Arthur C. Sturm, Jr.
If you are frustrated with marketing budgets that are based on cost, try starting with a strategic perspective.
The idea here is that too much focus is often placed on the cost of marketing without a broader understanding of opportunities in acquisition and retention, or of the likelihood of success based on the organization's market position.
This discussion is geared specifically toward you, the CFO, to help you understand where to focus your organization's marketing efforts, and how to evaluate the amount of risk your organization is willing to take. It is predicated on the belief that revenue growth is possible only through patient acquisition or patient retention. In other words, you have to either get new patients or build revenue from existing ones.
Those two approaches are shown in the exhibits below. Exhibit 1 shows acquisition opportunities and will help you understand your organization's ability to grow market share by focusing on acquiring new patients. Exhibit 2 illustrates retention opportunities and will help you gauge your ability to grow from an existing patient base.
Because the approaches are fundamentally different, you may be best suited for one, but not the other or both. Understanding your strategic perspective could help you and your marketers come to a better agreement on budgets and expectations going forward.
Hospital executives seem to focus customarily on revenue growth through patient acquisition. Other industries tend to agree with this approach, but the likelihood of successfully selling to a new prospect is 5 percent to 20 percent, according to a study by Griffin and Lowenstein (Customer Winback: How to Recapture Lost Customers-And Keep Them Loyal, 2001). That suggests that customer acquisition is not only challenging but also expensive. Is that your best strategy?
Most marketing fundamentals indicate that growth is predicated on having a higher preference than share. In other words, more people want to use your organization (preference) than currently do (share), so you have room to grow by converting preference into transactions. Conversely, low share and low preference are usually harbingers of darker days.
This model will become increasingly important as the cost of health care is pushed down to the patient. In a more customer-driven market, patients will vote with their pocketbooks and their attitudes. Preference, I would submit, will be determined not strictly on perceived quality, as is so often the case today, but more on value-that is, how much quality are patients willing to pay for?
So that you understand how Exhibit 1 reflects market dynamics, the war for revenue will be fought as follows:
- Cat Bird can pretty much do anything it wants, but its main goal is to preserve and expand its position-probably by preying on the weak.
- Hunter has the largest opportunity of all because the gap between preference and share is the widest-and thus, so is its potential. To Hunter, everyone is a target.
To the left of the axis are organizations that, for whatever reason, are laggards in the marketplace. The lack of share and preference could be driven by issues anywhere from contracts to customer service (more on that later).
- Fixer is at the greatest risk for preserving share primarily because patients would rather go somewhere else. If that opportunity ever presents itself, volumes could drop drastically.
- Résumé Writer is truly in dire straits. No one wants to go there, and in fact, no one does. My guess is that no one from a Résumé Writer organization is reading this article.
Whatever the cause, in reality Fixer and Résumé Writer will find growth extremely challenging and terribly expensive. They have to "fix" the dissatisfieds and then convince the market their organizations should be considered for care. Their focus arguably should be on looking at operations to understand what they can do to improve satisfaction and preference.
See Exhibit 1
The axes reflect share and preference scores. You can easily chart where your organization lands. Simply put, the proverbial sweet spot is the upper right-hand quadrant. Organizations in that square and the one immediately below it enjoy opportunity and share. Growth, though not guaranteed, is certainly possible.
Exhibit 2 presents a slightly different twist that suggests your potential for retention-gaining revenue from existing customers. Hospitals historically don't think that way, but they aren't alone.
See Exhibit 2
The axes now show "customer satisfaction" and "other products" as a framework for decision making. Why "other products"? People need something to "buy." Other products could include such things as a wellness center or rehab facilities for a cardiology center.
In a 2005 study by CRMGuru.com, researchers found that 80 percent of executives believed retention was "very important," but funded acquisition at twice the rate of retention. Contrast that with the analysis of Griffin and Lowenstein that says the likelihood of successfully selling to an existing customer is 60 percent to 70 percent (versus 5 percent to 20 percent for acquisition). Why would you not fund the path of higher probability of success?
Retention certainly seems to be the no-brainer strategy for efficiency, but it customarily seems to be the Cinderella of the budget: little to no support, but an expectation that a lot of work will get done on its own.
One 350-bed community hospital that ran customer retention data found that 60 percent of patients returned over three years downstream and contributed on average an additional $103,788,021 in contribution margin. That's the good news. The bad news is that they had 40 percent "leakage" or lost business. Each "retention point" (1 percent of total) is worth around $1 million. For many organizations, that is a sum worth pursuing-especially if Griffin's probability of success is factored in.
But more important, Griffin and Lowenstein report that repeat business comes primarily from good service. Their study found that 74 percent of consumers said they wouldn't return for repeat purchases because of bad service.
What? You don't agree? Not surprising. When the researchers turned the tables and asked managers why they thought customers didn't return, 49 percent said it was because of price. Only 22 percent cited customer service. It's another stunning example of how out-of-touch management can be with its customers, even outside health care. Those endless patient satisfaction reports are more than performance metrics; they are predictors in many ways of your ability to grow your business from happy customers.
In either scenario, if your organization is to the right of the axis in either exhibit, it is at least poised to increase revenue. The question, of course, is "how?"
Is Your Organization Willing to Market Itself?
