Distribution Marketing: Margin of Error is Small, Margin of Profit is Thin
by Kenneth M. Culpepper
Sales & Distribution Management Magazine, September 1998
Marketing and advertising tactics for wholesale distributors have noticeably needed changing in the marketplace. Why? Because technological and economic advancements have changed the distribution business. Anytime a new way of doing business is created by government, technology, society-culture, economy, law or any other non-controllable marketing component, the cobwebs of marketing myopia are exposed.
What is marketing myopia? It is when any business fails to recognize the larger scope of meeting their customers needs. Telephone companies were caught by this years ago when they realized that they were not just in the telephone business, but in the communications business. In the case of the modern wholesaler, they are not just in the distribution business, but in the business of delivering and fulfilling the product needs of their customer(s). As with other industries, the distribution industry is not the same margin for profit it was five years ago, much less ten to twenty. Competition is also continually changing.
Distribution companies are not just concerned about other wholesalers, but the possibility of manufacturers and producers of their products and services going direct to serve their customers. Modern technology, economic growth and international expansion are the major reasons why these competive threats are considered serious.
There is excitement and concern about what this means short and long-term to wholesale distribution companies as well as their customers. Additionally, there is more challenge for the marketer of distribution products and services. Today's marketer must be dedicated to learn how to educate, market, prospect, acquire and service both business and end-user customers. But with this marketing challenge comes a new twist to old marketing questions.
A New Way of Doing Business
It's quite natural. Because of increasing numbers of competitive threats andpossibilities of manufacturers or suppliers going direct to the customer, the marketing focus has to move from the transaction (sale, invoice, billing, etc.) to the customer relationship. It is understandable why this is unorthodox for most distribution companies. They have been used to focusing on the sales and product movement parts of business. The next business question in this marketing system is: what is the best way to move the focus from the transaction to the relationship? The first place to consider in making this type of change is from the customers' perspective, and what their perspective means to business costs and profits. Marketing the delivery and fulfillment of product needs to customers is more complex than marketing other products and services in most other industries. The average margins of profit are less than the retail, manufacturing, financial, communications and business-to-business sectors are yielding.
Because average profits are lower, the margin of error for spending marketing dollars has shrunk, and the results of marketing are now magnified within the distribution organization. Therefore, margin of error is small and margin of profit is thin. This sets up an old marketing question for the modern distribution marketer. How much should be spent on acquiring a customer? Traditionally, the answer may have been achievable for a distributor which had a history of responses to product and service offerings from customers.
However, because of today's constant bombardment of marketing efforts from competitors, the real determining factor combines this response history with customer value deliverables from every aspect of an organization's product and service offerings. This includes (1) distribution products and services designed to meet the customers' needs, (2) all support services that enhance customer satisfaction, (3) transportation services that help customers acquire and receive the product conveniently, and (4) pricing to enhance value.
What To Do?
The answer is found in implementing integrated database marketing into the forefront of the marketing strategy, both short and long-term. In this case, marketing begins with an insight into the needs and expectations of whoever is a customer or prospect for distribution products and services. This means there must be empirical planning, research and marketing strategy before any actual marketing is initiated to customers or prospects.
Research and strategy areas for marketing must not just develop the usual packaging of creative themes and media purchase plans. However, they must create a strategic marketing business plan that has empirically determined direction to questions like: How and when will marketing be communicated? Who will be targeted? What marketing messages of benefits will be integrated within the creative and media strategies? What are the short and long-term methods of measurement? What is the best schedule of test markets versus roll-outs of marketing efforts? How do identified customer segments value each product/service category? Furthermore, because of small margin of error and thin profits, a measurement for success of each marketing effort and return-on-investment for annual marketing allocation must be determined as well as a contingency plan. The plan also should provide for built-in strategy adjustments allowing monitoring of the entire integrated marketing and advertising strategy at predetermined feedback points. Two distinct advantages will result from measuring customer feedback and plan implementation: prospect optimization and customer loyalty programs.
Prospect Optimization
The specific issue addressed with prospect optimization is how much to spend on customer acquisition in light of profit targets. Initially, in a competitive marketing environment where there are subsequent selling efforts effecting reactivation, traditional Lifetime Value (LV) models are not applicable. However, using a customer response index, customer value delivery strategies, P&L's and spreadsheet software, we can determine with considerable precision the relationships between prospecting and long range profitability, while tracking the acquisition of each new customer. Based on these dynamics, we can project the optimum marketing quantities to maximize growth, maintain profit and reduce customer acquisition costs.
Customer Loyalty Programs
Since marketing efforts to customers will begin to increase as more response and value information is learned, it is crucial for any marketer to immediately initiate some type of criteria to forecast prospect response communication and retention. Crucial because the most expensive piece of marketing is customer acquisition, and if a distributor is successful in acquiring customers, it must learn how to maintain these customer relationships. After customer response values are indexed and analyses from test markets have determined who are likely profitable long-range customers, the marketer can identify an initial database segment of loyal customers. Test markets become an important part to forecasting an initial loyal customer base because they provide the current customer responses to applicable offers and marketing communications. In addition to the test market, exponential smoothing should not be ruled out until the marketer knows the complete marketplace scenario.
Although customers will perpetually activate and leave, fluctuate in profitability, and move from database segment to segment, evaluating a current loyal customer profile is both obtainable and efficient. Additionally, because of the continuous changes in the marketplace, laws, costs, customers, competitors and technology, it is important to emphasize that the marketing database is first to know when the loyal customer profile changes. This signals needed changes to customer retention and acquisition strategies.
Conclusion
The focus of marketing distribution products and services has to migrate from the transaction to the customer relationship. It is understandable why this is crucial for modern distribution companies. A failure to control customer acquisition costs or build and retain customer relationships will result in both short and long-term non-profitability. The margin of error is small. The margin of profit is thin.
Ken Culpepper is president of Integrated Marketing Solutions, Inc., a
knowledge-base marketing firm that
integrates tactical marketing strategy with management of multiple contacts
of businesses to their customers, prospects and channel customers. IMS incorporates
marketing business planning, long-term corporate ROI strategies, and marries
knowledge-based marketing with e-commerce strategy and systems. IMS has
offices in Atlanta, GA (770) 390-9199 and Nashville, TN (615) 782-0461.
(Web: migmar.com/ims)