February 02, 2006

Problems with Customer Value Formulas

Increasingly, marketers are relying on databases, histories, internal and external data, and information from a variety of sources in an effort to improve their marketing communications effectiveness. On such method being used is that of customer valuation formulas, which work to measure a consumer’s worth to an organization.

While many of these formulas are applicable in a range of circumstances, they are also problematic. This discussion outlines several areas in which Targetbase’s Customer Brand Value formula can be limited in offering a clear view of a consumer’s value.

The Customer Brand Value (CBV) formula by Targetbase seeks to measure the value of customer or customer group to a brand by combining four key factors. These include penetration, category-buying rate, share-of-purchases and contribution margin. As noted by Schultz in IMC: The Next Generation, this type of valuation method allows marcom managers ‘to build a basic platform for their marcom programs that encompasses what the program should be designed to achieve, how much they would or could be willing to invest, how returns could be measured, and – most importantly – how the firm should or could invest its finite financial resource among marketing communications target customers and communications alternatives’ (pg 114-115).

The first issue with this formula centers on the concept of context. Assuming for the moment that each of its elements can be trusted to be fairly accurate measures, all rely on historical measurements. This fails to take into account environmental changes. A core issue with current marketing communications practices is the nature of today’s marketplace and the opportunities it affords customers. Change today is a given, and as such, long-term anticipation of consumer habits nearly impossible to gauge. Due to the rapid development in technology – especially the Internet – this formula may overlook key threats or adaptations in the marketplace. While in certain instances (like consumer goods), this may be less of an issue, but in many commodity-based markets, democratization of buying and distribution channels needs to be considered. These changes can lead to quick buying behavior changes based on factors like convenience, cost and/or personalization. The formula anchors on the assumption of consistent, long-term buying and consumption behaviors that can change in an instant.

Somewhat related to overall context and seemingly imbedding into the equation is the concept of ‘corporate relevance’. This is the theory that the organization and its brand continue to maintain relevance in the eyes of the consumer and extrapolate this into quantifiable actions. Nowadays, relevance is especially challenging to maintain and cultivate long-term. Even the most established brands have periods where their relevance fluctuates. While it may be difficult to admit, it must be accounted for because it can have drastic effects on the behavior and consumption patterns of customers. If a brand loses luster or falls in this factor, it will certainly effect other factors. On the negative, drivers can be external (new advances, cost cutting), related to consumer shifts or even internal issues. On the positive side, if the organization is effective in addressing consumer desires and are able to increase their relevance, history becomes the baseline – not the true value.

These problems do not even consider the accuracy of the underlying data. While the formula’s ‘Contribution Margin’ can be seen as the most empirical, other measures like ‘Share of Purchases’, ‘Penetration’ and ‘Buying Rate’ are all somewhat subjective. Penetration assumes a symmetrical, easily identifiable marketplace. It might fail to quantify factors like complimentary products or the global marketplace. Share-of-Purchases and Buying Rate assumes an extremely in-depth knowledge of a customer segment – even in an age where it’s hard to even get someone’s email address. The point with all of these is simply: how accurate are these measures?

Another issue with this valuation method is it doesn’t address how the brand and its organization grows and adapts. As the company develops and introduced new products or services, consumers already participating with the brand may alter their behaviors in positive ways or negative ways. This can have effects on the entire brand family and their value. A perfect example would be the much-talked-about ‘halo’ effect that Apple is experiencing as a result of their iPod. More people are buying Macs, and more Mac loyalists have become re-invigorated with the brand. On the flip side, how many Ford buyers looking for a new car will buy Ford again? In both cases, contemporary developments at each brand effect a consumer’s brand value.

A final issue with this valuation method is that it fails to consider non-quantifiable factors of consumers in influencing those around them. There is an old saying that a happy customer tells no-one (not really true) and a dissatisfied one tells twenty. The point is that these behaviors – good and bad – aren’t measured in the formula. Goodwill and ‘badwill’ are huge. People influence other people; social networking and its derivatives are increasingly being valued today. The formula fails to take into account these ‘softer’ factors and only assumes that consumer behavior (in the form of purchases) contribute to value.

There are a number of ways for a brand to place a value on a consumer. Most rely on subjective ‘facts’ and measures in an effort to quantify behavior and map it to ROI. While this will continue to be a challenge regardless of the amount or quality of its underlying data, measures that factor in additional aspects can also be helpful.

