Marketing Performance

Introduction

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Customer is the source of all cash-flows

Importance of marketing performance - Reason number 3

Without customers, you do not have a business, you have a hobby Return On Customers, Peppers and Rogers.

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Characteristics of successful marketing companies

Customer centric Companies that are really customer centric Monitor customer needs and get insights in behaviors Are loyal to their customers so that the customers are loyal to the company Do not build exit barriers

Management maturity They also Measure marketing activities in terms of impact on the bottomline Identify leading indicators Develop integration programs Are very good in the implementation of coordinated initiatives (sales, marketing, customer service, and possibly other departments)

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The building blocks for optimizing your marketing investments

Business objectives

Value Capturing model

Metrics
Marketing Strategy Marketing Drivers Customer Equity Marketing Value Customer Value

Metrics

Skill Development, Better Process, Better Tools

Commercial Efficiency
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Source: THOM interpretation of Marketing Dashboard, Marketing by the dashboard light, P. LaPointe, 2005 4

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Metrics
Marketing Strategy

Business objectives

THOMs Model
Marketing Drivers Customer Equity Marketing Value

Metrics

Striving for commercial efficiency will lead to a number of benefits

Skill Development, Better Process, Better Tools

Commercial Efficiency

It aligns marketing objectives to the companys financial objectives through the selection of critical metrics and sharing of results It creates organizational alignment within marketing and it clarifies the relationship between marketing and other corporate functional areas. It establishes direct links between spending and profits. It creates a learning organization that makes decisions on hard facts supplemented with experiential intuition. It creates transparency in marketings goals, operations and performance, creating stronger alliances outside the departments. It promotes accountability

A return to focus, simple process discipline and attention to only the most important goals should be paramount.
Source: Marketing by the dasbhoard light by P. Lapointe and own experience @ THOM 5

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Integration and consistency

Value creation model
Value Proposition Value Creation Environmental and Competitive Scan
Marketing Strategy Marketing Drivers
Products / Technology

Value Capturing

Customer Equity

Marketing Value
Price Premium

Business Objectives

Services Purchase Process & Experience Communication

Awareness Perception & Reputation Preference

Acquisition Engine Retention Commitment

Market Share

Business Paradigms

Customer Value
Positioning Relationship Building Channel Management Scope Price Positioning Recommendation CLV

ROC

Deep Channel & Customer Insights Tangible Action Plans

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Business Results

Segmentation & Targeting

Intention

Behaviour

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The model integrates 2 perspectives

Marketing Value
Price Premium

Market Share

The competitive perspective Comparing your position from relative measures: price premium and market share Giving the opportunity to compare the evolution of the relative positions over time

Customer Value
CLV

ROC

The financial perspective CLV is the NPV of all cash-flows generated by your customer base CLV creates insights in actual profit contribution

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Combining CE(1) with MV(2) will result in the strategic options to increase marketing value capturing capacity

Missed Opportunities

Vulnerable position
Low

Marketing Value

High

(1) (2)

Customer equity Marketing value 8

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Strategic options to increase value capturing capacity depend on a brands position

Sales Conversion

Consolidate Protect

Prioritize
Low

Drive Brand Equity Marketing Value

High

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This approach provides a useful measurement indicator for marketing efficiency

Marketing Value
Price Premium Market Share

MEI

Marketing Value = Marketing Investments

Marketing Efficiency Indicator

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Calculation of the marketing value in an efficient way

Marketing Value
Price Premium

Marketing Value = Price Premium x Volume

How much value marketing generates (driven by what consumers are willing to pay & measured by market share & price premium)

Price Premium = 3 possible definitions

1) The average price of the brand x minus the average of the average prices of the three lowest priced brands 2) The average price of the brand x minus the lowest price in the market 3) The average price of the brand x divided by the lowest price in the market The right formula has to be used in accordance to the company analyzed. As an example, with the third formula, private labels, which are often the lowest price in the market, could be taken into account.

Market Share

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This approach provides a useful measurement indicator for marketing efficiency

Marketing Value
Price Premium Market Share

MEI =

Marketing Value Marketing Investments

This will allow us to calculate the required value creation when we increase our marketing investments: MEI = Marketing value / Marketing Investments means Marketing value = MEI x Marketing Investments

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Marketing Performance
Competitive Perspective

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Customer equity: What does it mean?

Value creation model
Value Proposition Value Creation Environmental and Competitive Scan
Marketing Strategy Marketing Drivers
Products / Technology

Value Capturing

Customer Equity

Marketing Value
Price Premium

Business Objectives

Services Purchase Process & Experience Communication

Awareness Perception & Reputation Preference

Acquisition Engine Retention Commitment

Market Share

Business Paradigms

Customer Value
Positioning Relationship Building Channel Management Scope Price Positioning Recommendation CLV

ROC

Deep Channel & Customer Insights Tangible Action Plans

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Business Results

Segmentation & Targeting

Intention

Behaviour

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Customer equity is a logical gradation of perceptions and behaviors

How customers feel

How customers behave

Market Share

Aided Awareness

Recommend

Buy

Preference

Spontaneous Awareness

Consideration

Top of Mind

Buy More

Buy Again

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Marketing Value: What does it mean?

Value creation model
Value Proposition Value Creation Environmental and Competitive Scan
Marketing Strategy Marketing Drivers
Products / Technology

Value Capturing

Customer Equity

Marketing Value
Price Premium

Business Objectives

Services Purchase Process & Experience Communication

Awareness Perception & Reputation Preference

Acquisition Engine Retention Commitment

Market Share

Business Paradigms

Customer Value
Positioning Relationship Building Channel Management Scope Price Positioning Recommendation CLV

ROC

Deep Channel & Customer Insights Tangible Action Plans

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Business Results

Segmentation & Targeting

Intention

Behaviour

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MEI formula: example for a brand with a price premium

The table has been built by using the second definition of the price premium.

Brands

Volume (units sold) 100 50 50 120 50 370

Price

Price premium ($) 4 0 3 2 1

Marketing value 400 0 150 240 50 840

A B C D E Total

9 5 8 7 6

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MEI formula: example for a brand with a price discount

The third definition of the price premium gives other figures:

Brands

Volume (units sold) 100 50 50 120 50 370

Price

Price premium ($) 1,8 1 1,6 1,4 1,2

Marketing value 180 50 80 168 60 538

A B C D E Total

9 5 8 7 6

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Lets consider Brand A for further investigation

Brands Volume (units sold) 100 50 50 120 50 370 Price ($) Price premium ($) 4 0 3 2 1 Marketing value 400 0 150 240 50 840

A B C D E Total

9 5 8 7 6

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Lets consider Brand A for further investigation

Brands Volume (units sold) 100 (25%) 50 50 120 50 370 Price ($) Price premium ($) 4 0 3 2 1 Marketing value 400 (48%) 0 150 240 50 840

A B C D E Total

9 5 8 7 6

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MEI formula: usage

(1)

Imagine that brand A considers to increase its marketing investments and desires to maintain its current MEI level: Marketing Investments ($): Last year = 1000 This year = 1200 MEI (%): Last year = 400/1000 = 40% = current objective We know that: MEI = Marketing value / Marketing Investments means Marketing value = MEI x Marketing Investments As a result, Marketing value = 0,4 x 200 = 80. TARGET MEI THIS YEAR = 480.

This calculation seems to be easy but many more factors have to be taken into account. Hence, a good structure is needed in order to make successful analyses.

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MEI formula: usage

(2)

Imagine that brand A considers to decrease its marketing investments and desires to maintain its current MEI level: Marketing Investments ($): Last year = 1000 This year = 800 MEI (%): Last year = 400/1000 = 40% = current objective We know that: MEI = Marketing value / Marketing Investments means Marketing value = MEI x Marketing Investments As a result, Marketing value = 0,4 x (-200) = -80. NEW TARGET = 320.

This calculation seems to be easy but many more factors have to be taken into account. Hence, a good structure is needed in order to make successful analyses.

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MEI formula: usage

(4)

Imagine that brand A considers to decrease its marketing investments and desires to maintain its current MARKET POSITION, it will need to INCREASE the MEI TARGET: Marketing Investments ($): Last year = 1000 This year = 800 MEI (%): Last year = 400/800 = 50% = current objective

MEI last year = 40%; new target for this year = 50%

What are the leverages to improve the MEI? (see marketing drivers)

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Application of MEI formula for a low cost company

Fictitious data for a flight Brussels-Barcelona Volume (seats) Price Price premium (*) x 100 230 Marketing value ()

British Airways KLM Ryan Air Total

50

69

11500

30 60
(MS=43%)

90 30

300 100

9000 6000
(share in MV =23%)

140

26500

The analysis of Marketing Value year on year and the evolution of the difference between Volume and Marketing Value in terms of percentage of the total gives insights but it stays very limited MEI calculation is much more useful to make comparisons with other actors of the market
(*): The third definition of the price premium has been used.
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Application of MEI formula for a low cost company

Fictitious data for a flight Brussels-Barcelona Volume (seats) British Airways KLM Ryan Air Total 50 Price premium (*) x 100 230 Marketing value () 11500 MEI (%)

20
(hypothesis)

30 60 140
(43%)

300 100

9000 6000 26500

(23%)

25 ?

As Ryan Air is a low cost company, its marketing costs must by definition be lower than traditional airways companies. By how much? -In order to be competitive, Ryan Air should at least have 20% as MEI. It means that its investments should amount to a maximum of 30 000 euros (6000 : 20%) -If Ryan Air will become more efficient than the two other players in marketing, marketing investments should be less than 24 000 euros. (6000 : 25%)
(*): The third definition of the price premium has been used.
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Application of MEI formula for a low cost company

Fictitious data for a flight Brussels-Barcelona

MEI calculation should be done year on year in order to: -Analyze the evolution of MEI for the other actors of the market: By how much does it change? What are the drivers of the changes in MEI: Marketing Value (Price premium or Volume?) or the amount of Marketing Investments? -Understand your own MEI evolution: Is it improving or not? What are the drivers of the changes in MEI: Marketing Value (Price premium or Volume?) or the amount of Marketing Investments? For a low cost company, the focus should be put on the amount of investments made in Marketing.
(*): The third definition of the price premium has been used.
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Analysis year on year

Illustration
Brands Volume (units sold) Price ($) Price premium ($) Marketing value Investments MEI (%)

100 135 117

9 9 10 8 7 7 6 6 6

4 4 5 3 2 2 1 1 1

400 540 585 150 134 110 50 56 63

1000 1200 1245 600 582 550 250 224 210

40 45 47 25 23 20 20 25 30

50 67 55

50 56 63

Note: The table has been built by using the second definition of the price premium. The lowest price of the market is 5 $ for the three years.

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Visualization
Analysis year on year
1400 50 45 1200 40 1000 35 30 25 600 MEI (A) 20 MEI (C) 400 15 MEI (E) 10 200 5 0 Year 1 Year 2 Year 3 0 Investments (A) Investments (C) Investments (E)

800

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Depending on your situation in the model, the commercial actions will be different

Marketing Drivers
Products / Technology Services Purchase Process & Experience Communication Relationship Building Channel Management Price Positioning

Drive sales conversion

Consolidate/ improve

Boost Brand Building

Drive customer equity

High

Low

Marketing Value
29

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Illustrative

An example: The communication driver will be different within each quadrant

Marketing Drivers
Products / Technology Services Purchase Process & Experience Communication Relationship Building Channel Management Price Positioning

ATL / PR << BTL / Trade communication Media close to the shops to drive trade relationships Focus on product specific values

ATL / PR >> BTL / Trade communication SOV >>>> market share Sponsoring should be part of media mix Focus on brand values

Low

Marketing value
30

High

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Illustrative

An example: The channel management driver will be different within each quadrant

Brand Drivers
Products / Technology Services Purchase Process & Experience Communication Relationship Building Channel Management Price Positioning

Identify route causes for not being pushed harder by the trade Coverage issue? Quality issue? Brand image issue? Margin issue? Focus on relevant & differentiating relationship drivers Drive partnerships capabilities Train & educate trade to support the brand image Focus trade incentives on providing the right brand stories to the consumers Select channels with positive impact on brand image Build brand equity without losing existing channel support

Low

Marketing value
31

High

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Drilling down is key

Example: identifying optimal communication efforts

High

Customer Equity

Missed Opportunities

Market Share

Aided Awareness

Preference

ing et k ar

lue a

u pt ca

ing r

t im Op

al

Spontaneous Awareness

Consideration

Top of Mind

Low

air F
Low

Vulnerable position
High

Marketing Value
32 32

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Understanding where to put the money

Concept lets discuss

Aided Awareness

Spontaneous Awareness

Top of Mind

Preference

Market Share

98

80
0,816 (1)

40
0,500

30
0,750

40
1,333

96

85
0,885

10
0,117

5
0,500

20
4,000

97

90
0,927

20
0,222

18
0,900

10
0,555

96

75
0,781

15
0,200

14
0,933

30
2,142

(1) A value between 0.8 and 1.2 is considered as appropriate

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Drilling down
Pricing

High

Customer Equity

Missed Opportunities
Recommend

et k ar

ing

lue a

ing Buyr u pt ca

t im Op

al

Buy More

Buy Again

Low

air F
Low

Vulnerable position
Marketing Value
34 34

High

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Analysis of price positioning

>1
(high value)

Price increase potential (Price Check-up)

Consolidate price structure

Huge potential

<1

Price increase potential (Mix check-up)

Low

Pricing Evolution
(Market = cut off)

High

Pricing Opportunity Framework : Own brand price evolution vs. total market & main competitors

*: Brand Index= Market share in value divided by Market share in volume

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Analysis of price positioning

Potential (low risk) Category level

Dangerous (no pricing opportunity)

Huge potential (low risk) Category level

Low

Careful, but act

Model level
High

Price Elasticity*

Pricing Opportunity Framework: In search for the balance between opportunity and risk
*: Price Elasticity= Change in Price divided by Change in Market Share
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Hard and soft measures: definitions

BEHAVIOUR

Loyalty

Hard measures
Purchase

Hard KPIs are related to sales actions from trial offers to customer retention. It is tangible.

Trial

Preference/Conviction

Soft measures

Consideration/Liking Knowledge

Awareness

Soft KPIs are related to ideas, feelings and perceptions in the mind of the customer from awareness to preference and conviction. It is intangible

MINDSET

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Soft measures are related to Customer equity

Here some examples

Awareness & Knowledge

Brand Awareness (Do you know?) Unaided Brand Awareness Slogan Recall Campaign Penetration Ad Awareness Awareness of Other Marketing Tools Spontaneous Awareness Top of Mind Beliefs (What do you think of?) Knowledge (What do you know?)

