MarMit-Based IVIa ii e merit

A SIXT H ED IT I ON MarMit-Based IVIa ii e merit Strategies for Growing Customer Value and Profitability ler J. Best Emeritus Professor of Marketing University of Oregon PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

CONTENTS Preface 16 About the Author 23 Acknowledgments 24 PART I MARKET ORIENTATION AND MARKETING PERFORMANCE 27 CHAPTER 1 CUSTOMER FOCUS, CUSTOMER PERFORMANCE, AND PROFIT IMPACT 29 Customer Satisfaction and Profitability 29 Customer Focus and Profitability 30 How to Underwhelm Customers and Shareholders 30 Customer Focus, Customer Satisfaction, and Profitability Building a Strong Customer Focus 33 Customer Satisfaction A Key Marketing Performance Metric 37 Measuring Customer Satisfaction 37 A Wide-Angle View of Customer Satisfaction 38 De-averaging Customer Satisfaction and Customer Profitability 39 Managing Customer Dissatisfaction 40 Dissatisfied Customer Revenge and the Use of Social Media 42 Profit Impact of Customer Dissatisfaction 42 Profit Impact of Customer Retention 43 Customer Satisfaction and Customer Retention 44 Customer Retention and Customer Life Expectancy 45 Customer Lifetime Value 46 Customer Loyalty 48 Measuring Customer Loyalty 49 Customer Loyalty Classifications Managing Customer Loyalty 56 50 Summary 57 Market-Based Strategic Thinking 58 Marketing Performance Tools and Application Exercises 59 Notes 60 Appendix 1.1 Present Value Table 62 31

CHAPTER 2 MARKETING METRICS AND MARKETING PROFITABILITY 63 Measuring Performance 63 Applying Marketing Metrics 65 A Marketing-Metrics-Based Strategy 66 Marketing Metrics 67 Financial Metrics versus Marketing Metrics 68 Internal versus External Metrics 70 Forward-Looking versus Backward-Looking Metrics 71 External Marketing Metrics 71 Contents Net Marketing Contribution A Marketing Profitability Metric 72 Marketing and Sales Expenses 75 Estimating Marketing and Sales Expenses 76 Marketing Profitability Ratio Metrics 76 Marketing Profitability and Product Line Management 78 Managing Marketing Profitability A Product Focus 79 Managing Marketing Profitability A Customer Focus 83 Profit Impact of Marketing Strategies 83 Market Growth Strategy 86 Market Share Strategy 86 Customer Revenue Strategy 87 Cost Reduction Strategy 88 Advertising Strategy 88 Channel Strategy 89 Benchmarking Marketing Profitability 90 Benchmarking Marketing ROS 91 Benchmarking Marketing ROI 92 Benchmarking Company Marketing Profitability Metrics 93 Managing Marketing Profitability 95 Summary 95 Market-Based Strategic Thinking 96 Marketing Performance Tools and Application Exercises 97 Notes 98 Appendix 2.1 Companies Represented in Figure 2-24 100 PART II MARKET ANALYSIS 103 CHAPTER 3 MARKET POTENTIAL, MARKET DEMAND, AND MARKET SHARE 105 Market Definition What Business Are We in? 105 Broad Market Definition 106 Narrow Market Definition 108

Contents Market Potential 109 How Innovation Changes Market Potential 112 Market Development Index 113 Managing Market Growth 114 Untapped Market Potential 116 Market Potential and Market Growth 118 Accelerating Market Growth 118 Product-Market versus Product Life Cycle 121 Product Life Cycle, Market Demand, and Profits 122 Market Demand and Prices 122 Product Life-Cycle Margins and Marketing Expenses 125 Product Life-Cycle Sales and Gross Profits 125 Market Share Performance Metrics 129 Building a Market Share Performance Tree 129 Market Share Index 129 Market Share Potential Index 130 Share Development Index 131 Growth Opportunity Portfolio 132 Summary 133 Market-Based Strategic Thinking 135 Marketing Performance Tools and Application Exercises 135 Notes 136 CHAPTER 4 THE CUSTOMER EXPERIENCE AND VALUE CREATION 139 The Total Customer Experience 139 The Customer Experience Actual versus Ideal 141 The Customer Experience of Lead Users 143 Reverse Innovation Invent to Order 144 Managing Customer Touch Points 145 Mass Collaboration and Crowdsourcing 146 Mass Collaboration 147 Crowdsourcing 149 Life-Cycle Cost and Customer Value 150 Price Paid 152 Acquisition Costs 152 Usage Costs 153 Financing and Insurance Costs 154 Maintenance Costs 155 Disposal Costs 155 Price-Performance and Value Creation 156 Relative Performance 158 Perceived Customer Value 159

