Software review: Is there a role for Activity Based Costing (ABC) in database marketing?

By Shaun Doyle

The author has been involved in a number of projects around the world where database marketing teams have been establishing Key Performance Indicators frameworks (KPI) for monitoring the effectiveness of direct marketing activities. These have ranged from simple campaign performance reporting solutions to complex customer orientated balanced scorecards.
One issue that appears to be poorly managed in most cases is the treatment of indirect costs (picked up by other departments) when monitoring the effectiveness of marketing activities. This paper looks at the basic principles of Activity Based Costing (ABC) and explores its potential application in database marketing.

The following is a simple definition of ABC. Activity-based costing (ABC) provides organisations with a means to measure and improve its processes. ABC is a technique that identifies the costs of specific activities based on their use of resources. It allows management to compare costs of activities based on process rather than the traditional departmental or functional approach to cost measurement.

Activity-based costing (ABC) provides organisations with a means to measure and improve its processes. ABC is a technique that identifies the costs of specific activities based on their use of resources. It allows management to compare costs of activities based on process rather than the traditional departmental or functional approach to cost measurement.

ABC has been popular in the manufacturing sector for many years and its use is well established. But the last few years have seen the use of ABC spreading to other business functions. Its use in marketing is still very embryonic but this will probably change as marketers start to understand the value that this technique provides.

The following are the potential application areas for ABC in database marketing:

— customer profitability analysis
— channel profitability analysis
— channel optimisation
— campaign performance analysis
— response management.

ABC was developed as a practical tool to solve a problem faced by most companies today. Traditional cost accounting systems have evolved primarily to serve the function of inventory valuation (satisfying the generally accepted accounting principles (GAAP) standards of ‘objectivity, verifiability, and materiality’), for external audiences such as the financial regulatory authorities, Inland Revenue, creditors and investors. These traditional systems have many failings, however, especially when used for internal management purposes. Two especially important failings are their inability to:

— report individual product or process costs to a reasonable level of accuracy
— provide useful feedback to management for the purpose of operational control.

As a result, managers of companies selling multiple products through multiple channels are making important decisions about resource allocation based on inaccurate and inappropriate cost information.
Traditional cost systems focus on the product, function or organisational unit in the costing process. The costs are traced to the product, because each product item is assumed to consume the resources in proportion to the volume produced. Therefore, volume attributes of the product item, such as the number of direct labour hours, machine hours or material dollars, are used as the ‘drivers’ to allocate overhead costs. These volume drivers, however, fail to account for product diversity in the form of size or complexity. Also, there is not always a direct relationship between production volume and cost consumption.

By contrast, ABC focuses on activities in the costing process. Costs are traced from activities to products, based on the product’s demand for these activities during the production/sales process. Therefore, activity attributes such as hours of set-up time, number of tasks or number of times handled are used as the ‘drivers’ to allocate overhead costs. As the number of activity measures used increases, ABC is better able to capture the underlying economics of the business’s operation, and the reported product sales and marketing costs or marketing process costs become more accurate.

Examples of marketing process costs include:
— cost of executing a communication by direct mail or e-mail
— cost of managing a response via a call centre or branch
— cost of managing returned direct mail.

These process costs may have very different drivers. For example, the costs of outward bound call may be driven by:
— hit rate (number of calls making contact)
— duration of call
— time of day
— skill requirements for the proposition.

The cost of executing a sale through the branch network may be driven by:
— number of handoffs
— location of branch
— skill set of staff in branch
— complexity of product selected.

Another important distinction between traditional cost systems and ABC is the scope of operations. Traditional systems, being concerned primarily with business functions, eg marketing, track only those costs incurred by the function, eg campaign-related spend. ABC theory contends that all the costs incurred by the organisation in managing the end-to-end customer communication process should be taken into account. Examples of these process costs in marketing include:
— campaign planning
— campaign execution
— response management
— campaign monitoring
— campaign analysis.

This means that costs may be picked up from other business functions and not just marketing. Possible sources of cost data include:
— logistics (where appropriate)
— customer service
— general administration
— production
— technology
— distribution
— sales
— financial administration
— information resources.

Many managers understand intuitively that their accounting systems distort product and process costs, so they make informal adjustments to compensate. Few managers, however, can predict the magnitude and impact of the adjustments they should be making. ABC was first developed as a solution to these problems by two professors at Harvard, Robin Cooper and Robert Kaplan. They identified three independent but concurrent factors as the prime reasons behind the need for, and the practicality of, ABC: changes in cost structures; increased competition; and availability of technology.

