Marketing 101 - The Essentials of Marketing
In articles and forums around the web, there is an obvious, common misconception of exactly what 'Marketing' actually is. Often people use the word marketing as though it were just another word for advertising. Some seem to think that Marketing is just another word for Promotion. Neither is true. Marketing is a far broader topic that holds promotion as a sub-function of marketing, and advertising as a sub-function of promotion.
Whatever your current understanding of marketing, from none to major, this essential primer should provide some interesting reading and should ensure that you have a good grasp of what marketing is, and how to use marketing to massively improve your business.
This won't be a quick post, so make yourself a drink, get comfortable, and prepare for a darned good read that may even change your business life.
So What Is Marketing?
In the broadest sense, marketing incorporates everything about understanding markets (both yours and the ones you have not yet made yours), bringing your product/service to a market, and even developing new markets.
To get to the real essence of marketing, as I've mentioned once or twice before, marketing is about producing what you can sell, rather than just selling what you can produce.
Marketing is basically the strategic part of business.
Marketing incorporates or impacts heavily upon all of the following activities:
Business Development
Product Development
Market Development
Market Research
Competitor Analysis
Pricing Strategy
Public Relations
Customer Service
Promotions
Brand Development
Company/Corporate Identity
So, now that you see how big and broad marketing truly is, I've probably just scared the heck out of you. Well, sip that drink and we'll start on how to get a handle on it.
Start at the beginning
The foundation of all good marketing is to know your market. That means your customers. The well marketed business is completely customer focused. They identify what the customer wants or needs, and then supply it at a price the customer is prepared to pay.
The customer is always right. That is the classic saying which has fallen from favour in recent years. However it is true. The customer is always right, provided that they are the right customer.
Henry
Ford supplied his model T Ford in any colour that customers wanted -
providing it was black. That was important. By having just one colour,
the single production line worked, and so the cost of the final car was
a fraction of what other cars cost. He was selling cheap cars, not
colourful cars. The right customer was the one who wanted a cheap car,
and was prepared to accept the fact that it would be black. They could
always pay for their own respray. 
Placing the customer foremost does not always mean having excellent customer service. It means knowing what the customer's priorities are, and making them your own. With that said, providing value, the values that the customer values most, is where the whole secret lies.
To paraphrase Henry Ford: "Whoever focuses on how much they can give for a dollar, rather than how little, is bound to succeed".
Knowing your customers
The tricky part to this is that you really need to know who your customers are and what they want even before you can make them your customers. Bigger businesses literally do this by carrying out extensive market research to find the best balance of the 4 P's of marketing before they go any further.
I'll come back to the 4 P's in a moment if you are not already familiar with them. First however, I want to discuss ways that the small business, even the Sole-Owner business, can do market research. In fact, you probably did some of this yourselves. You ask people you know. "What do you think of this...?", "Would you pay $50 for a service that...", etc.
Do what market research you can, and if that means carrying your own clipboard in the streets, or means trying to find people in your target market to interview, then so be it. Every scrap you glean will stand you in good stead later on.
It is the data you get from knowing your customers, combined with the data from studying your competition in the market, that helps you to find a good mixture of the 4 P's
The Four P's of Marketing
The four P's of marketing are:
Product
Price
Place
Promotion
Product is what you are selling. Not just the physical product or the actual service, but all the customer benefits and values that the product represents. It is usually not important to have the best possible product. Cutting edge and feature packed products cost more. The key is to have the most valuable product in its price range.
Price is the amount that the customer must pay. This is the acid test of whether the features you added to the product were really valuable, or whether you might have been better to cut a few low-value features out and so be able to offer a lower price.
Place is sometimes thought unimportant to online business. However, many deals still go best with a handshake. Services can only be cost-effectively provided within a fixed travel-radius. Shipping costs matter. Place is still a vital concern. With the internet, all online shops are on the super-highway and equidistant to any customer, and yet people still look for local and regional suppliers. Financial and legal issues are still mostly set by place too. Where will you place your distribution centers? Would better placement of your business let you ship faster or more cost-efficiently?
Promotion is the P that everyone knows Marketing is about. Of course, we are not only talking about advertising in promotions, but also sponsorships, public relations, special offers, viral marketing, and so much more.
Every business, and every product or service, will need its own special blend of those four elements. The cheaper the product and the better your place, the lower the price you can offer. The more attractive a product is for the price, the further people will travel or the longer they'll wait, and the less promotion the product will need.
The 4 P's of marketing all inter-relate to create an overall mix that you can control, and in doing so, can find the optimum blend for your customers and market conditions.
Let's illustrate this with something you'll all know - a computer.
I am going to create a great computer to sell. Using marketing for strategic business, I know I need to research my customers' values, and look at what my competition are supplying.
I find a gap in the market in two respects - first I see that almost all computer 'packages' are far too low on memory by default. Second, most computers are still pretty ugly, though great improvements have been made. I'm locating this business in the city, so I know there are plenty of people and businesses that can buy my machines, and that delivery costs will be cheaper because of that.
Okay, so offering at least 1Gb of memory in every PC is my first product development decision. (You do know that Windows XP won't run at full speed if you have less than 1Gb of memory, right?). Now, that means my machines are either going to be more expensive than my competitors, or I am going to have to cut out some other feature that offers less value.
I could go for a cheaper Graphics card for example, and so develop the computer for the no-nonsense user who wants reliability and performance for serious work, and isn't going to be playing many if any games.
Or I could save some on the processor, and offer a slower but more stable machine that my competitors. The thing is not to just guess, but to know what features customers assign the most value to. In actual fact, this is why most computers you buy in the shops are given inadequate memory - people value other things more highly, and have suffered all the increased likelihood of windows crashing and freezing up for all these years because they were more concerned with a big graphics card and surround-sound speakers, than in supplying Windows with the memory it actually needs (1Gb, remember).
Okay, I decide on a mix of components, some brand name, others generic, and create a PC that will be valued pretty well by customers. I find that I can offer really beautiful cases and matching keyboards in unusual colours (because my brother is a real artist with an airbrush) so I add that too. I now have a unique product that is as valuable as I can get it while not being far above the price of what else is available. I've done the market research to confirm that people will pay that little bit more for the truly beautiful colours and individual look that our custom cases and keyboards offer.
Now I put the price on it. I'd been considering price all along the design process as you noticed, but now is when I decide whether I can cut my margins a little to sell more, or whether I increase my margins so that I'm covered if my brother decides that painting all those cases is hard work and he wants more money.
What I'm actually doing here is betting my business on my belief that the value of the product to my customers is greater than the price tag I'm putting on it. I have now got the mix of product, price and place sorted and now need to add enough promotion to make it work.
A lot of that promotion may include educating my customers so that they realise how important it is for a PC to have enough memory. I can run an education campaign to help them learn that the vast majority of crashes on Windows are due to memory handling errors, and that by having 1Gb of memory, they will be a full 90% less likely to suffer a crash than a user with 256Mb of memory - (All pretty accurate, btw).
The rest of the promotion is to have some advertising that shows of the attractive cases and beautiful colours, inspiring some of the desire that I know the artistic work by my brother will arouse. I go for a couple of big posters at the railway station, some flyers on the high street where my shop is, and place some posters in the windows of some cafes where I know lots of office workers buy their lunch.
I spend quite a bit on some stunning pictures to use in the posters and on my website of course, and pay for some user testing (I know a guy at Site-Report.com) to ensure that the 'extra reliability' I am branding on is going to be supported and reflected by my website. I definitely don't want any unforeseen irony of an unreliable website.
There's the basis of my Promotion in place. I'll also use SEO and SEM too, because they offer unbeatable value. In fact, I decide to sort out shipping for orders from outside the city and oversees. That way I don't have to be so careful to exclude non-local surfers and shoppers. The shipping costs will push up the price massively for those orders of course, but though I'll have a lower conversion rate on shipped orders, I'll have a wider customer base to compensate. I still have superb value on the local business, so my thought for Place is going to pay off.
If the product really does appeal massively to customers, I may find that ongoing promotion isn't needed as the viral marketing effect of customer telling lead takes over. Of course, I may decide that means I'm under-charging, and raise my prices, so that I need to spend a little more on promotion, but not as much more as the higher margins are giving me.
Now that, dear friends, is the essential beginnings of marketing.
There's a lot more to say, but I'm all typed out for now, and there are others who can contribute more and different perspectives and information to this explanation of marketing and how to use it. I'll gladly hand over to them.
Edited by Black_Knight, 12 December 2005 - 09:33 PM.
#2
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Peacekeeper Administrator
Posted 07 May 2004 - 08:02 AM
To my mind this is the most important thread in all the Forums. It
is the make-or-break of any business. Get it right and all that
passion and energy that you have will be focused in the best possible
way on achieving your growth goals (that's growing better, rather than
necessarily growing bigger). Get it wrong and you may find that your
business is only operating at 30% efficiency. This may be enough to
allow you to survive, but you may not have as much fun as you should.
