Marketing: Investment Advisor to the Business
This excerpt is from the upcoming book “The Performance Manager,” to be published by Cognos, a provider of business intelligence and performance planning software.
These are the facts every marketing professional understands.
• There are more and more competitors for your market.
• Your competitors are constantly changing their business models and value propositions.
• Your customers can access massive amounts of information, making them aware of their options, tough bargainers, and fickle.
• Consumers’ appetite for products and services continues to change and grow.
Your competition and customers will continue to increase in sophistication. Marketing must do so as well if it is to serve your company and help it compete and win. This means its role must evolve.
Marketing must become an investment advisor to the business. As that investment advisor, marketing must define
• the overall investment strategy—what is sold, where, and to whom.
• the strategic path for maximizing return on the company’s assets (ROA),
• the cost justification for the operational path required to get there (in other words, support of return on investment numbers for scarce marketing dollars).
Marketing must be present in the boardroom, offering business analysis coupled with financial analysis. It must connect the dots between strategic objectives, operational execution, and financial criteria. It can provide the necessary alignment between strategy, operations, and finance.
Marketing must overcome three important barriers to provide this alignment and become an investment advisor. Each barrier underscores the need for information sweet spots, greater accountability, and more-integrated decision-making.
Barrier 1: complexity of defining the “size of prize”
In the days of homogenous mass markets, companies assessed value based on market share of major product lines, counting on economies of scale in marketing spending and healthy margins to deliver profits. Ten years ago, the challenge evolved from mass markets to defining and improving customer profitability. Companies began to include customer information in their data. Many companies have successfully developed this information sweet spot and now can group customers into meaningful segments.
Today this trend is evolving as customer requirements and characteristics are divided into smaller and smaller microsegments, which requires organizations to become responsive to the needs of more and more customer categories.
Size-of-prize marketing requires the company to do two things well. First, it must pool customers into meaningful microsegments that are cost-effective to target, acquire, and retain. Second, it must determine the profitability potential of these microsegments in order to set company priorities. These profit pools allow the marketing team to recommend the best investment at product/brand/segment levels. This is of particular relevance when considering different channel strategies: The more detailed the understanding and mapping of microsegment profits, the more the marketing and sales propositions can be refined.
Barrier 2: lack of integrated and enhanced information
Without appropriate context (where, who, when), marketing can’t define or analyze a microsegment. Without perspective (comparisons), Marketing can’t define market share or track trends at this more-detailed level.
As an investment advisor, marketing must merge three core information sources: customer (operational), market (external), and financial. To gain the full value of large volumes of customer data—electronic point-of-sale (EPOS), click-stream, feeds from CRM and ERP sources—the company must structure the information thoughtfully and integrate it cleanly. Marketing’s judgments and assessments must be supported by the capability to categorize, group, describe, associate, and otherwise enrich the raw data.
Companies need easy, fast, and seamless access to typical market information such as product category trends, product share, channels, and competitor performance. They also need financial information from the general ledger and planning sources to allocate cost and revenue potential in order to place a value on each profit pool.
Barrier 3: number-crunching vs. creativity
Companies create marketing strategies to win customer segments and the associated “prize.” Marketing must justify the tactics it proposes, set proper budgets, and demonstrate the strengths and limits of those tactics. Drilling down into greater detail and designing tactics around this information will help satisfy the finance department’s requirements. In the past, such detailed design was not the marketing norm, but it is what is required to generate the ROI that finance wants to see.
The right information is not always easy to get, however. And some departments contend that good ideas are constrained by such financial metrics, stifling the creativity that is the best side of marketing.
Marketing’s traditional creativity should not abandon finding the “big idea” but must expand to include formulating specific actions with a much clearer understanding of who, why, and size of prize. This is not a loss of creativity, simply a means to structure it within a more functional framework.
A guidance and early-detection system
As an investment advisor, marketing guides strategic and operational activity, which focuses on the potential of specific markets and how the organization can meet these markets’ needs. In this role, the marketing department can also be an early-detection system for how changes in the market lead to changes in products and services, selling strategies, or even more far-ranging operational elements of the business.
Many marketing metrics are important indicators for a company scorecard. Sudden drops in response rates for traditionally successful marketing efforts could mean competitor pressure, market shifts, and/or revenue trouble down the road. Good marketing departments see the big picture. They notice and interpret trends that are not readily apparent on the front line and provide the business context for what is being sold, or not, and the associated value proposition.
Marketing has the responsibility for defining, understanding, and leading five core areas of the company’s decision-making:
Core area 1: marketing opportunities
Making decisions about marketing opportunities is a balancing act between targeting the possibility and managing the probability while recognizing the absence of certainty. This decision area is fundamentally strategic and concerned with the longer term. It manages the up-front investment and prioritizes the most-promising profit pools while dealing with a time lag in results.
Understanding the profit potential in opportunities requires a detailed assessment of pricing, cost to serve, distribution requirements, product quality, resources, employees, and more. The most obvious market opportunities have already been identified, by you or the competition. You are looking for the hidden gems buried in the data. These are the microtargets that need to be identified, analyzed, and understood.
