The economics of marketing: in a poor economy, marketing should be a finely tuned resource allocation tool - Marketing

University Business, March, 2002 by Robert A. Sevier

I'D LIKE TO SPIN A BRIEF "What if" marketing scenario for you: You're charged with the marketing effort behind the recruitment of next year's class. The economy is dreadful, and money is tight. But you need to buy 150,000 four-panel search pieces.

One vendor prices the pieces at $.22, for a total of $33,000. Another vendor, using the same specs, prices them at $.19, or $28,500. You go with the second vendor because you believe you saved $4,500. End of discussion, right? If your job was to buy the least expensive search pieces, perhaps. But we know that your job is really to recruit the class.

Now, suppose a third vendor shows up and uses a different kind of math: She determines that last year, your 150,000 search pieces generated a response rate of 9 percent, with a cost-per-inquiry of $2.11. (150,000 search pieces generated 13,500 responses; $28,500 divided by 13,500 = $2.11). However, only 180 of your inquiring students matriculated. The result? While you saved your budget, you missed your class. The final search cost per matriculant is $158. This third vendor now proposes a slightly different strategy: Using basic prospect profiling analysis, she cuts your search list in half, to 75,000. This 75,000 represents the students who are most likely to persist in your funnel. She plans to send 25,000 of these students a highly customized brochure-with-letter that costs $1.10 each. The balance of these students will receive a letter that costs $.17 each to produce. Her total expenditures for search are $36,000. (25,000 times $1.10 = $27,500 plus 50,000 times $.17 = $8,500).

The blended response rate is 12.5 percent, or 9,000 students with a cost-per-inquiry of $4. However, these students matriculate at a much higher rate than those in the broadcast search. In September, 350 students matriculate. The cost per matriculant, For just the search, is $10.80. Of course, you will achieve other savings because you ordered fewer viewbooks and secondary publications. And finally, let's add postage to the picture; because you are sending less, you are saving more.

What lessons have you learned? One: Marketing dollars must be considered an investment, Two: Consider total program dollars--not just dollars for one component or another. Three: Response and effectiveness are the most important measurements of success. Yes, you paid more up front, but it saved you significant dollars in the end. That, my friend, is the economics of marketing. It's not about saving money. Rather, it is about investing those dollars well, and about the rewards they reap. It's about...

MARKETING AS A RESOURCE ALLOCATION TOOL

Increasingly, we are learning that colleges and universities are economic enterprises subject to many of the same market and environmental forces a for-profit organizations. For some administrators and faculty, this is a difficult reality to face. Professionally and personally, they have refused to acknowledge market forces, ant insist--because of higher ed's higher purpose--that the basic rules of business do not apply. History has largely supported this rose-colored orientation.

But today's marketplace is highly competitive, and resources are continually contested. As I write these words about 40 state legislatures have either trimmed or are planning to trim their budget, for state colleges and universities. And many private institutions, because of declining endowments and tuition revenue, are facing serious budget shortfalls. Because of this pinch, few colleges and universities have the dollars they need to adequately address all the opportunities--and obstacles--they face.

A by-product of all this is a new interest in marketing. But it should be a new interest in the economics of marketing. And that's because, at its most basic, marketing is a resource allocation tool. It is concerned with how we spend our time and our treasure so that we can achieve the greatest possible gain. If we were talking about a business, we would use the term ROI (return on investment). Colleges and universities, however, prefer the idea of "stewardship."

The academic dean who has proposals for three new academic majors must be able to determine--among other things--which major will yield the biggest payoff: Which one will return the most revenue to the institution? Which one will attract the most students? Which one will generate graduates who will land higher-paying jobs (and thereby be more willing to incur more debt via college loans)?

The president who must decide between two different campaign case statements must anticipate which one will generate the most excitement and donated dollars from potential donors.

The enrollment manager who is deciding whether to invest marketing dollars in Campus A or Campus B must be able to evaluate which geography has the most potential and most full- and fuller-pay students.

Still, while many IHEs support the idea of marketing as a resource allocation tool few colleges and universities have the conceptual tools or institutional will to follow through. Consider, for example, the general reluctance of colleges and universities to: