marmit-based ivia|ii|e merit - gbvbenchmarking marketing profitability 90 benchmarking marketing ros...

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S I X T H E D I T I O N

MarMit-BasedIVIa|ii|e merit

Strategies for GrowingCustomer Value and Profitability

ler J. BestEmeritus Professor of Marketing

University of Oregon

PEARSONBoston Columbus Indianapolis New York San Francisco Upper Saddle River

Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

C O N T E N T S

Preface 16About the Author 23Acknowledgments 24

31

PART I • MARKET ORIENTATION AND MARKETINGPERFORMANCE 27

CHAPTER 1 CUSTOMER FOCUS, CUSTOMERPERFORMANCE, AND PROFIT IMPACT 29

Customer Satisfaction and Profitability 29

Customer Focus and Profitability 30How to Underwhelm Customers and Shareholders 30Customer Focus, Customer Satisfaction, and ProfitabilityBuilding a Strong Customer Focus 33

Customer Satisfaction—A Key Marketing Performance Metric 37Measuring Customer Satisfaction 37A Wide-Angle View of Customer Satisfaction 38De-averaging Customer Satisfaction and Customer Profitability 39Managing Customer Dissatisfaction 40Dissatisfied Customer Revenge and the Use of Social Media 42Profit Impact of Customer Dissatisfaction 42

Profit Impact of Customer Retention 43Customer Satisfaction and Customer Retention 44Customer Retention and Customer Life Expectancy 45

Customer Lifetime Value 46

Customer Loyalty 48Measuring Customer Loyalty 49Customer Loyalty ClassificationsManaging Customer Loyalty 56

50

Summary 57 • Market-Based Strategic Thinking 58 • Marketing Performance Tools

and Application Exercises 59 • Notes 60 • Appendix 1.1 Present Value Table 62

Contents

CHAPTER 2 MARKETING METRICS AND MARKETINGPROFITABILITY 63

Measuring Performance 63Applying Marketing Metrics 65A Marketing-Metrics-Based Strategy 66

Marketing Metrics 67Financial Metrics versus Marketing Metrics 68Internal versus External Metrics 70Forward-Looking versus Backward-Looking Metrics 71External Marketing Metrics 71

Net Marketing Contribution—A Marketing Profitability Metric 72Marketing and Sales Expenses 75

Estimating Marketing and Sales Expenses 76

Marketing Profitability Ratio Metrics 76Marketing Profitability and Product Line Management 78

Managing Marketing Profitability—A Product Focus 79

Managing Marketing Profitability—A Customer Focus 83Profit Impact of Marketing Strategies 83

Market Growth Strategy 86Market Share Strategy 86Customer Revenue Strategy 87Cost Reduction Strategy 88Advertising Strategy 88Channel Strategy 89

Benchmarking Marketing Profitability 90Benchmarking Marketing ROS 91Benchmarking Marketing ROI 92

Benchmarking Company Marketing Profitability Metrics 93Managing Marketing Profitability 95

Summary 95 • Market-Based Strategic Thinking 96 • Marketing Performance

Tools and Application Exercises 97 • Notes 98 • Appendix 2.1 Companies

Represented in Figure 2-24 100

PART II • MARKET ANALYSIS 103

CHAPTER 3 MARKET POTENTIAL, MARKET DEMAND,AND MARKET SHARE 105

Market Definition—What Business Are We in? 105Broad Market Definition 106Narrow Market Definition 108

Contents

Market Potential 109How Innovation Changes Market Potential 112Market Development Index 113Managing Market Growth 114

Untapped Market Potential 116Market Potential and Market Growth 118Accelerating Market Growth 118

Product-Market versus Product Life Cycle 121Product Life Cycle, Market Demand, and Profits 122Market Demand and Prices 122Product Life-Cycle Margins and Marketing Expenses 125Product Life-Cycle Sales and Gross Profits 125

Market Share Performance Metrics 129Building a Market Share Performance Tree 129Market Share Index 129Market Share Potential Index 130Share Development Index 131

Growth Opportunity Portfolio 132

Summary 133 • Market-Based Strategic Thinking 135 • Marketing PerformanceTools and Application Exercises 135 • Notes 136

CHAPTER 4 THE CUSTOMER EXPERIENCE ANDVALUE CREATION 139

The Total Customer Experience 139The Customer Experience—Actual versus Ideal 141The Customer Experience of Lead Users 143Reverse Innovation—Invent to Order 144Managing Customer Touch Points 145

