This process enables them to move with, and often lead, change. The major benefit of a strong customer focus is long-run survival. Business with a strong customer focus not only outperforms their competition over the long term by consistently delivering higher levels of customer satisfaction, but they also realize higher profits in the short run. A customer-focused business creates greater customer value and manages customer loyalty as a way to create greater shareholder value. Little or no customer focus translates into an unfocussed value proposition and minimal customer satisfaction.
The result is a low level of customer loyalty because customers are easily attracted to competitors. Marketing efforts designed to restrain customer switching are expensive, as are efforts to acquire new customers to replace lost customers. Low levels of customer loyalty and higher marketing costs contribute to disappointing profits. In response, short term sales tactics and accounting maneuvers are used to bolster short run financial results. But investors are able to see through these facades, and shareholder value generally stagnates.
Perhaps worse, managers are now under even greater pressure to produce short run profits, diminishing their time and motivation to understand customer needs and unravel competitors’ strategies. A business with strong customer focus stays in close contact with customers in an effort to deliver a high level of customer satisfaction and build customer loyalty. Marketing strategies in these businesses are centered on customer needs and other sources of customer satisfaction. The strength also depends on how well it understands key competitors and evolving competitive forces.
This aspect enables business to tract its relative competitiveness in pricing, product quality, product availability, service quality, and customer satisfaction. A strong customer focus and higher levels of customer satisfaction lead primarily to a high level of customer loyalty. A market based business uses a variety of marketing performance metrics to measure its performance and progress, and one essential performance metric is customer satisfaction. Business that completely satisfies customers is the business that will keep them.
One ways to measure customer satisfaction is to compute a customer satisfaction index (CSI) based on customers’ ratings of their overall satisfaction. Management’s immediate concern should be the customers having a vary degree of dissatisfaction, who are the candidates for exit as customers. The reason customer satisfaction is a valuable marketing performance metric is its ability to forecast future revenues and profits. Customer satisfaction is a forward looking indicator of business success that measures how well customers will respond to the company in the future.
Other measures of market performance, such as sales and market shares, are backward-looking measures of success. They tell how well the firm has done in the past, but not how well it will do in the future. A “very satisfied” customers not only buy more, but they also buy higher margin products and services. Dissatisfied customers buy in smaller amounts and often buy low margin or promotional products. After considering the cost of marketing, these customers lose the company money.
However, despite their less significant role in profitability, a market-based management business gives its dissatisfied customer as much attention as its very satisfied customers merely because it costs much more to attract a new customer than to retain a customer. The job of a market-based management team includes not only tracking customer satisfaction but also encouraging dissatisfied customers to complain. Only by learning the details of a customer complaint can a business take corrective action. The relationship between customer satisfaction and customer retention is intuitively easy to discern.
Different competitive conditions, however, modify this relationship. Business with no or limited competition have high levels of customer retention despite any low level of customer satisfaction. In highly competitive markets, even high levels of customer satisfaction may not ensure against customer defection. Customer satisfaction and customer retention are important linkages to market-based strategy and to profitability. The ultimate decision of any marketing strategy should be to attract, satisfy, and retain target customers.
The customer as a critical component in the profitability equation is completely over-looked in financial analysis and annual reports. It is an asset that businesses have yet to quantify in their accounting systems. A market based management business sees customer as their lifetime partner. Customer life expectancy increases exponentially with customer retention. Another key determinant of customer loyalty is customer conviction. When customers recommend a service or product, they undoubtedly have the utmost confidence in its value. This conviction can be measured using Net Promoter Score with the following formula:
Net Promoter Score = Promoters – Detractors Promoters: percentage of customers who would promote the brand or product. Detractors: percentage who would not recommend the brand of product. Using findings on customer satisfaction, customer retention, and customer recommendation, a company can determine its overall customer loyalty score (CLS) using the following formula: CLS = customer satisfaction X customer retention X customer recommendation Four types of customer: 1. Top Performers: they account for most of a business’ profits. a. Advocates: Buy nearly everything a business has to sell and purchase regularly.
