This year, for the first time in many marketers’ memory, marketing budgets are under intense scrutiny. Gone are the usual 5-10 percent increases, with new technology budgets receiving almost automatic approval. In the economic earthquake of declining top-line revenue, roller coaster stock market and confidence-rocking accounting scandals, marketing has fallen out of the corporate priority spotlight.
This economic uncertainty creates an environment of decision rethinking/questioning past, present and future. When even past commitments come under review, marketers can no longer depend on resources.
In this environment, technology-enabled customer analysis and direct-to-consumer marketing can give senior management a measure of stability. But when marketing is perceived as a cost center, management looks to reduce expenditures in analysis, communications and technology. If marketers do not react swiftly and decisively, that trimming is exactly what will occur.
The time has never been better for marketing to step up and prove that customer management can play a dominant role in a company’s success. Addressing that challenge will be, I predict, the dominant marketing task for the next several years.
In order to gain credibility quickly, marketers must seek answers to key customer behavior questions that should drive marketing and overall business strategy. The first question, in a down economy, is the most obvious one: "Who is buying, and who is not?" In fact, that answer is the most critical part of developing an effective strategy for marketing in a tough economy. As with most aspects of technology-enabled marketing, the answer centers on "best customers." How those customers swing, so swings the health of the overall business a maxim never truer than when sales falter.
If 20 percent of customers equal 70-80 percent of sales, as is typical in most businesses, then obviously it is critical to overall business health to understand the behavior patterns of that relatively small group of customers. If that segment has maintained their frequency and purchase dynamics, the business as a whole is still fundamentally healthy even with a decline in overall sales.
If sales are declining and the core customer base still robust, the decline is occurring among less-frequent customers. Since that group is very promotionally sensitive, continuity in their purchases can be "bought" through a mix of incentives. The business, in this case, is still healthy, and the strategy overall would be to reinforce best customers’ behavior with an overlay of incentives to quickly drive infrequent customers back.
This strategy is appropriate, but marketers should still be cautious about a "buy the business" strategy for infrequent customers. The risk is that marketers can train customers to buy solely on discount, which can cause a price war that will only reduce margins for the company and its competitors. In addition, that strategy can spill over to best customers, which can dramatically alter the fundamental margin structure, since best customers represent so much of the total pie. In addition, since infrequent customers may contain potential best customers, it is possible that the incentive strategy may reduce the migration of infrequent customers into best customers.
As a result, the heavy-up incentive strategy should be used with caution, and additional analysis should be conducted to select offer- receiving customers. However, in a tough economy, the key is a focus on the fundamentals and to spend more time addressing best customer needs. When the answer to the analysis is that best customers have changed their behavior, then the strategy becomes critical to overall business success.
When a softness is detected in best customer behavior, the first thing to remember is not to panic. Best customers are similar to you and me, and their purchase behavior is not absolutely consistent but does vary due to events outside your knowledge, such as vacation schedules, family illness, job changes, etc. Not every change that you see among best customer behavior results from a decline in loyalty.
However, the converse is also the case not every change in best customer behavior is due to variability some changes do reflect the subtle shifts in purchase patterns that indicate softening of loyalty. Since best customers often do not often "leave" a company’s products they just stray away, one piece at a time it is essential that such trends be addressed as soon as they can be identified. In a tough economy, swift action to shore up weaknesses in best customers is even more essential.
Typically, weaknesses in best customer behavior come in three different "flavors" declines in frequency, purchase values or changes in product mix. Each can be addressed through a different communications mix, and incentives (rewards, recognition or access) designed to address behaviors while not overly cheapening the brand.
If frequency is the primary issue, repeat incentives are often part of a solution. Those incentives, however, do not have to come as price discounts. Non-discount offers (e.g., free shipping, free multiples on products) can be mixed with loyalty-type points programs to reinforce recognition of best customer status with frequency overtones. The key is to bring that customer back to ordering in the short term, so everything should be focused on reestablishing a consistent purchase pattern among customers who have lost that trend.
A decline in purchase value suggests that best customers are purchasing either fewer impulse products or trading down regular purchases for less expensive items. If best customers are purchasing at the same frequency, a decline in loyalty is not the problem rather those customers may be responding to the tough economy by tightening their belts as expected. The key to increasing revenue in this case is to help customers manage their wallets rather than seek to change that behavior. In that way, the company can be seen as the trusted friend rather than as a transaction-focused provider.
How to do this? Well, if customers have traded down in a specific category, the company can provide more accessories in bundled packages to increase value per dollar spent. In addition, the company can leverage their relationship with suppliers to reduce costs, which can be passed along to customers in lower prices on a proactive basis (the Wal-Mart strategy). Finally, best customer sales can increase purchase frequency, overcoming to some extent the decline in total market basket value.
A change in product mix also suggests belt tightening but may reflect declines in perceived trade-offs between products, such as moves from high- priced to lower-priced DVD players. Those changes may have margin implications if the new products are less profitable. In this case, marketing can continue to grow customer revenue and margin by highlighting the differences between products to assist customers in making knowledgeable trade-offs. In addition, planned sales on higher-end products can help to diminish the price-value disparity and convince customers to trade up selectively.
Despite the cause of best customer spending declines, marketing can play a major role in addressing those behaviors and enabling the company to correct overall business softness. One of the biggest benefits that marketing can play, however, is simply in identifying the underlying reason for business softness and determining appropriate strategies to address that softness. Too often, companies react too swiftly to such changes and damage their relationships with best customers as a result. If marketing can provide a "window into customer behavior" that assists the company in determining overall business strategy, marketing’s importance will be reinforced. As a result, when budgets are revisited, marketing (particularly direct to consumer) will be less impacted, since that activity will directly impact customer behaviors that, in turn, affect the company on a macro level.
The key to "taming the Bear" is not to hit it over the head with a club in a panic, but to understand its behavior and to support or correct specific behaviors to achieve the desired result. In this way, you can avoid a less pleasant alternative becoming lunch!
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