Jagdish N. Sheth and Rajendra S. Sisodia | Information technology, creative management boost marketing productivity.
In the last issue, we talked about the growing productivity crisis in marketing and how difficult it is to measure (he true output of an activity that involves so many intangibles. Even so, with cost cutters demanding accountability, even imperfect measures help make the case for marketers if they measure the right things.
The desired output of marketing is to acquire and maintain customers profitably. To accomplish this, marketing must pursue the ideal of ‘effective efficiency”—doing things right and doing the right things. We have identified 20 ways to improve marketing productivity and classified them into four broad categories: collaborating, rationalizing, “informationalizing,” and managing. (For an overview, see “Improving Marketing Productivity” on page 20.)
In Part 1, we focused on the first two categories, collaborating and rationalizing. Now, we discuss how to boost marketing productivity by using information technology and better managing the function for effective efficiency.
Many of the productivity improvements in aspects of business other than marketing have occurred through the deployment of information technology (IT). Particularly in the last decade (since PCs infiltrated the workplace), IT spending has been impervious to economic recessions or industry downturns because of its anticipated impact on productivity. In the last few years, the impact of that spending has indeed become apparent, and the so-called “Productivity Paradox”—a perceived lack of correlation between IT spending and overall productivity—has been laid to rest.
Several of the productivity enhancers discussed in Part 1 are based on the use of the new capabilities of today’s computing and communications technologies. Technology can improve and eventually alter marketing practice, in several ways.
When marketing becomes more productive, everyone wins, especially customers. Part 1 of this article described collaborative marketing strategies that improve marketing productivity as well as various ways to rationalize expenditures. Part 2 emphasizes the huge role information technology plays in the quest for “effective efficiency” and offers some innovative management strategies. With all of this focus on refining the science of marketing, though, we must take care never to lose sight of marketing as an art.
Improving Marketing Productivity
- Partnering: Treat suppliers and customers as partners in lowering system-wide costs and adding value.
- Relationship marketing: Be selective about customers, and take a long-term win-win perspective.
- Marketing alliances: Share resources and opportunities with other companies serving the same customers.
- Make vs. buy: Focus on your marketing core competenccs, and let outside experts handle the rest
- Bringing customers into the value chain: Lower costs and increase customer satisfaction by adding customers to the value chain.
- Reducing product and attribute proliferation: Variety does not always equate to value; reduce customer confusion and marketing costs by matching product lines with distinct market segments, and by adding product attributes that matter.
- Umbrella branding: Increase “Return on Branding” by developing brand names with broad applicability to multiple products and markets.
- Rethinking advertising: Better manage the selling of customer expectations, budget for advertising based on objectives, remove conflicts-of-interest and perverse incentives in agency compensation methods, unbundle advertising creation and placement, and understand advertising wearout.
- Focusing promotions: Stop creating “deal junkies,” end windfalls to existing customers and surgically target promotional incentives to achieve greater trial.
- Dynamic pricing: Use market-based pricing to increase profits and decrease marketing waste, and consider the use of dynamic pricing approaches such as yield management systems.
- Unbundling and rebundling services: Uncover the hidden costs of free service, and create new revenue sources.
- Market response modeling: Use well-established marketing models when high quality data is available.
- Database marketing: Target marketing efforts more precisely, but ensure that you are creating additional value for the customer and are acutely sensitive to privacy concerns.
- Front-line information systems: Deploy information tools where they have the greatest impact on customer service and satisfaction—at the front-line.
- Net-based marketing: Prepare now for a radically different, more integrated mode of marketing in the future, predicated on “total customer convenience;” Position yourselves for a future of one-to-one interactive marketing.
- Re-engineering marketing processes: Develop radically different and information technology-enabled ways of conducting key marketing processes.
- Activity-based costing: Understand where resources are being spent, where customer value is being created, arid where money is being made or lost.
- Zero-based budgeting: Overcome inertia in marketing budgets and improve accountability by linking marketing spending with specific objectives.
- Adjusting compensation of marketing personnel: Compensation drivers must be linked with the need for effective efficiency in all marketing activities.
- Continuous assessment of marketing practices: Beware of creeping marketing incrementalism; take a periodic “zero-based” view of marketing practices.
IT is not an automatic solution to marketing productivity problems; simply “automating” aspects of an otherwise unchanged marketing process leads to the classic result that students of business process re-engineering know very well: marginal improvements at best, and many new and hidden costs. Clearly, the fundamental processes of marketing must be addressed first, with the redesign recognizing and appreciating the power of new technologies. Even then, IT can prove to be a productivity hindrance in the short run as the organizational culture adapts to accept and integrate the new technology into various marketing processes.
For sustained competitive advantage, companies need an IT “platform” that uniquely blends core marketing competencies with seamless technology Over time, IT becomes less of a driving force and more of a requisite infrastructure. And this leads to the development of technology-based core competencies that arc not readily duplicated by others because they cannot be purchased “off- the-shelf.”
