• by Greg Banks , March 1, 2010

Direct marketing is one of the few disciplines in marketing with a long history of demonstrable financial returns. So how can direct marketers have a measurement problem? What can possibly be wrong with their tried-and-true "closed loop?"

Here's the story. It's a story of change, but it has a happy ending.

Past standard: the closed loop

For generations, direct marketers set the standard for marketing measurement; they leveraged a closed loop -- from investment (for example, direct mail to a predetermined list) to return (such as sales converted at a dedicated toll-free call center). With this closed loop, direct marketers have helped teach the entire marketing world about continuous improvement, and what we now call a "marketing investment orientation."

Historically, a direct marketer could invest, say, $50,000 and credibly calculate -- from the dedicated channel -- a profit of, say, $100,000 (and in this case, enjoy a 2:1 return). In addition, they set up tests along the way that allowed direct marketers to also credibly manage a sometimes even higher profit, say $150,000 (3:1), for the following year.

The direct marketer's closed loop has been very tidy. And very profitable.

But there are no more closed loops.

In the new demand economy, as the buyer steadily takes power from the seller, marketers can no longer control information; they can no longer control "the loop." Customer opinions, pro and con, spread like viruses. Customers will sometimes choose the dedicated channel, such as a call center, but they also might choose the Web site, a retail store, purchase kiosks, third-party sellers, brokers, VARs -- you name it.

An advertisement in Paris, Texas can generate a purchase in Paris, France. A TV ad might generate 1,000 inbound calls within an hour of its airing ... another 1,000 Web site visits overnight ... and another 2,000 retail purchases the following weekend. A marketing investment can catch on with the buying public and create several times the impact of the original investment, through social networks, across time and place. The list of examples goes on and on.

More channels can lead to more profit

Here's an interesting and timely question: What proportion of sales does a marketer generate outside of the so-called dedicated channel?

Answer: A large and increasing proportion

Over the last several years, my company has measured what we call the "multichannel" impact of marketing programs for several Fortune 500 companies. And we've seen, in most cases, a steep decline in the proportion of sales taking place in the dedicated channels.

This is not bad news, because we have also seen that an increasing proportion of marketing-driven sales -- in our experience, more than half -- take place outside of the dedicated channels. Remember that $50,000 marketing investment? Today's profit in the dedicated channels may be $35,000. But the profit in other channels may be an extra $65,000. This gets us back to the same total profit of $100,000 illustrated earlier and the same 2:1 return.

Not as tidy. But just as profitable.

That's why I say, "closed-loop direct marketing measurements are no longer good enough."

New standard: the open loop

In a world in which a marketing investment directed to thousands can instantly spread to millions, where customers can choose from 10 or more channels at any given time, we can no longer rely upon the traditional closed loop to accurately calculate sales and profit.

We now have a new standard, which we call the "open loop." Here we assemble information from all channels and from multiple other sources, and we use a combination of tracking and statistics and apportioning techniques to calculate marketing return. It's more complicated than in the past, but it's more fun, too.

Open-loop marketers are not intimidated by customer empowerment or by channel proliferation; open-loop marketers love these trends, because they lead to more sales opportunities.

And when we combine this open-loop approach and its advantage of multiple channels with the time-tested direct marketing tenets of continuous improvement and financial return, we now have a new -- and in fact, more successful -- generation of marketing investors.

I think our closed-loop direct marketing forerunners would be proud of us.