Here we outline a route for marketing to sustain the value of a company for its owners.
Without a Competitive Advantage (CA), a relative strength or a feasible strategy to gain a CA, then a company is left with marketing alone (and operational efficiency) to deliver sufficient customer value as to sustain shareholder value:
To offer customer value, marketing adapts the company’s products to customer needs. Such adapting can only be achieved by targeting specific customer segments whose needs differ from the rest of the market.
Marketing’s research into the target segment needs, positioning and tailoring of a mix will all raise customer utility ‘quality’. However these marketing activities also raise company cost, so the price may either reduce customer value or deliver insufficient profitability for shareholders:Also, targeting smaller segments will serve to raise customer utility to that segment above rival offerings. But the low volume sales from a smaller target also raises marketing cost per customer, since marketing is partly a fixed cost, along with other business fixed costs. So again the raised customer utility risks being cancelled out by the raised company cost.
The most profitable targets.
In balancing the above customer utility, cost to serve and sales volume factors, the criteria to decide profitable targets are:
• Degree of customer responsiveness to the company’s existing minor strength and consumer research insight advantage over rival existing offerings, to deliver high customer utility and retain customers,
• Size of segment, growth rate and extent of product usage per customer, to indicate sales volume potential (important for keeping the cost per customer low, whilst ensuring the segment is still meaningfully different from the rest of the market to keep utility per customer high, which typically leads to it being a smaller segment),
• Marketing cost to research a target segment, tailor a marketing mix to their needs and cost to reach in terms of both distribution channel and media communications.
Based on this, customer segments likely to prove most profitable are:
A. Existing profitable customers to retain them (responsive, limited sales potential, low cost to serve),
B. Defined sub-segments of existing profitable customers, to expand from what is potentially a minor strength core (somewhat responsive, greater sales potential, more costly to serve),
C. Under-served segments the company currently does not address (potentially responsive, high sales potential, costlier to serve).
Marketing that sustains shareholder value.
Therefore marketing on its own can at least protect shareholder value via a 3-pronged approach:
1. Reinforce a minor strength core to sustain shareholder value by:
1. retaining existing profitable customers,
2. expanding from existing profitable customers,
2. Seek market opportunities to potentially grow shareholder value (or at least sustain shareholder value) by:
3. targeting under-served customer segments,
4. responding to market changes impacting customer segments,
3. Avoid competing against CA’d rivals to minimise destruction of shareholder value.
1. Retention of existing profitable customers (or continue securing the same single-purchase customers as have proven profitable).
The cost of holding an existing customer is often around 25% of the cost of acquiring a new one. But less mentioned is that the company gradually moulds its structure and systems into serving repeat purchasing existing customers. Consequently, the company becomes very efficient at it and the proportion of retained customers who become threshold profitable for the company increases:
Efficiency is critical for a company lacking a CA or strength, since according to Bruce Greenwald in his book ‘Competition Demystified’- “operating with superior efficiency is the only method of competing available to a company separated from the conditions [offering a CA] in which strategy can make a difference.”
A key way that marketers can increase a company’s efficiency is by earning the loyalty and trust of retained customers. The result is that transaction costs between the two is kept low: simpler systems, fewer control procedures, reduced monitoring of actions, less price bargaining, fewer customer complaints.
Marketing actions to raise loyalty and increase retention include:
– Enhance products to better fit the customer’s ‘value chain,‘
– Trust building behaviour: building shared values, open communication, not acting opportunistically, investing in the relationship,
– Configure a CRM system,
– Prioritise customers based upon their attributes indicating lifetime value to the company (i.e. those of potential high lifetime value are given priority by the company to retain them and the opportunistic are given lower priority),
– Monitor loyalty metrics: customer satisfaction, retention rates.
– Follow up on complaints and defections, to minimise losses and regain customers.
In this cooperative, mutual gain environment, customer’s price sensitivity drops and switching cost rises, so as to enable the company to invest into improving the customer value offered, to remain competitive in the long-term and sustain shareholder value.
2. Expansion from existing customers.
All companies with customers of above threshold profitability could be said to have a minor strength over rivals that attract and secure such customers (‘threshold profitability’ is covered here and this calculation). Furthermore, the existing profitable customers as a small population can likely be segmented into sub groups by different needs, benefits sought, demographics etc. This enables tailoring a marketing mix in a low cost manner to such a sub group.
The combination of 1. an existing minor strength, added with 2. a newly tailored product mix, means that customer value can be enhanced to a targeted sub-group, resulting in the company penetrating that segment to gain more profitable customers:In selecting ideal sub-groups from existing profitable customers, target those groups who:
1. Represent a sizeable market of potential buyers as a ratio to existing buyers, and
2. Have not been specifically targeted and communicated to in the past (since non-buyers who resemble existing customers and have been previously targeted to will be non-buyers for a good reason (ask them why and potentially remove a bottleneck)).
Of all routes to gaining new customers, these customers are least costly to gain and likely to be loyal, due to desiring the company’s customer value that combines a potential minor strength with a tailored marketing mix to that segment.
