What is value? How do you design and deliver it?

Ed Rensi, the CEO of McDonald’s said:

We are in the value business”.

John Thompson, chair of Microsoft said:

Get fewer, smarter, people to deliver more value to customers faster“.

So what do they mean by value?

Well, I’m pretty sure what they don’t mean by value.  They do not mean aim the cheapest offer in the marketplace.  Being the cheapest, focusing on price alone, does not automatically produce best value in the minds of consumers.  Don’t think of how much value you give to customers; think how much worth customers see in your offer.

By focusing on price alone, rather than the wider marketing mix, you risk your products and services being seen as commodities  Indeed, many products formerly seen as commodities, such as Albert Bartlett potatoes, are now marketed on a wide range of marketing mix factors, not just price.  To enable this a product halo of associated brand factors and service elements has been bolted on to the physical product, a particular variety of potato.

If you focus on price and limit your vision to the physical product.  If you do not care about the product surround of benefits and services, then all consumers have to judge your products on is the price.  In such circumstances the only winner is the company that can sustain low margins over the long-term.

This creates a world of perfect competition, where goods and services are identical and the only marketing factor is price.

Such a position doesn’t square with Evian being able to charge a 10% additional premium on bottled water, or Starbucks being able to charge 20% extra for a cup of coffee, or branded salt being 10% more expensive than a supermarket own brand.

People develop brand preferences.  They derive value from brand identifiers, both tangible and intangible.  brands are familiar and they bring expectation of ‘worth’. Evian don’t sell water, they sell purity.

You are not selling physical products alone. You are selling additional benefits, tangible and intangible, some of which fit within the self actualisation needs described in Maslow’s hierarchy. Aim to sell a benefits package not just purchase value. Represent worth in the minds of consumers.

Porter describes three ways to deliver value:

  1.  Charge a lower price than your competitors
  2. Help your customers lower other costs
  3. Add benefits to make your offer more attractive.

To win through lower pricing, you need to aim for price leadership.  But this strategy requires deep pockets and the ability to produce in volume.  You need to be able to exploit economies of scale and to exploit the experience curve.

As an undergraduate, I sat in many a seminar looking at case studies where firms focused on cutting costs but in doing so reduced their capacity and lost economies of scale. Factory closures designed to improve efficiency and cut costs just reduced the firms cost base to a level where margins were unsustainable.

This is the strategy of the category killer.  The example of a category killer often quoted in academic texts is Toys R US.  The firm formerly famous for Geoffrey the Giraffe aimed to have the largest selection of toys at the cheapest prices. Of course, Toys R Us is no longer around having gone bankrupt a few years ago.

Another way to offer low cost to customers is to look for those who are willing to give up certain benefits for a lower price, e.g. offering mobile phones that can take calls but which don’t have cameras or MP3 players embedded.

You can also look at cost unbundling e.g. delivering items adds £100 to the retail price, so unbundle that cost and charge £80 separately for delivery.  this adds £20 to the profit margin.

There are significant limitations on a low cost strategy.  In particular, it can be extremely difficult to sustain a low price, low margin strategy over the long-term.  Look at what happened to Toys R Us, to Woolworths or to Carillion.

Can you offer value by reducing your customers other costs.  This is a well used strategy in B2B and industrial markets.  It requires the ability to show your target customers that despite a higher price your products and services offer better value over time.

For example Caterpillar offer guarantees that their earth-moving equipment breaks down less often, can be repaired quicker than the equipment of competitors, that it will last longer and it will have a higher second-hand value.

Other firms will offer customers value by reducing peripheral costs. BT do not just supply IT and telecommunications equipment.  They offer management services so customers can outsource the running of ITC provision.  Effectively BT becomes a partner in the business.  Other firms offer exceptional guarantees that, if cost savings cannot be identified the value of promised savings will be subtracted from the offer price.

Can you help your customers reduce their ordering and supply chain costs.  This could be as simple as reducing the required administrative paperwork or even by just adding a an automatic re-order button on your website.

Can you help you customer lower inventory costs e.g. by adapting your systems to cope with their just in time stock control systems?  Can you offer on consignment sales (what used to be known as Sale or Return).  Can you offer to outsource your customers inventory management?

Can you offer customers reduced processing costs by improving yields, reducing waste and rework, reducing labour costs or reducing energy costs?

Can you help reduce administrative costs by offering 24 hour helplines, shipment tracing and offering better customer accessibility.

The third way of offering more benefits to consumers for an equivalent price to that of your competitors.  You offer value-added products and services. You offer customisation. Look at car manufacturers such as Mini who offer mass customisation to consumers through leveraging new technology and just in time manufacturing.

Can you offer faster and better service? Can you offer coaching and training provision around your core product? Can you offer software tools expanding the functionality of your hardware? Can you offer membership benefits.

In conclusion, can you offer value to target segments by:

  1.  Lowering costs below the level of your competitors allowing prices to be cut whilst retaining margins?
  2.  Offering services, guarantees and functionality which helps your customers reduce other costs?
  3. Offering value-added?

Establishing Organisational Capabilities

It is an essential part of developing a sustainable marketing strategy that you establish and assess your organisational capabilities.  It is key to identify where your organisation is superior to its competitors and potential competitors.

