Performance Measurement

Marketers have traditionally focused on a company’s sales, market share, and margin to set its objectives and judge its performance. But gains in market share, while desirable, need further examination.

Did you gain the right or wrong kinds of customers? Are they the staying or the switching kind? Are you “buying” share or “earning” it? Are you gaining a greater share of a shrinking market? Consider the following:

• Years ago General Electric fired a division manager because he grew his share of the vacuum tube market when he should have pursued the transistor market.
• Jack Welch said when he retired from GE that he had been wrong about needing to be number one or two in every business because “it leads management teams to define their markets narrowly ... and has caused GE to miss opportunities and growth.”

Focusing on margins can also be misleading. U.S. automakers resisted making good small cars because the margins were small. The Japanese went after this market knowing that they could capture the hearts of new young customers who would eventually buy larger Japanese cars.


Your company needs a whole set of additional measures to set its goals and gauge its performance:

• Percentage of new customers to average number of customers.
• Percentage of lost customers to average number of customers.
• Percentage of win-back customers to average number of customers.
• Percentage of customers falling into very dissatisfied, dissatisfied, neutral, satisfied, and very satisfied categories.
• Percentage of customers who say they would repurchase from the firm.
• Percentage of customers who say they would recommend the firm to others.
• Percentage of customers who say that the company’s products are the most preferred in its category.
• Percentage of customers who correctly identify the company’s intended positioning and differentiation.
• Average perception of company’s product quality relative to chief competitor.
• Average perception of company’s service quality relative to chief competitor.

Your company must set more specific performance goals and measures for different marketing areas. For service support, you can use “on-time, first-time fix” to know the percentage of times the service person arrived on time and fixed the product perfectly. For order fulfillment, you can measure the percentage of “orders filled completely and accurately.”

Every company must set appropriate incentives for the achievement of different goals. Companies must avoid setting incentives that create short-term profit but long-term customer loss. Paying automobile salespeople a commission leads them to manipulate the customer in order to make the sale.

Stockbrokers on commission have an incentive to churn the customer’s holdings. Insurance claims representatives try to pay as little as possible. Telemarketers are paid for speed over service and this can hurt long term relationship building. Incentive systems must be carefully monitored to avoid abuse.

Positioning

Thanks to Al Ries and Jack Trout, “positioning” entered the marketing vocabulary in 1982 when they wrote Positioning: The Battle for Your Mind. Actually the word had been used earlier in connection with placing products in stores, hopefully at the eye-level position.

However, Ries and Trout gave a new twist to the term: “But positioning is not what you do to a product. Positioning is what you do to the mind of the prospect.” Thus Volvo tells us that it makes “the safest car”; BMW is “the ultimate driving machine”; and Porsche is “the world’s best small sports car.”

A company can claim to be different and better than another company in numerous ways: We are faster, safer, cheaper, more convenient, more durable, more friendly, higher quality, better value ... the list goes on. But Ries and Trout emphasized the need to choose one of these so that it would stick in the buyer’s mind.

They saw positioning as primarily a communication exercise. Unless a product is identified as being best in some way that is meaningful to some set of customers, it will be poorly positioned and poorly remembered. We remember brands that stand out as first or best in some way.


But the positioning cannot be arbitrary. We wouldn’t be able to get people to believe that Hyundai is “the ultimate driving machine.” In fact, the product must be designed with an intended positioning in mind; the positioning must be decided before the product is designed.

One of the tragic flaws in General Motors’ car lineup is that it designs cars without distinctive positionings. After the car is made, GM struggles to decide how to position it.

Brands that are not number one in their market (measured by company size or some other attribute) don’t have to worry—they simply need to select another attribute and be number one on that attribute.

I consulted with a drug company that positioned its new drug as “fastest in relief.” Its new competitor then positioned its brand as “safest.” Each competitor will attract those customers who favor its major attribute.

Some companies prefer to build a multiple positioning instead of just a single positioning. The drug company could have called its drug the “fastest and safest drug on the market.” But then another new competitor could co-opt the position “least expensive.”