They do business’ marketing for it by extolling its products to others and thereby generating new customers. b. Loyalist: Less ardent than advocates, would nevertheless and with little prompting recommend a business’ product to others. Have high level of dedication to a particular business, prefer to buy from business over any other, and are very profitable customers. 2. High Potentials: repeat customers with a high profit potential but are not loyal customers. a. Big spenders: repeat customers who buy at above average levels and frequently purchase products for others. . Underachievers: buy often but make relatively small purchases. A loyalty program targeted at underachievers can lead to an increase in their average purchase amount. 3. New Opportunities: first time or returning customers who are not yet loyal or profitable. a. Win-back customers: high potentials and top performers who switched to a competitor but for various reasons return to business. b. New potentials: fit the business’ profile for target customers 4. Non Profits: They are result of mismanaged customer selection. Unprofitable and unlikely ever to be loyal. . Misfits: They are unlikely to be retained no matter how hard the business tries. b. Spinners: These customers buy one time and then exit. Market-based management: Marketing knowledge (what we know – thinking) ( Marketing attitudes (what we believe – motivations) ( Market-based management (what we do – behaviors, strategies, and practices) ( Marketing performance (how we perform – marketing metrics) ( Marketing profitability (marketing profitability metrics) ( Business profitability (profit and financial performance metrics).
MARKETING PERFORMANCE AND MARKETING PROFITABILITY The number one concern CEO had with marketing was its failure to provide measures of its contributions to financial performance. To complement its financial performance, a business need a parallel set of external marketing metrics to tract its market-based performance. Market performance metrics are important for two reasons: 1. they provide measures of marketing performance; and 2. marketing performance metrics are correlated with profitability. Marketing performance metrics fall into for classes: . market metrics: measure a market with respect to current performance and profit impact; 2. customer metrics: gauge a business or product in terms of its performance with customers; 3. competitiveness metrics: index a business or product against benchmark competitors with respect to product performance, service quality, brand image, cost of purchase, and customer value; and 4. marketing profitability metrics. In marketing performance metrics there are process marketing metrics and result marketing metrics. 1. rocess marketing metrics are important because they are indicators of future financial performance. Examples: product awareness, intentions to purchase, product trial, and customer satisfaction and dissatisfaction, along with customer perceptions of relative product quality, services quality, and customer value. 2. result marketing metrics correspond more closely to past financial performance. Examples: relative market share, market share, customer retention, and revenue per customer. This metrics generally applied at the end of a financial performance period. Measurement perspective |Time Perspective | | | |PROCESS Metrics |RESULT Metrics | |INTERNAL Company Metrics |Company metrics occurring during an |Company metrics reported at the end of an| | |operating period, such as: |operating period, such as: | | |product defects |sales revenues | | |late delivery |percent gross profit | | |late payments |net profit before tax | | |inventory turnover |return on assets | |EXTERNAL Marketing Metrics Marketing metrics occurring during an |Marketing metrics reported at the end of | | |operating period, such as: |an operating period, such as: | | |customer awareness |relative market share | | |customer satisfaction |market share | | |perceived performance |customer retention | | |intent to repurchase |revenue per customer | A marketing profitability metrics needs to be strategic, i. e. must be related to the marketing strategy in a way that the marketing profitability of an overall strategy or a particular marketing tactic can be determined and reported with the same credibility as the result of a financial profitability metric. By simply separating marketing expenses from the other operating expenses, we can obtain a measure of marketing’s contribution to profit. These expenses are all the expenses associated with developing and executing marketing strategies.
