How to make a corporate hospitality return on investment
Here’s how to make entertaining a key part of your growth strategy
Forget the intangibles for a moment. Corporate hospitality has got to pay. Ultimately you run an entertainment budget to see a financial return.
Speculating to accumulate is a perfectly acceptable ploy and you mustn't forget the end-game, no matter how ugly talk of money may seem. That's the advice of a number of entrepreneurs who have made it a key part of their overall growth strategy.
The question is then, how do you make it worth the time and expenditure you set aside for it? And how do you then measure the value it has created?
This is where life gets tricky. From talking to various corporate hospitality consultants and the departments of astute accountancy firms in charge of corporate entertainment budgets, it is clear there's no one equation. Of course it depends in many ways on the industry you're in. After all, there are higher expectations in some, such as the media. It also depends on your objectives – for example, are you looking to achieve increased market share or profit growth?
Your average profit margin is also a factor – spending 5% of your profits from one particular client won't amount to much if your margins are 10% and the client only spends £10,000 with you in total. You'd probably stretch to a good bottle of champagne. Increase it to 10% of profits and you can start thinking about a low-key day or night out at £100- a-head.
The message is then, be sensible about what you can afford as there is sometimes a temptation to dismiss the expense as ‘worth it for the relationship'. As Mark Roy, chief executive of the REaD Group Plc says: “It bloody well does matter what you're spending. Sometimes the principle of corporate hospitality – making money – gets lost. And before you know it you've whittled away your profits.”
Applying a formula
His company applies a very simple formula. “If we spend £1,000, we like to see £5,000 back, over and above what they're already spending.” The REaD Group, which tracks house movers and the deceased to ensure direct mail companies don't send inappropriate or incorrectly addressed mail, has been running a major golf day every year for the past nine years.
The itinerary for the day includes 27 holes on one of Sussex's top courses, a night in a hotel, slap-up lunch and a spectacular meal to round things off, says Roy. The event costs £50,000 to put on, equating to £500 a head for the 100 guests. “So, say a client is spending £25,000 with us and deserves an invite we need to see an uplift of £2,500 in his or her spend.”
Roy can see a clear correlation between growth and hospitality. “It's a fairly key part of what we do as an organisation. And while it would be very easy to write a cheque and say ‘they've had a good day', the priority is to make the best possible event and then make the numbers work.”
In addition to the golf events, which have become an established date in his industry's calendar, Roy's marketing team fix other ‘freebies', such as rugby internationals, Wimbledon, major football matches and Ladies' Day at Ascot. “There's no point in doing it cheaply – you've got to give it everything you've got. Get the best possible price, but know full-well that it's a golden opportunity for a client.”
The clients the REaD Group invites are largely made up of direct and value-added resellers and Roy's team know exactly what they've spent historically and can forecast fairly accurately the expected growth. “We identify clients that ‘qualify' for corporate hospitality. It's simple, if you want to get involved in these events you have to spend more money with us. We wouldn't be so crass as to say that to them, but they know what they've got to do.”
With the marketing department Roy goes through a stringent cost versus benefit analysis. He recognises that while his 5:1 metric is the justification for the company's entertainment budget there are added values, such as creating a good relationship, shoring up an existing one and raising brand awareness.
Keeping it flexible
Business ISP Mistral Internet, which is owned by entrepreneur Anthony Galley, is another company that believes corporate entertaining has played an instrumental part in it's growth and can be a cost-efficient tool.
Marketing and PR manager Kat McClure is in charge of the company's £150,000 budget. With offices in Southampton, Basingstoke and Cardiff, the company has taken the executive box at Southampton Football Club's St. Mary's Stadium, another box at the Millennium Stadium in Cardiff, and a £4m yacht, which is personally owned by Galley.
