Database marketing outsourcing is a strategic transaction for retailers. This type of outsourcing can facilitate the integration of diverse marketing channels (e.g., web, social media, catalog and in-store sales) and enable more targeted and effective marketing to consumers.
Database marketing encompasses a potentially broad array of services, including:
- Implementation and hosting of a CRM database marketing solution;
- Data cleansing, matching, updating and enrichment;
- Data licensing;
- Data mining and analytics / reporting; and
- Campaign management and analysis.
This is the first of two articles highlighting some key business and legal considerations in these transactions. In this article I will discuss scope, sizing and pricing considerations.
Database marketing services are designed to give internal marketing organizations better data, tools and capabilities to conduct marketing campaigns, analytics and related activities. Clients may also purchase a broader suite of services, including marketing campaign execution support.
In our experience, large retailers with mature internal marketing departments tend to favor the former approach (often coupled with significant customization of the supplier's standard offering) while smaller organizations with less mature marketing capabilities gravitate toward a broader suite of the supplier's standard service offerings that includes professional services support for marketing activities. A high level of customization of standard supplier service offerings is often beyond reach for smaller organizations that cannot afford the time, cost and resource demands of a significant customization exercise. Customers need to evaluate which approach is best aligned with their internal capabilities and business objectives.
A significant challenge for all customers is properly sizing the solution to meet their projected needs. Pricing is largely based on the volume of customer records and related transactions (e.g., data cleansing, matching and appends) managed by the supplier. It can be extremely difficult for clients to accurately project the growth in these records and transactions, particularly if the database marketing services are being used to expand into new marketing channels such as social media.
An experienced supplier should be willing to help clients develop growth projections based on their experience with similarly situated customers. Clients would be well served to invest significant effort in this modeling before locking into a contract with a supplier. Of course, these models will likely be quite speculative, so the client's project budget should allow for material variations.
Pricing for database marketing services typically consists of some combination of the following elements:
Implementation Charges - Project charges for implementing the CRM database and associated tools to enable the delivery of services. Typically, this is priced on a fixed fee basis for the labor associated with implementing the solution. Clients should generally resist time and materials pricing for the implementation because it will be difficult for the client to assess the amount of effort required. Suppliers should have sufficient experience in implementing comparable solutions to provide a reliable fixed fee proposal.
Dedicated Asset Charges - Charges for hardware and third party software dedicated to the client's solution. These costs should be treated as pass-through expenses with no markup or, at most, a small administrative fee to cover the procurement costs. There should not be a separate charge for the shared infrastructure used by the supplier in delivering the services (i.e. those costs are captured in other pricing metrics). Because the supplier will be in a better position to size the dedicated hardware / software requirements based on the projected workload volumes, it is reasonable for clients to negotiate provisions that would hold the supplier responsible for the cost of any additional dedicated hardware / software that may be required to properly support those projected volumes.
Recurring Production Services Charges - Base monthly fee for hosting and maintenance of the database marketing solution, including database management and end user support. The base monthly fee may be tied to a baseline volume of customer records with incremental records charged at a click fee per thousand records. Rates may vary between addressable (i.e. customer name with postal address) and non-addressable customer records due to differences in update processing requirements. Clients should consider negotiating lower rates for non-addressable customer records.
Data Product / Transaction Fees - Variable fees tied to the volume of transactions processed and data appended to customer records by the supplier, including data cleansing, trade area appends, reverse email appends, reverse phone appends and the like. It is important for the client to have a clear understanding of how transactions are counted, particularly how they apply to periodic update processing and refreshes of customer records, and when matches with data in the supplier's own databases are included or excluded from the count. The processing of a single customer record can trigger multiple charges (e.g., cleansing, matching and appends) as it runs through a waterfall process. The contract should include diagrams of the process flows and suppliers should be required to provide projections of their transaction charges based on these process flows. In addition, clients should have the right to require suppliers to adjust the criteria for determining what constitutes a "match" in the waterfall process for any data matches that trigger discrete transaction charges.
Marketing Campaign Support and Other Professional Services - Monthly recurring charges for a baseline number of hours of support. Clients should have the right to scale the baseline number of hours up or down on reasonable advance notice and purchase additional hours above the baseline at discounted rate card rates.
Minimum Spend Commitments / Volume Discounts - Suppliers typically seek minimum spend commitments and tie discounts off their standard rates and charges to these commitments. Any such minimum spend commitments should meet the following requirements: (i) be easily met based on conservative projections of workload volumes; (ii) can be satisfied over the entire contract term rather than an annual "use it or lose it" approach; (iii) allow for carryover of any deficiency into at least one renewal period; and (iv) if not satisfied, result in the client only paying the supplier the unrealized profit on the unsatisfied balance of the commitment rather than the full amount of the unsatisfied balance (since the unrealized profit represents the supplier's actual damages based on the failure of the client to meet the commitment). Conversely, clients should negotiate volume discounts for spend in excess of the minimum commitments.