Marketing Budgets Depend on Measurability

Last week’s article about Are Marketing Budget Cuts Here to Stay? prompted interesting discussions about the role of measurability for supporting marketing budget proposals.  In the current scenario of declining or flat marketing budgets, measurability is a key factor that determines what is funded and what gets cut.

In recent years, marketing organizations have greatly improved capabilities to gather data, do analysis and produce meaningful metrics about most marketing tactics and activities.  This is all good – executives and other functional areas of a company now have a measureable view of marketing’s contribution to the business. Marketing has more insights into the effectiveness of what they’re doing and tracking their activities and results as never before.

Given the constrained business conditions and expanded availability of marketing metrics, it’s no surprise that executives are insisting on more measurable supporting data to determine what and how much of marketing budgets receive funding.  While this may seem like a reasonable approach on first impression, there are some concerns that marketers should consider to ensure that the right mix of marketing plans are approved in their budgets:

  • Inbound marketing channels such as websites, search engines, blogs, social media, videos, etc. are online and have built-in data gathering capabilities to produce a vast array of metrics.
  • Various research studies and anecdotal information from various marketers indicate a substantial shift of marketing budget allocations to inbound marketing from traditional outbound marketing channels.
  • While there is substantial proof that inbound marketing works, is it possible that some of the budget shift is influenced by it being so easily measurable and therefore more quantifiable for budget discussions with executives?
  • It’s generally more difficult to get meaningful metrics with direct correlation to outcomes from outbound marketing channels.
  • For many B2B and IT companies, outbound marketing channels such as trade shows, conferences, live seminars, etc. used to be the staple marketing tactic to find buyers and engage with customers.  These are the areas that are being cut the most in marketing budgets.
  • Although attendance at these type of live events have declined, are we possibly cutting back more than we should because we don’t have good supporting metrics?
  • I have talked with many salespeople who lament the continuing trend of decreased participation in these live outbound marketing events.  For many B2B and IT salespeople, meeting people face-to-face and speaking with them at these type of events is still the best way to find qualified prospects.
  • Although some metrics such as response rates, unique website visitors, clickthrough rates and others are easy to get and meaningful within a specific performance context, are they really meaningful for determining budget allocations?
  • Many marketing metrics are primarily about measuring activities.  But business results are what really count in the end.  Are the metrics for supporting marketing budgets based on funding activities or producing results?
  • What about funding for longer-term strategic marketing such as positioning, branding, developing market presence and credibility in target segments, engaging with influencers, etc.  These are vital for producing business results, but tough to measure and maybe more difficult to justify in constrained marketing budgets.

Are you seeing an increasing requirement and importance placed on metrics to get budget allocations and approvals?  How are you dealing with some of the concerns raised above?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC.

Are Marketing Budget Cuts Here to Stay?

Talking with a number of marketers and business executives over that past several weeks indicates a common theme of continuing marketing budget cuts.  Many marketers are now facing a second or third round of budget cuts after widespread marketing budget reductions late 2008 / early 2009.  The optimistic outlook for many marketers is to hopefully retain current budget levels into 2010.

Research from various sources substantiates this anecdotal information:

  • Marketing budgets were cut over 20% on average in 2009 versus pre-recessionary levels in 2007/2008.
  • The number of companies that cut marketing budgets in 2009 is 25% higher than predicted in January 2009.
  • In one survey less than 20% of companies are expecting marketing budget increases while over 40% are expecting further reductions in 2010.
In spite of these substantial and what now appear to be sustained marketing budget reductions, companies are still expecting marketers to deliver results and performance at levels similar to those prior to the cuts.  Marketers have generally responded positively to this challenge for accomplishing the same or more with less.  The following are some of the common approaches to this challenge:
  • Restrictions and reductions for expenses such as travel, agency fees, contractors and other external costs.
  • Staff reductions, organizational rationalization and other internal cost reductions.
  • Eliminating or delaying new projects and/or campaigns.  While this is a good short-term deferral tactic, it does raise concern whether further delay of these projects/campaigns will eventually impact business performance and results.
  • Reducing spend and attention on less effective outbound marketing channels such as print advertising, direct mail, tradeshows, etc.
  • Increased focus on more effective and less costly inbound marketing channels such as websites, search engines, blogs, social media, videos, etc.
  • In a fortunate confluence of circumstances and timing, inbound marketing is proving to be the primary means for marketers to produce good results with lower budgets.
Although overall marketing budgets are expected to decrease in 2010, the Forrester US Interactive Marketing Forecast predicts that social media, email, search and mobile marketing spend will grow significantly in 2010 and subsequent years while outbound marketing spend will decrease even further.

Marketers have cut expenses and refocused attention in response to budget cuts and mostly achieved performance goals and expectations during 2009.  The question is whether this performance can be sustained in 2010 with flat or further reduced budgets.

What are your marketing plans for 2010?  Do you expect your budget to remain flat, increase or decrease?  Are you going to shift more budget and attention to inbound marketing channels to meet your goals?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC.