Mass Collaboration and Crowdsourcing 146Mass Collaboration 147Crowdsourcing 149

Life-Cycle Cost and Customer Value 150Price Paid 152Acquisition Costs 152Usage Costs 153Financing and Insurance Costs 154Maintenance Costs 155Disposal Costs 155

Price-Performance and Value Creation 156Relative Performance 158Perceived Customer Value 159

Contents 7

Perceived Performance and Value Creation 160Perceived Product Performance 161Perceived Service Quality 162Perceived Company or Brand Reputation 163Overall Performance Index 163Cost of Purchase Index 164Perceived Customer Value Index 165

Emotional Benefits and Value Creation 167Emotional Benefits and Psychological Value 167Brand Personality and Value Creation 167

Identifying Value Drivers 168Customer Preferences 168Customer Value 169

Summary 171 ° Market-Based Strategic Thinking 173 ° Marketing PerformanceTools and Application Exercises 174 <> Notes 175 ° Appendix 4.1 Trade-OffAnalysis Computations 177

CHAPTER 5 MARKET SEGMENTATION ANDSEGMENTATION STRATEGIES 179

Millennial 179

Needs-Based Market Segmentation 181

Customer Needs, Price, and Product Benefits 182Customer Needs 183Forces That Shape Consumer Market Needs 183Forces That Shape Business Market Needs 185

Needs-Based Market Segmentation—Process 187The Demographic Trap 187Needs-Based Market Segments 188Segment Identification 189Segment Attractiveness 189Segment Profitability 192Segment Positioning 194Segment Strategy Acid Test 196Segment Marketing Mix Strategy 196

Segmentation Strategies 197Mass-Market Strategy 197Large-Segment Strategy 198Adjacent-Segment Strategy 199Multi-Segment Strategies 200Small-Segment Strategy 201Niche-Segment Strategies 203Subsegment Strategies 203

Customer Relationship Marketing 205Customer Value versus Company Value 206Database Marketing 207

8 Contents

Mass Personalization 207Mass Customization 208Customer Relationship Management 209


Tools and Application Exercises 213 • Notes 214

CHAPTER 6 COMPETITIVE POSITION AND SOURCESOF ADVANTAGE 215

Competitive Advantage 215Sustainable Advantage 218

Sources of Competitive Advantage 219Cost Advantage 220

Variable Cost Advantage 220Marketing Cost Advantage 222Operating Cost Advantage 224

Differentiation Advantage 224Product Advantage 224Service Advantage 224Reputation Advantage 225

Marketing Advantage 226Market Share Advantage 226Product Line Advantage 228Channel Advantage 229

Knowledge as a Source of Advantage 230

Competitor Intelligence 231Identifying the Benchmark Competitors 232Competitor Analysis 234Obtaining Competitor Intelligence 234A Sample Competitor Analysis 234Competitive Benchmarking 239

Industry Analysis 240Barriers to Entry 240Barriers to Exit 241Customer Buying Power 241Supplier Selling Power 241Product Substitutes 242Competitive Rivalry 242The Prisoner's Dilemma 243


Tools and Application Exercises 245 • Notes 246 • Appendix 6.1 Competitive

Position and Customer Value for 10 Competing Mid-Size SUVs 247 • Appendix 6.2

Estimating an Experience Curve Coefficient and the Percent Experience Curve 248

Contents

PART I I I • M A R K E T I N G M I X STRATEGIES 2 5 1

CHAPTER 7 PRODUCT POSITIONING, BRANDING,AND PRODUCT LINE STRATEGIES 253

Brand Expansion Strategies 253Fighter Brands 254Product Positioning 255Product Positioning and Market Share 257Product Positioning Strategies 258

Product Positioning and Differentiation 259Product Performance and Differentiation 260Service Quality and Differentiation 263Brand Differentiation 265Low Cost of Purchase 265

Branding and Brand Management Strategies 266Brand Identity 266Brand Encoding 267Brand Name Development 271Creating a New Brand Name 273Protecting Your Brand Name and Intellectual Property 274

Brand Equity 276Brand Assets 276Brand Liabilities 277Brand Equity 278

Brand and Product Line Strategies 279Product Line Development 279Umbrella Brands and Product Line Extensions 281Product Line Extensions .282Bundling and Unbundling Strategies 284



