Fall+2008+Section+07-SS+Week+2

= Class Discussion For Week 2= __**Key Topics Discussed**__:

I. Customer Satisfaction and Customer Retention II. Market Orientation III. Using Net Marketing Contribution as a guide to Marketing Strategy IV. Segmentation, Targeting and Positioning V. The Vanguard Case


 * I. Customer Satisfaction and Customer Retention**

A. The most important metric for assessing customer satisfaction and likely customer retention is "Whether a customer is likely to recommend a firm to a friend or colleague." The net promoter score measures this. However, it may not be being used correctly in practice. Customer satisfaction is influenced by the perceived quality of the product and service attributes, features and benefits, which in turn is influenced by the customer's expectations regarding the product or service. Of course, customer satisfaction is important for profitability, but one thing that struck me was the relationship between customer satisfaction and the flow of information. A satisfied customer is much more likely to listen to the message a company is sending, and more likely to give important feedback to the company. Whereas customer satisfaction may lead to customer loyalty and product repurchase, reliable measures of customer satisfaction can be done using different matrices. Customer satisfaction may also be measured through: One method of survey testing is using the following quantitative research method:
 * Customer satisfaction surveys
 * Concept survey testing
 * Target marketing survey testing



A ccording to Maltz, the Passive group (see picture above) is likely to include everyone who scores from 3-8, the detractor group is more likely to be the 1's and 2's. However, this is not an exact science so where to exactly to draw the line is unclear and has not been validated by rigorous empirical research.

It also needs to be noted that any of these measures need to be compared to other companies within your industry. If you have nothing to compare your numbers too you will learn very little from conducting these surveys.

B. If you can afford the resources the best way to measure likely customer loyalty is through a multi-item index consisting of a perceptual measure, a behavioral measure, and an intentional measure (see below). This is a form of qualitative research that is reached by using smaller sample groups in context to the product line and assess the attitudes using unique conversations with customers.



C. The length of time a customer has been with you is itself an excellent single item measure to project customer loyalty (see below).



All measures of customer satisfaction are helpful, but if you could choose only one metric, it should be the likelihood that a customer would recommend your company's product or service to a friend.


 * II. Market Orientation and the Marketing View of Profitability**

A. A __customer orientation__ requires acquisition, dissemination, and responsiveness to customer information by the entire firm. A __market orientation__ requires the firm to consider information beyond basic information on current wants, needs, and preferences. It considers competitor, regulatory, and technological information that shapes likely future customer preferences. Thus, it allows the firm to anticipate and be proactive by looking not only at current customer behavior, but his or her environment and latent needs due to his or her changing landscape. This will likely increase customer satisfaction and retention.

B. A __customer orientation__ often results in one way communication from marketing to the firm. A __market orientation__ explicitly encourages two way formal and informal communication and requires strong support from the leadership in the firm. A customer orientation may encourage two-way communication, but without the external data, it is like a telephone conversation. Telephones are useful, but tremendous insights into the conversation can sometimes be gained by being able to see what the other person is looking at, where they're at, and what is around them.

C. A market orientation also improves the ability of the firm to segment and target properly because it explicitly includes competitor, regulatory, and technological data in the assessment of segment growth rate and segment competitive intensity. These are crucial factors in projecting key marketing profitability metrics.


 * III. Using Net Marketing Contribution as a guide to Marketing Strategy**

A. The key metric for assessing marketing profitability is Net Marketing Contribution (NMC). It considers all revenues and costs that can be tied to a specific product line or segment but __does not__ include operating costs that cannot be tied to a product or segment (e.g., salaries or top management).

By understanding all the components of net marketing contribution and considering the characteristics of the segment you can guide your marketing actions. For instance if you have a high share (75%) you may want to focus on growing the market because your firm is likely to pick up a large percentage of the new customers. NMC may be examined at the product line level or at the customer segment level.

B. Two metrics that are based on NMC are also useful.

a. ROS tells you how many dollars your firm gains in profit per dollar of revenue obtained. If ROS is high then you want to focus on increasing the demand for your products. If it is low, then you may want to consider exiting that market unless there is a large opportunity and you are a low cost producer.

b. ROI tells you how efficiently you are using your marketing budget. If it is low (especially below 1) you need to reassess how you are spending your marketing dollars.


 * IV. Segmentation, Targeting and Positioning**

A. Segmentation is the process of breaking the entire market into pieces. These pieces are called segments. Segments need to be measurable, substantial, and actionable. When defining your market segments, think of the underlying need your product or service fulfills. This define the market. Then consider the benefit profiles of people who are interested in having the need fulfilled. This helps define the segment in an actionable way.

B. To make them measurable one must segment based on variables that are easy to measure, and which will provide significant differences. These are typically, demographics, industry type, and/or geography. When segmenting you also need to pay attention to the fact that certain smaller segments may be combined and need to decide whether to measure individually or as a grouping.

C. Substantial is a management decision based on the current size of the segment, the growth of the segment in units, and the projected profitability of the sales in the segment (i.e., projected ROS).

D. To make a segment actionable a firm must be able to reach the segment and be able to deliver value to the segment. To understand whether a segment is actionable one typically uses psychographic and/or behavioral measures. These are harder to use but provide more insight on buying intentions and what people value. To be considered a distinct segment, the group must differ from others in measurable ways that make a meaningful difference in the value proposition for that segment.

