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
Phone
Fax
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!