Changes in cost structures: The cost structure process has changed dramatically. At the beginning of the 20th century, direct labour accounted for about 50 per cent of total product costs, with material being 35 per cent and overhead 15 per cent. Now, overheads typically comprise about 60 per cent of product costs, with material being 30 per cent and direct labour less than 10 per cent. Obviously, using direct labour hours as the allocation basis made sense 90 years ago, but it has no validity at all given today’s cost structure.
Increased competition: The level of competition that most organisations face has increased dramatically. Knowledge of real product or process costs is key to surviving in this new competitive situation.

Availability of technology: The cost of measurement has fallen as information processing technology has improved. Even 20 years ago, it would have been cost prohibitive to accumulate, process and analyse the data necessary to run an ABC system. Today, however, such activity measurement systems are not only affordable, but many of the data already exist in some form within the organisation. Therefore, ABC can be extremely valuable to an organisation, because it provides information on the range, cost and consumption of operating activities.

The following are some of the specific benefits of ABC and potential strategic uses of this type of information. The first is that more accurate product or process costs enable better strategic decisions regarding:
— product pricing
— product mix
— process design
— process automation
— channel organisation and strategies— marketing spend
— investments in R&D.

Secondly, increased visibility of the activities performed (because ABC maps the activities and traces costs to them) enables a company to:
— focus more on the management of activities, such as improving the efficiency of high-cost activities
— identify and reduce non-value-added activities.

There are a large number of well-documented ABC methodologies.1 As a general rule they follow the key steps below.

Project initiation
This stage of the project is concerned with determining:
— objectives of the project
— scope of the study
— project team members
— project plan listing key tasks and timescales
— deliverables
— assumptions.

This information would normally be documented in the project terms of reference or project definition document.
Example scope: cost of using call centre for outward-bound calls.

Process documentation
This stage of the project is concerned with:
— defining the key processes
— defining the relationship between the key processes
— identifying parties implicated in the process execution
— roles of parties in the processes
— input to the processes
— output from the processes
— process descriptions.

This information would be documented as a process map and associated descriptions.
Example processes: set up campaign, set up script, brief telemarketing team, execute calls, monitor call performance.

Activities breakdown
Where a process is complex it may be necessary to decompose it into the individual activities, these may be system or people supported.
— defining the component activities for the key processes
— defining the relationship between the various activities with a process
— identifying parties implicated in the activity execution
— roles of parties in the activity
— input to the activity
— output from the activity
— activity descriptions.

This information would be documented as an activity map and associated descriptions.
Example activity: set up campaign
(process), produce campaign business case, produce supplier brief, manage supplier responses, enter campaign reference data in campaign management tool, select target audience for campaign, set up campaign performance reports (Activities). The key for ABC is to break down the processes to the right level, too detailed and the marketer ends up with too much data.

Determination of cost driver for activities
This stage of the project is concerned with determining what factors drive the costs of executing a specific activity. In most cases these drivers are determined from business understanding, but where the drivers are complex predictive modelling techniques may be used. This information is normally recorded in an ABC modelling tool.
Example cost drivers: execute call (process) call length, time of day, hit rate, skill of operator, product being promoted (Cost drivers).

Collection of cost data
This stage is concerned with collecting the necessary data to model the costs of activities. This may mean that new measurement systems need to be put in place to allow the input data to be collected. The resulting data provide input into the ABC modelling process.
Example cost data: call duration 8 min, operator grade 1, hourly rate £3.00.

ABC model development
This stage is concerned with running the model and assessing the model’s sensitivity to the key cost drivers. In most cases the model(s) would be developed on a sample of data then tested against another sample. This ensures that the data inputs into the original model are not biased in any way.

ABC model validation
The final model(s) will need to be validated with the business to ensure that what the model surfaces make sense from a business perspective. It may also be necessary to run the model using data from different time periods, to ensure that it is robust and to assess any impact over time. In most organisations ABC studies tend to be undertaken as pilots in the first place. The results of these pilots often blow away some historical assumptions about the business. This in itself can be a very powerful exercise.
In many cases the pilot itself can produce some very valuable cost data that can be used straight away to refine processes.

ABC roll out
Having built and validated a model this stage is concerned with putting the ABC model into production and enhancing the reporting process so that it can be used for management of the business (AB management). In some cases the ABC data are integrated with the enterprise balance scorecards and surfaced to the senior management on a regular basis.

ABC has an important role to play in improving understanding of a number of marketing processes. The following are potential application areas for ABC in marketing:
— customer profitability analysis
— channel profitability analysis
— channel optimisation
— campaign performance analysis
— response management.

A wider application of ABC methodologies and associated technologies in the marketing functions
is likely to be seen. The early adopters will be organisations that are executing
complex multi-stage, multi-channel campaigns. It is these organisations that
are starting to realise the issues associated with measuring campaign effectiveness in
today’s marketing environment.