All organisations are made up of specific assets and competencies.  Do you know what they are in your organisation?

It is also true that no organisation is good at everything.  There will be things you do better than other parts of your business process.  There will be areas which need improvement or which need additional investment.  You may be spending too much on other processes.

The following is a list of the type of assets which make up an organisation:

  1.  Sales Advantage:  Market Share; Relative and Absolute Media Weight; Leverage over Suppliers; International Presence; Sales, Distribution and Service Coverage; Specialist Skills due to Scale.
  2. Production Processes:  Level of Contemporary Practice; Flexibility; Economies of Scale; Capacity Utilisation; Patents; Unique Processes and Services.
  3. Working Capital:  Quantity; Access to; Location of; Access to Credit.
  4. Sales/Distribution/Service Network:  Coverage; Relationships; Size; Quantity.
  5. Relationship with Others;  Suppliers; Financial Institutions; Joint Ventures; Joint Exploitation of Assets e.g. Technology.
  6. Property:  Type; Location; Ability to Expand; Quality.

So Muller Dairies have a significant asset in owning the patent to the corner yoghurt pot.  House of Fraser once had an asset in its store portfolio but, with changes to the retail sector, that asset turned into a liability as stores were often of Victorian construction, difficult to maintain, and unsuitable for modern technology installation.

However, you organisations assets must not be viewed in isolation.  You also need to establish your organisational capabilities.

A tool which can be used to ascertain your organisational capabilities is value chain analysis.  This is more normally used to discover where your target customers see value in your organisational processes so that scarce resources can be targeted on those which offer the most value to customers.  Areas where customers do not see value can have their costs minimised.

In value chain analysis, there are two categories of process: Primary activities such as manufacturing processes and product distribution and Support activities such as human resources management and procurement.

But key competencies can be classed as either primary or support activities.  Davidson (1997) split key competencies into three areas:

  1.  Marketing:  New Product Development; Business Analysis; Category Management; Brand Extension; Brand Equity Management; Unique Market Research Techniques; Planning Skills; Database Management; Advertising Development; Customer Targeting; Design Testing.
  2. Selling:  Supply Chain Management; Account Management; Relationship Development; Customer Service;  Building partnerships; Motivation and Control; Planning; New Account Development; Merchandising; Presentations Skills; Space Management; Negotiation Skills; Pricing and Promotion; Trade Marketing.
  3. Operation:  Motivation and Control, Process Engineering, Industrial Relations, Inventory Control, Cost Management, Productivity Improvement, Planning, Health and Safety; new Facility Development, Management Training and Development;  Speed of Response; Flexibility;  Total Quality Management; Purchasing; Payment Systems, Capacity Utilisation; Product commercialisation; Supplier Engagement; Property Skills; Global Operation.

I don’t quite agree with the content of Davidson’s key competency groups.  Some items classed in Selling or Operations are more obviously marketing functions and vice versa, but his point stands; You must strategically align you organisation’s assets with your competencies.

It is then possible to use them to build a low-cost, a differentiated or a niche position in the marketplace.

Jobber (1995) believes managers should ask four key questions when attempting to match organisational assets with business competencies:

  1.  Marketing Assets:  Does your current market segment allow you to take advantage of current market strengths?
  2. Cost Advantage:  Can you enter price sensitive segments consistent with an organisation that has a low-cost base?
  3. Technological Strengths:  Do you have superior technology that can be used to your competitive advantage?
  4. Managerial Capabilities and Commitment:  Do you have the managerial and technical skills to succeed in your chosen segment?

Most importantly of all, is entering a particular market segment compatible with your organisations long-term aims and objectives?  If not, you may only be diverting time and scarce resources away from the common goals of your enterprise.

This is where tools like the Shell Directional Policy Matrix can be used.  By using weighted criteria, you can assess potential target markets based on segment attractiveness and the strength of your organisational assets and competencies.

Acquiring, Retaining and Growing Customers

Anyone who speaks to me about marketing will know my pet peeves.  Chief amongst them is organisations who conflate the term marketing with sales.  You often see the term ‘marketing representative’ used instead of salesman.  House builders have marketing suites on their developments, not sales offices.  But sales is not marketing.

I also see plenty of businesses who have a ‘Sales and Marketing’ department.  I hate this description it smacks of a silo mentality and that a firms marketing activities are subservient to its sales team.  It also usually means that to the organisation’s senior managers, marketing is predominantly a promotional activity.  But promotion is only one element of the marketing mix.

In my view, these definitions of marketing are wholly incorrect.  Properly defined, marketing is a critical strategic activity that should sit closely to an organisation’s senior management; not a distant silo subservient to the organisation’s sales team.

That said, sales and marketing are linked activities.  There is no point in a corporation developing a customer focused strategy, if it isn’t enacted by its sales representatives.

Marketing guru, Peter Drucker once said, “the only profit centre is the customer”.

For too long, the focus of sales teams was therefore growing the customer base.  More customers meant more profit and greater market share.

However, in today’s highly competitive markets, the focus has moved.  Bob Weyland said:

“The paradigm has shifted.  Products come and go.  The unit of value is the customer relationship”.

So today, particularly in B2B markets, the focus is about growing and deepening the relationship with your existing customers.