Companies such Frito-Lay, FedEx, Citibank, and American Airlines, for example, are outstanding at technology assessment, integration, and absorption. They have developed close partnering relationships with technology vendors and work with them on state-of-the-art solutions to problems others have not even experienced yet.
IT can improve marketing productivity in a number of ways. It can lower the cost of providing a particular service to customers as well as make it more convenient, It also can reduce the demand for personnel-based customer service. At FedEx, tot example, customers with access to the World Wide Web can track the status of their package in seconds, without ever dealing with a live representative.
At 3M, customers used to select and order products from a five-inch thick catalog listing the company’s 60.000 products. Known among sales representatives and customers as the “bible,” this catalog was a burden to thumb through, expensive to produce and distribute, and subject to rapid obsolescence. To replace it, 3M has developed a CD-ROM version that can be produced for S 1.50. In addition to eliminating the paper barrage of brochures, mailers, and product binders the company sent to clients to keep them updated, the technology has also decreased the demand for customer service. In the past, many customers called a customer service rep because it was faster and easier than using the catalog.
Marketers have only begun to feel the impact of IT. In the past decade, scanner systems allowed packaged-goods marketers to make better informed and more timely decisions, hut without appreciably changing what they did. However, the availability, affordability, and capability of IT are last approaching a level where wholesale changes will be made—changes that offer the promise of raising marketing productivity to a new level, The primary technological drivers are:
- Greater computing power in more portable form at increasingly affordable prices. Computing power that used to cost a million dollars can be had today for less than a dollar.
- Greater communication band width, along with more availability of wireless data transmission capabilities.
- Increasingly sophisticated and user friendly soft. ware, including the popularization of embedded and stand-alone expert systems, as well as a variety of ‘performance support systems.”
- Real time capture and distribution of pertinent marketing data, including transaction data as well as various stimulus variables such as advertising.
- Rapid progress in the area of voice recognition technology.
The impact of these enormously powerful technologies on marketing will be profound. To attain their full benefit, many marketing processes will have to be re-engineered, or redesigned “from the ground up” to take advantage of available information tools.
The relationship between IT and marketing productivity will manifest itself in five areas: analytical marketing models, database marketing, front-line information systems, net-based marketing, (the likely impact of the so-called information highway), and the re-engineering of key marketing processes.
Market Response Modeling
Market response models help companies develop strategies that lead to increased marketing effectiveness as well as significant cost savings. Most companies could benefit from a more analytical approach to marketing decision making than they have had in the past. Used in the appropriate contexts and with the right data, models can be very effective. For example:
- In over a thousand applications, the new product pretesting model “Assessor’ is highly accurate in predicting a new brand’s eventual market share. Studies have shown that actual market shares are within 10% of predicted market shares 0% of the time. Furthermore, companies can use Assessor and similar models to “fine-tune” the marketing mix before launching their product.
- The sales planning system “Call Plan” is very effective in improving decisions pertaining to optimal sales force size and deployment, as well as call planning at the salesperson level.
- Media planning systems such as “MEDIAC” are indispensable tools for making effective decisions on media selection, scheduling, and budgeting.
- The use of analytical approaches to evaluating advertising has allowed companies such as Anheuser-Busch and Campbell Soup to reduce advertising spending while increasing its overall impact.
The usefulness of models and the quality of their performance depends greatly on the availability of good data. For many aspects of marketing today, there is no dearth of highly accurate, timely, and affordable data. For example, supermarket scanners have created a virtual avalanche of clean, timely data. The ability to leverage these data into actionable insights is greater today than ever before. The potential value of models is thus higher.
Two relatively recent developments augur well for the increased use of market response models in the future. First, many such models now incorporate expert system approaches, providing managerial judgment as well as analytic insight. They are able to respond to “What if?” queries with a richer set of responses as well as make proactive suggest ions for managers to consider.
The second development pertains to the interface. Models are increasingly shielding the user from their inner complexity through the use of graphical interfaces as well as through more natural language capabilities. For example, an expert system called Cover Story provides managers of consumer products with a one-page memo in English summarizing the key insights gleaned from enormous quantities of scanner data.
Clearly, such tools lead to more effective and efficient marketing decisions, and it will be increasingly necessary for firms to adopt them in order to compete. Widespread availability and affordability will no doubt reduce their value as a source of competitive advantage, though some proprietary advantages might accrue to firms with sophisticated internal “knowledge bases.”
Just as all politics is local, once upon a time all marketing was local—and personal. Marketers had long-standing one-to-one relationships with their customers. However, the rise of mass markets mass advertising, and mass merchants led to the onset of impersonal mass marketing. Customers arc now quite remote from marketers, buffered by time, place, and multiple intermediaries. Database marketing (DBM) is once again starting to close the gap between marketers and customers.
