Wednesday, March 12, 2014

Short-selling Community Destination Marketing Returns

The City Council in Durham, North Carolina where I live has been wrestling with the idea of a 1% set-aside of property tax revenues to fund parks, something another council briefly tried to do to fund the arts back in the 1990s.

I had a front-row view of the struggle elected officials have with ear-marking during my now-concluded, four-decade, three-city career in community visitor-centric economic development, a function which is funded by earmarking a special tax assessed on visitors.

I find it interesting that most local officials seem to have mastered the idea of providing incentives for supply-driven economic development projects, even if only on the back end when the project is assured and increases in property taxes likely.

But when it comes to funding meant to fuel demand-driven, visitor-centric economic development, they seemingly try to siphon as much as possible away on the front end, essentially robbing their communities of 4 to 6 times the revenue they would generated if used as intended.

Like many, at first I thought the resistance to earmarking was about power based on the rhetoric of a few.  But more and more I came to realize that it is more often due more to a failure to think strategically.

Not because local elected officials can’t think strategically.  Most actually do.

But they are trapped in organizations where strategy-making is “inside-out.”  By that, I mean it is focused almost entirely on dividing up how resources are spent, with only the most general understanding of what drives revenues beyond merely voting to raise the tax rate from time to time.

Many businesses are similarly trapped in “bean-counting” cultures.  A great book that explains this and a much more effective alternative is entitled, Strategy from the Outside In.

Coincidentally, it happens to have been co-authored by Dr. Christine Moorman of The Fuqua School of Business here at Duke University, one of the very best.

The way visitor-centric economic development is supposed to work is revenue-based strategy-making.  A special tax on visitors is assessed and earmarked for the purpose of community marketing to attract and serve visitors. 

Local government then reaps a return of 6-to-1 in revenues from these visitors, mostly in the form of the portion of sales tax revenues that are returned to the City and County for general use.

Even if the return is restricted to only the ratio reaped from specific marketing efforts specifically and not from what it is able to spearhead overall, the return is 4.5-to-1, using Durham as an example because it is driven by analytics.

Yet even here, officials have always siphoned half of the funds up front before they could be put to work, effectively, in today’s dollars, trading $20 to $26 million for only $4.4 million up front.

This is the result of being resource rather than revenue focused as nearly all local governments are, more adept at dividing up the pie vs. growing the pie.

At Fuqua, Professor Moorman also directs the insight-laden CMO Survey, in partnership with the American Marketing Association and McKinsey & CompanyClick here to view the results of this year’s survey in slideshare.

There are always some interesting findings to glean from the survey, such as the portion of a marketing budget devoted to research is now benchmarked at 12%, about double what even data-driven community destination marketing organizations (DMO) such as Durham’s devote.

There is also some good information that could be used to help calibrate community destination marketing to a achieve a fuller share of visitor-related community tax revenues from the tourism sector, the way an individual business or corporation would.

From the survey, the percentage of overall revenues invested back into marketing to fuel more, varies depending on business to business or business to consumer activities (5.8% to 11%,) both of which are integral to community marketing to achieve demand-driven economic development.

Using this approach, the amount a community such as Durham would reinvest in community destination marketing should be 6.6%.

The percentage of marketing if Durham was a business with $842.4 million in sales from visitors varies depending on whether the markets are business to business or business to consumer, Durham marketing is a mix.

Using the formula of 6.6% the amount reinvested in community destination marketing to optimize the growth of local tax revenues back to Durham should be between $18 and $55 million, compared to the $2.9 million it does now.

The smaller amount is calibrated to a percentage of sales restricted to only what its marketing agency drives directly.  The larger amount is expanded to take into account the amount of sales it spearheads (spending by Durham visitors only in Durham, not coming to and from.)

Instead of $40 million, local governments here would reap $81 and $330 million to help fund not only tourism-related improvements but many other local government services.

This is what can happen when local government strategy-making is as much about optimizing revenues as how to divide them up.  It is also reliant on having a metrics-based, data-driven, best practice, highly accredited, leading-edge and sense-of-place driven community destination marketing agency as Durham does.

If your community doesn’t or you’re not sure, that is where to start.  A good indication there is a problem is if your local community marketing agency is hooked on subsidizing events or facilities or both rather than fueling revenues from which such needs can be addressed.

A preliminary analysis from a report that will be jointly published later this year by the IBM Institute for Business Value and the Economist Intelligence Unit asks the question whether marketers are leading and innovating or following.

Only 20% of the CMO’s surveyed were focused on “ROI accountability” as Durham's marketing agency is so the problem of being resource vs. revenue focused is not unique to local governments.

The more frequent Duke survey of CMOs finds that astonishingly 15% don’t measure marketing ROI at all and 27% go by “manager judgments” (another word for flying by the seat of the pants.)

It isn’t just local governments that can be trapped in “inside-out” strategy-making.

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