Posted by pgraber at 08:52 PM

January 18, 2006

Comparing IMC to The Traditional 4Ps

Traditional marketing theory and execution relies on the simplicity of the 4Ps: Price, Product, Promotion, & Place (Distribution). But as consumers change their buying and decision making habits, this theory has come under strain.

IMC is a relatively new model for organizations to market and communicate their brand, products and services to the general public. When compared to the traditional ‘4Ps’ in marketing – that of product, place, pricing and promotion – its value for modern businesses and organizations becomes clearer. This will discuss the advantages that an integrated marketing and communications approach offers organizations.

To understand the advantages of IMC, one first has to understand what IMC is all about and what it represents. Many of the concepts that the IMC process promotes differ from traditional marketing practices. In its most basic form, IMC places the customer at the center of an organization’s universe and focuses on developing messaging, communications, and even product and/or service features in relation to the needs, wants, desires and attributes of its consumers. IMC represents a holistic approach to communicating brand and product value that is rooted in the needs of the consumer, and one that is coordinated, targeted, consistent and measurable when successful.

In considering IMC relative to the traditional 4Ps, several advantages accrue to organizations that rely on it. These include understanding the customer at a greater level, enabling the ability to differentiate oneself from competitors offering similar products, more effective product and organizational planning and more quantifiable measurement and analysis on marketing communications investments.

The basis of IMC is in understanding the customer. This includes things like their wants, needs, desires, aspirations, as well as a countless number of demographic and physcographic attributes. Because of the fact that IMC forces an organization to understand and ‘feel’ many of these factors, management obtains a far greater level of understanding about the consumer. With this data and understanding, the organization is then able to create messaging and conduct activities that hold a greater degree of significance to that audience. Hopefully, this has a direct impact on the success of its product or service in the marketplace, as well as its success in creating greater shareholder value. It is also is able to make more educated decisions relative to product development, media spending, communications (internal/external) that works in support of its corporate mission.

Carrying this greater understanding of the consumer forward, organizations that practice IMC are also put in a more advantageous position relative to branding and differentiation. It is common knowledge nowadays that many of the advances in manufacturing and production over the last half-century has created an environment in which firms are finding it increasingly difficult to differentiate themselves. In the days previously, organizations may have relied on product features, manufacturing processes or other techniques to create barriers of entry into the marketplace and to position themselves. This is no longer an option. Plus, when these factors are combined with other emerging trends, like globalization and/or electronic communication, standing out in the marketplace is all the more difficult. Not ironic is the fact that many of these techniques closely paralleled marketing theory popular in the day: the traditional 4Ps.

IMC frees organizations to differentiate themselves in ways that are relevant to their core consumers. As such, it is an extension of consumer knowledge and another weapon in their arsenals. While branding and brand management is a gigantic and complex topic in its own right, organizations are able to obtain more value – in terms of bottom line impact - out of successful brand development comparable efforts in other areas. The reason for this is that when properly implemented, the brand actually becomes part of the consumer. It establishes an intimate relationship with the consumer that transcends product features, price, logistical issues or other ‘hard’ factors. In doing so, organizations and its products become positioned within ‘spaces’ that are ultimately defendable against any competitor utilizing any means. Basically, its marketing at a deeper level. The differentiation ‘answers’ are actually provided by the consumer; it becomes the organization’s charge to implement them.

This process is a stark contrast from traditional methods of separating oneself in the marketplace. Traditionally, organizations would offer the products and gauge the consumer’s reactions. Sort of a top down approach. IMC promotes the exact opposite, all in service to the consumer.

Further upstream in the organization – at the managerial level of strategic planning, etc - IMC enables organizations to develop more effective courses of action in much the same light as differentiation. Once again, the knowledge of the consumer gleaned from the IMC processes paints the picture and fills in the blanks. One hand washes the other. At worst, the organization makes decisions in the context of as much information and consumer understanding as possible. In contrast to traditional marketing approaches (top-down, centralized), IMC-enabled organizations become more effective planners, anticipator and reactors. They see change as it happens, are able to react faster when needed, and are in a better position to recognize areas of shortcomings and make corrections. When this is done effectively, the processes and decisions that are carried out have a greater chance of creating value than ones formulated in a less-than integrative fashion. This is largely due to the consumer-focused nature of the decisions, their relevance to the consumer and their integration with perceived consumer wants, needs and desires.

