Link Customer Strategies to Profit Growth

In response to the rise in retailer power over the past 15 years, manufacturers have invested significant human and financial resources in customer-specific market research, shopper insights, marketing, and promotional programming. While some of this investment may be useful in building relationships, we have observed much of it to be unfocused and financially ill advised. The types of strategies engendered by these investments rarely provide a financial return that is incremental at the TOTAL brand or manufacturer level.

Regarding promotional strategies, these companies recognize that it is not enough to drive incremental volume at one account. Account-by-account volume maximization leads to overspending on trade, an increase in price elasticity, and a reduction in the effectiveness of brand building activity. Instead, they demand that their promotional strategies drive profitable volume measured at the total Brand level.

Companies do this strategically by tightly aligning their promotional tactics to marketing strategy. For instance, in consumption inelastic categories like underarm deodorant or over-the-counter (OTC) pain medications, the role of trade promotion is to maximize a brand's available shelf presence with the least amount of price discount possible. In more expandable consumption categories like beverages or salty snacks, the role of trade is to maximize a brand's share among switchers, at price points that minimize equity erosion. They do this analytically by uncovering the tactics that drive incremental consumption at the TOTAL brand level.

By contrast, best-in-class companies demand that customer strategies deliver a measurable impact on revenue and profit at the total brand or company level (vs. at the customer level). In addition, they focus their investments in retail relationships more narrowly and much more strategically. Experience has taught them how difficult it is to implement programs that truly meet the definition of "win-win."

The low margin retail business model, combined with organizational barriers between buyers and across functions that exist at most customers, creates barriers to execution of anything more complex than features and displays. Great companies instead focus on doing a few things well. First, they flawlessly launch new products, the lifeblood of any line or staff sales function. Beyond this critical strategic area, great companies focus all of their organizational energy, resources, and investment against three simple strategies that most retailers can execute well. When done properly, these strategies can lead to consistent increases in revenue and profit for both trading partners:

• Shelf Flow Organize categories into a shelf set that is intuitive and efficient for consumers to shop.
• Assortment Develop an SKU set within the shelf flow that maximizes variety for a consumer and minimizes duplication for the retailer, thus optimizing revenue and profit.
• Price Promotion Provide the vehicles, frequency and depth of discount at a given retailer that maximize incrementality of revenue and profit to the brand in TOTAL.

Many, if not all, manufacturers spend time and energy on these strategies. What differentiates best-in-class companies is the approach used to generate and execute these strategies. The same market structure framework used to understand a brand's competitive frame of reference, enable its positioning, optimize spending, and enable strategic pricing can also be used to drive customer strategies. How?

Market structure is used to identify precisely how consumers organize both their usage and purchase of a given competitive set of products. For example, say a fictional snack food company used its market structure to identify that a small cheese cracker brand they owned competed not just with other cheese crackers (a small market), but with all flavored salty snacks such as flavored potato and tortilla chips (a much larger market). The company used this knowledge to create a strategy to win vs. all flavored salty snacks. The strategy included a new positioning vs. salty snacks, new advertising spending principles that took into account the spending levels in the salty snack market, and so forth. The same logic that was applied to these strategies can be applied to the core customer strategies as well.

• Shelf Flow Based on the competitive frame identified by the market structure, cheese crackers should clearly be shelved next to flavored salty snacks such as potato chips and tortilla chips. While this is an enormous change for retailers, the benefits are obvious: shelving the category in the same way the consumer uses the products makes it more intuitive and efficient to shop. While the category as a whole will benefit, our fictional manufacturer stands to gain the most since its consumer strategy of positioning its brand vs. potato chips aligns most closely with the new shelf flow.
• Assortment With the shelf flow now defined according to consumer behavior, the manufacturer can set about maximizing its assortment. Formerly, its small cheese cracker brand was defined by retailers as part of a declining cracker segment, and forced to constantly fend off discontinuation efforts by cracker titans like Ritz and Wheat Thins. Classic, linear, velocity- based assortment modeling, the industry standard, would have looked at the SKUs in the cheese cracker market in the context of the cracker category. It would have incorrectly optimized the SKUs in this brand's lineup in the context of the cracker category. It would have recommended discontinuing many of them due to their size and velocity vs. other much larger cracker brands. Market-structure based assortment, informed by actual switching behavior, shows that unlike other cracker brands, cheese crackers are an independent market segment that interacts highly with salty snacks. As such, cheese crackers cannot be optimized vs. other cracker brands. It must be optimized vs. other salty snacks. When compared to other snacks instead of other crackers, our cheese cracker brand's lineup actually moved much more quickly than many small regional and local snack players. With its completely aligned growth story of new positioning, spending principles, and shelf flow strategy, the brand is now a growth brand in a growing snacking segment, and is able to hold onto distribution of many of its SKUs while expanding others.
• Price Promotion With the shelf flow and assortment defined, the manufacturer can turn its attention to price promotion. As a competitor in the cracker category, the cheese cracker brand was promoted two to three times per year during major holiday periods via temporary price reductions. With its new strategy however, its promotion principles clearly will need to change. Salty snack competitors compete in an expandable consumption category and can be promoted more frequently. But what are the right promotional tactics? Scan data-based promotional evaluation approaches would emphasize the tactics that maximize revenue or profit within a specific retailer. The market structure approach is different. Because it is based on switching data that encompasses all channels, this approach identifies the tactics that maximize revenue and profit at the Brand level. In this case, the market structure highlights the importance of feature and display, with limited price discounts, to drive impulse purchase and pantry loading 15 to 20- times per year vs. two to three times per year. That is more in line with the promotion tactics of other salty snacks.

Of critical importance, great companies recognize that account-by-account volume maximization leads to overspending on trade, an increase in price elasticity, and a reduction in the effectiveness of brand building activity. Instead, they demand that their promotional strategies drive profitable volume measured at the total Brand level.

How do they achieve this? First, they tightly align their promotional tactics to marketing strategy. For instance, in consumption inelastic categories like underarm deodorant or over-the-counter (OTC) pain medications, the role of trade promotion is to maximize a brand's available shelf presence with the least amount of price discount possible. In more expandable consumption categories like beverages or snacks, discussed above, the role of trade is to maximize a brand's share among switchers, at price points that minimize equity erosion. Secondly, they use market structure based analytics to identify the tactics that drive incremental consumption at the TOTAL brand level.

Companies that approach customer strategies this way have made them an integral part of their overall growth agenda. They focus limited organizational resources on the strategies a retailer can execute easily: Shelf Flow, Assortment and Price Promotion. And they link these customer strategies directly to consumer strategies via the market structure: The same market structure that is used to enable positioning, spending principles and strategic pricing is used to create customer growth strategies. This logical approach to growth helps convert key customers into partners in a category and brand growth vision. It puts companies that use it at the head of the class in terms of thought leadership. Perhaps most importantly, though, approaching shelf flow, assortment and price promotion in this very strategic fashion can yield x-y% revenue and x-y% profit growth for even the most mature brands.

We have now discussed 4 of the 5 Control the Controllables growth levers. Companies have come to expect:

	Revenue	Profit
Positioning
Spending
Pricing
Customer Strategies

When deployed systematically as part of a strategic growth plan, companies have been able to expect x-y% revenue and x-y% profit "Controlling the Controllables" on their core business. And these numbers do not yet include the impacts of innovation!

Of course, this growth does not come easily. It requires a new expectation for growth from mature businesses and demands a new level of accountability from Marketing and Sales management. It calls for a few new tools including Market Structure. Perhaps most significantly, it requires a commitment to the arduous work of long term brand building by both Marketing and Sales quarter after quarter, year after year.