University of Washington MBA Program F06

Managing Customer Relationshipsthrough Direct Marketing

Framework and Introduction

Instructor: Elizabeth Stearns

Fallacies about Marketing

• Marketing is the Marketing Department • Marketing is the 4 (or fewer) P’s• Marketing = Selling• Marketing is intuitive• Marketing and math don’t mix• Marketing is packaged goods

What is Marketing?

• As a management function: it is the process

responsible for identifying, anticipating and

satisfying customer requirements profitably.*

• “Everything starts with the customer.”» - Lou Gerstner, former CEO of IBM

*Chartered Institute of Marketing (UK)

Relationship marketing issues

• 21st Century– Real time customer– Mandatory multi channel-customer choice– Privacy needs/remedies confused,-self regulation

and gov’t involved– Fulfillment & database essential skill sets-often

not resident at many companies– CRM: hot topic! Myth or Reality

Famous Relationships in “History”

• Romeo & Juliet

• Cavaradossi & Tosca

• Elizabeth Taylor & Richard Burton

• Well there are still happy endings…..

The Marketing Toolbox

Product

MarketingMix

Place(Distribution)

Service

Promotion(Communications)

Price

Product Variety Quality Design Features Brand Name Packaging Sizes Services Warranties Returns Price

List Price Discounts Allowances Payment Period Credit Terms

Promotion (Communications)

Sales Promotion Advertising Salesforce Public Relations Direct Marketing

Channels Coverage Assortments Locations Inventory Transport

Product

Place (Distribution) Target

Market

Marketing Mix

Advertising

Personal Selling

Public Relations and Sponsorship Marketing

Direct Marketing Communications

Sales Promotion

Point-of-Purchase Communications

Economic Environment

Competitive Environment

Technological Environment

Social-CulturalDemographic Environment

RegulatoryEnvironment

ProductDecisions

DistributionDecisions

PromotionDecisions

Pricing Decisions

Environmental Influences

Dryden Press

Marketing Plan Review

Analysis of promotional program situation

Analysis of the communication process

Budget Determination

Develop integrated marketing communications program

Advertising Direct Marketing Sales Promotion PR/ Publicity Personal Selling

•Create Awareness

•Develop Attitudes

•Change Attitudes

•Inform

•Persuade

•Generate a Sale

•Generate a Lead

•Qualify a Lead

•Enhance a db

•Relationship

Building

•Create Excitement

•Stimulate

demand/sales(short

term)

•Support sales

force/trade/customer

(selling and buying)

•Fostering

Goodwill between

co. and publics•Brand Awareness•Build Attitudes•Encourage

purchase behavior

•Influence purchase needs•Educate consumers•Provide Product usage/marketing assistance/•After sale service and support

Functions of Direct Marketing

• Make a sale

• Generate a lead

• Qualify a lead

• Relationship building

• Database enhancing

Definition of Direct Marketing

• “Direct marketing is an interactive system

of marketing which uses one or more

advertising media to effect a measurable

response and/or transaction at any location”

Direct Marketing Update 2003

• Total Sales Revenue: US$ 2.2* trillionCatalogue US$ 110.6 billionInternet US$ 41.5* billion

• Jobs: 15.6 million11.6 % US Employment

• DR Advertising : *US$ 204.8 billion*(56% total adv. $)

Mail alone US $48.6* billion

*’03 (otherwise ’01)

Source: WEFA/DMA

Course Concepts

Marketing Mix & Customer Framework

Classic Direct MarketingOffers,Creative, Clubs, Media, Catalogues

21st Century Technology SupportCRM, Database, Segmentation, Profiling

Relationship MarketingPermission Marketing, Real Time DM, Customer InteractionTESTING

“All ideas are good ideas”

“Creating shareholder wealth is not the purpose of business. It is the reward for

creating customer value.”

• Michael Tracy and Fred Wiersema in CFO Magazine

Measuring Organizational Performance

Roger J. Best, Roger J. Best, Managing Markets of Profitable GrowthManaging Markets of Profitable Growth (University (University of Oregon)of Oregon)

CommTech’s Six Year PerformancePerformance ($ million) Base Year 1 2 3 4 5

Sales Revenue $254 $293 $318 $387 $431 $454

- Cost of Goods Sold 135 152 167 201 224 236

Gross Contribution $119 $141 $151 $286 $207 $218

- Manufacturing Overhead 48 58 63 82 90 95

- Marketing, Sales, and Administration 18 23 24 26 27 28

- R&D 22 23 22 25 24 24

Net Profit 16 22 26 37 50 55

Return on Sales % 6.3% 7.5% 8.2% 9.6% 11.6% 12.1%

Assets $141 $162 $167 $194 $205 $206

Assets (% of sales) 56% 55% 53% 50% 48% 45%

ROA 11.3% 13.5% 15.6% 19.1% 24.4% 26.7%

Don’t Be Fooled by FinancialsCommTech’s Six Year Market-Based Performance

Roger J. Best, Roger J. Best, Managing Markets of Profitable GrowthManaging Markets of Profitable Growth (University (University of Oregon)of Oregon)

