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Strategies for GrowingCustomer Value and Profitability

tooeir J.Emeritus Professor of Marketing

University of Oregon

Pearson Education International

Preface 20About the Author 26Acknowledgments 27

AGO®

CHAPTER 1 CUSTOMER FOCUS AND MANAGINGCUSTOMER LOYALTY 35

Customer Focus and Profitability 36

How to "Underwhelm" Customers and Shareholders 36Customer Focus and Customer Satisfaction 37Customer Satisfaction: A Key Marketing Performance Metric 38A Wide-Angle View of Customer Satisfaction 39De-Averaging Customer Satisfaction and Customer Profitability 40Profit Impact of Customer Dissatisfaction 43

Profit Impact of Customer Retention 44

Customer Satisfaction and Customer Retention 45Estimating Customer Retention 46Customer Retention and Customer Life Expectancy 46The Lifetime Value of a Customer 47Net Promoter Score 49

Customer Loyalty and Managing Customer Loyalty 51

Measuring Customer Loyalty 51Managing Customer Loyalty 52Top Performers 52High Potentials 53New Opportunities 54Nonprofits 54

8 Contents

Customer Focus 56

Customer Focus and Marketing Knowledge 56Customer-Focused Behaviors and Practices 57Marketing Performance 58Marketing Profitability 58

Summary 59Market-Based Strategic Thinking 60Marketing Performance Tools 61Notes 62Appendix 1.1 Present Value Table 63

CHAPTER 2 MARKETING PERFORMANCE AND MARKETINGPROFITABILITY 65

Marketing Performance Versus Financial Performance 66

Measuring and Tracking Marketing Performance 67

A Market-Based Strategy 68

Marketing Performance Metrics 69

Internal Versus External Performance Metrics 70Process Versus Result Marketing Metrics 71

Profit Impact of Marketing Performance Metrics 72

Marketing Profitability and Profits 72Marketing Profitability and Performance Metrics 74Marketing Profitability and Product Lines 76Managing Marketing Profitability—A Product Focus 77Managing Marketing Profitability—A Customer Focus 79

Profit Impact of Marketing Strategies 81

Market Growth Strategy 82Market Share Strategy 83Customer Revenue Strategy 84Cost Reduction Strategy 84Advertising Strategy 85Channel Strategy 85

Benchmarking Marketing Profitability 86

Marketing Return on Sales 87Marketing Return on Investment 88Profit Impact of Marketing Profitability Metrics 89Managing Marketing Performance and Marketing Profitability 90

Summary 91Market-Based Strategic Thinking 92

Contents

Marketing Performance Tools 93

Notes 94

CHAPTER 3 MARKET POTENTIAL, MARKET DEMAND, ANDMARKET SHARE 99

Market Definition—What Business Are We In? 100

Broad Market Vision 102

Market Potential 103

Market Development Index 107

Untapped Market Potential 107Market Potential and Market Growth 109

Managing Market Growth 110

Accelerating Market Growth 111Customer Adoption Forces 112Product Adoption Forces 113

Product-Market Versus Product Life Cycle 114

Product Life-Cycle Demand and Profits 115Market Demand and Prices 116Product Life-Cycle Margins and Marketing Expenses 118Product Life Cycle and Marketing Profitability 119Share Performance Metrics 121Market Share Index 124Share Potential and Market Share Management 124Market Share Potential 125Share Development Index 126

Summary 127Market-Based Strategic Thinking 128Marketing Performance Tools 129Notes 129

CHAPTER 4 THE CUSTOMER EXPERIENCE ANDVALUE CREATION 131

The Total Customer Experience 132

Empathic Design 132Hypothetical Videos: Current Versus Desired Customer Experience 133

10 Contents

The Customer Experience of Lead Users 134Reverse Innovation—Invent to Order 136Managing Customer Touch Points 137

Mass Collaboration 138

Prosumers—Customers as Co-Inventors 140Partners—Engaging Professionals 140Suppliers—Leveraging Supplier Participation 140Employees—An Under-Leveraged Opportunity 141