3. Target under-served customer segments.
Customer segments that experience problems and feel dissatisfied may have under-served needs that can justify market research to gain insight into. Seek out the customer negatives in the market- the frequent defectors (‘churn’), complaints, lobbying, problem detection research, voiced risks. This can present an opportunity to target and develop a new, enhanced product to meet their needs:
Targeting such a group can involve high market research and marketing mix costs (e.g. new product development) that affects short-term profitability, but could prove lucrative in the future.
Sales growth from 2. and 3. above ideally would be part of a coordinated increase in sales volume within a broader customer need segment as to secure CA sources and the potential to develop a CA, as described in starting a broad or niche advantage.
Therefore consider which segments to target and align an existing minor strength with a tailored marketing mix to, for the potential to build a minor strength into a potential CA to create a RoIC spread and grow shareholder value.
4. Market changes that impact customer needs.
A disruptive change in the market can affect customer needs, enabling the alert competitor to out-adapt rivals into better fitting the affected needs. Acting in this way can lead to a first-mover advantage of a growth spurt in sales and the securing of CA sources. Examples of market changes are:
a. Adopting new technologies,
b. Incorporating new communication and distribution channels,
c. Meeting higher level customer needs or needs affected by related sectors,
d. Exploiting new legislation.
In point 4 (and 5 below), marketing’s adapting to the market involves game theory of considering rivals’ reactions to your own actions. A basic rule of thumb for marketers deciding whether to act on market changes can be as follows.
If the market change offers an opportunity to lower company cost in serving customers or an opportunity to enhance customer utility over rivals, and:
o Will eventually be exploited by all rivals, the company will have to adopt the change. Little if any shareholder value benefit will be derived from adopting the change and instead only the customers will benefit, but at least the company will not be at a disadvantage relative to peers and can sustain shareholder value.
o Can only be exploited by one or two rivals either as a first mover advantage or because it requires high volume share of that customer segment to justify adopting it and the company is in either position, then keenly adopt the change if it fits an overall strategy for CA development.
o The company has been operating at a competitive disadvantage in that customer segment (RoIC<CoC), likely do not adopt the change and instead seek to invest in a more attractive market segment (or close, sell off assets and return proceeds to shareholders to sustain shareholder value).
5. Avoid serving customers who consider a Competitively Advantaged (CA’d) competitor’s product as a direct alternative to your own.
A CA’d company is able to deliver superior customer value over rivals in serving the same customers. By not directly competing to serve the same customers as a CA’d competitor, you avoid:
• The cost of having to adapt to customer value expectations the market wants from you that they can gain from your CA’d rival,
• A decline in your sales into the same fixed cost structure, which in turn raises cost of each sale for a lower % margin, and
• Having to drop prices and profit margin to offer sufficient customer value, in an effort to share the same competitive space as a CA’d rival.
Avoiding this situation increases the likelihood of protecting shareholder value.
A weaker rival to a CA’d company should recognise the inevitable outcome and quickly exit by serving a different customer segment. But that is easier said than done. Instead we tend to cling onto failing product lines that hold back the whole business’ performance, due to natural psychological tendencies:
• Commitment and consistency effect- our desire to remain consistent to a prior commitment in supporting a product line, regardless of changing circumstances,
• Contrast misreaction- a slow and gradual financial struggle quarter-by-quarter can lack sufficient alarm to evoke any action and instead go unreacted to,
• Deprival overreaction tendency- overextending our efforts to avoid the pain of seeming product failure,
• Optimism tendency- the hope that business prospects will improve soon (“it’ll turn a corner”),
• Overconfidence- excessive belief that we’re capable of improving the situation, and
• Pain-avoiding denial- we avoid acknowledging the struggling reality.
Explicitly recognising these mental forces enables us to act more rational.
Conclusion- Survival of the Best Fitting.
The above presents opportunities to develop a Strength or even an early CA. Importantly, the route is also low cost to implement, to fit the reality of a business on limited resources. Therefore it enables marketing to be sufficiently sophisticated enough to sustain customer value competitiveness for profitability, which in turn justifies future modest marketing to adapt the business.
What it critically avoids is “communications only” marketing, where a struggling company can only afford to promote and push what it is able to make to whoever will buy.
Such marketing often coincides with being locked into a doom cycle of financial results managing the business: a lack of marketing budget to adapt the business to the market reality leads to decreasing customer value and profitability, which brings tighter financial monitoring and further financial constraint, causing a further inability for marketing and the company to adapt to market changes.
“When the rate of change inside the company is exceeded by the rate of change outside the company, the end is near.”
Jack Welch, ex-Chairman of GE.
Therefore the above is akin to changing through Darwinian evolution, where continuing adaptation is needed for a company to maintain its relative fitness within the industry it is co-evolving with. (Such adapting may seem costly and inefficient, yet a company that is highly proficient at serving last year’s customer needs is perhaps more inefficient).
When lacking any CA or strength advantage, the ability to sustain shareholder value is largely decided by the company’s ability to adapt to the market. Marketing is pivotal in this regard, by identifying market changes and influencing the company to be “market-led.”
In a business world that trumpets growth, managing a company to merely sustain shareholder value sounds inadequate and unsatisfactory. Yet all companies eventually reach a situation of having neither competitive advantage nor material strength. Faced with this difficult competitive environment, protecting the value of the company is creditable.