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  • December24th

    Does Marketing Matter or is it Increasingly Irrelevant?

    Posted in: articles, marketing strategy

    Here at Firewhite, we’re kind of known for asking the big, hairy, audacious questions. You know the kind of questions I mean. The ones everyone is afraid to ask. But that tend to linger long after you thought the discussion was over … the proverbial “elephants in the room”.

    One of those questions is whether marketing even is relevant in today’s times. A startling number of start ups are finding their way to market without the benefit of a marketing VP, something unheard of during the last bubble.

    Web 2.0 Start ups
    In actuality, marketing matters more and not less than ever before. Web 2.0 start ups may well be an anomoly. Let me explain. In a start up, often the Chief Marketing Officer is the CEO. After all, in a start up the most important thing—often the only thing that defines success or failure— is to figure out if there is market for your product or service. Many great companies have been founded, gotten funding, and attracted a brilliant executive team only to bite the dust some 2, 3, or 5 years later. Why? The product or service provided turned out to appeal to too few customers. So figuring out how to craft the company’s offering to appeal to the maximum number of customers is the key job of the CEO in the early days of a company’s lifecycle, a job you can’t necessarily delegate. (Thankfully, you can ask for professional help … either by hiring in a VP of Marketing or by hiring on a consultant or two.)

    Extreme Competition
    The more established your company, the more likely it is that marketing is a key source of competitive advantage. Why? Because of extreme competition. Extreme competition is a term that got introduced into the business lexicon courtesy of the nice folks of McKinsey Consulting. It is characterized by an oversupply of almost everything. Labor is cheap. Technology is ubiquitous. The economy is now global, making it imperative that companies locate manufacturing plants and R&D centers based on these fundamental economics. In these “white knuckle” times, the one thing not in oversupply is customers.

    Companies that declare that they are now customer focused due to a recent investment in CRM software are not telling us anything new or very different. The reality is that every company must focus on its customers (getting customers, keeping them, and growing them in value) to survive and prosper.

    Suddenly marketing matters. Not just to marketing people and their agencies but to CEOs, CFOs, and their Board of Directors (BODs). Companies that figure out how to market better—that is more efficiently, effectively, and by bringing new products to market that gain rapid customer acceptance with superior margins—will consistently outperform their peers. In other words, they’ll get—and keep—competitive advantage.

    Competitive advantage comes to companies that not only make marketing matter but that also build continuous improvement and learning into the systems that they use to manage marketing performance.

    This is our vision here at Firewhite and one we look forward to sharing with you should you become our client.

  • October11th

    Just what the Doctor Ordered: an Extreme Makeover for Marketing

    Posted in: articles, marketing strategy

    Presentation given at SoftSummit, October 11, 2005 (Santa Clara, CA), a conference sponsored by Macrovision maker of Installshield and attended by some 1,000+ independent software vendors

    Argues that today we live and work in a time of extreme competition where products and brands are in excess supply. As a result, the traditional model of marketing—which is advertising centric—no longer fits. The alternative is to move towards a new model, one that represents an “extreme makeover” for marketing based on what we know works from direct marketing and marketing science.

      Accelerating Time to Revenue

  • May17th

    Three strategies to improve campaign ROI

    Posted in: ROI marketing, articles

    There are three main ways to improve campaign ROI within a customer segment:

    Today, it is not uncommon to have the cost of new customer acquisition exceed what you will see in profits off the first purchase from a new customer. The way the major networks and publishers are pricing advertising vehicles has a lot to do with this.

    So one way to improve ROI is to look at ways to reduce new customer acquisition (NCA) costs.

    Many clients start out thinking that direct marketing and even some forms of interactive advertising are more expensive for NCA purposes than advertising. They are right on this, but only to a point. Often this misperception happens because clients are relying on the wrong metrics. “Cost per” calculations look only at the cost of a given media but do not look at the revenue or contribution side of the equation. The result is that you are constantly spending less to bring in more and more customers. The customers you get may be very poor quality, however, and eventually this destroys your franchise, or the ability of the business to drive repeat sales year after year.

    A better strategy is to build a Market-Mix Model and determine the optimal mix of media that will drive new customer acquisition costs down while optimizing your total return on customers.

    With these models in hand, we can quickly see that while advertising looks less expensive initially on a “cost per” basis, advertising does not always work so well when it comes to acquiring high value customers, the kind of customers why buy from you once and again. With business-to-business clients, we generally find that the least expensive way to create new customers is using key words followed by properly targeted direct marketing. General advertising runs a poor third to these media choices.

    In most market sectors, marketing ROI is heavily influenced by what happens after the initial purchase. To increase ROI, look for ways to reduce the purchase interval between the first purchase and the next sale (”R” or recency), to encourage customers to buy more often (”F” or frequency) or to increase the size of the average sale by migrating customers to more expensive products in your portfolio (”M” or monetary value). Likewise, anything you can do to increase the likelihood that a customer will stay with you beyond the initial sale will increase the return on investment.

    Originally published on Firewhite Consulting site, 5.05.

  • March13th

    Why your next agency is likely to be a consultancy

    Posted in: articles

    Funny thing.  Our phones are ringing again, for the first time in a long while.  I guess this means that the great recession of 2001-2004 is finally over.  Clients are starting to wake up from the big slumber, stretch, scratch themselves, and reach for the phone.  They’re calling us and folks like us, not only to figure out where they should put their marketing dollars but also to help them find new sources of growth.  This observation has been confirmed by no less than the Harvard Business Review (HBR) which recently wrote a nice article about the merits of outsourcing certain marketing functions to folks like us.

    “A discipline that was once principally creative has become increasingly analytic, as the old workhorses — print and television advertising, and direct mail — become less and less effective.”  — Gail McGovern and John Quelch, Harvard Business Review March 2005

    The HBR article validates what we’ve been doing for the past 32 months, which is building a consulting practice that focuses on the chief marketing office (CMO) as the person at the company in charge of getting customer insight and using that insight as a launching pad to find growth opportunities for the business as a whole.  The HBR article is remarkable because it uses the “O” word – “O” as in outsourcing.  Turns out marketing people have always outsourced major parts of the marketing function. Who knew? Well, we did, actually.

    Advertising agencies – for example – are typically hired to oversee branding, positioning, and messaging work as well as create advertising and place it in specific media. 

    Agencies have long been considered strategic partners.  Unfortunately, the last 3-4 years have seen clients significantly decrease the compensation they are willing to pay their agencies.  Prior to the year 2000, a profit margin of 15-20% was the norm for an agency.  Nowadays, most agencies consider themselves lucky if they can earn a profit margin of 10-12%. 

    Some of this is the agency’s own doing.  It used to be that agencies marked up the services, media and people they provided to clients by 17.65%.  Today, most of the major agencies no longer plan or purchase their own media, instead working through one of handful of media buying companies such as Carat1, Initiative, Mediacom, Mindshare2, OMD3, Starcom4, Universal McCann5, or Zenith Optimedia and give the agencies no latitude for markups.  It is as if one day agencies woke up and found that half of their revenue stream had suddenly vanished.

    The other half of the agency’s fee structure is likewise under attack by clients who find themselves struggling to compete in today’s hypercompetive6 global market.  As a result, the 17.65% markup that use to be the norm is normal no longer.  Major clients like Microsoft and Charles Schwab typically end up paying much less than this, in the neighborhood of 10%. Nice neighborhood to be in if you are a client, but close to the poverty line if you are an agency.

    To survive, agencies have to cut their costs, and anything that clients won’t pay for is gone. Most clients pay for advertising to be developed, so of course creative functions like art direction, copy writing, print production, and the like stay. Strategy was typically something agencies didn’t charge for in an explicit way.  It was a freebie. But in professional services, you are what you bill for.  And increasingly that means that agencies are firing senior staffers, particularly those whose roles were strategic, and replacing them with more tactical players who are a) less expensive people and b) spend the majority of their time managing projects vs. building strategies.  This leaves the agencies leanly staffed and profitable within the confines of a 10% markup.

    Recognizing this situation for what it is — agencies are no place to go for strategy — savvy and forward-looking clients are beginning to turn to consultants to help them build strategies to accelerate growth.  One way to accelerate growth is to look at the various types of customer you sells to, their wants and needs, and how exactly your company satisfies these wants and needs.  In other words, do a needs-based segmentation.  When we do segmentation work, we rely on heavy-duty statistics, build models based on multiple variables, and make sure the segments we find are actionable from a marketing perspective.

    Depending on the assignment, we may even expose various segments to different pricing scenarios to discover whether some segments are more or less price-sensitive than others.  Additionally, we’ll test different value propositions with different segments. This way, we can uncover entirely new business opportunities that the client didn’t even realize existed.  Once we find a handful of price and/or value propositions that look like winners, we will test them in market by developing an appropriate, statistically-based test-and-learn plan.  We’ll work with the client and their agencies to ensure the execution of the test-and-learn plan is “clean” and will result in data that we can use for decision-making purposes. 

    Agencies would love to do this work – but they can’t, for two reasons.  First, the kind of project we are talking about is all “left brain” activity and agencies – at least the good ones – are “right brain” driven.

    Left Brain Right Brain
    Logical Random
    Sequential Intuitive
    Rational Holistic
    Analytic Synthesizing
    Objective Subjective
    Look at parts Look at whole



    A few of the bigger advertising holding companies are trying to build ancillary businesses around consulting but few have succeeded.  The ad industry is still smarting from the debacle that was Ammirati Puris Lintas — a highly respected firm that hired Rick Hadala from McKinsey as its CEO — to disastrous results.  Ammirati Puris Lintas is now basically gone, disemboweled and absorbed into Lowe & Partners.7

    People who followed the matter will tell you that the two cultures – consulting and advertising – simply did not mix. It’s hard to be creative. It’s hard to be analytic. It’s impossible to be both.

    Agencies can’t do this work for a second reason — they simply don’t have the right people with the right skills standing by.  Nor do most clients.  Harrah’s has an ongoing investment in customer marketing and analytics and as such has stepped up hiring of analytically-based MBAs into its training program from 10 per year to 25 per year.  To which we say, Harrah.  GE is well known for worshiping at the altar of Six Sigma management.  As a result, all employees–not just some of them–receive hours of classroom instruction on how to collect and analyze data.8 (A popular saying around GE is this one:  “In God We Trust. Everyone Else Bring Data.”)

    But both Harrah’s and GE are anomalies.  Most of the CMOs we talk with day in and day out don’t have a team of analysts they can rely upon.  CMOs are comfortable and know how to hire ad agencies.  They’re a lot less comfortable with hiring consultants.

    Comfortable or not, the next set of resources CMOs are likely to need are not going to be found at one of their agencies.  A recent study sponsored by the ANA and Forrester Research found that CMOs are stepping up their investments in accountability, particularly when it comes to marketing mix modeling and understanding of customer profitability and valuation and for these kinds of tasks they will look to outside measurement firms (a.k.a. consultants) to do the work.9  The majority of CMO’s surveyed won’t be looking to outsource this type of initiative to an existing agency partner.  Doing so would be tantamount to asking the fox to stand guard over the chicken house.  Sure, you could do it.  But why take the risk?

    It’s tempting to hope that you can sidestep the consulting phase and instead go directly to a technology solution.  As we learned with CRM, this is simply not possible.  No system for MRM or “marketing resource management” will make the marketing organization accountable.  Building accountability requires that you first understand what kinds of marketing activity matters at your company.  In practice, this is a lot harder than it sounds.  Considerable time and energy must be spent getting disparate types of data together in one place, integrating the data together in a useful way, and then analyzing the data to find underlying relationships and build predictive models.10  All of which sounds like – and is – a lot of work. 

     
    So.  CMOs – next time you need to outsource some work, think long and hard about what kind of skills you really need.  If your needs are more analytic than creative, consider adding a consulting firm to your roster, one that specializes in customer marketing and analytics.  Our holiday parties may not be as much fun, but then again – we don’t serve rubber chicken. 