Life-Cycle Cost and Customer Value 141

Price Paid 143Acquisition Costs 143Usage Costs 144Ownership Costs 145Maintenance Costs 145Disposal Costs 146

Price-Performance and Value Creation 147

Relative Performance 147Relative Price 148Customer Value 149Value Mapping 150

Perceived Benefits and Value Creation 150

Product Benefits 150Service Benefits 151Company or Brand Benefits 152Overall Customer Benefits 153Cost of Purchase Index 153Customer Value Index 154

Emotion Benefits and Value Creation 156

Emotional Benefits and Psychological Value 156Brand Personality and Value Creation 157

Transaction Cost and Value Creation 158

Space Value 158Transaction Value 159Value Creation Across the Supply Chain 159

Identifying Value Drivers 160

Customer Preferences 161Customer Value 162

Summary 163Market-Based Strategic Thinking 165

Contents 111

Marketing Performance Tools 166Notes 167Appendix 4.1 Trade-Off Analysis Computations 168

CHAPTER 5 MARKET SEGMENTATION ANDSEGMENTATION STRATEGIES 169

Needs-Based Market Segmentation 170

Customer Needs 173

Forces That Shape Consumer Market Needs 173Demographic Influences 174Lifestyle Influences 174Usage Behaviors 174Forces That Shape Business Market Needs 174Firm Demographics 175Business Culture 175Usage Behaviors 176

Needs-Based Market Segmentation 176

The Demographic Trap 177Needs-Based Market Segments 178Segment Identification 179Segment Attractiveness 180Segment Profitability 181Segment Positioning 184Segment Strategy Acid Test 185Segment Marketing Mix Strategy 186

Segmentation Strategies 187

Mass-Market Strategy 187Large-Segment Strategy 187Adjacent-Segment Strategy 188Multi-Segment Strategies 189Small-Segment Strategy 191Niche-Segment Strategies 191Sub-Segment Strategies 191

Customer Relationship Marketing 193

Customer Value Versus Company Value 194Database Marketing 195Mass Personalization 196Mass Customization 196Customer Relationship Management 197

Summary 199Market-Based Strategic Thinking 200

12 Contents

Marketing Performance Tools 201Notes 202

CHAPTER 6 COMPETITOR ANALYSIS AND SOURCESOF ADVANTAGE 205

Sources of Competitive Advantage 207Cost Advantage 207

Variable Cost Advantage 208Marketing Cost Advantage 210Operating Cost Advantage 210

Differentiation Advantage 211Product Advantage 211Service Advantage 212Reputation Advantage 213

Marketing Advantage 213Market Share Advantage 214Product Line Advantage 215Channel Advantage 216

Knowledge as a Source of Advantage 217Competitor Intelligence 219

Benchmark Competitors 219Competitor Analysis 221Obtaining Competitor Intelligence 221A Sample Competitor Analysis 223Competitive Benchmarking 224

Industry Analysis 226Barriers to Entry 226Barriers to Exit 227Customer Buying Power 227Supplier Selling Power 227Product Substitutes 227Competitive Rivalry 228The Prisoner's Dilemma 229

Sustainable Advantage 229

Summary 230Market-Based Strategic Thinking 231Marketing Performance Tools 232Notes 232Appendix 6.1 Estimating an Experience Curve Coefficient and the Percent

Experience Curve 234

Contents 13

CHAPTER 7 PRODUCT POSITIONING, BRANDING, ANDPRODUCT LINE STRATEGIES 239

Product Positioning 240Product Positioning and Market Share 242Product Positioning Strategies 243

Production Positioning and Differentiation 245Product Differentiation 245Service Differentiation 248Brand Differentiation 249Low Cost of Purchase 250

Branding and Brand Management Strategies 251Brand Identity 251Brand Encoding 251Brand Name Development 255Creating a New Brand Name 256