Unfortunately 30% efficiency may not be sufficient to ensure survival in
so many markets.
I would also say what an excellent start Ammon has written to kick off this thread. I couldn't have written it better. I agree 100% with the key points he has raised.
Given that, I thought some "mind-conditioning" points might be worth making. This marketing subject is much more complicated than you probably realize. I want to cover three points.
1. What is Marketing?
2. The Marketing Function?
3. So you think you're customer-centric, do you?
There are more detailed aspects of marketing that will be covered as this thread grows, and I hope a great number of people will wish to contribute. However these points I raise stem from that "helicopter vision" of the subject that I believe is essential before you get into the nitty-gritty.
1. What is Marketing?
I turned to my trusty Fourth Edition of The Concise Oxford Dictionary published in 1956 to check the definition. It doesn't include the word! Yes folks, this subject is relatively new.
Like any computer-savvy individual, I therefore did a Google search for define:marketing. There are all sorts of very different definitions. I give just two below to illustrate the range.
The process of planning and executing the conception, pricing, promotion, and distribution of goods, services, and ideas to create exchanges that satisfy individual and organization objectives.
www.ncn-ltd.co.uk/sellingtaster/misc/glossary.htm
the commercial processes involved in promoting and selling and distributing a product or service; "most companies have a manager in charge of marketing"
www.cogsci.princeton.edu/cgi-bin/webwn
In fact there are very different meanings that different people hold. So don't assume anyone else understands what you are talking about when you use the word 'marketing'. This can best be illustrated by looking at how the word is used in organizations.
2. The Marketing Function?
If you look at the evolution of companies, originally it was all very simple. The cobbler mended shoes and stuck a sign outside his door in the village. People noticed his 'advertising' and popped in with their hole-y shoes. By word-of-mouth others became aware of his fine service (?viral marketing) and his business grew. He was able to hire a helper and even have time to mend his own children's shoes.
He was a stickler for high quality and people were coming from surrounding villages to have their shoes repaired by the best. His little store was becoming too cramped and he was making a fairly good cash stream. He felt that his business was fairly recession-proof since people always wanted their shoes repaired in good times or bad. So he felt confident in building a second cobbler's shop in the next major village and hiring cobblers to work there.
He realized that his time was best spent thinking about sales since he was good at that and hiring cobblers to do the work in his two stores. You can guess how it went, business continued to grow and he progressively built more stores in more villages. He even opened up some stores in the county town. He knew he had a formula for success and decided that he would have to spend more time managing and looking for more opportunities. So he hired a sales manager.
This was happening before 1950 so of course he didn't have the dilemma as to whether he should have called this lady a sales manager or a marketing manager. The word wasn't yet invented.
The essential minimal functions in a company prior to 1950 would be defined as production, sales and accounting. The boss looks after human relations. You make the stuff and then you sell it.
I am not sure how the word, marketing, was first used in organizations. It was probably seen as an additional parallel function, as per the definitions above, which would support the direct selling function. So it might cover advertising and promotions for example. At one point in my career, I had the title Vice-President, Sales and Marketing. I covered both functions. Marketing is still used in many organizations in this sense. It's just a parallel function to the Selling function.
Others have realized a fundamental truth. Your business is really defined by what your customers want to buy from you rather than the competition. Your marketing strategy is the key chapter in your total business strategy. They use the word, Marketing, in a much bigger sense than just a support to sales. This is my view. In this view, the three fundamental functions in a company are production, marketing and finance/accounting.
Marketing has as part of it, the sales function. But more importantly, it now includes Internet marketing. This is another big topic that may not get addressed in this thread. However the fact of the Internet has changed the whole role of direct selling.
3. So you think you're customer-centric, do you?
This is perhaps the most important of the three points I want to make. I believe that no person ever sees the world in exactly the same world as any other person. I developed this point in one of my early newsletters Six Important Words.
I believe it's very tough to try to get into someone else's shoes and see things as they do. I encourage you to take the points that Ammon discussed and try to see them from the customer's point of view rather than you, the business owner. You can read more on this way of looking at things in an article I wrote, "Winning Marketing Plans are Client-Centric.
I believe Marketing is the most important function for your business success. So take the time to do it well. Your rewards will justify your efforts. You'll be glad you did.
I would also say what an excellent start Ammon has written to kick off this thread. I couldn't have written it better.
I agree 100% with the key points he has raised.Given that, I thought some "mind-conditioning" points might be worth making. This marketing subject is much more complicated than you probably realize. I want to cover three points.
1. What is Marketing?
2. The Marketing Function?
3. So you think you're customer-centric, do you?
There are more detailed aspects of marketing that will be covered as this thread grows, and I hope a great number of people will wish to contribute. However these points I raise stem from that "helicopter vision" of the subject that I believe is essential before you get into the nitty-gritty.
1. What is Marketing?
I turned to my trusty Fourth Edition of The Concise Oxford Dictionary published in 1956 to check the definition. It doesn't include the word! Yes folks, this subject is relatively new.
Like any computer-savvy individual, I therefore did a Google search for define:marketing. There are all sorts of very different definitions. I give just two below to illustrate the range.
The process of planning and executing the conception, pricing, promotion, and distribution of goods, services, and ideas to create exchanges that satisfy individual and organization objectives.
www.ncn-ltd.co.uk/sellingtaster/misc/glossary.htm
the commercial processes involved in promoting and selling and distributing a product or service; "most companies have a manager in charge of marketing"
www.cogsci.princeton.edu/cgi-bin/webwn
In fact there are very different meanings that different people hold. So don't assume anyone else understands what you are talking about when you use the word 'marketing'. This can best be illustrated by looking at how the word is used in organizations.
2. The Marketing Function?
If you look at the evolution of companies, originally it was all very simple. The cobbler mended shoes and stuck a sign outside his door in the village. People noticed his 'advertising' and popped in with their hole-y shoes. By word-of-mouth others became aware of his fine service (?viral marketing) and his business grew. He was able to hire a helper and even have time to mend his own children's shoes.
He was a stickler for high quality and people were coming from surrounding villages to have their shoes repaired by the best. His little store was becoming too cramped and he was making a fairly good cash stream. He felt that his business was fairly recession-proof since people always wanted their shoes repaired in good times or bad. So he felt confident in building a second cobbler's shop in the next major village and hiring cobblers to work there.
He realized that his time was best spent thinking about sales since he was good at that and hiring cobblers to do the work in his two stores. You can guess how it went, business continued to grow and he progressively built more stores in more villages. He even opened up some stores in the county town. He knew he had a formula for success and decided that he would have to spend more time managing and looking for more opportunities. So he hired a sales manager.
This was happening before 1950 so of course he didn't have the dilemma as to whether he should have called this lady a sales manager or a marketing manager. The word wasn't yet invented.
The essential minimal functions in a company prior to 1950 would be defined as production, sales and accounting. The boss looks after human relations. You make the stuff and then you sell it.
I am not sure how the word, marketing, was first used in organizations. It was probably seen as an additional parallel function, as per the definitions above, which would support the direct selling function. So it might cover advertising and promotions for example. At one point in my career, I had the title Vice-President, Sales and Marketing. I covered both functions. Marketing is still used in many organizations in this sense. It's just a parallel function to the Selling function.
Others have realized a fundamental truth. Your business is really defined by what your customers want to buy from you rather than the competition. Your marketing strategy is the key chapter in your total business strategy. They use the word, Marketing, in a much bigger sense than just a support to sales. This is my view. In this view, the three fundamental functions in a company are production, marketing and finance/accounting.
Marketing has as part of it, the sales function. But more importantly, it now includes Internet marketing. This is another big topic that may not get addressed in this thread. However the fact of the Internet has changed the whole role of direct selling.
3. So you think you're customer-centric, do you?
This is perhaps the most important of the three points I want to make. I believe that no person ever sees the world in exactly the same world as any other person. I developed this point in one of my early newsletters Six Important Words.
I believe it's very tough to try to get into someone else's shoes and see things as they do. I encourage you to take the points that Ammon discussed and try to see them from the customer's point of view rather than you, the business owner. You can read more on this way of looking at things in an article I wrote, "Winning Marketing Plans are Client-Centric.
I believe Marketing is the most important function for your business success. So take the time to do it well. Your rewards will justify your efforts. You'll be glad you did.
#3
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Ready To Fly Member
Posted 07 May 2004 - 06:09 PM
Barry - really interesting reading. The link to "Winning Marketing
Plans are Client-Centric" isn't working - could you post the correct
link as I'm interested in reading this? Thanks.
