Competing For Profits

Last Updated Jan 3, 2008 2:34 PM EST

The true test of a marketing program is to deliver products and services that are both competitive and profitable. To do this you need to understand the factors that differentiate your business from your competitors and focus on developing your strengths. In some cases that means enhancing your products or improving your performance in marketing them. It also means controlling and reducing the costs of doing business to improve profitability.

What You Need to KnowIs it important to take a long-term view of profitability

Most companies constantly look for ways to expand their pool of profitable customers, aiming to optimize each customer's lifetime value. It is important to begin with a complete view of the customer and an understanding of which customers are profitable and why. Once you have determined which types of customers you should seek to retain, you can concentrate on developing products and services that will lock those customers in, while contributing to profitability.

What to DoUnderstand Your Competitors

Competitor information helps you to identify how you can protect your most important business and, more positively, how you can strengthen your position with customers. These are the main questions you should be asking:

  • How many competitors do you have?
  • Who are your major competitors?
  • Are they direct or indirect competitors?
  • How do your products compare with competitive offerings?
  • What are your competitors' main strengths?
  • How do prices compare?
  • What are customers' attitudes toward your competitors?
  • How do they compare with attitudes toward your company?
Focus on Customer Profitability

When you are looking at competitive threats to your customer base, it is important to remember that retention means more than keeping customers; it also means maintaining their value. Although customer retention is critical, it is important to recognize that not all existing customers may be profitable. Historical sales policies may have created a wide range of scenarios in which profitability varies by customer or even by transaction. Profitability can be influenced by different types of discounts, penalties, and allowances, as well as rebates in kind, or additional services given for free. Many companies have lost control of these factors as their business, product range, and customer base has grown. As a result profitability levels may be compromised.

Build on Product Strengths

When you have identified the most valuable customers, you need to have a wide range of products or services to offer them. Cross-selling and up-selling are the best ways to increase customer value and profitability, but these can be difficult with a limited product range. You can improve your competitive position by extending or enhancing your existing product range—new product development is not the only option. Existing products can go through a continuous process of review and development to ensure that they remain focused on changing customer needs. There are a number of different approaches to product extension:

  • Enhance the product with additional features and benefits.
  • Introduce higher- or lower-priced versions.
  • Increase the range.
  • Use product variants to segment the market.
  • Introduce niche products.
  • Introduce "own-label" products.
  • Buy products or services from third parties.
  • Respond to competitive product actions.
Involve Customers in Product Development

If you are planning a new product or developing an existing one, ask your customers for their views on the existing product and their requirements for a new one. By explaining your plans and involving customers in product development, you can strengthen relationships and provide a service that is mutually beneficial. Questions could include:

  • How can we improve the current product?
  • What problems need to be overcome?
  • What new features would they welcome?
  • Do the plans represent an improvement?
  • Would they make greater use of a product that included the features they have highlighted?
Look at Your Pricing Policy

Your pricing policy is key to profitability and competitive positioning. To assess prices, you need to carry out research in a number of areas:

  • What benefits do your customers get from using your product or service?
  • Is price one of their important criteria for buying decisions, or are factors such as speed of delivery, convenience, or reliability more important?
  • What value do your customers place on receiving the benefits you provide?

When you are looking at customer benefits, how does your product or service compare with competitive offers? Will customers be prepared to pay for those benefits? You may be able to charge a premium if you are first to market. You should also consider how your pricing compares to the market price of similar products or services. Do not just look at your competitor's pricing—look at the whole package they offer. What value-added services do they offer? The perception of your product or service is also important. In many markets, a high price contributes to the perception of your product as being of premium value. This might encourage customers to buy from you—or it might deter price-conscious customers. If you have products or services that are exclusive to your business, you can also use these to position yourself as a leader and set prices accordingly.

Build a Strong Reputation

Most companies have to work hard to get visibility, especially in a crowded marketplace. If your reputation is not strong, you may find that prospects do not want to buy from an unknown vendor. They prefer to buy from companies they can know and can trust. Trust is built on reputation and reputation is generally not built on advertising. One way to improve your reputation and your competitive position is to become an industry thought leader. You can build a strong reputation, even with limited resources. Articles in important publications, speaking appearances at industry events, well-produced customer magazines, white papers, podcasts, and Webcasts can all help to position a company as a thought leader and build preference for your company's products and services.

Strengthen Customer Relationships

Thought leadership can be considered as part of a relationship marketing program, helping to build a favorable attitude toward a company and its products through recognition that the company understands its business, the needs of its customers, and the marketplace. Relationships can be reinforced even further by programs that reward customers for their loyalty. Relationship marketing programs can take many different forms from simple concepts like discounts on repeat purchases, incentives for purchases of specific products, to more complex frequent user programs that provide rewards to customers who continue to use a service regularly. Programs like these help to increase account control and shut out competitors. There is an added benefit—the more you know about your customers and their requirements, the more closely you can tailor your marketing programs to their individual needs. A database that builds up a detailed picture of individual customers and their purchasing habits is important. The information allows you to target specific groups of customers with relevant offers and increase their value and profitability over the long term.

Focus the Sales Force on Customer Relationships

Building stronger customer relationships may require a fundamental change in the way you manage your sales force—moving from sales to account management. Sales staff need to change their role and their attitude. In many companies, the sales force is used tactically to maximize sales potential and to deal almost exclusively with the purchasing department. However, by broadening the role to account management, a company can strengthen both sales and account control. Instead of pursuing short-term profit, account managers must concentrate on managing customer relationships, and they must understand the customer's whole business. There are a number of important elements in bringing about this change which include:

  • a shift from short-term sales to managing customer relations;
  • developing an understanding of the customer's whole business;
  • focusing on profitability, as well as turnover;
  • developing a long-term focus;
  • working at different levels in the customer organization;
  • understanding and influencing the complete decision-making structure;
  • recognizing the importance of customer care and customer satisfaction.
Reduce the Cost of Customer Service

The cost of serving customers can make a significant contribution to profitability. You can use the flexibility of the Internet to offer customers self-service facilities. Self-service reduces customer support costs and improves convenience for customers. It means you can deliver service around the clock, without tying up key staff. It also enables you to reduce your telephone-based support facilities by transferring support resources to the Web Site. Self-service is important to a number of sales and customer service processes:

  • delivery of information
  • direct sales
  • sales administration
  • customer support
  • technical support
Control Your Marketing Costs

An increasing number of marketing activities from advertising, direct marketing, relationship building, customer service and channel support are now Internet-based. E-mail, for example, is a precise, flexible medium that is extremely cost-effective. It can be used to build regular communications with a large segmented customer base or develop a one-to-one relationship with selected profitable customers. It is essential to identify the activities that can move effectively to the Web and ensure that they are produced to the same rigorous standards as traditional marketing activities.

What to AvoidYou Overlook Competitive Activity

Competitive activity can have a significant impact on your own plans. If you are about to run a marketing campaign or new product launch, competitive activity could limit its effectiveness. You may also identify growing threats to important accounts. Unless you monitor activity and take appropriate action, your business faces risk.

Where to Learn MoreBook:

Hooley, Graham J., and John A. Saunders, and Nigel Piercy, Marketing Strategy and Competitive Positioning. Financial Times/Prentice Hall, 2003.

Web Site:

Ten3Business e-Coach: www.1000ventures.com