Consideration/Liking
Brand consideration Brand relevance Brand credibility

Preference/Conviction
Purchase Intentions Brand Equity Metrics Willingness to recommend

Likeability (usually on a qualitative rating scale) Q Score (familiarity and appeal)

Revenue generation capabilities of brand Customer satisfaction

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How to measure brand equity?

Brand equity is included in the main components of customer equity

There are three main methods: Customer Mindset measurement Trying to determine Awareness, Likeability, Preference, Loyalty, Q score, etc Product-Market level measurement Related to the results of the product on the market (price premium) Financial measurement Looking at the financial value of the brand if it would be sold on the market.

Source: Tim Jans, De meting van Brand Equity, Universiteit Hasselt, Belgi, 2008
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How to measure brand equity?

Example mobile phones
Brand Equity Index (score out of 100) could be divided into five main components equally weighted in the total: Loyalty (20%): - Price Premium (10%) - Satisfaction (10%) Perceived quality/ Leadership (20%): - Perceived quality (10%) - Leadership (10%) Differentiation (20%): - Perceived value (5%) - Personality (5%) - Organization (5%) - Differentiation (5%) Brand Awareness (20%)

Market Value (20%)

Source: Tim Jans, De meting van Brand Equity, Universiteit Hasselt, Belgi, 2008
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Net promoter score

46%

Net promotor score = 11 (46% - 35%)

35%

F. Reichheld, Bain & Company: The best way to measure loyalty is just to ask people one simple question: Would you recommend us to a friend? One single measure will not be sufficient to measure loyalty Simple metric to follow-up on evolution in time
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Zoom on qualitative measurement: net promoter score

NPS: The Good Clients want simplicity and they want action. They don't have time to quibble about theory and minutia. When it is all too common for companies to overload on numbers and facts, the search for meaningful minimalism is to be applauded. NPS: The Bad The question (Would you refer a friend?) is irrelevant in many situations and industries. Besides, it doesnt get at root causes and there are serious concerns about its biased wording.
NPS Response Bias: Research in other industries has shown that the most satisfied customers (including patients and clients) are the ones most likely to respond to surveys, leading to artificial inflation of satisfaction ratings. NPS Question Bias: The NPS question presupposes a positive response NPS Question Validity: The Net Promoter question is by nature close-ended, and these types of questions have various benefits and disadvantages: They are easier for measurement purposes but force a binary choice on the respondent, when the actual answer might be somewhat grey or open-ended.

Source: http://www.customersatisfactionstrategy.com/pdf/whitepaper-NPScore.pdf
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Net Promoter Score versus Customer satisfaction Index

Pros and Cons
On one side of the ring is the tag team of Fred Reicheld, father of the Net Promoter System (NPS) concept and Satmetrix Systems, implementer of NPS-based survey systems. On the other side of the ring in the red trunks, we find Claes Fornell, father of the American Customer Satisfaction Index (ACSI) and ForeSee Results, implementer. Lets start by handing out some awards to the teams: - Best marketed: Net Promoter (Reicheld is very good at sharing his concept and in writing compelling books about it) - Easiest to use: Net Promoter (many studies show that CEOs believe it) - Most mature: Satisfaction (The ACSI has been tracking data since about 1994 and satisfaction has been around as long as I can remember) - Most quantitative: Satisfaction - Sexiest: Net Promoter Net Promoter has gained a lot of momentum over the last few years as many large companies have adopted it. The methodology is pretty straightforward: ask people if theyd recommend your firm. Based on their response, they get categorized as a Promoter, Detractor, or neither. You take the percentage of Promoters and subtract the percentage of Detractors and that leaves you with a Net Promoter percentage. The American Customer Satisfaction Index uses customer interviews as input to a multiequation econometric model. The ACSI model is a cause-and-effect model with indices for drivers of satisfaction on the left side (customer expectations, perceived quality, and perceived value), satisfaction (ACSI) in the center, and outcomes of satisfaction on the right side (customer complaints and customer loyalty, including customer retention and price tolerance).
Source: http://experiencematters.wordpress.com/
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Net Promoter Score versus Customer satisfaction Index

Pros and Cons
Using industries Reicheld cites as exemplars of Net Promoter, the research fails to replicate his assertions regarding the clear superiority of Net Promoter compared with other measures in those industries. Net Promoter is not the ultimate measure for a customer relationship. Then again, neither is satisfaction. But companies are better off when they have more satisfied than dissatisfied customers and more Promoters than Detractors. Main recommendations: - Dont expect any single measure to be eutopia - Focus on one measure to build alignment - Evolve your metrics over time - Look at other metrics such as Customer Advocacy. So, in the purple trunks is Customer Advocacy, the perception that the firm does whats best for customers, not just whats best for its own bottom line. We strongly recommend that financial services and healthcare firms take a very close look at this measure. The bottom line: Dont get too caught up in determining the winner of this battle. Just make sure that you do something and are prepared to learn and evolve over time.

Source: http://experiencematters.wordpress.com/
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Hard measures are related to Marketing Value

Here some examples as well

Trial
Trial Prospect Lifetime Value Average Acquisition cost Average new appointments generated per sales rep New Account cycle time Number of leads to be generated to achieve revenue goal

Purchase
Number of Customers Recency Customer profit Customer Lifetime Value Purchase Habits Unit Margin/Margin (%) Contribution per unit Contribution Margin (%) Break-Even Sales Level Target Volume/ Target Revenues Net profit Return on Sales Return on Investment Payback Net Present Value Internal Rate of Return Market Share Brand Development Index Penetration Share Share of Requirements

Re-purchase/Loyalty
Retention rate Average retention cost Loyalty Repeat volume Year-on-Year Growth Compound Annual Growth Rate Opportunity success rate % of sales lost % of returning customers Involuntary customer churn Voluntary customer churn

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Logo client

Marketing Performance Financial Perspective

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Agenda

2.

Measurement tools: from basics to predictive Pareto RFM Analysis Marketing ROI at campaign level Customer Lifetime Value Marketing ROI on CLTV Return on Customers

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Nominal value and relative performance

High-level view on 2 different groups of metrics

There are two main types of measurements regarding return on investments (ROI):

- As an absolute value ( or time):

e.g.: NPV, CLTV, Payback period, RFM, etc

- As a delta (%):
e.g.: ROI, ROA, Marketing ROI, ROC, etc

The focus will be put on RFM Analysis, Customer Lifetime Value, Marketing Return on Investments and Return on Customers

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Who are the customers with the highest value?

Revenue 1400 1200 1000 800

Revenue

600 400 200 0 1 9 17 25 33 41 49 57 65 73 81 89 97

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Who are the customers with the highest value?

Cumulative 120% 100% 80% 60% 40% 20% 0% 1 8 15 22 29 36 43 50 57 64 71 78 85 92 99

Cumulative

Same exercise can should be done with profit

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RFM: What does it mean?

RFM is a method to determine the value of a customer or group of customers where: R = Recency the time since the last purchase was made F = Frequency the number of purchases made during a time period M = Monetary Value the dollar value of the purchases made -Categories for each variable have to be defined by applying business rules or using data mining techniques -Once it is done, customers are assigned a ranking number of 1,2,3,4, or 5 (with 5 being highest) for each RFM parameter -The three scores together are referred to as an RFM "cell" . The database is sorted to determine which customers were "the best customers" in the past, with a cell ranking of "555" being ideal.

http://www.answers.com/topic/recency-frequency-monetary-value http://searchdatamanagement.techtarget.com/sDefinition/0,,sid91_gci751219,00.html
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Variance on RFM - example major retailer in B

# Art / Visite

Dpenses / Trim

Silver

Golden

Frquence

25+

OneShot

StockPiler Commuter Nugget

1-24
# Art / Visite

Focused

Hopper

/ Trim

1-2

3-6

7-15

16+
Visits / Trim

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Managing clients differently, according to their value and their behavior

priorit Bons Max Frquence Total Bons/V visite/trim Bons/trim isite Reward Diriger Reward/B Diriger/bons strat % strat % ons/trim /trim

rcompenser GOLDEN rcompenser SILVER orienter COMMUTER frquence HOPPER orienter STOCKPILER frquence ONESHOT orienter FOCUSED orienter NUGGET

2,5 3 3 4 3 4 3 1

31 11 10 5 5 2 2 20

78 33 31 20 15 8 7 20

75% 75% 25% 25% 25% 75% 25% 0%

25% 25% 75% 75% 75% 25% 75% 100%

58 25 8 5 4 6 2 0

20 8 23 15 11 2 5 20

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RFM: limitations

The focus is only put on profitable existing customers, it leads to two risks:
over-marketing to the most attractive RFM segments negligence of other segments that would be profitable if developed properly.

The method is backward oriented and:

assumes that customers are likely to continue behaving in the same manner is too much descriptive so no forecasts related to consumers behaviors are possible

There is no reference to the acquisition and to the retention of existing customers

http://www.answers.com/topic/recency-frequency-monetary-value http://www.dbmarketing.com/articles/Art149.htm http://en.wikipedia.org/wiki/RFM

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Marketing ROI at campaign level

Basic formula

( (Acquisition (#) Churn (#)) * Margin () ) - Investment ROI = Investment ()

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Direct Marketing

Number of pieces you are mailing or e-mailing: 100.000 ex. Total program costs: 5.000 Response Rate: % of responses expected: 5% Purchase Rate: % of responses expected to make purchases: 3% Average profit per sale: 2.5 (NPV of future cash profit)

ROI

= ?

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Direct Marketing

Number of pieces you are mailing or e-mailing: 100.000 ex. Total program costs: 5.000 Response Rate: % of responses expected: 5% Purchase Rate: % of responses expected to make purchases: 3% Average profit per sale: 2.5 (NPV of future cash profit)

100.000 x (5%) x (3%) x 2.5 ROI = 5.000 375 / 5.000 - 1 - 92.5% -1

= =

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ROI as a decision making tool

Direct marketing

Campaign A Number of contacts targeted: 500.000 Response rate: % of responses expected: 1,0% Marketing investments 290.000 Incremental customer value per sale: 75 Campaign B Campaign A + additional 25 incentive (additional discount voucher for customers who buy) will increase response with 0,6% to 1,6% Would you go for the additional incentive (campaign B)?

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ROI as a decision making tool

Direct Marketing

Direct mail Number targeted Sales conversion rate Number of sales Marketing investment Cost per sale Incremental customer value (ICV) per sale Net profit Net ROI 500.000 1.0% 5.000 290.000 58 75 375.000 29.3%

Direct mail + 25 offer 500.000 1.6% 8.000 490.000 61 75 600.000 22.4%

Difference

3.000 200.000 3

225.000 6,9%

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CLTV is nothing else than the NPV of all the profits from a customer during its lifetime.

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Customer Lifetime Value: What does it mean?

CLTV takes three factors into account:

Get

Keep

Increase

Acquisition (#)

Loyalty (time)

Customer Value ()

Hence,
CLTV = Revenues Cost of Acquisition Cost of Retention Cost-to-Serve
Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms ,
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Choosing the discount rate for NPV

Different perspectives are possible, but The minimum rate should never be lower than the WACC (Weighted Average Cost of Capital, taking into account the different financing sources) The capital needed for the project should return as much as if invested in an alternative initiative The rate should be much higher if the initiative is a risky one

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Choosing the calculation methodology: 3 option

Fully allocated profit: Profit is calculated per customer or per customer group. Pre-requisite: costs can be allocated per customer or per customer group. What about investments, fixed structure costs Marginal contribution per customer: Gross margin per customer: what is left when all variable costs have been deduced from revenue? Which means: what does the company lose in value that it cannot save in costs when the customer has left Free cash flows Here meant as Net Income Capital Expenditure (direct costs) Still 2 options: fully allocated or marginal In practice: marginal free cash flow is the most pragmatic one no capital and depreciations reconciliation, no discussions on indirect costs
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Example

Revenue Service costs COGS GROSS MARGIN Campaign (Acquisition) COS NET MARGIN Overhead costs Depreciation EBIT Financial costs EBT Tax NET PROFIT

700000 10000 25000 665000 250000 100000 315000 15000 300000 100000 200000 ? ? ? ? 100 150

3750

3500

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Fully Allocated Profit

Marginal Contribution

Free Cash Flow

P&L 1000000 50000 250000

Customer x 5000 250 1000

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What is the value of my customers?

Example (1)
Y1: turnover/customer Y2: turnover/ customer Annual cost/year 35 000 45 000 30 000

Year

# of clients 1000 600 390 273 205 160 126 101 81 65

Retention rate 60% 65% 70% 75% 78% 79% 80% 80% 80% 80%

Total revenue (millions) 35 000 000 27 000 000 17 550 000 12 285 000 9 213 750 7 186 725 5 677 513 4 542 010 3 633 608 2 906 887

Variable costs 30 000 000 18 000 000 11 700 000 8 190 000 6 142 500 4 791 150 3 785 009 3 028 007 2 422 405 1 937 924

Gross margin 5 000 000 9 000 000 5 850 000 4 095 000 3 071 250 2 395 575 1 892 504 1 514 003 1 211 203 968 962 34 998 498

NPV at 5%

1 2 3 4 5 6 7 8 9 10 Total

5 000 000 8 571 429 5 306 122 3 537 415 2 526 725 1 876 996 1412 216 1 075 974 819 790 624 602 30 751 268

CLTV/ customer

30 751

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What is the value of my customers?

Example (1)

Y1: turnover/customer Y2: turnover/ customer Annual cost/year

35 000 45 000 30 000

Retention rate increased by 10% (1000 new customers acquired)

Year

# of clients 1000 700 525 420 349 307 273 246 221 199

Retention rate 70% 75% 80% 83% 88% 89% 90% 90% 90% 90%

Total revenue (millions) 35 000 000 31 500 000 23 625 000 18 900 000 15 687 000 13 804 560 12 268 058 11 057 453 9 951 707 8 956 537

Variable costs 30 000 000 21 000 000 15 750 000 12 600 000 10 458 000 9 203 040 8 190 706 7 371 635 6 634 472 5 971 024

Gross margin 5 000 000 10 500 000 7 875 000 6 300 000 5 229 000 4 601 520 4 095 353 3 685 818 3 317 236 2 985 512 53 589 438

NPV at 5%

1 2 3 4 5 6 7 8 9 10 Total

5 000 000 10 000 000 7 142 857 5 442 177 4 301 911 3 605 411 3 056 015 2 619 442 2 245 236 1 924 488 45 337 537

CLTV/ customer
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What is the value of my customers?