This should not be surprising; more and better information about customers is at the heart of marketing. Marketers are recognizing that past behavior, as recorded in transaction records, is the best indicator of future behavior. DBM is now rightly moving into the marketing mainstream, and increasingly must he used by almost all marketers. The use of DI3M is spreading fast:
- Donnelley Marketing Inc. found that, in 1994, 56% of manufacturers and retailers were building
a database, an additional 10% planned to do so, and 85% believed they would need database marketing to be competitive beyond the year 2000.
- GM now has a database of 12 million GM credit card holders, giving the company access to a great deal of data on their buying habits. GM also surveys these customers to get information on driving habits and needs.
- Blockbuster has a database of 36 million households and 2 million daily transactions. Ii uses the technology to suggest additional movie choices and cross-promote its affiliates such as Discovery Zone for children.
- Philip Morris’ database of 26 million smokers is used to market cigarettes as well as solicit support in lobbying efforts.
- Claridge Hotel and Casino now distributes a “frequent-gambler” card, known as CompCard Gold, to 350,000 “members.”
Direct marketing and database marketing are not synonymous, although direct marketers have long led the way in using databases. With better targeting of prospects for products and promotions, greater ability to customize marketing mess ages and programs, and so on, DBM clearly contributes to greater marketing efficiency. When practiced properly, it yields double-digit response rates, compared to 2%-4% for “junk mail.”
For example, Hilton Hotels offers targeted promotions to senior citizens through its Senior Hon— ors program, prompting almost half of the members to take previously unplanned trips that include d stays at Hilton.
While DBM is not inexpensive and must be cost-justified like any other initiative, it can “piggy-back” on existing costs. American Express, for example has initiated what it calls “relationship billing’ or customized monthly bills that include offers triggered by specific purchases, such as flights and special store sales. Relationship billing has been rolled out in Europe, Canada, and Mexico, and AMEX claims an increase of 15%- 20% in year-over-year card member spending in Europe.
Relationship hilling allows AMEX to move closer to “mass customization.” the tailoring of communications/offers to individual customers. For example rather than using broad demographics, AMEX might now define a market segment as “female business travelers who bought jewelry abroad on their last trip.” Some of the company’s offers have gone out to as few as 20 people, but received very high response rates.
DBM provides tremendous opportunities for cross-selling related products. For example, Canon Computer Systems maintains a database of its 1.3 million customers. The company obtained a 50% response rate in a direct mail solicitation asking printer owners if they wanted information on a new color scanner: buyers of scanners received four free ink cartridges for their printers.
We see several issues affecting database marketing in the future:
Privacy issues will increasingly come to the fore. Unless the marketing profession (not just the Direct Marketing Association) develops an approach to deal with privacy concerns, it could lead to very restrictive government-imposed rules on the use of customer information, such as those already in force in Europe.
DBM must focus on greater value creation for the customer in addition to marketing efficiency enhancement: in other words, the customer’s “profit” in the relationship must increase.
As technological capabilities expand, companies will have access to virtually unlimited data and broadband interactive multimedia communication channels with their customers, The winners will be companies that are best able to use these efficiency-increasing capabilities to satisfy customers.
The analytical processes used in DBM have been quite basic—in many cases, limited to sorting and weighting. With the increasing accessibility of fuzzy logic and massively parallel technology, more can and will be done to extract real value from customer and prospect databases.
In particular, the use of better models in conjunct ion with database marketing can identify customers with a high propensity to buy and a low likelihood of attrition.
Front-Line Information Systems
In the traditional hierarchical corporation, customer contact personnel occupy the lowest tier in terms of stat us, responsibility, and compensation levels (see Exhibit 1). However, their impact on customer satisfaction is arguably greater than that of any other group. Typically, in such corporations, the most sophisticated IT is deployed at the top tier of management for “executive information systems” (EIS). The next priority tends to be management information systems” (MIS) for middle managers. Employees below that level have traditionally been provided with low- level transaction-support technologies.
This represents a misplaced sense of priorities, however, because the most powerful impact of this technology is felt when it is harnessed at the front lines. Companies that invest in and deploy cutting-edge “front-line information systems” (FLS) achieve breakthrough improvements in service quality and reliability, and thus very high levels of customer satisfaction. By adopting sophisticated FIS, firms will achieve quantum improvements in the effective efficiency of their marketing activities.
Many of today’s FIS models were designed primarily to process customers efficiently and were not conceived as marketing tools. This has started to change, however. Dollar Rent-A-Car, for example, is rebuilding its counter systems to include a graphical interface that gives the sales agent access to a customer’s complete itinerary. Dollar’s system will be integrated with those of travel agents and airlines to take advantage of distributed processing capabilities. As car reservations are made, they will be combined with other information and downloaded to the counter database.
Classic Hawaii, a travel agent, uses ANI (automatic number identification) to identify customers, call up their travel itinerary, and greet them by name. The system also automatically routes customers to the agent who made the original booking, providing a high level of familiarity and comfort.