Obviously, if a company claims too many superior attributes it won’t be remembered or believed. Occasionally, however, this works, as when the toothpaste Aquafresh claimed that it offered a three-in-one benefit: fights cavities, whitens teeth, and gives cleaner breath.

Michael Treacy and Fred Wiersema distiguished among three major positionings (which they called “value disciplines”): product leadership, operational excellence, and customer intimacy.

Some customers value most the firm that offers the best product in the category; others value the firm that operates most efficiently; and still others value the firm that responds best to their wishes.

They advise a firm to become the acknowledged leader in one of these value disciplines and be at least adequate in the other two. It would be too difficult or expensive for a company to be best in all three value disciplines.

Recently Fred Crawford and Ryan Mathews suggested five possible positionings: product, price, ease of access, value-added service, and customer experience. Based on their study of successful companies, they concluded that a great company will dominate on one of these, perform above the average (differentiate) on a second, and be at industry par with respect to the remaining three.

As an example, Wal-Mart dominates on price, differentiates on product (given its huge variety), and is average at ease of access, value-added service, and the customer experience. Crawford and Mathews hold that a company will suboptimize if it tries to be best in more than two ways.

The most successful positioning occurs with companies that have figured out how to be unique and very difficult to imitate. No one has successfully copied IKEA, Harley Davidson, Southwest Air-lines, or Neutragena. These companies have developed hundreds of special processes for running their businesses. Their outer shells can be copied but not their inner workings.

Companies that lack a unique positioning can sometimes make a mark by resorting to the “number two” strategy. Avis is remembered for its motto: “We’re number two. We try harder.” And 7-Up is remembered for its “Uncola” strategy.

Alternatively, a company can claim to belonging to the exclusive club of the top performers in its industry: the Big Three auto firms, the Big Five accounting firms. They exploit the aura of being in the leadership circle that offers higher-quality products and services than those on the outside.

No positioning will work forever. As changes occur in consumers, competitors, technology, and the economy, companies must reevaluate the positioning of their major brands. Some brands that are losing share may need to be repositioned. This must be done carefully.

Remaking your brand may win new customers but lose some current customers who like the brand as it is. If Volvo, for example, placed less emphasis on safety and more on slick styling, this could turn off practical-minded Volvo fans.

Price

Oscar Wilde saw a major difference between price and value: “A cynic is a person who knows the price of everything and the value of nothing.” A businessman told me that his aim was to get a higher price for his product than was justified.

How much should you charge for your product? An old Russian proverb says: “There are two fools in every market—one asks too little, another asks too much.”

Charging too little wins the sale but makes little profit. Furthermore, it attracts the wrong customers—those who will switch to save a dime. It also attracts competitors who will match or exceed the price cut. And it cheapens the customer’s view of the product. Indeed, those who sell for less probably know what their stuff is worth.

Charging too much may lose both the sale and the customer. Peter Drucker adds another concern: “The worship of premium prices always creates a market for a competitor.”


The standard approach to setting a price is to determine the cost and add a markup. But your cost has nothing to do with the customer’s view of value. Your cost only helps you to know whether you should be making the product in the first place.

After you set the price, don’t use the price to make the sale. You use the value to make the sale. As Lee Iacocca observed: “When the product is right, you don’t have to be a great marketer.” Jeff Bezos of Amazon said: “I am not upset with someone who charges 5 percent less. I am concerned with someone who might offer a better experience.”

So how important is price? Christopher Fay of the Juran Institute said: “In over 70 percent of businesses studied, price scored #1 or #2 as the feature with which customers are least satisfied. Yet among switchers, in no case were more than 10 percent motivated by price!”

Globalization, hypercompetition, and the Internet are reshaping markets and businesses. All three forces act to increase downward pressure on prices. Globalization leads companies to move their production to cheaper sites and bring products into a country at prices lower than those charged by the domestic vendors.

Hypercompetition amounts to more companies competing for the same customer, leading to price cuts. And the Internet allows people to more easily compare prices and move toward the lowest cost offer. The marketing challenge, then, is to find ways to maintain prices and profitability in the face of these macro trends.