CHAPTER 8 VALUE-BASED PRICING AND PRICINGSTRATEGIES 291

Apple's Pricing Strategies 292

Cost-Based Pricing versus Market-Based Pricing 292Cost-Based Pricing: Underpricing and Lower Profits 293Cost-Based Pricing: Overpricing and Lower Profits 294

Value Pricing 296Understanding Total Cost of Ownership 297Value-in-Use Pricing 298Life-Cycle Value Pricing 299Perceived-Value Pricing 300Performance-Based Pricing 302

1 0 Contents

Customerization Value Pricing 306

Product Life-Cycle Pricing Strategies 307Skim Pricing 309Single-Segment Pricing 309Penetration Pricing 310Low-Cost-Leader Pricing 311Multi-Segment Pricing 311Plus-One Pricing 312Reduce-Focus Pricing 313Harvest Pricing 314

Pricing and Profitability 315

Price Elasticity and Profitability 317Inelastic Price Management 318Elastic Price Management 320

Price and Break-Even Analysis 320Price and Break-Even Volume 321Price and Break-Even Market Share 321

Product Line Pricing 322Pricing Substitute Products 323Pricing Complementary Products 323



CHAPTER 9 MARKETING CHANNELS AND CHANNELMAPPING 329 •

Channel Value Proposition 330

Channel Mapping 331

Consumer and Business Channels 335

Marketing Channel Performance 336Customer Reach and Digital Marketing Channels 337Operating Efficiency 339Service Quality 340

Alternative Marketing Channels 341Direct Channels 341Indirect Channels 342Mixed Channels 344B2C Channels 344B2B Channels 345B2B and B2C Marketing Channels 346

Marketing Channels that Improve Customer Value 347Product Performance 347Service Quality 348Company or Brand Reputation 349

Contents 1 1

Managing Customer Interaction 350Improving Cost Efficiency 352

Marketing Channels and Competitive Advantage 354Sales Force Advantage 354Sales Productivity 354Distribution Advantage 355

Profit Impact of Alternative Marketing Channels 356



CHAPTER 10 MARKETING COMMUNICATIONS, SOCIALMEDIA, AND CUSTOMER RESPONSE 361

Marketing Communications and Customer Response 362Brand-Image Communications 364Brand-Information Communications 364Brand-Action Communications 364

Digital Marketing Communications 366

Digital Media Marketing Analytics 368

Social Media Marketing Communications 369New Communications Paradigm 370Customer Connectivity and Engagement 370Social Media: New Communications Platforms and Challenges 371Social Media Marketing Metrics 376

Marketing Communications 377Customer Response Index 379Improving Customer Response 379

Building Customer Awareness and Comprehension 380Media Selection and Customer Awareness 380Message Frequency and Customer Awareness 382Ad Copy and Customer Response 384

Message Reinforcement 384Pulsing 385Heavy-Up Message Frequency 385

Stimulating Customer Action 386

Pull versus Push Communications Strategies 386

Pull Communications and Customer Response 387, Advertising Elasticity 387

Advertising Carryover Effects 388Promotional Price Elasticity 390

Push Communications and Customer Response 391Trade Promotions and Customer Response 391

1 2 Contents



PART IV B STRATEGIC MARKETING 397

CHAPTER 11 PORTFOLIO ANALYSIS AND STRATEGICMARKET PLANNING 399

Portfolio Analysis and Strategic Market Planning 400Portfolio Analysis Models 400

Strategic Market Planning 402Product Life Cycle/Market Share Portfolio 408GE/McKinsey Portfolio Analysis 409

Market Attractiveness 410Competitive Position 412Portfolio Analysis and Strategic Market Plans 414

Offensive Portfolio Strategy 416Defensive Portfolio Strategy 418

Portfolio Diversification 419Two Levels of Diversification 420

Marketing Mix Strategy and Performance Plan 421Marketing Mix Strategy 421Performance Plan 422



CHAPTER 12 OFFENSIVE STRATEGIES 429

Apple's Product Portfolio and Offensive Growth 430Strategic Market Plans 430Offensive Strategic Market Plans 432Offensive Core Strategy I: Invest To Grow Sales 434

Offensive Strategy IA: Grow Market Share 435Offensive Strategy IB: Grow Revenue per Customer 436Offensive Strategy IC: Enter New Market Segments 437Offensive Strategy ID: Expand Market Demand 438