Other examples of companies using high-end I FIS include FedEx, Frito-Lay, and Hertz, each of which equips front-line personnel with technologies that enable them to do their work faster and better. Not incidentally, such companies also tend to have high levels of front-line employee satisfaction. Furthermore, because they are using sophisticated tools to perform the work, they’re gathering all the data needed for managerial control purposes; such data then “trickle up” to the MIS and EIS levels.
Well-conceived investments in FIS (such as those used by salespeople and customer service representatives) provide very substantial returns, far more so than those intended to automate back- office operations or improve management information systems. FIS investments tend to promote efficiency (through faster and more accurate processing) as well as effectiveness (by improving the quality of service received by the customer).
For example, many companies that provided their sales forces with sophisticated laptop computers and wireless communications have improved their performance and productivity in the areas of account management, lead management, literature fulfillment, reporting (using templates), proposal generation, customer inquiry response, quote status, inventory checking, and so on. Salespeople spend less time on sales administration and paperwork; there is no need for a salesperson to contact marketing for literature or manufacturing for inventory availability. And, because salespeople are not available 24 hours a day, IT can be used to answer customer questions and full ill their needs around the clock.
For example, by providing an FIS capability to its sales organization at a cost of S30 million, Campbell Soup Co. expects to save $18 million a year through shorter order cycle time, more accurate invoicing, and better control of product promotion funds.
Anderson Consulting now equips its consultants with a CD-ROM called the “Global Best Practices Knowledge Base,” which contains best practice information on about 170 business processes. By
deploying FIS capabilities for their sales forces. AT&T and Compaq have largely freed salespeople from the constraints of reporting to an office. They now employ the concept of hoteling,” whereby permanent office space for salespeople is replaced by temporary space on an as-needed basis. This lowers costs as well as encourages salespeople to spend as much time as possible iii contact with customers.
The long-awaited “information highway” will be the most significant driver of dramatic change in marketing processes in coming years. Widely available, interactive broadband communication will allow companies to integrate advertising, sales promotion, personal selling, and even distribution to a far greater extent than is now possible, possibly spelling the end of time and place constraints on customers.
Predicted to become widespread in the United States by the year 2005. this technology will dramatically transform the marketing functions of advertising, personal selling, and physical distribution. It will reconfigure industries such as retailing, health care, and education while significantly affecting nearly all others.
Marketing in this new environment will be predicated upon “monocasting” or “poinicasting” of communications, mass customization of all marketing mix elements, a high degree of customer involvement and control, and greater interaction between marketing and operations. Companies
that successfully make the transition to this new way of marketing will be characterized by fewer wasted marketing resources and minimal customer alienation resulting from misapplied marketing stimuli. All companies will experience enormous pressures to deliver greater value, more global competition, and intense jostling for the loyalties of “desirable” customers.
An early version of the information highway is already here. Some are calling the World Wide Web (WWW) the most important new marketing tool since the television commercial.
The WWW is a part of the global Internet system of linked computers. Those with access to the Internet (now numbering over 35 million in the United States alone and growing rapidly) can be connected to a company’s “Home Page” in an instant. From there, they can receive information, order product literature or purchase products, submit queries, check the status of orders or shipments, interact with other customers, “link” to any other related site worldwide—and anything else an imaginative designer can concoct. All of this incorporates multimedia capabilities as appropriate, including audio and video clips and full-color photographs and illustrations.
While the WWW represents a true breakthrough with major implications for marketing, it really represents only a glimpse of more dramatic changes to come, as processing power continues to improve, two-way communication bandwidths explode, and imaging moves toward high definition.
Marketing has a great deal riding on the information highway (which some are calling the marketing highway); it is here that much of the waste that seems inescapable with traditional marketing can be removed. It is also here that new forms of customer-company and customer-customer communication can take place, giving rise to many new opportunities for value creation.
The Internet, as it has evolved in the last two years, gives us an early glimpse of the possibilities for marketing on the information highway. Though constrained by its availability to a small subset of the population and its very narrow communications bandwidth, the power of the medium is already apparent to many and is leading to an explosion of activity in establishing new “sites.”
Some industry observers arc calling the kind of marketing that will prevail in this new medium “Intelligent Marketing.” We refer to it as “Net- Based Marketing” (NJ3M). In any event, it will be a mode of marketing that is cost-effective, accountable, individualized, interactive, and relationship-based– the very essence of “effective efficiency.”
Several characteristics of this new medium make it a significant development. Few barriers, Although only 7% of the U.S. population currently subscribes to any kind of online network, growth rates are increasing exponentially and eliminating barriers to use. The absence of encryption and other means of providing for the security of network transactions has also hindered the spread of commercial transactions thus far. However, such standardization and security issues are expected to be resolved by the end of 1996.