The main answers seem to be better segmentation, stronger branding, and superior customer relationship management.

Products

Most companies define themselves by a product. We are a “car manufacturer,” a “soft drink manufacturer,” and so on. Theodore Levitt, former Harvard Business School faculty member, pointed out years ago the danger of focusing on the product and missing the underlying need.

He accused the railroads of “marketing myopia” by failing to define themselves as being in the transportation business and over-looking the threat of trucks and airplanes.

Steel companies did not pay enough attention to the impact of plastics and aluminum because they defined themselves as steel companies, not materials companies. Coca-Cola missed the development of fruit-flavored drinks, health and energy drinks, and even bottled water by overfocusing on the soft drink category.

How do companies decide what to sell? There are four paths:

1. Selling something that already exists.
2. Making something that someone asks for.
3. Anticipating something that someone will ask for.
4. Making something that no one asked for but that will give buyers great delight.

The last path involves much higher risk but the chance of much higher gain.

Don’t just sell a product. Sell an experience. Harley Davidson sells more than a motorcycle. It sells an ownership experience. It delivers membership in a community. It arranges adventure tours. It sells a lifestyle. The total product far exceeds the motorcycle.

And help the buyer use the product. Explain how it works, how it can be used safely, how its life can be extended. If I pay $30,000 for a car, I would like to buy it from a company that helps me stretch the most value from its use.

Carl Sewell preached this message in his book (with Paul Brown), Customers for Life. He not only sold cars, but assumed responsibility for fixing them, cleaning them, offering loaners, and so on.

It costs more to build and sell bad products than good products. The late Bruce Henderson, who was head of the Boston Consulting Group, noted: “The majority of the products in most companies are cash traps .... They are not only worthless but a perpetual drain on corporate resources.”

In slow economies in particular, companies need to concentrate their investments in a smaller group of power brands that command a price premium, high loyalty, and a leading market share, and are stretchable into related categories. Unilever decided to prune its 1,600 brands and focus its huge advertising and promotion budget on 400 power brands.

Too many companies carry a poorly constructed product portfolio. My advice is that your company must participate in several parts of any market that it wants to dominate.

Marriott’s major role in the hotel marketplace is based on its use of different price brands from Fairmont to Courtyard to Marriott to Ritz-Carlton. And Kraft conquered the frozen pizza market by creating four brands: Jack’s aims at the low-price end; Original Tombstone competes with the midprice frozen brands; DiGiorno’s competes in quality with freshly delivered pizzas; and California Pizza Kitchen aims at the high end, charging three times the price per pound of the lower-end offerings.

At the same time, it is not always the best product that wins the market. Many users regard Apple’s Macintosh software as better than Microsoft’s software, but Microsoft owns the market. And Sony’s Betamax offered better recording quality than Matsushita’s VHS, but VHS won.

Sometimes it is the better marketed product, not the better product, that wins. Professor Theodore Levitt of Harvard observed: “A product is not a product unless it sells. Otherwise it is merely a museum piece.”

Profits

Should a company aim at maximizing current profits? No! Companies formerly thought that they would make the most profit by paying the least to their suppliers, employees, distributors, and dealers. This is zero-sum thinking, namely that there is a fixed pie and the company keeps the most by giving its partners the least.

This is a fallacy; the company ends up attracting poor suppliers, poor employees, and poor distributors. Their outputs are poor, they are demoralized, many leave, replacement costs are high, and the company is impoverished.

Today’s winning companies work on the positive-sum theory of marketing. They contract with excellent suppliers, employees, distributors, and dealers. They operate together as a team seeking a win-win-win outcome. And the company ends up as a stronger winner.

A company that is short-run profit driven will not make long-run profits. The Navajo Indians are smarter. A Navajo chief does not make a decision unless he has considered its possible effects on seven generations hence.


Some companies hope to increase profits by cutting costs. But as Gary Hamel observed: “Excessive downsizing and cost cutting is a type of corporate anorexia ... getting thin all right, but not very healthy.” You can’t shrink to greatness.