Example (1)
Y1: turnover/customer Y2: turnover/ customer Annual cost/year 35 000 50 000 30 000

Cross-selling (turnover increased by 10%)

Year

# of clients 1000 600 390 273 205 160 126 101 81 65

Retention rate 60% 65% 70% 75% 78% 79% 80% 80% 80% 80%

Total revenue (millions) 35 000 000 30 000 000 19 500 000 13 650 000 10 237 500 7 985 250 6 308 348 5 046 678 4 037 342 3 229 874

Variable costs 30 000 000 18 000 000 11 700 000 8 190 000 6 142 500 4 791 150 3 785 009 3 028 007 2 422 405 1 937 924

Gross margin 5 000 000 12 000 000 7 800 000 5 460 000 4 095 000 3 194 100 2 523 339 2 018 671 1 614 937 1 291 950 44 997 997

NPV at 5%

1 2 3 4 5 6 7 8 9 10 Total

5 000 000 11 428 571 7 074 830 4 716 553 3 368 967 2 502 661 1882 954 1 434 632 1 093 053 832 802 39 335 024

CLTV/ customer

39 335

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What is the value of my customers?

Example (1)
Y1: turnover/customer Y2: turnover/ customer Annual cost/year 35 000 50 000 30 000

Revenue and Loyalty (retention and turnover increased by 10%)

Year

# of clients 1000 700 525 420 349 307 273 246 221 199

Retention rate 70% 75% 80% 85% 88% 89% 90% 90% 90% 90%

Total revenue (millions) 35 000 000 35 000 000 26 250 000 21 000 000 17 430 000 15 388 400 13 651 176 12 286 058 11 057 453 9 951 707

Variable costs 30 000 000 21 000 000 15 750 000 12 600 000 10 458 000 9 203 040 8 190 706 7 371 635 6 634 472 5 971 024

Gross margin 5 000 000 14 000 000 10 500 000 8 400 000 6 972 000 6 135 360 5 460 470 4 914 423 4 422 981 3 980 683 69 785 918

NPV at 5%

1 2 3 4 5 6 7 8 9 10 Total

5 000 000 13 333 333 9 523 810 7 256 236 5 735 882 4 807 215 4 074 687 3 492 589 2 993 648 2 565 984 58 783 383

CLTV/ customer
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A simpler approach: the margin multiple

CLTV = m ( r ) 1+i-r
- m = margin or profit from a customer per period (e.g. a year) - r = retention rate (decimal or percentage) - i = discount rate (decimal or percentage) - (r/1+i-r) = margin multiple
Source: Sunil Gupta and Donald R. Lehmann, Managing customers as investments, Wharton School Publishing, University of Pennsylvania, 2005
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The margin multiple: example

( 0.8 ) = 2.67 1+0.1-0.8

- m = margin or profit from a customer per period (e.g. a year) - r = retention rate 80% - i = discount rate 10%

Source: Sunil Gupta and Donald R. Lehmann, Managing customers as investments, Wharton School Publishing, University of Pennsylvania, 2005
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A simpler approach

Assumptions:

Margins remain constant over time

Customer retention rate is also constant

CLTV is estimated over an infinite time horizon (even at 80%

retention, a customer is almost 90% used up after just ten years.)

Source: Sunil Gupta and Donald R. Lehmann, Managing customers as investments, Wharton School Publishing, University of Pennsylvania, 2005
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The margin multiple

Retention rate 60% 70% 80% 90% 10% 1,20 1,75 2,67 4,50

Discount rate 12% 14% 1,15 1,11 1,67 1,59 2,50 2,35 4,09 3,75

16% 1,07 1,52 2,22 3,46

For most companies, the multiple is in the range of 1 to 4.5!

Source: Sunil Gupta and Donald R. Lehmann, Managing customers as investments, Wharton School Publishing, University of Pennsylvania, 2005
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Customer Lifetime Value

Retention rate 60% 70% 80% 90% Annual margin Retention rate 60% 70% 80% 90% 10% 120 175 267 450 10% 1,20 1,75 2,67 4,50
100,00

Discount rate 12% 14% 1,15 1,11 1,67 1,59 2,50 2,35 4,09 3,75

16% 1,07 1,52 2,22 3,46

Discount rate 12% 14% 115 111 167 159 250 235 409 375
44,44% 50,00% 63,64%
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16% 107 152 222 346

68,75%
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59,38%

55,77%

Source: Sunil Gupta and Donald R. Lehmann, Managing customers as investments, Wharton School Publishing, University of Pennsylvania, 2005

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More sophisticated financial ROI calculation

Keep Get
Increase

(# retained cust. - # lost cust. + # new cust.) x CLTV - Investment

Marketing ROI =

Investment

CLTV

CLTV

Corporate

SME
Get
Increase

2 marketing initiatives SME retention & upsell program Corporate acquisition program

Keep

Legend
Situation t0
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# customers
Launch t1

No Launch t1

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3. Financial ROI calculation

The formula is easy, the execution is not
Keep Get
Increase

(# retained cust. - # lost cust. + # new cust.) x CLTV - Investment

Marketing ROI =

Investment

Tips

Think incremental - Think in delta and make impact measurable Look at impact per segment - immense difference in CLTV per segment Dont use ROI as the only criteria - Prioritize marketing activities in line with strategy

Key Challenges

Isolating Cause & effect - Think in control & test group when setting up the measurement. Check competitive action - Use data mining tools to detect correlations Estimating the long term financial impact of Brand Value - Use historical data to estimate long term effect of Brand Value - Make simple hypothesis & adjust
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Customer loyalty and ROMI

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To define customer loyalty a distinction is to be made between loyal behavior and a loyal attitude
A customer who stays, is doing repeat purchases in the same retail store, renews his contract with his service provider is seen in many companies as a loyal customer

Behavioral loyalty

HOWEVER this does not mean these customers are truly loyal !! They might leave once situation changes!

Attitudinal loyalty

THEREFORE loyalty is to be defined as: Commitment to continue using a product or service, despite situational influences and marketing efforts of competitors which make it more attractive to switch providers

Source: Klantenloyaliteit, Marnix Bgel; definition Olivier 1997

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Focus on customer loyalty management has evolved over the past decades
1970s -Managing customer satisfaction as a driver for loyalty -Measurement of defection rates and root causes -Launch of frequent flyer miles-programs

1980s

1990s

-Churn prediction modeling -Concept of points- and discount programs implemented in various industries (retail, telco, FMCG), with varying results -Partnerships & coalition programs -Increasing number of programs threatens relevance of traditional loyalty programs -Shift from points scheme to club programs with no rewards other than special recognition and individual communication

>2000

Source: Journal of Targeting, Measurement and Analysis for Marketing 2004, Marketing NPV 2005, Mc Kinsey Quarterly 2002
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But what is customer loyalty? There are multiple definitions in marketing literature
Real loyalty happens when you have captured both customers heads and their hearts: F. Reichheld, Bain & Company The head wants to know that you offer outstanding value, features, pricing The heart wants to feel things like this company knows me, understands me, cares about me, and shares my ideals Transactional, contractual, functional, emotional loyalty Inertial, deliberative, emotive loyalty

Marketing NPV Mc Kinsey Quarterly

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Satisfaction does not necessarily grow loyalty

There is a correlation between satisfaction and loyalty

Impact on loyalty

But satisfaction is an insufficient solo condition to loyalty

65%-85% of customers who defect say they were satisfied with their supplier (F. Reichheld)

loyaltists

For an average of 75% satisfied customers, a company will typically have 30% loyal customers HABITUAL USERS will switch as soon as competition offers interesting promo

defectors

Dissatisfied

Merely satisfied

Delighted

Level of customer satisfaction

INERT RESIDENTS may switch if competitions offer is worth the effort, or giving better return than switching cost

Source: Ipsos Loyalty, Marketing Leadership Council 2004

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Through value lies not only in a focus on the key purchasing criteria, but also in divestments of over-delivered criteria...

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Blue ocean strategy: Which of the factors that the industry takes for granted should be eliminated? Which factors should be reduced well below the industrys standard? Which factors should be raised well above the industrys standard? Which factors should be created that the industry has never offered?

Where do you want to excel in? Source: W. Chan Kim - Blue Ocean Strategy; Instigate Group - Strategy training
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Loyal behavior is driven by two dimensions: switching barriers & level of involvement, involvement is important for driving loyal attitude
= Perceived emotional, social or functional risk of switching

DELIBERATIVE CONFIRMERS Loyal by consciously reconfirming their brand choice upon purchase HABITUAL USERS Loyal by making an un-deliberate same choice out of habit

CONVINCED LOYALISTS Loyal by identifying with the brand

Two directions

Involvement

High

Increased loyal behavior

INERT RESIDENTS Loyal because they are locked in or switching is not worth the effort High

Low

Increased loyal attitude and behavior

Low

Switching barriers
= perceived effort, cost, time to switch / frequency of transactions
Source: ThoM analysis of McKinsey Quarterly 2002 & Marketing NPV 2005
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Level of involvement & switching barriers vary per sector and product
DELIBERATIVE CONFIRMERS CONVINCED LOYALISTS

= Perceived emotional, social or functional risk of switching

High

Involvement

HABITUAL USERS

INERT RESIDENTS

Low

Low

High

Switching barriers
= perceived effort, cost, time to switch / frequency of transactions
Source: ThoM analysis of McKinsey Quarterly 2002 & Marketing NPV 2005
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Loyalty drivers are different for each individual, and experiences need to match expectations

Each individual will have specific motivations and drivers influencing attitudinal loyalty
Trust

+
Loyalty drivers
Expectations Satisfaction

Loyalty
Quality of competitive alternatives Investment in relation

Experiences

Source: Klantenloyaliteit, Marnix Bgel

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Loyalty increases the lifetime value of a companys customer base

Lifetime Retention effect

Lifetime Value

Profitability Loyal customers are more open to up- and cross-selling Number of customers Loyal customers tend to refer more, e.g. via member gets member actions
Source: Klantenloyaliteit, Marnix Bgel
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Loyalty increases the lifetime value of a companys customer base

Financial benefits of customer loyalty
Annual customer profit

Legend:
Acquisition Base profit Revenue growth Cost savings Referrals Price premiums

Loyal customers are more susceptible to up and cross-selling Cost saving by retaining customers rather than acquiring them Happy loyal customers are likely to be brand ambassadors Customer loyalty can be associated with lower price elasticity

Source: Marketing NPV 2005

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Loyalty as a growth strategy also impacts the value capturing model

Sales Conversion

Consolidate Protect

Two directions
Positive correlation: customer equity drives loyal attitude

Prioritize
Low

Drive Brand Equity Marketing Value

High

Increased loyal behavior impacts captured marketing value

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Main loyalty instruments are brand positioning and marketing drivers

Value Proposition Value Creation Environmental and Competitive Scan
Marketing Strategy Marketing Drivers
Products / Technology

Value Capturing

Customer Equity

Marketing Value
Price Premium

Business Objectives

Services Purchase Process & Experience Communication

Awareness Perception & Reputation Preference

Acquisition Engine Retention Commitment

Market Share

Business Paradigms

Customer Value
Positioning Relationship Building Channel Management Scope Price Positioning Recommendation CLTV

ROC

Deep Channel & Customer Insights Tangible Action Plans

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Business Results

Segmentation & Targeting

Intention

Behaviour

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Loyalty instruments: brand positioning

Value Proposition Value Creation Environmental and Competitive Scan
Marketing Strategy Marketing Drivers Products / Technology
Services Purchase Process & Experience Communication Relationship Building Channel Management Scope Price Positioning ROC

Value Capturing

Customer Equity
Intenti on Awareness Behavi our Acquisition Engine

Marketing Value

Positioning
Business Results

Business Objectives

Segmentation & Targeting

Price Premium

Market Share

Business Paradigms

Perception & Retention Reputation Commitment RecommenPreference dation

Positioning on benefits and target groups impacts Expectations > trust Affinity with brand

Positioning

Customer Value
CLTV

Deep Channel & Customer Insights Tangible Action Plans

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Loyalty instruments: quality of product, and service as experienced by customers

Product
Value Proposition Value Creation Environmental and Competitive Scan
Marketing Strategy Marketing Drivers Products / Technology
Services Purchase Process & Experience Communication Relationship Building Channel Management Scope Price Positioning ROC

Value Capturing

Perceived quality of product impacts Trust Satisfaction

Customer Equity
Intenti on Awareness Behavi our Acquisition Engine

Marketing Value

Business Objectives

Market Share

Business Paradigms

Perception & Retention Reputation Commitment RecommenPreference dation

Positioning

Customer Value
CLTV

Business Results

Segmentation & Targeting

Price Premium

Service Customer experience during interactions with company impacts Trust Satisfaction

Deep Channel & Customer Insights Tangible Action Plans

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Loyalty instruments: loyalty actions versus loyalty programs Loyalty actions

Value Proposition Value Creation Environmental and Competitive Scan
Marketing Strategy Marketing Drivers Products / Technology
Services Purchase Process & Experience Communication Relationship Building Channel Management Scope Price Positioning ROC

Value Capturing

Customer Equity
Intenti on Awareness Behavi our Acquisition Engine

Marketing Value

Ad hoc marketing actions with as purpose to improve loyalty (repurchase rate, visit frequency, contract prolongation)
Business Results

Business Objectives

Segmentation & Targeting

Price Premium

Market Share

Business Paradigms

Perception & Retention Reputation Commitment RecommenPreference dation

Positioning

Customer Value
CLTV

Loyalty programs Are a set of activities that are communicated to customers in advance, with pre-defined rules

Deep Channel & Customer Insights Tangible Action Plans

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Loyalty- and retention management have a different objective

Loyalty management Long term Aims at retaining customers and increasing customer value Through building sustainable relationships Focuses on increasing Involvement
KEEP GET

Retention management Short-Medium term Aims at reducing and preventing churn, retaining customers Through fixing the basics, and lock-in systems

GROW

Involvement
DELIBERATIVE CONFIRMERS CONVINCED LOYALISTS

High

Low

HABITUAL USERS

INERT RESIDENTS

Primary dynamic is increasing switching barriers, secondary increasing involvement

Low

High

Switching barriers
Source: ThoM analysis
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and focus on different customer groups

Loyalty management Customer value

Retention management

High

Build sustainable relationship with customers with a high potential (customer lifetime) value

Medium

Retain high & medium value clients with a high churn risk

Low

Low

High

Churn risk

Source: ThoM analysis

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What aspects should be considered when managing customer retention & -loyalty?
-Assessment customer lifecycle & moments of truth per segment -Where is higher churn faced? -What actions can be taken to reduce churn? To which clients? -What % of churn reduction can be reached? ROI? Quick fixes for ST churn reduction LT plan for retention management -What are the loyalty drivers? -What are the objectives you want to reach? -Which clients to target? -Determine appropriate loyalty program -Expected ROI from customer retention & development? LT loyalty program

Retention management

Loyalty management

Source: ThoM analysis

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Customer lifetime management means having the right approach at each customer lifestage to improve CLTV
Profit

Loyalty

Time

Get!
Acquisition

Grow!
Development

Keep!
Retention Win back

Source: ThoM analysis

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In general, loyalty programs can be ranked on 3 axes: the reward-moment, required counteraction & customer initiative
1