    Notes

    1. Unless otherwise noted, all the media buying and planning firms listed here are independent and not associated with one of the advertising holding companies. ↩
    2. Part of the holding group IPG↩
    3. Omnicom’s media buying arm. ↩
    4. Part of Leo Burnett ↩
    5. Supports McCann as part of the IPG group. ↩
    6. SeeThe McKinsey Quarterly, 2005 Number 1 Extreme Competition ↩
    7. Rick Hadala lasted 6 months from November 1998 to April 1999. APL was absorbed into Lowe 6 months later in November 1999. ↩
    8. The Six Sigma process as applied to CRM is described here very well in this article ↩
    9. Study cited is available here ↩
    10. Typically, there are three types of data you’ll need: behavioral data about the customer, financial data such as revenue, contribution margin, by product purchased (to match to each customer), and marketing activity by time period and geography. ↩

    Originally published on Firewhite Consulting site, 3.05.

  • January28th

    Retailers get a Q4 wake up call

    Posted in: articles, retailing

    Neo: “That’s not possible.”
    Morpheus: “I promised you the truth, Neo, and the truth is that the world you were living in was a lie.”
    Neo: “How?”

    Morpheus: “I’ll show you.”
    —From The Matrix (1999), starring Keanu Reeves as Neo and Laurence Fishburne as Morpheus.

    What if you woke up in January 2005 and discovered that much of what you thought you knew about driving shareholder value was wrong. That you’d been living — and selling — in a world that looks real but is a distorted version of the truth. That’s the situation facing major retailers as they look back on the 2004 holiday season.

    Here are some of the rules that appear to have been broken this holiday season.

    • Q4 is make-or-break for retailers
    • Focus on driving traffic every day – but especially on Black Friday
    • Don’t worry about ecommerce sales – they’re icing on the cake
    • Whatever you do – avoid out-of-stocks – they’ll cost you sales during Q4

    Further investigation proves that these “rules” are being followed by some retailers, those who aren’t making money. Profitable retailers know something other retailers don’t: that in the new reality of retailing, the old rules aren’t rules anymore.

    Is Q4 really make or break?
    Let’s take the old saw that Q4 is make-or-break for retailers. Turns out that this is not the case. Below is a chart that plots Market Value/Sales (the Y axis) against EBITDA (earnings before interest, taxes, depreciation, and amortization) as a % of Sales (the X axis) for a set of specialty retailers. Retailers “above the line” have stocks that trade at a substantial premium above the price they should get based on their market cap and earnings. Likewise, retailers below the line trade at a substantial discount. Funny thing, this chart. Only about 33% of the variation in Y (Market Value) is explained by changes in X (Earnings). The strength of a retailer’s brand, variability of earnings, and other factors account for the other 67%.

    As it turns out, virtually all the retailers above the line deliver positive earnings not just in Q4 but throughout the year. In other words, the financial markets value retailers who are profitable 365 days a year much more than the ones who only make it happen during Q4.

    This has implications for our second rule – whatever you do make sure it drives traffic every day but especially on Black Friday.

    Putting Black Friday in perspective
    Most retailers obsess about the promotions they run day in and day out. This obsession peaks at the end of November and Black Friday. For those unfamiliar with the term, this is the Friday after Thanksgiving when – legend has it – retailers turn the corner and magically become profitable after sloshing around in red ink for most of the year.

    According to the old rules, the way to maximize your chances of seeing black ink that Friday is to field a door-busting promotion. You know the kind of promotion I mean: Give away a DVD player worth $29 to the first 500 customers who enter your doors Friday a.m., for example. The idea behind these big and splashy promotions is that people willing to line up at 4am just to get their hands on a free DVD player will drop big bucks once they get in the store.

    In fact, Black Friday creates a kind of alternative reality for price seekers, a special kind of shopper, who is always and only looking for the lowest price. Loyal to no retailer, this customer will only spend money on items priced so low as to deliver the retailer almost no margin. Customers like this are worth firing – which is what Best Buy did this fall – when they went public with a plan to exorcise its “devils” – that is customers that are unprofitable and bound and determined to stay that way based on these and other behaviors. Price seekers will take each and every promotion you offer them with alacrity. What they won’t do is purchase items at full price. If you are like most brick-and-mortar retailers you’ll end up spending $50-$100 to acquire this customer only to see the customer spend less – considerably less – than this when they purchase.

    Given these economics, it is no surprise that retailers like Target – which resides very much above the line – experimented with a very different kind of promotion this holiday season. Instead of using price to drive door-busting behavior, it simply asked for permission to market to the customer. Customers were asked if they wanted a wake-up call delivered by one of 10 characters, to get them into the store earlier and avoid the rush. This gave Target an opportunity to acquire customers who valued Target and also potentially to understand what kind of customer they might be acquiring. Bribes – excuse me! Free stuff just for going to Target – were not needed to drive customers as part of this promotion. Results speak for themselves. Target was one of the few retailers that reported a sales increase by 5.1% this past December 2004 vs. December 2003.

    Think ecommerce last not first
    Another fallacy that retailers tend to fall into come Q4 is thinking of their ecommerce sites last rather than first. The belief here is that customers will wait until the last minute to purchase gifts, which gives brick-and-mortar stores a major advantage over ecommerce retailers. This belief is based on a fallacy, that retail stores are the main way most customers want to shop and that the customers who shop through your ecommerce site are somehow not core to your business. Not so. Our work with clients suggests that high-value customers tend to shop through multiple channels and the channel they chose depends on the usage situation. During most of the year approximately 2% of revenues in the retail sector happen via ecommerce sites. During Q4, this number increases to 30%, an increase of 15x. An amazing figure when you consider that during Q4 total shopping revenues go up dramatically — by a factor of 2-3x.

    Putting ecommerce first means getting your customers familiar with your ecommerce site well in advance of the holidays or any other peak buying period for that matter. Studies show that customers like to shop at sites with a familiar interface, which is why we see so many sites mimicking amazon.com in look and feel. When it comes to ecommerce, focus on the familiar vs. making your site seem novel or new.

    Another way to put ecommerce first is through fielding promotions that encourage selective customers to do more buying at your website. Many retailers don’t field these kinds of promotions, fearing cannibalization. To this we say, bah humbug. Multi-channel customers deliver more value to your company. Period. Full stop. Want to accelerate growth in revenues? See if you can isolate a group of customers on your file who look like your high-value customers but who – unlike your high-value customers – are not yet purchasing through your ecommerce website. Invariably, we find that the fastest way to grow the value of these customers is to get them using multiple channels, particularly the web. Multi-channel customers like your brand, the retail experience, the merchandise assortment, or all of the above so much that they will buy from you across all usage situations.

    Do out of stocks matter?
    Increasingly, retailers are recognizing that no matter how much technology and smart people they throw at the problem, anticipating consumer demand is a Herculean task. Which means out-of-stocks happen, even to best-in-class retailers. And at the worst times, such as holidays. Out-of-stocks continue to matter, but not as much as they once did, thanks to stored value, the technology behind gift cards.

    These little cards are truly a gift from the gods as far as the retailers are concerned. Gift cards allow retailers to shift demand from Q4 to Q1. This evens out demand, enabling retailers who don’t have the clout to get their hands on a particularly “hot” product in Q4 to make the sale anyway. And there is a host of evidence that when the customer comes back in store — gift card in hand — they’ll spend more than the face value of the card and will purchase higher-margin items that are not on sale.

    We learned this holiday season that high-performing retailers have stopped lulling themselves into believing that if they wait for Q4 profits will come. Instead, they’re making profits a year-round affair. They’re making new rules up as they go along – and downloading them into the brains of their disciples. Film at 11.

    — Marcia Kadanoff

  • October19th

    Accountability

    Posted in: articles

    And its impact on the lifespace of the average CMO

    Splat! That sound you hear is another CMO hitting the dust. It’s September — the leaves become a brilliant, colorful mosaic, the air turns crisp and cool, and it’s hunting season for CMOs. See the folks in the orange flak jackets, armed to the teeth with Blackberrys and Mont Blancs? They’re the CEOs of public companies. See the ones running for their lives? Those poor folks are the CMOs. Their life expectancy is short. On average, a CMO lasts only 18-22 months before a CEO brings him down. It’s often not a particularly clean kill, either.

    At Firewhite, we have a simple prescription for increasing the lifespan of the average CMO. It’s called accountability. For example, we build marketing scorecards that give C-level executives a quick set of metrics on how marketing is doing at driving the number of new customers acquired, increasing the lifetime value of existing customers, and in encouraging customers to move up to premium products and across into new categories. Our scorecards are built in Excel and Flash. What makes them so remarkable – apparently – is the fact that we get to do them at all.

    Accountability presents something of a dilemma for marketing executives. Is it an opportunity or a threat? From a purely personal, career perspective, does it really help to be able to stand up in front of your CEO and announce that you’re managed to drive your acquisition costs down 15% across all media, or are you simply providing the rope with which you’ll eventually be hanged? After all, nobody ever got fired for branding, but you can definitely get canned for not hitting the numbers you’ve helped create.

    Right? Well, wrong. Here’s why.

    First, this genie is not going back into the bottle. Analytics, and the accountability they deliver, aren’t the flavor of the month. If there’s one thing CEOs are always clamoring for (along with Gulfstream G-V jets) it’s more and better information. As technology gets better, costs get lower and information gets faster, marketing gets less and less murky, and, to be Machiavellian about it, smart marketers get more and more leverage, authority and influence.

    Second, by creating accountability, you’re also increasing transparency, which is only going to strengthen your cause. At bottom, the reason marketers make such tempting targets is that the lack of hard data makes everything a judgment call. If your judgment works out, great. You keep your job. But if it doesn’t, you don’t have any way to defend your decision. That, plus a nervous CEO, means you lose your job. However, if you can point to hard data and logic in defense of something you did that didn’t work out, you can demonstrate a) why you did it; and b) why anyone else would have done the same thing. Hard to fire someone for doing to obviously right thing.

    Finally, accountability gives CMOs an increasingly influential role in strategy. CEOs are under more pressure than ever before to grow their businesses at a time when the markets they compete in aren’t necessarily growing. A recent study reported in the Harvard Business Review suggests that, on average, executives spend less than 3.5 hours per month1 thinking about fundamental strategic issues. Like how to grow the business. Marketing is the one organization tasked with thinking about business strategy and how it affects the customer. As such, the chief marketing officer is uniquely suited to partner with the CEO on issues of strategy, especially when it comes to growth.

    So what we have here is a situation were the CEO wants and needs the CMO to work with them on strategy issues but the CMO does not necessarily have the skill set. According to Strategy + Business Magazine “The new class of strategic marketer will own the talents that, in recent years, have resided variously among consultants, agency executives, and senior strategists”2 including the ability to spot business trends early, develop business plans that deliver growth, interpret complex customer behavior, direct multiple agencies, and the intellectual security to stand up for what is right for the business while building consensus across departments.

    The disconnect here is huge, which is why CMOs feel – and rightfully so – that at any given minute than can and will be fired. It’s hunting season out there and there is a big red target on the back of the average CMO. Given this, it’s not surprising that most CMOs don’t want accountability. What they want is to hide their heads in the sand and hope that this too will pass.

    The reality is that it won’t. The discipline of marketing is in the midst of a colossal transformation. Marketing is becoming more strategic than ever before. Case in point: Sprint. Sprint has been in the wireless phone business for a decade. For most of this time, the company has been an also ran, trailing its peers in every number that counts, be it profits, new customer acquisition, and growth.

    This is a company that only recently got smart about marketing as strategy. Its ads have always been smart, thanks to the work of Publicis and Hal Riney. It was its marketing strategy that lagged (woefully) behind. Instead of focusing on understanding who its customer was and what it needed to do to serve that customer better, Sprint focused on cutting its cost structure, in ways that exacerbated churn. For example, Sprint was one of the first vendors to experiment with Indian-based call centers for tech support, and to require customers calling with an issue to navigate a complex phone tree a/k/a “voice mail hell.” While this cut costs, it did little to endear Sprint to its customer, and the company found itself continually ranked below its peers in terms of profitability, margins, net additions (new installs minus churn), and other metrics.

    At some point Sprint woke up and decided to change its marketing strategy. No doubt a new CEO — in the form of Gary D. Forsee who arrived in 2003 — helped. One of the problems Forsee inherited was a customer base that was defecting to the competition at a rapid clip. Under Forsee’s direction, Sprint decided it needed to understand the true drivers of customer attrition.3 Sprint found that customers were leaving the carrier in droves at the exact time they started to use their phones more and more. Ironically, the very thing that made Sprint great – its reliable network and voice quality that rivaled a wireline connection – was now driving customers to defect. Customers who were accustomed to using wireline phones for routine calls now felt safe using their mobile phones to handle all their calls thanks to Sprint. But these same customers quickly found Sprint “too expensive” for their everyday needs. Once their contract with Sprint ended, they moved to another carrier who could offer them more minutes for less money.