Recommended reading
The following site provides a wide range of material on ABC and associated subject areas: online resource centre for Activity Based Costing.
The following papers provide good examples of the application of ABC:
IBM Sales Force Benefits from Automation with ABC, by David L. Carreon. IBM Corporation 2002.
Willards Foods: Managing Customer Profitability with ABC Information. Keith Phillips, National Brands Ltd. Kevin Dilton-Hill, World Class International 2002.
ACB An Introduction by Chris M Pieper, SAS, 2002
These can all be found on the site.

1 Many of these methodologies are covered at

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Affiliate Marketing 2014 – Opportunities for Entertainment/Leisure/Casino Businesses

By Greg Powell and Shaun Doyle

Customer Acquisition via Affiliate Marketing

Today, a vast majority of customers make their decisions on holidays, vacations and entertainment as a result of a review or personal testimony read online.

While some of these reviews are personal reviews, most of this content is created to steer potential customers to businesses via affiliate links.

This trend has caught the attention of marketing executives worldwide, and as a result, many have developed Affiliate Marketing Programs as a cost effective, results based marketing strategy. Many publically traded companies’ attribute more than 65% of their customer acquisitions to their affiliates’ marketing efforts. An Affiliate Program opens up the company brand to a vast audience of customers who may sometimes be impossible to reach through inhouse marketing campaigns.

Affiliate Marketing is a type of performance-based marketing in which a company rewards its affiliates for each customer brought to them by the affiliate’s own marketing efforts. There are four core participants in the process:

  • The merchant (retailer/brand)
  • The network (contains offers for affiliate to choose from and issues payments)
  • The publisher (aka the affiliate)
  • The customer

Affiliate Marketing has become the linchpin of online marketing due to the guarantee that you ONLY pay for successful advertising. Rather than paying upfront, you pay only when that advertising is successful and your company has profited. The affiliate’s payment (via a referral fee or commission) is a results-oriented function, e.g.: if a customer performs the desired action (i.e. pay-per-click, pay-per-lead, pay-per-sale) through the affiliate’s link to the merchant’s website, the affiliate is rewarded for bringing that customer to the company.

Possible Business Plan for US Casinos & Online Poker Platforms

A large majority of the online poker operators in Europe have built their player databases through Affiliate Marketing Programs. Because of the vast number of affiliate websites already dedicated to gambling, there is no faster way to reach a mass audience than by allowing affiliates to promote brands and offers on their sites.

In the US, all signs point to a significant interest for a regulated online poker and casino market, whether on a state or intrastate level. In states like New Jersey, Delaware and Nevada there are thousands of customers already playing real money games online. These players are generating great new revenue and will continue to grow rapidly in 2014.

In New Jersey, for example, where online gambling was most recently approved, online gambling sites are seeing a weekly growth rate of new players and analysts predict this trend will continue to grow as more players are introduced to the online games. Affiliates have been building sites and collecting data of NJ players since 2011 when the legislation was first being presented.

There is no question that in the new online landscape, gaming operators will adopt affiliate marketing to grow their customer base. Once an affiliate program is launched, the operator will choose between two primary commission models for their affiliates:

  •  CPA (Cost per Acquisition) for each new player who makes a deposit; or
  • Revenue Share, where the affiliate receives a percentage of the ‘rake’ generated by each player per month.

All existing, large poker software providers (real money online poker/casinos) have an Affiliate Marketing Program to support their internal marketing efforts for new players. One prime example is the growth of From their early days they embraced affiliate marketing as their primary sales force. In 2008 at the Casino Affiliate Conference in Amsterdam, a presenter acknowledged that 85% or more of new players who registered at that year were brought in through their Affiliate Program.

Affiliate Marketing is the top marketing strategy for online poker and casino sites to acquire players – and building a database of customers can be done exponentially cheaper and faster by allowing affiliates to promote each company’s offers and promotions.

Before selecting an online gambling site, online poker and casino players will research and evaluate where to spend their gambling dollars. Many of their searches will lead them to affiliate websites and they will take the reviews and recommendations into account when choosing which gambling site to join. Operators whose brand is displayed across hundreds of affiliate websites will increase their brand awareness, traffic and ultimately new registrations.

Online Gambling in New Jersey

The New York Times gambling analysts say the regulation of online gambling is the most significant development since casinos opened in Atlantic City over three decades ago. Upon the launch in late November 2013, Governor Chris Christie estimated that the States casinos would generate over $1 billion in the first year. Even the most conservative estimates place revenues in year one to over $300 million.

Online Gambling in Delaware

Delaware is yet to attract the same levels of interest that has been recorded in fellow regulated states New Jersey and Nevada. As of January 23, 2014 Delaware was averaging just 18 players online at any given time during the previous seven days. Popular websites in Nevada and New Jersey on the other hand record an average of several hundred players. Delaware officials have announced that online gambling in their state generated just $253,000 during its first two months of operations. These figures leave Delaware well short of its goal of generating $5 million in revenue during the first year of online gambling. The state will collect 100% of the first $3.5 million generated in online gaming revenue, meaning that casinos in Delaware are yet to receive any of the income.

