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Strategies for Sustaining PositionStrategies for Sustaining Position

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““The primary responsibility of The primary responsibility of marketing management is to create marketing management is to create

and and sustainsustain mutually beneficial mutually beneficial exchanges between the company exchanges between the company

and its customers in the competitive and its customers in the competitive marketplace.”marketplace.”

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Strategies for Sustaining PositionStrategies for Sustaining Position

Operational excellenceOperational excellence Product leadershipProduct leadership Customer intimacyCustomer intimacy

– customer relationship managementcustomer relationship management– customer equitycustomer equity– strategic componentsstrategic components

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Operational ExcellenceOperational Excellence

Objective: lead the industry in price and Objective: lead the industry in price and convenienceconvenience

Requires: relentless pursuit of Requires: relentless pursuit of efficiencyefficiency

Source of enduring advantage?Source of enduring advantage?

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Product LeadershipProduct Leadership

Objective: produce a continuous Objective: produce a continuous stream of state-of-the art products and stream of state-of-the art products and servicesservices

Requires: creativity, speed, willingness Requires: creativity, speed, willingness to self-cannibalizeto self-cannibalize

Source of enduring advantage? Source of enduring advantage?

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Customer IntimacyCustomer Intimacy

Objective: continually shape products Objective: continually shape products and services to meet customer needsand services to meet customer needs

Requires: the ability to develop Requires: the ability to develop learning learning relationshipsrelationships with customers with customers– mass customization, one-to-one marketingmass customization, one-to-one marketing

Source of enduring advantage?Source of enduring advantage?

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Key Activities in Building Key Activities in Building Customer RelationshipsCustomer Relationships

Acquisition

Retention

DevelopmentNew

Customers

ProfitableCustomers

UnprofitableCustomers

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Key Activities in Building Key Activities in Building Customer RelationshipsCustomer Relationships

Customer acquisitionCustomer acquisition– prospecting, qualifying, convertingprospecting, qualifying, converting

Customer developmentCustomer development– turning unprofitable customers into turning unprofitable customers into

profitable customersprofitable customers Customer retentionCustomer retention

– extending customer lifetimeextending customer lifetime

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Customer AcquisitionCustomer Acquisition

How much does it cost you to acquire a How much does it cost you to acquire a customer?customer?– five times more costly than retentionfive times more costly than retention

What is the ROI of your acquisition What is the ROI of your acquisition expenditures?expenditures?

Which of your acquisition efforts yields Which of your acquisition efforts yields the most profitable customers?the most profitable customers?

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Customer DevelopmentCustomer Development

Who are my least profitable customers?Who are my least profitable customers?– generally follows the 80/20 rulegenerally follows the 80/20 rule

What is the best path of transition from What is the best path of transition from unprofitable to profitable?unprofitable to profitable?– cross-sell products / servicescross-sell products / services

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Distribution of Customer EquityDistribution of Customer Equity

DecileNumber of Customers CEFI

Decile Index to Average

Cumulative Percentage

of Total CEFI

1 1000 $1,231.00 273 27%2 1000 $1,002.00 223 50%3 1000 $851.00 189 69%4 1000 $631.00 140 83%5 1000 $441.00 98 92%6 1000 $321.00 71 99%7 1000 $147.00 33 103%8 1000 $38.00 8 104%9 1000 ($41.00) -9 103%

10 1000 ($120.00) -27 100%Average $450.10

Customer Equity Decile Chart

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Conclusions from Decile ChartConclusions from Decile Chart

Top 30-40 % of customers represent Top 30-40 % of customers represent 70-85% of total customer equity70-85% of total customer equity

Bottom 20% of the customer base Bottom 20% of the customer base generate negative valuegenerate negative value

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Customer RetentionCustomer Retention

What is the lifetime of your average What is the lifetime of your average customer?customer?– average lifetime is 1 / (defection rate)average lifetime is 1 / (defection rate)– remember 80/20 ruleremember 80/20 rule

How do you decrease the likelihood of a How do you decrease the likelihood of a customer defection?customer defection?– learn about customer to create barrier to learn about customer to create barrier to

switchingswitching

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Customer ProfitabilityCustomer Profitability

Customer focus rather than product Customer focus rather than product focusfocus

Different financial measuresDifferent financial measures– lifetime value of customer (LTV)lifetime value of customer (LTV)– customer equity financial index (CEFI)customer equity financial index (CEFI)

Mix strategy with long term view of Mix strategy with long term view of customer profitabilitycustomer profitability

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Measures of Customer Measures of Customer ProfitabilityProfitability

Lifetime Value of a Customer (LTV)Lifetime Value of a Customer (LTV)– expected future contribution net expected future contribution net

acquisition costsacquisition costs Customer Equity Financial Index Customer Equity Financial Index

(CEFI)(CEFI)– the total asset value of the firm’s the total asset value of the firm’s

customerscustomers

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Lifetime Value of a CustomerLifetime Value of a Customer

Steps in computation:Steps in computation:

A. What is total expected contribution A. What is total expected contribution over customer’s lifetime?over customer’s lifetime?