    Sprint’s countered with a brilliant customer-oriented bundling strategy it calls the “Fair and Flexible Plan”. Instead of making customers feel like naughty children for going over the minutes they picked when they set up their initial contracts, Sprint simply adjusts their minutes from month-to-month based on last month’s usage. This is a win:win for both Sprint and the customer. The numbers speak for themselves. Churn: down by 2.3%. Contract length: up to 22 months on average. Revenues: up 17% over the prior year.

    Other ways Sprint is growing its business is by recognizing that certain customer segments like business and the youth market are not ones it serves particularly well. Sprint is like most of the other carriers in that back in the late 1990s it overbuilt its network infrastructure and now finds itself with excess capacity. Unlike the other carriers, it decided to do something with this capacity, to market it and allow other brands to resell its service under their brand umbrella. Brands as disparate as the old standard — AT&T — and the new gonzo brand — Virgin Mobile — both rely on Sprint to provide the underpinnings of their wireless network. The result? Sprint’s market share has grown dramatically.

    Driven by marketing analytics, what Sprint has learned is that the only way to grow the business is by understanding who your customer is, what they need, and building products and services that address the needs you know that customer has today as well as the ones you expect them to have tomorrow.

    We see a lot of underperforming businesses like Sprint’s. The situation is not going to change until marketers wake up and recognize that they have a choice. Keep your head in the sand and become road kill. Or change the way you’re seen within your organization. Go from being a cost center to a profit center. Instead of spending money, making it. Stop any attempt at “business as usual” – it will only get you fired. Business as usual is risky business, precisely because nobody knows what value you are bringing to the business.

    Or, to put it yet another way, like it or not, accountability is here to stay. And if you embrace it, well, so are you.

    — Marcia Kadanoff

  • October7th

    Marketing Dashboards and Causal Modeling

    Posted in: articles, marketing analytics

      “Hot Topics” Talk

    As presented at the American Marketing Association in October 2004

  • June30th

    Marketing through the Rapids

    Posted in: articles, marketing strategy

    As the economy (finally) recovers, marketers ask “what now”

    Crocodiles slither from the banks into the river as they continue their risk-filled journey. He sarcastically points them out to her: “Waiting for their supper, Miss.”

    Rose: Don’t be worried, Mr. Allnut.
    Charlie: Oh, I ain’t worried, Miss. Gave myself up for dead back where we started.
    —From The African Queen, starring Humphrey Bogart as Charlie and Katharine Hepburn as Rose.

    Things are finally beginning to look up. The African Queen is the classic story of a treacherous journey by boat through the African jungle. It may be the greatest movie ever made. Right now, on our own journey through the wilds of the business world, the trip finally seems to be getting smoother. Things are moving in the right direction. Job listings on Craigslist are up. The numbers are trending in the right direction. The economists, for the first time in a long time, have good news. The roar of the rapids is receding into the distance. What now?

    For a lot of marketers, the knee-jerk reaction is to run out and hire an ad agency. It’s been a long, ugly recession, and it now seems to be ending. Let’s go get some customers! It seems to make perfect sense — when there are, finally, customers out there for the getting, why not invest in some marketing to go and get them?

    Because, to paraphrase Gertrude Stein, cycles are cycles. The good times will not last forever. Advertising is great when the rising tide is lifting all boats, but when the tide goes out, you need something else. Something evergreen — something that provides you with aid and comfort both when things are going great and when, as they must, they go less well.

    And the one thing that always works, always pays dividends, always makes sense is information. We refer to it as “accountability”, but the bottom line is that it all refers to understanding what’s going on with your marketing — being able to measure, and thus manage, your marketing budget.

    Which brings us to our real topic here. Marketing, as we speak, is going through a profound change — its own version of a perfect storm. Several factors are converging at once to change virtually everything about marketing — what it does, how it works, how it’s viewed, and where it resides in the corporate food chain.

    For decades, marketing budgets were considered discretionary. If times were lean, and you needed to cut somewhere, you could always take it out of marketing. Why? Because nobody was ever able to quantify exactly what marketing accomplished. There were a lot of theoretical discussions about the need for marketing, the benefits it provided, and so on, but unlike sales, which was always inexorably tied to a number, marketing was considerably more opaque. Given this, when the budget-makers had to wield a scalpel (or a meat-axe, depending on how bad things were) they could always take a cut at marketing. Nobody would notice anything.

    That was then; this is now. Thanks to the perfect storm, it is now possible to measure exactly what you get for your marketing dollar, down to the point of being able to calculate ROI, with real numbers and real dollars.

    The storm, like its natural counterpart, has three elements. The first is database technology — databases are vastly more robust, powerful and fast, and they continue to improve. The second is equally improved point-of-sale (POS) systems that enable retailers to collect and process information about their customers in real time, and in some detail. Finally, the Internet itself enables companies to tie all their information sources together, seamlessly.

    When you tie all this together, you essentially create a marketing machine where money goes in one end, and results come out the other. You can measure, and quantify, cost-per-customer (both acquired and retained); spending, revenue and profitability; purchase intervals, and virtually limitless other metrics.

    This, as they say, changes the whole ball game. Marketing is no longer a black hole for spending. It’s a profit center. It’s an unbelievably effective system for understanding exactly who your customer is, what she buys, what she’ll buy next. And this information is beginning to be the dog instead of the tail. It affects strategy, logistics, accounting, everything.

    To use just one example, let’s look at Dell. Michael Dell is personally worth $13 billion, a fact which should get your attention. His company, Dell Computer, employs four hundred marketing analytics people — that’s one analyst for every 120 employees. That’s an enormous number of people whose job is to grind through marketing data, and draw conclusions.

    And at Dell, marketing drives everything. As soon as Dell fields a marketing campaign, they know exactly what kind of results it’s delivered. This allows them to calibrate inventory, revenue projections, logistics, virtually the entire enterprise — to marketing. It has also allowed Dell to absolutely flatten every competitor, with the exception of Gateway, in the personal computer space. And Gateway is tottering.

    Dell was able to accomplish this, right through a crippling consumer electronics recession, because they spend heavily on accountability for their marketing systems. They produce, and evaluate, tsunamis of information, and it has made them unstoppable. The very same thing is happening in all kinds of other industries, from apparel to manufacturing to entertainment (got iTunes yet?).

    And it’s all driven by marketing, which, in turn, is driven by information. Which requires some initial, pump-priming investment. The good times are beginning to roll. Advertising and branding are the Meg Ryans of business — fun, pretty, easy to spend time with. However, when the good times stop rolling — when your boat is making its way down a crocodile-infested river in Africa, and you have to be Humphrey Bogart — do you really want Meg as your co-star? “Oh, look! Alligators! How cute!”

    Eventually, the ride is going to get rough. It always does. When that happens, instead of Meg, you will assuredly wish you had someone more Katharine Hepburn-like star in your movie. A little more difficult, to be sure, and demanding of some work and some smarts. But in the long run, a much better investment, and one making it much more likely that you’ll arrive, safe and dry, at your destination.

    — Marcia Kadanoff

  • May21st

    On Differentiation

    Posted in: articles, marketing strategy

    it takes a surprising amount of courage to build differentiation into products

    Sign hanging around the neck of a well dressed panhandler we spotted in downtown San Francisco: “Have Courage Will Differentiate for Six Figures”

    As a marketer, it is extremely tempting to push your company to build me-too products. After all, differentiation takes courage. A me-too product that tanks is bad enough, but something new and different that fails is a really hard decision to defend. It takes real nerve to try something new, a quality that seems in short supply inside most executive suits.

    cowardylionAt Firewhite, we don’t have any magic elixir that will give senior marketing people courage. This isn’t Oz, unfortunately, and we’re not the wizard who can hang a medal that says “Courage” around your neck. However, what we do have is some encouraging news. Safe and painless differentiation isn’t all that hard if you listen to what your customers are telling you, both in words and deeds.

    WORDS
    Every time your customer touches your company they leave behind their words. Sources of words at your company may include:

    • Customer phone calls
    • Customer mail/fax
    • E-mail/website contacts and/or support inquiries
    • Public online discussions (Internet message boards, blogs)
    • Comments in surveys/focus groups

    Until very recently, unstructured data like this was simply viewed as jetsam and flotsam, too inchoate to bother analyzing. More recently, companies as disparate as Procter & Gamble and Mazda are finding that text mining can be used in much the same was as data mining: to uncover insights hidden in plain sight within unstructured data.

    Case in Point: Mazda
    A recent article in Business 2.01 magazine waxes poetic about how Mazda has reshaped its dealerships by installing Internet kiosks in the center of showrooms and – gasp! – encouraging customers to research pricing right then and there. Customers aged 24-35 make up the lion’s share of new car sales among the “Big 3” (Honda, Mazda, and Toyota). This target is getting harder and harder to reach through traditional media but spends a significant amount of time online. To get a better shot at this moving target, Mazda turned to text mining. It’s a surprising finding. By connecting with web-savvy bargain hunters through the medium they preferred—the Web—Mazda could engage at a deeper level with this group, and could increase revenues and margins.

    DEEDS
    More obviously, every time a customer interacts with your company, they leave behind a trail of behavioral data. This data can become the basis for extraordinarily effective differentiation. After all, your customers are your customers. They don’t belong to anyone else. By understanding their needs, it is possible to precisely tailor your offerings in a way that 1) separates you from the competition; and 2) makes your offerings a tighter “fit” with the needs of your particular customer.

    Case in Point: Charles Schwab
    Charles Schwab recently rolled out a new product offering it calls Personal Choice. By mining customer behavioral data, Schwab discovered that it served three broad groups of customers: self-directed investors, those that need help managing their portfolios and are willing to pay for it, and frequent traders. By developing different products and services for each need-based segment the company is able to create a set of highly differentiated offerings in a category that has become fixated on the $9.95 trade.2 The goal here is to focus Schwab’s customers on the value of what they are getting from their broker instead of the cost of a single trade.

    ALTERNATIVES
    Whole categories of products are moving to commodity status at unprecedented speed. Commoditization is the black hole3 of business—once it’s in place, it’s extremely hard to escape, and it can swallow up whole markets very quickly. Think of, for instance, the neighborhood stationery store, which has now been crushed by Office Depot, OfficeMax and Staples.

    Many companies don’t realize how their own behaviors contribute to commoditization. Instead of building meaningful differentiation into their products, companies get caught up in a kind of vicious cycle where they:

    • design a new product to match the competition feature-by-feature
    • pay lip service to differentiation by adding a handful of features that don’t really matter
    • price the resulting offering at parity with the competition

    Viola! Your new product is guaranteed to find success in the marketplace. After all, it offers more features for less, something important to today’s value-oriented consumer, right? There are two problems with this model.

    First, eventually it drives profits down to zero or nearly zero. Feature creep is costly, particularly in categories that don’t offer a lot of margin opportunity in the first place, e.g. computers. So we see strong brands like Gateway struggling to make a go of it against such Goliaths as HP and Dell, both of whom have overpowering economies of scale Gateway lacks.

    Second, and more importantly, today there is no such thing as a market serving a single type of consumer. Increasingly there is not one market but tens of smaller markets. Winning in this type of competitive environment is a matter of figuring out what tenth of the market you will dominate and crafting a strategy that allows you to do so profitably.

    The way to avoid the black hole, then, is to tailor your value proposition to the market you want to own. You must convey to your customers what you will do for them, and it must be something they care about. Since everyone doesn’t care about everything, different markets demand different value propositions. A “me-too” product’s proposition is basically identical to every other product’s. A differentiated product’s is, well, different. It reflects, and speaks to, the needs of a submarket in a way it’s bigger, dumber, “me-too” cousin can’t possibly.

    Case in Point: Apple
    The best example of this is Apple. Apple is up against the Four Horsemen of Commoditization: Intel, HP, Microsoft and Dell. Yet, they have survived, and even thrived, by articulating a value proposition that speaks to the mini-markets they want to, and do, own: students, creative services (design, music and so on) and very high-end (and profitable) consumers seeking an integrated solution. Their proposition is, basically:

    We make computers that are powerful, beautifully designed, especially good at graphics and media, and don’t have you, like everyone else, spending money that eventually goes to Bill Gates.