Reward-moment
Immediate benefit
2

Postponed benefit

Counteraction

Transaction based

Not transaction based

Direct Adv Program

3

Relationship Program
Service related & other advantages

Savings Program
Saving points for gifts via transaction

No initiative

Customer initiative

Direct discount

Initiative

Contest Program
Advantage won through contest

Event Program
Event invitation

Customer Adv Program

Saving points for gifts via initiative

Source: Klantenloyaliteit, Marnix Bgel

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Current programs mostly combine several features and we see a shift from save to relationship focus
Immediate benefit Transaction based Direct Adv Program Not transaction based Relationship Program Savings Program Postponed benefit

No initiative

Initiative

Contest Program

Event Program

Customer Adv Program

Source: ThoM analysis

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Research shows that effectiveness of loyalty programs differs, direct advantage- and savings program being most effective
Effectiveness of loyalty programs
Score loyalty impact (Likert) Large effect

Rewards directly linked to transactions are more effective than any other reward Customers are less motivated if they need to perform an initiative on top of transactional process Immediate rewards are more effective than postponed rewards

Limited effect

No effect
Cust Adv Pr Contest Pr Saving Pr Event Pr Relationsh Pr Dir Adv Pr

Type of program

Source: Klantenloyaliteit, Marnix Bgel

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According to research, program effectiveness is slightly different per industry: 4 industries tested
Following overall trend in effectiveness Direct Advantage Program scores even relatively better Example Direct Advantage Program: AG Shows different trend: Savings program more efficient than Direct Advantage Program Example Savings Program:

Financial

Clothing

Editing / media

Following overall trend in effectiveness Example: discount when renewing subscription Following overall trend in effectiveness Relationship program less effective than in general Example Savings program: TopStar &

Telco

Source: Klantenloyaliteit, Marnix Bgel

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In order to improve effectiveness of loyalty initiatives it is important to differentiate approach depending on customer value and needs
Value differentiation % CLTV Needs based differentiation

Product

Service % cust base 80/20 rule: 20% of customers generate 80% of revenues Prioritize loyalty initiatives to- and adapt loyalty offers for high value clients Should be in line with general level of customer experience

Loyalty action

Loyalty program

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Loyalty is to be measured in different ways and for different objectives

Measuring effect of behavioral loyalty = MARKETING VALUE KEY QUESTIONS: What is ROMI of loyalty initiative? To what extent did it help reaching customer retention & development? How did it evolve CLTV of customer base? MEASURES - GENERAL: -CLTV MEASURES SPECIFIC: -Retention target versus control group -Evolution of customer value before, during and after loyalty initiative USE: Business case, ROMI Measuring attitudinal loyalty = CUSTOMER EQUITY KEY QUESTIONS: How loyal do customers feel themselves towards our brand, product, service? What is driving their loyalty? Would they recommend us to others? MEASURES - GENERAL: -NPS MEASURES SPECIFIC: -Research on loyalty drivers, and score on each of these loyalty drivers versus competition

USE: Defining direction for loyalty instruments: branding, product, service, loyalty actions and programs
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Measuring effect of behavioral loyalty: CLTV customer lifetime value

Why CLTV

Increased loyalty > Increased CLTV > increased profit Net actual value of expected profit during customers lifetime

Definition

Value yr 1 + Value yr 2 + + Value yr n (1 + r) (1 + r)n-1 Start before initiative: -Current customer base -Current profitability -Current retention % -Current referral % After initiative: -# extra customers -profitability -retention % -referral %

How to measure impact of loyalty initiative on CLTV

Change in CLTV Investment loyalty initiative

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Measuring effect of behavioral loyalty: survivor modeling and other

Survivor modeling
Survivor modeling
# customers

Other - Changes in customer recency, frequency, monetary value; latency - Price sensitivity

Target Control
Time

- Contract renewal rates, profitability

Group

Before

During

After

Value of clients retained

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Measuring attitudinal loyalty: NPS net promoter score and other

Net promoter score

Net promoter score

Other

- Attitudinal surveys on brand preference: a brand I can trust, like - Qualitative research on brand drivers and quantitative tracking of performance on each of these drivers on a regular basis

46%

Net promotor score = 11 (46% - 35%) 35%

Would you recommend us to a friend?

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Segmentation
Ichec program
2010-2011

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Where does it fit in the Value Creation Model?

Value Proposition Value Creation Environmental and Competitive Scan
Marketing Strategy Marketing Drivers
Products / Technology Services Purchase Process & Experience Communication Positioning Relationship Building Channel Management Scope Price Positioning ROC Intention Awareness Perception & Reputation Behaviour Acquisition Engine Retention Commitment Customer Value Preference Recommen dation CLTV Market Share

Value Capturing

Customer Equity

Marketing Value Price Premium

Business Objectives

Business Paradigms

Deep Channel & Customer Insights Tangible Action Plans

Impact on all further strategy development: - Enables clear and focused brand/product positioning
- Provides guidelines to develop the marketing driver mix
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Business Results

Segmentation & Targeting

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Segmentation: what does it mean?

Segmentation is about identifying different groups of purchasers in a market in order to target specific products and services for each group or segment. By tailoring the offering (communication, product, channel, price) to different groups you are able to more precisely meet the needs of more customers and consequently to gain a higher overall level of share or profit from a market(1) Market segmentation is the process of splitting customers, or potential customers, in a market into different groups, or segments, within which customers share a similar level of interest in the same, or comparable, set of needs satisfied by a distinct marketing proposition(2) Marketing segmentation is the first step in the marketing triptych segmentation targeting - positioning which enables companies to optimize their marketing strategies in relation to their core resources(3)

Source (1): www.dobney.com, market research and choice consultancy based in the UK Source (2): Malcolm McDonald and Ian Dunbar, Market segmentation How to do it, How to profit from it, Elsevier Butterworth-Heinemann, Oxford, 2004. Source (3): Definition inspired of Jean-Pierre Baeyens, Introduction to marketing, Solvay Business School, INGE3, Brussels, 2005.
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Target marketing: What does it mean?

Target marketing is about selecting the segments that the organization is willing and able to service. Any given segment may be attractive in some way, but not able to be serviced due to the particular mix of capabilities within the organization(1). Targeting involves concentrating marketing efforts on one or a few key segments determined after having broken down the market into homogenous segments based on pre-defined criteria(2). Target marketing is defined as the detection of the market segments that are identified as being the most likely purchasers of a companys products. []. Targeting investigates specific segments in terms of how they should be approached to optimize their value for the company(3).

Source (1): http://gnomejournal.org/article/39/marketing-gnome-part-two-segmentation-targeting-and-positioning Source (2): Jan Jacobs, The successful product marketing manager, LMS International September 2003, Leuven Source (3): http://www.da-group.co.uk/main/s6/st72798.htm
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What are the benefits of target marketing?

Specifically, the advantages of target marketing are that(1) : Marketing opportunities and unfilled gaps in a market may be more accurately appraised and identified. Such gaps can be real (e.g. sweet, strong, harsh or mild) or they can be illusionary in terms of the way people want to view the product (e.g. happy, aloof, silly or moody). Market and product appeals through manipulation of the marketing mix can be more delicately tuned to the needs of the potential customer. Marketing effort can be concentrated on the market segment(s) which offer the greatest potential for the company to achieve its goals - be the goals to maximize profit potential or to secure the best long-term position for the product or any other appropriate goal.

Better targeting leads to better marketing performance (higher Marketing ROI and CLTV). Targeting means optimizing. Marketing investments are focused on the profitable segment(s) to which the company is really able to deliver added-value.
Source (1): http://www.da-group.co.uk/main/s6/st72798.htm

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Positioning

Positioning = The place the product or service occupies in customers minds relative to competing products. It is typically defined by customers on the basis of important attributes. The main benefits consists in: Finding and establishing your playing field. Clarifying your distinct ability to make an impact. Describing your organizationand building a clear public imagein relationship to your competitors Defining your character and how you want to be seen

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There exist 4 different ways to segment your customers

1.

Descriptive segmentation schemes

2.

Behavior based segmentation schemes

3.

Attitudinal or Psychographic-based segmentation schemes

4.

Value-based segmentation schemes

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There exist 4 different ways to segment your customers

1. Descriptive segmentation schemes -> segment customers based on who they are
region of the world or country country size density of the area climate age gender family size family life cycle education income occupation socioeconomic status religion nationality/race language
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Geographic variables

Demographic variables

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There exist 4 different ways to segment your customers

1. Descriptive segmentation schemes 2. Behavior based segmentation schemes -> segment customers based on how they behave

Behavioral variables

benefit sought product usage rate brand loyalty product end use readiness-to-buy stage decision making unit profitability income status

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There exist 4 different ways to segment your customers

1. Descriptive segmentation schemes 2. Behavior based segmentation schemes 3. Attitudinal or Psychographic-based segmentation schemes -> segment customers based on how they think (about the features of a product/service) and what they prefer Advantage: gets an idea of the actual aspect of the product that will get customers to respond personality life style value attitude

Psychograhic variables

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There exist 4 different ways to segment your customers

1. Descriptive segmentation schemes 2. Behavior based segmentation schemes 3. Attitudinal or Psychographic-based segmentation schemes 4. Value-based segmentation schemes -> segment customers based on how much worth they potentially hold for the organization

Value variables

turnover profit (direct or net contribution) customer lifetime value (CLTV)

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 Draft The basic models are the most currently used

Frequency of occurrence of criteria used amongst respondents using segmentation B2B Cies only
Company Specific Statistics

B2C Cies only

B2B&B2C Cies

77,9%

44,7%

76,1%

Geography

50,8%

58,2%

63,4%

Customer Behaviour

46,2%

58,2%

47,9%

Demographics

29,4%

76,5%

53,5%

Psychological Customer Profile Internal Financial Results

24,8%

51,2%

28,2%

30,5%

21,8%

40,8%

Operational Elements

31,7%

20,0%

32,4%

Characteristics of Purchasing Department

Source: THoM Yearly Marketing Survey 2008
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20,6%

9,4% Net Adjusted Index (%)

16,9%

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Value-based segmentation

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Segmenting on value can be made on a yearly period or on the full customer life time
Value-based segmentation is the process of splitting the market into more homogenous groups by using quantitative criteria. Static view of the model could be based on yearly figures of: Turnover Direct profit contribution Net profit contribution:
- Include direct contribution and indirect costs. - Cost allocation by Activity-Based Costing (ABC) which is a costing model that identifies the cost pools, or activity centers, in an organization and assigns costs to products or services based on the number of events or transactions (cost drivers) involved in the process of providing a product or a service(1).

Dynamic view of the model is mainly based on the analysis of the Customer Lifetime Value (CLTV) on a complete period (from the acquisition till the last purchase) and enables to make forecasts for the other companies in the same pre-defined segment.
(1): www.valuebasedmanagement.net
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Two different ways to look at value: present vs. potential value

Present value

Value potential

Based on : Current turnover Current profit

Based on : Market potential Product Market Share

Example: IT
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Comparison of alternative segmentation models

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Segmentation strategies (e.g. banking sector)

Pros and Cons
Segments Demographic Pros Easy customer classification and marketing strategies Used to assess market for placement of ATM and for efficient management of branch staffing and service levels Past or current behavior is the best predictor of future behavior Understanding lifestyle and attributes can help banks enhance image or determine promotional strategies Companies can focus greatest attention on customers creating greatest profits Cons Behavior does not necessarily correlate with demographic data Of limited use to product development and marketing strategies

Geographic

Behavioral

Complex data collection and application process Complex data collection and application process

Psychographic

Value

Can result in poor service for lower profitability segments with a detrimental effect on the brand, and a fight for higher profitability customers

Source: Council of Financial Competition, Checking Account Design by Life Stages, Corporate Executive Board, December 2006.
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Improving segmentation approaches is all about enhancing customer understanding

The more we increase our understanding of customer values the more likely we are to develop successful marketing strategies

Information acquisition complexity

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Why needs-based segmentation goes beyond simple value-based segmentation

Many companies view segmentation as dividing customers into: - high value - medium value - low value measuring the customers: - gross contribution margin - net contribution margin because: - the required information tends to be readily available the goal of attracting and retaining the highest value customers would logically have a high ROI PROBLEM: This value-based segmentation assumes that all high-value customers have identical needs and preferences which is not the case most of the time SOLUTION: needs-based segmentation will have far more impact on determining what combination of products and services will be required to create a compelling value proposition for different customer segments

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Combining value-based segmentation with behavioral or descriptive segmentations improves the likeliness to reach superior targeting and ROMI

Both approaches can be crossed and used simultaneously: customer segmentation focuses on what can be offered value based segmentation focuses on which customers are most profitable
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Pricing
To grow clients top line, bottom line and the value management capabilities

Ichec program
2008-2009

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Where does it fit in the Value Creation Model?

