Firms face five marketing forces

Five major marketing forces have converged over the past 10 years to place immense pressure on companies, particularly business-to-consumer (B2C) organisations. The collective consequence is it is no longer an era of just increasing sales, but rather increasing sales profitably.

The combination of these five forces means that suppliers must pay much more attention to their customers, and the best way of doing this is through good customer intelligence systems.

The five forces are the shift from product-driven toward service-based differentiation, the need for customer retention, one-to-one marketing, expanded product diversity and the power shift from sellers to customers.

Firstly, there has been a shift in the source for competitive advantage. In the past, companies focused on building products and selling them to every potential prospect. Many products or service-lines, however, are one-size-fits-all, and have become commodity-like. By definition, there is competitive advantage from selling a commodity.

To complicate matters, product development management methods have matured, leading to quick, me-too copying of new products by competitors.

Since any competitive advantage from products is being neutralised, value-adding services have therefore become more important. There is a shift towards service-based differentiation, where the customer relationship grows in importance.

The Internet is shifting power, irreversibly, from sellers to buyers.

Gary Cokins, strategist for performance management solutions, SAS

The second trend is the increasing recognition of the importance of customer retention.

It is generally more expensive to acquire a new customer than to retain an existing one - and satisfied existing customers are likely to buy more and `spread the word` to others.

Hence the increasing focus on customer satisfaction. The trend today is towards growing existing customers and making them loyal, rather than simply acquiring new ones. As a result, loyalty programmes and other frequency points programmes have grown in popularity.

The third force is one-to-one marketing. Technology is being hailed as an enabler to identify customer segments, and tailor marketing offers and service propositions to individual customers. There is now a shift from mass marketing to a better understanding each customer`s unique preferences, and what he or she can afford.

Traditional marketing measures, such as market share and sales growth, are being expanded to more reflective measures of marketing performance, such as additional products and services sold to existing customers. There is frequent reference to `share of customer wallet`. Customer lifetime value is a trendy new indicator for quantifying each customer`s economic value with which companies use to offer differentiated service levels.

Companies must now continuously seek ways to engage in more content-relevant communications and interactions with their customers. Each interaction is an opportunity to gain knowledge about customer preferences - and to strengthen the relationship.

Expanded product diversity, variation and customisation is another force. As product and service-lines proliferate, complexity increases. As a result, more indirect expenses, or overhead costs, are needed to manage the complexity; and indirect expenses are increasing at a relatively faster rate than direct expenses.

With indirect expenses growing as a component of an organisation`s cost structure, managerial accounting practices typically require enhancing.

Many costing systems arbitrarily allocate overhead to products and standard service-lines based on broad-brush averages, such as product sales or direct labour input hours. They do not reflect each product`s unique consumption of indirect expenses and hence distorts the true costs and consequently profit margins. Activity-based costing (ABC) is now accepted as the method that resolves this problem. ABC traces and assigns costs based on cause-and-effect relationships.

This does not mean that an increase in overhead costs is a bad thing. It simply means that a company is required to invest and spend more on expanded product offerings and services to increase its customers` satisfaction - and it should know with accuracy what products, channels and customers cost.

Finally, the Internet is shifting power, irreversibly, from sellers to buyers. Thanks to the Internet, consumers and purchasing agents can more efficiently explore more shopping options, compare supplier prices and more easily educate themselves.

Customers have an abundance of options; and now they can get information about products or services that interest them in a much shorter space of time. The customer is in control more than ever. Consequently, from a supplier`s perspective, customer retention becomes even more critical and treating customers as `a lifetime stream of revenues` becomes paramount.

The combination and convergence of these five forces means that suppliers must pay much more attention to their customers. Profit growth for suppliers and service-providers will come from building intimate relationships with customers, and from providing more products and services to the existing customer base.

Earning, not just buying, customer loyalty is now mandatory.

But how much should companies spend on marketing to retain existing customers and on which type of existing and prospective customers should more be spent to achieve the highest yield?

Few organisations can answer these questions as they do not have meaningful, consistent and reliable marketing performance metrics.

Worse yet, in an attempt to build customer loyalty, they continue to deploy blanket mass-marketing strategies rather than differentiate, or segment, their customers based on cross-sell and up-sell opportunities. When it comes to measuring the overall marketing function, many companies miss the ROI mark.

The solution is to invest in good customer intelligence systems that manage customers by measuring customer profitability and customer lifetime value.