In pursuing planning, differentiation and consumer knowledge, organizations are also constantly seeking to improve their methodologies and processes. Doing so helps create greater shareholder value and, more importantly, enables the organization to serve the needs of their consumers in a greater way. Another advantage of IMC is the prospective wealth of quantifiable measurements that can be taken from this process. At present, it is well known that IMC measurement best practices continue to develop, but what’s more important from the discipline’s perspective is potential. IMC provides potential in measuring a greater number of factors, greater understanding of their relevance. Related to this measurement potential is the fact that the organization can then hold their processes and practices more accountable than has been the case when using traditional approaches. While the measurement systems within IMC continue to develop, they work in tandem with this concept. Compared to traditional approaches, IMC possesses a greater degree of potential in this area.

Organizations of all types continue to grapple with the current marketplace and are finding it harder to stand out, to communicate their value and to achieve relevance in the eyes of their consumers. While IMC is certainly no panacea and remains a challenging concept to implement, doing so provides a number of advantages. As marketers, we are only beginning to be understand the advantages of integrative approaches and groups that take the organizational risks to implement them stand to gain the greatest advantages.

What we do know at this point is that IMC is a process that takes time and effort to implement. We understand also the processes that successful organizations have taken to implement it. And, of course, we know what goals it seeks to achieve.

So while there is risk to change, unknowns to tackle while it is pursued, IMC has several advantages over traditional means that are warranted for today’s environment.

Posted by pgraber at 09:10 AM

January 11, 2006

IMC: Are Agencies Threatened By It

Since its beginnings in the late 1980s, IMC has been looked upon by traditional agencies as a threat. When effectively done, IMC moves most of the strategic marketing communications upstream and into the organization. Many agencies have struggled with this.

Although I've vever worked for an agency before, I can see why traditional agencies view IMC as a threat. If IMC is practiced effectively by the organizaion - the agencies role changes dramatically. And in doing so, it takes a lot of cash out of their pockets. Agencies of yesteryear were focused on single-minded specialization - on such things as media-placement and creative/executional aspects of an organization's needs. If they were good, they could create more revenue via more creative and more media placement. With things moving upstream more and more now - into the organization - these activities may not carry as much weight overall. While they are still extremely important, spending is becoming increasingly more targeted, and hence suggest the utilization of a myriad of providers.

Beyond the strictly monetary (financial) concerns agencies have, IMC does effectively take the smoke and mirrors out of the whole process, at least from the organization's perspective. To counter this, agencies are being forced to truly understand the businesses and industries of their clients. Can they effectively and profitably do this? And as measurement becomes more and more critical, it puts agencies in an awkward position of not only having to 'know' but also to map their ideas to effective strategies. This is a good thing - both for agencies and for organizations.

As IMC grows into the norm at large and small companies alike, measuring the retuns and value it provides becomes increasingly critical. And with a greater portion of this process being driven by front-line managers, the role of external vendors and their impacts will be under the microscope.

From the agencies perspective, they are somewhat limited as to what they can do to carry out an IMC program. IMC represents a holistic, encompassing, and strategic process. As a result, it requires a long-term committment on the part of management and on the part of other key stakeholders in the process. It represents a process that changes the traditional marcom paradigm by looking for answers and solutions externally to customers, rather than internally to management.

Due to its nature, an external provider like an agency can be somewhat limited in delivering effective IMC. Since many of the tactical decisions in IMC need to be based on interpretation of data (qualitative/quantitative), there is also the issue of information access. The organization may be averse to this.

Another factor is this whole 'management buy-in' factor. I think an agency - regardless of how effective their last campaign was - will always be considered an outsider. As such, as their reconmmendations approach the more strategic level, there's less trust on the part of decision makers to implement their suggestions. What's important to realize about IMC is that it runs deeper than tactical executions that agencies are skilled at implementing. This requires a committment by managerial decision makers. This aspect would certainly limit an agency as far as planning a program.

Many would also consider the number of media forms and outlets a factor as well. Increasingly, however, I am having trouble with this. I think agencies are actually better positioned to understand how/when to use each particular media relative to the organization. Since all forms require functional skills and knowledge, I believe the agency is the better route. Communications production and execution is what they do. What's the most important in this process, however, is that the agency be given clear direction on what needs to be communicated. This comes from the client; the agency executes. Without clear guidance, organizations will rely on the agency and its judgements.

Posted by pgraber at 09:37 PM

December 23, 2005

Measurement and Metrics in IMC

Determining and quantifying the overall value - pinning ROI on IMC - is a key topic in marketing communication today. Results need to be quantified. Doing this is a challenge.

Starting in early January, a series of posts will highlight how today's IMC practitioners address this and how smaller organizations can map some of their techniques into their own models.

The text for the study is by Don Schultz, a preeminent thinker in the IMC field.

Posted by pgraber at 10:08 AM