Relationship vs. Transaction Marketing

Customer relationship marketing means creating close and long-term relationships with your customers with the objective to secure steady revenues. It is common knowledge that keeping current customers happy is more cost effective than investing in new customer acquisitions. Relationship marketing has become a buzz word a long time ago. However, many companies are going too far and overextend themselves by trying to create too many close customer relationships.

Below are some points to consider:

1) For most companies, 20% of customers provide 80% of revenues. Therefore, prioritization is key and so is a careful calculation of opportunity cost and ROI.

2) It is difficult to sustain close relationships unless all of the following attributes are present: trust, loyalty, commitment and interdependence. Therefore, unless you are fairly confident that these attributes are achievable, do not invest in relationship marketing.

3) Relationship marketing is appropriate only when switching costs for the customer are high. In the presence of high switching costs, the customers tend to have a long-term view, are less price-sensitive, their systems are more integrated and their buying behavior centers around technology and vendor, rather than product or person. In these cases, once the customer switches, she is lost for good. This is a case where investments into relationship marketing is appropriate. Under reverse circumstances (low switching costs, focus on product, modular customer system, short-term customer time horizon), transaction marketing focusing on price and advertising is more suitable.

To sum up this short post, relationship marketing has its esteemed place in both B2B and B2C marketing. However, companies that invest into expensive relationship marketing programs for customers that face low switching costs are exposed to losing customers to low-cost competitors.

Technology Adoption Rates and the Role of Lead Users

In the high-tech industry, technology adoption life cycle is one of the most important concepts. It is used to segment the market into early adopters, early and late majority, followers and laggards, and to develop customized strategies for approaching these disparate target segments. In a graph, these adopter categories fall into normal, bell-shaped curve. Each segment has different psychographic characteristics and different reasons for adopting new technologies. Early adopters are typically companies that take higher risks and expect higher returns, while the majority and the laggards wait for the technology to prove itself in the mass market before making a purchasing decision. Marketers must distinguish between these segments in order to capture the largest possible share of a given market. In other words, they need to understand the buying dynamics and the motivations of these segments to develop an effective sales and marketing strategy. Customers in the early adopters segment demand personalized solutions, great support and knowledgeable sales force. They are more tolerant to glitches and are willing to pay a premium. They buy new technology to achieve breakthroughs in their competitive position. The majority market is not looking for revolutionary changes but rather evolutionary ways to improve their operations. They demand end-to-end solutions and proven applications (case studies are an effective sales tool for this segment), as well as a great technical support. Last, the laggards are extremely risk averse, price-sensitive and only buy solutions that have undisputedly higher ROI than alternatives. They are typically not worthy of significant investments but it is important to understand their characteristics, nonetheless. At the end of the day, focusing on early adopters has its advantages but market leadership comes from a successful capture of the majority market.

Below are examples of effective strategies for capturing the majority market:

1) Offer end-to-end solution and a great technical support (often these are achieved via collaboration with partners)

2) Simplify product features (focus on a few features of highest importance)

3) Develop vertical sales and marketing strategies

4) Assume responsibility for system integration (work with partners, SIs in particular)

5) Methodically assess the buying dynamics and adjust your sales and marketing strategy accordingly

6) Develop sales tools that demonstrate your competitive advantage (features, support, ROI, etc.), and include case studies to support your value proposition and messaging

Learn from Lead Users

Lead users are a sub-category of early adopters that has a unique value to a technology vendor. Lead users are those customers that buy the product mostly for the satisfaction of being on the technical cutting-edge. As I mentioned before, they require high customization and thus are an expensive segment to pursue. They have, however, a unique quality that can be extremely advantageous to technology marketers: they come up with break-through ideas that can result in dramatic product improvements, and a much better chance of winning the majority customers. Lead users often develop workarounds in packaged applications that enable them to achieve their business objectives. Often, they develop custom applications when they deem the functionality of packaged applications insufficient. Learning the reasons behind workarounds and development of custom applications can be extremely telling to R&D and marketing professionals at a technology firm. Thus, while the lead-users segment might not necessarily be profitable, the access to their knowledge and understanding the way they use your technology is extremely valuable for your ability to develop winning solutions. Gathering information from lead users is most often realized via empathic design, focus groups and customer visits. Traditional techniques such as surveys or interviews are not as effective (see my post Product Features: How to Get it Right).