Maddy
Maddy
#4
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Peacekeeper Administrator
Posted 07 May 2004 - 06:12 PM
Sorry, I normally check every link in a Preview, but that snuck
through. I made an error in the post code. It's corrected now.
Thanks, Maddy, for pointing that out.
#5
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Honored One Who Served Moderator Alumni
Posted 08 May 2004 - 01:01 AM
Excellent thread, guys. Being a marketing bod myself, I'll dive in and add my piece.
Product Differentiation
As Ammon illustrates, marketing has become a fundamental aspect of product and service design. It simply cannot be bolted on as an afterthought. It must shape the product or service.
But even that isn't enough.
Why?
Because the world is full of stuff. Stuff is not hard to come by. Stuff isn't rare. There is way too much stuff. And there are way too many people advertising their identical stuff. It's pretty hard to have and maintain a unique selling point in an established, information rich marketplace.
In order to stand out, you don't just need to be a bit different. You need to be radically different.
A lot of people have their favourite books they recommend, and one I'd recommend to those new to marketing is "The Purple Cow" by Seth Godin. In this book, Seth talks a lot about how marketing is changing beyond the P's, and how the unique selling point needs to be pushed harder than ever before in order to generate attention. While the subject matter can be found elsewhere, the book is a quick, easy read for those who want to learn the essentials of product differentiation. And it's purple
"Are you making very good stuff? How fast can you stop?"
Very good doesn't cut it.
The world is full of "very good", therefore very good is invisible. "Very good" has become the baseline standard. This is why new, me-too articles on meta tags, no matter how great in terms of quality, will remain invisible. Why? They are not remarkable, no matter how well they are written. Remarkable isn't necessarily about quality, it means worthy of being remarked upon or noticed. It is about product differentation.
This forum is full of very good threads, but the remarkable threads, the genuinely different threads, stand out a mile. And people will talk about them. They will link to them. They will link to this one, not simply because it contains very good information, but because it is talking about something relevant that hasn't been talked about much in the context of webmaster forums. And that differention, in itself, is effective marketing.
Don't strive to be very good. Strive to be remarkable.
Product Differentiation
As Ammon illustrates, marketing has become a fundamental aspect of product and service design. It simply cannot be bolted on as an afterthought. It must shape the product or service.
But even that isn't enough.
Why?
Because the world is full of stuff. Stuff is not hard to come by. Stuff isn't rare. There is way too much stuff. And there are way too many people advertising their identical stuff. It's pretty hard to have and maintain a unique selling point in an established, information rich marketplace.
In order to stand out, you don't just need to be a bit different. You need to be radically different.
A lot of people have their favourite books they recommend, and one I'd recommend to those new to marketing is "The Purple Cow" by Seth Godin. In this book, Seth talks a lot about how marketing is changing beyond the P's, and how the unique selling point needs to be pushed harder than ever before in order to generate attention. While the subject matter can be found elsewhere, the book is a quick, easy read for those who want to learn the essentials of product differentiation. And it's purple
"Are you making very good stuff? How fast can you stop?"
Very good doesn't cut it.
The world is full of "very good", therefore very good is invisible. "Very good" has become the baseline standard. This is why new, me-too articles on meta tags, no matter how great in terms of quality, will remain invisible. Why? They are not remarkable, no matter how well they are written. Remarkable isn't necessarily about quality, it means worthy of being remarked upon or noticed. It is about product differentation.
This forum is full of very good threads, but the remarkable threads, the genuinely different threads, stand out a mile. And people will talk about them. They will link to them. They will link to this one, not simply because it contains very good information, but because it is talking about something relevant that hasn't been talked about much in the context of webmaster forums. And that differention, in itself, is effective marketing.
Don't strive to be very good. Strive to be remarkable.
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Honored One Who Served Moderator Alumni
Posted 08 May 2004 - 05:33 AM
Thanks, Peter and Barry, for helping to spread this vital
information. Anyone who hasn't bookmarked this discussion thread yet
should do so now, because there's a lot of valuable information still to
come.
And with that reminder made, lets get on with providing it.
Knowing Your Customers
Okay, we've mentioned already that the first, golden rule of marketing is to be customer focused. The fact is, that the better you know your customers, the better you can anticipate their needs, the better you can serve their needs, and the better you'll be able to sell them what they want and make them delighted about it. So in this post, let's look at how to get to know your customers.
The more you can learn about your customers, both existing and potential, the better. Watch them, find out all you can about what they want and what they value. Talk to them and ask them questions. Make friends and allies of your customers. Show them that you both have the same goal of making them happier at heart.
Collecting Customer Information
Now we have certainly all learned that we are supposed to collect information about our customers. However, many businesses are not nearly as clear on what kind of information they should collect, how best to collect it, or how to use it once they have collected it.
The kind of information you most definitely want is the kind that you can use to build up customer profiles (sort of a 'stereotype' of typical customers) and of course, the ability to identify customer segments so that you can tailor your products and services for particular key groups and types of your customers.
How to collect the information isn't too hard either. In-house you'll probably have plenty of data in invoices, shipping info, and perhaps a mailing list. Regulatory bodies often hold plenty of data about companies and finances which can be great for profiling your B2B customers. Customer feedback is a staple everyone knows about, but those who freely give feedback may not be representative of the broad customer base. Customer Interaction, which is basically market research (either professional or your own) can therefore be very useful.
I have known businesses to offer $50 to people they selected as being representative of their target customer type to come in and be interviewed and get a lot of priceless info that way. You could offer free trials of a product or service on the basis that customers taking the offer would provide detailed feedback and a brief telephone interview. The options are limitless. Recognizing the imperative need to gather information from your customers, using any option you can make work effectively for you, (and comfortably for customers) is the thing.
Customer Profiling
For a basic customer profile, you want to know what age group your customers are in, and the male/female split. You want to know where they live, and how far they are prepared to travel or have things shipped. Do they make one-off purchases or have an ongoing relationship with suppliers? How much do they earn and what proportion of that are they spending each month/year?
For business to business customers, you'll be looking to profile the company size, the industry, location, turnover, and spending. Just these few basic type of questions allow you to build a basic customer profile. This can immediately pay dividends.
For an example, I quote an ecommerce venture that was selling lingerie online. Through profiling, they discovered that a very significant segment of their customers were actually transvestites, using the relative anonymity of the web to avoid embarrassment or prejudice. Another major segment was men buying lingerie for their lovers. Through their profiling, they discovered that women were actually a minority of their actual customers and were able to make important and immediate changes to their marketing to take into account this better understanding of who their customers really were, and in doing so, serve them better.
Some companies make complete dossiers of their customer profiles, to effectively create a full persona for the typical customer groups, right down to imaginary names, professions, families, and commitments, etc. The forum thread "MSN knows their customers, and so can you" provides a good example and some further resources on customer profiling.
Remember to also gather some of the important data that directly relates to sales and customer value too. What is the average transaction size, and does this vary by customer profile? How often do your customers make a purchase from you, and again, does this vary by customer profile? Which payment methods are used? Through these questions, you can find which customers are the most profitable to you, and which are the least profitable.
Customer Lifetime Value
It is always preferable to develop an ongoing relationship with repeat customers rather than depend on costly promotions to attract fresh custom. You should calculate your Customer Lifetime Value to highlight just how important this factor is.
To calculate your Customer Lifetime Value, take the average transaction size that you deal with. Multiply this by the number of purchases an average customer makes from you each year to calculate the average annual sales volume of each customer you have.
e.g. I determine that an average transaction is $50, and that an average customer buys from me just once each year, so the average annual sales volume per customer is (50 x 1) $50.
How many years does your average customer keep buying from you? Multiply the annual sales volume per customer by that number of years to calculate their direct lifetime value.
I have determined from looking at billing details that my average customer keeps buying from my company for around 3 years, so their direct lifetime value is 3 yrs multiplied by $50/yr = $150
How many additional customers are referred to you each year by your average customer? Multiply that number by the number of years that your average customer keeps buying from you.
I've ascertained that an average customer refers 2 new customers to me each year, so in the 3 years that they are customers, they refer (2 x 3) 6 additional customers.
Finally multiply the direct lifetime value of the customer by the number of total referrals that your average customer brings, and add the direct lifetime value to the result. This is the total customer lifetime value.
Since an average customer has a direct lifetime value of $150, the 6 referrals bring ($150 x 6) $600 and then adding the customer's own lifetime value of $150 means an average customer is worth a total of $750 (and more when you consider that the six referrals they brought may each in turn bring six more).
Take a look at those figures and calculate how much more you would make if you could encourage a customer to make just one extra referral each year, and also to remain a customer for just one extra year. It makes a big difference doesn't it?
