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.

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

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

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.

At 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.

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

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.