Performance Base Year 1 2 3 4 5

Market Growth (%) 18.3% 23.4% 17.6% 34.4% 24.0% 17.9%

CommTech Sales Growth (%) 12.8% 17.4% 11.2% 27.1% 16.5% 10.9%

Market Share (%) 20.3% 19.1% 18.4% 17.1% 16.3% 14.9%

Customer Retention (%) 88.2% 87.1% 85.0% 82.2% 80.9% 80.0%

New Customers (%) 11.7% 12.9% 14.9% 24.1% 22.5% 29.2%

Dissatisfied Customers (%) 13.6% 14.3% 16.1% 17.3% 18.9% 19.6%

Relative Product Quality 19% 20% 17% 23% 9% 7%

Relative Service Strength 0% 0% -20% -3% -5% -8%

Relative New Product Sales 8% 8% 7% 5% 1% -4%

Performance Indicators

Pre-Sale

Sale

Post-Sale

Performance Indicators

Financial Oriented Volume Oriented

Awareness Attitude

Purchase Intention

Dollars(Nominal, Real)

Units

Growth

Market Share

Trial,Adoption,

Repeat

Contribution Bottom Line

Profit

CashGenerated

GrossRevenue

Return onInvestment

Customer Satisfaction

Consideration

Pre-Sale

Sale

Post-Sale

Overall Business Objectives

• Profit

• Share

• Income

• Growth

• ROI

It is mandatory to articulate your objectives before developing any plan. This may be

by Brand, Division, and Customer Segment. It gives permission to pursue or to

decline to pursue certain segments, and guides differential

spending between segments.

Overall Customer Objectives

• Retention

• Acquisition

• Increase rate of purchase/trial new

products/services

• Referrals

• Other?

pets.com

• Online retailer of pet products, information and resources– Food, Toys, Expert Advice

• Challenges– Market dominated by Petsmart & Petco who

were about to launch online– Three month window– Cluttered media landscape

pets.com• Assignment

– Build brand from scratch

• Consumer insight– Treat pets like children– Celebrate enthusiasm and personality quarks

• Brand Positioning– “Passionate Advocates for the Modern Pet”

Campaign Results

• Initial Sales Figures multiplied 35x

• Orders grew by 2527%

• Conversion rate up – 97% first month – 375% second month

• The Puppet was 5% of total sales for site

• Campaign won Gold Effie

so…have you always wanted to be in

Sports Management?

Importance of Understanding the Big Picture before we try to extract value from

specific customers.Application of Break Even Analysis to

Advertising Expenditure

You are the Chicago White Sox Marketing Director.

An advertising campaign costing $500,000 has been proposed for the team.White Sox tickets have a per seat season ticket unit contribution of $1,600.

CLASSIC QUESTION: How many additional seats will need to be sold as a result of the campaign in order to justify its costs?

Importance of Understanding the Big Picture before we try to extract value from

specific customers.Application of Break Even Analysis to

Advertising Expenditure

You may have had a winning season(does the World Series Qualify?Thanks Freddie Garcie!!!!!) and demand is up. So you are reviewing a best case unit contribution of $2,100.

What are the implications of that?

$500,000 / $1,600 per seat = 313 seats$500,000 / $2,100 per seat = 238 seats

What if the proposed campaign cost $2,000,000? How many seatswould we have to sell to break even at $1,600/seat and $2,100/seat?

The 21st Century Relationship Manager’s Question

then is:

WHO is going to sit in those seats? What do they look like?

How will they hear about the seats?

Where will they buy?

How much other stuff will they buy?

Whom will they bring with them?

How much will those friends buy?

How can we get both to come back again? (will

they be satisfied)

And hopefully, how will we track all that behavior?

Relationship marketing issues

• 21st Century– Real time customer– Mandatory multi channel-customer

choice– Privacy needs/remedies confused,-self

regulation and gov’t involved– Fulfillment & database essential skill

sets-often not resident at many companies

– CRM: hot topic! Myth or Reality

“Zero Defections: Quality comes to Services”

Reichheld and Sasser

$$ $ $$$ $$ $

Some Customers are Worth More!