B. How much does it cost to acquire this B. How much does it cost to acquire this customer?customer?

LTV = A - BLTV = A - B

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Expected Future ContributionExpected Future Contribution

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Cost of AcquisitionCost of Acquisition

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Calculating Customer EquityCalculating Customer Equity

Number of prospects (10,000)Number of prospects (10,000) Customer acquisition rate (0.10)Customer acquisition rate (0.10) Customer retention rate (0.75)Customer retention rate (0.75) Cost of soliciting prospects (@ $5.00)Cost of soliciting prospects (@ $5.00) Future revenues ($25 to $125)Future revenues ($25 to $125) Contribution margin (45%)Contribution margin (45%)

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Calculating Customer EquityCalculating Customer Equity

YearNumber of Customers

Average Sale/ Customer

Gross Margin Per Customer

Total Gross Margin

Marketing Expenses Net Profit

1 1000 $25.00 $11.25 $11,250.00 $50,000.00 -$38,750.002 750 $50.00 $22.50 $16,875.00 $300.00 $16,575.003 563 $75.00 $33.75 $18,984.38 $225.00 $18,759.384 422 $125.00 $56.25 $23,730.47 $168.75 $23,561.725 316 $125.00 $56.25 $17,797.85 $126.56 $17,671.296 237 $125.00 $56.25 $13,348.39 $94.92 $13,253.477 178 $125.00 $56.25 $10,011.29 $71.19 $9,940.108 133 $125.00 $56.25 $7,508.47 $53.39 $7,455.089 100 $125.00 $56.25 $5,631.35 $40.05 $5,591.31

10 75 $125.00 $56.25 $4,223.51 $30.03 $4,193.48CEFI $78,250.81

Customer Equity Financial Index

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Increasing Customer ProfitabilityIncreasing Customer Profitability

Lower cost of acquisitionLower cost of acquisition– increase response rateincrease response rate

Increase future profitsIncrease future profits– increase usage (existing customers)increase usage (existing customers)– increase number of servicesincrease number of services– increase duration of customer lifetimeincrease duration of customer lifetime

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CustomerProfitabilit

y

Acquisition

Development

Retention

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Developing Customer IntimacyDeveloping Customer Intimacy

Strategic components:Strategic components:

1. Information strategy1. Information strategy

2. Production/delivery strategy2. Production/delivery strategy

3. Organizational strategy3. Organizational strategy

4. Assessment strategy4. Assessment strategy

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Information StrategyInformation Strategy

Initiate dialogues with customers and Initiate dialogues with customers and capture information on preferencescapture information on preferences– sales force, direct marketing, Internetsales force, direct marketing, Internet– databasedatabase

ExamplesExamples– Otis Elevator, Dell ComputerOtis Elevator, Dell Computer

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Production/Delivery StrategyProduction/Delivery Strategy

Fulfill the needs of individual customersFulfill the needs of individual customers– Introduction: collaborationIntroduction: collaboration– Maturity: customizationMaturity: customization

ExamplesExamples– Silicon GraphicsSilicon Graphics– Farm JournalFarm Journal

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Organizational StrategyOrganizational Strategy

Manage customers and capabilitiesManage customers and capabilities– key accounts, customer teams, customer x key accounts, customer teams, customer x

capabilities matrixcapabilities matrix ExamplesExamples

– American ExpressAmerican Express

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Assessment StrategyAssessment Strategy

Evaluate performanceEvaluate performance– customer satisfaction, loyalty, customer customer satisfaction, loyalty, customer

profitability, share of customerprofitability, share of customer ExamplesExamples

– XeroxXerox– Charles SchwabCharles Schwab

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Strategies for Sustaining PositionStrategies for Sustaining PositionOver the Product Life CycleOver the Product Life Cycle

Introduction

ProductLeadership

CustomerIntimacy

Growth

Maturity

OperationalExcellence