    Is your value proposition shipshape?
    A good value proposition will compel a certain group of customers to do business with your company and not your competition. A compelling value proposition has those same customers delivering incremental revenues and profits to your company year after year.

    Ultimately, commoditization means competing on price alone, which isn’t really competing at all. It’s just an endless game of “who can make and sell it cheaper.” Commodity products have little intelligence built into them, and your customers have little loyalty. If the next guy can make it more cheaply, they’re gone. And so are you. Differentiation short-circuits this by, in effect, building your customers into your product. Your product is different, it’s better, and you get customers for life. Sure beats “me, too”.

    Notes

    1. Source: Business 2.0 – June 04. The complete article is available to subscribers who login or via email by going to this page and requesting the full article by email. ↩
    2. At $9.95 a trade, a full-service brokerage firm like Schwab can’t make money given today’s volumes, down significantly since the height of the bubble. ↩
    3. A black hole is a region of space-time from with a gravitational pull so intense that nothing can escape. ↩

    Originally published on Firewhite Consulting site, 5.04.

  • May15th

    Customer Avoidance

    Posted in: articles, direct / database marketing

    The Lake Wobegon effect: Or how to avoid the customers you wish you didn’t have

    Garrison Keillor’s radio show, A Prarie Home Companion, originates from the mythical Minnesota town of Lake Wobegone, where “the women are strong, the men are good looking, and all the children are above average.”

    Like the parents of Lake Wobegon, a lot of marketing managers seem to live in a place that’s a little disconnected from reality. In that place, every customer is profitable. In the real world, they’re not, and there’s an important issue in all this for marketers.

    Marketing, particularly direct and online, is typically focused on two activities–acquiring new customers, and retaining existing ones. In both cases, the metrics are typically pretty cut-and-dried. But as Einstein is said to have said, “Make everything as simple as possible, but not simpler.”

    The classic metrics many marketers rely on may, in fact, be too simplistic: How many customers did we acquire? What did they spend? How much revenue did they bring in? Often, that is as far as the analysis goes. A new customer is a new customer is a new customer. Revenue is revenue. It’s all good.

    Not quite. In fact, there are many customers you would be better off without. Let’s repeat that: there are customers you have now that you don’t want, and there are new customers you don’t want to go near.

    Why? Because they are costing, rather than making, you money. This happens in every business, selling every sort of product, in every market.

    Black-belt marketing, then, is not simply going out and bringing in customers. It also requires understanding both what kind of customers you want and, perhaps more importantly, what kind you don’t. Or, if you will, identifying the kids in Lake Wobegone who are a little … slow.

    Here’s an example. One company, contending with an erosion of its profits, determined that an astonishing 15% of customers were actually costing them money. Although these people exhibited all the traditional signs of being good-paying, high-value customers, and they spent a lot of money, it turned out that down the road they had a tendency to get behind, sooner or later, on their bills. This led to a long series of extremely expensive collection actions the company was obliged to take, including customer visits, repeated communications, and so on. The cost of these steps guaranteed that these customers, even if they paid up, would remain unprofitable, on average, for at least 18 months.

    This sounds like a finance issue, right? What does this have to do with marketing? Well, thanks to CRM and customer database technology, the answer turns out to be everything.

    Like a lot of businesses, this company had never done an in-depth profitability analysis of its customer base. In particular, it had never analyzed what kind of long-term behavior different customer segments tended to exhibit, and how that affected their long-term value. Had it done so, it would have discovered a segment of problem children within its customer base that was costing it a fortune, no matter how much they spent. In fact, the more service the company gave these customers, the more money it lost.

    As a rule of thumb, roughly 15% of your customers are responsible for 65% of your customer-service costs. And it’s increasingly possible to predict who they’re going to be.

    Consider retailing. Retail is all about a few basic metrics—same-store sales growth, revenues and so on. The customers who are part of loyalty programs and who receive the most love and care tend to be the ones who spend the most—period.

    It turns out, however, that someone who buys a lot of clothing may also purchase only during sales or may return a lot of what she buys or may require a huge amount of customer-service help (electronics and computer manufacturers tend to suffer from this, too) and is therefore not only not profitable, but deeply unprofitable. Some of your biggest spenders may be costing you more than they are worth.

    And without some kind of lifetime value analysis, as a marketer you may be spending enormous amounts of money to acquire these customers in the first place. Or, to put it another way, you may be spending hundreds of dollars to acquire customers who are costing you money. That is not really a formula for business success. And by doing some analysis, you can do a great deal to stop this situation before it starts.

    The solution? Conceptually, it’s a three-step process:

    • Do the homework to understand which of your customers are profitable and how profitable they are. Remember, revenue doesn’t equal profitability. The results of this research may astonish you.
    • Do the database work to understand who these customers really are—append demographic data to your customer database and develop a rich profile.
    • Finally, in both your acquisition and retention work, avoid marketing to people who match this profile. Clone your money-making customers and avoid those with profiles similar to the money-losers. Allocate your scarce marketing dollars to the customers who are making you money, not these guys.

    That’s the long answer. The short one is this: accept the fact that there are some customers you really don’t want.

    There’s an ancient business joke about a guy who buys a product for $1 and is selling it for $.95. A friend asks him how he can possibly stay in business when he’s selling his product for a loss, and the guy says, “Oh, that’s easy. I’m making it up on volume.”

    At the end of the day, volume isn’t the point. Profit is the point. More and more, it’s the job of marketers to understand where that profit comes from—and more importantly, where losses come from—and to use that data to guide their marketing and allocate their spending.

    Even in Lake Wobegone, where all the children are above average, some are more above-average than others.

    First published on the site Marketing Professionals in May 2004.

  • April15th

    Customer Franchise

    Posted in: articles, marketing strategy

    SBC a.k.a. “the phone company” is running an ad campaign featuring the actor Tommy Lee Jones that makes my heart go pitter-patter. It’s not what you think. Yes, I appreciate Tommy Lee Jones. Especially when portrayed against a backdrop of linemen, complete with sweaty biceps and hard hats, climbing telephone poles. But what really gets my engine going is Tommy’s assertion that what makes SBC a “real” phone company is its network: switches, routers, towers, wires, trucks. It seems that “real men” like “real companies” where the value lies in tangible infrastructure.

    Now I’m not a “real man” and unlikely to become one anytime soon. But what I do know is that the real value of most companies has little or nothing to do with tangible infrastructure. Most of the time, about 25% of the company’s value lies in its brand, about 25% in physical infrastructure, which leaves a full 50% of the company’s value unaccounted for. In today’s service-oriented economy, we find that this 50% comes from your customers and what we call their “franchise” value — or ability to create repeatable revenue streams.

    Let’s look at the attributes of two distinct asset bases: the tangible infrastructure that exists at a company like SBC versus the less tangible — but far more valuable — customer base.

    Two types of assets at your company

    TANGIBLE INFRASTRUCTURE CUSTOMER BASE
    ACQUISITION COST Low High
    MAINTENANCE COST High Low
    VALUE OVER TIME Decreasing Increasing

    Today, the cost of capital right now is almost zero, which makes it relatively inexpensive for SBC to invest in switches, cables, poles, and the like. You’d think that companies who have infrastructure (SBC) would be able to sit around on their laurels, collecting excessive profits from those companies that do not (Virgin Mobile). But you’d be wrong. In point of fact, SBC needs to keep throwing money at its infrastructure simply to remain competitive. Without ongoing investment, SBC will be unable to offer internet access at true 3G speeds (300 Mbps), voice-over-IP, and video conferencing. All services that will be considered humdrum (as opposed to technologically advanced) by the year 2010. For SBC, Moore’s Law means it can look forward to a heady future of spending more and more on infrastructure only to see that spending add less and less value to its business.

    Customer Franchise
    Thankfully, SBC has another asset base worth coveting: the lasting value of its customers, something we call a “customer franchise.” Here, the company gives its customers an initial good or service that is either free or deeply discounted in exchange for the right to collect ongoing revenues. For example, wireless carriers often give away the basic handset in exchange for a 2-year contract for wireless service. Similarly, Hewlett-Packard laserprinters are sold at or below cost. What HP loses on the initial sale it makes up later, in the aftermarket, when it sells toner cartridges. Sometimes this way of doing business is called “razors and razor blades”, a reference to a popular business model used by consumer products companies.

    No matter what you call it, this type of business model values customers before infrastructure. This fact that has not been lost on the men (and women) in black on Wall Street. Recently, Cingular Wireless bought AT&T Wireless. Cingular shocked the industry by dumping the AT&T brand name in favor of its own. The AT&T brand name has been around since 1894 — versus the Cingular brand which first appeared on the scene in 2001. What Cingular paid for when it bought AT&T wireless was a little infrastructure and a lot of customers. In fact, the acquisition catapulted Cingular from the #3 wireless carrier in the US to #1 carrier overnight.

    Some people think that Cingular overpaid for AT&T Wireless. If you look at the deal in terms of the value of customers only, Cingular paid $1708 per customer to acquire 24M customers from AT&T. Assuming normal churn and modest increases rates, Cingular’s investment can be expected to pay out for them in less than 42 months.1

    The economics of your customer franchise
    To understand why customers are so valuable, you first have to come to grips with the fact that today it costs more to acquire a single customer than that customer initially delivers in revenue. Amazon, for example, is known for the efficiency of its new customer acquisition effort. Offline, Amazon does not invest much in advertising. Online, most of its new customers come from paid-content deals with search engines and portals and from affiliate marketing. This strategy has been successful and resulted in a new customer acquisition cost of around $25. The problem is that the average new customer does not spend anywhere near $25.

    Amazon’s situation is far from unique. Most of our clients spend more on acquisition than they get from the first sale in terms of revenue, never mind contribution. Amazon’s business model is all about building a customer franchise. Books are a consumable good, at least for book lovers: if you enjoy books, you’ll keep buying them. Instead of loyalty, Amazon focuses everything it does on making it easy for its customers to deliver an ongoing revenue stream to Amazon. This strategy is evidenced in Amazon’s one-click ordering process which it protects by patent. (The fact that Barnes & Nobles has a network of brick-and-mortar stores should give it the advantage. It doesn’t. And when B&N tried to replicate Amazon’s one-click functionality, Amazon sued and won. Companies will go to great lengths to protect IP especially when the intellectual property in question is central to locking its customers in and the competition out.)

    Customer franchise: Not loyalty but inevitability
    In other words, Amazon has built its business model around not loyalty but acquiring customers whose future business is inevitable. Strategies to consider towards this end include:

    Lock your brand in
    Subscriptions are an obvious way to do this. A less obvious way is exemplified by Microsoft with its software assurance program, where customers are asked to commit in advance to pay for upgrades, whether they ended up upgrading their end users or not. Taken at face value, software assurance looks like a program designed to deliver a win:win. The company (Microsoft) gets more upgrade revenue, while Enterprise customers get to buy software at a reduced rate. However, the program did not take into account falling hardware prices which makes upgrades to Microsoft office look relatively expensive relative to the cost of new desktop computers. The software assurance program misfired and misfired badly. Instead of locking Microsoft in, changes in its licensing practices are one reason that Enterprise customers are starting to take a serious look at Linux as an alternative to Microsoft on the desktop.

    Lock the competition out using IP
    The Big 3 printer vendors (HP, Lexmark, and Xerox) spend an inordinate amount of their R&D time developing ink which for them is truly “black gold.”2 The most recent trend is to build intelligence into laser toner cartridges, intelligence which can be used for either good or evil. When Dell entered the market for laser printers,3 it chose to use the intelligence to sense when a printer was running low on toner and have the printer initiate an order for replacement supplies automatically over the internet. A less benign example is seen with Lexmark4 where the intelligence takes the form of Digital Rights Management. Buy a Lexmark printer and you’ll find that the DRM software will prevent you from using any other company’s brand of replacement toner cartridges.

