Wednesday, May 11, 2016

New vs. Existing: A Time for Every Patron

This post is part of a series in conjunction with TRG Arts on developing relationships with both new communities and existing stakeholders through artistic programming, marketing and fundraising, community engagement and public policy. (Cross-post can be found at Analysis from TRG Arts.)

As a chief marketing officer, consultant and now managing director, I’ve participated in my fair share of marketing committee meetings. One of the most hotly debated topics is whether to focus resources on developing new audiences or on increasing loyalty to bolster return on investment and per capita revenue. Two camps usually square off – the artistic team and trustees vs. the professional marketing staff.

Can you guess which sides of the argument they typically represent?

Nothing is sexier to most artistic directors and trustees than developing new audiences. On the other hand, marketing directors with limited resources are constantly trying to find ways to do more with less, which means developing ways to increase returns, and naturally, some shy away from audience development because it requires significant upfront capital, both monetary and personnel, with limited short-term gains.

Here are three things I’ve learned over the years…

1)      If your company is in financial trouble, a heavy focus on new audiences might be the nail on the coffin. The first order of business is to understand why you’re in trouble to begin with. I once had a client that was posting million dollar plus deficits year after year, and they couldn’t understand what was going wrong, as the number of new households that were purchasing was up 24% in two years. But, for every new person that was walking in the front door, twice as many were running out the back. There was an abrupt and substantial change in programming which accomplished what they intended – large numbers of new audiences were coming, however it also had the unintended consequence of driving an established core audience away. Subscriptions were in a free fall, but a new under-30 membership program was skyrocketing. The financials were problematic. It cost $0.13 on the dollar to renew current subscribers and $0.62 on the dollar to acquire new under-30 members, while at the same time, the per capita revenue from the under-30s was 42% less. If the company was capitalized well, over time the gamble might have paid off. But they completely underestimated the costs of a heavy acquisition campaign over multiple years, and found themselves in the position of taking loans from their endowment to cover payroll.

2)      If your company is financially stable, not investing in new audiences will slowly kill you. When I was the director of marketing and membership at the Smithsonian Associates, my immediate predecessor was somewhat legendary, known for being a great analytical strategist. I joined just as the world economy was starting to rebound from the global economic crisis, and to help shepherd the organization through rough waters, every department at the Smithsonian was asked to find ways to do more with less. On the surface, the data and financials in my department looked pretty healthy – we were spending less and revenues were steady, which was about all you could expect at that time. But under the surface was something troubling. To reduce cost of sale and increase ROI, a decision was made to cut expenses earmarked to acquire new visitors and patrons, and developmental money was jettisoned for new programs and experiences. For the time being, on paper, things were great. But in looking ahead, we didn’t have a pool of cultivated prospects to convert into members; even with a great membership renewal rate of above 85%, without new prospects and patrons, we were in trouble. The Smithsonian is the world’s largest cultural organization, and perhaps the most financially stable. It was clear that a sizable investment to develop new visitors and patrons would not risk the overall health of the organization, but without an investment, memberships would steadily decline thereby jeopardizing key programs in the coming years.

3)      Product is the most important of the marketing P’s in developing new audiences. When I was in my 20s, I was often hired as a technology and marketing consultant who was tasked with helping mature organizations reach Millennials. However, most organizations viewed audience development as a marketing activity, and few paid enough attention to product development. Facebook + Twitter + Snapchat does not = younger audiences. Those tasked with developing new audiences should work closely with their artistic colleagues to create experiences that are attractive to their targeted demographics. Without the right product, other strategies will fall on deaf ears.

In coming to Milwaukee Repertory Theater in 2013, I was fortunate to join a company that was on the rise. They had a talented staff, a relatively new Artistic Director that had excited audiences, and the stability of being a large LORT theater with a 60-year history. However, over more than a decade, the company had amassed an accumulated operating deficit of nearly $1 million and was coming off an unexpectedly rough year with some unusual circumstances leading to a near $375,000 operating deficit, although the company had increased in size by almost 20% in the prior three years. Along with members of the senior leadership team, TRG Arts and Management Consultants for the Arts, we conducted an exhaustive situational analysis of all of our business lines. One finding I did not expect – we were heavily underinvested in marketing, which for a company that has a 65/35 split between earned and contributed revenue, probably wasn’t good. Some wanted to increase marketing expenditures substantially and immediately to acquire new audiences, but the data showed that doing so would have exacerbated our underlying structural deficit. So, we decided to temporarily reduce our operating budget by nearly 5%, maintain our marketing expenditures, focus on building loyalty, and launch an aggressive fundraising campaign to widen our evergreen base of annual fund donors.

In that first year, we ended with a 5% operating surplus, and two years later, have not only restored all cuts, but have significantly expanded.  Also, our accumulated operating deficit stemming back to 2004 was completely eliminated, and we’ve been able to use operating surpluses to build cash reserves so that when the next recession hits (and it will), we’ll be prepared. Our operating budget is now the largest it has ever been supported by a business model that has proven to operate in the black consistently for three years. Circumstances have now changed. If we don’t invest in cultivating new audiences now, we will be in as much trouble in a few years as if we would have invested in new audiences just a few years ago. Data drives strategy. Don’t go on a hunch. And realize that sometimes there isn’t a right or wrong approach, merely the right time to pursue each.