Crossing the chasm from the early adopters to the profitable majority market is what makes or breaks a technology product. To cross the chasm, one must clearly understand the characteristics of each customer segment based on the technology adoption rates, and, while learning from lead users, develop a highly-focused strategy for capturing the majority-market customers.

Relationship vs. Transaction Marketing: How to Choose

Customer relationship marketing means creating close and long-term relationships with your customers with the objective to secure steady revenues. It is common knowledge that keeping current customers happy is more cost effective than investing in new customer acquisitions. Relationship marketing has become a buzz word a long time ago. However, many companies are going too far and overextend themselves by trying to create too many close customer relationships.

Below are some points to consider:

1) For most companies, 20% of customers provide 80% of revenues. Therefore, prioritization is key and so is a careful calculation of opportunity cost and ROI.

2) It is difficult to sustain close relationships unless all of the following attributes are present: trust, loyalty, commitment and interdependence. Therefore, unless you are fairly confident that these attributes are achievable, do not invest in relationship marketing.

3) Relationship marketing is appropriate only when switching costs for the customer are high. In the presence of high switching costs, the customers tend to have a long-term view, are less price-sensitive, their systems are more integrated and their buying behavior centers around technology and vendor, rather than product or person. In these cases, once the customer switches, she is lost for good. This is a case where investments into relationship marketing is appropriate. Under reverse circumstances (low switching costs, focus on product, modular customer system, short-term customer time horizon), transaction marketing focusing on price and advertising is more suitable.

To sum up this short post, relationship marketing has its esteemed place in both B2B and B2C marketing. However, companies that invest into expensive relationship marketing programs for customers that face low switching costs are exposed to losing customers to low-cost competitors.

Product Features: How to Get it Right

One of the key aspects of effective product management is the ability to identify and offer the features and the functionality that will satisfy the preferences of your target market better than the offerings of your competition. Naturally, customers make trade-offs between product attributes and price, so the right features must be offered at the correct price point. Conjoint analysis is one of the analytical tools often used to unravel these trade-off patterns. This is a somewhat simplistic view, as there is a myriad of other factors such as brand equity, level of support, partner ecosystem, etc. For the purposes of this blog, however, let us isolate the issue of identifying and offering the right product features.

There are 3 types of features, each having a very different impact on customer satisfaction (and your success):

1.) The must-have features: these features are extremely important but do not increase customer satisfaction. They are assumed to be part of the product offering. Their presence does not improve satisfaction. However, their absence is exponentially related to levels of dissatisfaction. These attributes are often unspoken by the customer, due to the fact that they are assumed.

2.) The one-dimensional competitive features exhibit a linear relationship with satisfaction: increasing the performance of these features by one unit will increase customer satisfaction by one unit. These features are easily identified during customer surveys.

3.) The leap features are those that have an exponential positive relationship with customer satisfaction. Improving their performance beyond that of competitive products has a dramatic impact and leads to significant competitive advantage. The catch is, these attributes are unspoken by the customer and are hard to identify.

Below is a graphical representation of the relationship between functionality and satisfaction described above:

Now, let's talk about implications. What this means to marketing professionals is that they need to select the appropriate techniques of assuring that customer functionality preferences are properly identified. Typically, the must-have features are common knowledge; for example, in the case of servers, this is reliability, scaleability, security, etc. These attributes are often included in customer surveys (online or phone) and customers assign high importance rankings to them. However, they are not interesting in terms of achieving competitive advantage. The competitive features display a higher impact. Understanding their importance is key to being competitive. Customers can identify them on their own, as they think of these features in terms of solving their business problems and enabling their business objectives. Market researchers look for their relative importance, for trade-offs that customers are willing to make, and for the relationship between importance and satisfaction (the goal is to achieve high satisfaction for attributes of high importance).

The most intriguing and difficult to identify are the leap features. They are also the ones with the largest impact. Because customers are typically unaware of the features (or of the fact that they would significantly improve their business), marketing professionals cannot rely on traditional research techniques such as online panels or phone interviews. Other methods such as empathic design or customer visits need to be deployed to identify leap features. The idea behind empathic design and customer visits is to close the gap between what customers say they do (need) and what they really do (need). Ideally, these visits would include someone from the engineering and/or marketing team (though this is seldom the case). Depending on the maturity of these solutions, these methods can be augmented by an online survey (for more mature solutions) after building hypotheses based on the results of phone surveys and empathic design/ customer visits. The purpose of this validation is to arrive at the desired confidence interval and margin of error (typically, we target 95% confidence and 5% margin of error).

To sum up, marketing professionals need to understand the relationship between functionality and satisfaction to select the appropriate market research techniques. Depending on the product maturity and its position in the technology adoption cycle, they ought to deploy the proper mix of methods to achieve their objectives.

Tips for structuring a strategic market plan

Again, high-tech companies should follow a slightly different path when creating their strategic market plan, as compared with their non-tech peers. This is a result of the different dynamics that are unique to high technology. For instance, competitive actions and reactions are much quicker in the technology sector. Thus, traditional planning processes are quickly rendered obsolete. Market planning in the technology sector must be more nimble, simpler, and integrated.

Below are some quick tips as to what to focus on:

1) Start with internal capabilities before looking outward: define source of your unique value and core competency. Analyze internal financial resources, intellectual capital, manufacturing capacity, brand equity, technical and business skills, knowledge).

2) Define the broad business arena that you will focus on and segment it based on benefits and functionality that you are capable of offering.

3) Understand the features that customers value the most but also understand what trade offs they are willing to make and at what are the price points (this is best done via conjoint analysis).

4) Understand the buying dynamics: who is making the purchasing decisions, what needs are fulfilled by the technology, who in the organization gets involved and when. What are the top 5 buying criteria? Is it brand, reputation, partner support. What are the top 5 product attributes the customer is basing their decisions on? Reliability? ROI? Support? What are the barriers?

5) Understand the value chain: where is value created, from suppliers of raw materials to the channel.

6) Analyze competitive landscape: who provides related products or services, what are their value propositions and core competencies. What is their business and distribution model? How do you compete? Differentiation? Price leadership? How do you make customers switch to your product or service? Who are your direct and indirect competitors? What is the level of threat of a substitute product or a "killer ap" coming along before you get to the cash-cow stage?

7) Based on the above, conduct a SWOT and GAP analysis to determine what will make your firm achieve a sustainably profitable position in the market. Are there synergies with other products/ processes to be exploited? Is investment into new initiative leverageable? Is your strategy consistent?

8) Select a FEW top opportunities to focus on. Concentrate your resources and develop a leadership position in the key truly attractive markets or segments. Don't over-extend your resources.

9) Select the appropriate channel (reselling vs. influence). What players are best positioned to a) sell your product while b) realizing lucrative gains. If your product is complex, look at SIs and consulting firms channel. For commodities, Service Providers, VARs, ISVs with complementary products might be your best bet. Plan and execute a focused strategy of building key channel relationships. Develop partner programs that will incentify your channel to work with your firm.

10) Finally, develop a financial model and determine the level of investment to achieve your target ROI.

Basic Questions Technology Marketers Should Ask (and Answer)

Marketing of technology products is very different from marketing products in other industries. This is due to the following factors:

- High market uncertainty: customer needs are ambiguous and the customers display a high degree of FUD (fear, uncertainty and doubt) about technology and its ability to address their pain points and needs;
- High technology uncertainty: the degree of certainty that the technology is viable;
- High competitive volatility: new entrants can come from all directions, even outside the industry; high level of innovation.

All these factors make marketing of technology product much more challenging that marketing traditional items.

Below are some key questions that marketers of high-tech products should ask themselves when creating a marketing plan:

- Do you market your product as a radical innovation (revolutionary) or position against existing products as an incremental innovation? This depends on how customers perceive it and drives marketing strategy and use of marketing tools.

- Is this a supplier-drive market or a demand-driven one? Supplier-driven market requires R&D to play large part in marketing.

- What are the target segments (based on benefits) and their size and growth, what is the product positioning relative to competitors, what is the current market share and what are the goals for 3-6 years from now?

- Positioning: customers' perceptions of how your product compares to competitors on important dimensions.

- Incremental innovation: what is the product's differentiation vs. competitors? Radical innovation: competition unknown, how do I position the product?

- Incremental innovation: features vs. cost trade-offs determined by customer surveys; radical innovation: testing done by customer partners/ alliances.

- How well does the customer understand your technology?

- How much education and evangelism is necessary? If it’s new, the value of customer feedback is questionable as they have no point of reference. Thus, for radical innovations, qualitative research is more effective (phone interviews with existing customers rather than mass-scale quantitative studies).

- How do I select my market and identify segments?

- How do I clearly communicate the benefits relative to other solutions?

- How do I develop an effective distribution channel and build effective relationships?

- For radical innovations, how do I cross the chasm from selling to early adopters to mass commercialization?

- How do my customers buy and why do they buy? Why are we losing deals – internal and external reasons.