CEO’s letters to shareholders that accompany annual reports of the firm almost always address to two things: cash flow and plans for growth. Cash flow is a measure of the firm’s current profitability and plans for growth address future cash flow. Strong cash flow and credible plans for growth are key indicators of the health of a business and, by inference, the success of the CEO. The implication for the marketing function is clear, develop and execute marketing plans and activities that produce cash flow in the present and for the future. Marketing plans should align with these objectives, and if they do, they are likely to be endorsed and even enthusiastically promoted by senior management. Such marketing plans will address several market and marketing factors and make clear linkages to cash flow.
1. Growth And Retaining Current Customers. It is difficult for a firm to grow or even remain stable if there is a steady erosion of current customers. This is not just the result of lost sales. It is more expensive to attract new customers than to keep current customers. So, even if a firm is able to replace lost customers and the revenue they generate, its costs are higher, which reduces margins and cash flow. Thus, every marketing plan should address the retention of current customers. Analysis of retention should also recognize that not all customers are equally valuable. Some customers buy more; some customers buy higher margin products; some customers influence other current and potential customers; some customers are more vulnerable to loss to competitors; and some customers cost more to serve than others. Specific marketing strategies and actions should be designed to address these various contingencies and the resources the firm should expend to retain particular customers. A customer who buys a lot of higher margin products and influences others deserves more attention and investment than the occasional customer who buys low margin offerings and is costly to serve. This should be the easiest part of the marketing plan to create and execute, but it is often ignored by many firms.
2. Growth Opportunities Among Current Customers. Current customers, or at least their characteristics, are known and by virtue of their buying and they are likely to be less costly to reach and easier to persuade to buy. A low risk and relatively low–cost approach to growth is to sell more to current customers. This might take the form of convincing current customers to use a product or service more often. Examples of this approach involve suggesting more frequent use or identifying and communicating new use occasions. Church and Dwights’ Arm and Hammer brand of soda–based products is a classic example: in addition to a baking product, baking soda is a teeth whitener, a drain cleaner, a carpet cleaner, and a deodorizer for the refrigerator, among others. Current customers are a great source of information about new uses of products.
It may also be possible to develop and market new products to sell to existing customers. These products might be natural extensions of current products, such as a paint company offering paint brushes and painters tape, or the new products might be different from existing products, such as a fast-food firm offering a breakfast menu. A variant on this approach is vertical diversification, where the firm enters the business of suppliers or distributors. Apple successfully employed this strategy when it opened its own retail outlets. Netflix has been successful going in the other direction, moving from distributor of DVDs to a producer of original content.
The key to this type of growth is customer satisfaction. Customers who are unhappy with a firms existing products or services are unlikely to buy and use them more often or to buy new, additional products offered by the firm. Where a firm has satisfied customers this satisfaction can be leveraged for growth, and such growth is less risky and less expensive than moving into new markets or completely new businesses.
4. Growth By Opening New Markets. Expansion into new markets, especially new geographic areas, is what most often comes to mind when managers think about growth. However, such growth carries far more risk than is often assumed. It is a rare market that can be entered by simple extension of what has been successful in the past. Products may have to be modified for local tastes, new distribution channels may need to be established, and the competitive landscape may be different. Part of the risk in such expansion is assuming that what has worked in other markets will work in new markets. Thus, Subway found that its menu of cold sandwiches did not appeal to Chinese consumers, who prefer hot food. Even very successful firms can fall victim to this problem. Disney had enormous difficulty transferring its amusement part business to Europe and Hong Kong despite enormous success in the United States and Japan.
5. Growth Through Diversification. The growth strategy that carries the greatest risk and often greatest upfront investment is developing a new product to offer in a new market. This is essentially the creation of a completely new business for the firm. This strategy may make sense when a firm has exhausted other opportunities for growth, but the absence of prior experience with both the product offering and new market make this a high stakes strategy. It is for this reason that firms often diversify through acquisition of an existing business already in the market with a product offering. In such cases, part of what is being acquired is the experience and management talent of the acquired firm. Of course, this means that the success of this strategy often rests on the ability to retain the management talent in the acquired firm.
Growth Planning Must Be Explicit. Whatever the strategy for growth, the market planner should be explicit about how the firm will grow, what resources will be required to support growth, and when and how much return will be realized. By doing so, marketers and the plans they develop will not only be read by senior management, they will likely be mentioned in the CEO’s annual letter. This is the ultimate proof of buy–in.
Contributed to Branding Strategy Insider by: David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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