Studies have shown that the cost of obtaining a new customer is five times that of keeping existing customers happy.  The longer you keep a customer, the more you can earn from them.  It can take many years for a new customer to buy at the same level as existing customers.

The focus on existing customers means not taking them for granted.  Every so often you have to do something special for them.  You need to encourage their feedback and react to that feedback.

However, there will always be a process of erosion.  Whatever you do you will lose customers.  For example, the fashion retailer Top Shop targets consumers under the age of 30.  So what happens when that target market ages?  How many sixty year olds will buy clothes from Top Shop?  Like products, customers will have a lifespan.

So as well as retaining existing customers, you will always need to obtain new customers.  And of course you have to turn new prospects into repeat buyers.

In today’s markets, customers have extensive choice.  There is an abundance of suppliers and brands.  So you have to do more than locate prospects.  In addition to locating prospects, you need to sell to them and you need to turn them into repeat buyers.

Generating customer leads is a three-step process.

Firstly you need to define the target market.  That means a structured process of segmentation, targeting and positioning.

My brother runs a small landscape gardening business.  I asked him who his target customers were.  His reply: “Everyone and anyone”.  This is clearly an unrealistic approach. For a start, his business doesn’t have the resources, financial or otherwise, to promote his services to all.  He needed to identify customer groups which were worth obtaining; customer groups which would offer the best returns and who were the best match for his skills.

The targeting and positioning process means that you need to deepen your knowledge of the target market;  you need to know what it wants; what it buys; where it buys; when it buys and HOW it buys.

Secondly, you need to solicit leads through communication tools, the promotion bit of the marketing mix.  Traditionally, this has meant advertising, personal selling, direct mail and events such as trade shows.  Today it may also mean product registrations, event sponsorship, using celebrity advocates.

Remember the internet and social media is a promotional channel, like television or radio when it comes to soliciting leads.

Thirdly, you need to qualify the leads you gather.  Not all leads are worthwhile.  For example, there is little purpose in my brother collecting leads five hundred miles from his base as the cost of travelling to do the job will erode any profit margin.

Some prospects may express an interest in purchasing your goods but will have no intention of actually doing so.  They may lack the means.  I would love to own a vintage Fender guitar, but the cost, and my level of ability on the guitar make that prospect a dream rather than a reality.  Ferrari recently produced a high-end sports car model where to be able to buy the car, you had to prove that you had the ability and expertise to buy it.  You never got to keep the car at your home.  It was kept by Ferrari who would ensure it was safe for you to drive.  Clearly, many motor racing fans would love to drive that Ferrari but would lack the expertise needed to drive it.

It really matters that you identify the BEST leads.  You need to distinguish between hot, warm and cool leads.  Hot prospects are those most able and willing to buy; those most able to buy.

Hot leads need to be prioritised.  It is not worth wasting the time and resources selling to those only partially interested in buying.

A useful selling technique is to use SPIN questions:

  1.  Situation Questions – e.g. how many employees do you have?
  2. Problem Questions  – what problems and difficulties is the customer experiencing? What are they dissatisfied with?
  3. Implication Questions – How do the problems affect the customer?
  4. Need pay-off Questions – What is the value or usefulness of your proposed solutions? e.g. What if I told you that I could reduce the cost of the implication by 80%?

You aren’t selling products or services but solutions and capabilities.

So how do you calculate if a customer is worth getting?  One method is to analyse the customer acquisition cost against prospective customer lifetime profit.

For example:

  1.  Cost of sales representative = £100,000 per annum (this is the total cost not just their salary)
  2. Average number of calls per annum by the sales representative = £200
  3. Average cost per sale = £2000

This is an underestimate of the cost of customer acquisition as it ignores work on advertising, promotions and administration.

  1. Annual revenue from customer = £10,000
  2. Average number of years of loyalty = 2 years
  3. Profit margin = 10%
  4. Customer lifetime profit = £2000

This may appear to be a breakeven situation but the prospective customer lifetime profit is an over-estimate as profit margins will vary between customers.

So in this example the company is actually paying to acquire the customer.  The cost of acquiring the customer exceeds their worth to the company.

Once you have obtained a new customer, your next task is to keep them.  You have to develop a customer and move them through development stages.  This is often referred to as the ‘customer ladder’.  Customers move from prospects, to first-time customer, to client, to advocate, to member, to partner, to part owner.

To make a first time buyer a client, they must be satisfied; not dissatisfied or ambivalent.  It is therefore crucial to develop a customer satisfaction index and to listen to your customers.  You need to estimate the cost of losing customers.  Do you need to improve your customer services.  remember social media makes it very easy for dissatisfied customers to tell others.  You need to resolve customer complaints quickly.  You need to accept responsibility to win back goodwill.  Remember ‘the customer is king’.

Once a first time buyer becomes a repeat customer, you need to identify key accounts.  You need to classify customers by ‘depth of repeat’.  You need data on frequency, recency and monetary value of a customer’s purchases.

Remember retained customers are better targets for cross-selling and up-selling.  They reduce the cost of service through familiarity with your products and systems.  Highly satisfied repeat customers become advocates and create word of mouth.  Long-term customers are also less price sensitive.

Advocates represent the statements “the best advertisement is a satisfied customer” and “Satisfied customers become apostles”.