E. The first target segment chosen should be the most substantial segment that meets the criteria //and in which the firm has greatest competitve advantage to deliver on its value proposition//. The target segment should be chosen based on the ability of the firm to serve the segment first and how substantial it is second. If a segment is not actionable by a firm it is irrelevant how big it is or how fast it is growing. Only once the first segment is being fully served should the firm focus on the next segment in which it has greatest competitive advantage (and which is substantial).

F. The firm's __initial__ position is based on the initial target segment and should be summarized in a position statement which should articulate the market being served (the basic need being fulfilled). The benefits sought by the target segment and the capabilities the firm has to deliver on those benefits better than the competition. If one chooses to add a new product into their current segment, they need to be aware of how that action may affect sales of their current offerings in the Brita case they called it cannibalization.

G. If the firm believes that it has enough resources it can target multiple segments. If it does so, it should expand out the position statement to reflect the benefits sought by all segments targeted and develop specific value propositions for each segment served.

F. The seven steps to guide decisions on which market segments to target:
 * 1) Define the Market
 * 2) Define the Benefits desired in the market.
 * 3) Define segments of interest (measurable, actionable, substantial).
 * 4) Analyze each segment using the Benefit-Segment Matrix. The benefit matrix assigns a level of importance of each benefit to each segment.
 * 5) Analyze the Benefit -Capability matrix. This matrix ranks the organization's ability to deliver the benefits previously identified.
 * 6) Develop position and rank segment.
 * 7) Formulate position statement.

V. The Vanguard Case

A. The Vanguard case was a classic example of a company struggling with how to grow their business. Do they stretch the brand vertically--by providing more products and services to their existing segment? Or do they stretch the brand horizontally by modifying their product mix to serve a different segment of customers? See below:

Clearly, Vanguard has some capabilities that would appeal to the high worth segment. They value reliability and would be interested in wealth preservation. Vanguard's buy and hold approach could perhaps be framed as appropriate for these people in conjunction with the additional staff for "handholding." However, this is risky and would require significant changes in culture, metrics and organizational structure to be implemented well. Vanguard will want to fully vet the needs of the high net-worth segment. The "handholding" may only be required upfront and not a drain on staff resources over the long haul. Even the upfront needs may only include assurance of the planned strategy being implemented. Having a clear understanding of this segment will provide Vanguard with valuable information. Focus groups and surveying current clients that fit this segment may be the first steps to understanding this segment. Vanguards compensation program for staff rewards high return performance and lowering costs it doesn't have a reward system for handholding. I think another look at what decision drivers formed criteria for studying the market segment categories would be helpful. Vanguard Executive staff do not seem to be supportive of the decisions nor are they fully invested in any of the plans for marketing. If they don't have consensus on the plan, or how they will absorb the costs, then resolving those points is more important than picking the plan. Vanguard should expand their reach into the 50K to 1M group but they should stick with their low cost, high return segment orientation...they need to focus on this segment and expand the size of this pie. They don't shows signs of having a plan to be successful with high touch, high labor intensive clients.
 * Vertical Stretch: provide more products that appeal to them and expand the segment through making more of these people aware of the Vanguard products and services || Diversification: Serve new segment with new products and services that don't rely on any current Vanguard capabilities. Not a reasonable option. ||
 * Existing Segment: cost conscious, do it yourselfers served with index funds and no frills || Horizontal stretch: Serve the large opportunity in the high worth segment who look for "handholding." Do this by adding staff that can help these people. ||

The safer approach, depending on the size of the opportunity that still exists for Vanguard is to continue catering to their existing segment and try to make more customers aware through advertising and direct appeals. The risk here is that the advertising dollars may not be as efficient. We don't really have enough information to know how much share they hold in this segment but assuming they do not have enormous market share this strategy appears to make sense. In general, strategies that do not require a change to a new position will be more efficient if the firm has not reached a market-share ceiling. The most conspicuous examples recently being the attempts by LVMH, Coach, and Burberry to go far down-market and position themselves as exclusive AND for the masses, expensive AND cheap. They learned very expensive lessons, and retreated to their original positions in less than five years. Actually, Coach and Burberry were able to go down market to some degree with some success. They created exclusive lines with the original branding to appeal to the very wealthy and slightly lower quality and lower priced lines to appeal to the upper middle class. What has happened is that they have lost the market for the very wealthy but have picked up significant share with a wider market. If you look at the performance of both companies up until very recently this has increased their profitability because they were able to grow. They did trade off some margin % for volume so overall it was a reasonable strategy. I'm not sure if LVMH has been as successful. (As reported by Fortune, the reason for abandoning the new strategies was lower share prices, and significant erosion of the original high-margin brand.) Typically when comapnies do this they create two brands. One for the very wealthy (a select brand) and another one for the upper middle class. (In this case they may have gone too far down-market in that they literally went all the way down to T-shirts and baseball caps as low as $50, which may have created a dissonance with the original brand ,not being adjacent segments and approached with discordant value propositions.) One interesting note. Once a company has created a brand with a mid to lower middle class brand associations it is extremely hard to move up. Levi has tried very hard with modest success. Target has been reasonably successful at capturing some of the upper middle class.