    • Be proactive about retention
    Churn doesn’t just happen. One of the biggest causes of churn is price. Indeed, wireless carriers find that 48% of churn comes from people who go over the minutes provided in their rate plan. Sprint manages retention through a set of predictive models that identify customers at risk in advance. The goal here is to be proactive, to direct customers into a less expensive plan at Sprint before they can be lured away by the competition.5

    Extract a price premium for customers unwilling or unable to commit to future buying

    Newspaper advertising is a case in point. Commit to a schedule of 26 insertions per year and you’ll pay one rate. But if you are unable to commit to a schedule that guarantees volume, you’ll pay another – much higher – rate. (Figuring out how to extract price premiums from some customers without turning off others is both an art and a science. These are the kind of bet-the-business pricing decisions we thrive on here at Firewhite.)

    Tommy Lee’s right, to a point. You’re always going to have to string cable and drive trucks if you’re selling telecommunications. But that stuff just gets you into the game. To win the game, you need to build a customer franchise.

    Tommy Lee, the clue phone is ringing. It’s for you.6

    To learn more about how to build a customer franchise and the fundamental economics that make customers so valuable please call the women (and men) in black at Firewhite.

    Notes

    1. According to Lisa Pierce of the Giga Group – now part of Forrester Research – it costs a wireless carrier $250 – $300 to acquire a single new customer. New customer acquisition costs for different types of carriers et. al. are summarized here.↩
    2. HP spending on R&D for ink alone is estimated at $900M annually according to the San Jose Mercury News April 04. ↩
    3. Dell’s printer strategy as discussed in Forbes Magazine March 03. ↩
    4. Lexmark’s lawsuit regarding DRM and ink was reported on C|Net January 03. ↩
    5. January 2003 – Billing World & OSS Today – available here. (Site registration required.)↩
    6. According to the Pittsburgh Post-Gazette: “A light-hearted way of urging others to get a clue or otherwise pull their heads out of various locations”. ↩

    Originally published on Firewhite Consulting site, 4.04.

  • February16th

    Choice Modeling

    Posted in: articles, marketing analytics, marketing strategy

    Today’s business environment sometimes feels much like a reality TV show. The stakes are high, the contestants are mostly good looking, amazingly fit, and overqualified for the tasks thrown at them. Part of the allure of watching a reality TV show is the knowledge that the majority of the contestants will fail and fail miserably. This kind of thing has been fun to watch for centuries, and leaves the rest of us feeling much better about our prospects in the morning.

    Watching a train wreck happen makes for good television but is hardly a business strategy. Yet many companies facing low or no growth in their core markets seem stuck in do nothing mode. A situation we find hard to fathom. It’s like watching The Apprentice except that everyone might get fired in the end.


    At Firewhite, one of our favorite conceptual tools is (no surprise) a chart which depicts the risks and rewards of different strategies for growth.

    Many clients are so risk-adverse that their preferred strategic mode is to do nothing. Doing nothing seems like it should minimize risk, but in today’s volatile and hypercompetitive markets while you’re sitting still you can be sure your competition is moving forward. So we typically assess “do nothing” with a risk score of +2. A strategy of “doing nothing” is likely to end badly, with your business getting smaller in the process. We indicate this here with a reward score of -1.

    Optimization – meanwhile – requires a modicum of risk. When you optimize, you’re polishing: making minor, incremental alterations to deliver slightly better results. The risk is limited (+0) because you’re tinkering with something you thoroughly understand. The reward is likewise limited (+0). Bringing out a line extension in a familiar market is an example.

    The middle of the spectrum is innovation: trying something new, perhaps to meet customer needs you’ve never really addressed before. This is a bigger degree of change than optimization, and involves proportionately more risk (+1). Here we’d assess the potential reward at +1. Case in point: Burberry, the maker of traditional plaid-lined raincoats. Last summer, Burberry innovated by moving into a new market, one where fashionistas rule. The company brought out a line of raincoats in popsicle colors: bright pink, neon green but still lined with its distinctive plaid. The results of this move are impressive: earnings +15%; stock price +50%. Proving that innovation can turn a staid performer into a growth stock.

    In the upper-right-hand-corner right on our chart is change. These are the bet-the-company strategic decisions that alter the most basic elements of your business: what you’re selling, what it does, who you’re selling to, what needs it meets, and so on. Change is scary but also offers the biggest reward. Change often happens by moving into adjacent markets, where both the customers and the needs you are satisfying are new. Case in point: Apple Computer has added $100M to its bottom line through the introduction of iTunes, a downloadable music service.

    On Risk
    Decision makers in business have one thing in common with your average game-show contestants: they’re human and they don’t like risk. The devil you know is always preferable to the one you don’t, so human nature pushes decision makers towards the left side of the spectrum, toward a strategy of “do nothing” or “optimize” what we have today. Innovation happens rarely. Change almost never. Which means the really big strategic wins are taken off the table, because the cost of failure is simply too great.

    At Firewhite, we work with our clients to put change and innovation “back on the table”. We don’t have a magic wand we can wave to make risk go away. What we do have is an arsenal of techniques in customer marketing and analytics, among them something called choice modeling.

    Choice modeling combines market research with simulation. It was invented in the 1970s by Daniel L. McFadden (University of California, Berkeley) who won a Nobel Prize for this work. CM is used to determine the optimal price and/or feature set to maximize profits, contribution margin, and/or market share. In-depth analysis of the data collected can also be used to understand how you can build more sustainable advantage into your product or service offering.

    Choice modeling isn’t cheap — it utilizes specialized practitioners, software and modeling techniques. That said, it can give your company an edge by reducing the risk of innovation and change, particularly when your strategy could greatly affect revenues, earnings, and market share.

    On Choice Modeling
    In the old days (up until a few years ago), the only way to remove the risk from a bet-the-business decision was by fielding an in-market test. In other words, go through the time, expense and complexity of developing your entire program for change and rolling it out in a single test market to see how it works. If it fails in a test-market scenario, don’t roll out your innovation in other markets, effectively killing the idea. The test market serves as the canary in the coal mine, so to speak. This is an expensive (and slow!) way to reduce risk.

    Contrast this method with the type of virtual test market we can field using choice modeling. Here, you can take your next big idea and reduce it to its component parts. Add or remove ingredients. Change the price. Bundle it with other products. Change the packaging. Sell it through completely different channels. In other words, break your big idea into a set of variables that can be combined in a myriad of permutations.

    Next, we expose the target customer to your big idea. To do this, we use an online survey and ask the target to choose between various products (or bundles of product) that vary in price or value. Responses are used to create a choice model depicting how demand for a given product varies with changes in elements of your value proposition.

    By fielding virtual test markets, we can simulate how the market is likely to respond to your new offering. We don’t pretend the results are an accurate way to judge absolute demand for your product or service.0 Virtual test markets are best used to shed light on a relative basis, to tell you which combination of features and benefits is most likely to meet with success in market.

    With a virtual test market, you can take the level of risk involved in change down to the level seen with innovation. Or, you can innovate, and reduce the risk to the level of optimization. Stop and ponder the implications of that for a second.

    Virtual test-markets aren’t without limitations. You need to target a customer we can reach through internet marketing and/or direct mail. You also need a solid value proposition that can be articulated in specific terms. The results of choice modeling are simulations of how consumers will behave when they know all the alternatives available to them, which isn’t always how the real world operates. Also, choice modeling doesn’t shed much light at all on things like the size of your available market. Digging into some of these issues may require additional in-market testing.

    However, what choice modeling can do is give you the information you need to make big, market-shifting bets, with less risk. Virtual AND in-market testing is the equivalent of getting up in the morning and packing your briefcase with a trail map, a census of the animal life, and a good pair of boots. After all, if you’re going to compete on Survivor we want to make sure you will win — and the best way to do that is by giving you an unfair advantage.

    Note

    1. Is performance on The Apprentice an accurate predictor of on-the-job performance?↩

    Originally published on Firewhite Consulting site, 2.04.

  • October8th

    On Strategy Building

    Posted in: articles

    There are as many ways to build a strategic plan as there are strategy consultants. Radical incrementalism is a process that has been applied to fields as disparate as software development and government. At Firewhite, it is the methodology we use for strategic planning.

    The idea here is that the best way to drive big changes is through a series of small initiatives that are executed in waves, one wave followed almost immediately by the next. By itself, each wave represents a small step in the right direction. Taken together, the overall cumulative effect on your business can be radical.

    There are two prerequisites for putting radical incrementalism into place at your company.

    Vision + Commitment
    Radical incrementalism will backfire without a strong vision of where the organization needs to arrive some 18-24 months hence. Why? Because without this, the organization can end up executing a series of initiatives that give the appearance of momentum but in fact do not move the company any closer to the end goal.

    At GE, that point of arrival was always to be #1 or #2 in each of the market segments they competed in. The leadership team at each business unit would commit, both to this vision and the specific initiatives they needed to deliver that quarter to move the company towards that goal.



    Suppose you’ve mapped out a strategy that will get you to your point of arrival within 4 “waves”, where a wave is a set of strategic initiatives that together move the business closer to its goal. Even if each individual wave turns out to off by about 15 degrees, it is still possible to reach your point of arrival on time, so long as you course correct as you go. So the focus here is not on accuracy but on speed: both of the execution itself and of the data that flows back to you that tells you whether you need to recalibrate or not.


    Alternatively, suppose that there is no common vision of where the organization needs to arrive. As a result, each strategic wave ends up taking the organization in a different direction. After 4 waves, the organization will have spent a lot of time executing. Everyone involved is tired. Yet the organization has spent most of its time, energy, and considerable talents going around in circles.

    Focus on speed not perfection
    Like vision/commitment, another prerequisite for radical incrementalism is the recognition that time-to-market matters. The more quickly you can execute, the more quickly you can get data back, analyze it, and incorporate that learning in a just-in-time manner.

    Perfection takes too long and costs too much. Instead of perfect think “almost perfect”. Getting the job done 85% right means that you move the organization forward, gain valuable learning about what works and what doesn’t, and can incorporate that learning into your next set of initiatives. The result: a strategic planning process that starts and ends with a thoughtful analysis of what works.

    Originally published on Firewhite Consulting site, 10.03.

  • March8th

    Getting past the "O" word

    Posted in: articles

    Funny thing. Marketers have been outsourcing stuff for years. But we never called it that. Instead, we just picked up the phone and rung up those nice (and creative!) folks at the agency. So recently, we’ve been thinking about what other marketing functions might be right to hand off to an outside partner and why.

    If you’re HP, you may have 400 people responsible for analyzing customer interactions and doing root-cause analysis. But if you’re a smaller player, it’s more likely that you can count the people in your company who handle these functions on one hand.

    One-handed functions like these are ripe for outsourcing. Functions that are outside of your company’s core competence should be offloaded to outside partners, wherever possible. Look for partners that can provide you with:

    Access to talent you can’t hire internally
    In the knowledge economy, access to talent can make a big difference. Think of GE, which has grown some of the best and most capable management talent of our generation. Many of the talents you need, aren’t available to hire in the traditional manner. A headhunter friend of ours said it best. “One of the side effects of the Internet boom is that it reduced the talent pool. Highly talented people either made their money and are now retired or decided to take the plunge themselves and become free agents.”

    Flexibility
    Outsourcing takes costs that were once considered fixed and turns them into the most variable part of your budget. You can scale up or down as need be to meet changing economic conditions. The corollary of this is also true. Be wary of any firm that makes you commit to payments and/or staffing levels before you have a true need. Business conditions can and do change in a nanosecond and the best firms to partner with are those that can adapt to these changes with flexibility and grace.

    Greater continuity
    Consider the situation where you are thinking about bringing one analyst in house to build and maintain a set of marketing analytics for you. This person will be working solo, without anyone else in marketing doing anything remotely similar. This looks like the cheapest way to get the job done – but buyer beware. There are some hidden costs that need to be considered. For example, higher turnover. To move up, the analyst will have to “move out” of the organization. Each time an analyst leaves and must be replaced, you will have to rebuild the formal and informal knowledge acquired in the job from scratch.

    Access to best practices
    Look around your organization and it’s likely that many of the people who work for you today worked at one of your competitor’s yesterday. So, in all likelihood, you know a lot about how your competition is handling the various business challenges facing your company. What you don’t know is the types of challenges facing businesses that are completely different from yours. And what you don’t know can and will hurt you, especially in today’s environment where limited visibility seems to be the norm.

