There are many striking changes in CMO thinking in the new, post-recession economy (let's not argue about whether there was one or not; it was certainly close enough to be painful). One of them is an increased rigor in examining and managing the link between brand building and profitability.
 Regular readers of this column will know that we have consistently highlighted the role of the CMO as the chief builder of shareholder value in the corporation, and typically that means a tight focus on earnings and profits. We have also advocated a more vigorous effort to assess the effectiveness of marketing actions with tight, objective analysis of the returns on marketing investments, which is still a rare and imperfect activity, but one which repays effort.
For those who have gathered their marketing machete in hand and started to hack away at the dense undergrowth that obfuscates the link between marketing and profitability, some new truths are starting to emerge.
Some customers are more profitable than others, and they are not always the ones you think. Recent research shows that many customers -- even the most loyal -- are unprofitable. (Loyalty does not necessarily mean profitability -- a blow to the loyalty industry but a revelation that will drive CMOs to drill a little deeper into expensive loyalty campaign results). For consumer banking, 80 percent of customers may be unprofitable, and for many segments 50 percent is common.
You may not want to fire all your unprofitable customers, but you may want to examine ways in which you can move them to a more profitable quadrant. Tools are emerging which can "learn" about which marketing actions are most able to upgrade the profitability of a consumer portfolio, and today's CMOs should be experimenting with them and mastering their application.
Channel management should be a profit-oriented activity. Many brands are losing ground in the stand-off between brand power and channel power. Often the response is to pay more to the channel in order to maintain support, space and visibility. This constant profit erosion may lead to the point where the channel is unprofitable, and if the channel is an important volume contributor, some hard decisions have to be faced.
Either the channel must be persuaded to engage in a joint profitability study where the two parties can co-market, co-promote and co-manage for shared profits (my reveries.com colleague Chris Hoyt knows all about these tools). Or the brand owner must review the profitability of the portfolio of channels and ensure that there is optimization at the portfolio level even if one component is marginal. Or it may be necessary to exit a channel and rethink the distribution strategy. Philips' arrangement with Target, where there is a semi-exclusive Philips section in Target stores, is one example of deflecting the channel power of mass-market retail by co-marketing with a selected partner.
Packaged goods companies are particularly vexed by the problem of growth because product-based growth may be at an end.
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Make sure growth is not an unprofitable activity. Many brands are faced with major growth challenges today. A recent study which stripped away "growth masks”"(like international expansion, acquisitions and price increases) found "core growth" rates of zero or less for major companies like P&G and Gillette. Packaged goods companies are particularly vexed by the problem of growth because product-based growth may be at an end. The activities brands undertake to fight the problem are often profit destroyers. New products, especially line extensions, result in manufacturing complexity, incremental channel costs, and marketing costs which never pay back, while often cannibalizing the core brand.
Out-of-the-box thinking is required to understand how to monetize the brand assets in ways other than product development. Consumer and customer relationships can be leveraged in novel ways, often by "servicizing" what was previously a product business. IBM is the classic example of this, having established its largest and fastest growing business, IBM Global Services, by translating its expertise in manufacturing products to an expertise in consulting and services for users of computers.
But think also of General Mills' Betty Crocker brand. Here's a company which has quietly built a huge business in licensing, publishing, information and many other related services around an expertise in cooking that in turn was generated by decades of careful brand building around Betty Crocker products.
The profit-oriented CMO will inventory the brand's assets and find new ways to monetize them that are more profitable than the conventional, linear lines of product development.
Get ready for the era of individual customer profitability. For business-to-business marketers, individual customer profitability is a reality, or potentially achievable, since there are individual customer records, and the ability to record revenues and allocate costs to that record. For consumer banking, telco and some other service businesses that have both consumer databases and transaction and operations databases, individual customer profitability analysis is at least conceivable, and certainly they can examine profitability by customer segment.
Increasingly, CMOs will be held accountable for profitability.
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For businesses such as packaged goods, where it is impossible today to link individual customers with their transactions and their costs, individual customer profitability might seem like an impossible vision. However, it may not be long before database technology can achieve individual customer record capabilities, link them to some POS sales (via store loyalty cards or credit cards) and model their additional purchases in an accurate manner to come up with an individual consumer's total expenditures on a brand.
Similarly, marketing costs and other costs-to-serve can be estimated and modeled. As Internet penetration increases, the individual customer identifier and the record of individual expenditures (via direct purchase over the Internet or an Internet diary panel or modeling or a combination of these tools) become more and more feasible.
CMOs in all industries should be allocating some of their time and development funds to making a start on building a capability for analysis of individual customer profitability.
Increasingly, CMOs will be held accountable for profitability. Inevitably, this accountability will assume a more granular focus over time -- driving down through division level, brand level, channel level, and customer level, all the way to the individual consumer level.
The savvy CMO will stay ahead of the trend by mastering the marketing-to-profitability link.
Hunter Hastings is managing partner of EMM Consulting Group, which advises companies on how to implement Enterprise Marketing Management, a multi-faceted system for global brand management combining marketing knowledge, best practice processes and training with collaborative software, marketing tools and infrastructure. He can be reached at HunterHastings@EMMConsulting.net
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