Mar 18, 2004
A new software solution, using the principles of variable pricing
and yield management, promises to transform the account statement
from a cost into a profit center.
By George Linkletter
Airlines do it. Broadway shows do it. Television networks and
telecommunications firms do it. Even the City of London now does it to
reduce mid-day traffic congestion.
In fact, most businesses do it, at least to some degree.
'It,' of course, is variable or demand-based pricing. And it is a concept
that now promises to transform the monthly bill or account statement --
currently viewed as a cost center or a customer relationship tool -- into a
bold revenue generator, and possibly even a profit center.
The inspiration behind this innovative approach to in-statement marketing
is Jim Enright, a mathematician/software developer/economist who heads a
consulting firm called Critical Decision Systems.
Enright, a hands-on business analyst with more than 20 years of planning
and forecasting experience, is well-versed in the nuances of variable
pricing, yield management and optimization modeling. He has worked for or
consulted with the nation's largest telecommunications carriers. He has
testified before the FCC on pricing issues. And he has helped Sears,
Pfizer and Yellow Freight Co., develop and analyze solutions to measure the
effectiveness of business operations, marketing initiatives and pricing
strategies.
From Costs to Profits
Enright says the epiphany of using variable or tiered pricing to boost the
revenue from in-statement marketing resulted from a consulting assignment
from a top-five credit card biller. The problem? The bank's in-statement
marketing program was hampered due to a lack of processing efficiency and
high costs due to extra set-ups.
The bank processed more than 12 million account statements monthly and was
stepping up its in-statement marketing effort. "Each mailpiece carried
several inserts selected from among a large pool of potential inserts, with
each bundle of inserts assembled according to multiple targeted
assignments," he recalls.
However, the print/mail finishing center encountered significant cost
over-runs due to the unexpected and excessive number of set-ups required to
accommodate the increased number of possible insert combinations.
As a result of the set-up snafu, equipment operators were forced to
interrupt processing more than 100 times per day to restock the enclosure
feeders with new combinations of insert materials and program new
processing specifications for the equipment. Each set-up procedure cost
more than $200 in labor and lost productivity.
An Algorithm to the Rescue
To solve the problem, Enright modified a yield management software solution
he had developed for a previous assignment. That software, based on an
algorithm, re-sequenced the billing statements according to the combination
of inserts assigned.
Typically, re-sequencing in the print stream is done to presort mailpieces
to lower postage costs, or to boost productivity by arranging all
similar-sized mailpieces together. For example, arranging all two-page
mailpieces together yields better efficiency than mixing one-page, two-page
and three-page statements at random.
The new solution, however, boosted efficiency by reducing the number of
set-ups, and the need for re-stocking, so the entire inserting function
could operate more efficiently. The bank reduced set-ups by 25 per day,
achieved an annualized savings of more than $1.2 million, and incurred no
impact on postal discounts for presorting.
That experience caused him to engage in some 'what if' musings. He
wondered, might there be an even bigger opportunity to boost the revenues
of in-statement marketing via the use of more advanced algorithms and yield
management modeling?
To validate the theory, he created a comprehensive in-statement marketing
solution, or decision management tool, which is now patent-pending and can
accommodate a virtually limitless number of customer-specific messaging
combinations.
The Entire Statement, All Messaging Techniques
The solution differs from existing approaches because it coordinates the
variable messaging potential of the entire statement package, especially
its three principle channels: the available white space on the statement
itself, the mix of the inserts enclosed within each statement, and the
exteriors of the reply and the outgoing envelope.
Enright also points out that the new decision management solution, called
OPT-IM (short for Optimum Planning Tool for Integrated Messaging) is robust
enough to accommodate emerging messaging techniques such as Repositionable Notes as well as the more standard but less variable rear-flap of reply envelopes often enclosed with the statement.
Who will be the first to implement the new OPT-IM capability? Credit card
billers and large retailers are the likely early adopters. These firms are
among the most advanced in using the statement for marketing purposes, have
a large base of customers, and are experienced in segmenting by profile,
preference and in delivering l:1 marketing messages.
However, the CDS team also believes the new technology holds value for
virtually every company that is obligated to distribute customer mailings
on a large scale, even those where the monthly statement is limited to
little more than invoicing the customer.
Current events are also on the side of CDS. The phenomenal acceptance of
the Do-Not-Call registry and the strong consumer support for anti-spam
initiatives shows that telemarketing and e-mail messaging are rapidly
losing appeal for consumers.
Indeed, in-statement marketing may be poised for exceptional growth. "As
telemarketing and online marketing are increasingly encumbered by
regulation, other DM options will need to improve. With our new
applications, statement mail can be better managed to become a most
cost-effective and profitable channel," says Christine Pham, chief
operating officer for CDS.
Not a NASCAR-look
Additionally, in-statement marketing offers the added benefits of
exclusivity and synergy. The messaging and inserts delivered via the
account statement can be highly targeted to unique customer needs and
interests, and there's no clutter. The messages compete with only three or
four other messages included in the statement.
A similar marketing message or advertisement in a publication such as
Fortune Magazine, for example, competes with scores, if not hundreds of
other messages. In many instances, those marketing messages are easily
overlooked by readers.