Brand Equity 257Brand Assets 257Brand Liabilities 259Brand Equity 259

Brand and Product Line Strategies 261Product Line Development 262Umbrella and Flanker Brands 262Product Line Extensions 264Bundling and Unbundling Strategies 266Product Line Substitution Effects 268Product Line Scale Effects 268

Summary 269Market-Based Strategic Thinking 270Marketing Performance Tools 271Notes 272

CHAPTER 8 VALUE-BASED PRICING AND PRICINGSTRATEGIES 273

Value-Based Pricing 274Value-in-Use Pricing 274Perceived-Value Pricing 276Performance-Based Pricing 278

14 Contents

Price-Margin Management 282Pocket-Price Bandwidth 283

Product Life-Cycle Pricing Strategies 285Skim Pricing 285Single-Segment Pricing 286Penetration Pricing 287Low-Cost-Leader Pricing 288Multi-Segment Pricing 288Plus-One Pricing 289Reduced-Focused Pricing 290Harvest Pricing 290

Pricing and Profitability 292Price Elasticity and Profitability 294

Inelastic Price Management 294Elastic Price Management 296

Prince and Break-Even Analysis 298Price and Break-Even Volume 299Price and Break-Even Market Share 299

Product Line Pricing 300Pricing Substitute Products 300Pricing Complementary Products 301

Summary 303Market-Based Strategic Thinking 305Marketing Performance Tools 306Notes 307

CHAPTER 9 MARKETING CHANNELS AND CHANNELMAPPING 309

Channel Mapping 310Marketing Channel Performance 313

Customer Reach 314Operating Efficiency 315Service Quality 316

Alternative Marketing Channels 317Direct Channels 318Indirect Channels 319Mixed Channels 319B2C Channels 319

Contents 15

B2B Channels 320B2B and B2C Marketing Channels 322

Marketing Channels That Improve Customer Value 322Product Benefits 323Service Benefits 323Brand Image 325Company Benefits 325Improving Cost Efficiency 327

Marketing Channels and Competitive Advantage 329Sales Force Advantage 329Sales Productivity 329Distribution Advantage 330

Profit Impact of Alternative Marketing Channels 331

Summary 333Market-Based Strategic Thinking 334Marketing Performance Tools 334Notes 335

CHAPTER 10 MARKETING COMMUNICATIONSAND CUSTOMER RESPONSE 337

Building Advertising Awareness 341Customer Response Index 343

Strategies to Increase Customer Response 344Building Customer Awareness and Comprehension 347

Media Selection and Customer Awareness 347Message Frequency and Customer Awareness 347Ad Copy and Customer Response 350

Message Reinforcement 351Message Reinforcement and Pulsing 351Heavy-Up Message Frequency 352

Stimulating Customer Action 352Pull Versus Push Communications Strategies 352Pull Communications and Customer Response 354

Advertising Elasticity 354Advertising Carryover Effects 355Direct Marketing Promotions 357Promotional Price Elasticity 358

16 Contents

Push Communications and Customer Response 359Trade Promotions and Customer Response 359Market Infrastructure and Push Communications 360

Summary 361Market-Based Strategic Thinking 361Marketing Performance Tools 362Notes 363

CHAPTER 11 PORTFOLIO ANALYSIS AND STRAGETICMARKET PLANNING 367

Strategic Market Planning 368Product Life Cycle/Market Share Portfolio 374

GE/McKinsey Portfolio Analysis 375

Market Attractiveness 376Competitive Position 378Portfolio Analysis and Strategic Market Plans 380

Offensive Portfolio Strategy 382Defensive Portfolio Strategy 384

Portfolio Diversification 385Two Levels of Diversification 385

Marketing Mix Strategy and Performance Plan 387Marketing Mix Strategy 387Performance Plan 388

Summary 391Market-Based Strategic Thinking 392Marketing Performance Tools 393Notes 394

CHAPTER 12 OFFENSIVE STRATEGIES 395

Strategic Market Plans 396Offensive Strategic Market Plans 397Offensive Core Strategy I: Invest to Grow Sales 399

