As a consumer research and later an advertising professional I mostly think B2C market but I do B2B marketing.
I have worked at two large and successful agencies with diametrically different approach to selling their services (in the business of advertising you just don’t sell your services to potential clients but every major campaign or activity that you create and execute for a client is an act that succeeds a multi-step sales process).
One agency sells a final creative product. The starting point for it is the client brief. They rather scrupulously stay away from even probing the client’s business and marketing strategy.
Over the last decade or so, as the economy has boomed, this agency climbed the charts quickly and become by all reckoning the agency that represented the face of an advertising business that also boomed.
The agency’s creative product is constantly top class. And they did it by investing in resources and systems that were geared to converting a client-given advertising objective into breathtaking disruptive advertising that at the same time delivered on the objective fair and square.
I would call this approach to B2B selling as an approach that focused on the richness of the product-feature. It is akin to say an IT hardware selling on the efficacy of the machines in perhaps innovatively meeting clearly understood client needs expressed in terms of specifications.
The other agency made the client’s business its primary business. The top resources in the company were people who could and would sit at the table with the client company’s senior management and not just discuss the company’s business and marketing strategy but debate it.
The agency made its business to know everything they could know about the client’s business and market. Its middle and junior level would spend time and resources interacting with not just the marketing people in the client company but the sales people.
In many cases the agency co-crafted in many cases the marketing strategy with the client and crafted by itself the advertising objective. The agency than got on to creating advertising that met this objective.
The company’s biggest bottom-line contribution came when the agency managed to change the client’s perception of their own business! For example a client actually pulled investment in a new plant to manufacture the next generation of products as the agency proved to them that the market for the current generation still very large and profitable. Of course, this required a greater marketing and advertising thrust now instead of when the new plant would have opened two years later.
Such game-changing contributions allowed the agency to sit at the highest table with the client and enabled to make top dollar on that business.
Very many times the beginning of this game-changing contribution could be pinned to a seminal meeting where the agency’s top team delivered a ‘jolt’ to the client, a powerful marshalling of arguments that shifted client perceptions about their own business and established a fresh paradigm.
Not surprisingly, given the smaller share of resources and time allocated to the creative process, the agency delivered a middling-quality product (some will immediately argue that the best approach is to combine the approach of agency 1 and agency 2 but that would be, in my mind, asking uncle to be aunt too).
The agency did extremely well in the decade after liberalization that the Indian economy and companies were getting used to the new economic climate and testing opportunities, flexing muscle that had been until then in disuse.
Over the last decade or so, as company after company muscled their way to high growth under managements much more confident, this agency fell back to mediocre growth. It still was successful and but also-ran successful.
I would term this agency’s approach to B2B selling as a mix of solution-selling and consultative. It is what happens when an IT hardware company spends time and resources in developing along with the client the RFP, so to speak and then with the business locked supplies the hardware.
Over the last year the cycle has come full circle. The boom is gone and companies and managements should be searching for new paradigms.
But all indications are that most companies and managements are frozen in the headlights. They have cut out discretionary spending and frozen budgets whose principal strategy is cost-cutting.
Advertising agency budgets are being slashed and agency one- the ‘creative’ agency in the B2B product selling mode, by all reports, is also frozen in the headlights, busy with its own cost-cutting strategy.
Agency two is less talked about and more opaque. Some reports indicate that during the boom years the agency had nurtured self-doubt.
Its business and marketing strategy making and debating skills diminished as it flailed about to strengthen without much success its creative resources and product.
I do not know whether this agency realizes it,but with the “recession” the times are good for this agency to climb the market share chart and perhaps be the growth leader over the coming decade.
However it must go back to not just the old ways but raise the bar further by making the development and administration of the paradigm- changing jolt to its client’s central strategy.
To do so the agency will need not just to go back to the unmatched strategic capabilities it had in its heyday but surpass those by a significant margin by strengthening resources and systems that allow them to:
- Identify a problem that resonates well with management of client and target companies. For example, the need for a car company to escape the vicious cycle of unhappy dealers and falling sales.