Contents 7 Perceived Performance and Value Creation 160 Perceived Product Performance 161 Perceived Service Quality 162 Perceived Company or Brand Reputation 163 Overall Performance Index 163 Cost of Purchase Index 164 Perceived Customer Value Index 165 Emotional Benefits and Value Creation 167 Emotional Benefits and Psychological Value 167 Brand Personality and Value Creation 167 Identifying Value Drivers 168 Customer Preferences 168 Customer Value 169 Summary 171 Market-Based Strategic Thinking 173 Marketing Performance Tools and Application Exercises 174 <> Notes 175 Appendix 4.1 Trade-Off Analysis Computations 177 CHAPTER 5 MARKET SEGMENTATION AND SEGMENTATION STRATEGIES 179 Millennial 179 Needs-Based Market Segmentation 181 Customer Needs, Price, and Product Benefits 182 Customer Needs 183 Forces That Shape Consumer Market Needs 183 Forces That Shape Business Market Needs 185 Needs-Based Market Segmentation Process 187 The Demographic Trap 187 Needs-Based Market Segments 188 Segment Identification 189 Segment Attractiveness 189 Segment Profitability 192 Segment Positioning 194 Segment Strategy Acid Test 196 Segment Marketing Mix Strategy 196 Segmentation Strategies 197 Mass-Market Strategy 197 Large-Segment Strategy 198 Adjacent-Segment Strategy 199 Multi-Segment Strategies 200 Small-Segment Strategy 201 Niche-Segment Strategies 203 Subsegment Strategies 203 Customer Relationship Marketing 205 Customer Value versus Company Value 206 Database Marketing 207

8 Contents Mass Personalization 207 Mass Customization 208 Customer Relationship Management 209 Summary 211 Market-Based Strategic Thinking 212 Marketing Performance Tools and Application Exercises 213 Notes 214 CHAPTER 6 COMPETITIVE POSITION AND SOURCES OF ADVANTAGE 215 Competitive Advantage 215 Sustainable Advantage 218 Sources of Competitive Advantage 219 Cost Advantage 220 Variable Cost Advantage 220 Marketing Cost Advantage 222 Operating Cost Advantage 224 Differentiation Advantage 224 Product Advantage 224 Service Advantage 224 Reputation Advantage 225 Marketing Advantage 226 Market Share Advantage 226 Product Line Advantage 228 Channel Advantage 229 Knowledge as a Source of Advantage 230 Competitor Intelligence 231 Identifying the Benchmark Competitors 232 Competitor Analysis 234 Obtaining Competitor Intelligence 234 A Sample Competitor Analysis 234 Competitive Benchmarking 239 Industry Analysis 240 Barriers to Entry 240 Barriers to Exit 241 Customer Buying Power 241 Supplier Selling Power 241 Product Substitutes 242 Competitive Rivalry 242 The Prisoner's Dilemma 243 Summary 243 Market-Based Strategic Thinking 244 Marketing Performance Tools and Application Exercises 245 Notes 246 Appendix 6.1 Competitive Position and Customer Value for 10 Competing Mid-Size SUVs 247 Appendix 6.2 Estimating an Experience Curve Coefficient and the Percent Experience Curve 248

Contents PART III MARKETING MIX STRATEGIES 251 CHAPTER 7 PRODUCT POSITIONING, BRANDING, AND PRODUCT LINE STRATEGIES 253 Brand Expansion Strategies 253 Fighter Brands 254 Product Positioning 255 Product Positioning and Market Share 257 Product Positioning Strategies 258 Product Positioning and Differentiation 259 Product Performance and Differentiation 260 Service Quality and Differentiation 263 Brand Differentiation 265 Low Cost of Purchase 265 Branding and Brand Management Strategies 266 Brand Identity 266 Brand Encoding 267 Brand Name Development 271 Creating a New Brand Name 273 Protecting Your Brand Name and Intellectual Property 274 Brand Equity 276 Brand Assets 276 Brand Liabilities 277 Brand Equity 278 Brand and Product Line Strategies 279 Product Line Development 279 Umbrella Brands and Product Line Extensions 281 Product Line Extensions.282 Bundling and Unbundling Strategies 284 Summary 285 Market-Based Strategic Thinking 287 Marketing Performance Tools and Application Exercises 288 Notes 288 CHAPTER 8 VALUE-BASED PRICING AND PRICING STRATEGIES 291 Apple's Pricing Strategies 292 Cost-Based Pricing versus Market-Based Pricing 292 Cost-Based Pricing: Underpricing and Lower Profits 293 Cost-Based Pricing: Overpricing and Lower Profits 294 Value Pricing 296 Understanding Total Cost of Ownership 297 Value-in-Use Pricing 298 Life-Cycle Value Pricing 299 Perceived-Value Pricing 300 Performance-Based Pricing 302

