1 Strategies for Sustaining Position

2 “The primary responsibility of marketing management is to create and sustain mutually beneficial exchanges between the company and its customers in the competitive marketplace.”

3 Strategies for Sustaining Position n Operational excellence n Product leadership n Customer intimacy –customer relationship management –customer equity –strategic components

4 Operational Excellence n Objective: lead the industry in price and convenience n Requires: relentless pursuit of efficiency n Source of enduring advantage?

5 Product Leadership n Objective: produce a continuous stream of state-of-the art products and services n Requires: creativity, speed, willingness to self-cannibalize n Source of enduring advantage?

6 Customer Intimacy n Objective: continually shape products and services to meet customer needs n Requires: the ability to develop learning relationships with customers –mass customization, one-to-one marketing n Source of enduring advantage?

7 Key Activities in Building Customer Relationships Acquisition Retention Development New Customers Profitable Customers Unprofitable Customers

8 Key Activities in Building Customer Relationships n Customer acquisition –prospecting, qualifying, converting n Customer development –turning unprofitable customers into profitable customers n Customer retention –extending customer lifetime

9 Customer Acquisition n How much does it cost you to acquire a customer? –five times more costly than retention n What is the ROI of your acquisition expenditures? n Which of your acquisition efforts yields the most profitable customers?

10 Customer Development n Who are my least profitable customers? –generally follows the 80/20 rule n What is the best path of transition from unprofitable to profitable? –cross-sell products / services

11 Distribution of Customer Equity

12 Conclusions from Decile Chart n Top % of customers represent 70-85% of total customer equity n Bottom 20% of the customer base generate negative value

13 Customer Retention n What is the lifetime of your average customer? –average lifetime is 1 / (defection rate) –remember 80/20 rule n How do you decrease the likelihood of a customer defection? –learn about customer to create barrier to switching

14 Customer Profitability n Customer focus rather than product focus n Different financial measures –lifetime value of customer (LTV) –customer equity financial index (CEFI) n Mix strategy with long term view of customer profitability

15 Measures of Customer Profitability n Lifetime Value of a Customer (LTV) –expected future contribution net acquisition costs n Customer Equity Financial Index (CEFI) –the total asset value of the firm’s customers

16 Lifetime Value of a Customer Steps in computation: A. What is total expected contribution over customer’s lifetime? B. How much does it cost to acquire this customer? LTV = A - B

17 Expected Future Contribution

18 Cost of Acquisition

19 Calculating Customer Equity n Number of prospects (10,000) n Customer acquisition rate (0.10) n Customer retention rate (0.75) n Cost of soliciting prospects $5.00) n Future revenues ($25 to $125) n Contribution margin (45%)

20 Calculating Customer Equity

21 Increasing Customer Profitability n Lower cost of acquisition –increase response rate n Increase future profits –increase usage (existing customers) –increase number of services –increase duration of customer lifetime

22 Customer Profitability Acquisition Development Retention

23 Developing Customer Intimacy Strategic components: 1. Information strategy 2. Production/delivery strategy 3. Organizational strategy 4. Assessment strategy

24 Information Strategy n Initiate dialogues with customers and capture information on preferences –sales force, direct marketing, Internet –database n Examples –Otis Elevator, Dell Computer

25 Production/Delivery Strategy n Fulfill the needs of individual customers –Introduction: collaboration –Maturity: customization n Examples –Silicon Graphics –Farm Journal

26 Organizational Strategy n Manage customers and capabilities –key accounts, customer teams, customer x capabilities matrix n Examples –American Express

27 Assessment Strategy n Evaluate performance –customer satisfaction, loyalty, customer profitability, share of customer n Examples –Xerox –Charles Schwab

28 Strategies for Sustaining Position Over the Product Life Cycle Introduction Product Leadership Customer Intimacy Growth Maturity Operational Excellence