- Develop the jolt point-of-view about the issue- one that links with marketing, sales and consequently marketing communication strategy. As a strictly illustrative example (jolt point-of-views do not come easy and certainly not in the process of writing an article) say the refiguring of commercial relationship with dealers with the marketing and sales budgets being entirely concentrated on micro-marketing programs in each clearly identified dealer catchments.
- Figuring out the jolt point-of-view is one thing, administrating the jolt is quite another. It requires B2B communication and presentation skills of the highest order and must therefore be consciously nurtured.
However the agency must be careful with not going for the jolt strategy where it is not applicable. It is quite likely that a majority of sell situations will be amenable to the jolt strategy. However there will be areas where it will be immune.
For example a start-up that is already figured around a disruptive strategy in a market where the established players are frozen. Or say in a “comfort-food” category that actually booms in a downturn.
It will be evident to the thoughtful reader that the jolt strategy will be relevant to a wide variety of B2B categories and marketing situation.
In fact think tanks are already at work on this facet.
My nascent perceptions on the difference between the business strategies of agency 1 and agency 2 were crystallized by an article that I came across in the latest issue of HBR (my immediately previous post was also based on a HBR article. This venerable repository has started humming again as it does in every structural transition).
If you have anything to do with B2B marketing read it.
In a Downturn, Provoke Your Customers
by Philip Lay, Todd Hewlin, and Geoffrey Moore
HBR.org March 2009
Tuesday, February 24, 2009
Thursday, February 19, 2009
Brand equity is fine. But what about customer equity?
I believe the current economic turmoil is not a recession or a depression. It is a crisis of transition. Transition in the very socio-economic structure that will change, at the deepest level, the way we relate to each other and on the surface level the way businesses and economies are run.
One of fundamental changes will be the disappearance of “valuation” as a key metric. By valuation I mean the hypothetical sum of money that a potential buyer would be willing to pay if he were to acquire a business lock, stock and barrel.
This is because the business of buying businesses will largely disappear. What will remain is the business of building business and running business profitably. Those of us old enough will recognize this as the way things were two decades ago.
The above seismic shift will see the re-emergence of a marketing fundamental.
Brands don’t create wealth. Customers do.
Attracting and keeping the highest-value customers is the cornerstone of a successful marketing program.
This was the thesis of an article published by Robert C. Blatberg & John Deighton titled “Managing Marketing by Customer Equity Test” in the July-August 1996 issue of Harvard Business Review.
In 1996 the article would have been trampled under the rush of salivating CEOs and investment bankers dreaming about ballooning brand valuations. I suspect that over the coming years reprint revenues for this article will see a spike.
Simply put customer equity is the net present value of all the customers of a business discounted for marketing rate of returns.
And once concepts like brand valuations are put aside, the simple objective of a business’s marketing program should be to maximize customer equity.
Maximizing customer equity has two distinct and equally important components. Maximizing customer equity contribution from customer acquisition and maximizing customer equity contribution from customer retention.
The second half of the twentieth century was the age of the mass media. And as a direct result of this, it was also the age of mass marketing.
Mass marketing by its very nature has difficulty in measuring effectiveness of its various components and in building predictive models.
However increasingly marketing is becoming interactive with pervasive individualized media like the Internet, mobile phones and increasingly RF id triggered shopper marketing programs.
In this new age of interactive marketing it is now possible to tightly define objectives of specific components of a marketing program and measure effectiveness.
This then allows the use of “Decision Calculus” to design marketing programs and budgets to maximize customer equity.
This decision calculus works on models built on tracking cost of acquisition against percentage of target population acquired and cost of retention against percentage of current customers retained.
The calculus is based on identifying the levels of acquisition and retention beyond which the marginal utility is negative.
Disruptive events can change this calculus dramatically.
For example in the early years of the courier business, the courier companies used regular scheduled flights and had no real control over delivery and thus customer satisfaction. In that scenario the acquisition yield curve was far better that the retention yield curve and most of the marketing budget was devoted to customer acquisition. However as big brands like Fedex acquired their own aircraft their control over customer satisfaction increased dramatically. This resulted in a change in retention yield curves and marketing budgets shifted in favour of customer retention.