Economic Value to Keeping Customers

2% Retention equals ~ 10% reduction in costs

“Zero Defections”

Profit improvement from 5% increase in retention

SoftwareOffice Building Mgt.

Industrial LaundryIndustrial Distrib.

Insurance BrokerageCredit Insurance

Credit CardBusiness Banking

Auto Service

Source: Bain & Company

Percent Increase in Annual Profits

0 20 40 60 80 100 120 140

Why Customers Are More Valuable Over Time

Com

pan

y P

rofi

t

Year

Base Profit

Profit from increased purchases & higher balances

Profit from reduced operating costs

Profit from referrals

Profit from price premium

CustomeracquisitioncostSource: Reichheld & Sasser,

Jr.

0 1 2 3 4 5 6 7

Do you personally know your top 100 customers?

What is your 80 : 20 Rule?

Customer Value

Two Key Questions:

Who is the Customer?

What does the Customer Value?

Understanding today’s customer

The Customer: DefinitionNot just the end user or

purchaser!!

Manufactureror

Distributor

Dealeror

Retailer

End User/Purchaser Customer

Firm

Influencers/Gatekeepers/Spoilers

Customer: Any person or organization in the chain of distribution and decision whose actions can affect the purchase of your products and services

Marketers Need to know:

• “How buyers respond to the various marketing stimuli that the organization might use?”

They need to know:

WHO buys?

WHERE do they buy?

HOW do they buy?

WHY do they buy?

WHAT do they buy?

WHEN do they buy?

Bases for Describing Groups

• Demographics/”Firmographics”

– Consumer: language, age, wealth, income, sex, race,

geographic location

– Organization: industry, size, ownership, profitability,

legal entity, growth, geographic location

• Behavior Patterns

– Usage, growth in usage, decision-making unit,

decision-making practices

• Psychographic Characteristics

– Lifestyle, lifecycle, lifestage

• Technographics

– Understanding, usage, integration into home/work

Bases for Describing Groups

Average Life Expectancy

1776

1876

1996

2001

2050

Changing Demographics ????

Life Stages Tied to Age

0 1000 - 18 19 - 60 61 - 75

Easy for Marketers: Very Linear

Work/Family LeisureEducation

Life Stages Not Tied to Age

0 100

Now Cyclic: Not so easy for Marketers

0 - 16

Education Work/Family Leisure

Customer Life Cycle

• The ability of the firm to manage the Customer Life Cycle is critical because the needs of the customer change at various stages

Customers go through Lifecycles, Customers go through Lifecycles, too!too!

Time

Customer

Value

Prospect/lead First time

buyer

First-timerepeatbuyer

Regularcustomer Declining

Stage

Hong Kong Vending Machine!

And your customer’s customers change how they buy.We all know that the function of collecting money is changing

from the vending machine to the phone company charging the customer via the mobile phone bill.

This brings new Risks/Opportunities for software

•Customer Service

•New Partners

•Brand Image

•Credit Risk-especially when using thisas payment device to more

expensive items

Use of Psychographics in Marketing Strategy

• Understanding life-style and personality

characteristics are useful to:

1. Identify market segments.

2. Position products and/or services through

advertising.

3. Develop “media” guidelines.

4. Define new product targets.

5. Develop products.

Psychographic Targeting

• Psychographics represents a combination of consumers’ aactivities, iinterests and oopinions (AIO items)

• Useful but more difficult to identify and measure compared to demographic variables

VALS2

• Eight categories are identified based on a combination of demographic and lifestyle factors such as age, income, education, level of self-confidence, health, and interest in consumer issues

• Two-dimensional format

VALS 2 Groupings

2003 PRIZM NE (Next Evolution)

What does the customer value?

What Does the Customer Value?

Customer Values

Emotional

EconomicFunctional

Customer Values

Psychological

Emotional

EconomicFunctionalRational

statusself-assurancepeace of mindperceived risk of changing suppliers

pricediscountscredit terms

reliabilityavailabilityease of useefficacyefficiencysafety

Psychographic Targeting

• Psychographics represents a combination of consumers’ aactivities, iinterests and oopinions (AIO items)

• Useful but more difficult to identify and measure compared to demographic variables

shepherd:30

VALS 2 Groupings

A Positive Appeal to Mature(!) Consumers

monster.com :30

Never kissed a Frog :30

S

The Marketing Decision-Making ProcessMarketing

analysisAttractiveness vs.

resources

Marketing Strategy

Value proposition

Marketing Implementation

(Mix)Create and capture

value

ProductProduct PricePrice

PlacePlacePromotionPromotion

TargetMarket

Product Product positioningpositioningProduct Product positioningpositioning

5 C’s

Context/Community:

Customers:

Company:

Competition:

Collaborators:

STP

Customer Customer Segmentation,Targeting Segmentation,Targeting

The Marketing Decision-Making Process

STP1. Identify Segmentation/segmentation

bases and segment the market.

