In many meetings, I’ve been asked by customers, “How do you demonstrate an ROI for an MDM solution to manage customer data.” They all get the merits of what MDM can do - a single source of truth for customer data that is the foundation of many customer-centric business initiatives.
But how do you create a business case for this?
To start, we need some basic metric assumptions that will be useful for our calculation:
- Number of customers: 2,000,000
- Number of people that moves every year: 10% - US Census Bureau reported 11.2% of the American population moved in 2016
- Number of existing systems with customer records: 4 (e.g., call center, web, sales, and billing)
- Percentage of duplicate records in existing systems: 15%
- Percentage of your customer records that are part of a household: 20% (2 out of 10 customers are related to each other)
- Average labor cost for staff handling customer data: $20/hour
- Average campaign cost per customer: $10/customer/year (This varies by frequency and type – mail, digital, social, tele-sales, etc.)
- Average billing cost: $5/customer/year
- MDM project cost for first year: $1,750,000 (software cost $500,000, hardware cost $250,000, and the services cost $1,000,000)
- On-going MDM software support & service cost: $100,000 (20% of original software license)
- On-going implementation and maintenance service cost: $200,000 (20% of original implementation cost)
Feel free to change the assumptions based on your situation. I have used individuals, but you may be managing corporations, which will have different metric characteristics. Now that we have some fundamental assumptions let’s try to create a simple ROI – Benefits – Investment.
Benefits can be tangible and intangible. There are many intangible benefits like better customer satisfaction, improved customer loyalty, etc., but these are hard to quantify in dollars and cents. Instead, let’s concentrate on the tangibles, and break them into three main categories: Cost Reduction, Revenue Improvement, and Risk/Regulatory Compliance.
To start, let’s review the Cost Reduction factors:
- Call center:
- Address Change – with an estimated 2,000,000 customers and about 10% changing addresses in any given year that translates to 200,000 customers impacted. Assuming customer address records in four systems, and two minutes per system change, we can expect a total update time of 200,000*4*2 = 1,600,000 minutes. Since MDM can facilitate once-and-done processing, i.e., automatically synchronize changes across all systems, then you save 1,200,000 minutes or 20,000 hours. With $20/hour in labor costs, you save 20,000*20 = $400,000/year.
- The same concept applies to other profile data changes that your customers will call in about, e.g., credit cards, phones, IDs, etc.
- Campaign costs – if 15% of the 2,000,000 customers in your campaign system are duplicates, that means 300,000 records that you can remove from your campaigns. Assuming $10/customer/year, you will save $3,000,000/year.
- This can be scaled depending on the number and type of campaigns.
- Billing cost – using $5/customer/year, and 300,000 duplicates as above, you can save another $1,500,000/year.
- This can be scaled by type and frequency of billings.
- Now that you have some examples, you can do the same cost reduction calculations for all the other channels and departments that handle customer data.
With these metrics, we are ready to do a simple 5-year ROI analysis. Let’s leave out the Revenue Improvement and Risk/Regulatory benefit categories for the time being and consider the Cost Reduction category as these are hard dollar savings:
The simple ROI above shows a 564% return over five years period, with a breakeven somewhere in the second year.
From my experience, you need to start with a simple ROI framework like above and identify the three to five significant and distinct cost reduction categories.
Depending on how these work out, you may not see a breakeven until further down the line. The other kinds of factors that can help tip the scales are Revenue Improvement and Risk/Regulatory Compliance. Here are some examples:
- Revenue Improvement:
- Increased sales through more targeted and accurate sales calls (15% duplicates removed) – increased ability to identify customer needs and develop up-sell and cross-sell offers
- Increased sales effectiveness via family-based instead of individual-based marketing – assuming 20% of your clean deduplicated customer base (i.e., 1,600,000 out of 2,000,000) is part of a family household, you would have 320,000 households
- Risk/Regulatory Compliance:
- Reduced fraud
- Reduced non-payment
- Reduced fines from regulators
Many times, you would adjust your ROI based on a phased implementation approach that delivers certain kinds of business value faster. If you want to impress your senior leadership team, you can also improve your ROI analysis by taking into consideration the cost of capital, net present value, pay-back period, risk-adjusted ROI, etc. These are the factors you would see when you pay big bucks to big consulting firms to conduct your study.
Conducting an ROI assessment of your MDM project is critical to ensuring that your company can get the most out of its MDM implementation. This process will force you to identify the areas across your channels and business lines that will benefit from MDM. More importantly, it provides a framework for how to prioritize your MDM project into smaller phases by identifying areas with a high potential for ROI, and plan for which business users need to be brought on board and when with your MDM implementation journey. Many companies set themselves up for failure by taking a “build it, and they will come” mentality - trying to load all their data into MDM at once and hoping that the users will get on board later. These are the ones that fail to deliver business value or get stuck in phase 1. If this is you, it is never too late to conduct a business value assessment. Seek help from experts that have done this and successfully helped others to justify and implement MDM!