Customer interaction. Customer relationships and satisfaction will become even more important. NBM will greatly raise the stakes for the delivery and management of customer satisfaction. To a far greater extent than ever before, a company’s customers will have the ability to interact among themselves, rather than simply. This can be a tremendous source of value- enhancement because loyal and satisfied customers can be creatively used as resources to supp ort the needs of newer customers.
The potential clearly exists to foster unprecedented levels of customer loyalty. As Nick Gassman, a participant in the Internet-based INET discussion group, said, “The Internet creates personal relationships. They choose to visit you on the Web, they talk about you with others in the newsgroups, and you join in. And you talk to them privately by e-mail. If you do it right, you make good friends with your customers.”
However, the nurturing of such “customer communities (akin to organizations such as the Acura Buyers Club, where communication among customers is enabled through more cumbersome traditional means) can also backfire. By drastically increasing the “connectivity of opinion,” net-based marketing can create a snowball effect in which one customer’s complaint can rapidly escalate into a customer relations nightmare (as with Intel’s Pentium debacle). Companies must develop realist is contingency plans for such scenarios.
By the same token, however, companies providing superior products and services will probably prosper even more than before at the expense of those for whom reality falls short of promises. In all likelihood, the Internet promises to be an inhospitable habitat for marginal performing companies of any kind.
Customer retention. As we mentioned in Part 1, too much of marketing’s attention is devoted to customer acquisition and too little to customer retention and growth. It appears that NBM has the greatest potential for the latter, primarily because of its greatly enhanced ability to provide superior customer service through the WWW.
For example, FedEx’s site allows customers to key in their package tracking code and immediately receive details on every stop made by a package on its journey. To the extent that NBM can facilitate longitudinal data capture and store a customer’s transactions and preferences, value delivery can increase over time.
Egalitarianism. In many ways, the Internet promises to become a “great equalizer’ for businesses:
- “Store-fronts” on the WWW are as readily create d by individuals or small businesses as by large corporations.
- The entry cost is low. It has been estimated that a sophisticated site could be created for $200,000— less than half the cost of a single 30-second spot on a top network TV program.
- Advertising and other marketing materials can be created for less, can be modified more easily, and can be reused as appropriate.
- Establishing a brand name becomes a potentially less capital-intensive proposition.
Co-op marketing. A major key to success with NBM is the ability to attract traffic to a site. Some of the more popular sites (such as the one maintained by Wired magazine) already charge upwards of $30,000 a month to provide an advertising link into a sponsor’s site. For small companies, more affordable alternatives exist. For example, they could co-market” their site with others targeting the same customers by providing mutual cross-linkages. The power of such networking will increase the prevalence of cooperative marketing. In either case, the marketing skill set differs considerably. Content and value will drive browsers (prospects) and buyers (customers) to a site.
Micromarketing. The Internet is an ideal tool for targeting market fragments—market segments far smaller than any considered before. Interactions with fragments are usually characterized by very high levels of customer involvement. Such niche markets can be reached at a fraction of the cost of direct mail and other forms of advertising.
Integrated functions. NBM integrates marketing sub-functions and marketing with other functions. It will redeem sub-functional boundaries within marketing as well as across business functions. For example, marketing, sales, and order processing are integrated functions with NBM.
The need for such integration has been keenly felt; according to a Chilton Publishing report, sales tends to ignore 85% of leads generated by marketing through trade shows and advertising. In Web- based marketing, however, “A person visits the site, gathers information, qualities himself, asks questions, provides answers to questions, builds an interactive relationship, and offers or responds to an offer to do business,” said Ken Sethney of the Sethney Group in INET discussions.
NBM also promotes integration beyond the marketing function. The same resource can be used also to perform customer service and order- processing functions as well as address suppliers, business partners, shareholders, and employees. And all of this communication occurs faster, more accurately, interactively, and at lower cost through NBM than is possible with any other alternative.
Value-added. As a result of this ability to integrate functions and services, and because customers will gain the ability to obtain the lowest price instantaneously on a given stand-alone item, the locus of competition will shift to providing bundles of benefits—combinations of products and services enhanced through customization, database capabilities, updates, and so on. Marketers will slowly shift from treating buyers as customers to regarding them as clients.
Redefined advertising, Given a higher level of customer involvement, marketing communication in the new medium will move from providing simple (and, companies hope, memorable) messages to delivering real information (based on the customer’s requirements) and eliciting a response.
‘Think content, not hype,” said Jill Ellsworth, author of Marketing on the Internet and another INET discussant. Highly creative, hype-dominated advertising serves the needs of the advertiser far more effectively than those of the client. While visual style and panache at every bit as important in NBM they must be accompanied by real substance.
Devastate “traditional” marketers. The strategy for many new NBM entrants might be based primarily on technology. This is already true for a host of online businesses. Many new entrants will be powerful companies looking to expand geographically, primarily in a virtual sense. Others may be telecommunications or credit card companies leveraging their information assets and detailed customer databases to provide a wider array of products and services to customers.