In some markets it is possible for satisfied customers to become members e.g. a golf club will often accept ‘pay and play’ customers but to survive in the long-term it will need a robust membership.  Car manufacturers operate owner’s clubs which offer special benefits and privileges.  Rock bands and TV shows develop fan clubs.  If customers switch away from these clubs, they lose the membership benefits.

In B2B markets, often the aim is to develop a partnership with a customer.  Software firms get customers to help develop and amend their products.  They use beta testing where trusted customers get to use prototype programmes, to identify bugs and to suggest improvements. Aerospace manufacturers will work closely with engine manufacturers.  The finished aircraft will be an effective joint-venture.

In a part-ownership model, the customer is a critical stakeholder.  This is the model used by building societies, cooperatives, community owned pubs, credit unions and buying clubs.  Customers have a direct say in the organisations policies and procedures.

So, if you want you business to be a success in today’s highly competitive business environment, it is not enough to garner new customers, you need to keep customers and develop them not just in terms of profit growth but in terms of an ever closer relationship.



Is Distribution Part of Your Marketing Strategy?

When I see many organisations defining their marketing activity, I find that their definition is often limited to two areas, Promotion; and the incorrect definition of marketing as sales.

As I have discussed in previous blog entries, marketing strategy involves a far wider mix of subject matter.  The extended marketing mix has seven elements which affect all aspects of your business; Product, Price, Promotion, Place, People, Process and Physical Evidence.

When you consider distribution, you are dealing with the fourth of those elements, Place.  If you are a retailer place would include the location of your shop premises.  But the vast majority of businesses are not retailers.  For them Place has a different definition.  For non-retail businesses Place refers to distribution and supply networks.  It is the relationships you develop with suppliers, logistics firms, wholesalers and retail chains such as supermarkets and department stores.

Often achieving commercial success isn’t only about the relationship you have with consumers; the end users of your products and services; but about how frictionless and efficient are your distribution channels.  That is why such channels are often called ‘marketing channels’.

Good distribution channels and strategies can contribute strongly to developing strong links with your customers and help build your competitive advantage.  Distribution channels are an important part of your value delivery network.

To build strong distribution channels you need to build strong relationships with key suppliers and resellers.  This extends marketing functionality beyond your customer base.

Marketing channels include your upstream and downstream partners, your suppliers, your logistics contractor, your wholesalers and your retailers.  Your downstream partners are the vital link between your firm and your consumers.

The term supply chain is limited.  It implies that raw materials, production inputs and factory capacity should be the starting point for marketing activity.  Many businesses decided to use the term demand chain instead.  It was felt that demand chain was a better fit to the serve and respond view of markets.  It emphasised the process of identifying consumer needs and the response of producing a chain of resources and activities which produce customer value.

However, today the term demand chain is also seen as limiting.  It limits marketing channels to a step-by-step linear model of purchase, produce and consume.  The term now used to define distribution channels is Value Delivery Network: a network of suppliers, distributors and ultimately customers who partner to improve performance of the entire system in delivering sustainable customer value.

Few manufacturers sell goods directly to the end consumer. Although direct sales are more common in industrial markets and increasingly thanks to the internet.  In the majority of markets, manufacturers need to develop strong and reliable channels as the effectiveness of their distribution activity will affect every other aspect of their marketing mix.  Pay too little attention to your distribution channel and your distribution partners and you can cripple your business.

Your distribution network will be affected by retailers.  You will have different distribution arrangements and expectations if you work with discount retailers compare to working with luxury retailers.  These differences will affect the price of your products.

Innovative distribution can create strong competitive advantage.  Why do you think Amazon is investing in drone technology and truck manufacturers are looking at self-driving and convoy vehicles?

Creating strong distribution channels takes long-term commitment.  It is far easier to adapt your product range or to change your promotional strategy than to build strong distribution channels.  Building reliable channels cannot be done overnight.  Channels have to be built not only with regard to current practices but with one eye on the future.

So how do strong marketing and distribution channels add value?

  1.  Information:  Your distributors and resellers are critical to the gathering and distribution of marketing information.  They are the direct contact between your firm and your consumers, your competitors and other market actors.  Their knowledge of market forces are critical to business planning and exchange.
  2. Promotion: Your distribution partners are often a crucial messenger for developing and spreading persuasive communications about your products and offers
  3. Contact:  Your distribution network are a good way to find and communicate with prospective buyers.
  4. Matching:  Distributors can help to develop your products to meet customer expectations through activities such as packing and product bundling.  They may be involved in the assembly of your products e.g. most cycle shops need to  part assemble and test a bicycle before it can be ridden by the customer.
  5. Negotiation:  Often members of your distribution channel are given the ability to negotiate with customers on issues such as price and timescales for delivery.  They allow ownership and possession of products to be transferred.  Remember, in law, a price indication is an invitation to treat, not a contractual offer.
  6. Physical Distribution:  Obviously, your distributors are responsible for the physical movement of goods and components.
  7. Financing:  Often your distribution partners are crucial in acquiring and raising funds to cover the cost of the channel.
  8. Risk-Taking:  Often the risk of carrying out the distribution network is, in full or in part, transferred to the distribution partner from the business core e.g. in franchise models.  Often critical decisions need to be made as to who carries out certain distribution channel activities.  It is a question of who carries out that work, not that the work needs to be done.  The shifting of tasks from a manufacturer to intermediaries can lower costs and increase profitability.  Channel intermediaries may have more technical expertise than a manufacturer.  Distribution channel partners may increase your productivity and efficiency trough their knowledge and resources.