Value Proposition Value Creation Environmental and Competitive Scan
Marketing Strategy Marketing Drivers
Products / Technology Services Purchase Process & Experience Communication Positioning Relationship Building Channel Management Scope Price Positioning ROC Intention Awareness Perception & Reputation Behaviour Acquisition Engine Retention Commitment Customer Value Preference Recommen dation CLTV Market Share

Value Capturing

Customer Equity

Marketing Value Price Premium

Business Objectives

Segmentation & Targeting

Business Paradigms

Deep Channel & Customer Insights Tangible Action Plans

Pricing is an important strategic issue because (1) it is a huge lever to increase profits and (2) it is related to other marketing mix elements such as product positioning & features, channel decisions, and promotion.
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Business Results

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Achieving top line and profitable growth are among top five priorities of European CEOs

Pricing plays a key role in achieving these priorities

Source: The Conference Board, CEO Challenges 2007, October 2007
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Pricing is a powerful lever to increase profits

Profit increase
Profit + 13% Profit = 10 Variable Cost = 25
Reduce Variable Costs by 5%

Profit + 50%

Improve Price by 5%

Total Revenue = 100

Fixed Cost = 65

Improved price realization of 5% generates 50% profit improvement*

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Cost Cust

Three inputs to strategic pricing exist and yet some companies price using just one

Comp

Philosophy: Financial prudence ensures that each unit of sale achieves a target return over its full cost (Finance & Accounting)

Philosophy: Market demand requires that pricing of products and services reflects what customers willing to pay (Marketing & sales)

Costs

Customers

Competition
Philosophy: Price to maintain or grow market share, short term focus, or me too pricing (Sales, Management)

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Cost Cust

Costing: deciding on the most profitable activities

Comp

Step 1: Determine contribution margin Step 2: Identify incremental costs Step 3: Identify volume/price trade-offs Step 4: Evaluate the market context to understand profit implications

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Cost Cust

Contribution margin: variable & fixed costs

Company XYZ: Price
Ex. 10

Comp

Unit variable cost

Ex. 7

Total Contribution Per Unit = 3 ............................... Fixed Costs Contribution Margin if sell 1000 units
= 3,000/10,000 = 30% Ex. 1,500

Profits
= 1,500

Unit Sales
Ex. 1,000

Total Contribution = Sales revenue Total Variable Cost Contribution Margin (%) = Total Contribution / Sales Revenue
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Cost Cust

Costing: deciding on the most profitable activities

Comp

Step 1: Determine contribution margin Step 2: Identify incremental costs Step 3: Identify volume/price trade-offs Step 4: Evaluate the market context to understand profit implications

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Cost Cust

Identify relevant costs for pricing decision

Comp

At Company XYZ, theres an opportunity to sell 500 more units at a price of 8/Unit. For this, additional capacity is required at a cost of 400 and admin costs would increase with 200. Variable production costs would only be 6.7 per unit.
Total Euros Units 1,000 10,000 10,000 + 500 4,000 = 1,500 14,000 Euros per unit 1,000 10 +500
(Incremental)

Full cost 9,3

Revenues Revenues

Costs Costs - Direct Var. Costs

7,000

3,350

10,350

6.7

6.9

- Direct Fixed Costs - General & admin costs Total Costs Profits

1,000

400

1,400

0.8

0.93

500

200

700

0.5

0.4

0.47

8,500

12,450 1,550 (+3%)

133

8.5

7.9

8.3

1,500

1.5

0.1

1.0

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Identifying The Incremental Costs

Incremental costs: Cost of production for one additional unit Variable cost: Cost of last produced unit NOT average variable cost Fixed costs: Most seen as incremental BUT be careful of step changes Opportunity costs: The contribution foregone when an asset is used for one purpose instead of another

Comp

Understanding How Costs Change with Changes in Sales is a Prerequisite to Managing Costs Strategically

Cost Type High Variable costs High Fixed Costs Opportunity Costs

Implications Low CM High CM CM foregone (=left)

Strategic Objective Drive Price Drive Volume Capacity Optimization

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Costing: deciding on the most profitable activities

Comp

Step 1: Determine contribution margin Step 2: Identify incremental costs Step 3: Identify volume/price trade-offs Step 4: Evaluate the market context to understand profit implications

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Identify volume/price trade-offs: Breakeven analysis

Unit Breakeven Sales
Price
Ex. 10

Comp

% Breakeven sales change

Example

Total Contribution Per Unit = 3 .......................

Current price: 10.00 Variable cost/unit: 7.00 Current Weekly Sales: 1,000 Units Fixed Costs
Ex. 1,500

Unit variable cost

Ex. 7

How much would sales have to increase to make a 10% price reduction profitable?

BreakEven %BE = Unit Sales

= 500

- (-1) = 50% (3+ (-1))

Break-Even Sales = Fixed Costs / Total Contribution per unit

- Price %BE = (CM + Price)

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Understand price elasticity

Price elasticity is defined as the percentage of change in quantity demanded as per the percentage change in price of the same commodity. The formula is the following:

Price elasticity of demand = % change in demand / % change in price . The number is a means to an end; it is only used to measure price sensitivity. The higher the price elasticity, the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand.

Source: http://ingrimayne.com/econ/elasticity/Elastic1.html http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm http://en.wikipedia.org/wiki/Price_elasticity_of_demand

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Price elasticity and impacting factors

The price elasticity of demand for a particular demand curve is influenced by the following factors:

Availability of substitutes Degree of necessity Proportion of income Time period considered Permanent or temporary change Psychological factors

the greater the number of substitute products, the greater the elasticity.

luxury products tend to have greater elasticity than necessities, but some luxury products are habit forming and can become "necessities" to some consumers. products requiring a larger portion of the consumer's income tend to have greater elasticity and purchase of these products will be postponed more rapidly elasticity tends to be greater over the long run because consumers have more time to adjust their behavior to price changes a one-day sale will result in a different response than a permanent price decrease of the same magnitude. decreasing the price from $2.00 to $1.99 may result in greater increase in quantity demanded than decreasing it from $1.99 to $1.98.

Source: http://ingrimayne.com/econ/elasticity/Elastic1.html http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm http://en.wikipedia.org/wiki/Price_elasticity_of_demand

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Impact on pricing: literature versus actual impact

Literature on pricing Elasticity puts a cap on prices

Actual impact on pricing Elasticity has a relative low impact on pricing There is no precise measurement possible of price elasticity in reality (only past data extrapolated) The ideal trade-off is not fixed: elasticity can be influenced by marketing, so no real cap exists - E.g.: Communicating the value of a product to a customer, can increase willingness to pay

Price should be set according to the ideal trade-off between price and volume

Pricing can not be put above a certain level because too much volume would be lost

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Cost Cust

Costing: deciding on the most profitable activities

Comp

Step 1: Determine contribution margin Step 2: Identify incremental costs Step 3: Identify volume/price trade-offs Step 4: Evaluate the market context to understand profit implications

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Market context and profit implications

Comp

Can you get the required volume change needed to be profitable? Customer Considerations
Customer value Customer power Customer groups
Costs Customers

Competitive Considerations
Competitions cost structure Competitions response Competitions power
Competition

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Competition
Sports Competition
The more intense, the better

Comp

Price Competition
The more intense, the worse

Play as hard as you can

Weigh the cost of each confrontation Goal is to profit, considering all costs

Goal is to win, regardless of the cost

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Competition: To act or not to act

Illustrative Examples

Comp

Ignore
Too Costly

Accommodate
(Actively adjusting strategy to minimize impact of threat)
If competitor matches you, develop an accommodating strategy

Price Reaction is

Attack
Cost Justified

Defend
(Attempt to cause competitor to back off)
If competitor initiates, do not match but target specific key competitors accounts for conversion with enhanced incentives

Weaker Competitor is strategically

Neutral or Stronger

Modified from: The Strategy and Tactics of Pricing, 3rd Edition, Nagle and Holden, pg. 133g Presentation1

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Competition
Tactic Examples

Comp

Non price Responses

Reveal your strategic intentions and capabilities Compete on quality Offer to match competitors' prices, offer everyday low pricing, or reveal your cost advantage Increase product differentiation by adding features to a product, or build awareness of existing features and their benefits. Emphasize the performance risks in low-priced options. Form strategic partnerships by offering cooperative or exclusive deals with suppliers, resellers, or providers of related services

Co-opt contributors

Price Responses
Use complex price actions Offer bundled prices, two-part pricing, quantity discounts, price promotions, or loyalty programs for products Introduce flanking brands that compete in customer segments that are being challenged by competitors Adjust the product regular price in response to a competitor's price change or another potential entry into the market

Introduce new products

Deploy simple price actions

Extract from How to Fight a Price War By Akshay R. Rao, Mark E. Bergen and Scott Davis
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Customer: The End Goal

Comp

high Vulnerable Sustainability of brand at stake

Price Paid

medium Unharvested Value low low medium high

Value Received

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Customer
Customer Driven
Determine what features customers want Ask customers how they value features Set prices using natural, convenient metrics Vary prices to reflect willingness-to-pay

Comp

Value-Based
Determine what benefits customers seek Estimate objective value of benefits offered Create price metrics that reflect value received Justify prices to raise willingness-to-pay

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Recap Best Practices

COSTING BEST PRACTICE: Understand the incremental costs of product/service elements, enabling company to profitably offer multiple product/service offerings at different price levels Understand which sales drive incremental capacity costs and which do not, enabling company to price to profitably recover capacity cost from the former, while pricing to drive incremental contribution from the latter Adjust non-negotiable price levels based on the ability to improve contribution from all customers who would qualify for that price level, not based on the value of an individual deal COMPETITION BEST PRACTICE: Identify current/potential competitive advantages and capabilities that leverage those advantages Target customers (or jobs) that most value capabilities for profitable growth and focus your resource investments of service to those segments Anticipate and plan for changes in competitor and customer behavior that could threaten your competitive position in your target segments Collect and communicate competitive information to minimize the impact of negative-sum competitive confrontations Evaluate your competitive success by your ability to grow profits, not market share. CUSTOMER BEST PRACTICE: Understand how the products and services that you sell generate value for customers (revenues or cost savings), noting particularly differences between the value delivered by you and by the competition Sell value delivered, not features, and grow markets by educating more customers on the value that your company can deliver Segment your market for pricing by offering different product/service bundles at different price levels to reflect differences in the value that you deliver.
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Value based pricing focuses on the entire Pricing Strategy Pyramid, not only on the price level
MISTAKEN BELIEF: The price level is the only cause of price resistance, and is, therefore, the only way to overcome it.

Price Level

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You can unlock profitable growth by minimizing the gaps in the value waterfall
Opportunities to get more from price
4

Value Creation Gap Value Communication Gap

2

Price Strategy Gap

1

Price Execution Gap

Potential Value

Delivered Value

Perceived Value

Willingness to Pay

Price Paid

Most price improvement efforts only focus here

Profitable Growth

Managing Margin

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From our experience, companies face many barriers to achieving higher price realization
1 2 3 4 5

Organizational misalignment around pricing Gaps in price execution and management (Unwarranted variance in field, reactive pricing,..) Offer not aligned to different value requirements of segments or desired customer behaviors Failure to drive and sustain value differential Not effectively communicating value to change customers perceptions

Target price

Price realized

Value-based pricing is about addressing these gaps to increase profitability

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Organizational misalignment around pricing

Differing, and at times conflicting goals, relating to pricing within same company can limit the effectiveness of pricing strategies

President

Get me both higher market share and profit . . . now

R&D

Finance

Marketing

Sales

BU Manager
We are well behind this quarter. Lets do what it takes to start driving volume now

Operations

This is the best product with the best technology on the market. It should be worth millions

This product took years to develop and our prices need to recapture this huge investment

If we bundle in more services we can justify higher prices and drive market share

Customers are saying our price is too high and competitors have and lowered price

Special requests from customers are killing us. Its driving our costs through the roof

Pricing should be addressed strategically after finding common grounds and approaches on pricing and value management

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Price execution gaps: Unwarranted variance across pricing

Sophisticated customers use your discounting policies to gain unwarranted discounts

Results Outliers
Acceptable line

50% 45%

Actual discount

40% 35% 30% 25% 20% 15% 10% 5%

0

Outliers
100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000

Sales revenues
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Price execution gaps: Unwarranted variance across pricing

Companies can decrease these gaps by managing pricing proactively

Reactive, exception-based price management, drives prices down

Example: End-of-quarter discounts Meeting competition

Proactive, policy-based price management ties pricing to value

Example: Loyalty discounts for high store share On-line, fast pay, low service discounts

Develop proactive policies that set proper customer expectations

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Offer is not aligned to different segments, value requirements or desired customer behaviors
2

.leaves money on the table for these customers and communicates that value does not have to be paid for

High Received Value Low

Setting price here

A
Segment Size
3

.and misses growth opportunities by pricing these customers out of the market
Offer configuration is necessary to serve all segments more profitably Differences in value can be captured with product variations or service augmentation that creates natural fences between segments

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By tailoring the offer to customers needs, more value can be captured

1

In this way you can capture value that would otherwise have been foregone

High Received Value Low Offer #4

Or secure business where you would have been too expensive

Offer #3 Offer #2

Offer #1 A
Segment Size

And:
Value-Based Segmentation Also Allows: Identifying value drivers that inspire new, profitable products/services Removing cost where it is not valued

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Failure to sustain and drive differential value

Sustain differential advantage
Less Freight 0,03 Less Defective 0,08 Less WIP Scrap 0,07 Fewer Material Rejection 0,05

Drive differential advantage

Traditional way Product Value-based way Product Cost Price Value Customers

Positive differentiation

Cost Price Value Customers

Next best competitive Alternative internal mixing costs

Reference Value 0,85 / kg

Change approach for new product development to ensure delivered value e.g. IKEA

Innovations sustain and expand differential value

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Example Carbon Black Producer

Not effectively communicating value to change customers perceptions

Concept Features
Product Focus What do we offer?

Example
Carbon black particles

Benefits
Cost Drivers Revenue Drivers

Application Focus Why should the customer care?

Better product dispersability creates more complete mixing that...

reduces total raw materials used, decreasing input cost by

Our cleaner product creates output reliability which...

allows you to target supply sensitive segments, generating improved revenue of

Value

Customer Focus What is that worth?

0,06 / kg 0,06

0,10 / kg

Better articulating value helps to change price perceptions and justifying price points

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Logo client

Product Management

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The Levels of Product

Expected Product

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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The Value for: Metrics (KPI)

Value for: Market penetration Market share Share of wallet Usage Preference NPS

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What is a Product?

A Product is anything that can be offered to a market for attention, acquisition, use, or consumption and that might satisfy a want or need.

Physical Objects Services Events Persons Places Organizations Ideas Combinations of the above

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Product Features & Benefits

Features are product characteristics that deliver benefits; we buy products for their benefits. Features are product characteristics such size, color, capacity, functionality, design, hours of business, fabric content, etc. Benefits answer the customers question: Whats in it for me? This distinction is further illustrated in the following table: A feature is. . . A benefit is. . .
Physical size A 75 horsepower motor Patented mattress spring design Its small enough to fit in your raincoat pocket. A mower that takes the work out of yard work. A restful night's sleep.

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Product Features & Benefits : Differentiation

Products may be highly unique (specialty products) or virtually indistinguishable from competitors products (commodity products) and anything in between. Specialty products are not necessarily better than commodity products, but they do require different marketing strategies. A potentially important strategy for specialty products is differentiation. A company differentiates its products when it sets them apart from the competitors products in the minds of customers. Having a thorough understanding of how your products benefits compare to your competitors allows you to compete with them through differentiation.

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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A methodology to determine a differentiating and relevant product or service proposition for a selected target group

HIGH

No differentiation and no relevance

Core : need to have Limited possibilities for differentiation

Satisfaction with current players Nice to have Strong relevance and possibilities to differentiate

LOW

LOW

Importance of the offered features and benefits

HIGH

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Strategies that are based upon features

Introducing
Being "the first" to offer a new product feature is a proven competitive strategy. For example, being known as "the first" organic body lotion to have Vitamin E will position your company as a leader, at least for a while.

Improving/Modifying
Instead of being at the head of the pack with a totally new feature, you might simply modify and/or improve your products features. "Improving" your product creates the impression that your company cares about satisfying its customers. Modifying product features is a strategy many businesses use to compete with a competitor who lowers their price. For example, if the maker of one organic body lotion lowers its price, the maker of another may add Vitamin E as a "new improved" feature but keep its price the same. Dont forget that modifying features usually leads to changes in benefits. Stay on top of knowing the perceived benefits your product offers so you can communicate them in your marketing messages.