3 referrals a year for 4 years mean a total of 12 referrals, with each having a direct lifetime value of (4yrs x $50) $200, so the total lifetime value of the average customer would be (12 x $200 + $200) $2,600
If that doesn't show you why gaining customer loyalty and building ongoing customer relationships is so incredibly important, then you are probably not cut out for business. Customer relationships are absolutely vital to any business.
And with that reminder made, lets get on with providing it.
Knowing Your Customers
Okay, we've mentioned already that the first, golden rule of marketing is to be customer focused. The fact is, that the better you know your customers, the better you can anticipate their needs, the better you can serve their needs, and the better you'll be able to sell them what they want and make them delighted about it. So in this post, let's look at how to get to know your customers.
The more you can learn about your customers, both existing and potential, the better. Watch them, find out all you can about what they want and what they value. Talk to them and ask them questions. Make friends and allies of your customers. Show them that you both have the same goal of making them happier at heart.
Collecting Customer Information
Now we have certainly all learned that we are supposed to collect information about our customers. However, many businesses are not nearly as clear on what kind of information they should collect, how best to collect it, or how to use it once they have collected it.
The kind of information you most definitely want is the kind that you can use to build up customer profiles (sort of a 'stereotype' of typical customers) and of course, the ability to identify customer segments so that you can tailor your products and services for particular key groups and types of your customers.
How to collect the information isn't too hard either. In-house you'll probably have plenty of data in invoices, shipping info, and perhaps a mailing list. Regulatory bodies often hold plenty of data about companies and finances which can be great for profiling your B2B customers. Customer feedback is a staple everyone knows about, but those who freely give feedback may not be representative of the broad customer base. Customer Interaction, which is basically market research (either professional or your own) can therefore be very useful.
I have known businesses to offer $50 to people they selected as being representative of their target customer type to come in and be interviewed and get a lot of priceless info that way. You could offer free trials of a product or service on the basis that customers taking the offer would provide detailed feedback and a brief telephone interview. The options are limitless. Recognizing the imperative need to gather information from your customers, using any option you can make work effectively for you, (and comfortably for customers) is the thing.
Customer Profiling
For a basic customer profile, you want to know what age group your customers are in, and the male/female split. You want to know where they live, and how far they are prepared to travel or have things shipped. Do they make one-off purchases or have an ongoing relationship with suppliers? How much do they earn and what proportion of that are they spending each month/year?
For business to business customers, you'll be looking to profile the company size, the industry, location, turnover, and spending. Just these few basic type of questions allow you to build a basic customer profile. This can immediately pay dividends.
For an example, I quote an ecommerce venture that was selling lingerie online. Through profiling, they discovered that a very significant segment of their customers were actually transvestites, using the relative anonymity of the web to avoid embarrassment or prejudice. Another major segment was men buying lingerie for their lovers. Through their profiling, they discovered that women were actually a minority of their actual customers and were able to make important and immediate changes to their marketing to take into account this better understanding of who their customers really were, and in doing so, serve them better.
Some companies make complete dossiers of their customer profiles, to effectively create a full persona for the typical customer groups, right down to imaginary names, professions, families, and commitments, etc. The forum thread "MSN knows their customers, and so can you" provides a good example and some further resources on customer profiling.
Remember to also gather some of the important data that directly relates to sales and customer value too. What is the average transaction size, and does this vary by customer profile? How often do your customers make a purchase from you, and again, does this vary by customer profile? Which payment methods are used? Through these questions, you can find which customers are the most profitable to you, and which are the least profitable.
Customer Lifetime Value
It is always preferable to develop an ongoing relationship with repeat customers rather than depend on costly promotions to attract fresh custom. You should calculate your Customer Lifetime Value to highlight just how important this factor is.
To calculate your Customer Lifetime Value, take the average transaction size that you deal with. Multiply this by the number of purchases an average customer makes from you each year to calculate the average annual sales volume of each customer you have.
e.g. I determine that an average transaction is $50, and that an average customer buys from me just once each year, so the average annual sales volume per customer is (50 x 1) $50.
How many years does your average customer keep buying from you? Multiply the annual sales volume per customer by that number of years to calculate their direct lifetime value.
I have determined from looking at billing details that my average customer keeps buying from my company for around 3 years, so their direct lifetime value is 3 yrs multiplied by $50/yr = $150
How many additional customers are referred to you each year by your average customer? Multiply that number by the number of years that your average customer keeps buying from you.
I've ascertained that an average customer refers 2 new customers to me each year, so in the 3 years that they are customers, they refer (2 x 3) 6 additional customers.
Finally multiply the direct lifetime value of the customer by the number of total referrals that your average customer brings, and add the direct lifetime value to the result. This is the total customer lifetime value.
Since an average customer has a direct lifetime value of $150, the 6 referrals bring ($150 x 6) $600 and then adding the customer's own lifetime value of $150 means an average customer is worth a total of $750 (and more when you consider that the six referrals they brought may each in turn bring six more).
Take a look at those figures and calculate how much more you would make if you could encourage a customer to make just one extra referral each year, and also to remain a customer for just one extra year. It makes a big difference doesn't it?
3 referrals a year for 4 years mean a total of 12 referrals, with each having a direct lifetime value of (4yrs x $50) $200, so the total lifetime value of the average customer would be (12 x $200 + $200) $2,600
If that doesn't show you why gaining customer loyalty and building ongoing customer relationships is so incredibly important, then you are probably not cut out for business. Customer relationships are absolutely vital to any business.
#7
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Posted 08 May 2004 - 01:11 PM
Ammon and Barry,
This is fundamental stuff for all of us and I applaud your effort.
(It is useful to read again, just to refresh and for those starting out to point in the right direction.)
To often, people make a decision to start a business online and get caught up in the "hype and hoopla."
The reality is starting a business online is no different from starting a bricks and mortar business. Business is business.
Yes the Internet offers some tremendous opportunities and can act as the great democratizer, but if folks don't have an understanding of the basics ... you will quickly become another statistic.
Hey, it is also a great promo tool for the forum.
Cheers, John.
So, I look forward to the next installment.
Kind regards,
John
John Glube
Toronto, Canada
This is fundamental stuff for all of us and I applaud your effort.
(It is useful to read again, just to refresh and for those starting out to point in the right direction.)
To often, people make a decision to start a business online and get caught up in the "hype and hoopla."
The reality is starting a business online is no different from starting a bricks and mortar business. Business is business.
Yes the Internet offers some tremendous opportunities and can act as the great democratizer, but if folks don't have an understanding of the basics ... you will quickly become another statistic.
Hey, it is also a great promo tool for the forum.
Cheers, John.
So, I look forward to the next installment.
Kind regards,
John
John Glube
Toronto, Canada
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Posted 10 May 2004 - 04:22 PM
Hi Guys,
This is a great post – thanks.
In addition to all the excellent posts, I'd like to make my humble addition regarding the theme of customer differentiation, that is, using your customer base to gain a sustainable competitive advantage.
I hope I communicate my thoughts with clarity…
A strong theme in this thread is the customer and it is evident that this must be the cornerstone of all marketing. The onus being for your company to deliver value to its customers.
For me delivering value can only be achieved by:
1. Understand who your customers are.
2. Learn about them
3. Provide relevant value to them – not what you think value is, but rather what your customers 'tell' you is valuable to them
Hopefully, you should see where I am going… to do the above, you need to enter into a qualitative relationship with your customers, and herein another issue lies:
Given that all this relationship malarkey costs resources, it is imperative that one focuses on acquiring and maintaining only quality customers i.e. those that offer sufficient ‘paybacks’ to make such an exercise worthwhile. This is a somewhat difficult concept for those whom are hell bent on simply maximising the number of customers. Please note I am not saying that you shouldn’t maximise your customers, what I am saying is: maximise the right type of customer.
Ammon did a great job of explaining the need to profile customers. During this process, in time, you should also be able to ascertain whether your customers are:
1. Transaction buyers: customers only interested in price.
2. Relationship buyers: customers looking for some form of relationship.
It is clear that the first type have no loyalty; they are driven by price and will go to the ‘best deal’. Why waste precious resources on them?
The second group, on the other hand, in addition to wanting reliable/quality products and services also seek something extra: people who recognise then, remember them, do favours for them and build a relationship with them. Such customers know that they can possibly save money by shopping around, but would rather not waste their time. This is the type of customer you want to build relationships with and tap into their ‘lifetime value’.
So how do you build relationships? Easy, as echoed throughout this entire thread, provide relevant value... you get what you give. Enter into that learning relationship whereby with every interaction, you learn more about your customer allowing the relationship to become smarter over time – you will begin to ‘naturally know’ what the customer wants and this will engender loyalty.
In this vain, the technology is a facilitator – use it! Don’t, however, fall into the trap of using technology for the sake of it, make sure you know what the focus is!