The following factors must be taken into consideration when selecting distribution channels:

  1.  Market Factors:  Your buyers may expect your products to be sold in a particular way.  A failure to meet buyer expectations through the way you organise distribution will have serious consequences for your business.  Often consumers need product information such as technical specifications and installation advice.  Often the provision of this information is the responsibility of channel intermediaries.
  2. Geographic Location:  Are you remote from your customers.  Do you need to employ territory agents to sell and distribute your products in distant locations?
  3. Producer Factors:  Do you lack the resources to carry out all channel functions?  Do you have the finances, skills and other resources?  Do you make a wide range of products that means distribution activity can be brought in-house?  Or do you make a single product and therefore rely on others as direct distribution is cost ineffective?  How much control do you want or need over your distribution channel?  Levi’s jeans are a good example.  Levi’s has very tight control over the distribution and reselling of their clothing.  they even control how their products are displayed on the shop floor and the type of retailer they want to sell their products.  The retailer is part of Levi’s brand image.  As a result, Levi’s fought a long legal battle with Tesco over the supermarket chain’s purchase of ‘parallel import’ clothing for sale in its supermarket.  If you make hazardous or bulky products you may have no option but to develop direct distribution to end users.  Retailers may not want to stock your products as they are difficult to display.
  4. Competitive Factors:  You may operate in a market sector where your competitors own or control the major distribution channels, through vertical integration or market power.  Often you may have to disrupt the distribution channels through the use of alternative technology.  Much of the disruptor activity is driven by new distribution technologies.  We live in the age of the digital download and soon 3-D printers will be common domestic appliances.  My father recently needed a small plastic plumbing part for a DIY repair.  He bought it over the internet.  In a few years time he will purchase the computer code for the component and print the part himself.

Distribution channels are a critical part of your marketing strategy and planning.  They should be a central part of your SMART marketing objectives.


Developing Customer Retention Strategies

Most senior managers in a business talk of developing customer or brand loyalty.  The principle is that the longer you keep a customer, the more you earn from them.   To survive in the long-term, you need to develop high lifetime value.

However, loyalty is fickle.  Successive academic studies have shown that even the most loyal of customers will switch to a competitor if the believe there is better value on offer.

In this blog we have also discussed that there is no longer a product which is purely defined by the definition goods.  All products have a service element and often the opportunity to differentiate goods from those of competitors and to add distinctive value.

This makes it odd that in some sectors little is done to retain customers and customer service is, quite frankly appalling.  For example how many of us have been stuck on the telephone line for what seems like an age to a bank or utility firms call centre with no ‘call back’ option.

Then there are industries where customer retention seems to be an alien concept and customer lifetime value appears to be the last thought of company directors.  The car insurance industry is one such sector.  The aim appears to be to get consumers to switch every year by only offering discount to new customers.

In business to business markets, where there are often fewer customers, higher purchase costs and complicated contracts, there is often a constant battle to adapt and improve service capabilities and product functionality.  In such markets, customer retention is the key to business growth and survival.

Senior managers shouldn’t confuse customer or brand loyalty with customer retention.  You don’t develop brand loyalty strategies, you develop customer retention strategies.

So how do you develop customer retention:

  1.  Target Customers:  Not all customers are worth building a relationship with over the longer-term.  Some customers are habitual brand switchers.  Some will not generate significant lifetime value; they will not provide sufficient income or their service demands incur excessive costs.  Some customers; disruptive ‘zombies’; may actually disrupt service provision and affect a firm’s relationship with other more profitable customers.  This is a classic marketing segmentation and targeting approach.  You should aim to retain, high value, frequent use, loyalty-prone customer groups who recognise your product as having high service values and utility.  You need to identify those customers  in that group who are most likely to defect to competitors and ask whether they are worth retaining.  You then need to build a value-added strategy to meet those customers demands.  For loyalty-prone customers, it is important to maintain communication bonds.  It is worth remembering the Pareto principle that 80% of turnover comes from 20% of your customer base.
  2. Bonding:  You need various levels of strategy to bond customers and service providers together.  You need to select the  level of strategy most appropriate for the bond with each customer:
    1. Level One:  You bond through financial incentives.  You provide discounts for bulk purchase or you provide a loyalty scheme for repeat purchase.  However, such financial incentives are easily copied by competitors.
    2. Level Two:  You develop more than just price incentives; you build sustainable competitive advantages through the creation of social as well as financial bonds.  Customer service encounters are often also social encounters.  To build social bonds, you require frequent communication.  You need to provide community of service through and entertainment activities.  for some customers you need to make them feel that they are being treated as an individual.  For example, Harley Davidson runs events for their owner’s club; Las Vegas casinos offer ‘High Rollers’ the use of luxury suites and special tables.
    3. Level Three:  You need to develop financial, social and structural bonds.  The relationship should feel more like a partnership than that of a supplier and a customer.  This often involves the creation of bonds which tie the customer to your company.  For example some logistics firms provide customers with packing equipment which only works with the logistics firm’s systems..  Such structural bonds often create formidable barriers against customer switching and new competitors entering the market.
  3. Internal Marketing:  To build high quality service delivery, you need high quality performance from employees.  Recruitment and employee selection is often key to bonding as is employee retention. Retained employees often develop expert knowledge about your products and services.  You need to provide high quality staff training.  You need effective communication channels with your staff and they need to be appropriately motivated.  Staff need to have technical competence but they also must be able to relate to customers.  All your staff, from your receptionist to your engineers, are part-time marketers.
  4. Promise Fulfilment:  You must make credible realistic promises, keep those promises and give your staff the knowledge and equipment to deliver upon them.  this is the keystone of maintaining customer relationships.  They are the cues to match customer expectations and to avoid customer disappointment, dissatisfaction and defection to competitors.  The mantra should be ‘under-promise; over-deliver’.  First impressions count so your first contact with customers is critical. For example, Marriot Hotels have a ‘first ten minutes strategy’ to ensure the relationship with hotel guests gets off on the right foot.
  5. Building Trust:  Customer retention relies on building trust.  Services are intangible.  To ensure retention you need to keep in touch with customers and modify services to respect their views.  This means providing guarantees which inspire confidence and which reduce perceived purchase risk.  Your policies need to be considered fair by consumers.  Staff must recognise required high levels of conduct with consumers.
  6. Service Recovery:  Solving problems can restore customer trust.  Ideally, potential problems should be eliminated before they actually happen; but that isn’t always possible.  If incidents occur, systems should be capable of modification so those incidents cannot be repeated.  This means having a quality assurance system capable of adaptation such as Kaizen or Six Sigma.  Systems should be tracked to identify service failures. Customers should be encouraged to report problems.  Monitor complaints and their resolution.  Follow up on service provision.  Most importantly, train and empower your staff to deal with problems and complaints before they escalate.  Successful resolution of a complaint can actually increase a customer’s positivity about a service provider.  This is called the recovery paradox.  But if the complaint recurs, the increased positivity can dissolve into dissatisfaction and recrimination.  Service recovery can encourage organisational learning and service staff should be motivated to report problems.  Effective service recovery systems can increase customer retention.

Establishing Goals; Setting Objectives and Targets

Few organisations have a single objective.  They have a range of objectives which compete for the attention of managers and stakeholders.  These include profitability, sales growth, retention of market share and risk containment.

These objectives are influenced by a range of cultural factors:

  • Environmental factors –
    • Societal values
    • Pressure groups
    • Government policy
    • Legislation
  • Organisational culture –
    • History and age
    • Leadership and management style
    • Structure and systems
  • Nature of business –
    • Market situation
    • Nature of products
    • Technology
  • Expectations of stakeholders
    • Shareholders
    • staff
    • customers
    • suppliers
    • distributors

Stakeholders cannot influence an organisation’s strategies without the existence of an influencing mechanism; they must hold some power over the organisation.  Power can be exerted on an organisation in a number of ways.  It could be shareholders voting down the pay awards of senior management; consumers boycotting your products; retailers refusing to stock your goods, etc.  Different markets have different power dynamics.  For example in the market for milk, the supermarkets and dairy processors hold the power to determine the price of milk.  In the oil market, OPEC states virtually control the price by managing extraction.

Organisational objectives have traditionally been afforded a central role in influencing strategy.  This often leads to rigid strategies incapable of amendment.  The expectations and influence of stakeholders, both internal and external need to be taken into account when setting goals and objectives.  Also ensure that strategies are open to adaptation and amendment during development to take account of stakeholder concerns.

Objectives should be set under a range of headings and then each category should be managed.  Objective management needs predetermined planning and control processes.

Every management textbook will tell you that objectives should be SMART (Specific, Measurable, Achievable, Realistic and Time-bound).  Other guidelines also need to be adhered to:

  1. There should be a hierarchy of objectives.  You should weight your objectives from the most important to the least important.
  2. Objectives should be quantitative.  You must satisfy the measurable part of SMART.  An objective shouldn’t be to increase market share, it should be to increase market share by a pre-determined percentile.
  3. You shouldn’t be guilty of wishful thinking.  The realism in your objectives should come from careful analysis and research.  Analysis should be carried out according to pre-determined and documented processes.
  4. You need to be consistent in your objective setting.  It is impossible to offer the highest level of quality in the market and simultaneously maximise profits.  Quality costs.

It goes without saying that your marketing objectives should be derived from and should reflect your corporate objectives.

Organisations have primary and secondary objectives.  For many years it was perceived wisdom amongst economists that profit maximisation was the sole primary objective of a commercial enterprise.  However, management science has now evolved to recognise that professional managers pursue a far wider range of goals.

It is also recognised that many objectives defined as secondary have a direct influence on an organisation’s primary objectives and to ensure the achievement of your primary objective, you must first achieve your secondary objectives.  In certain circumstances, secondary objectives may shift to become primary objectives.  For example, in times of economic downturn, organisational survival or retention o market position may overtake the profit maximisation objectives.