In the case of IBM the shift of the market from high-value mainframes to low-value microcomputers prompted a shift in the yield curves in favour of customer acquisition, prompting a dramatic shift in marketing strategy.
It is my belief that increasingly as Interactive Marketing replaces Mass Marketing model based budgeting will become the norm and the key metric will be Customer Equity.
The concept of Customer Equity will also add a new metric to Marketing Audits.
The true measure of a company’s financial soundness lies not in its P&L account but in the analysis of its cash flows. The marketing soundness of a company does not lie in its market share or sales growth but in an analysis of the Customer Value Flow.
In conclusion it would be worthwhile for marketing thinkers in India to start examining the concept of Customer Equity closely and evaluate their current marketing strategy in the light of this old but newly relevant concept. It will be great preparation for the times to come.
One of fundamental changes will be the disappearance of “valuation” as a key metric. By valuation I mean the hypothetical sum of money that a potential buyer would be willing to pay if he were to acquire a business lock, stock and barrel.
This is because the business of buying businesses will largely disappear. What will remain is the business of building business and running business profitably. Those of us old enough will recognize this as the way things were two decades ago.
The above seismic shift will see the re-emergence of a marketing fundamental.
Brands don’t create wealth. Customers do.
Attracting and keeping the highest-value customers is the cornerstone of a successful marketing program.
This was the thesis of an article published by Robert C. Blatberg & John Deighton titled “Managing Marketing by Customer Equity Test” in the July-August 1996 issue of Harvard Business Review.
In 1996 the article would have been trampled under the rush of salivating CEOs and investment bankers dreaming about ballooning brand valuations. I suspect that over the coming years reprint revenues for this article will see a spike.
Simply put customer equity is the net present value of all the customers of a business discounted for marketing rate of returns.
And once concepts like brand valuations are put aside, the simple objective of a business’s marketing program should be to maximize customer equity.
Maximizing customer equity has two distinct and equally important components. Maximizing customer equity contribution from customer acquisition and maximizing customer equity contribution from customer retention.
The second half of the twentieth century was the age of the mass media. And as a direct result of this, it was also the age of mass marketing.
Mass marketing by its very nature has difficulty in measuring effectiveness of its various components and in building predictive models.
However increasingly marketing is becoming interactive with pervasive individualized media like the Internet, mobile phones and increasingly RF id triggered shopper marketing programs.
In this new age of interactive marketing it is now possible to tightly define objectives of specific components of a marketing program and measure effectiveness.
This then allows the use of “Decision Calculus” to design marketing programs and budgets to maximize customer equity.
This decision calculus works on models built on tracking cost of acquisition against percentage of target population acquired and cost of retention against percentage of current customers retained.
The calculus is based on identifying the levels of acquisition and retention beyond which the marginal utility is negative.
Disruptive events can change this calculus dramatically.
For example in the early years of the courier business, the courier companies used regular scheduled flights and had no real control over delivery and thus customer satisfaction. In that scenario the acquisition yield curve was far better that the retention yield curve and most of the marketing budget was devoted to customer acquisition. However as big brands like Fedex acquired their own aircraft their control over customer satisfaction increased dramatically. This resulted in a change in retention yield curves and marketing budgets shifted in favour of customer retention.
In the case of IBM the shift of the market from high-value mainframes to low-value microcomputers prompted a shift in the yield curves in favour of customer acquisition, prompting a dramatic shift in marketing strategy.
It is my belief that increasingly as Interactive Marketing replaces Mass Marketing model based budgeting will become the norm and the key metric will be Customer Equity.
The concept of Customer Equity will also add a new metric to Marketing Audits.
The true measure of a company’s financial soundness lies not in its P&L account but in the analysis of its cash flows. The marketing soundness of a company does not lie in its market share or sales growth but in an analysis of the Customer Value Flow.
In conclusion it would be worthwhile for marketing thinkers in India to start examining the concept of Customer Equity closely and evaluate their current marketing strategy in the light of this old but newly relevant concept. It will be great preparation for the times to come.
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