Knowing the marketing expenses allows us to figure the net marketing contribution (NMC). Net Marketing Contribution = sales revenues X percent gross profit – marketing expenses. Net profit (before taxes) = Net Marketing Contribution – operating expenses. As with financial performance metrics, we need to convert the overall measure of marketing profitability to standardized ratios that allow for comparing the results of different sales levels. Two marketing profitability metrics that serve this function are marketing ROS (Return on Sales) and marketing ROI (Return on Investment). Marketing ROS computes marketing profitability (NMC) as a percent of sales. Marketing ROS = Net Marketing Contribution / Sales X 100%
Marketing ROS = Gross profit (%sales) – Marketing expenses (% of sales). Marketing ROI computes marketing profitability (NMC) as a percent of expenses. Marketing ROI = Net Marketing Contribution / Marketing Expenses X 100% Marketing ROS = Marketing ROS / Marketing expenses (% of sales). These two marketing profitability metrics provide marketing managers a way, to demonstrate marketing’s contribution to profit within the financial framework of the business and therefore in a way familiar to senior management. Besides the financial perspective of NMC, we also need strategic perspective, by breaking down sales into more meaningful marketing variables as follows:
NMC = sales revenues X percent margin – marketing expenses Sales revenues then divided into: – Market demand (units) – the size (number of units purchased per year) in the served market. – Market share (%) – the business’ market share of the served market. – Average selling price ($ per unit) – the price paid by end customers who will use the product. – Channel Discount (1-CD%) – One minus the percent channel discount is the percent of the market sales that the company will obtain after compensating channel intermediaries for channel services, such as sales, distribution, and customer service. Percent Margin (%) – Gross profit as a percentage.
It is also equal to (price – unit cost)/price. Marketing Expenses ($) – The investment in marketing to produce a 12. 5 percent market share and a net marketing contribution of $15. 5 million. Managing Marketing Profitability – A Customer Focus While it is convenient to report performance by product, for several reasons we should also track performance by markets and customers. The product-focused accounting statement helps us understand product unit volume, product price, and product unit margin. The customer-focused accounting statement helps us understand customer demand, customer share, customer volume, revenue per customer, and variable cost per customer.
Recognizing the product or customer as a unit of analysis, we can evaluate different aspects of net marketing contribution in order to gain more insight into the development of marketing strategies designed to grow profitability. Types of marketing strategies: 1. Market Growth Strategy: the challenge is bringing more customers into the market. 2. Market Share Strategy: the most common marketing strategy is market penetration. 3. Customer Revenue Strategy: An examination of customer needs might identify new products and services to better serve those needs and grow revenues. 4. Cost Reduction Strategy: By lowering the variable cost per unit, but the business would need to be certain the new distribution strategy will not adversely impact the level of customer satisfaction. 5. Advertising Strategy: By using advertising to grow market share. . Channel Strategy: To bypass the channel and thereby eliminate most of the channel cost. Benchmarking Marketing Profitability A comparison of NMCs of competing businesses would enable a business to better understand its marketing efficiency in producing marketing profits. The first marketing profitability metric we will benchmark is marketing return on sales. Profitability corresponds with marketing ROS. Benchmarking marketing ROS enables a business to judge its marketing profitability relative to other businesses in the same industry is marketing. Another is marketing ROI. A market-based business engages in three distinguishing practices: 1.
It tracks market-based measures of marketing performance; 2. It measures marketing profits by product, market, or both; and 3. It organizes around markets rather than products. Market Analysis Fundamental inputs of market analysis: market demand, customer analysis, market segmentation, and competitor analysis. The tipping point in a product-market occurs when consumption behaviour shifts from virtually unnoticed to epidemic-like proportions. Greatest threat to a business’s survival is a narrow focus on existing product-markets. Businesses that do not look at the broader picture of customers, market demand, and forces that shape un-served market demand expose themselves to this risk.
A market definition is essential for any business in order to understand and measure market demand, market potential, and market share. Short-term vision, with its limited view of a market, can overlook a chance to grow profits. A strategic market definition, because it enables managers to see a broad set of customer needs, lead, leads to the discovery of new market opportunities. A broad market definition then provides a market-based business three key benefits: • It reveals new opportunities • It enables management to recognize potential substitutes and competitive threats; and • It provides management with a thorough understanding of fundamental customer needs