Drucker (1955) suggested eight areas in which organisational objectives need to be developed and maintained:

  1.  Market standing
  2. Innovation
  3. Productivity
  4. Financial and physical resource
  5. Market performance and development
  6. Worker performance and attitude
  7. Profitability
  8. Public responsibility

In recent years, public responsibility has become more important.  In the 1980s, the concept of the triple bottom line was developed.  This is often referred to as the alternative 3 ‘P’s’; People, Planet, Profit.

This approach to organisational goal categorisation was popularised by firm such as Bodyshop and its late creator, Anita Roddick.  The triple bottom line places environmental quality and social equity on an equal footing as profit maximisation.  Bodyshop’s mission statement includes the corporate view on social justice and human rights as an integral part of its business practice.

The theory of the triple bottom line argues that highlighting social issues and taking responsibility for the effect your business objectives will have on them will increasingly be the strategy of choice to enable sustainable competitive advantage

Assessing Marketing & Business Risk

In the last week, other than the royal wedding, the news in the UK has been dominated by three stories; the parliamentary committee report into the collapse of Carillion; Stagecoach and Virgin losing the east coast rail franchise which has been taken back into public ownership; and the report into building control regulation following the Grenfell tower fire.

What links these three stories are businesses who acted recklessly or who did not properly assess the risks to their strategies.

Two of these stories, Carillion and Grenfell clearly involve criminal recklessness which should result in prosecutions and censure of senior board members.  The east coast rail story is a clear case where the bidding firm overestimated potential earnings and underestimated costs.  The result was that Stagecoach/Virgin overbid for the franchise and could not meet expected levels of turnover.  In the words of Chris Grayling, the lamentable transport minister (who causes chaos in whichever department he leads), “they got their sums wrong”.

The assessment of risk is central to the development of marketing and business strategies.

So where do you start?  After all there are a multitude of potential risks in such strategies.  And we can all repeat Murphy’s Law: That anything which can go wrong, will go wrong.  Such a multitude of potential risks means that appropriate assessment of them may seem impossible.

In the book Marketing Due Diligence, McDonald et al. argue that there are three common points in all business and marketing plans:

  1.  The market is this big.
  2. We’re going to take a share of that market
  3. That share will produce this much profit.

These points lead to three risks:

  1. The market isn’t as big as forecast
  2. The planned strategy doesn’t provide the expected share of the market
  3. The target market share doesn’t provide the expected level of profit

These three points therefore capture all the variables that can go wrong in a strategic marketing plan.

Assessing these risks is fundamental to marketing due diligence. It is not a case of counting all the risks with a plan.  It is accurately assessing the potential of these generic risks in your plan.

McDonald breaks each of the three generic risks; market risk, market share risk and profit risk into five sub-categories.

Market risk is that the market is not as big as the forecasts suggest.  When looking for competitive advantage through a gap in the market, it is always worth asking yourself not whether there is a gap in the market but: Is there a market in the gap.

Market risk arises from assumptions in a marketing plan.  All plans are based on assumptions and if they are not adequately tested the can be found to be erroneous and ill-founded.  For example, many Brexit-supporting politicians quote the work of Professor Patrick Minford on the UK economy as gospel.  However, the vast majority of economists (over 90%) see Professor Minford’s Liverpool model as making huge incorrect assumptions and ignoring advancements in economic science since the model was developed in the 1970s.

The five sub-components of market risk are:

  1.  Product category risk:  The product category is smaller than planned.  This risk is higher if you are producing a new novel product or service.  This risk was at the centre of the Dot.com bubble where share values of new internet businesses rocketed with little or no evidence that the market for novel internet products was large enough to provide expected dividends.
  2. Market existence risk:  This is where a segment is smaller than expected.  This risk is stronger in new market segments and lower in established segments.  I do a presentation based on an airline catering firm who produce high-end restaurant quality food for private jets.  The clear outcome of the presentation is that the owner of the business over-estimated the size of his target segment.
  3. Sales volume risk:  This is where sales volumes are lower than planned.  This risk is lower if you use market research to estimate sales volume potential.
  4. Forecast risk:  The market grows less quickly than forecast.  This often because of the incorrect reading of trend data.
  5. Pricing risk:  Your pricing strategy is wrong and reduces the size of your market.

Assessing market risk requires careful questioning of both written and unwritten business plans.  You need a market risk assessment to moderate market size assertions.

A strong strategy will lead to strong market share.  Weak strategies won’t.  So you must objectively assess what makes a strong strategy compared to a weak strategy.  One example of a weak strategy is one which is ‘one size fits all’ rather than one which offers the customer bespoke products meeting their segment or personal needs.

However, you must not define market segments too tightly or too loosely.  For example many in the press will offer Millennial as a segment; yet the Millennial generation is roughly a third of the UK population.  Equally, if you are only aiming the target one-legged Welsh farmers, then it is unlikely that you will meet your market share expectations.

A ‘one size fits all’ strategy only really operates in quasi-monopolistic situations.