Grouping
Oftentimes, features are "grouped" into different product modelsand pricesstarting with a basic model to a "fully loaded" model. Automobiles, many electronic devices, even vacation packages offer a variety of features to add to a basic product model. This can even be true of services.

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

Additional illustration : car manufacturer

1. Identify the components of the solution/service
The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.

The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.

The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.

Additional illustration : car manufacturer

2. Develop the offer

Additional illustration : car manufacturer

3. Relate products to customer needs

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Discovering your product's benefits

Emotional Benefits Customer Benefits Product Benefits Product Attributes

In groups of three, choose a product that you market today. Describe core features and move to key product, customer and emotional benefits

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Discovering your product's benefits

To identify your products benefits, you must consider the customers viewpoint. Besides putting yourself in your customers shoes mentally, talk to or survey them asking them to identify your products benefits. They might provide you with information you never thought about! Look at who has purchased your product in the past. What does that customer profile tell you about your products benefits? Going forward, you might set up a few systems to develop and track product benefits Ask customers for suggestions for improvement.

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Discovering your product's benefits

Pay attention to customer complaints and prospect inquiries. Be open to what your customers say. Go so far as to train and reward employees for questioning customers and prospects to learn what they want and what they dont like about your product. Analyze and learn from this input. Watch your competitors. Do the changes in their product offerings suggest desired product benefits? Why is it important to understand what my products features and benefits are? Understanding product features and benefits allows you to do such things as: Describe your products in a way that is most relevant to customers. Differentiateexplain how your product is different ("better") than the competitions. Use a variety of pricing and positioning strategies effectively
Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

Product and service decisions

Individual Product Product Line Product Mix

Product attributes : Quality Features Style Design Branding Packaging Labeling Product support Product services

Product line length: Line stretching: adding products that are higher or lower priced than the existing line Line filling: adding more items within the present price range

Product line width: Number of different product lines carried by company Product line depth: Number of different versions of each product in the line Product line consistency

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Positioning map highlights potential of Product Leadership

High
Image Branding Experience Branding

Examples: Kube Hotel Marlboro Benetton

Examples: Nike Nokia Apple

Eventually the product carries the brand

Emotional Aspirations

Threshold Branding

Functional Branding

Examples: Bic Lada

Examples: Duracell

Low

Functional Benefits
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High

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Positioning map also highlights differentiating potential of position

High

By adopting that approach you build trust between yourself and your customer

Emotional Aspirations
Focusing on product development will differentiate Sorin CRM from competitors

Low

Functional Benefits

High

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Managing the delivery

Consumers

Customer Experience Products Channels

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Portfolio planning : Boston Consulting Matrix

HOLD

BUILD

Four alternative objectives can be pursued in order to balance the companys portfolio. The most appropriate ones are indicated

HARVEST

DIVEST

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Boston Consulting Matrix: example

i-Phone Palm

Kodak film

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Product portfolio Management: key considerations

Strategic fit of product portfolio Portfolio products performance Coherence of product portfolio Balanced composition of portfolio and evolutions therein Synergies between products of product portfolio Opportunities for new product initiations Contribution of portfolio strategy to company mission and vision Respect of timings indicated in the portfolio plan Number of new products introduced in portfolio plan

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Product portfolio Management: possible KPIs

Trial (first try) Repeat volume Penetration Volume projections Year-on-Year Growth Compound Annual Growth Rate Cannibalization Rate Brand Equity Metrics Conjoint Utilities Segment Utilities Conjoint Utilities and Volume projections

More general metrics: Unit Margin or Margin (%) Contribution per unit or Contribution Margin (%) Break-Even Sales Level Target Volume Target Revenues

Source: Paul Farris, Marketing Metrics: 50+ Metrics Every Executive should Master , Wharton School Publishing, 2006, New Jersey 179

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Product Life Cycles

Product Life Cycles are based on the theory that consumers will adopt new innovations at various rates
34% 34% Early majority 13.5% Early adopters 16% Laggards Late majority

2.5 % Innovators

Time of adoption of innovations by users

Source: Marketing Management, Philip Kotler

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Product Life Cycle Strategies

The Typical Product Life Cycle (PLC) Has Five Stages Product Development, Introduction, Growth, Maturity, Decline Not all products follow this cycle: - Fads - Styles - Fashions The product life cycle concept can be applied to a: Product class (soft drinks) Product form (diet colas) Brand (Coca Cola Light)

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Five stages of the PLC

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

Five stages of the PLC

Stage 1

Begins when the company develops a new-product idea Sales are zero Investment costs are high Profits are negative

Product development Introduction Growth Maturity Decline

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

Five stages of the PLC

Stage 2

Low sales High cost per customer acquired Negative profits Innovators are targeted Little competition

Product development Introduction Growth Maturity Decline

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Marketing Strategies: Introduction Stage

Product Offer a basic product Price Use cost-plus basis to set Distribution Build selective distribution Advertising Build awareness among early adopters and dealers/resellers Sales Promotion Heavy expenditures to create trial

Marketing Objectives : Create product awareness and trial

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Targeting the right audience

Early Adaptors

Early Majority

Mainstream

Late majority

Laggards

Adaptors

Speed of adaptation

186

Five stages of the PLC

Stage 3

Rapidly rising sales Average cost per customer Rising profits Early adopters are targeted Growing competition

Product development Introduction Growth Maturity Decline

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Marketing Strategies: Growth Stage

Product Offer product extensions, service, warranty Price Penetration pricing Distribution Build intensive distribution Advertising Build awareness and interest in the mass market Sales Promotion Reduce expenditures to take advantage of consumer demand

Marketing Objectives : Maximize market share

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

Five stages of the PLC

Stage 4

Sales peak Low cost per customer High profits Middle majority are targeted Competition begins to decline

Product development Introduction Growth Maturity Decline

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Marketing Strategies: Maturity Stage

Product Diversify brand and models Price Set to match or beat competition Distribution Build more intensive distribution Advertising Stress brand differences and benefits Sales Promotion Increase to encourage brand switching

Marketing Objectives : maximize profits while defending market share

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

Five stages of the PLC

Stage 5

Declining sales Low cost per customer Declining profits Laggards are targeted Declining competition

Product development Introduction Growth Maturity Decline

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Marketing Strategies: Decline Stage

Product Phase out weak items Price Cut price Distribution Use selective distribution: phase out unprofitable outlets Advertising Reduce to level needed to retain hard-core loyalists Sales Promotion Reduce to minimal level

Marketing Objectives : reduce expenditure and milk the brand/product/service

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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Summary of marketing strategies for each phase of the life cycle

Strategic Marketing Objectives Product Stimulate Primary Demand Quality Improvement Build Share Build Share Hold Share Harvest

Continue Quality Improvements Broad

Rationalize

Concentrate on Features

No Change

Product Line

Narrow

Rationalize

Hold Length of Line

Reduce Length of Line

Price

Skimming vs. Penetration

Reduce

Reduce

Hold or Slightly Reduce Reduce

Channels

Selective

Intensive

Intensive

Intensive

Selective

Communications High

High

High to Declining

High to Declining

Reduce

Source: Marketing Management, Philip Kotler

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The framework can also highlight opportunities and threats

Life cycle Stage Characteristics

Intro
Market growth rate Technical change product design Moderate

Growth
High

Shakeout
Leveling Off

Maturity
Insignificant

Decline
Negative

High

Moderate

Limited

Limited

Limited

Segments

Few

Few - Many

Few- Many

Few-Many

Few

Competitors

Small

Large

Decreasing

Limited

Few

Profitability

Negative

Large

Low

Large for high marketshare holders

Low

Source: Marketing Management, Philip Kotler

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The product life cycle linked to business performance

Product development sales are zero, investment costs are high Introduction profits do not exist, heavy expense of product introduction Growth rapid market acceptance and increasing profits Maturity slowdown in sales growth. Profits level-off. Increase outlay to compete Decline sales fall-off and profits drop

Source: Jan Jacobs, The Successful Product Marketing Manager, LMS International -Empowering Engineering Innovation, 29-30 September 2003, Leuven

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There are several (dis)advantages to Conjoint Analysis

Advantages Estimates psychological tradeoffs that consumers make when evaluating several attributes together Measures preferences at the individual level Uncovers real or hidden drivers which may not be apparent to the respondent themselves Realistic choice or shopping task Able to use physical objects Can be used to develop needs based segmentation Respondents are unable to articulate attitudes toward new categories Poorly designed studies may over-value emotional/preference variables and undervalue concrete variables Disadvantages Designing conjoint studies can be complex With too many options, respondents resort to simplification strategies Difficult to use for product positioning research because there is no procedure for converting perceptions about actual features to perceptions about a reduced set of underlying features

Note: Deloitte uses a Conjoint Analysis Source: Wikipedia 196

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Channel Management

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Value Creation and Capturing Model

Environmental and Competitive Scan
Marketing Strategy Marketing Drivers
Products / Technology

Customer Equity

Marketing Value
Price Premium

Business Objectives

Purchase Process & Experience Positioning Communication Relationship Building Scope Channel Management Price Positioning

Awareness Perception & Reputation Preference

Acquisition Engine Retention Commitment Recommendation

Market Share

Customer Value
CLTV ROC

Deep Channel & Customer Insights Tangible Action Plans

Business Results

Segmentation & Targeting

Services

Intention

Behaviour

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Driver action planning An example

Marketing Drivers
Products / Technology Services Purchase Process & Experience Communication Relationship Building Channel Management Price Positioning

Identify route causes for not being pushed harder by the trade Coverage issue? Quality issue? Brand image issue? Margin issue? Focus on relevant & differentiating relationship drivers Drive partnerships capabilities Train & educate trade to support the brand image Focus trade incentives on providing the right brand stories to the consumers Select channels with positive impact on brand image Build brand equity without losing existing channel support

Low

Marketing value

High

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Benefits of working with channels?

Enhanced reach in the market => Increase in revenues Lower cost of sale: Define low cost routes to market and product/service configuration capabilities of your channel Lower customer support cost: Integration and extension of service components Reduced time to market: Shorter product lifecycles Spread of risk Ability to meet customer purchasing preference Provide customers with industry specific expertise Local & physical presence (culture, language, ) Increased capacity to integrate multiple products : One stop shop requirement (Street) visibility

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Type of channels & influence on branding

Segmentation based on dominance of brands in customer decision taking

Reseller Megabrand

Independent dealer

Dependent dealer

Tied Dealer

Franchise

Direct

Carrefour Accenture

PC dealer Independent supermarkets

Most HP dealers

BMW Caterpillar

Sony Centre Van de Velde (Marie-Jo)

Dell

Reseller Dominant brand

Manufacturer

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What are key challenges in working with channels?

Cost to recruit partners Gaining partner mindshare:
Very hard to create loyal relationship and/or to lock down your partners in preferential terms (i.e. legal implications)

Delivering sales tools to partners Risk of partners selling competitive products

Multi-channel complexity

Reduced control over the sales process

How to guarantee end-to-end quality in commercial process? Power of channels due to EU landscape (consolidation)

Coordinating partner & vendor sales teams efforts

Need for transparent guidelines & communication Positive confrontation in channel conflict situations

Complex forecasting process

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What are key challenges in working with channels?

Loss of end customer contact Margin issues Need to adjust internal business processes Channel dependence Competitive pressure Direct or indirect sales conflict Business cannibalization Vendor doesnt reach all segments Take over of distribution (by another vendor or competition)

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Channel conflicts: key points

Conflict in a channel is inevitable, even desirable "Progress flows only from struggle."
Louis Brandeis, 1856-1941, U.S. Supreme Court justice

if kept within bounds "Contradiction should awaken attention, not passion."

Thomas Fuller, 1606-1661, Chaplain to Charles II

Source: Harnessing channel tension, Erin Anderson, INSEAD 204

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Channel conflicts: key points

Dual Distribution: Base it on end-user behavior, not just your cost structure Reason should be transparent You cant build walls around customers Above all, dont base the channels on the current size of the business the customer does with you

Source: Harnessing channel tension, Erin Anderson, INSEAD 205

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Channel conflicts: key points

Management should be the traffic officer: give the channels different spaces that the customer will respect Customers fall into natural segments Customers behave consistently, even on different purchasing occasions Large, growing markets Differentiated products Customers do their own buying Where dual routes to market work poorly Customer segmentation is arbitrary Customers act one way for one occasion and another way on a different occasion Small, shrinking markets Commodity Buying groups dominate

Source: Harnessing channel tension, Erin Anderson, INSEAD 206

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Channel conflicts: key points

Collaboration between channels can happenbut not without management effort Differentiate each channels offerings Rules of engagement, announced in advance and publicly enforced When two channels contribute to a sale, credit both of them - Simple rules that are approximately correct in the long rundont negotiate each sale

Source: Harnessing channel tension, Erin Anderson, INSEAD 207

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Channel Design Decisions

Analysing end user needs

Setting channel objectives

Identify major alternatives

Evaluate Major alternatives

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Channel Design Decisions

Step 1: Analyzing end user Needs Cost and feasibility of meeting needs must be considered Step 2: Setting Channel Objectives Set channel objectives in terms of targeted level of customer service Many factors influence channel objectives Step 3: Identifying Major Alternatives Types of intermediaries - Company sales force, manufacturers agency, industrial distributors Number of marketing intermediaries - Intensive, selective, and exclusive distribution Responsibilities of channel members Step 4: Evaluating Major Alternatives Economic criteria Control issues Adaptive criteria

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Definition of successful partnerships in selling added value

Bche J., La segmentation des portefeuilles distributeurs en B to B. Perspectives thoriques et oprationnelles, Revue franaise de gestion 2008/2, n 182, p. 171-189.

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Academic model

In all industries, the success of added value sales through distribution is based on high fit partnership
2 leverages contributing to partnership

(1)

Strategic convergence Strategic fit

Vision of management Resources (IT, HR, Finance) Skills (Sales, service)

Relational convergence Organizational fit

Sales structure Incentives plan

Engagement Co-dependency
How much business does the vendor do with the distributor How much business does the distributor do with the vendor Interest in added value philosophy Behavior aligned with intentions

Relational fit
Relationships between sales forces Trust in mutual capabilities

Performance in selling solutions

Note: International research Source: Jerome Beche Dever Consultants, Paris 211

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Academic model

Successful partnerships: final theoretical concept

Strategic fit Strategic convergence with the supplier Co-dependency

Interorganizational learning Organizational fit

High performance for complex sales

Organizational convergence with the supplier Relational fit

Turnover Market share () Net profits Number of existing or new customers

Note: International research Source: Jerome Beche Dever Consultants, Paris 212

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Academic model

Different kinds of distributors to work with; some present high potential

Independents with high stake

Partners

Developing skills

Autonomists

Enhancing Relationship

Followers

Low

Relational convergence

High

Note: International research Source: Jerome Beche Dever Consultants, Paris 213

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Critical factors in partnerships

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The most critical failings in many partnerships

1. Failure to quantify the value of opportunities 2. Failure to raise the opportunities to higher-level decision makers in both the supplier's and trade partner's organizations 3. Short term emphasis 4. Single-element business reviews (e.g. one product, one service) 5. Narrowly defined problems 6. Exclusive focus on cost

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Key elements of a successful partnering team

Open, honest communication Everyone working together High standards and goals

Continuous communication

Clear, common direction

Committed to delivering best effort Meeting and exceeding deliverables Logic and in-depth quantification of issues Each presentation better than the last Concise, easy-tounderstand communications

Willing to ask the "stupid" questions Ability to admit mistakes

Everyone "pulling their weight"

Partnering a high priority

Continuous learning

Frequent team meetings

A fast start

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Channel management impacts the value for the customer by mainly playing on the customer experience
Value for a customer Channels impact Tangibles Intangibles

Product Quality Convenience

Brand Image Attitude

The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.