It's a moving feast though, which can be important to keep things fresh, and the boxes in Cardiff and Southampton will soon be dropped in favour of a box at the new Wembley Stadium, which alone is costing £100,000. “I don't think we'll have a problem finding clients keen to attend Wembley in its first season,” says McClure. “And we decided it's better to buy individual games elsewhere when you know people who will want to go. It costs more, but can be more targeted and we keep a record on our CRM system of what clients like – golf, sailing, rugby, football, the team they support etcetera.”
Like the REaD Group's Roy, Mistral is clear about its grounds for such expense. “It has to pay off,” says McClure, “and is a lot of money to spend for a business of our size.” Mistral boasts a turnover of £20m and while it doesn't have a set-in-stone metric it expects a very healthy return.
“Our deals tend to be reasonably sized so just one clientwin has an impact. A leased line provided by us could be worth £30,000 over three years. For spending £150,000 on corporate hospitality we'd probably expect a return of around £1m or possibly more in increased revenues,” says McClure.
Setting a budget
The reason budgeting a significant amount is worthwhile, says Ben Thompson of corporate hospitality consultancy Ben Thompson Events, is because thanks to the internet and price transparency, customers are less loyal. “Companies are looking for real value and superb service, so the key aim is to keep close to existing customers and try to up their spend and retain them, rather than spending the majority of your budget on recruiting new ones.”
As for the process of knowing how much to spend Thompson says looking at each customer and assessing the net profit they contribute to the businesss is the simplest approach. “That means net of account manager salary, overheads, communication costs etcetera,” he says. “And in the region of 5% or up to around 10% of that net figure is spent on corporate hospitality.”
At recruitment consultancy CBS Butler, managing director David Leyshon says his account managers and sales executives are required to submit corporate hospitality / entertainment budgets via the annual business planning process. “These budgets are then compared to the forecasted revenue streams for the respective accounts during the validation process. We generally expect a return on investment of at least 20 times cost for established accounts and a multiple of 10 for new customers. However, there is always leeway on this metric where a solid business case can be given, such as where key relationships need to be maintained or long-term potential exists.”
Additionally, the company's marketing team carries out an annual survey to determine actual return on corporate hospitality spend by customer, so as to track predicted against actual performance. “A brief report is prepared and the findings are fed into the budget validation process. This has proved exceptionally useful, particularly in ‘pulling-inthe- reins' where little value has been generated.”
CBS is projecting an approximate turnover of £18.5m for 2005 and has set aside £68,000 for hospitality. The previous year's turnover was £14.4m, with £54,000 allocated for entertainment. Like the REaD Group, CBS runs a corporate golf competition for £150 per head, which includes 18 holes and an awards dinner. That accounts for £8,500 alone, with boxes at the autumn rugby internationals, including a meal and entertainment, costing £4,000 for each match at around £350 per head. “For trading year 2004, we have achieved our benchmark ROI from 75% of existing customers. However, new customers have returned a disappointing 46%,” adds Leyshon.
Reflecting the nature of the marketing perhaps, the REaD Group, which turned over £12m in 2004 and is projecting £13.3m this year, has a corporate hospitality budget of £172,000 for 2005. This is up from £151,000 last year. In addition it has a separate marketing budget of £500,000. Overall, this should lead to additional revenues of more than £3m. As well as its main events Roy advises that there needs to be some flexibility in the budget for organising ad-hoc events, such as four-wheel-drive days, with clients you know will really love it.
Mistral Internet uses its extensive database to help control budget. It logs the event, date, customer attendee, budget per person and actual cost (accounting for the fact that you sometimes have no-shows which raise the cost-per-head), plus prior and post-event comments. The system enables sales people to analyse individual clients and companies and what they did as a result of the event. Equally, if somebody sends an email or letter of thanks after the event, the comments are added to the system.
Getting the right mix
According to all the entrepreneurs we spoke to it makes sense to bring existing and prospective clients together. “You'll find that existing clients say things like ‘these guys are great' – and they don't have a gun held to their heads,” says Roy.
