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Marketing effects
in a value chain
Olga Tretyak
September 2011
Marketing effects in a value chain Presented at IMP 2011
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Content
Introduction
Short-term and long-term marketing effects
Theoretical background and indicators of long-term
marketing effects
Client’s flow: assessment and management
(on the particular case descriptions)
Discussion and conclusions: theoretical and
managerial implications
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Introduction
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There is an increasing pressure in companies to make
marketing accountable
•
Traditional marketing metrics such as brand awareness,
attitudes, or even sales and share are not enough to
show a return on marketing investment
•
In fact, marketing actions that improve sales or share
may actually harm the long-run profitability of a brand.
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Introduction
•
From a single transaction to value chain as a focus of contemporary
marketing. Is there a real need in new indicators?
Academic researchers as well as practitioners are pointing out the
imperfection of existing indicators considering both managerial activity
results of a single entity or a value chain
•
Specific Russian conditions
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Most of existing indicators were developed in previous century, and not
react to the process of “new economy” (for on example, of telecom
industry) adequately
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The need for new performance metrics based on the customer flow:
motivation for the study and literature review
Marketing theory:
researchers…
Marketing practice:
practitioners…
Researchers recognize that customers are
members of the value chain (Piercy, 2009;
Vargo & Lusch, 2004)
Practitioners measure performance of
transactions: increase in volume, revenue,
profit margin…
Various forms of customer “inclusion in the
chain” proposed (cf. Heikkilä, 2002; Jüttner,
Christopher and Baker, 2007)
Experts recognize importance of measuring
customer loyalty, brand and customer
equity, marketing’s contribution to firm
capitalization
Firms are investing heavily in marketing
assets, so it is critical to assess results
(Srivastava, Shervani & Fahey, 1999)
Managers recognize that relationships with
partners across value chain are critically
important for long term performance, but
don’t formally measure relationships
Valuation methods that account for long-term
results of marketing actions are not
numerous, and should undergo dozens of
adjustments in order to give even rough
estimates (Weaver, 2001)
At present, CLV approaches and the like
are still too complicated, so calculating the
long-term results of marketing activity raises
arguments between accounting, finance,
operations and marketing departments
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The need for new performance metrics based on the customer flow:
motivation for the study and literature review
Marketing theory:
researchers…
Marketing practice:
practitioners…
Recent studies have found that not all
customers are equally profitable. Therefore,
it may be desirable to “fire” some customers
or allocate different resources to different
group of customers (Blattberg, Getz, and
Thomas 2001; Gupta and Lehmann 2005;
Rust, Lemon, and Zeithaml 2004).
Managers recognize that differences and
rank their clients
Financial metrics such as stock price and
aggregate profit of the firm or a business
unit do not solve the problem. Although
these measures are useful, they have
limited diagnostic capability.
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Introduction: the research project and its scope
A picture tells that marketing action impact on sales dynamics is different
in the short term and the long term
Sales
Peak point of
marketing action
Best
scenario
Worst
scenario
Initiating
marketing
action
Completing Stabilization
marketing
of sales
action
Time
Source: (Adopted from Rao V. and Thomas J, 1973, Dynamic Models for Sales
& Promotion Policies, Operation Research Quarterly, 24, 3, p 403-417)
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Example from a e-commerce industry
A weekly table of indicators…
Industry context
Financial indicators are often inadequate
Business is subject to seasonal fluctuations
as well as the observed bursts of volume of
services provided during the holidays
Extensive historical data about individual
customer behavior is available, and allows
for identification of cause and effect
Key questions of practitioners:
How many “active” clients can be attracted
and retained in result of a marketing action?
Is the company able to convert this inflow of
active customers into longer-term increase
of sales?
Week (month)
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Number of users
11,000
12,000
The volume of services provided
50,000
55,000
The volume of services provided
20,000
within a particular marketing
campaign
Number of users emerged as a result 2,000
of a marketing campaign
Dynamics of change of number of
+1,500
users
Dynamics of change of the services +150%
due to a marketing campaign
8,000
The contribution of marketing
campaign to increase in the number
of users
The contribution of marketing
campaign to increase in revenue
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+1,000
-60%
+25%
+6%
+50%
10%
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Theoretical background and indicators of long-term marketing effects
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Marketing strategy plays key role in the processes of attracting and retaining
customers, providing growth and renovation of business, developing solid
competitive advantages and enhancing financial performance of the firm during
its life cycle. [Srivastava, Shervani, Fahey, 1999].
•
Relationship between share price and net present value of expected cash flows
from the client base expansion is shown in [Кim, Mahajan, Srivastava, 1995] on
example of telecom industry. Similarly [Ailawadi, Borin, Farris,1995]
demonstrates marketing actions impact on EVA and MVA indices through
customer value indicators, revealing a direct correlation between marketing
strategy and changes in entity’s financial welfare.
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Theoretical background and indicators of long-term marketing effects
• The evaluation of marketing productivity ultimately involves projecting
the differences in cash flows that will occur from implementation of a
marketing action. In contrast, from an accounting standpoint,
decomposition of marketing productivity into changes in financial
assets and marketing assets of the firm as a result of marketing actions
might be considered. The devotion of more attention to these marketing
assets is likely to transform the way businesses are managed. (Rust R.
T., Ambler T., Carpenter G. S., Kumar V., Srivastava R. K., 2004)
• Authors emphasize the significance of taking into account the client
flow’s heterogenic character, of targeting the most profitable clients
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Client’s flow: assessment and management
Example of recruiting of “active” customers: the net long-term result of a
marketing action
Transformation 1
Recruited
Transformation 2
Transformation n
900
Active clients who
have made
1st purchase
Active clients who
have made
nd
2 purchase
Reactivated
600
200
100
PASSIVE
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Client’s flow: assessment and management
Recruiting efficiency: comparing Russian and European cases
Recruited
Russia
Europe
1,000,000
500,000
2,000,000
2,000,000
950,000
450,000
1,050,000
1,050,000
+
Active
Passive
=
Tentative example based on internal data on customer retention process of European and Russian
branches of a multinational company
Actual numbers and company’s name are not to be disclosed
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Conclusions and directions for future researches
As marketing strives to become more accountable, we need metrics
and models that help us assess the return on marketing investment.
CLV is one such metric.
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We suggest to consider a client retention rate dynamics as a result
of long-term marketing activity in a value chain;
• Such dynamics is determined by increase of the client flow’s
active part, generating major cash flows;
• Monitoring of this dynamics makes it possible to detect problems
and reorganize current marketing activity, if necessary;
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Conclusions and directions for future researches
Directions for future researches include:

Practical approval of the method in different industries, customer
acquisition-retention model and how can we use it to evaluate long term
marketing results;

Considering model modifications depending on a role and a place of a
dominating actor in a value chain.
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Web:
http://www.hse.ru/
Web: http://noe.virtass.ru/
e-mail: [email protected]
Olga Tretyak, September 2011
Thank you for your attention!
Marketing effects in a value chain Presented at IMP 2011