    Offsite but not out of mind
    We are not enamored of companies that put “their people” at “your site”. The net result is to transfer facilities costs from the professional-services firm to you, the client. You’ll end up paying for this in more ways than one. Once people work day-in and day-out with you, they lose their objectivity. Productivity gets reduced as the consultants you hired start to spend more time working the organization then they do working through the business issues of interest to you.

    The quality of the consulting also suffers. Associates at the firm who spend the majority of their time at the client’s location can’t help but lose out on the many supervisory and training opportunities that can only happen when a bunch of people work together side-by-side and have ready access to people more experienced than them. Today, there is no real reason why people who work together have to do so from the same physical location. The technology to break down barriers of time and space is readily available – in the form of video conferencing, web-enabled meetings, and extranets to share documents and WIP.

    What about cost savings?
    Increasingly, when you call Sprint or Microsoft the nice person on the end of the phone is likely to work 12 time zones away, out of a call center located in Bangalore, India. The best companies in the field train their people to speak “Americanized” English and offer their clients substantial cost-savings over the cost of handling the function in the US, say with a call center in Sioux Falls, SD.

    Our take on this is that any cost savings that derive from outsourcing will be short term at best. Already the Internet has made it possible for knowledge workers to work from anywhere. As a result, the United States has seen both real wages and real estate prices become increasingly homogenous. Where once the cost of living was highest in the larger metropolitan cities on the two coasts (LA, San Francisco, Washington DC, New York, Boston) this is no longer the case. Over the past 5 years, the differential between the cost of living in Sioux Falls, SD – for example – and Sunnyvale, CA – have moved closer together. Likewise, real estate prices have migrated up in Sioux Falls and down in Sunnyvale. Economists tell us that this is a real trend, that increasing globalization means that standards of living – and their concomitant costs – in India must inevitably migrate towards the mean. Which means that the company you outsource today that resides halfway around the world will eventually become no cheaper than handling the function closer to home.

    THE REAL REASON TO OUTSOURCE
    Not so much to save money but to gain expertise
    As Bangalore becomes more and more a place dominated by technology-service providers like Widpro these companies will develop a knowledge base and expertise that cannot be duplicated. This will give companies like Sprint and Microsoft an even more compelling reason to continue to outsource functions: to access expertise not available internally.

    We think this makes a lot of sense. Functions ripe for outsourcing include those that are people (and therefore cost) intensive like support. But let’s not forget those functions that are highly specialized and therefore thinly staffed within any particular company. It makes sense to outsource these functions – not to save money but to gain access to a broader skill set and the expertise that comes with specialization and scale.

    Related Links

    Originally published on Firewhite Consulting site, 3.03.

  • December8th

    Direct Marketing books

    Posted in: articles, direct / database marketing

    Ronald G. Drozdenko and Peter Drake – Optimal Database Marketing
    Good guide to analytic techniques, especially now that the “the big red book” (referenced below) is out of print.

    Lois K. Geller – Response: The complete guide to profitable direct marketing
    Good overview for people who are just getting started in direct marketing.

    Garth Hallberg – All Consumers are NOT created equal
    From the head of the “differential marketing” practice at O& M, which is what these guys call direct marketing. Interesting perspective on the intersection between direct marketing and consumer packaged goods.

    Ed Nash – The Direct Marketing Handbook
    The big red book. If it’s not in here, it may not exist. If you can only buy one DM book, this is probably it. Nash has also edited a similar encyclopedia on best practices in database marketing called Database Marketing.

    David Ogilvy’s – On Advertising: Confessions of an Advertising Man
    David didn’t know it but he was really a DM guy.

    Stewart Pearson – Building Brands Directly
    Written by a Brit and “spot on” when it comes to how branding and DM can be used in a complementary fashion. Exclusive focus on B-t-B DM, which is rare.

    Don Peppers and Martha Rogers, Ph.D. – The One to One Future
    The book that served as a wake up call to the entire marketing community to take DM seriously. There is a sequel “Enterprise” version that speaks to impact of the Internet on one-to-one marketing.

    Frederick Reichheld -The Loyalty Effect
    Written by a consultant from Bain known affectionately as “Mr. Retention.” Be afraid, be very afraid. Major management consulting firms are discovering DM in a big way. Read Chapters 1 – 3 and avoid the rest, it’s largely redundant.

    Patricia Seybold – Customers.com
    A direct marketing book dressed up in new economy guise.

    David Siegel – Creating Killer Websites
    Won’t tell you much about DM goodness but will give you the basic design principles so you can feel savvy about this new, largely direct response medium.

    David Shepard – The New Direct Marketing
    The definitive guide for quant jocks. Practical how to guide by a recognized expert. David also offers a course that is well worth taking if you are are a nerd in waiting.

    Joan Throckmorton – Winning Direct Response Advertising: From Print Through Interactive Media
    The rules as they used to apply to direct marketing. Know them so you can break them.

  • December8th

    Website Phases

    Posted in: articles, web strategy

    Where O Where is Your Web Strategy?

    Rome wasn’t built in a day and neither was a winning website
    Rumors of the demise of the web are greatly exaggerated. What is true is that many of the companies who are on the web today are finding that their early efforts were misguided. The same companies which rushed pell mell to get big at any cost the web are now stepping back and asking themselves some hard questions about how their going to get profitable.

    Now our point of view on this is that the only legitimate reasons to be on the web is for direct marketing purposes. That said we think the average website will go through 4 distinct and progressive phases: View, Talk, Do, Think.

    View
    View sites work under the same premise as commercial television. In exchange for a great viewing experience, you’ll be subjected to advertising, which the website’s sponsor sells to underwrite the cost of developing the content available on the site. Our study showed that 37% fall into the View category, although sadly, few of the viewing experiences were anything to stand up and shout about. This is too bad and limits their audience considerably. Sites that provide dynamite content are finding they can succeed on advertising revenue alone. This includes C-NET and Hot Wired, among others.

    Talk
    Relatively few companies are using their web presence to encourage customers and prospects to talk with them. Only one half of the sites we studied allowed customers to provide feedback via e-mail. And those that do don’t get back to you nearly fast enough. Customers on the web are there because of their impatience with other media. They view a 9-minute call to an 800# as an ordeal. Consequently, it behooves you to get back to them sooner versus later. Slow or no response represent a missed opportunity for you to strengthen the relationship between yourselves and your customers, to build loyalty, and ultimately lifetime value.

    Do
    Most active websites are designed to make it easier for the customer to do business with you. Part of making it easier is providing customers with a list of your products, pricing, and an opportunity to order the product right then and there, if not using the web itself than using a phone or FAX. Customers want to use the web to gain access to information that will help them make more informed product choices. A list of your product does nothing to help bring them closer to the buy decision.

    Think
    Can a website think for you? Well, no. But the technology is already here to provide customers with a web experience that is tailored to their particular needs, wants, and points of interest. Here’s an example which will either chill your soul or excite your spirit. Large companies have a lot of trouble keeping track of their computer assets. Imagine you compete in the cutthroat hard disk market, where price is everything. The technology exists to poll all the computers in your customers’ companies and pull off a profile of the hardware and software used. The profile can be housed on your site and resold back to the customer with value-added analysis for a fee. Privacy is an obvious concern here.

    First published in Marketing Computers magazine in April 1996 and updated July 2001; reprinted here with permission.

  • December8th

    Move Over Mensa

    Posted in: articles, web strategy

    A Website IQ Test: Just exactly how intelligent is that website of yours?

    Probably the single question we get asked most often is “Can you take a look at my website and tell me what I’m doing wrong from a direct marketing perspective”? In response, we’ve developed a simple and easy test you can take in the privacy of your own office to determine how much direct marketing intelligence is built into your site.

    All that is required to take the test is a sharp pencil and brutal honesty. When you’re finished evaluating your site, add the resulting scores together. The higher the result, the more intelligence is built into your website. If you find that your website is missing a few marbles, don’t panic. You can “reverse engineer” your site to bump up your score on this test and up the resulting “intelligence quotient.”

    INTELLIGENCE TEST FOR WEBSITES
    Give yourself 1 point for each question you answer “yes” to:

    MAKE YOUR SITE EASY TO FIND
    URL (5 points):

    Your URL is like an 800#. Consider it with care and change it only when you absolutely must.

    • Is your URL one that is readily associated with your product or company?
    • Is your URL easy to remember?
    • Is your URL easy to spell and memorize?
    • Is your URL fewer than 10 characters in length?
    • Is your URL in a standard format? (www.___________.com)

    Meta tag (6 points):

    The meta tag is hidden text inserted as part of the HTML code that can be read by search engines, spiders, and crawlers for indexing purposes.

    • Does your site include a meta tag?
    • Does the meta tag include all the keywords and phrases your prospect associates with your product or company?
    • Are popular misspellings of keywords also included in your meta tag?
    • Did you review your meta tag before your site went live?
    • Do you refresh your meta tag at least once a quarter to stay abreast of changes in site content? Have you searched for your site with success?

    FIRST IMPRESSIONS COUNT
    Background color/graphics (4 points):

    The WWW is primarily a text-based medium, so it is important that you design your site for readability. The human eye is most comfortable when reading dark text off of a light background. To maximize the contrast between the background and the text, you’ll want to avoid any graphics that mimic “watermarks.”

    • Did you choose a background color that is easy on the eye (light background and dark text)?
    • Does the background load within 10 seconds using a 14.4 modem?
    • Are the graphics used simple and non-distracting?
    • Is a single background style used consistently throughout your site, no matter how deep you click?

    Frames (4 points):

    Frames are either good or evil depending on how they are used. A good use of frames is to draw attention to certain content, to provide a table of contents in the margin of every page, or to provide feedback on where you are within the site. Used poorly, frames cut the page up into many small areas, which is confusing to the reader and doesn’t give the marketer much real estate to work with.

    • Are frames used sparingly to split pages into separate windows? (three at most)
    • Does the site still look and work great even when viewed with the frames turned off?
    • Is only one window scrollable at any given time? (When more than one window is scrollable, it can get very confusing and frustrates visitors at your site.)
    • Does the site use frames for one (or more) of the good reasons mentioned above? (Frames are hot right now, which means many programmers include them to show off their prowess. Since frames by their nature are somewhat puzzling, gratuitous frames have no place on your site. )

    Graphics (6 points):

    Like frames, graphics are best used in small doses, as “eye candy to add visual interest and excitement and keep the reader engaged and involved. Keep in mind that not everyone has access to an ISDN or T-1 line or to a Java-enabled browser.

    • Are your graphics interlaced so that your prospect can start reading before all of your graphics download completely?
    • Are 75% or more of navigational graphics reused (cached) within your site?
    • Are your graphics smaller than 30K? (Download time equals approximately 30 seconds on a 14.4 modem for each 30K of graphics.)
    • Is navigation still possible with the graphics turned off?
    • Are animations implemented using GIF 89s versus Java applets?
    • Does each page have a central point of focus? (Is there a main graphic that draws the viewer’s attention?)

    ENCOURAGE INTERACTION
    Home page (6 points):

    Your home page is the place to start directing people to the content most of interest to them.

    • Is your site supported with a table of contents on the home page?
    • Is any search engine you implement supported with pop-up menus? (Forcing visitors to guess at the right keywords within your site is a drag.)
    • Is it clear where first-time visitors should go versus repeat visitors?
    • Are the areas of your site that are “new” marked as such?
    • Do you tell customers when they should bookmark a particular page on your site?
    • Do you consistently ask for the behavior you need? (”Click here if you are a first-time visitor.”)

    NAVIGATION(10 points):

    A good navigation scheme is essential to ensure that visitors get the content they need at your site and are exposed to the depth and breadth of your message.

    • Have you divided your website into sections?
    • Is there a site map or other visuals that help prospects understand how the various content areas within your site interrelate? Are the sections within your site named in such a way that your visitors can readily tell what content is located where? (Obscure icons that look great but don’t telescope their content should be avoided.)
    • Is the navigation scheme you use introduced on your home page?
    • Do you end each page by giving the visitor navigation options?
    • Is navigation still possible with graphics turned off? (20-30% of people surf with graphics turned off.)
    • Is one navigation scheme used consistently within your site? (Changes in navigation scheme like changes in the UI of software are to be avoided, in that repeat visitors get accustomed to how your site is laid out.)
    • Is copy presented in independent blocks, each of which can stand on its own? (Remember, your prospect can jump in anywhere due to the non-linear way readers navigate through your site.)
    • Are links to other sites located at least 3 clicks down from your home page? (Three clicks per site is average for most visitors surfing the Web. Don’t give visitors an opportunity to link to anyone else’s site before you’ve gotten your fair share.)
    • Are you maximizing your opportunity by interlinking within your site?