Offensive Core Strategy II: Improve Competitive Position 440Offensive Strategy IIA: Improve Customer Loyalty and Retention 440Offensive Strategy IIB: Improve Differentiation Advantage 441Offensive Strategy IIC: Lower Cost/Improve Marketing Productivity 441Offensive Strategy IID: Build Marketing Advantage 442

Contents 13

Offensive Core Strategy III: Enter New Markets 442Offensive Strategy IIIA: Enter Related New Markets 442Offensive Strategy IIIB: Enter Unrelated New Markets 444Offensive Strategy IIIC: Enter New Emerging Markets 445Offensive Strategy HID: Develop New Markets 445

When Growth Stalls 446

Rebounding with an Offensive Growth Strategy 448

Choosing Offensive Strategic Market Plans 449

Summary 450 • Market-Based Strategic Thinking 451 ° Marketing PerformanceTools and Application Exercises 452 ° Notes 452

CHAPTER 13 DEFENSIVE STRATEGIES 455

Defensive Strategic Market Plans 457

Defensive Core Strategy I: Protect Position 458Defensive Strategy IA: Protect Market Share 459Defensive Strategy IB: Build Customer Retention 464

Defensive Core Strategy II: Optimize Position 466Defensive Strategy IIA: Maximize Net Marketing Contribution 466Defensive Strategy IIB: Reduce Market Focus 469

Defensive Core Strategy III: Monetize, Harvest, or Divest 469Defensive Strategy IIIA: Manage for Cash Flow 470Defensive Strategy IIIB: Harvest or Divest for Cash Flow 470

Choosing Defensive Strategic Market Plans 475

Summary 476 ° Market-Based Strategic Thinking 477 ° Marketing PerformanceTools and Application Exercises 478 ° Notes 478

PART' V" • :-*M;A:RKESlfi|Slfcll§l^^

CHAPTER 14 BUILDING A MARKETING PLAN 483

Creativity versus Structure 484

Benefits of Building a Marketing Plan 485Identifying Opportunities 485Leveraging Core Capabilities 485Adopting a Reduce-Market-Focus Strategy 486Resource Allocation 486Building a Performance Roadmap 486

Building a Marketing Plan 487

Part I: Situation Analysis—Where Are We Now? 487Step 1: Assess Current Situation 489Customer Performance 496Step 2: Perform SWOT Analysis 497

14 Contents

Part II: Marketing Strategy—Where Do We Want to Go? 498Step 3: Develop a Strategic Market Plan 498Step 4: Develop a Marketing Strategy 500

Part III: Performance Plan—What Is the Expected Impact? 506Step 5: Develop a Revenue Plan and Marketing and Sales Budget 507Step 6: Marketing Profit Plan 509Step 7: Performance Review 513


CHAPTER 15 MARKETING METRICS, PERFORMANCE,AND STRATEGY IMPLEMENTATION 517

Marketing Metrics and Performance 518

Barriers to Getting Started in Using Marketing Metrics 519Usage Barrier I: "They are too complex and too difficult to use." 520Usage Barrier II: "They do not solve my business's problems." 521Usage Barrier III: "There are too many; I don't know where to start." 521Usage Barrier IV: "I do not have the data nor the budget to gather the data." 521Usage Barrier V: "I do not have the time for this type of work." 522

Getting Started with Marketing Metrics 522

Forward-Looking versus Backward-Looking Metrics 523Forward-Looking Marketing Performance Metrics 523Backward-Looking Marketing Performance Metrics 525

Successful Strategy Implementation 525

Managing Successful Strategy Implementation 527Owning the Marketing Plan. 527Supporting the Marketing Plan 529Adapting the Marketing Plan 530Assessing the Implementation of a Marketing Plan 532

Variance Analysis 533


CHAPTER 16 MARKET-BASED MANAGEMENT ANDFINANCIAL PERFORMANCE 541

Operating Income versus Marketing ROI 541

Financial Impact of Marketing Profitability 542

Basic Inputs to Marketing Profits and Profitable Growth 544Market Demand 544Market Share 545Revenue per Customer 546

Contents 1 5

Percent Margin 546Marketing and Sales Expenses 546

Customer Performance Metrics and Profitability 546Customer Satisfaction 547Customer Retention 548

Marketing Profits and Financial Performance Metrics 550Return on Sales 550Return on Assets 551Return on Equity 552Return on Capital 553

Shareholder Metrics 554

Market-Based Management 556



Glossary 560

Index 567

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