Relation Service Communication

The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.

Inspired by Sunil Gupta and Donald R. Lehmann, Managing customers as investments, Wharton School Publishing, University of Pennsylvania, 2005

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The right channel for the right value proposition

+

Zone of ineffectiveness Value Proposition Ca ne marche pas Face-to-face Call Center ATM Extranet Zone of inefficiency Internet Relational Power + Cest inefficace

Example: financial services. Source: Pr. K De Wulf - Vlerick

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The different types of channels could be mapped on these two axes

High
Sales reps

Value Added Partners

Distributors

Direct Sales channels

Delivered Added Value

Telemarket -ing

Retail

Indirect channels

Internet

Low

Direct Marketing channels

Low Cost Required

High

Source: Philip Ktler, Marketing Management

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A strong knowledge of the characteristics (strengths and weaknesses) of each channel has to be developed

Audience Media (press, billboard, radio, TV) Internet (site, banner, search, forum, social) Mail (post, e-mail, in/out) Event (road show, seminar) Phone (in/outbound) Extranet (portal with userID) F2F (meeting, visit) Mass Mass Few Few One One One

Addressable N N (+/-)* Y Y Y Y Y

Interactive X XX XX XX XXX XXX XXX

Cost OO OCC* O OC OC OCC OOCC

Cookies, IP addresses, Username O=Opex; C=Capex

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Three main steps are required to build a strong channel communication

Where to communicate

What to communicate

How to communicate

Source: Telenet

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Where to communicate

What to communicate

How to communicate

Classification of POS

Source: Telenet

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POS / POC Matrix

High Sales (High internal Traffic) POS Classfication

(based on sales)

High External Visibility

Low external visibility

Low Sales (Low internal Traffic)

AAA
Source: Telenet POC: Point of communication

AA

B+

B-

POC Classification
(based on external visibility)

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POS / POC Matrix

AMBASSADORS FULL KIT INT & EXT TELENET SERVICE CENTER

HIGH Internal Visibility HIGH External Visibility

High Int. Medium Ext.

Probably doesnt exist

POS Classfication

(based on sales)

Medium Int. High External

Medium Int. Medium Ext.

Medium Int. Low Ext.

Low Int. High External

Low Int Medium Int. Medium Ext. Low Ext.

Forget It

AAA
Source: Telenet

AA

B+

B-

POC Classification
(based on external visibility)

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Where to communicate

What to communicate

How to communicate

Defining Guidelines

Source: Telenet

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Objectives of Visibility

From a Sales Perspective

Tell the consumers where to go. ( Here available ) Develop clients sales. (Help him sell) Develop clients goodwill. (Win-Win relation)

From a Marketing Perspective

Develop brand awareness. Build image, communicate values. Communicate promotions.

Source: Telenet

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Several factors will define guidelines

IDTV

What kind of shop is it ? (PC Store, GSM, Brown Goods,) What does it sell ? (Internet, Telefonie, IDTV, 2/3, 3/3) In which category is it ? (matrix) IDTV Distribution policy. IDTV Communication Strategy. Corporate Policy ? One brand ? Two brands ? How do they live together ? Where do we put the focus on ?

Source: Telenet

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Where to communicate

What to communicate

How to communicate

Defining Tools

Source: Telenet

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Looking for efficient and qualitative POS communication.

Smoke less but smoke better Zino Davidoff We want communication not noise Less material, better material Placement guidelines to be defined : ex : Rather one great corner than one small element in each corner Try to get exclusivities on defined places Go for flexible standardization Tailor-made, own initiatives, create noise , jalousy among retailers, Prefer permanent material with promotion carriers Set Rules Negociate presence Secure places through charters and fixed material Control Reward
Source: Telenet

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Examples

Kits based on POS/POC Matrix

EXTERNAL Amb. Large electric sign with own name "Raamomlijsting" (exclusive) Doorhandle Open/Closed Windmaster High Electric Sign (Standard) "Raamomlijsting" (exclusive on one window) Open/Closed Windmaster Medium "Raamomlijsting" (1 or 1/2) Open/Closed Windmaster Low Windmaster

INTERNAL Telenet Corner with PC desk. Illuminated Totem Counter Promo Holder Amb.

Telenet Corner (Panels only) Illuminated Totem Counter Promo Holder Illuminated Totem Counter Promo Holder Counter Promo Holder

High

Medium

Low

Source: Telenet

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Example Ambassadeur

telenet
telenet

Huis X telenet

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Example High

telenet

telenet

telenet

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Example Medium

telenet

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Example Low

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Key KPIs to measure sales force and channel performance

Sales Potential Forecast Sales Total Sales Force Effectiveness Break-Even Number of Employees Sales funnel, sales pipeline Out-of-Stocks Inventories Direct Product Profitability Gross Margin per channel Return on Inventory Investment

Source: Paul Farris, Marketing Metrics: 50+ Metrics Every Executive should Master , Wharton School Publishing, 2006, New Jersey

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Additional KPIs to monitor channel performance

Number of partners per type Average Revenue per Distribution/Channel Partner Number of Distributors/Channel Partners that Account for 50% of Sales Sales growth (total and per partner) Average sales revenues or Net revenues (sales - commissions) per partner Number of subscriptions per partner Number of new subscriptions/Number of new users per partner Average users per subscription total and per partner Number of incoming leads per partner Number of calls generated per partner

Number of migrated subscriptions to other partners (cannibalization rate) Lead conversion rate per partner Commissions per partner and per type of work / support delivered by partner Average commissions per partner (total and average) Fees of partner program to finance partner marketing activities Customer Service Quality per Distribution/Channel partner

Source: Paul Farris, Marketing Metrics: 50+ Metrics Every Executive should Master , Wharton School Publishing, 2006, New Jersey

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Logo client

Increasing Marketing Communications Effectiveness

Communication is a major marketing driver of the Value Creation and Capturing Model
Environmental and Competitive Scan
Marketing Strategy Marketing Drivers
Products / Technology

Customer Equity

Marketing Value
Price Premium

Business Objectives

Purchase Process & Experience Positioning Communication Relationship Building Scope Channel Management Price Positioning

Awareness Perception & Reputation Preference

Acquisition Engine Retention Commitment Recommendation

Market Share

Customer Value
CLTV ROC

Deep Channel & Customer Insights Tangible Action Plans

Business Results

Segmentation & Targeting

Services

Intention

Behaviour

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The communications effectiveness pyramid

Recom mendati on

BEHAVIOUR

Loyalty

Win again & again & again &

Repurchase

Trial

Winning over the heart

MINDSET , ATTITUDE
Conviction

Preference

Desire Knowledge Interest Awareness

Winning over the head

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Communication Objective
Awareness I see Interest I look again Knowledge I understand Desire I like

Metric

Influenced by
Cross Media Effectiveness

How to measure
Share Of Voice SOV CPM (cost/1000) Gross Rating Point GRP Opportunity To See OTS Pre test Post test Pre test Post test

Input from
CIM Website traffic Quanti research Quali/Quanti copy testing Day after recall

Top of Mind Spontaneous awareness Aided awareness Stopping power

Creative work

Information power Clarity Correct Brand attribution Conviction power (credibility, brand commitment, likeability) Recall Evoked set Corporate reputation Persuasion

Creative work

Positioning Creative work

Brand Identity Pre test Post test

Quali/Quanti

Preference I prefer Conviction I choose Action to self I do Action to others You do too

Creative work General corporate image Creative work

Image Tracker

Quali and Quanti reputation study Buying Intention research Trade info Nielsen (FMCG) CRM, loyalty prg Quanti research

Pre test Post test Coupon redemption Orders, sales Repurchase (RFM) Net Promoter Score

Trial Repurchase Loyalty Recommendation

Call to Action impact Client Satisfaction Client Delight

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Some important concepts

Average frequency (OTS OTH) An expression of the average number of times a particular campaign or advertisement will be seen or heard by an individual in the selected target audience for the campaign. In visual media, the expression is synonymous with "average opportunity-to-see" (OTS) and in radio with "average opportunity-to-hear" (OTH). Cost-per-thousand (CPM) Cost-per-thousand is a way in which cost-efficiency can be expressed. It is a measure of audience delivered per unit of cost (eg a TV spot costing 1000 seen by 100,000 housewives delivers a cost-perthousand of 1000/100 = 10.00). It is typically used in inter- or intra-media comparisons of costefficiency (usually abbreviated to 'cpt' - 'cpm' in some countries). Audiences may be general (eg 'All housewives') or highly specific (eg 'C1C2 males aged 15-44 who are regular readers of the Daily Telegraph'). Coverage The coverage is the number or percentage of the target audience who see or hear it an ad.

GRP (short for Gross Rating Point) = Frequency x Coverage Example: 19% of women aged between 18 and 39 watch the news at 1 pm; an ad is broadcasted 2x; 2X19%= 38 GRP

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Advertising Research quick insights

Research can be conducted to optimize advertisements for any medium: radio, television, print (magazine, newspaper or direct mail), outdoor billboard (highway, bus, or train), or Internet. Different methods would be applied to gather the necessary data appropriately. First, there are two types of research, customized and syndicated. Customized research is conducted for a specific client to address that clients needs. Only that client has access to the results of the research. Syndicated research is a single research study conducted by a research company with its results available, for sale, to multiple companies. Pre-testing / Copy Testing Pre-testing, is a form of customized research that predicts in-market performance of an ad, before it airs, by analyzing audience levels of attention, brand linkage, motivation, entertainment, and communication, as well as breaking down the ads Flow of Attention and Flow of Emotion. Pre-testing is also used on ads still in rough form. Pre-testing is also used to identify weak spots within an ad to improve performance, to more effectively edit 60s to 30s or 30s to 15s, to select images from the spot to use in an integrated campaigns print ad, to pull out the key moments for use in ad tracking, and to identify branding moments. Post-testing / Ad Tracking Post-testing studies can be customized or syndicated. Tracking studies provide either periodic or continuous in-market research monitoring a brands performance, including brand awareness, brand preference, product usage and attitudes. Advertising tracking can be done by telephone interviews or online interviewswith the two approaches producing fundamentally different measures of consumer memories of advertising, recall versus recognition.
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Integrated Marketing Communications = 360 Marketing Communications

But what does it mean?

The American Marketing Association describes it as

a PLANNING process designed to assure that ALL BRAND CONTACTS received by a customer or prospect for a product, service, or organization are RELEVANT to that person and CONSISTENT over time

Planning develop the communication roadmap based on customer insights All brand contacts identify the Moments of Truth in the Customer Lifecycle, identify hidden communication moments Relevant which channels does the customer want you to use? Consistent using multiple communication channels means stepping up control & guarding consistency
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Integrated Marketing Communications is more effective when senders transmit their message via channels and with attributes that receivers prefer(1)
Different views on attributes of successful B2C communications Senders believe communications should be informative, appropriate (i.e., properly targeted), difficult to ignore, not annoying. They feel that purchase intentions will be raised if the communication is difficult to reject. However, none of these attributes is seen as important by consumer receivers! They prefer communications to be enjoyable, entertaining and reliable. More agreement as to which channels are most effective for B2C The phone, email, SMS and door-to-door media all result in lower purchase intentions than mail (personal and generic), television, catalogs, radio, newspapers and magazines. B-to-C senders believe that receivers might be more receptive to the newspaper channel, but receivers place newspapers as equivalent to all other mass media in terms of effectiveness.
(1): A Comparison of the Effectiveness of Marketing Communication Channels: Perspectives from Both Receivers and Senders, Peter J Danaher and John R Rossiter**, Department of Marketing University of Auckland, 2006 Presentation1

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B2B MarCom also demonstrates a disconnect between senders and receivers(1)

Different views on view on attributes of successful B2B communications Senders generally think that entertaining and not disruptive communication will be more effective. Business receivers agree that a communication should not be disruptive, but their preference is for acceptable and appropriate communications rather than entertaining ones. These differences between Bto-B senders and receivers can amount to quite large differences in downstream purchase intentions, and actual purchase. A comparison of predicted purchase probabilities when senders emphasize attributes that diverge from what receivers want results in 30 to 35% lower values of purchase intention. Different views on media usage in B2B Senders to the business segment often feel that newspapers and magazines are more effective, receivers do not agree. For B-to-B recipients, their purchase intentions are equivalent, and highest, for printed direct media and mass media. Email, telephone, SMS and door-to-door channels perform consistently the lowest.
(1): A Comparison of the Effectiveness of Marketing Communication Channels: Perspectives from Both Receivers and Senders, Peter J Danaher and John R Rossiter**, Department of Marketing University of Auckland, 2006 Presentation1

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Developing the ideal Media Plan and setting Media Objectives is about making trade offs
Budgets are not infinite, media planners will start by making a high level choice on the following objectives Reach The higher % we reach, the greater the volume opportunity Frequency The higher the frequency, the more likely the message will be noticed & remembered (minimum 3-5 times) Continuity / duration The more weeks of support, the less opportunity to forget the message Examples how would you rank objectives? 1. Launch of new taste of high quality and high price pet food within existing brand and existing broad portfolio 2. Launch of spectacular offering of mass retailer: come and collect products for free on day X
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Identifying reach objective an example

Objective: generate 2.500 additional visits to shop Assume 5% of target households (HH) will respond to advertising Need to reach 50.000 HH (50k x 5% = 2.500) Convert to % of total target, e.g. 100.000 HH in service area, need to reach 50% of target

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Developing media strategies

Evaluate & compare each media type against objectives and budget

Reach Vehicles Targetable By Demographic Group Targetable By Geographic Group TV Magazines Newspapers Outdoor Local Radio

Frequency Vehicles Radio Magazines

Local Radio Local Media

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Media channel overkill jeopardizes effectiveness in B2C mainly

Receivers in the consumer segment are less likely to act on an offer from a particular channel if there is already a lot of material sent to them via that channel (e.g. TV clutter, e-mail clutter). Senders of marketing communications via digital channels, where costs are lower, might be tempted to send more frequent communications. Clearly, this is likely to have a downstream negative impact on the response to the advertising. By contrast, receivers in the business segment are more likely to act on an offer if they already receive higher volumes from that channel. This could be interpreted as meaning that a business receiver does not see additional offers sent to them via high-activity channels as an impediment to consideration and action on future offers. Perhaps they have come to trust and become comfortable with channels where there is already quite a lot of business communication.