Here’s the story of one company that thought that its profits lay in cost cutting.

Ram Charan and Noel M. Tichy believe companies can achieve growth and profitability together, and present that view in their Every Business Is a Growth Business: How Your Company Can Prosper Year after Year. This is a bold claim, given that top management always faces trade-offs. But they make a compelling case.

Some companies have proven that they can charge low prices and be highly profitable. Car rental firm Enterprise has the lowest prices and makes the most profit in its industry. This can also be said of Southwest Airlines, Wal-Mart, and Dell.

To understand the source of the profits of these “low price” companies, recognize that return (R) is the product of margin × velocity; that is:

A low-price firm makes less income on its sales (because its price is lower) but generates considerably more sales per dollar of assets (because more customers are attracted by its lower price). This works when the low-price firm gives good quality and service to its customers.

Profits come from finding ways to deliver more value to customers. Peter Drucker admonished: “Customers do not see it as their job to ensure manufacturers a profit.” Companies have to figure out not only how to increase sales but how to earn customers’ repeat business. The most profit comes from repeat sales.

At board meetings, the talk focuses primarily on current profit performance. But the company’s true performance goes beyond the financial numbers. Jerre L. Stead, chairman and CEO of NCR, understood this: “I say if you’re in a meeting, any meeting, for 15 minutes, and we’re not talking about customers or competitors, raise your hand and ask why.”

Here are four Japanese-formulated objectives for achieving exceptional profitability. Each deserves a textbook-size discussion:

1. Zero customer feedback time. Learning from customer reactions as soon as possible.
2. Zero product improvement time. Continuously improving the product and service.
3. Zero inventory. Carrying as little inventory as possible.
4. Zero defects. Producing products and services with no defects.

Too many companies spend more time measuring product profitability than customer profitability. But the latter is more important. “The only profit center is the customer.” (Peter Drucker)

Public Relations

I expect companies to start shifting more money from advertising to public relations. Advertising is losing some of its former effectiveness. It is hard to reach a mass audience because of increasing audience fragmentation.

TV commercials are getting shorter; they are bunched together; they are increasingly undistinguished; and consumers are zapping them. And the biggest problem is that advertising lacks credibility. The public knows that advertising exaggerates and is biased. At its best, advertising is playful and entertaining; at its worst, it is intrusive and dishonest.

Companies overspend on advertising and underspend on public relations. The reason: Nine out of 10 PR agencies are owned by advertising firms. Advertising agencies make more money putting out ads than putting out PR. So they don’t want PR to get an upper hand.

Ad campaigns do have the advantage of being under greater control than PR. The media are purchased for the ads to appear at specific times; the ads are approved by the client and will appear exactly as designed. PR, on the other hand, is something you pray for rather than pay for.


You hope that when Oprah Winfrey ran her book club, she would nominate your book as the month’s best read; you hope that Morley Safer will run a 60 Minutes segment on why red wine keeps cheese-eating and oil-eating Europeans healthy.

Building a new brand through PR takes much more time and creativity, but it ultimately can do a better job than “big bang” advertising. Public relations consists of a whole bag of tools for grabbing attention and creating “talk value.” I call these tools the PENCILS of public relations:

• Publications.
• Events.
• News.
• Community affairs.
• Identity media.
• Lobbying.
• Social investments.

Most of us got to hear about Palm, Amazon, eBay, The Body Shop, Blackberry, Beanie Babies, Viagra, and Nokia not through advertising but through news stories in print and on the air. We started to hear from friends about these products, and we told other friends. And hearing from others about a product carries much more weight than reading about the product in an ad.

A company planning to build a new brand needs to create a buzz, and the buzz is created through PR tools. The PR campaign will cost much less and hopefully create a more lasting story.

Al and Laura Ries, in their book The Fall of Advertising and the Rise of PR, argue persuasively that in launching a new product, it is better to start with public relations, not advertising. This is the reverse of most companies’ thinking when they launch new products.