By building a quality base of loyal customers, you can then begin to create customer differentiation i.e. your competitive advantage is your customer base and your impermeable relationship with them. All other things may be replicated (products; services) by your competitors, but the quality of your relationship can’t; this will act as a protective factor. Over time this will deepen so why would the customer go to a competitor? Think of all the time he needs to spend to get to a level where you guys are at.
Example: I go to the same coffee shop. Why? They know just how I like my drinks (semi skimmed, no cream etc!). I don’t need to explain to them, they do it. Now I can go to other shops and even get my mocha cheaper, but I would then have to spend time undergoing this process whereby they learn how I like my drinks etc… I don’t have time to watch over the server’s shoulder!.. the current company does it just fine. Similarly by building that relationship with me (through good service, willingness to accommodate me etc) I want to give them my business, because they are cool – I have an affiliation with them.
OK speaking of coffee I think I need some. The main message of my post is the need to focus on building a quality base of customers. Allocate your resources into identifying, acquiring, retaining and growing your valuable customers. On the Net there is this tendency for wanting to be ‘all things to all people’ which often results in ‘being nothing to no-one’.
Equally important is the need for quality relationships that you grow over time with your customers. The more you learn and understand about them, the more you can serve their needs which equate to loyalty and increased ‘customer share’.
Peace
Amjid
This is a great post – thanks.
In addition to all the excellent posts, I'd like to make my humble addition regarding the theme of customer differentiation, that is, using your customer base to gain a sustainable competitive advantage.
I hope I communicate my thoughts with clarity…
A strong theme in this thread is the customer and it is evident that this must be the cornerstone of all marketing. The onus being for your company to deliver value to its customers.
For me delivering value can only be achieved by:
1. Understand who your customers are.
2. Learn about them
3. Provide relevant value to them – not what you think value is, but rather what your customers 'tell' you is valuable to them
Hopefully, you should see where I am going… to do the above, you need to enter into a qualitative relationship with your customers, and herein another issue lies:
Given that all this relationship malarkey costs resources, it is imperative that one focuses on acquiring and maintaining only quality customers i.e. those that offer sufficient ‘paybacks’ to make such an exercise worthwhile. This is a somewhat difficult concept for those whom are hell bent on simply maximising the number of customers. Please note I am not saying that you shouldn’t maximise your customers, what I am saying is: maximise the right type of customer.
Ammon did a great job of explaining the need to profile customers. During this process, in time, you should also be able to ascertain whether your customers are:
1. Transaction buyers: customers only interested in price.
2. Relationship buyers: customers looking for some form of relationship.
It is clear that the first type have no loyalty; they are driven by price and will go to the ‘best deal’. Why waste precious resources on them?
The second group, on the other hand, in addition to wanting reliable/quality products and services also seek something extra: people who recognise then, remember them, do favours for them and build a relationship with them. Such customers know that they can possibly save money by shopping around, but would rather not waste their time. This is the type of customer you want to build relationships with and tap into their ‘lifetime value’.
So how do you build relationships? Easy, as echoed throughout this entire thread, provide relevant value... you get what you give. Enter into that learning relationship whereby with every interaction, you learn more about your customer allowing the relationship to become smarter over time – you will begin to ‘naturally know’ what the customer wants and this will engender loyalty.
In this vain, the technology is a facilitator – use it! Don’t, however, fall into the trap of using technology for the sake of it, make sure you know what the focus is!
By building a quality base of loyal customers, you can then begin to create customer differentiation i.e. your competitive advantage is your customer base and your impermeable relationship with them. All other things may be replicated (products; services) by your competitors, but the quality of your relationship can’t; this will act as a protective factor. Over time this will deepen so why would the customer go to a competitor? Think of all the time he needs to spend to get to a level where you guys are at.
Example: I go to the same coffee shop. Why? They know just how I like my drinks (semi skimmed, no cream etc!). I don’t need to explain to them, they do it. Now I can go to other shops and even get my mocha cheaper, but I would then have to spend time undergoing this process whereby they learn how I like my drinks etc… I don’t have time to watch over the server’s shoulder!.. the current company does it just fine. Similarly by building that relationship with me (through good service, willingness to accommodate me etc) I want to give them my business, because they are cool – I have an affiliation with them.
OK speaking of coffee I think I need some. The main message of my post is the need to focus on building a quality base of customers. Allocate your resources into identifying, acquiring, retaining and growing your valuable customers. On the Net there is this tendency for wanting to be ‘all things to all people’ which often results in ‘being nothing to no-one’.
Equally important is the need for quality relationships that you grow over time with your customers. The more you learn and understand about them, the more you can serve their needs which equate to loyalty and increased ‘customer share’.
Peace
Amjid
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Posted 12 May 2004 - 08:41 AM
Good points, Amjid, and thanks for making them. Those are great
points you raise about some customers being more valuable than others.
Of course, what I want to talk about now, is ways of promoting less
valuable customers into more valuable ones.
We're talking Loyalty and reward programs.
But first, lets take a step back and look at all the different levels of customer involvement we have, in ascending order of value:
Untouched - The customer we haven't reached and who hasn't heard about us.
Unmoved - This customer has heard of us, our marketing has reached them, but they are not ready to buy from us.
Prospect - This customer is considering buying, maybe from us, or maybe from a competitor. We're in the running, but haven't closed the sale.
Customer - This customer has made a one-off purchase from us.
Client - This is a happy customer who has returned to buy from us again, and is now a regular client.
Advocate - This customer not only buys from us himself, but also recommends us to others he knows.
Now, the key thing is that every customer begins at the first level of that list and starts moving to higher values. You can make that clear by reading the list to yourself again, and this time, add the words "so far" to each line.
You have control over whether customers move up or down in value, because it will largely be based upon how you compare to your competitors, and how you relate to your clients.
So, lets look at loyalty and rewards programs, which can be invaluable tools for helping move customers in the direction you want on that value list.
Now, the reason we need to reward loyalty is simple. It is because customers need a good solid reason to be loyal. They'll be loyal to you because it helps them, not because it helps you.
The basic loyalty system has been proven to work for many businesses. You give customers a card that records their transactions with you, and when they reach a set level, they become eligable for special bonuses, special treatment or gifts.
One of the cool benefits of these systems are that you don't have to work out complex ways of working out repeat custom anymore, because now your customers are volunteering that information. It makes it easy as pie to gather the data to spot buying patterns and all sorts of useful data for improving your products and services. Loyal customers are also much more likely to fill in questionnaires and offer you more details about themselves.
Offering discounts off of future purchases is always a winner and is the simplest form of loyalty program. A discount off of their next purchase from you makes your company even more attractive when they next need to buy. It is not an expense, because the money you'd have spent on advertising to them, maybe paying for their click in search, all that is avoided now. The discount voucher probably works out cheaper, and certainly offers a much higher conversion rate.
That doesn't mean you can ever stop attracting new customers, of course. Any customer base has an attrition rate, where customers move, change jobs, change needs, or even die. A static customer base is always a shrinking customer base. You must always attract customers at least as fast as you lose them, and preferably faster, allowing you to grow.
You can use the loyalty and rewards program again to help you here. Simply offer incentives and rewards for customers who send you leads and referrals. Offer a small incentive like a small gift, a discount voucher, or entry into some prize draw to any customer who gives you a lead. Offer a higher reward/incentive bonus if the lead they refer actually becomes a customer, and they'll do their best to send you the best leads they can.
In summary, learn that list of customers by value, and think through the things that make a customer move up, or down, the value list. Look at ways to incentivize them moving to a higher value, and examine the reasons that customer may move in the wrong direction, and seek to make that happen less.
Incidentally, quite a bit of research has shown that customers who make a complaint, but have it resolved quickly and pleasantly, often become more loyal advocates than customers who never made a complaint at all.
I'd recommend the recent discussion thread "A little service goes a long way" as an excellent reference for further information about dealing with customer complaints.
We're talking Loyalty and reward programs.
But first, lets take a step back and look at all the different levels of customer involvement we have, in ascending order of value:
Untouched - The customer we haven't reached and who hasn't heard about us.
Unmoved - This customer has heard of us, our marketing has reached them, but they are not ready to buy from us.
Prospect - This customer is considering buying, maybe from us, or maybe from a competitor. We're in the running, but haven't closed the sale.
Customer - This customer has made a one-off purchase from us.
Client - This is a happy customer who has returned to buy from us again, and is now a regular client.
Advocate - This customer not only buys from us himself, but also recommends us to others he knows.
Now, the key thing is that every customer begins at the first level of that list and starts moving to higher values. You can make that clear by reading the list to yourself again, and this time, add the words "so far" to each line.
You have control over whether customers move up or down in value, because it will largely be based upon how you compare to your competitors, and how you relate to your clients.
So, lets look at loyalty and rewards programs, which can be invaluable tools for helping move customers in the direction you want on that value list.