10 Contents Customerization Value Pricing 306 Product Life-Cycle Pricing Strategies 307 Skim Pricing 309 Single-Segment Pricing 309 Penetration Pricing 310 Low-Cost-Leader Pricing 311 Multi-Segment Pricing 311 Plus-One Pricing 312 Reduce-Focus Pricing 313 Harvest Pricing 314 Pricing and Profitability 315 Price Elasticity and Profitability 317 Inelastic Price Management 318 Elastic Price Management 320 Price and Break-Even Analysis 320 Price and Break-Even Volume 321 Price and Break-Even Market Share 321 Product Line Pricing 322 Pricing Substitute Products 323 Pricing Complementary Products 323 Summary 324 Market-Based Strategic Thinking 235 Marketing Performance Tools and Application Exercises 326 Notes 327 CHAPTER 9 MARKETING CHANNELS AND CHANNEL MAPPING 329 Channel Value Proposition 330 Channel Mapping 331 Consumer and Business Channels 335 Marketing Channel Performance 336 Customer Reach and Digital Marketing Channels 337 Operating Efficiency 339 Service Quality 340 Alternative Marketing Channels 341 Direct Channels 341 Indirect Channels 342 Mixed Channels 344 B2C Channels 344 B2B Channels 345 B2B and B2C Marketing Channels 346 Marketing Channels that Improve Customer Value 347 Product Performance 347 Service Quality 348 Company or Brand Reputation 349

Contents 11 Managing Customer Interaction 350 Improving Cost Efficiency 352 Marketing Channels and Competitive Advantage 354 Sales Force Advantage 354 Sales Productivity 354 Distribution Advantage 355 Profit Impact of Alternative Marketing Channels 356 Summary 358 Market-Based Strategic Thinking 358 Marketing Performance Tools and Application Exercises 359 Notes 360 CHAPTER 10 MARKETING COMMUNICATIONS, SOCIAL MEDIA, AND CUSTOMER RESPONSE 361 Marketing Communications and Customer Response 362 Brand-Image Communications 364 Brand-Information Communications 364 Brand-Action Communications 364 Digital Marketing Communications 366 Digital Media Marketing Analytics 368 Social Media Marketing Communications 369 New Communications Paradigm 370 Customer Connectivity and Engagement 370 Social Media: New Communications Platforms and Challenges 371 Social Media Marketing Metrics 376 Marketing Communications 377 Customer Response Index 379 Improving Customer Response 379 Building Customer Awareness and Comprehension 380 Media Selection and Customer Awareness 380 Message Frequency and Customer Awareness 382 Ad Copy and Customer Response 384 Message Reinforcement 384 Pulsing 385 Heavy-Up Message Frequency 385 Stimulating Customer Action 386 Pull versus Push Communications Strategies 386 Pull Communications and Customer Response 387, Advertising Elasticity 387 Advertising Carryover Effects 388 Promotional Price Elasticity 390 Push Communications and Customer Response 391 Trade Promotions and Customer Response 391

12 Contents Summary 392 Market-Based Strategic Thinking 393 Marketing Performance Tools and Application Exercises 394 Notes 395 PART IV B STRATEGIC MARKETING 397 CHAPTER 11 PORTFOLIO ANALYSIS AND STRATEGIC MARKET PLANNING 399 Portfolio Analysis and Strategic Market Planning 400 Portfolio Analysis Models 400 Strategic Market Planning 402 Product Life Cycle/Market Share Portfolio 408 GE/McKinsey Portfolio Analysis 409 Market Attractiveness 410 Competitive Position 412 Portfolio Analysis and Strategic Market Plans 414 Offensive Portfolio Strategy 416 Defensive Portfolio Strategy 418 Portfolio Diversification 419 Two Levels of Diversification 420 Marketing Mix Strategy and Performance Plan 421 Marketing Mix Strategy 421 Performance Plan 422 Summary 425 Market-Based Strategic Thinking 426 Marketing Performance Tools and Application Exercises 428 Notes 428 CHAPTER 12 OFFENSIVE STRATEGIES 429 Apple's Product Portfolio and Offensive Growth 430 Strategic Market Plans 430 Offensive Strategic Market Plans 432 Offensive Core Strategy I: Invest To Grow Sales 434 Offensive Strategy IA: Grow Market Share 435 Offensive Strategy IB: Grow Revenue per Customer 436 Offensive Strategy IC: Enter New Market Segments 437 Offensive Strategy ID: Expand Market Demand 438 Offensive Core Strategy II: Improve Competitive Position 440 Offensive Strategy IIA: Improve Customer Loyalty and Retention 440 Offensive Strategy IIB: Improve Differentiation Advantage 441 Offensive Strategy IIC: Lower Cost/Improve Marketing Productivity 441 Offensive Strategy IID: Build Marketing Advantage 442