The insert messages contained within a statement can also be selected and
assembled to achieve the added impact that comes with synergy. For
example, mailers can create a bundle of messages to capitalize on virtually
any criteria. And with each message reinforcing the other, the entire
collection stands to benefit.
And, of course, the principle of variable or tiered pricing will enable
mailers to charge more for delivering messages to the most lucrative
segments of their customer base, or for delivering messages that become
part of a synergistic package of messages.
As a simple example, consider Valentine's Day, where marketers could create
and deliver a package of complementary marketing messages. These might be
targeted to either males or females, aged 25-34 with a certain income
level, and inserted in the statements of billing cycles preceding February
14th.
This package could include messages or discount coupons from Victoria's
Secret, Godiva Chocolates, 1-800 Flowers, Hallmark Cards and perhaps a
national hotel chain featuring a weekend-gateway promotion. And each
insert in the package could command a higher price for the synergy of being
included with the others.
Since the existing price for delivery of bundles of inserts via the
statement may be as low as one to three cents a piece, and alternative
delivery channels, such as a stand-alone direct mail piece, can cost 12
times that amount, there is huge and unexploited pricing power within every
account statement.
So, the untapped pricing power really comes from three related sources: 1)
the ability to charge more for access to the most lucrative customer
segments; 2) the ability to charge more for creatively-assembled insert
'bundles'; and 3) the ability to charge for access (on a space available or
yield management basis) to lesser quality customers.
A Shift in Thinking
Enright and his associates believe passionately in the value of their
innovative approach to in-statement marketing. They are also realistic
about the effort required to bring this solution to the attention of the
right decision-makers. "Of course, OPT-IM can always help lower costs and
improve processing efficiency," he says. "We've already proved that. But
using it to unlock the revenue and profit potential of the account
statement will require someone with a broader vision."
To be truly successful with OPT-IM, managers of customer messaging centers
will need to look beyond their traditional goals of reducing the cost per mailpiece, or improving the visual appeal of the document, or using the
statement to strengthen customer relationships.
There is no question this is a novel approach for an industry that has
traditionally focused on cost per unit solutions. But managers can now
transform the account statement from a profit drain into a profit maker.
And they can do it in a few simple steps.
The first step involves determining the value of a particular message for a
particular segment of customers. Mailers can develop this variable price
estimate in cooperation with insert-based marketers. They can also derive
it through standard marketing analysis. Or CDS can provide the expertise
and analysis to provide a reasonable 'first pass' estimate.
The second step centers on blending those prices and pricing structures
with whatever factors the mailer uses to determine which customers will
receive which messages, and particularly the priorities that will be
employed when multiple and possibly conflicting messages are intended for
the same recipient.
The third step requires OPT-IM software to handle the complex
decision-making involved in coordinating the insertion and delivery of the
vastly increased volumes of interrelated messaging opportunities. In a
nutshell, "OPT-IM develops the assignments which determine which customers
get which marketing messages," says Enright. And the result? "Maximum
revenue with a minimum impact on the cost of operations."
He also points out that once mailers assess a variable or tiered price for
access to its customers, the practice will feed upon itself and generate
added demand for in-statement marketing. "Under the existing fixed-price
approach, marketers seek out the highest value customer segments, and
disregard the remainder. But individual customers can possess multiple
characteristics that make them either desirable or less desirable to
various marketers."
Maximum Profit
OPT-IM does not just enable a higher price for delivering marketing inserts
to the most valuable segments of customer. Of course, that activity is
important and will result in added revenue. But OPT-IM can also increase
the number of inserts delivered to lesser desirable segments of customers,
and that results in still more added revenue.
The real benefit of OPT-IM comes from a comprehensive optimization or yield
management capability that delivers the maximum number of marketing
messages, to the maximum number of recipients, at the highest possible
price per statement, at the lowest possible cost of operation.
Whatever you call it ? optimum, tiered or variable
? pricing is Enright's 'sweet spot.' It's what he's been doing for years. And even though it may
be complex initially, he can show how variable pricing maximizes revenue
and profit.
Indeed, his experience spans dozens of pricing models and applications
developed for other industries. It also includes one project, recently
completed for a Seattle-based computer software firm, that was designed to
maximize the revenue and profit of bundled software products. The project
was based on in-depth consumer willingness-to-pay survey data.
$2 per Customer in Profit
Enright believes the unrealized profit potential of variable-priced,
in-statement marketing is huge and could be as high as $2.00 per customer
per year. "A credit card biller with a base of 10 million customers could
be leaving as much as $20 million a year on the table by not using an
effective variable or tiered pricing strategy," he says.
And if all those benefits weren't enough, if there is still skepticism
about the value of this innovative approach to in-statement marketing, the
CDS team is willing to 'put up or shut up.'
In fact, Critical Decision Systems is so confident of the potential
benefits of the solution that they are willing to implement it on a
gain-sharing basis. That means a forward-looking high-volume mailer could
implement OPT-IM at no cost and share in the gains generated by the
technology.
If there is a better win-win scenario out there in the customer messaging
industry, I certainly haven't seen it.
For information, contact Christine Pham at
cpham@critisys.com or call
732-747-2025.