How ChE Prepared Me for Business (and How It Didn’t): Marketing

We started off this series talking about cognitive efficiency and how perceptions and snap judgments become the foundation for what we believe. I used to think that a ChE background was fraught with misperceptions amongst the wider business audience, but, surprisingly, marketing has the same issue. What is marketing? You can ask 50 people and get 50 answers, with the most common being that marketing = advertising. Advertising, social media, and sales, are all marketing tactics, but marketing strategy is about figuring out what needs people have (market research), designing a product to meet those needs (product management), and creating some awareness with that audience about your offer (marcom). I had the opportunity to get to know a chief marketing officer of a former Fortune 500 company, and over coffee one day we came up with the following: "Marketing is the art and science of acquiring and keeping profitable customers." So, what does this have to do with ChE?

Back to the M&E Balance

Remember that companies follow the differential financial balance:

?$in - ?$out = ?$Accumulated

This applies to marketing in two ways:

? $in = Net new revenue from:

(a) new customers

(b) existing customers purchasing more services/products

? $out = Net new spend from:

(a) acquiring new customers

(b) keeping the customers you have

the art of marketing is using as much science as possible (versus just gut) to maximize ?$Accumulated.

Contrary to popular belief, marketing success is not solely driven from advertising (as implied by this recent NPR article), but from applying resources to both acquiring new customers and keeping the ones you have. Rewards programs are examples of customer retention costs, direct sales force salaries/commissions are examples of customer acquisition costs, and product development is a cost of both customer acquisition and customer retention. All of these activities are marketing tactics, but the strategy behind marketing can be tied to the M&E balance: who do I go after, with what, and how, in order to maximize ?$Accumulated?

Advanced M&E: application to an industry

An analogy I've used when describing the M&E balance is filling a leaky bucket with water. As long as I'm filling faster than the hole is leaking, the water level in the bucket is always rising. Savvy investors and analysts have been paying attention to Facebook's leak rate as an indicator of future success (article). All companies have customer leaks, and if they can't reduce your leaks ("churn") they'll end up in trouble, as did the pre-Cingular-merger AT&T. Before AT&T was the preferred iPhone vendor, it once had a reputation for two things: great deals but poor customer service (including coverage). AT&T was actually the first to market with an "all you can eat" voice plan for $99/month, but this deal couldn't stop up the company's leaks. The rate at which customers were leaving AT&T was outpacing the number of customers its was acquiring. In an industry where it's critical to have a large stable customer base to maintain revenue streams, a negative ?CustomersAccumulated made their mobile business untenable, causing the company to leave the market until its later acquisition of Cingular (article). Why did this neglect of the customer base happen? Various reasons, but a very human reason is that new customer acquisition is fun and sexy, and feels less like finance. For an executive team without an appetite for operations or market research, a focus on customer retention could easily fall to the wayside. Where the ChE background provides value is the balanced perspective that you don't get something for nothing. Customers that you are trying to keep, as well as the new customers you are going after, are going to need resources. Once you've decided to maximize your financial balance, you can use the scientific method to segment your potential customers and help them meet their needs, based on the resources you can bring to bear. Is this starting to sound like process control? It should, as we'll talk about that next.

Can you think of other examples where the scientific method applies to your new understanding of marketing?

Photo: Robert J.Pennington, (C)2011 Arkan Kayihan, used with permission