Such competitors will come in without any organizational inertia or sunk investment in existing ways of doing business. If the new entrants are successful (as some inevitably will be), traditional marketers will end up with huge “stranded assets”: networks of warehouses around the country, distributed customer service operations, expensive retail real estate, and so on.
Just as cellular companies have historically been valued on “potential customers in licensed region” rather than on physical assets, NBM companies may he valued on the basis of analogous measures, such as potential customers served.” Over time, of course, potential customers must become actual customers for this type of company to sustain its value.
Empower customers. Though it has become almost a cliché to talk about increasing customer power, it is indeed the case that future customers will call the shots to a far greater extent than ever before. Marketing must move quickly to make customers their allies rather than uneasy adversaries. Customers will no longer be innocent bystanders or passive targets of marketing; they will seek to control it to their advantage.
Indeed, with IT, the very nature of the relations hip between buyers and sellers could be altered, with buyers becoming marketers and sellers becoming prospects. In this environment, marketing management becomes demand management. Databases containing information on product image, prices, inventory availability, and so forth will be used by customers as well as by marketers. Purchase decisions in the future may be influenced by database search and display programs, instead of salespeople.
Re-engineering Marketing Processes Rather than upgrading with piecemeal IT additions, companies will achieve far better results by re-engineering their marketing processes (based on the principles of effective efficiency) and incorporating technology as an inherent element of the redesign.
In the last few years, the re-engineering wave has swept through corporations worldwide. However, relative to other business functions, marketing has been slow to adopt a re-engineering mindset.
As Thomas Davenport pointed out in Process Innovation: “.Nothing is more critical to a firm’s competitive success than its ability to develop new products and services and deliver them to customers Product/service development and delivery are likely candidates for innovation in virtually any company. Yet few have process view of activities, applied innovative thinking to the proces.sea and employed IT or human resources to enable radical change” (italics added).
Davenport suggests that the reason for this has to do with the very nature of marketing activities:
“The open-ended nature of marketing makes it difficult to know when and whether a particular set of activities results in a transaction or relationship. The primary output of a marketing process is thus highly uncertain, and this accounts for many companies unwillingness to consider marketing in process terms.”
Although we won’t be able to address re-engineering marketing processes in detail, Exhibit 2 illustrates how re-engineering might affect three key marketing processes: new product development, order management, and customer retention/relationship management.
Ultimately, to be successful, companies will need to have competency in both marketing and technology. Neither alone will suffice.
Tasks such as planning, analysis. control, compensation systems, and the like all require better marketing management—in the traditional sense of that word. One of the key reasons for poor marketing productivity is that most companies— approximately 70%, according to a 1989 survey by the Institute of Management Accountants— treat marketing activities as revenue centers rather than profit centers. As a result, most marketing managers are under little pressure to deliver high contribution margins.
Many companies that do treat marketing as a profit center rely too much on transfer pricing based on actual costs, rather than standard costs. By using standard costs, it becomes possible to separate manufacturing cost performance from marketing performance; the former is typically outside the control of the marketing manager.
Marketing productivity would be greatly enhanced by (1) adopting activity-based costing, (2) budgeting better, (3) linking compensation with effective efficiency, and (4) conducting an ongoing auditing of marketing activities.
As Philip Kotler points out in the latest edition of his classic Marketing Management text, companies such as General Foods, Du Pont, and Johnson & Johnson have established a “marketing cont roller” position to help improve efficiency. However, this practice is still limited to a few companies and focuses heavily on efficiency of expenditures and profitability; it does not address the effectiveness dimension. To develop a comprehensive marketing accounting discipline, marketing must work with the accounting function.
Developments in this field are occurring rapidly, from the concept of “Economic Value Added” (linking corporate spending to shareholder value creation) to more recent attempts at measuring intellectual capital. These efforts grapple with the measurement of the largely intangible elements that constitute much of the assets and added value in today’s businesses. As such, they are potentially very valuable tools for measuring (and thus improving) marketing productivity.
One accounting tool that is clearly of great importance for marketing is activity-based costing. According to Robert Kaplan, one of the pioneers in the ABC field, “Failure to completely understand cost drivers leads to SKU proliferation; pricing divorced from actual operating costs; poor understanding of product, brand, and customer profitability; ineffective vendor relationships; and hidden costs from inefficient processes.”
The fundamental question posed through the use of ABC is: “Would the customer pay for this activity if they knew you were doing it?” For many marketing activities, the answer is “No.”
Traditional accounting methods allocate overhead as a percentage of direct labor. ABC is based on some fairly simple principles. The first is, because most business activities support the production and delivery of goods and services, they should be regarded as direct product costs. ABC thus abandons the traditional accounting practice of treating large blocks of corporate and overhead expenditures as “fixed costs” allocated evenly across all products. Rather, it defines a much wider section of corporate activities and costs as “variable,” allocating them as directly as possible to specific goods and services.