2. Develop profiles of the resulting Segments.

1. Evaluate the attractiveness of each Segment.

2. Select target Segment(s).

1. Identify possible positioning concepts for each Segment.

2. Select, develop, and communicate the chosen positioning.

SegmentatiSegmentationon

PositioningPositioning

TargetingTargeting

Segmentation

• Dividing up the market into groups of customers who share similar needs (and who respond similarly to marketing mix variables)

– Account for customers’ diverse needs and differing behaviors in its strategy

– Design the marketing mix to more closely match customer needs

– Improve efficiency and effectiveness of resource allocation

Purpose of Forming Market Segments

• To form the closest possible match

between customers’ needs or wants and

priorities, and the firm’s offer, such that

customer satisfaction is maximized and

competitive advantage is created.

• As a result, unit volume and/or price

increases, and profits are enhanced

Remember, not all customers are worth the same!

$$ $ $$$ $$ $

Segments Defined by Customer/Product Profitability

P1

Highlyprofitableproduct

P2Profitableproduct

P3Losingproduct

P4Mixed-bag

product

Products

++ ++

++Highprofitcustomer

++

-B/E: Avgcustomer

+

--

Losingcustomer

S1 S2 S3

Customers

Maybe BMW

Segments Defined by Churn / Share of Wallet Share of Closet/Share of

Garage

• “Never Churns”

• 1 to 2 Brands

• 2+ Brands

BMW Loyal

50% BMW

Segments Defined by Channel?Customers Shop and Purchase

in Different Channels

• D-Download, S-Store/Brick & Mortar, C-Catalogues/Direct Mail, etc.

D

CD / CC / D

SS / C / D

D / C / S

C / S / D

“The Customer has Escaped”

WHY?!

Which interaction best describes

a relationship marketing approach?

“I have an offer …”

offer

Outbound: Days

“Let me find the best offer for

this person.”

offeroffer

offeroffer

“I have a person …”

Inbound: Milliseconds

$ $$ $$$ $ $$

$$$

Understanding Customer Needs is at the base of Designing Offers for

Customers

OfferCostValue

PriceTimeEffortRiskInnovat

ion

PartnerRelationships

BrandEquity

TrainingServices Support

Products/Platforms

©E. Stearns 2005

Understand Your Customers

• Their Demand for Your Product or Service

• Their Changes over Time

• Their “Growth” Needs

• Their Technology/Personal Service Conundrum

• Their Available Choices for Solutions

Their Value to You!

Satisfaction =

Performance minus Expectations

Strategic Focus and Customer Targeting

ROI

Increase Sales Volume (units) from customers

Improve Efficiency

Improve Price

Reduce Investment

Change Sales Mix

Reduce Costs

Direct Marketing

• An organized and planned system of contacts

• Using a variety of media

• Supported by general advertising in print and broadcast

media, if appropriate

• Aimed at selected prospects and customers

INTRODUCTION

Direct Marketing

• Seeking to produce a lead or an order

• Measurable in its costs and results

• Improvable through testing and analysis

• Expandable with confidence

Functions of Direct Marketing

• Make a sale

• Generate a lead

• Qualify a lead

• Relationship building

• Database enhancing

Image Response

• Connectivity between all communications

• Maximizing budgets

• Not distruptive of other efforts

The Top 21 BrandsRank Company

NameBrand Value ($ Millions)

2005 2004 2005 2004

1 1 Coca-Cola 67,525 67,3942 2 Microsoft 59,941 61,3723 3 IBM 53,376 53,7914 4 GE 46,996 44,111 5 5 Intel 35,588 33,4996 8 Nokia 26,452 24,0417 6 Disney 26,441 27,1138 7 McDonald’s 26,014 25,0019 9 Toyota 24,837 24,837

10 10 Marlboro 24,837 22,12811 11 Mercedes-Benz 20,006 21,33112 13 Citi 19,967 19,97113 12 Hewlett-Packard 18,866 20,97814 14 American Express 18,559 17,68315 15 Gillette 17,534 16,72316 17 BMW 17,126 15,88617 16 Cisco 16,592 15,94818 44 Louis Vuitton 16,077 NA19 18 Honda 15,788 14,87420 21 Samsung 14,956 12,55321 25 Dell 13,231 11,500

Available Media

• Brochures or catalogs sent by mail

• Radio and TV ads

• Television Shopping Networks/Programs

• Telephone

• Newspaper and magazine ads, preprints, bind-ins, etc.