This article carries the bias that growth, whether through acquisition or retention, can come through direct-to-consumer strategies. Certainly contracting, physician relations, and other initiatives are in the strategic mix, but the goal here is to help you evaluate whether a consumer approach is warranted, and if so, how it should be supported financially.
Although this list is certainly not complete, following are some questions to help you evaluate your institution's marketing willingness.
What's your risk tolerance?
Marketing at any level to any audience is a risk. Management-even the board-should decide whether the organization is willing to take risks and to what level it is willing to go. The more competitive your market, the higher the cost of acquisition-and therefore the risk.
Cat Bird and Hunter face a higher probability of success for programs with a solid business model. The issue for these two is rate of return, not success versus failure. For Fixer and certainly Résumé Writer, the risks are higher, and the time in market to realize a return is likely to be longer.
There isn't a solid metric I can suggest for risk tolerance, but your organization's answer to this question would probably be "we are" or "we aren't" risk tolerant.
Are you best suited for acquisition or for retention?
Or maybe for both? Your organization needs to develop a set of strategies or even corporate goals that focus on acquisition or retention with targeted growth rates for each. One hospital identified 58 percent of its customers as "new" each year, meaning it has not seen them in the past 24 months. That's a lot of business the hospital has to replace each year-and it's expensive.
Yet a comparison of that hospital's data with those of six other hospitals shows a comparative "new patient" rate of 54 percent for the group. It looks as if many hospitals are in the same boat.
Other industries call this rate of replacing customers a "churn rate." Although health care is unique, it is interesting to compare these churn rates with those of other industries. Consultant Graham Hill, a specialist in consumer value management, reports that mobile telecommunications companies have an average churn rate of 25 percent to 35 percent. At the high end, the cost of replacing these customers is about $162.3 million per year. The financial impact of retention becomes quite vivid in this example. Can you develop a similar financial impact report for your organization?
Do you know the value of a patient?
Health care is one of the few industries that often do not understand the financial value of a customer. The distinction here is value over time versus value of a transaction.
Value over time recognizes that the payoff of acquisition is keeping a patient in your health stream for as long as possible. Transactional revenue is a short-term, shortsighted metric that looks only at one-time revenue, such as an emergency department visit.
Understanding the value of a patient, whether identified as a "general" patient or by product line, will do legions to help you identify what you would be willing to spend to acquire or retain a certain customer base. Understanding this also plays nicely against your risk tolerance. Many industries base marketing budgets on spending a percentage of the value of the customer; 10 percent is an often-cited starting point.
In our acquisition and retention matrix, Hunter needs to understand customer value perhaps more than any of the others. Hunter must choose wisely where to invest and what to risk. Understanding the value of a customer will help Hunter know what to spend.
One hospital identified the value of a cardiovascular customer at $3,282 in direct margin in year one. But when the hospital looked at downstream activity over three years, it saw that a repeat patient generated an additional $4,813-for a total patient value of $8,095.
The value of the customer changed the way the hospital set its marketing budget. It then allotted 10 percent of that margin for patient acquisition. A 10 percent acquisition cost is often considered "reasonable," even in health care.
Here's how the organization did the math: The average value of a cardiology patient was $8,095. Multiplying that by 10 percent results in $809 per patient. If the hospital wants 200 new patients over two years, it would develop an acquisition budget of $161,800. Is that enough to achieve your goals? It depends on your market.
Contrast that with another specialty hospital that has an acquisition cost of slightly more than $11,000 to get $80,000 in revenue. Obviously an aggressive organization, its focus is not on the cost but on the return.
Do you have the right marketing infrastructure?
Successful marketing is driven off data and managing customer interactions. Data help develop, drive, and measure strategy. Customer interactions, such as call centers and the Internet, capture and channel the demand created by the strategies.
Advances in technology have made it possible for hospitals of virtually any size to capture and mine their own customer data for insights on customer segments, revenue, and, most important, mea-surement of marketing activities. It is imperative that market-driven organizations (Cat Bird and Hunter) create, mine, and manage their patient data. It will increase the likelihood of success and move the organization into a more disciplined approach to acquisition or retention.
Without the database, an organization is simply guessing at what will and will not work. And the absence of data speaks to the findings in a report, Impact Marketing: Optimizing Value and Return on Investment (Society for Healthcare Strategy and Market Development, 2004), that only 19 percent of surveyed CEOs said they have a reliable tool for evaluating marketing performance.
Infrastructure is not just essential-it is imperative. Without it, your organization lacks the metrics and the access that will guide revenue generation, be it through acquisition or retention.
What to Do with Your Answers
Build your budget around how you answered those four questions. Financial officers have the ability and responsibility to give marketers their fiscal parameters for performance.
- If you understand your strategic imperative to grow from acquisition, retention, or a mix of both, you can give marketers your perspective on areas that are mostly likely to be funded.
- If you can articulate your risk tolerance, marketers will have guidance on spend levels that can achieve basic goals versus funds required for stretch goals. You will, too.
- If you know the value of the customer, you can make a decision in the planning phase on the economic benefit of pursuing an audience as well as your willingness to spend conservatively or aggressively-or not spend at all.
- If you want to see marketers succeed, you'll give them the same tools that other professionals use. Like tools for any trade, tools for marketers are scalable and readily available. Look for what works with your organization versus leaving your team empty-handed.
Arthur C. Sturm, Jr., is president and CEO, SRK, Chicago (firstname.lastname@example.org).
Publication Date: Monday, May 01, 2006