    EVALUATING TEST RESULTS

    • If you scored between 30 and 41, congratulations! Your website is as intelligent as Einstein.
    • A score between 20 and 29 indicates your site is bright as a 100-watt light bulb.
    • A score between 10 and 19 tells us your site is just somewhat lackluster with room for improvement.
    • A score below 10 tells us that your site is dumber than wood when it comes to direct marketing; our best advice: burn it and start over.

    First published in Marketing Computers magazine in December 1996 and updated November 2000; reprinted here with permission.

  • December2nd

    RFM Analysis

    Posted in: articles, direct / database marketing

    Zoning and Cloning your Best Customers; Avoiding the Worst

    Before the bubble popped in April of 2000, all that mattered for a new economy company was to get big fast, which in turn meant acquiring customers at any cost.

    Well, Toto, we aren’t in Kansas anymore— which is my way of saying that start ups must now prove they are on a “path to profitability”. This in turn is driving people to go back to the future, to return to fundamental tools of direct marketing, such as RFM. RFM stands for recency, frequency, and monetary value and is one powerful yet relatively simple analytic tool.

    RECENCY (R)
    This is a score designed to represent how recently the customer bought from you. All things being equal, customers who purchased from you most recently are the best source of new business for three reasons:

    Sanitary data
    The more recent the buyer the better the chance that the data corresponding to that buyer is update and in good hygene, which means you’ll get fewer pieces of email or snail mail returned to you. Email addresses in particular age very quickly, which means that if you depend on email to drive repeat business, less recent names on your file are likely to yield far less revenue that more recent names.

    Brand affinity
    Recent buyers were attracted to your brand for a reason, and presumably that reason will extend to another purchase that is close in time to the first.

    Actively seeking solutions in your category
    A recent buyer generally corresponds to a buyer who is active seeking solutions in your category. (If you’ve changed strategic directions and don’t feel recently is relevant to active search behavior in the category, you may wish to go on and look at other factors, such as product affinities score. See David Shepard’s book for a discussion of product affinities and how to calculate them.)

    Scoring
    One way to score a file for recency is like so:

    • Give all customers who have purchased in the last 6 months a score of 3
    • Give customers who have purchased within 6 to 18 months a score of 2
    • Give customers who purchased within 18 to 36 months a score of 1
    • Give all customers on your file for 36 months or more get a score of zero (which is about what they’re probably worth)

    FREQUENCY(F)
    The frequency that a given customer purchases from you in a particular time period. Often times, this means recording how often a particular customer purchases within a 90-day window. Some people also like to score the file based not only on frequency in a given time period but also count the number of categories a particular customer has purchased in during that same window. This gives you a measure of depth of purchasing activity within your overall franchise. The idea being that if you have a large and broad product base, both frequency and depth will be important in separating out the best customers from the rest.

    MONETARY VALUE (M)
    The value of that customer’s purchases, ideally in terms of net margin or profit contribution.

    Continuing with our scoring example
    Now multiply all the scores together (R x F x M). Sort the file with high RFM customers at the top and low RFM customers at the bottom. The top 20 percent of your file represents your zone of opportunity. These are your best customers. The bottom 20 percent of your file represents your zone of avoidance. These are your worst customers.

    This new information lets you do two important things. First, you can prioritize your marketing resources based on objectives for each of these customer segments. Many successful companies spend heaviest against the middle 60 percent, focusing on moving them up to the top 20 percent. Second, you create a profile of your best customers and use that information to clone these types of customers next time you field a marketing program designed to acquire new customers.

    Cloning Customers
    Say you have a file of 1 million records. The top 20 percent of customers based on RFM represents 200,000 records. An old homily from direct marketing is that the best source of new business is customers who look like your old customers. Consequently, what you want to do is take those 400,000 records from the top and bottom of your file and match them to one of several published database sources, to learn more about them. For example, if you sell business-to-business, you may wish to match the file to Dun & Bradstreet’s file, to be able to profile your best customers by company size and SIC (standard industry classification) code. If you sell to the home market, you may want to work with Metromail or Lifestyle Selector, who have rich databases that can give you both demographic and psychographic information on your customers.

    Now that you have identified your best customers and what they look like in terms of the types of businesses they work in or the demographics and psychographics that best describe them, you start to target your marketing mix toward acquiring more customers who fit the profile of what your best customers look like.

    Avoidance as a strategy
    What about your worst customers, those customers at the bottom of your file with the lowest RFM scores? One of the realities of life after the bubble popped is that companies can no longer afford to waste dollars chasing after unprofitable customers. Which means you can use the profiles you’ve developed that describe the bottom 20% of the file – to ensure you don’t go after these types of customers in your next marketing campaign.

    First published in Marketing Computers magazine in September 1995 and updated July 2001; reprinted here with permission.

  • December1st

    Retention 101

    Posted in: articles, direct / database marketing

    Towards Relationship Marketing

    Three fundamental building blocks of any relationship marketing program: Recognition, Reward, Shared Purpose

    The computer biz is aging fast. If you want proof, you need only attend PC Expo and go eyeball to eyeball with those waiting in line for a taxi. Today you’ll find that the average attendee sports a few wrinkles and gray hair in abundance. It’s not only “our crowd” that is showing signs of wear and tear. The people we sell to are also aging rapidly. In the home market, 40% of households already own one or more PCs. In the business market, the majority of new PCs are purchased as replacements for an existing desktop machine. These trends mean that as an industry we must wean ourselves away from new customer acquisition as the single marketing strategy that will determine our success or failure to one where retention and cross-selling are equally if not more important.

    Weaning is hard work. Ask any mom and she’ll tell you that one of the biggest problems here is listening to the well-meaning but misinformed advice of so-called experts. For example, Steve Ballmer, Executive Vice President of Microsoft (the company we all love to hate), is on record as saying that relationship marketing doesn’t apply to his franchise in that Microsoft sells the majority of its product through the channel. Not true, Steve! This is an old wives’ tale of the first order.

    In fact, relationship marketing is a broad-based strategy that applies to any company that depends on sales to existing customers for its financial health and well-being. The problem is that few people really understand what relationship marketing is, never mind how to put together a program that makes sense for their customer base.

    Ask the average marketing person to define RM and they’re likely to point to a customer newsletter they received or one of the frequent flyer programs they belong to, or hand you a thank-you card they recently received from a retailer. While these tactics could all be part of a relationship marketing program, taken by themselves they are just that — tactics.

    Here’s the definition we use with our clients. See if it works for you:

    “Relationship marketing is an ongoing program designed to treat different customers differently based on their underlying affinity to the brand.”


    Relationship marketing is where advertising and direct marketing intersect.

    Advertising professionals have long known how to wrap the brand in emotion. Like advertising, relationship marketing starts with the premise that people buy the brands they do for both rational and emotional reasons. Where advertising seeks to create a preference for the brand, RM works to strengthen the emotional attachment to your company. The goal is to build an attachment that will endure the inevitable ups and downs inherent in marketing technology products. (One day your product is on top of the world, well differentiated, the darling of every review and roundup. The next day, you find that your point of difference has evaporated into thin air due to the introduction of an even whizzier product from the competition.)

    So what’s a smart company like yours to do? Build strong relationships with your customers that keep them true to your brand. The kind of relationships we’re talking about aren’t necessarily of the touchy-feely kind. Technology buyers don’t want you to send them flowers, a birthday greeting, or a thank-you note. No, what the technology buyer wants is a relationship built on recognition, reward, and shared purpose:

    • Recognition
      Recognizing your best customers as such.
    • Reward
      Rewarding your best customers with extras that add value to their product experience.
    • Shared purpose.
      Encouraging your customers to feel a part of something bigger than they are. This was the original basis for user groups—to help customers bond with other like-minded customers.


    The best relationship marketing programs use recognition in combination with reward and shared purpose. Volume discounts and points programs are nice, but they do little to shape and change how the customer feels about your product, service, and company. Savvy customers can recognize a bribe when they see it. If you have to bribe someone into buying your product, it probably means you don’t have much of a relationship with them to begin with.

    We’re all familiar with the frequent flyer programs that award points in exchange for purchase. What may not be obvious is how these programs work. The airlines have figured out that people will go out of their way just to maintain their best-customer status so as to have the ability to block the seat next to them in coach or upgrade to first class on a whim and very little cold, hard cash.

    Think about your holiday card list. Chances are, only about 10% of that list is made up of people in your inner circle. It’s this top 10% that gets a regular, ongoing stream of communications, which you hand-pick for their relevance to them. Everyone else gets a single mailing once a year with a generic recap of the year’s events.

    At the very minimum, you should be touching your best customers more often than customers of lesser value. Does upping the frequency of communications lead to greater loyalty and ultimately more buying of your products and services over the competition? Yes, as long as the communications you send are well targeted for maximum impact and relevance.

    Consider establishing a separate e-mail address for best customers off your website, one that guarantees select customers an answer within 24 hours. Use snail mail to make sure your best customers know about your latest, greatest product offering before it hits the press. After all, you wouldn’t let your best friend read about your engagement in the newspaper, would you? Yet, it is standard in our industry to preview new products with the press before we get the word out to our best customers.

    All relationship marketing programs use recognition, reward, and shared purpose in some combination to increase customers’ affinity to the brand and therefore their willingness to spend more with you as opposed to your competition. Your customers have a special relationship with you by virtue of the fact that they are your customers. What relationship marketing is all about is leveraging your initial relationship into something more meaningful, more long-lasting, and ultimately more financially rewarding.

    First published in Marketing Computers magazine October 1997 and reprinted here with permission.

  • June9th

    Retailing MisExpectations

    Posted in: articles, retailing

    Most mid-market retailers have as much chance of becoming “like Target” as Anna Nicole Smith has of becoming “like Laura Flynn Boyle.”

    Ask any retailer what they want to be when they grow up, and they’ll tell you that their strategy is to become like Best Buy, Home Depot, Target, or Wal*Mart. Nice chains to emulate. Problem is that most mid-market retailers have as much chance of becoming “like Target” as Anna Nicole Smith has of becoming “like Laura Flynn Boyle.” Which is to say, no chance at all.

    Sure, these 4 retailers have enviable positions in the market. Together, the Big 4 accounts for 24% of the revenue and 30% of the profits seen in their peer group, which we define as the top 50 retail chains in the US. Between 2001 and 2000, the Big 4 grew revenues by 14%. Not too shabby when you consider that the retail market as a whole grew by only 3.3% during this period. What is really interesting, however, is to look at the Big 4 in comparison to what we’ll call the “Other 46”. The Other 46 retailers we looked at are also big, but not always profitable.

    What these numbers tell us that the Big 4 are adept at controlling their growth. Not so the Other 46 — who grew revenue at a torrid pace (up 156%) while seeing margins plummet (down 69%).

    To effectively compete against these Goliaths, retailers must change both their mindset and business plans in at least 4 ways:

    1. Avoid bulking up on revenues — simply to boost same-store sales
    The first change — and it is a big one — is to avoid focusing on same-store sales as the one barometer that matters. Each month, as regularly as one calendar page flips to the next, retailers announce their financial results in terms of same-store sales. The problem is that it is relatively easy to manipulate same store comps simply by fielding a few, well-timed sales promotions. The result of this strategy is to build an income statement that is top heavy when it comes to revenue but light below the line where profits get reported.

    2. Be selective — recognizing that not every revenue dollar and not every customer is worth having
    Kmart provides a negative example here with its focus on Sunday supplements and “blue-light” specials to drive store traffic. These tactics worked to drive in-store traffic up, revenue up, and profitability down to the point of bankruptcy. A more positive example can be found in Hot Topic, a mall-based retailer that is growing at a rapid clip (35%) and profitable to boot. Its secret? It sells music-related goods (t-shirts and accessories) designed to appeal to fickle teenagers. The more fickle the better. Because fickle teenagers spend more (a lot more) on music-related merchandise, particularly as it relates to esoteric bands that are here today and out of favor tomorrow.