Now, the reason we need to reward loyalty is simple. It is because customers need a good solid reason to be loyal. They'll be loyal to you because it helps them, not because it helps you.
The basic loyalty system has been proven to work for many businesses. You give customers a card that records their transactions with you, and when they reach a set level, they become eligable for special bonuses, special treatment or gifts.
One of the cool benefits of these systems are that you don't have to work out complex ways of working out repeat custom anymore, because now your customers are volunteering that information. It makes it easy as pie to gather the data to spot buying patterns and all sorts of useful data for improving your products and services. Loyal customers are also much more likely to fill in questionnaires and offer you more details about themselves.
Offering discounts off of future purchases is always a winner and is the simplest form of loyalty program. A discount off of their next purchase from you makes your company even more attractive when they next need to buy. It is not an expense, because the money you'd have spent on advertising to them, maybe paying for their click in search, all that is avoided now. The discount voucher probably works out cheaper, and certainly offers a much higher conversion rate.
That doesn't mean you can ever stop attracting new customers, of course. Any customer base has an attrition rate, where customers move, change jobs, change needs, or even die. A static customer base is always a shrinking customer base. You must always attract customers at least as fast as you lose them, and preferably faster, allowing you to grow.
You can use the loyalty and rewards program again to help you here. Simply offer incentives and rewards for customers who send you leads and referrals. Offer a small incentive like a small gift, a discount voucher, or entry into some prize draw to any customer who gives you a lead. Offer a higher reward/incentive bonus if the lead they refer actually becomes a customer, and they'll do their best to send you the best leads they can.
In summary, learn that list of customers by value, and think through the things that make a customer move up, or down, the value list. Look at ways to incentivize them moving to a higher value, and examine the reasons that customer may move in the wrong direction, and seek to make that happen less.
Incidentally, quite a bit of research has shown that customers who make a complaint, but have it resolved quickly and pleasantly, often become more loyal advocates than customers who never made a complaint at all.
I'd recommend the recent discussion thread "A little service goes a long way" as an excellent reference for further information about dealing with customer complaints.
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Peacekeeper Administrator
Posted 12 May 2004 - 04:27 PM
There is another important one to add to that list of customer states. Can you guess it?
Well it's the lost customer: in other words, someone who used to buy from you and no longer does so. These are really important people. Perhaps it was just some small thing you did wrong and by approaching them again, you can find what it was and by being sorry and making some kind of recompense you can win them back.
In a sense it's only from the lost customers that you hear the truth about your product or service. There's a high-faluting term for something that affects actual customers. It's called 'cognitive dissonance'. People don't like to express negative things about products they are buying and using. They like to say things that confirm what wise and prudent shoppers they are. This doesn't apply to the lost customers. If you approach them in the right way looking for help on what you can do better, then they will tell you.
At the extreme right of the scale, Ammon mentioned the Advocates. I've also heard the term 'Missionaries' used. These are the highly satisfied customers who go around encouraging all their friends to buy from that fine company. It's just great to have such customers.
However there may be a group at completely the other end of the spectrum. They are the lost customers, who are very dissatisfied. Sometimes these are labelled "Activists" or "Revolutionaries". Unfortunately since bad news travels ten times as fast as good news, they tend to influence many more people than the Missionaries. Some of them may be completely impossible to deal with.
However a good proportion may be willing to listen. Again they may help you understand some real truths about your company and your products and services. If you work hard enough, you may be able to turn them around. Surprisingly such people are sometimes a little like Paul on the road to Damascus, for those who know their Bible. From being the strongest Revolutionaries, they suddenly switch to become the strongest Missionaries.
A final footnote is that Lost Customers were persuaded to buy from you once. It may be easier to bring them back into the fold, than to persuade some of those Untouched or Unmoved folk to become Prospects.
Well it's the lost customer: in other words, someone who used to buy from you and no longer does so. These are really important people. Perhaps it was just some small thing you did wrong and by approaching them again, you can find what it was and by being sorry and making some kind of recompense you can win them back.
In a sense it's only from the lost customers that you hear the truth about your product or service. There's a high-faluting term for something that affects actual customers. It's called 'cognitive dissonance'. People don't like to express negative things about products they are buying and using. They like to say things that confirm what wise and prudent shoppers they are. This doesn't apply to the lost customers. If you approach them in the right way looking for help on what you can do better, then they will tell you.
At the extreme right of the scale, Ammon mentioned the Advocates. I've also heard the term 'Missionaries' used. These are the highly satisfied customers who go around encouraging all their friends to buy from that fine company. It's just great to have such customers.
However there may be a group at completely the other end of the spectrum. They are the lost customers, who are very dissatisfied. Sometimes these are labelled "Activists" or "Revolutionaries". Unfortunately since bad news travels ten times as fast as good news, they tend to influence many more people than the Missionaries. Some of them may be completely impossible to deal with.
However a good proportion may be willing to listen. Again they may help you understand some real truths about your company and your products and services. If you work hard enough, you may be able to turn them around. Surprisingly such people are sometimes a little like Paul on the road to Damascus, for those who know their Bible. From being the strongest Revolutionaries, they suddenly switch to become the strongest Missionaries.
A final footnote is that Lost Customers were persuaded to buy from you once. It may be easier to bring them back into the fold, than to persuade some of those Untouched or Unmoved folk to become Prospects.
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Posted 28 November 2005 - 11:57 PM
In your opening post, Ammon, you talk about pricing strategies.
I'd like to explore this topic a bit further.
There will always be companies that strive to be the cheapest, which would seem to be a good strategy on the surface. No doubt, their thinking is that they'll have reduced margin, but will more than make up for it with volume. Do you think this lowest price strategy work against companies by creating a 'perception' of inferior quality?
I'd like to explore this topic a bit further.
There will always be companies that strive to be the cheapest, which would seem to be a good strategy on the surface. No doubt, their thinking is that they'll have reduced margin, but will more than make up for it with volume. Do you think this lowest price strategy work against companies by creating a 'perception' of inferior quality?
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Posted 29 November 2005 - 01:11 AM
Good question, Garrick.
Yes, there is always that element of doubt when we shop around. The idea that if one company can really sell the same thing for x amount, why aren't all the companies price-matching? We naturally smell cheaper or inferior quality. We sense a catch.
There's truth to that too. How can one company successfully undercut all the competitors? Well, it does happen. Cheaper labour can be one way. Bulk-buying discounts can be another. And where those things happen, and the price difference is explained (factory stores, warehouse discounts, large chains) the public are reassured and are more than happy to buy the cheaper goods, assured that it is not the quality that has cheapened, but the supply chain.
However, one of the truly key points to get across is that the cheapest deal is not always the most valuable deal, or even the most cost-efficient purchase. People are always willing to pay more (money) to get more (value). Save money by going to collect, or pay the extra to have it delivered? Pay more to take it home now, or save money by ordering it and having to wait for delivery?
You have to know what market is willing to pay what price and for what. It is a balancing act, like so many things are. All things being equal, most people would rather pay less for the same goods and service of course. But then if you are selling the same goods and service, you've already missed the whole point of having a USP, of differentiating your offering, and could already be doomed.
I'm reminded of a real life case in these forums, where our own Caissa (Cre8asite's Example of the Year 2003) said how Amazon was able to sell one of her leading products at a price that was effectively cheaper (because of the immense bulk buying discount Amazon can get) than she could buy it from the manufacturer.
I'm a huge fan of "value extras", with the very strong proviso that they truly do add core value, as defined by your market/customers, not mere bloat and creeping featurism that RCJordan provided the name and link for in a recent post.
The price is something that helps balance what you offer, against what a potential customer is asked to give for it. One cannot equate price to value. Price can be lowered to increase value, but no more effectively than the offering can be improved to increase value.
What it all comes down to, is that a markedly lower price can create doubts, instead of desires. When in doubt regarding prices, people will often look to what they trust instead, and brands can do very well from this situation. I guess it shows confidence to not lower a price, and it may often show a lack of confidence in the product when one company undervalues it.
There are no fixed answers here, as with so much in marketing. It is about finding the balance that you believe will work best for your market. Some markets are about economy and some are about luxury. Which is the richer market for any given company to enter/target often depends on their own abilities to identify with that market, connect with that market, even to handle bulk, or to sell with confidence.
Yes, there is always that element of doubt when we shop around. The idea that if one company can really sell the same thing for x amount, why aren't all the companies price-matching? We naturally smell cheaper or inferior quality. We sense a catch.
There's truth to that too. How can one company successfully undercut all the competitors? Well, it does happen. Cheaper labour can be one way. Bulk-buying discounts can be another. And where those things happen, and the price difference is explained (factory stores, warehouse discounts, large chains) the public are reassured and are more than happy to buy the cheaper goods, assured that it is not the quality that has cheapened, but the supply chain.