Contents 13 Offensive Core Strategy III: Enter New Markets 442 Offensive Strategy IIIA: Enter Related New Markets 442 Offensive Strategy IIIB: Enter Unrelated New Markets 444 Offensive Strategy IIIC: Enter New Emerging Markets 445 Offensive Strategy HID: Develop New Markets 445 When Growth Stalls 446 Rebounding with an Offensive Growth Strategy 448 Choosing Offensive Strategic Market Plans 449 Summary 450 Market-Based Strategic Thinking 451 Marketing Performance Tools and Application Exercises 452 Notes 452 CHAPTER 13 DEFENSIVE STRATEGIES 455 Defensive Strategic Market Plans 457 Defensive Core Strategy I: Protect Position 458 Defensive Strategy IA: Protect Market Share 459 Defensive Strategy IB: Build Customer Retention 464 Defensive Core Strategy II: Optimize Position 466 Defensive Strategy IIA: Maximize Net Marketing Contribution 466 Defensive Strategy IIB: Reduce Market Focus 469 Defensive Core Strategy III: Monetize, Harvest, or Divest 469 Defensive Strategy IIIA: Manage for Cash Flow 470 Defensive Strategy IIIB: Harvest or Divest for Cash Flow 470 Choosing Defensive Strategic Market Plans 475 Summary 476 Market-Based Strategic Thinking 477 Marketing Performance Tools and Application Exercises 478 Notes 478 PART' V" : -*M;A:RKESlfi Slfcll l^^ CHAPTER 14 BUILDING A MARKETING PLAN 483 Creativity versus Structure 484 Benefits of Building a Marketing Plan 485 Identifying Opportunities 485 Leveraging Core Capabilities 485 Adopting a Reduce-Market-Focus Strategy 486 Resource Allocation 486 Building a Performance Roadmap 486 Building a Marketing Plan 487 Part I: Situation Analysis Where Are We Now? 487 Step 1: Assess Current Situation 489 Customer Performance 496 Step 2: Perform SWOT Analysis 497

14 Contents Part II: Marketing Strategy Where Do We Want to Go? 498 Step 3: Develop a Strategic Market Plan 498 Step 4: Develop a Marketing Strategy 500 Part III: Performance Plan What Is the Expected Impact? 506 Step 5: Develop a Revenue Plan and Marketing and Sales Budget 507 Step 6: Marketing Profit Plan 509 Step 7: Performance Review 513 Summary 514 Market-Based Strategic Thinking 515 Marketing Performance Tools and Application Exercises 516 Notes 516 CHAPTER 15 MARKETING METRICS, PERFORMANCE, AND STRATEGY IMPLEMENTATION 517 Marketing Metrics and Performance 518 Barriers to Getting Started in Using Marketing Metrics 519 Usage Barrier I: "They are too complex and too difficult to use." 520 Usage Barrier II: "They do not solve my business's problems." 521 Usage Barrier III: "There are too many; I don't know where to start." 521 Usage Barrier IV: "I do not have the data nor the budget to gather the data." 521 Usage Barrier V: "I do not have the time for this type of work." 522 Getting Started with Marketing Metrics 522 Forward-Looking versus Backward-Looking Metrics 523 Forward-Looking Marketing Performance Metrics 523 Backward-Looking Marketing Performance Metrics 525 Successful Strategy Implementation 525 Managing Successful Strategy Implementation 527 Owning the Marketing Plan. 527 Supporting the Marketing Plan 529 Adapting the Marketing Plan 530 Assessing the Implementation of a Marketing Plan 532 Variance Analysis 533 Summary 537 Market-Based Strategic Thinking 538 Marketing Performance Tools and Application Exercises 539 Notes 539 CHAPTER 16 MARKET-BASED MANAGEMENT AND FINANCIAL PERFORMANCE 541 Operating Income versus Marketing ROI 541 Financial Impact of Marketing Profitability 542 Basic Inputs to Marketing Profits and Profitable Growth 544 Market Demand 544 Market Share 545 Revenue per Customer 546

Contents 15 Percent Margin 546 Marketing and Sales Expenses 546 Customer Performance Metrics and Profitability 546 Customer Satisfaction 547 Customer Retention 548 Marketing Profits and Financial Performance Metrics 550 Return on Sales 550 Return on Assets 551 Return on Equity 552 Return on Capital 553 Shareholder Metrics 554 Market-Based Management 556 Summary 557 Market-Based Strategic Thinking 558 Marketing Performance Tools and Application Exercises 559 Notes 559 Glossary 560 Index 567