Activity-based costing becomes especially critical when a company achieves the “preferred supplier” status. In such situations, the customer/partner typically requires that the supplier open its company books, detailing costs for materials, assembly, labor, sales, marketing, and so on. Customers can then bypass entire categories of cost; for example, they may see no need to pay for sales and marketing because the partnership arrangement makes most of those activities unnecessary.
Understandably, activity-based costing is an element that frightens many suppliers and makes them wary of customer partnerships. Indeed, it can expose suppliers to strong-arm abuse; a customer might insist that a supplier sell at 10% over its cost of manufacturing, with no allowance for research and development, technical support, or other activities considered essential to the businesses.
In successful partnerships, however, customers appreciate the supplier’s need to make a good profit. By lowering total system costs, both partners arc able to benefit without an adverse impact on profitability. A striking illustration of this comes from Chrysler, a company that works very closely with its suppliers. Chrysler currently has the lowest cost structure of the Big Three car makers, makes the highest profit per vehicle, and has the most profitable suppliers.
In the grocery business, the use of direct product profitability (DPP) has led to substantial improvements in overall productivity. Marketing productivity can be measured at the account level in a similar way, using a combination of activity- based and account-based costing for marketing activities. ABC enables companies to eliminate the unintended (i.e., hidden) cross-subsidies between accounts that often invite “cream-skimming” competitors to take away highly profitable customers.
The use of ABC in marketing raises effective efficiency through possible reduction in, and more balanced application of marketing resources.
Marketing budgets should be set to achieve specific objectives, rather than fund self-perpetuating commitments. This requires a greater degree of resource flexibility than is traditionally present in most companies.
Marketing dollars also should be reallocated across brands. Well-known, mature brands, for example should be able to prosper with greatly reduced marketing expenditures. Consider P&G’s Ivory brand, which has extraordinarily high levels of consumer awareness and trial. Allocating a large advertising budget to Ivory would be far less productive than using those resources to support a less well-established brand.
Some companies also are experimenting with budgets based on customer acquisition, customer relationship management, customer relationship enhancement, and so forth. This is a sound approach because it forces the integration of marketing elements to achieve a particular objective.
“The customer pays the bills, but not the wages,” said Robert Heller in a January 1Q94 Management Today article. “.. . Decisions on promotions, powers, positions, perks, punishments are made internally. The practice of internal politics, in most companies, heavily outweighs the theory of putting customers first and foremost.”
To improve effective efficiency, companies must create transparent incentive schemes to focus
all marketing personnel on the essentials: increasing the profitability of what they do and increasing customer satisfaction. Companies such as IBM have adopted precisely those two criteria in determining sales force compensation and such approaches could be spread into all areas of marketing.
One area that companies need to look at more carefully is the use of commissions. Many companies, such as Best Buy, Home Depot, and Charles Schwab, have come to the conclusion that commission-based selling is inherently antithetical to achieving a high level of customer satisfaction. While we would not go that far, we do recommend designing sales incentive mechanisms with utmost care so salespeople are rewarded for effective efficiency.
As in any other human or business endeavor, marketing practices suffer from substantial inertia; new practices are added on slowly and old ones are discarded even more slowly. As with creeping product proliferation, marketing programs have a way of accumulating by perpetuating themselves even after they have outlived their usefulness.
Michael Treacy of CSC/ Index Consulting Group has suggested that innovative marketing programs start to lose their effectiveness after three or four companies adopt them. It’s important to distinguish here between marketing innovations that arc short-lived and those which represent a lasting improvement; the latter may cease to be sources of competitive advantage after others adopt them, but are certainly not candidates for termination. We believe that the relationship marketing paradigm falls wider this category.
Marketing could achieve addition through subtraction” by periodically reviewing and rationalizing the whole gamut of marketing activities, programs, and offerings—a “marketing productivity audit.” As always, the criterion to use should be whether or not the elements in question contribute to the achievement of effective efficiency.
In Exhibit 3 on page 30, we have classified the 20 approaches to improving marketing productivity y on the basis of their primary impact. Each approach has both efficiency and effectiveness enhancing potential, though the primary impact may be only in one area. For a number of approaches, the impacts arc strong and nicely balanced between efficiency and effectiveness; most of these have to do with collaborative strategies and the informed use of information technologies.
Science and Art
Conducting business in today’s globalized, highly competitive marketplace is risky and unpredictable. Customers worldwide are becoming accustomed to outstanding levels of quality at affordable prices. They arc no longer willing to subsidize unproductive expenditures by companies, be they on convoluted product development processes, ruinously expensive attempts to push inventory down the distribution pipeline, inefficient purchasing strategies, inefficient provision of support services, or a host of other areas.