However, one of the truly key points to get across is that the cheapest deal is not always the most valuable deal, or even the most cost-efficient purchase. People are always willing to pay more (money) to get more (value). Save money by going to collect, or pay the extra to have it delivered? Pay more to take it home now, or save money by ordering it and having to wait for delivery?
You have to know what market is willing to pay what price and for what. It is a balancing act, like so many things are. All things being equal, most people would rather pay less for the same goods and service of course. But then if you are selling the same goods and service, you've already missed the whole point of having a USP, of differentiating your offering, and could already be doomed.
I'm reminded of a real life case in these forums, where our own Caissa (Cre8asite's Example of the Year 2003) said how Amazon was able to sell one of her leading products at a price that was effectively cheaper (because of the immense bulk buying discount Amazon can get) than she could buy it from the manufacturer.
Caissa said
Unfortunately, a competitor has arisen that sells Fritz to the consumer at the same price I pay for it... Amazon. They are $39.99 with free shipping.I believe there was some follow-up to this matter, not only in the same thread, but in the later discussion titled "Discount Pricing and Shipping", which was all about actually testing lowering the prices on items. Certainly worth a look for some further perspective.
From: http://www.cre8asite...p?p=17470#17470
I'm a huge fan of "value extras", with the very strong proviso that they truly do add core value, as defined by your market/customers, not mere bloat and creeping featurism that RCJordan provided the name and link for in a recent post.
The price is something that helps balance what you offer, against what a potential customer is asked to give for it. One cannot equate price to value. Price can be lowered to increase value, but no more effectively than the offering can be improved to increase value.
What it all comes down to, is that a markedly lower price can create doubts, instead of desires. When in doubt regarding prices, people will often look to what they trust instead, and brands can do very well from this situation. I guess it shows confidence to not lower a price, and it may often show a lack of confidence in the product when one company undervalues it.
There are no fixed answers here, as with so much in marketing. It is about finding the balance that you believe will work best for your market. Some markets are about economy and some are about luxury. Which is the richer market for any given company to enter/target often depends on their own abilities to identify with that market, connect with that market, even to handle bulk, or to sell with confidence.
Edited by Black_Knight, 12 December 2005 - 09:41 PM.
#13
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Posted 30 November 2005 - 10:07 PM
Quote
Do you think this lowest price strategy work against companies by creating a 'perception' of inferior quality?
Of course. Consumers interpret something from the price. They infer value. In some cases demand increases at higher prices.
Being a price leader is a simple strategy that works in some cases -- but in most cases it's a poor strategy. There's much more to value than price.
#14
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Posted 30 November 2005 - 11:28 PM
The thing I find most interesting about the "Lowest Price" strategy
is that many famous brands used it as the method to enter the market
and become famous brands. Ford Motors and
Volkswagon are obvious examples from the car industry. Both companies
'pioneered' cheaper cars to make the car a thing affordable for all
people. In furniture we see Ikea and 'flat-pack' manufacturers aplenty.
There are hundreds of similar examples in any other industry from
House-building to Jewellery.
What is less successful (generally) is when an existing brand creates a cheaper range. This can create confusion about the brand and the 'quality' it represents. What most companies will choose to do instead is to create a new brand for their cheaper range. This can create examples such as JVC and Panasonic in the electronics industry, where higher grade components go into the JVC brand products, even when the design and manufacture of their products are otherwise identical.
Despite what we like to think about our ability to prefer quality and service, the rise of the chain-store, the mass-production and bulk-discount approach has been the single biggest success of the past 3 decades. All over the Western world, small, dedicated businesses based on tradition and passion are closed down by cheaper-priced chains. This can most easily be seen in bookshops, drug stores, tools shops, and especially in grocery stores. The super-market has been conquering these time and again.
People do like low prices. They just have to believe that they aren't being sold rubbish, and in your favour, they really do want to believe that they can buy SEO for $49, a website for $99, etc, etc. The vast majority of people know very little about what actually makes for quality in most products. They are often reasured by confidence from the seller, and only confused by facts.
What is less successful (generally) is when an existing brand creates a cheaper range. This can create confusion about the brand and the 'quality' it represents. What most companies will choose to do instead is to create a new brand for their cheaper range. This can create examples such as JVC and Panasonic in the electronics industry, where higher grade components go into the JVC brand products, even when the design and manufacture of their products are otherwise identical.
Despite what we like to think about our ability to prefer quality and service, the rise of the chain-store, the mass-production and bulk-discount approach has been the single biggest success of the past 3 decades. All over the Western world, small, dedicated businesses based on tradition and passion are closed down by cheaper-priced chains. This can most easily be seen in bookshops, drug stores, tools shops, and especially in grocery stores. The super-market has been conquering these time and again.
People do like low prices. They just have to believe that they aren't being sold rubbish, and in your favour, they really do want to believe that they can buy SEO for $49, a website for $99, etc, etc. The vast majority of people know very little about what actually makes for quality in most products. They are often reasured by confidence from the seller, and only confused by facts.
#15
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Peacekeeper Administrator
Posted 02 December 2005 - 04:47 PM
It's important to realize when you're talking about pricing, you're
talking about a critical element of strategy. Price is an important
indicator of the value of the product.
You might think it's just one of the marketing levers that you can move up or down to boost sales. You could certainly think of an advertising campaign this month or a direct mail campaign next month as marketing levers. The reality is that advertising or direct mail has a transitory effect. In three months time, the few people who were aware of it will likely have forgotten it. It doesn't usually change the long-term perception of the product or service you're selling.
Price on the other hand is a very visible and memorable factor that attaches to a product or service. Usually once you've shown you will discount the price, then folk will assume that says something about your brand and they will be expecting discounts from time to time. So if you're going to use the price lever accept that this marks the brand for ever. Price is part of the strategic make-up of the product or service.
This means that you should only use price discounting as a weapon if you're prepared to live with that for the rest of the life of the product or service. If like Walmart, you decide to use lower price as a major component of what your product or service delivers, then make sure your cost structure is better (i.e. lower) than the competition. So if you're designing websites then you may wish to outsource to high quality resources that have much lower economics, say in India. If you're selling pots and pans, you may choose to get your high quality products from China. That's an essential component of a low-price strategy.
If you adopt a low-price strategy, then you have to realize that your margin per unit sold will likely be lower. So you have to sell many more units. You're usually dealing with a mass market just as Walmart does. You hope that a great number of people will find that your basic no-frills product or service fits their needs. You then make a limited range of products but in great numbers
For most of us, that is not a strategy that will work for us. We can't afford to take on the giants who are fighting over the mass market. Luckily the Internet opens up a new possibility. That's to go after Long Tail micromarkets. This is an idea developed by Chris Anderson. He has a blog on the way to a book. His assumption is that in fact there are a lot of microniches within the total market. If you can customize your product so that each microniche will find a version that meets its needs, then you may find you're the only supplier. You must arrange that your production process can manufacture all the customized variants needed by the microniches. You can then set a fair price that allows you to be economic in supplying each of the microniches, since in essence you do not have any competitors. There's much more involved than I've set down here but perhaps that's enough to give the flavour of the Long Tail idea.
You might think it's just one of the marketing levers that you can move up or down to boost sales. You could certainly think of an advertising campaign this month or a direct mail campaign next month as marketing levers. The reality is that advertising or direct mail has a transitory effect. In three months time, the few people who were aware of it will likely have forgotten it. It doesn't usually change the long-term perception of the product or service you're selling.
Price on the other hand is a very visible and memorable factor that attaches to a product or service. Usually once you've shown you will discount the price, then folk will assume that says something about your brand and they will be expecting discounts from time to time. So if you're going to use the price lever accept that this marks the brand for ever. Price is part of the strategic make-up of the product or service.
This means that you should only use price discounting as a weapon if you're prepared to live with that for the rest of the life of the product or service. If like Walmart, you decide to use lower price as a major component of what your product or service delivers, then make sure your cost structure is better (i.e. lower) than the competition. So if you're designing websites then you may wish to outsource to high quality resources that have much lower economics, say in India. If you're selling pots and pans, you may choose to get your high quality products from China. That's an essential component of a low-price strategy.
If you adopt a low-price strategy, then you have to realize that your margin per unit sold will likely be lower. So you have to sell many more units. You're usually dealing with a mass market just as Walmart does. You hope that a great number of people will find that your basic no-frills product or service fits their needs. You then make a limited range of products but in great numbers
For most of us, that is not a strategy that will work for us. We can't afford to take on the giants who are fighting over the mass market. Luckily the Internet opens up a new possibility. That's to go after Long Tail micromarkets. This is an idea developed by Chris Anderson. He has a blog on the way to a book. His assumption is that in fact there are a lot of microniches within the total market. If you can customize your product so that each microniche will find a version that meets its needs, then you may find you're the only supplier. You must arrange that your production process can manufacture all the customized variants needed by the microniches. You can then set a fair price that allows you to be economic in supplying each of the microniches, since in essence you do not have any competitors. There's much more involved than I've set down here but perhaps that's enough to give the flavour of the Long Tail idea.
