Although some CE retailers, most notably Best Buy, have successfully adopted a more customer-centric marketing approach, most have clung to their product- and campaign-centric ways. But product- and campaign-centric models may be on their last legs based on two key trends discerned by Forrester Research.
The first is increased consumer resistance to intrusive marketing. Indeed, some 68 percent of consumers agree there are too many ads today, according to Forrester, while 63 percent of U.S. households wish they received less direct mail and 66 percent of e-mails received are unwanted.
Second, consumers are actively taking control away from marketers. To wit: 75 percent of consumers have or intend to sign up for do-not-call lists, and 74 percent have or intend to install pop-up and spam blockers, Forrester says.
In response to these trends, some retailers are beginning to pay more attention to the customer experience and, in some cases, have adjusted their marketing practices so that they are delivering fewer, more relevant messages that reflect the multichannel relationship they have with the customer.
Yet many merchants are finding it difficult to make the transition to a more customer-centric approach. There are many possible reasons for this, although primarily it is because they don’t know why they should change to a customer-centric approach.
The answer to the question “Why should we switch to a customer-centric marketing approach?” is an economic one, the answer being, “Because it will increase profits.” This will happen for two main reasons:
- Customer-focused (as opposed to promotional and product-focused) communications will increase customer loyalty and, as a result, customers will buy more from you over a longer period of time.
- Your marketing investment will be better aligned with customer profit potential so your marketing will become more cost-efficient (i.e., you won’t be wasting marketing dollars on low-potential customers).
Research conducted by Bain and Harvard Business School shows that the longer a customer stays with you, the greater the annual profit generated from that customer. These increased profits come from a combination of increased purchases, cost savings, referrals and a price premium.
Related research sheds light on the old 80-20 rule, that 80 percent of your revenue comes from the top 20 percent of your customers. In fact, the top 20 percent of your customers can provide as much as 200 percent of your profit. This means that your best customers actually subsidize the weakest customers — the ones who use up a lot of your marketing budget but don’t spend a lot in return.
This research implies that retailers should base their marketing programs on these three basic tenets:
- Acquire new customers that have the best potential to become long-term customers. Go for quality, not quantity in the customer acquisition process.
- Determine as early in the relationship as possible which new customers have the greatest potential to become high-value, long-term customers — and focus marketing spending on them rather than on low-potential customers.
- Reward existing high-value, loyal customers with special treatment in order to retain a higher percentage of them, since they are the customers keeping you in business!
These points may seem obvious, but the majority of multichannel retailers do not design their marketing programs around them because they use the wrong key measure of success: market share. Indeed, most companies focus too much on market share.
Research on market-share leaders and profit leaders across more than 200 industries shows that market share and profit are not highly correlated. In fact, the economics of customer profitability suggest they are inversely correlated. When your goal is to maximize the number of customers you bring in, you are inevitably going to bring in a large number of customers who will turn out to be unprofitable. And when this happens, any economies of scale you may have realized gets eroded and profit declines.
Focusing on maximizing market share translates into goals to increase sales. This focus on selling more products creates the problem of short-term sales incentives, which is then compounded by a lack of customer-focused positioning. This creates a stream of “I’ll give you a discount to buy now” messages to consumers, and trains them to wait for discounts while potentially alienating loyal customers who wonder why they are not getting treated any better than non-customers.
How do retailers get themselves in this predicament? It really comes down to having the wrong measurements in place. Marketing management today runs by what I call “the law of averages.” The law of averages works like this: We know how much profit we make on average when we sell a particular SKU. We also know on average how many SKUs we sell per year to an average customer. Therefore, our marketing programs should be designed to sell X number of SKUs or bring in Y amount of new customers to achieve Z in profits.
Retailers like this approach because of the simplicity and short-term nature of the measurements. It is very simple to measure whether we have increased product sales or brought in new customers within the past quarter, but it is not so easy to measure whether we have brought in more profitable customers.
By definition, the law of averages approach will generate results that are, well, average. If greater-than-average profitability is your goal, do not manage your marketing programs by the law of averages. And do not have compensation packages based on average measures of success.
The first step toward greater profits is to recognize that company profitability is driven by customer-level profitability. You can either believe the research (there is plenty of it out there) or do your own analysis to determine the customer profit dynamics in your business. Doing the latter will certainly make it easier to persuade others in your organization that you need to make the switch to customer-centric marketing — and it will provide the basis for the development of your new, customer-centric contact strategy.
- Customer-Centric Marketing: From Concept To Reality - January 5, 2006