Marketing is ultimately about pleasing (even delighting) the customer to such an extent that he or she is willing, even anxious, to engage in a continuous relationship with the seller (see ‘Productivity Lessons From Most-Admired Companies” on facing page). Incessant pressures to increase marketing efficiency without regard for marketing effectiveness can easily lead to customer alienation, rebellion, and ultimately defection.
Companies must excel at both the art and science of marketing but, unfortunately, most attempts to improve marketing practice focus on the latter. Even though we agree that marketing needs to become more scientific (in so doing, it’s bound to become more productive in the traditional sense), this must not occur at the expense of devaluing the art of marketing.
The goals for improving marketing productivity are not all quantifiable. For example, at 3M, marketing goals include increasing earnings by 10% a ye as well as achieving the “preferred supplier” status with top customers. The marketing department is assessed in terms of its overall effectiveness to the company—specifically, the amount of sales brought in by a particular product line, customer satisfaction ratings, and budget/cost analyses.
Ideally, the science of marketing must incorporate within it those human elements normally associated with the art of marketing. Continued, intense pressure for efficiency improvements alone can only lead to an increasingly dehumanizing experience for employees as well as for customers. Such a downward spiral benefits no one except competitors.
Over time, the market will become more efficient through the increased availability of information and knowledge. Companies that improve marketing productivity by today’s standards will still be vulnerable. Marketing productivity must be considered relative to other companies. As the overall market becomes more efficient, the companies that make more than marginal profits will be those best able to tailor their offerings for market fragments and discriminate by price across customer groups. In a highly efficient market effectiveness becomes all the more crucial.
The push for productivity in marketing spending is in no way contradictory to creating and maintaining a market orientation. Being customer-oriented, however, does not automatically mean spending more on marketing. The fact is that too many companies use marketing dollars as a blunt weapon, believing chat if they spend enough, they will become customer-oriented. Instead, they subject existing customers to a barrage of redundant advertising and sales promotions. Focused and tailored marketing spending not only is more efficient, but also reduces the amount of marketing noise and improves customer contentment.
Marketing reform must come from within, rather than being imposed from above. That is the only way to ensure that the changes increase the efficiency as well as the effectiveness of marketing actions.
In the future, marketing will be called upon to make even greater contributions to the corporation than it has in the past. More and more, corporate ‘top line” success (revenues and market share) will depend on the quality of marketing efforts; at the same time, corporate “bottom line” success (profitability) will depend on how cost-effectively marketing is able to perform its tasks.
We would like to acknowledge useful comments by Bob Buzzell on an earlier draft. Raj Sisodia would also like to thank his MBA students at George Mason University, who discussed many of these ideas and collected some of the company examples. The participants on the “INET” listserve provided useful ideas related to net-based marketing. Brigitte Brown and Mary Lou Murray made useful contributions in student projects at George Mason University.
About the Authors
Jagdish N Sheth is the Charles Kellstadt Professor of Marketing at the Gouizeta Business School, Emory University, Atlanta. He was formerly the Robert Brooker Professor of Marketing at the University of Southern California and the Walter Stellner Distinguished Professor of Marketing at the University of Illinois. He has also served on the faculties of Columbia University and the Massachusetts Institute of Technology. Jag has published 26 books and hundreds of articles in marketing and other business disciplines. His book, The Theory of Buyer Behavior (co-authored with John A. Howard), is a classic in the field of consumer behavior and one of the most cited works in marketing. Jag has worked for numerous companies in the United States, Europe, and Asia, both as a consultant and a seminar leader. His clients have included AT&T, Bell Canada, Ford, Motorola, Northern Telecom, 3M, Whirlpool, General Motors, and numerous others. He has been an advisor to the Singapore Economic Development Board and various other governmental agencies in several countries. He has received numerous awards for his work, including the 1992 PD. Converse Award for outstanding contributions to theory in marketing from the American Marketing Association, the Outstanding Marketing Educator award from the Academy of Marketing Science, and the Outstanding Educator Award from Sales and Marketing Executives International.
Rajendra S. Sisodia is Associate Professor of Marketing at George Mason University, in Fairfax, Va. Before joining GMU, he was Assistant Professor of Marketing at Boston University. Raj has a PhD in marketing from Columbia University. His research, teaching, and consulting expertise spans the areas of marketing strategy, marketing productivity, business impacts of information technology, Asia-Pacific business practices, and the impact of the information highway on marketing. Raj has published over 40 articles in conference proceedings and journals such as Harvard Business Review, Journal of Business Strategy, Marketing Letters, Marketing Management, Marketing Research, Journal of Services Marketing, Encyclopedia of Marketing, Information & Management, Telecommunications Policy, International Journal of Technology Management, and Design Management Journal. He has also written over two dozen cases, primarily on strategic and marketing issues in the telecommunications industry.
Exhibit 1 in Part 1 of this article in the Fall 1995 issue contained some errors, The correct exhibit appears below, We apologize for any inconvenience this may have caused.—The Editors