• Statement inserts

• Cooperative mailings

Available Media

• Package and bag stuffers

• Take-ones

• Cereal boxes, egg and milk cartons, matchbooks, etc.

• Interactive cable

• Worldwide Web/Internet

There are over 110 combinations of communications!

Person

Mail

Phone

Fax

email

Web

TV

Radio

Outdoors

POS

Person Mail Phone Fax email Web

How

Cos

. Com

mu

nic

ate

How Customers Respond

Dr. Gary Bridge, IBM

Wireless

Development of DM in U.S.

• Substantial mail order activity in existence for more than

100 years

• Originally built to serve needs of a working class, rural

nation

• In 20th century specialty businesses evolved

– Often featured low price but hard-to-find items

– Fostered a “discount” image

– Market mostly middle/lower class

– Pattern of thousands of small, independent mail order

businesses established

Popeels on Parade

Development of DM in U.S. (cont.)

• Starting in 60’s patterns changed markedly

– Rapid growth; faster than retail

– Achieved “in” status, better public image

– Quality, variety, convenience became main

reasons for purchase, not prices

– Market became urban/suburban, upper middle

class

Development of DM in U.S. (cont.)

– Rapid growth in number of, and access to, rented

lists of mail order buyers

– Large companies saw growth opportunities-

bought/started direct marketing activities

– Still thousands of companies, few with sales of

more than $100 million

Development of DM in U.S. (cont.)

• Late 80’s/90’s saw:

– Slower growth of consumer businesses

– Time Poor Consumers: “Cognitive Overload”

– Growth of multi-channel-particularly addition of

retail stores by mail order businesses-much faster

than serious growth of direct marketing by retail

Development of DM in U.S. (cont.)

– Internet growth for ecommerce

– Continued use of database by financial,

transportation, manufacturing sectors

– Relational vs. Transactional databases

– Technology as a facilitator and inhibitor (Privacy)

Development of DM in US (cont.)

• 21st Century– Real time customer– Mandatory multi channel-customer choice– Privacy needs/remedies confused,-self regulation

and gov’t involved– Fulfillment & database essential skill sets-often

not resident at ecommerce companies– CRM: hot topic! Myth or Reality– Telemarketing-Profit and Closed “Doors”

Development of DM in U.S. (cont.)

• Business to business sector accounts for about 50%

of total sales. Efficient as:

– Prospecting tool

– Way to sell low volume customers or low volume

product

– Information/intelligence gatherer

– Sales!

Trends Favorable to GrowthDemographic and Lifestyles

• For households in which both adults work and for business customers, convenience and time savings assume great importance.– Many U.S. consumers have more discretionary money

than time.– Businesses are seeking higher productivity.

• Higher educational levels – particularly with the “baby boom” generation - produce more shoppers with self-confidence to permit purchase decisions based on written materials.

Trends Favorable to GrowthDemographic and Lifestyles (cont.)

• Retail shopping less often provides an enriching or self-

gratifying experience. 21st Century consumer shops and

purchases across channels.

• Individual consumer’s values/needs can be recognized in

personalized or interactive direct marketing

communications and replace the physical one to one contact

that is sometimes too expensive for the firm.

Trends Favorable to GrowthMarketing Needs of Major Corporations

• Rising costs of marketing and declining price or

many products, requires greater efficiency.

• Narrow/specialized target markets must be dealt

with individually.

Trends Favorable to GrowthMarketing Needs of Major Corporations

• Multiple distribution channels are desirable. Technology

has facilitated improvements and growth in this area.

• Direct marketing can be both complementary and

incremental.

• Direct marketing databases and statistical analysis

disciplines assist measurement between and among

channels.

Trends Favorable to GrowthDirect Marketing

• Highly qualified approach builds management’s confidence.

– Controlled launch and growth.

– Measured results.

– Accurate projections.

• Superior financial performance usually is achieved.

– Low capital outlays.

– Quick sales.

– High ROI

Trends Favorable to GrowthDirect Marketing (cont.)

• Testing provides basis for marketing and financial

improvement.

– Refine audience selection, offer, appeal, price,

promotion, etc.

– Experiment in small volume. Expand that which

is profitable.

– Attach confidence level to projection.

Trends Favorable to GrowthDirect Marketing (cont’d.)

• Expense is selling cost with highly measurable results rather than an advertising cost with limited demonstrable impact.

• Synergy with and lower cost of emerging computed and communication technology fosters:

– Marketing databases.

– Personalization.

– Interactive communications.

• Expanding array of better and more targeted media.

Thank you!