    3. Be relentless about driving new customer acquisition costs down
    Five years ago, virtually all retailers had the same costs when it came to new customer acquisition. Today, new customer acquisition costs can vary by a factor of 10x from one retailer to the next. New customer acquisition costs are highest for retailers who rely on a single channel, lowest for those who use multiple channels to reach the customer, including not just retail outlets but also the web (e-commerce) and cataloging (even if you don’t sell direct off the page).

    4. Invent new products and services that address the needs of your best customers

    Mercer Consulting calls this demand innovation, a term that unfortunately IBM Global Services claims as its own. No matter what you call it, the point is to figure out who your best customers are and what need they are satisfying when they buy from you. Looking at the customer’s need set in a more wholistic fashion can allow retailers to effectively compete with the Big 4, by identifying pockets of growth and profitability that bigger players cannot exploit cost effectively.

    Our client the Good Guys, for example, effectively competes against Best Buy – not by trying to be “like Best Buy” but by a concerted effort to be different. Integrating today’s high definition television with yesterday’s PC and audio tuner is a daunting task, one that makes regular networking over Ethernet look like child’s play. While there are numerous third parties you could involve to install and integrate your equipment, the Good Guys has recognized that their customers want them to take ownership of the problem. Today, they offer a wide variety of custom installation offerings that enable a customer to purchase the right system with confidence and see that system get set up and integrated with other equipment already available in the home.

    The bottom line
    Most retailers in a given category have access to virtually the same goods and services. So to compete and win, a retailer must focus on understanding who their best customers are and what needs are not being met elsewhere in the market. Resist any urge to imitate the Big 4. What works for them will not necessarily work for you, and in fact may sink your franchise.

    Related Links

    — Marcia Kadanoff

    Note

    1. You must subscribe to Business Week online to access this article dated June 9, 2003 and entitled “Hotter than a Pair of Vinyl Jeans.”↩

    Originally published on Firewhite Consulting site, 6.03.

  • November8th

    Rules of the road for online advertising

    Posted in: articles, web strategy

    The text book publisher J. Wiley calls this article a “must read”. Unfortunately, you must read it here since this article is no longer available on Clickz.

    Warning: Immediate gratification ahead
    By Marcia Kadanoff

    Drive results with caution
    OK, I’ve been here 4 months now. It’s official. I’m no longer an agency principal, responsible for the direct & interactive marketing needs of big corporate clients. No, I’m back in Corporateland myself, this time as VP of Marketing. Thankfully, the company is a hip, San Francisco start up. To be specific, Flycast, the only company that allows you to buy and sell Web advertising space in real time. I stumbled upon Flycast back in April of 1997. At the time the company shared with me its vision for instant gratification. Place your banner ads on the Web right from your desktop. Watch click-throughs happen in real time. Make changes to your campaign on the fly. Drive the results you need when you need them. Avoid the “wait state” that comes from calling or e-mailing half a dozen reps and waiting for them to get back to you. Immediate gratification allows you to drive the net results you need when you need them. But before you drive, know the rules of the road. Here is what is in my driver’s education manual when it comes to driving results on the web:

    Explore roads not traveled
    There seems to be some sort of herding effect at work on the web, with ad managers all flocking to the same handful of site that “everyone” seems to have on their “must buy” list. Flycast’s customers and their agencies (direct, interactive or general) know that the “must buy” sites often are priced out of reach when it comes to cost-effective new customer acquisition. If the net result you need is new customers at a cost you can live with, you’ll want to search out the smaller, more targeted sites that are priced to move. People who use the web to buy products tend to browse deep within the given category, visiting as many as 10 sites to search out the products and info they need. So, if you want to reach sports fanatics, think about buying space on sites like Fan Center (www.rtsn.com) and 2play sports (www.2play.com). These kinds of sites are hidden gems in our network: they reach the same demographic as ESPN and SportsZone combined but at a greatly reduced price.

    Always test drive your vehicle before a long trip
    The web allows you to buy media in increments as small as $5. So when in doubt, test. Set aside 10% of your budget for testing purposes. Many Flycast buyers are taking a web-first approach to testing. When in doubt, they test concepts first on the web to determine not only which campaign is best for the web, but also which concepts will work best in other advertising mediums.

    Know the rules of the road
    The great thing about testing on the web is that it allows you to test a lot of options really fast, so you can figure out just what banner, offer, or media placement will work best for specific types of customers you are interested in acquiring. If you are unfamiliar with how to set up a test matrix, we can help. We’ve reduced all the statistics you need to know to some simple rules of thumb. Like the fact that each cell in your test matrix needs to deliver 250 actions to achieve statistical significance. Planning on a 2% click through rate followed by a 10% download rate? Then the action rate you can expect is .2% (2% x 10%). You’ll need to field a test with at least 125,000 impressions in each cell (250/.002). Want to test three banners X three sites? Plan on purchasing 1,125,000 impressions to populate your test matrix.

    Resist white-line fever
    The marketing director over at CarSmart (www.carsmart.com) may have gotten a great response by purchasing car-specific editorial on sites like Learn2.com (www.learn2.com). This same tactic may fail miserably for you if you are Good Company (www.goodcompany.com). Why? The need to buy a new car is generally triggered by some event. For example, your car just hit 100,000 miles, your lease is about to expire, or that new job you just landed can’t be reached by public transit. In contrast, wanting to hook up with other like-minded people is a state of mind not triggered by any particular need. To reach people in this state of mind, a match-making service like Good Company knows that its best bet is to place its ads very broadly across a broad range of sites, precision timed to reach specific day parts, say evenings and weekends. Targeting by day-part will outperform any form of editorial content.

    Don’t get overally distracted by the scenary
    It’s natural to want to be the first on your block to use a particular creative or promo technique. Sure, novelty will drive your click through rate through the roof. For example, Java banners can get responses 10X those of a normal banner. But, most of these responses are webheads interested in the next best thing, not qualified leads for your product or service. If that’s your goal, you are better off relying upon tried-and-true advertising vehicles.

    It’s better to be quick than to be dead
    Many of the sites we call “the usual suspects” like to sell their inventory in advance. Buying in the “up front” market is not for the weak of heart. Nothing beats the burning rage that occurs when the site you want informs you that placement in the exact section of interest to you has been sold out since last July? What the usual suspects won’t tell you is that the inventory situation is much different elsewhere on the Web. In general, as much as 70% of Web advertising impressions go unsold in today’s market. So if you are willing tonay, have to buy at the last minute, you can enjoy significant savings. Forget about buying up front. Instead buy in real time. You can get the same high quality impressions you would have bought at a fraction of the cost. Runner’s World (www.runnersworld.com) is a site on the Flycast Network that represents a great buy. Normally available for a CPM of $25 in the up front market, you can start bidding on impressions at a CPM as low as $15 in the real time market.

    Don’t fall asleep at the wheel
    Think you’re satisfied with your current Web advertising plan? Think again. To build a franchise at the speed of the web, you need to get out there and test, test, test ’til your daddy takes the T-bird away.

    Originally published in ClickZ, 11.97

  • September8th

    On How to Work Better

    Posted in: articles

    Admit mistakes
    We are not perfect, no firm is. Best to say, oops we blew it, than to try to brush a mistake under the carpet. Clients are quite aware that there is a trade off between accuracy and time spent. That said, we should strive for 97.5% accuracy. Making a lot of mistakes in a short period of time hurts our credibility. So does arrogance which often manifests itself in statements about how smart we are (not) or how bullet proof our processes are (ditto). If you doubt this, think about Microsoft and its “trustworthy computing” initiative. Widely publicized, this initiative was supposed to reassure the public that it was “on top” of its security problem. Instead, it had the opposite effect, especially after it became known that the slammer worm had infiltrated Microsoft itself. The result? IT is taking a good long look at LINUX as a viable alternative to Microsoft Server.

    Know the problem
    Most of the time, errors creep in at later stages of a project. Instead of doing things at the last minute, pace yourself so that you can get the deliverables you need well done before they’re actually needed. This is the single best way to avoid making mistakes; by being proactive you are giving yourself the time you need to find mistakes and correct them.

    Keep it simple
    Yes our analyzes can get complex. Mistakes are like mosquitoes2; there is a tendency for them to breed if you let the complexity stand.

    The best way to build simplicity into your work product is to breakdown your analysis into bite-size chunks. Explicitly think through how a sanity checker can check the results of each chunk. Use the chunks as building blocks and you’ll know that each piece of your analysis has been sanity checked.

    Distinguish sense from nonsense
    Some findings are anomalies of the data. Others are real. Distinguishing between them takes experience and the willingness to look at different data different ways. Good is having one set of facts or analytics to support your conclusions. Better is having two sets of facts or analytics. Best is having three different facts or analytics that converge. Convergence means you can be sure the inference you are drawing from the data is real and not an artifact.

    Ask for help
    It’s hard to find errors in a document or analysis that represents your personal sweat and tears. Someone who has not worked on the project needs to serve as the sanity checker — to proof the content and fact check documents for obvious errors in thinking, logic, and mathematics.

    Learn to listen
    Every person here at Firewhite has a valuable role to play in getting to a quality work product. Think about Marilisa Walski, one of our associates here at Firewhite and a member of the founding team. Marilisa is often involved in producing the final work product. In that capacity, she’s the “gold standard” of what can go out in terms of look and feel. Listen to her feedback. If she does not feel something is up to our usual quality standard, she CAN and WILL call for a “do over”.

    Likewise, as the CEO I am the “gold standard” in terms of overall quality of the strategic thinking. This means I should see/sign off on every major work product BEFORE it goes out to the client and I reserve the right to ask you for a “do over” if the thinking isn’t up to snuff.

    A “do over” is not something to take lightly; it isn’t a lot-o-fun and will invariably mean that you’re here late into the evening and/or through the night so as to meet the deadline we promised the client.

    Foot all your calculations
    Clients can and will make million-dollar decisions based on the work that we do. This means we must have mechanisms in place to sanity check critical calculations. Most of the time, when errors creep into our work product it happens due to the one of the following:

    a number got transposed
    Microsoft Office scrambled the data on its way from Excel into PowerPoint3

    a consultant didn’t take the time to foot their work with row and column totals
    a sanity checker didn’t check the data on the slide against the original source

    Footnoting your work will help both you and the sanity checker assigned to your team zero in on the problems. The process is simple. Number each calculation and use footnotes to your document to describe exactly how you worked the numbers. The notes can be for internal use only or presented to the client – that’s up to you. Typically, we provide workbooks with most of our analysis, to enable the clients to look at the assumptions we made and the work we did to get to the result of interest. This sounds like a lot of work (and it is) but it will actually save you a lot of time if you have to adjust your numbers later.

    Accept change as inevitable
    Ideally, production isn’t where we should be catching the majority of our mistakes. We’d all like to identify mistakes BEFORE the final production of the presentation or other deliverable. That said, we’re a young firm and a team that is working very hard and wearing many hats. For that reason, it is important that you stay hands on through the final production process including bindery. Avoid the temptation to dump and run — when you think something is finished and hand it off to someone else, in the hopes that everything will be “all right.” Only rarely will that be the case. Which means you should stay and see the project through to the bitter end.

    Learn to ask questions
    Making a mistake won’t kill your career, at least at Firewhite. What will is failing to ask why a particular mistake happened. Codify what you learn in something we call a “mistakes memo”. A mistakes memo is a description of what went wrong, how you figured out it was wrong, and what to do about it for next time. Writing this down and putting it on the Extranet means that our collective learning is available to all. Without this there is a tendency to repeat our mistakes over and over again, as new people join the business and old people leave.

    Remain calm.
    The single best way to recover from a mistake is to handle it with grace, dignity, and aplomb. Slow down. Breath. Acknowledge and recognize the problem. Commit to correcting it with all due speed. If you’re the lead person on the engagement, take ownership of the mistake by using the “I” word as in “I blew it.” (Conversely, when being praised use the “us” word. “Thanks for that high praise. It means a lot to us, particularly to Alex and Chinh who really made this project shine.”)

    Notes
    1. Limited edition lithographs available through Matthew Marks Gallery.
    2. If you missed this lecture in biology, mosquitoes breed in standing water.
    3. A known problem (is it a bug or a feature? Only Bill Gates knows for sure) with Microsoft Office as reported in PC Magazine.

    Originally published on Firewhite Consulting site, 5.03.

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