#16
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Time Traveler Member
Posted 15 December 2005 - 02:31 PM
Hi
The product life cycle provides a good framework for marketing analysis, the diagram the y-axis could equally be labelled time.
To use a light-hearted example, successful marriages/relationships are those were the partners are prepared to analyse the current state of their relationship. If the relationship has reached the maturity stage, then it’s time to “spruce things up a bit”, to prevent the relationship sinking into the decline phase.
TreV
The product life cycle provides a good framework for marketing analysis, the diagram the y-axis could equally be labelled time.
To use a light-hearted example, successful marriages/relationships are those were the partners are prepared to analyse the current state of their relationship. If the relationship has reached the maturity stage, then it’s time to “spruce things up a bit”, to prevent the relationship sinking into the decline phase.
Quote
What makes that complex is that the price you set may influence the number of competitors and what pricing strategy they adopt. There's lots of challenging decisions there.Good point Barry, pricing is a complex issue, fortunately much has been written on this subject, from the simple "cost plus" approach, to complex calculations involving several factors.
TreV
#17
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Hall of Fame
Posted 10 January 2006 - 05:41 AM
Finally got to reading through this whole piece thanks to Ammon's signature. Very good stuff.
I wonder if we could try to apply this material directly to the business model that most of the folks in this forum run - that of an online provider of marketing services (for the web). For some of us, it's usability consulting, others SEO or SEM management, some are in webdev, others design and still others, full marketing solutions for online properties.
Given this business model, are there specific pieces of the puzzle that are more important or less important to pay attention to. Some that come to mind for me are:
1. The aforementioned relationship-based pricing over cut-rate pricing. In some cases, these services may even be a sort of Griffin good, where the higher the price, the more demand there will be.
2. Customer evangelists are of particular importance in this field, recommendations are even more important, but getting folks to share that data is exceptionally hard - most companies I know who work specifically with an SEO or online marketing consultant prefer to keep that knowledge very private so as to hoard the resource of talent they have making them competitive.
3. Focus - It's my belief that finding an underserved niche, specializing and targeting the "long tail" of customers in a sector is even more important. You can do it by market segment, i.e. "legal firms", "real estate", "software vendors", etc. or by targeting unique service niches, i.e. "keyword research", "linkbait creation", "link building", "high end design". You can even combine these and offer "real estate link building" or "high end design for law firm sites".
Here's to hoping this discussion goes on for another year
I wonder if we could try to apply this material directly to the business model that most of the folks in this forum run - that of an online provider of marketing services (for the web). For some of us, it's usability consulting, others SEO or SEM management, some are in webdev, others design and still others, full marketing solutions for online properties.
Given this business model, are there specific pieces of the puzzle that are more important or less important to pay attention to. Some that come to mind for me are:
1. The aforementioned relationship-based pricing over cut-rate pricing. In some cases, these services may even be a sort of Griffin good, where the higher the price, the more demand there will be.
2. Customer evangelists are of particular importance in this field, recommendations are even more important, but getting folks to share that data is exceptionally hard - most companies I know who work specifically with an SEO or online marketing consultant prefer to keep that knowledge very private so as to hoard the resource of talent they have making them competitive.
3. Focus - It's my belief that finding an underserved niche, specializing and targeting the "long tail" of customers in a sector is even more important. You can do it by market segment, i.e. "legal firms", "real estate", "software vendors", etc. or by targeting unique service niches, i.e. "keyword research", "linkbait creation", "link building", "high end design". You can even combine these and offer "real estate link building" or "high end design for law firm sites".
Here's to hoping this discussion goes on for another year
#18
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Honored One Who Served Moderator Alumni
Posted 10 January 2006 - 04:33 PM
Sevices are a tough product. When selling a company, the Services
company is almost always worth the least amount based on turnover,
because it doesn't own much.
Who's the fastest Athlete? Will that person still be the fastest athlete in 5 years?
Services sell what people can do. But people can change employer. Other people can learn to do what you do. It is the most volatile and changable market. And the value of any given service is generally a fast downward trend as Services have the least barrier to competition, and are one of the fastest things to reach saturation point.
Okay, those are the market realities to know and fully accept as the facts.
So why enter the Service marketplace? Probably for those same reasons. It doesn't have huge barriers to entry. It doesn't take huge investment. You can usually copy the ideas of others. In other words, getting into it is cheap and easy.
The first and most important thing with your new services business is to accept that the product life-cycle is short, and that competition will grow. So decide how you are going to deal with that. Your choices are to keep developing new products (new services) accepting that each will have the same short life-span, or to seek to develop something you can own (patents, technology, a product line).
Noticed how most of the bigger SEO companies soon develop specialist tools? Now you know why. But again, are those tools easy to develop? What is the barrier to competition? What stops a never ending supply of school-leavers with lower wage needs from copying and undercutting you?
Obviously, I can't give answers here, because that wouldn't give you a USP. Your competitors could work on it right now along side you, not even having to wait to see it to copy the idea.
Nope, you have to answer these questions for yourself, and the most important consideration you must give is the barrier to competition. The more investment it would take a newcomer to create what you have, the fewer competitors will appear, and the longer your product's life-span will be.
Who's the fastest Athlete? Will that person still be the fastest athlete in 5 years?
Services sell what people can do. But people can change employer. Other people can learn to do what you do. It is the most volatile and changable market. And the value of any given service is generally a fast downward trend as Services have the least barrier to competition, and are one of the fastest things to reach saturation point.
Okay, those are the market realities to know and fully accept as the facts.
So why enter the Service marketplace? Probably for those same reasons. It doesn't have huge barriers to entry. It doesn't take huge investment. You can usually copy the ideas of others. In other words, getting into it is cheap and easy.
The first and most important thing with your new services business is to accept that the product life-cycle is short, and that competition will grow. So decide how you are going to deal with that. Your choices are to keep developing new products (new services) accepting that each will have the same short life-span, or to seek to develop something you can own (patents, technology, a product line).
Noticed how most of the bigger SEO companies soon develop specialist tools? Now you know why. But again, are those tools easy to develop? What is the barrier to competition? What stops a never ending supply of school-leavers with lower wage needs from copying and undercutting you?
Obviously, I can't give answers here, because that wouldn't give you a USP. Your competitors could work on it right now along side you, not even having to wait to see it to copy the idea.
Nope, you have to answer these questions for yourself, and the most important consideration you must give is the barrier to competition. The more investment it would take a newcomer to create what you have, the fewer competitors will appear, and the longer your product's life-span will be.
#19
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Ready To Fly Member
Posted 21 September 2006 - 10:58 AM
Hi guys!
I'm fresh out of University and just landed my first online and digital marketing role. Thought i would just throw in my $0.02 with regards to service marketing.
As well as the 4p's at university we found that extending these with an extra 3ps helped when analysing and devising marketing mixes in regards to services.
People
As said earlier, people are the face of most services and can be key to the right delivery of a service
Process
Is the process applicable to the needs of a customer? A classic example would be the differing needs of a customer at a fast food restaurant compared a customer eatinging at the ritz. The process at a fast food restaurant may be geared to getting you served quickly, whereas the ritz the process may be geared to your comfort, mood setting and overall experience over the course of an evening
Physical Evidence
Services have a fairly intangible product and so any physical evidence can help in reducing a potential customers percieved risk associated with it. What does the branding tell you? Is there a physical location for the service? Do the smells coming from a restaurant make you want to eat there or do you want to cross the street to get away? The smell coming from a bakery could be the primary reason somebody uses it!
So there we are - 7ps for services!
I'm fresh out of University and just landed my first online and digital marketing role. Thought i would just throw in my $0.02 with regards to service marketing.
As well as the 4p's at university we found that extending these with an extra 3ps helped when analysing and devising marketing mixes in regards to services.
People
As said earlier, people are the face of most services and can be key to the right delivery of a service
Process
Is the process applicable to the needs of a customer? A classic example would be the differing needs of a customer at a fast food restaurant compared a customer eatinging at the ritz. The process at a fast food restaurant may be geared to getting you served quickly, whereas the ritz the process may be geared to your comfort, mood setting and overall experience over the course of an evening
Physical Evidence
Services have a fairly intangible product and so any physical evidence can help in reducing a potential customers percieved risk associated with it. What does the branding tell you? Is there a physical location for the service? Do the smells coming from a restaurant make you want to eat there or do you want to cross the street to get away? The smell coming from a bakery could be the primary reason somebody uses it!
So there we are - 7ps for services!
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