Why On-Premises Business Software Vendors Should Give Their Products Away

Traditional on-premises business software vendors are facing challenges on multiple fronts:

  • Published financial results for the second calendar quarter of 2009 from 10 of the major vendors reported license revenue declines in the 20-40% range year-over-year.
  • Buyers continue to show increasing interest and preference for Software as a Service (SaaS) business software.  SaaS business software vendors reported an average of over 20% increase in new subscription revenue for the same year-over-year period.
  • On-premises vendors now derive 50% or more of their revenues from annual maintenance fees, but are facing increasing dissension from customers over increasing costs and perceived lack of value for the annual maintenance fees.
Licenses are the lifeblood of on-premises business software vendors – it’s what drives current revenues from services and long-term revenues from maintenance.  These vendors must sell more licenses by acquiring new customers and/or selling more products and/or user seats to existing customers.  While most on-premise vendors have announced plans for delivering SaaS solutions and some have already delivered some SaaS applications, their on-premises licensed products are still the core of their businesses and SaaS may not be the preferred delivery for many customers.

Some vendors are responding to the challenge by offering ‘buy one get another free’ type of deals to increase the number of licenses and users for which customers will require implementation services and pay annual maintenance fees.  IMO, this is a flawed marketing tactic as discussed in last week’s bog post.

On-premises business software vendors have to get more licenses to feed their continued existence as viable businesses.  A review of their business models reveals some interesting points:
  1. Based on results for the 12 months through second calendar quarter of 2009, License revenues now account for approximately 20-25% of total revenues.
  2. These vendors spend approximately 20-22% of total revenues on sales and marketing, of which over 90% is usually targeted at license sales.
  3. Taking cost of goods and other expenses into account, license sales are at best a break-even proposition.
  4. On-premises vendors are known to deeply discount product licenses to get a sale.  Discounts of 75% or more off list are more common than most are willing to admit.
  5. These vendors now derive 50% or more of their total revenues from annual maintenance fees with 80% or higher gross margins on this revenue source.
  6. Services account for approximately 25% of revenues with gross margins typically in the 25-30% range.
  7. License sales currently contribute little or nothing to profitability, but are the lifeblood that drives maintenance and services revenues and profitability.
Given all the abovementioned circumstances and other factors, why not give the product licenses away?  The end game is to get more customers and users using more products for which they pay implementation services and annual maintenance fees.  The business of selling licenses is tough and hardly profitable.  Why not change the game and focus on creating value for customers rather than selling them licenses.

A proactive move by on-premises business software vendors to give their product licenses away can produce several positive results:
  • Bolster current services revenues and longer term maintenance revenues.
  • Compete more effectively with SaaS vendors.  Negate a big selling point of SaaS vendors because there would be no initial license cost for on-premises products.
  • Change the relationship with customers from selling them stuff to creating value for their businesses.
  • Get rid of the licensing fee and discounting practices that customers view as a farce.
  • Realign a leaner sales organization focused on creating lifetime customer value.
  • Change the way customers view the annual maintenance fee to be more like an annual license fee that includes support, enhancements and maintenance.
I would go as far to argue that if these vendors don’t do this proactively now, they will have to do it reactively later anyway to survive.  They can do it on their terms now and make this a win-win situation for them and their customers.

Depending on your role from a vendor or customer perspective, what do you think about this situation and the recommendation?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC.

Buy One Get Another Free – Is this a Good Marketing Tactic for Business Software Vendors?

A major business software vendor recently offered buyers at midsize companies CRM product licenses at no charge when they purchase a particular version of their ERP product.  There are qualification requirements to get the free CRM licenses.  The catch – customers must pay the regular annual maintenance fee on the no cost CRM licenses.

Other business software vendors have made this type of offer either directly with buy one get another deals or indirectly through product bundling deals.  The real objective is to get more of their software and more users in a client site which produces additional implementation services and annual maintenance revenues in exchange for foregoing the initial license fee.  I’ll discuss the business perspective of doing this in next week’s post, and focus on the marketing aspects of this tactic in this post.

From a strategic marketing perspective, considering that everything a company does is marketing and impacts marketing, I think there’s more downside than upside to this tactic for the following reasons:

  1. This type of offer smacks of a wheeler-dealer approach to marketing and selling.  We’re talking about serious business buyers, and major industrial strength business software from major well-established vendors.  Do they really want to project a wheeler-dealer type of image for their company in that market?
  2. There are a number of qualifying requirements for these types of offers and there’s always the back-end implementation and annual maintenance costs.  Even though the vendors may be upfront, open and honest about disclosing all these terms and conditions, there’s always the risk of the customer perceiving they were taken in by a bait-and-switch type of tactic.
  3. The vendor is debasing the product they’re giving away by openly declaring that it has no license value.  The product they’re giving away will be viewed as adjunct or subordinate to the main product customers have to buy.
  4. Is there any going back?  Although it may be a limited time special offer, buyers will remember that they attached zero value to this product, and may never be willing to pay for it again.
  5. How do you explain this to existing customers who paid for the product that is now being given away?  If I were a customer who previously bought ERP and CRM, I would be on the phone with my sales rep asking for a refund or credit for the CRM I paid for and others are now getting for free.
  6. What about customers who previously bought the core product (ERP in this example) but didn’t buy CRM, can they now get the CRM at no cost on the same terms?  If I were a customer in that situation, I would certainly ask for it if I need a CRM system.

While I can see this type of offer generating some activity and sales, I’m struggling to find anything positive from a strategic marketing and market positioning perspective.  I think the product being given away will be forever devalued or debased.  Is that a fair trade for the annual maintenance and short-term service revenues in the vendor's business and product plans?

What do you think about this marketing tactic for major business software vendors?  Have you tried something like this and if so, how did it work out?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC.