Nick was nervous. He had been hired into Beacon Products, Inc.'s marketing department just two months ago, and already Annie, the marketing director, has asked him to come up with marketing strategy ideas that Annie could present to Beacon's CEO at the upcoming quarterly strategy review.
Nick decided to begin by analyzing trends in the competitive environment. He then drafted a plan that he showed to Annie later that week. "I think this is really the way to go," he said as Annie flipped through his report. "A lot of our competitors are getting great results with low pricing and very aggressive promotions of new products. I feel confident that we can get similar results with these strategies."
Annie looked up at him, a puzzled expression on her face. "Nick," she said, "low pricing and aggressive promotions would be fine if we used a velocity business model here. But we work from margin. We're going to need a very different set of strategies."
Nick's heart sank. Velocity? Margin? What was Annie talking about? He thought to himself. Nick realized he still had a lot to learn.
Name That Business Model
Nick had made an all-too-typical mistake: ignoring his company's business model while formulating marketing strategies. The phrase "business model" crops up frequently in organizations everywhere—but what exactly does it mean?
A business model defines who a company's customers are and how it plans to generate cash by providing them with value. In broad categories, there are three types of business models:
- Margin—generating high profits on sales. For example, IBM sells complex, expensive business solutions comprising products and services—and customized to individual customers.
- Velocity—selling products or services rapidly. For instance, Wal-Mart seeks to turn over its inventory as quickly as possible through low pricing.
- Leverage—extracting money from assets that other organizations own. To illustrate, Disney generates cash every time other firms buy rights to its characters and use those characters in merchandise or toys.
Companies can use all three of these models—though in any particular firm, one of the three will likely dominate. By supporting your company's business model through your marketing strategies, you demonstrate marketing's strong links to cash flow. Let's take a closer look at how you might support each of the three business models.
Margin: Fat Profits, High-Touch Service
Suppose your firm relies primarily on the margin business model. If so, focus on helping your company to develop innovative products, tailored to customers' individual needs, and delivered through high-touch service. Your goal? To persuade customers to pay a premium price for what they perceive as high-value offerings—a price that significantly exceeds the costs of providing the product or service.
To accomplish this goal, develop a deep understanding of individual customer's unique needs and requirements—uncovered through innovative market research tactics. And gauge potential customers' perceptions of different price points. For example, at what price might customers stop feeling they're paying for extra quality and decide they're overpaying for your offerings?
Also consider how often customers would be comfortable hearing from your company and what types of contact they prefer—such as phone calls, on-site visits, emails, special Web offers, and so forth. Further influence margin by improving service quality to the extent that customers will pay a premium for your offering.
Building brand preference (and therefore willingness to pay a premium) through advertising or loyalty programs is another margin-related marketing strategy. Brand preference might also make your brand less vulnerable to competitors' actions, such as price discounting.
Velocity: Getting Those Products Out the Door
If your company primarily uses the velocity business model, support that model by formulating strategies for accelerating turnover of your company's inventory—its products or services. Such strategies might include affordable pricing, basic product design, and accessible purchasing processes, such as an easy-to-use shopping cart on your company's Web site. The common theme underlying all your marketing strategies? Efficiency.
Consider Dell Computer Corporation: This company assembles products to customer specifications in less than a week—a remarkable velocity. As a result, it generates cash quickly and keeps costs low, both of which translate into higher profits.
You can also increase velocity by encouraging your company to establish an extensive distribution network so that it can sell its offerings wherever consumers want or need them. Coffee behemoth Starbucks, for example, has planted a store seemingly on every street corner, in every airport, and at every hotel. It even sells bags of coffee for people to brew up at home. Any time a consumer wants a cup of coffee, and anywhere he or she wants it, Starbucks is there.
You can further improve your company's velocity by initiating well-thought-out promotions and price reductions, as well as by helping your sales team close more sales.
Leverage: Making Money—without Paying for Assets
If your company employs a leverage business model, it uses other organizations' assets to produce cash for itself. European fashion retailer Benetton, for instance, owns no stores and no manufacturing plants. However, it does own a powerful brand and possesses a workforce renowned for its creativity. Benetton uses its brand and innovativeness to control the assets of distributors (retailers) and manufacturers without having to own (and thus pay for) those assets. Consequently, its relatively small asset base produces a large return; in financial terms, Return on Assets is potentially high.
In your organization, the intangible assets you create—brand equity, customer equity, workforce knowledge and productivity—can all provide leverage by enabling the company to control assets it doesn't have to own. For example, every time Disney creates a new animated movie character, it creates opportunities for leverage. It can license use of the character to toy manufacturers, merchandisers, and other enterprises.
Disney collects a royalty on such licenses and does not have to tie up its own money in manufacturing and inventory. The license allows Disney to obtain the benefits of the licensee's assets without having to actually own the assets. Therefore, the organization does not have to invest as much of its own money to get the benefit of substantial assets. Result? It keeps more of its cash.
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Regardless of the business model that predominates in your company, you can help your superiors and colleagues see your connection to cash flow by actively supporting that model through your marketing strategies.
Note: This article is adapted from the book I wrote with Allen Weiss and David Stewart titled Marketing Champions: Practical Strategies to Increase Marketing's Power, Influence, and Business Impact (Wiley, 2006). To learn more about the book and to download a chapter, visit www.marketingchamps.com or order the book from Amazon.
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