The REaD Group's office has a top-50 clients list, based on profit. Some are spending not far shy of seven figures, he says, and inevitably those are the ones receiving the most attention. “Having said that, there's an argument that there's more potential in ones at the bottom, so we look to get a mix.” And such is the demand to attend the company's golf day, Roy claims he had to turn at least 30 or 40 away last year.
Mistral bases its invites on a spreadsheet with data on what clients are spending, when their contract is up for renewal and what is in the pipeline. It also has a top-100 client list to draw from. “You have to use corporate hospitality with everything else,” adds McClure. “First you have to find the prospects, get close to finalising the deal and put in the leg work, then use entertainment.”
Don't get desperate if key clients or hot prospects are unable to make it though, warns Tom Atkinson CEO of Cash Simply. “Make sure the spaces are filled with the right people. It's all too easy to fill a late space with a third-tier player who drinks too much and spoils the day for your influential guests.”
Handling the event
At each of its events, Mistral tries to ensure at least one director attends in addition to the sales staff “as guests like to see someone from the board there”, presumably because then they don't feel lured into a sales pitch.
Having said that, there was almost total agreement that any organised day is purely for enjoyment and getting to know the client better, not selling. “We don't do the hard-sell,” confirms McClure. “That's left for afterwards. It's just good to be able to put a face to a name.” Mistral does, though, find that the yacht works best, as with 10 to 20 events a year for 12 people each time it effectively has a captive audience. “They have to talk, especially when you're out at sea and we tend to have a ratio of one of us to every three or four of them.” Each guest also goes away with a pack containing information on products, the latest press releases and company background documents.
The REaD Group goes a step further. At its golf days it provides branded golf balls, polo shirts, umbrellas and places banners around the course. “We changed our corporate identity two years' ago and corporate hospitality has been influential in building it,” says Roy. Like Mistral though, there's no shop talk. “We have a holein- one competition on one of the par threes and anyone holing there will win a car. But when I'm giving out prizes at the end of the day there's no chance of me giving a company lecture.”
If a client does bring up the subject of contracts or business, Roy suggests it's best to ask if they'd like to set a date to talk properly. “Certainly when I've been invited to events I want to watch the races or play golf,” he says. “But as you feel obliged to talk to your hosts, you inevitably fear shop talk. In my opinion you need to treat the relationship with a fair amount of respect.”
Even if you don't attempt to ‘sell' on the day, there are ways to prepare, says CBS Butler's Leyshon. “While no set objectives are stipulated, we do make a policy of ensuring our staff are allocated defined customers and that all are very well-briefed beforehand. And while we never actively encourage business talk we do expect staff to have come away from the event with ‘next steps' and a follow-up plan to build on the relationship.”
Access all areas
After the event, it pays to have some idea of the period in which you expect to see a response. To keep its hospitality cost-effective, recruitment company CBS Butler aims to cover costs with increased profits from a given contract within a month, says Leyshon, which means maximising the goodwill engendered by an event in the immediate aftermath.
Roy believes in striking while the iron is hot too, but suggests you view it as an annual thing where the benefit could be seen in the next month or eight months down the line. “The thing you notice most in the aftermath is increased access. Calls are more readily taken and conversations more readily had,” he says. “It can be hard for sales guys to achieve a 5% upturn in revenue, although we usually see the £250,000 gross revenue return we expect from the golf day within three months.”
He adds that the company's analytical matrix helps understand what's going on with each individual client. “If they don't increase their spend it might be to do with their business, something we've done or they might have reached their limit.”
Leyshon believes it helps having his marketing team, who control the entertainment budget, carrying out regular followups in-house to establish whether customers attending the event have been contacted and progress made.
Cash Simply's Atkinson says writing to thank attendees for coming and asking for referrals can generate extra business. “Just give them a call if they don't call you first. My experience is that they will contact you to say thank you, and that is an easy time to sell.”
And finally, if you hold an annual event it's wise to use it to look at areas for improvement. For Roy, this presents a challenge for the nine-year-old golf event, although he admits that he and his marketing team always look into it. “This year we're planning fireworks over the lake for the first time. But generally, if it's working, why change it?”