Core area 2: competitive positioning
Effective competitive positioning means truly understanding what you offer as products and/or services to the segments you target and how they compare with those of other suppliers. As an investment advisor, marketing must clearly define the business and competitive proposition: In which market segments are you competing, and with what products and services?
Marketing must define and invest in specific information sweet spots that give it insight into how its customer-selection criteria compare with those of its competitors. Marketing must understand the customer-relevant differentiators in its offerings and the life span of those differentiators based on, for example, how difficult they are to copy. It also needs to understand the pricing implications of this information: Are your price points below or above those of key competitors, and if so, by how much? If they’re lower than those of your competitors, is this sustainable given your cost profile, or is cost a future threat? What premium will customers pay for value-added propositions?
Core area 3: product lifecycle management
Products are born, grow, and die. Marketing organizations must manage the product lifecycle and maximize the return at every stage by adapting or retiring unprofitable products and introducing new ones. Lifecycles vary significantly among industries and market segments. For example, computer technology evolves over a 12-month cycle; cars have a three- to five-year cycle. This pace of innovation (which is subject to sudden change) sets the context in which management needs to bring “new news” to your markets. New news fuels the marketing machinery; it’s a significant way to excite and capture customer mindshare. It is also tied to financial performance, as product innovation may point to future earnings.
Innovation may mean small or significant changes to existing products as well as the introduction of new products. Based on its understanding of existing and new segments, for instance, the marketing team can drive changes in packaging and pricing to target new opportunities. These changes can be achieved in the short term or the long term and are part of marketing’s role in defining profitability targets and predictions.
Marketing should understand what proportion of existing sales comes from new products and compare this percentage with that of competitors. This measure helps the organization judge the impact of investing more or less in innovation. As an investment advisor, marketing is in a position to counsel the company on how to forecast changes in market share if the company does not introduce new products in a given time period. In-depth analysis allows the company to segment products by their various lifecycles and corresponding expectations, so the company can plan additional product introductions.
Core area 4: pricing
Companies once defined their product proposition broadly to cast the widest net possible in homogenous mass markets. The downside of this practice was that as a product became a general commodity, it became subject to price sensitivity. Smart marketers today see microsegment markets not as a challenge but as an opportunity to define smaller, more-customized offerings that are less price-sensitive. The more your product proposition is tailored to solve a specific customer’s problem, the easier it is to protect your price and margin.
Tailoring the product proposition requires more-detailed information. Simple reports from transactional systems can provide enough information to support homogeneous mass-marketing strategies. Targeting microsegments means modeling price implications and tracking results at many levels:
• What product- and service-bundling opportunities are possible for given market segments and customers?
• Does the product portfolio offer a combined value and convenience advantage that can be priced tactically?
• What impact will an increase/decrease in price have upon volume (a measure of price elasticity)?
• To what extent should pricing be used as a defensive vs. aggressive tool, and what are the relative cost benefits? For example, where a business has only a small market share, does it pay to be aggressive in its competitor’s backyard?
Setting prices based on well-thought-out models is one thing, but companies also must monitor how flexible local offices and sales teams need to be. Centralized pricing ensures margin stability but can be counterproductive in a fast-moving, competitive situation. As a compromise, companies typically offer pricing guidelines and a pricing floor. This lets local sales reps respond to competitive pressures but protects the business from dangerously low price levels. Good marketing systems monitor these data to test the validity of pricing assumptions, as well as to gain early warning of competitor attacks on pricing.
Well-designed sales incentives can help avoid price erosion, but experience shows that these can also encourage unintended behaviors. Developing sales incentives without implementing a reporting system on those incentives is a recipe for wasting money. The ability to manage pricing guidelines while offering local sales reps the flexibility they require depends on the use of information from business intelligence and planning tools.
Core area 5: driving demand
Driving demand is where marketing rubber hits the road. All of marketing’s strategic thinking and counseling about microsegments, profit potential, the offer, and competitive pressures comes to life in advertising, promotions, online efforts, public relations, and events.
Marketing manages its tactical performance by analyzing promotions, communications, marketing campaigns, below-the-line support, internal resourcing, response rates, and cost per response. At the same time, marketing must understand whether the company is acquiring the right customers for the ideal future portfolio. This is key to understanding the results of a microsegment marketing effort.
Improving marketing tactics is not simply about designing more detailed and specific activities; it also means understanding which elements work better than others. Marketing must understand the health and vitality of its various decision areas, including pricing, promotions, packaging changes, and consumer communications. What provokes a greater response? At what cost? With a wide variety of options for online, direct response, and traditional advertising, marketing needs to know which tools work best for which groups.
Understanding and analyzing this information is key to alignment and accountability. Driving demand requires close alignment with sales, and marketing tactical teams continually fine-tune their aim and selection of tactical “arrows” until they hit the bull’s-eye.
Roland P. Mosimann is CEO of BI International (www.business-intelligence.com), a Malvern, PA-based consultancy specializing in performance and risk management. Meg Dussault is director of analyst relations and corporate positioning for Cognos. Patrick Mosimann is founding and joint managing director of PMSI Consulting (www.PMSI-consulting.com), a data-driven strategy group in Malvern, PA.
Related articles:
Microsegmentation for Macro Returns
Marketing Dashboards: The Visual Display of Marketing Data