The five sub-categories of market share risk are:

  1.  Target market risk:  Your strategy works for only part of your targeted market segments.  This risk is higher if you use homogenous target market segments e.g. ‘millennials’, as opposed to homogenous needs.
  2. Proposition risk:  The proposition you develop for customers fails to appeal to some of your target market.  This risk is lower if segment specific propositions are delivered.
  3. SWOT risks:  SWOT stands for Strengths, Weaknesses, Opportunities, Threats.  This risk occurs if you do not leverage your strengths, you do not take up opportunities, you do not protect against threats or if you do not remove weaknesses from your business.  Each of the four SWOT categories must be rigorously assessed and leveraged.
  4. Uniqueness risks:  This is where you compete with others in your market head on rather than leveraging difference.  It is higher if you offer identical products nad services to those of your competitors.
  5. Future risk:  This is where you do not properly account for changes in customer needs or market expectations.  A prime example is Kodak who continued to produce 35mm film for cameras when most consumers were going digital.  The Kodak situation was worsened by the fact that the digital sensor for cameras was invented by Kodak.

Profit risk arises by not properly assessing competitors’ response to your strategy.  So how do you assess what your competitors will do?

Again there are five sub-components to profit risk:

  1.  Profit pool risk:  This is where the total amount of profit available in a market is less than forecast.  Therefore your competitor’s actions have a direct bearing on your profits because they do not react as you expected.  This risk is higher if the overall profit pool is static or shrinking e.g. in mature and declining markets.
  2. Profit sources risk:  This risk is higher if your plan is to take your growth in profits by seizing customers from your competitors.  It is lower if you are seeking to leverage growth from new customer segments.
  3. Competitor impact risk:  Profits are less than planned because of the impact of your strategy on an individual competitor.  if there is a single dominant competitor in your market, e.g. Amazon in the case of digital retail, and your strategy affects their survival, you may face stiffer competition, harder reaction and therefore lower profits than you planned.
  4. Internal gross margin risk:  This is where profit margins are lower than planned due to a rise in the cost of making your product or service.  This is one area where Carillion went wrong.  The company’s directors operated on very slim margins and had a policy of gaining contracts by undercutting their competitors’ bids.  When projects began to be delayed and the costs of raw materials rose, those profit margins disappeared.  Similarly, Stagecoach found that by over-bidding to run the east coast rail line, they weren’t able to make their expected margins.
  5. Other costs risks: This is where other costs associated with production, such as the costs of marketing or delivery is higher than expected.  These higher costs impact on expected profit margins.

In summary, the risk of not delivering the promised margins is high if your market is small and shrinking, your market contains one dominant competitor and you are over-optimistic in your assumptions about costs.


A Key Marketing Activity

Business leaders and academics are agreed that the correct definition of a business’s market, followed by careful market segmentation are key to successful marketing planning, the development of sustainable competitive advantage and the creation of stakeholder value.

The following ingredients  must be combined to create world-class marketing functionality:

  • A deep understanding of the market in which you operate
  • Correct marketing segmentation
  • Careful product development, positioning and branding based on that segmentation activity
  • Effective marketing planning processes
  • Long-term, integrated marketing plans
  • Institutionalised creativity and innovation
  • Total supply chain management
  • A market-driven organisational structure
  • Careful recruitment, training and career management
  • Rigorous line management implementation

All these activities rely heavily (or in part) on an organisation correctly defining the market within which it operates.

Lets take the example of a businessman who runs an Italian restaurant.  How should he define his market; who is he competing against?

It is unlikely that he views his business as just being in competition with other Italian restaurants.  It is likely that he will view his business as in competition with other types of restaurant e.g. Chinese, Indian or Thai.

But is that sufficient?  Should that restaurateur be looking at the wider food industry for competitors?

The correct way to define the market in which you operate is to assess your competitors as all those businesses which satisfy the same need.

Our restaurateur may feel that  this definition is met best by considering all leisure activities which compete for a consumers disposable income.  He isn’t competing in the restaurant business but the evening leisure and entertainment sector.  He isn’t just competing against restaurants but also pubs, clubs, cinemas, theatres and sports venues.

Take as an example a pension provider.  A pension is a financial services product, not a market.  Pension providers do not consider themselves as competing only against one another.  They are also competing against other forms of post-work income provision such as equity release firms, investment brokers, financial advisors and investment trusts.

Pension funds compete against a wide range of financial products, not just other pension suppliers.

An important element in defining your market is to draw a market map.  Ask yourself:

  • Who are your competitors?
  • Who are the market distributors?
  • Who are the market resellers?
  • Who are the customers?
  • Who are the end users?
  • What distribution channels are there?

Then assign values to:

  • The market as a whole
  • Each layer of the market
  • Each distribution option
  • Each market player

You therefore create a map which displays the distribution and value chains that link suppliers with end users and which takes into account buying mechanisms and the part played by ‘influencers’.  For example, in financial services, independent financial advisors are likely to be considered market influencers.

Delia Smith, the celebrity cook, could be considered a market influencers.  When she includes particular ingredients in her recipes, cookery fans will rush to buy them and often there are shortages on supermarket shelves.  Grocery suppliers therefore keep a close watch on Ms Smith’s recipes to look for the next fashionable ingredient.

A marketing map also allows you to identify leverage points. These are parts of your market where your organisations attributes, your market power and your marketing mix can be used to impact consumers purchasing decisions.

If you are in business, any business, a clear understanding of the environment in which you operate is crucial to sustained success and developing a market map is the crucial step in developing that understanding.