Offensive Strategy IA: Grow Market Share 399Offensive Strategy IB: Grow Revenue per Customer 400Offensive Strategy IC: Enter New Market Segments 401Offensive Strategy ID: Expand Market Demand 402

Contents 17

Offensive Core Strategy II: Improve Competitive Position 404

Offensive Strategy IIA: Improve Customer Loyalty and Retention 405Offensive Strategy IIB: Improve Differentiation Advantage 405Offensive Strategy IIC: Lower Costs/Improve Marketing Productivity 406Offensive Strategy IID: Build Marketing Advantage 406

Offensive Core Strategy III: Enter New Markets 407

Offensive Strategy IIIA: Enter Related New Markets 407Offensive Strategy IIIB: Enter Unrelated New Markets 408Offensive Strategy IIIC: Enter New Emerging Markets 409Offensive Strategy HID: Develop New Markets 410

Choosing Offensive Strategic Market Plans 411

Summary 412Market-Based Strategic Thinking 412Marketing Performance Tools 413Notes 414

CHAPTER 13 DEFENSIVE STRATEGIES 415

Defensive Strategic Market Plans 416

Defensive Core Strategy I: Protect Position 419

Defensive Strategy IA: Protect Market Share 419Defensive Strategy IB: Build Customer Retention 425

Defensive Core Strategy II: Optimize Position 425

Defensive Strategy IIA: Maximize Net Marketing Contribution 426Defensive Strategy IIB: Reduce Market Focus 429

Defensive Core Strategy III: Monetize, Harvest, or Divest 430

Defensive Strategy IIIA: Manage for Cash Flow 430Defensive Strategy IIIB: Harvest or Divest for Cash Flow 430

Selecting a Defensive Strategy 433

Summary 434Market-Based Strategic Thinking 435Marketing Performance Tools 436Notes 436

CHAPTER 14 BUILDING A MARKETING PLAN 441

Creativity Versus Structure 442

Benefits of Building a Market Plan 443

18 Contents

Identifying Opportunities 443Leveraging Core Capabilities 444Focused Market Strategy 444Resource Allocation 444Building a Performance Roadmap 444

Building a Marketing Plan 445

Part I: Situation Analysis—Where Are We Now? 445

Step I: Current Situation 447Step 2: SWOT Analysis 456

Part II: Marketing Strategy—Where Do We Want to Go? 457

Step 3: Strategic Market Plan 457Step 4: Marketing Mix Strategy 459

Part III: Performance Plan—What Is the Expected Impact? 464

Step 5: Develop a Revenue Plan and Marketing Budget 465Step 6: Develop a Profit Plan 468Step 7: Performance Review 473

Summary 474Market-Based Strategic Thinking 475Marketing Performance Tools 476Notes 476

CHAPTER 15 PERFORMANCE METRICS AND STRATEGYIMPLEMENTATION 477

Marketing Performance Metrics 479

Process Versus Result Metrics 481

Process Marketing Performance Metrics 481Result Marketing Performance Metrics 482

Successful Strategy Implementation 483

Managing Successful Strategy Implementation 484

Owning the Strategic Market Plan 485Supporting the Strategic Market Plan 487Adapting the Market Plan 489Assessing the Implementation of a Market Plan 490

Variance Analysis 491

Summary 495Market-Based Strategic Thinking 496Marketing Performance Tools 497Notes 497

Contents 19

CHAPTER 16 MARKET-BASED MANAGEMENTAND FINANCIAL PERFORMANCE 499

How to Overwhelm Customers and Shareholders 501Customer Satisfaction and Profitability 502How Market Strategies Affect Profitability 504

Customer Volume 504Margin per Customer 505Gross Profit 507Net Marketing Contribution 507Net Profit (Before Taxes) 507

How Market Strategies Affect Assets 508Investment in Accounts Receivable 508Investment in Inventory 509Investment in Fixed Assets 510

Return Measures of Profitability 510Measures of Shareholder Value 512Market-Based Management 514

Summary 516Market-Based Strategic Thinking 517Marketing Performance Tools 517Notes 518

Credits 519Glossary 520Index 529