, customer journey orchestration and channel management. As Figure 2 highlights, these are all connected and may not even be distinctly different areas in some businesses. But the underlying activities all represent optimisation opportunities.

sustain potential

Figure 2: Optimisation Opportunities

Campaign optimisation ensures that marketing campaigns deliver the best return possible. During upturns campaigns would be growth-oriented, so they could arguably be included in the blue oval. But they are not an investment to be protected and in downturns the focus of campaign optimisation needs to be on determining what expenditure to cut to protect cashflow.

A similar argument could be said for channel optimisation – interacting via the channel that delivers the greatest value-to-cost ratio – with value encompassing both customer and business dimensions.  But in the context of a downturn, the primary goal is enabling the shift to lower cost channels to reduce costs to serve.

Optimising products and pricing can improve both cashflow (e.g. increasing the price on unprofitable products or discontinuing them and eliminating support costs) and support long term growth. For example, you may want to maintain products that are not currently profitable but you believe customers will want to buy in the future.  

Customer strategy encompasses customer acquisition, retention, growth and profitability (with lifetime value providing the longer-term value dimension). It helps protect cashflow by identifying customers which should not receive inducements and discounts or incur marketing costs. It identifies customers that are unprofitable but can potentially be profitable if served via lower cost channels. And it also identifies the customers that offer greatest long-term potential and need to be retained and nurtured. 

Customer strategy sits at the nexus of all five optimisation opportunities – it acts as the guide for what happens in other areas. And even if revenue and expenditure are not attributed to it directly, balancing expenditure on customers with their value to the business is a major opportunity for optimisation.

The final optimisation opportunity is the customer journey and it also sits in the overlap of the three opportunity areas. Poor customer journeys inhibit conversion and so reduce revenue in the short term and will also discourage customers from returning or expanding their relationship with the business. Similarly, poorly designed web sites or apps that mean customers have to cease an online journey and call the contact centre significantly increase costs to serve.

3. Define analytical requirements

The quality of any decision is a function of the insight that underpins it. The tougher the decision – spending cuts being among the toughest – the more important the role of data and analysis. This is where customer-facing leaders are in a much better position than during the financial crisis as there have been significant increases in data types available, great advances in analytics tools and good developments in the skills required to use them. 

customer strategy

Figure 3: Enabling Analyses

Figure 3 above outlines a number of different analyses that can be undertaken to support optimisation in each of the five areas. Rather than describe each on in detail in the body of the article, Figure 4 describes the insights that each analysis should deliver.

description of analyses

Figure 4: Description of Analyses

4. Map analytical interdependencies

So where to start? Prioritisation of these analytical initiatives is made harder by the dependency of some analyses on others. Figure 5 highlights the most important interconnections, although the true picture is likely to be more complicated than that.

For example, a seemingly obvious place to start might be campaign profitability as it identifies opportunities for immediate savings in discretionary spend. But campaign profitability relies on analysis of customer profitability (including a multi-year view) to ensure that the return in terms of contribution to the bottom line is being calculated. And customer profitability requires an understanding of product profitability (the contribution delivered by each product the customer buys or holds) and channel value (to determine costs to serve - average cost per customer interaction by channel multiplied by the number of interactions for that customer).

Hence calculating an accurate view of campaign profitability is dependent on other analyses being completed, meaning it is not a place you can start.

analytical interdependencies

Figure 5: Analytical Interdependencies

5. Identify quick wins

Clearly the first step is identifying gaps, including whether existing analyses are being undertaken to the level required.  Once gaps have been identified, the next step is identifying quick wins.

Starting with quick wins help build momentum. To qualify as a quick win, the analysis needs to be relatively quick to deliver (for example because it is not dependent on the completion of other analyses, or you are building on an existing piece of analysis) and it is valuable. Looking at Figure 5, one example would be customer path analysis.  To determine whether any analysis qualifies as a quick win, it needs to be qualified against both value and speed criteria.

For those not clear what path analysis is, Figure 6 shows an example created using Teradata Vantage, one of the leading tools. This particular example highlights all the routes taken by customers up to the point where they close their account, with the thickness of each line reflecting the volume of customers. But it can also be used to map routes to acquisition and cross-sell as well as highlighting where journeys are costly to both customer and business.  

churn analysis

Figure 6: Teradata Vantage Churn Analysis Sankey Diagram (source: Teradata)

If we use path analysis as an example, from a value point of view it sits at the intersection of all three of the priority objectives. In terms of protecting cashflow, path analysis highlights problems in the journey that are reducing conversion – these can often be quickly fixed so addressing them has an immediate impact. In the context of reducing cost to serve, path analysis identifies opportunities for eliminating higher cost channels (e.g. a staffed call centre) from customer journeys. Thirdly it is an enabler of personalised next best actions which are key to building satisfaction, loyalty and customer lifetime value. Hence from a value point of view it ticks all the boxes.  

Path analysis is also quite simple from a data perspective – all it requires is a common unique identifier across all channels and time stamping of interactions. With this information, a path analysis tool can plot interactions as a sequence to a pre-determined outcome. So provided your data is reasonably well organised, it is also quite easy to get started with no dependency on additional analyses.

Please note, the aim here is to demonstrate the evaluation of quick wins rather than argue that path analysis should be your starting point. That will depend on the particular circumstances of your business. But for businesses with a mix of channels, it would certainly be a candidate for consideration.    

6. Iterate, improve and industrialise

Once quick win analyses have been initiated, it is then a matter of working through the remaining analyses to determine the value each will deliver and the timescales for realising the opportunities enabled.

With new analyses, it may be necessary to take an 80:20 approach, so long as the analysis delivers a view of profit or contribution rather than a top line metric such as customer numbers or revenue, as these are not sufficient for protecting cashflow.

These analyses can then be iterated, improved and industrialised so that they are available to managers on an ongoing basis rather than requiring a one-off effort from the analytics team. The insights these analyses provide are valuable at all points in the cycle, but in buoyant times they may fall into disuse (and not be maintained) with top-line oriented analyses receiving more attention. 

As highlighted at the beginning of this article, the tougher the decision, the more confident the decision maker needs to be in the supporting insights. For a multitude of very obvious reasons, fewer decisions are tougher than cutting expenditure. And when the going gets tough, the tough need to get analysing.

OK so Billy Ocean didn’t sing that back in go-go late 1980s, but if he was rewriting it for recession-riven 2020...  

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.