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Get into the brain of your receiver

This theory of the structure and functions of the mind suggests that the 2 different sides of the brain control two different "modes" of thinking. Each of us prefers one mode over the other.
Left Brain uses logic detail oriented facts rule words and language present and past math and science can comprehend knowing acknowledges order/pattern perception knows object name reality based forms strategies practical Right Brain uses feeling "big picture" oriented imagination rules symbols and images present and future philosophy & religion can "get it" (i.e. meaning) believes appreciates spatial perception knows object function fantasy based presents possibilities impetuous risk taking

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Start with the conception of a clear briefing to a creative agency

Target group & relevant insights into the target group Positioning of the brand / product / company Single Selling Idea: what 1 thing does the target audience need to remember? What is the expected outcome of the campaign? What do you expect the target audience to THINK, to FEEL, to DO? Background info on the company / brand / market / competition /

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Why is the Single Selling Idea important?

Pick out 8 balls and throw them towards someone in 1 movement

How many will he be able to catch? Right if youre lucky 1

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Unless youre a trained tennis ball catching dog

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How to judge the effectiveness of Creative Work?

We need to distinguish between the execution and the strategy behind the idea Conclusions of studies(1) about the execution elements of creative work were non-conclusive, except for this: there is no magic formula for the creation of effective advertising it is likely that the most important factor in effective advertising is the creative combination of many elements into a persuasive art form

(1): Ernst (1980), Stewart & Furse (1986), Garnard & Morris (1988), Stewart & Koslow (1989), Laskey et al (1994), Laskey, Fox & Crask (1995)

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It pays to look at the strategy behind the idea(1)

Results of the Laskey et al study

Conclusion: There is a difference in effectiveness of 2 main message types (informational versus transformational) Effectiveness was measured in terms of Related recall (% consumers who remember seeing the ad) Key message comprehension (% consumers who remember key message point) Persuasion (shift in brand preference attributable to exposure to ad) Typology on main message strategies Informational advertising Comparative (competition explicitly mentioned) USP (explicit claim of uniqueness) Pre-emptive ( testable claim of superiority based on attribute/benefit) Hyperbole (untestable claim of superiority based on attribute/benefit) Generic (focus on product class) Transformational advertising User image (focus on the user) Brand image (focus on brand personality) User occasion (focus on usage occasions) Generic (focus on product class)
(1): Laskey, Fox & Crask (1995)
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Some things to consider while looking at Creative Work

Is there a BIG IDEA, or just a nice gimmick? Does it have STOPPING POWER (capture attention/create impact) ? Is the message EASY to UNDERSTAND? (Single Selling Idea) Does it allow DECLINATION to different media types? Is there a clear link with the BRAND (name but also positioning, pack shots, sound signature, identity, tone of voice) Is it DIFFERENTIATING? Does it have the EFFECTS on the target in line with the briefing? Do people LIKE it?
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Importance of advertising likeability according to Millward Brown

40% of advertising effectiveness is explained by its liking score Ad-liking correlates with Ad-recall/Awareness Liking = 5 : 3% impact/100GRPs Liking = 6 : 10% impact/100GRPs Liking = 7 : 33% impact/100GRPs Emotions Create attention Determine associations Emotive advertising works best One must understand what emotion is Not interfering with rational or opposite rational Determines the rational

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Increase Print Advertising Effectiveness

Does the headline grab the reader? Ideally the headline is 9 words or less (Ogilvy: high impact headline is read by x5 people) Does the headline promise an important benefit? (Ogilvy: ads with benefits are read by 4x more people) Body copy long enough for useful information and proof of promise but not too long! Roper Starch Worldwide, database of + 2M print ads found that excessive copy reduces the effectiveness of ads and recommends copy of max 50 words or less Increasing white space around the ad or headline increases effectiveness

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Increase Direct Marketing Effectiveness

Total response rates are less important than ROI calculation, consider things such as Number of buyers Cost per buyer Number of responses Cost per response Cost per Lead / per Order Lead-To-Sales Conversion Avg profit on order Expense-to-revenue ratio Example of effectiveness DM: American Direct Marketing Association 2007: ROI of DM in automotive - for every dollar spent in DM, 33.81 dollar gained

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Customer Experience
Ichec 2010-2011

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For a company, The Customer Experience is core to the brand positioning, mainly to sustain a premium positioning
Great customer experience and optimal results are achieved when the operational reality is aligned with the brand promise and business objectives

An effective Customer Experience strategy is a key driver of: Strong brand image and differentiation building Brand preference: ensuring consumer choice over competitors Brand loyalty: ensuring repeat purchases Optimization of cost to serve per customer segment

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For the customers, the customer experience is all interactions that he has with the Brand : from seeing an advertising. to purchasing more!
Lets take the example of a customer having seen a Wii advertising

Want to find

Find where to buy

Buy & Pay

Get started & Use

Need help

Repurchase Or exit

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So, improving the customer experience will drive the Customer Lifetime Value by improving the way we get, keep and increase the customer value

Find & Buy

Get Started

Use

Billing

Need Help?

Repurchase

Get

Keep

Increase

Acquisition (#)

Loyalty (time)

Customer Value ()

CLTV = Revenues Cost of Acquisition Cost of Retention Cost-to-Serve

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We create happiness for children of all ages

Disney Resorts Brand Promise

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Customer experience is not only a matter of standardized processes

Processes, products and services can be calibrated and structured Length of queues Max 15 minutes Food quality standard Cleanness of alleys Cleaning tour every 50 minutes No paper So clean you could eat on the ground but children are unpredictable

customer experience is also a mindset for all employees

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Five building blocks for a pragmatic top down approach methodology

Business strategy / Customer perception match ?
1 2 3 Understand Brand positioning Understand Brand values Get Customer insights

The interactions process as part of CE Define the aspirations per interactions Identify gaps Prioritization Define KPIs per interaction

Interaction identified & actions prioritized

CE

Financials Scenario building & implement Monitor

Turn KPIs into business drivers

6 7 8

Build scenarios Implement

CPM

Measure

ROMI

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Put yourself in the shoes of the consumer: gather customer insights data!
Step 3 a: Customer insights can be generated through various opportunities: Economic value:
Surveys Complaint registration Panel discussions

Data mining techniques

Registration of products and contracts Loyalty registration

Step 3 b: Cluster the different Consumer Groups (segmentation) and deliver the right experience to the right Customer Group Usage, geo-marketing, distribution, satisfaction data

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The interaction process as part of the customer experience (step 4)

Motivational segmentation

Lifestage

Wallet

Interactions

Want to find

Find where to buy

Buy & pay

Get started & Use

Need help

Repurchase Or exit

Channel

Brand COM

Products & services

Price

Products & services

Relationship Management

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Lets start from the customers, and define their aspirations (what they expect from the Brand) at all those interactions points

Get Started

Find & Buy

Use

Billing

Need Help?

Repurchase

R A T I O N A L

Clear go to action in the ads Shops, Customer Services work flexible hours & have fast handling (low waiting time in shop and CS) Easy website

Quick activation process & provisioning Clear tariff structure Clear product and service communication E.g. device compatibility (GPS, 3G,..)

Best in class product quality & usability Fast and easy configuration at installation (DIY) Clear installation communication Short lead time & timeslot

Tariff structure clearly reflected in the invoice No billing errors

Broader channel accessibility CS flexible hours Fast handling Easy website Self service in shops Friendly & competent staff

Automatic contract renewal Open billing platform (cross selling) Personalized direct marketing

E M O T I O N A L

He feels welcome
Friendly & competent staff Customer identification

He feels reassured
Clear installation communication at order intake

He feels right

He feels respected
Promotions & advantages clearly expressed

He feels we like to taken care of him

First time right highest possible rate

He trusts us
Right product proposal (CRM)

Usage is as intuitive as expected

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Prioritization of potential actions

HOW = x x

WHO

WHO

WHAT

WHEN

THROUGH

Life stages

Value

Motivational Segmentation

Interactions

Channels

21

12 096 potential actions!

Concept needs a human dimension, needs to be manageable for people

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Prioritization according to relevant criteria

Through Customer Research (and Business strategy) we now have the data necessary to priorities the actions through a 3-phase approach. They are depicted in the following prioritization funnel: n = # of actions

1st criteria Relevance to the Customer 2nd criteria Customer Satisfaction x 3rd criteria Company Feasibility and/or Revenue Generator

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Prioritizing by customer relevance

This prioritization consists of multiplying the relevance ratings from the Customer Research to obtain an OMCE Relevance Score For example, if as part of the Customer Experience exercise we wish to establish that the right service is offered through the right distribution channel and communicated through the right media, for each consumer group:
Service Type Score Channel Score Media Score OMCE Relevance Score

Consumer Group 1

A B C

7.1 6.9 4.4

A B C

5.2 8.5 6.1

A B C

2.1 4.0 8.3

AxBxC 501 AxCxB 173

Consumer Group 2

A B C

8.4 5.1 2.0

A B C

2.1 4.0 8.3

A B C

7.1 6.9 4.4

AxCxA 495 AxBxB 231

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Prioritizing by customer satisfaction

We can now plot the OMCE Relevance score against Customer Satisfaction to determine the most urgent attention points:
High

x x Satisfaction DISREGARD x x

x CONTINUE x x x x INVEST x

Minimum Level

High

OMCE Relevance Score

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Prioritizing by business priorities

Finally, we can filter the results to obtain the OMCEs that most urgently require attention:
High

x x Satisfaction DISREGARD x x

x CONTINUE x x x x INVEST x

OMCE Relevance Score

Bus. Priority 1-10

OMCE Priority Score

Low

High

OMCE Relevance Score

ABC ACB ACA

501 173 495

8.5 5.1 2.3

ABC ACB ACA

4259 882 1251

Value For

Value From Loyalty Margin Volumes

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Turn KPIs into business drivers (step 5)

Want to find

Find where to buy

Buy & pay

Get started & Use

Need help

Repurchase Or exit

KPI

KPI

KPI

KPI

KPI

ACQUISITION

LOYALTY

UPSELLING

DECREASE COST TO SERVE

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KPIs

Want to find
Awareness Top of Mind Ad awareness Brand/product knowledge

Find where to buy

Web site satisfaction Customer service easy reach POS coverage POS Visibility POS Availability

Buy & pay

# of shop visits related to billing # calls related to billing Share of e-Bill # of bills sent par month per customer # settlement issues Market Share Penetration Volumes sold and margin calculation Sole Usage Numbers of brands purchased Heavy usage index Willingness to search

Start & Use

Need help

Repurchase Or exit
Cross-selling rate Up-selling rate Margin Volume sold Churn rate while moving %billing issues when moving %movers needing a follow-up %movers filling a complaint %churn for winback customers

Attitude/Liking/ Image Perceived value for money Perceived quality Intentions Brand Preference

% of reworked Customer orders Satisfaction on % DIY % of support explanations case received Installation % of issues solved lead time through Time slot size % waste web/selforders service Per product: Availability, down time, dropped calls, quality of service, speed and usability

NPS ACSI Customer Advocacy Willingness to recommend

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Developing scenarios for the priority actions

Step 6 & 7 : Based on the qualitative research collected during the Customer Research phase, and knowing which OMCEs are prioritized, we can develop Scenarios to improve Customer Experience in the most relevant and feasible way. This is applicable to each separate Customer Group, who will now each have a customized Scenario for their needs. Scenarios include the following information: - A description of the Customer Group and behavior - Implicit guidelines - Explicit guidelines - Actionable recommendations

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How to measure pragmatically the impact of CE

Awareness and Knowledge

Awareness: % of potential customers who recognize a brand Top of Mind: First brand that comes to mind Ad awareness: % of potential customers who recognize an add (could be aided), response rate to communication campaign Brand/product knowledge: % customers who demonstrate specific knowledge or beliefs about the brand Attitude/Liking/Image: % of potential customers who agree with statements like: this is a brand for people like me. Perceived value for money: % of customers who agree with statements like: this brand has usually good value for money Perceived quality: quality perception compared to other product and services in the market Intentions: % of potential customers who agree with statements like: It is very likely that I will buy this product Brand Preference Number of new customers Market Share Penetration Volumes sold and margin calculation
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Attitudes/ Purchase Intentions

Acquisition

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How to measure pragmatically the impact of CE

Usage Usage in a year, month, week Relative usage: Usage of 1 brand compared to total usage in a given period of time Sole Usage: The fraction of a brands customers who only use the branch in question Sole Usage percentage: Proportion of sole users to customer base Numbers of brands purchased Repeat rate: The % of customers in a given time period who are also customers in a subsequent time period Repurchase rate: The % of customers who repurchase the brand on a next occasion Churn rate Cross-selling rate and Up-selling rate = Average total purchases in category (#, )/ Average total purchases in category by all customers ! This index does not indicate how heavily customers use a specific brand, only the category The willingness to delay a purchase in order to not switch brands = Accept no subsitutes
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Consumer Franchise and category usage

Heavy usage index

Willingness to search
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How to measure pragmatically the impact of CE

Maturity index

Concept introduced by Insites Consulting measuring the maturity of your company in delivering Customer Experience It is based on 4 elements: Understanding your customers, organizational alignment, moments of truth and brand consistency Individual measurement and benchmark comparisons based on internal evaluation Importance Performance analysis is a graphical and analytical tool for developing prioritization in improvements on attributes, be it store attributes, service attributes, Questionnaires will determine the importance and satisfaction on each attribute and plotted on the graph The position of each attribute will determine the urgency of improvement This model is the input in the THoM methodology

IPA

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How to measure pragmatically the impact of CE

NPS

Net promotor score, developed by Fred Reicheld, calculates customer satisfaction through 1 question Would you recommend us to your family and friends The advantage is the simplicity, but this also implies limited statistical significance Customer Satisfaction Index is the main competitor to NPS It is constituted by multiple questionnaires and calculations are based on regression models The complexity of this model makes it easy to compare within sectors or industries, but not useful for individual use. The research has to be done by external sources CSI used by Electrabel The Customer Experience Index is developed by Forrester and gives the opportunity to make an overall view on Customer Experience of your company within the industry The methodology is based on 3 items: The usefulness, how easy it was to use or interact, and the way the customer felt during this interaction

(A)CSI

CxPI

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