Olga Tretyak September 2011

1. Marketing effects in a value chain Olga TretyakSeptember 2011

2. Content IntroductionShort-term and long-term marketing effectsTheoretical background and indicators of long-term marketing effectsClient’s flow: assessment and management(on the particular case descriptions) Discussion and conclusions: theoreticaland managerial implications 2

3. Introduction • There is an increasing pressure in companies to make marketing accountable • Traditional marketing metrics such as brand awareness, attitudes, or even sales and share are not enough to show a return on marketing investment • In fact, marketing actions that improve sales or share may actually harm the long-run profitability of a brand. 3

4. Introduction • From a single transaction to value chain as a focus of contemporary marketing. Is there a real need in new indicators? Academic researchers as well as practitioners are pointing out the imperfection of existing indicators considering both managerial activity results of a single entity or a value chain • Specific Russian conditions • Most of existing indicators were developed in previous century, and not react to the process of “new economy” (for on example, of telecom industry) adequately 4

5. The need for new performance metrics based on the customer flow: motivation for the study and literature review Marketing theory:researchers… Marketing practice:practitioners… Researchers recognize that customers are members of the value chain (Piercy, 2009; Vargo & Lusch, 2004) Various forms of customer “inclusion in the chain” proposed (cf. Heikkilä, 2002; Jüttner, Christopher and Baker, 2007) Firms are investing heavily in marketing assets, so it is critical to assess results (Srivastava, Shervani & Fahey, 1999) Valuation methods that account for long-term results of marketing actions are not numerous, and should undergo dozens of adjustments in order to give even rough estimates (Weaver, 2001) Practitioners measure performance of transactions: increase in volume, revenue, profit margin… Experts recognize importance of measuring customer loyalty, brand and customer equity, marketing’s contribution to firm capitalization Managers recognize that relationships with partners across value chain are critically important for long term performance, but don’t formally measure relationships At present, CLV approaches and the like are still too complicated, so calculating the long-term results of marketing activity raises arguments between accounting, finance, operations and marketing departments

6. The need for new performance metrics based on the customer flow: motivation for the study and literature review Marketing theory:researchers… Marketing practice:practitioners… Recent studies have found that not all customers are equally profitable. Therefore, it may be desirable to “fire” some customers or allocate different resources to different group of customers (Blattberg, Getz, and Thomas 2001; Gupta and Lehmann 2005; Rust, Lemon, and Zeithaml 2004). Managers recognize that differences and rank their clients Financial metrics such as stock price and aggregate profit of the firm or a business unit do not solve the problem. Although these measures are useful, they have limited diagnostic capability.

7. Introduction: the research project and its scope A picture tells that marketing action impact on sales dynamics is different in the short term and the long term Sales Peak point of marketing action Best scenario Worst scenario Initiating marketing action Completingmarketingaction Stabilizationofsales Time Source: (Adopted from Rao V. and Thomas J, 1973, Dynamic Models for Sales & Promotion Policies, Operation Research Quarterly, 24, 3, p 403-417)

8. Example from a e-commerce industry Industry context A weekly table of indicators… Financial indicators are often inadequate Business is subject to seasonal fluctuations as well as the observed bursts of volume of services provided during the holidays Extensive historical data about individual customer behavior is available, and allows for identification of cause and effect Key questions of practitioners: How many “active” clients can be attracted and retained in result of a marketing action? Is the company able to convert this inflow of active customers into longer-term increase of sales?

9. Theoretical background and indicators of long-term marketing effects • Marketing strategy plays key role in the processes of attracting and retaining customers, providing growth and renovation of business, developing solid competitive advantages and enhancing financial performance of the firm during its life cycle. [Srivastava, Shervani, Fahey, 1999]. • Relationship between share price andnet present value of expected cash flows from the client base expansion is shown in [Кim, Mahajan, Srivastava, 1995] on example of telecom industry. Similarly [Ailawadi, Borin, Farris,1995] demonstrates marketing actions impact on EVA and MVA indices through customer value indicators, revealing a direct correlation between marketing strategy and changes in entity’s financial welfare. 9

10. Theoretical background and indicators of long-term marketing effects • The evaluation of marketing productivity ultimately involves projecting the differences in cash flows that will occur from implementation of a marketing action. In contrast, from an accounting standpoint, decomposition of marketing productivity into changes in financial assets and marketing assets of the firm as a result of marketing actions might be considered. The devotion of more attention to these marketing assets is likely to transform the way businesses are managed. (Rust R. T., Ambler T., Carpenter G. S., Kumar V., Srivastava R. K., 2004) • Authors emphasize the significance of taking into account the client flow’sheterogenic character, of targeting the most profitable clients 10

11. Client’s flow: assessment and management Example of recruiting of “active” customers: the net long-term result of a marketing action Transformation 1 Transformation 2 Transformationn Recruited 900 Activeclientswhohavemade1stpurchase 600 Activeclientswhohavemade2ndpurchase 200 Reactivated 100 PASSIVE

12. Client’s flow: assessment and management Recruiting efficiency: comparing Russian and European cases Russia Europe Recruited 1,000,000 500,000 + 2,000,000 2,000,000 Active - Passive 950,000 450,000 = 1,050,000 1,050,000 Tentative example based on internal data on customer retention process of European and Russian branches of a multinational company Actual numbers and company’s name are not to be disclosed

13. Conclusionsand directions for future researches As marketing strives to become more accountable, we need metrics and models that help us assess the return on marketing investment. CLV is one such metric. • We suggest to consider a client retention rate dynamics as a result of long-term marketing activity in a value chain; • Such dynamics is determined by increase of the client flow’s active part, generating major cash flows; • Monitoring of this dynamics makes it possible to detect problems and reorganize current marketing activity, if necessary; 13

14. Conclusionsand directions for future researches Directions for future researches include: • Practical approval of the method in different industries, customer acquisition-retention model and how can we use it to evaluate long term marketing results; • Considering model modifications depending on a role and a place of a dominating actor in a value chain. 14

15. Web: http://www.hse.ru/Web: http://noe.virtass.ru/e-mail: noe@hse.ruOlga Tretyak, September 2011 Thank you for your attention!