Online Gambling in Connecticut

Online poker is a possibility for the State of Connecticut in 2014. After the 2011 decision from the Department of Justice regarding the Wire Act being inapplicable to Internet gambling or poker, Connecticut began to investigate the opportunity. Governor Dannel Malloy recently acknowledged that Internet gambling was inevitable because, ‘if one state legalized it, everyone else would as well’. The State Legislature’s Public Safety and Security Committee held a hearing in February 2012 to examine the issue, and while legislators were not enthusiastic, the two primary tribes in Connecticut were supportive of online poker. The Governor and Legislators are in ongoing discussions with the tribes to work out a possible agreement.

The State currently benefits greatly from the receipt of 25% of tribal casino revenue. In 2011, reports note that Mohegan Sun turned over more than $186 million in slot machine profits to the State, and Foxwoods added another $174 million to that. Should online poker and gambling be legalized in Connecticut, those numbers would grow exponentially.

Some casinos, in Connecticut, have already built fully functional websites and platforms: players register and play free games that can be redeemed for hotel prizes (concert tickets, restaurant coupons, etc.). Once approved by state legislature, these games could immediately be turned into real money games. To incentivize affiliates to send players to free online money games – a small commission is paid per unique registration. Then, once real money gaming is allowed, affiliates will gain real value by tagging players to their account for life.

Current Affiliate Marketing Landscape

Casinos and hotels are using Affiliate Marketing to reach audiences they were previously unable to access. Affiliates use a variety of ways to promote products and services within the terms of each respective Affiliate Program, and tend to specialize in various forms of marketing, such as: search engine rankings, blog posts, social media, pay per click, content marketing.

A search through Google will show just how many major US hotel and casino groups have embraced Affiliate Programs. There are countless review sites, blogs and trip report content pages being added to the web every day – and most of these sites have an Affiliate Program linked to them to promote offers in a variety of ways.

Launching your own Affiliate Marketing Program

To launch and start operating an Affiliate Marketing Program a company will need to:

  • Create goals and expectations on what it would like to gain from launching an Affiliate Program (i.e. sales, revenue, new customers, other metrics, etc.).
  • Select the right affiliate network or software package based on the goals above.
  • Identify which affiliates would make a great addition to the program and what type of marketing message/medium is required to attract producing affiliates into the program.
    •  An example of hotel/casino affiliates would be:,,,,
    • Online Poker and Casino affiliate examples:,,,,, • Create marketing tools affiliates will use to take offers to market (in-house/outsourced).
  • Launch a marketing campaign to promote the new Affiliate Program, making it feel exclusive and inviting. The goal is to create a buzz in the affiliate community and encourage early affiliates to promote the brand.

The biggest mistake a company can make when launching an Affiliate Program is selecting the wrong network, tracking platform and marketing strategy. It takes experience to know what affiliates are looking for in specific markets, and more importantly where to find the right affiliates who will promote specific brands. There are dozens of affiliate networks and software providers and they offer a variety of services including sales tracking, reporting, payments and more. Selecting the right provider is crucial to each programs success.

For more information on how to launch an Affiliate Marketing Program, please contact Cognitive Box Consulting LLC.

The Cognitive Box Charitable Giving Program

Cognitive Box (Consulting) LLC began a Charitable Giving Program in 2012.  The Charities are chosen by our team and reflect a wide range of social issues close to each of our hearts.  Displayed in our Connecticut office is a framed piece of art with the logos of these institutions.  Also framed, are some remarkable “Thank you” letters.

We call this our Wall of Honor  

Wellness House of Annapolis, MD WallofHonor
Women In Need, Inc. NYC
Help the Hospices
Autism Initiatives
Boy Scouts of America
Interfaith Community Luncheon Norwich, CT
MASH Mystic Area Shelter and Hospitality, Inc.
East African Playgrounds
Born This Way Foundation, Inc.
Red Cross Relief for Hurricane Sandy

In 2013 we have continued the tradition and have so far donated to:

Friends of Amanicharitylogos
Atlanta Day Shelter for Women and Children
Franziska Racker Center
Horses Healing Humans, Stonington, CT
Second Harvest Food Bank of East Tennessee
Pawcatuck Neighborhood Center, Pawcatuck, CT
Critter Cavalry Rescue, Tennessee
Doctors Without Borders/Medecins Sans Frontieres (MSF)
END7 Campaign/Sabin Vaccine Institute
St. Michael the Archangel, Pawcatuck, CT
Atlanta DayShelter for Women & Children, Inc.

We are very proud to be able to give back.