“Is the view going to be worth the climb?”
The whine of a pre-teen on a family vacation to Yellowstone? For sure. But in this case, I’m quoting my boss, who raises this question when approached with project proposals. What he’s getting at is one of the most fundamental gates to business value creation: will the benefits outweigh the costs?
In the Shotgun! primer, I talk about B2B CMOs claiming roles of “operational relevance” in their companies in order to realize the benefits of being market driven firms. I summarized the “view” – the benefit of being market-driven – as follows:
“…the best chance to respond profitably with a viable offering and outpace competitors.”
The CMO’s “climb” consists of a multitude of harrowing ascents en route to a summit of sorts, evidenced by marketing’s substantive contributions to sales, product development, and customer management.
But for the CMO of the aspiring market driven firm, is the view going to be worth the climb? Let’s start with a closer look at the view from the top.
Summit: Market Driven
The ultimate measuring stick I use to gauge the worth of any business initiative is profit impact. Specifically, I’m concerned with gross profit – margin dollars per unit sold – and operating profit – margin dollars after operating expenses. A market driven approach is intended to maximize both profit lines on the income statement.
Gross profit is grown by maximizing prices while minimizing cost of sales. A market-driven approach addresses both sides of this equation. On the pricing side, a market-based decision framework is founded on a detailed understanding of competition, region specific elasticity of demand, and market segment size and growth rates. Prices can be discriminatorily set by subsegment to maximize overall gross profit dollars without sacrificing market share gains. The result: maximum total gross profit dollars captured via margin percentage and sales volume.
To the extent your company is selling complex solutions, your cost of sales will increase proportionally to the length of your sales cycles. Market driven firms are increasingly staffing their direct and indirect sales forces with individuals with domain experience in their target markets and placing less emphasis on experience selling a particular product or service. Why? To shrink sales cycles and increase win rates, thereby reducing cost of sales and contributing to better gross profit performance.
Operating profit is grown in large part by driving efficiencies in marketing, product, R&D, and support operations. These efficiencies materialize as more revenue generated per unit of operating expense. A market driven firm prioritizes its operational investments in direct response to a rigorous quantitative analysis of which markets have the highest probability of yielding the most revenue in the shortest period of time.
For example, if your company offers more than a handful of products and services, there are important decisions to be made and trade-offs to consider regarding how best to allocate R&D capital across your portfolio of offerings. The market driven firm begins by asking which offerings are most relevant to the top two most promising market segments and then makes investment allocations hierarchically from there.
False Summit: Product Driven
On their way to achieving a market driven organizational perspective, many mid-stage B2B companies settle on a product driven approach. If you characterize market driven as “outside-in,” you can, by contrast, look at product driven as “inside-out.” This usually means that the company’s own products, points of view on business problems, and solution paradigms form the primary frame of reference for every strategic decision.
Depending on how much your company’s DNA is shaped by the engineering function, this product driven orientation can persist way beyond your company’s adolescent phase. By deliberately or unwittingly choosing this route, these companies underperform on the scores of both gross and operating profit.
Product driven companies tend to underprice or overprice their offerings, sacrificing gross profit or market share, respectively. If there’s a hardware or discrete good component of the offering, then the company will often use a standard cost-plus pricing approach, tacking on a margin to the known manufacturing and sales cost base. Alternatively, software and services companies often employ a value based pricing approach, basing prices on presumed value that would be realized by the customer.
In both of these cases, the commercial climate of the target markets – indicated by competitive alternatives, switching costs, price sensitivity, and price parity with comparable offerings – is an afterthought at best, resulting in pricing practices that suboptimize gross profits.
On the cost side of the gross profit equation, product driven companies will typically misspend by building sales forces with deep product or category experience and spotty industry domain experience. Again, this is especially damaging in complex solution selling, when industry veterans on the customer side can readily sniff out a neophyte hawking the wares of the product vendor du jour. Fact is, it’s a lot simpler – and more profitable – to hire for market knowledge and train the product knowledge than vice versa.
On the operating side, product driven firms with the best of intentions can misspend enormous quantities of money, time, and resources on marketing, product, R&D, and support operations. This usually happens as a result of some combination of three faulty decision frameworks for allocating operational resources across product lines:
- “Rear-view mirror”: singular focus on historical revenues, customer tendencies, competitive behaviors, and product competence levels, with minimal forward-looking analysis.
- “Peanut butter”: spreading investment equally without any strategic prioritization.
- “Squeaky wheel”: reactively investing in product development and support in response to subjective pleas from individual product managers, salespeople, or customers.
Base Camp: Customer Driven
A reasonable strategy for early stage B2B companies with limited capital and zero momentum is to dive headlong into meeting the needs of a few major customers in a niche market. Geoffrey Moore would call this textbook “bowling pin” strategy.
But problems arise when companies maintain this customer driven approach unchanged beyond the $10 to $20 million annual revenue mark.
Professor Julie Hennessy of Northwestern University’s Kellogg School of Management offers this cautionary note:
“Just listening and giving the customer what he/she asks for, increasingly means being undifferentiated from competitors. Falling margins and increasing rates of failure result. The rewards of being ‘customer-driven’ are illusory. True competitive advantage arises from successfully creating and shaping markets in your organization’s best interest, with an understanding of customer needs as foundation.”
As Hennessy suggests, a singular focus on voice-of-customer can result in competitive parity which will rob your company of pricing power and therefore quickly erode gross margins. However, to the extent existing customers are a subset of your target market, their needs should be captured and carefully considered as one of the inputs into resource allocation decisions.
Unilateral servitude to customers kills operating margins as well, saddling companies with direct and opportunity costs associated with reactively shuttling R&D and support resources to and fro to satisfy customers’ requests. By contrast, market driven firms segment their customer bases and treat them as captive “markets” with clear value tiers serving as guard rails for resource allocation decisions.
Mapping the Climb
Due in large part to cash flow constraints, most B2B companies need to reach base camp and false summit before reaching the true summit. To best manage the pace of the climb, the CMO and his/her executive peers need to begin with the end in mind and proactively plan for the transition from customer driven, to product driven, and to market driven (Figure 1).
Figure 1 – Getting to Market-Driven
The fact is smooth transitions from one stage to the next will require hard and soft investments which are most easily made when your current approach is still earning you cash. The “strategic transition points” pictured above illustrate organizational and operational investments that, if made while you are still on the “upswing” of your current stage, allow you to make the necessary changes without losing too much momentum on your way to the summit.
This article was originally published on the Marketing Executives Networking Group’s MENG Blend blog on August 8, 2012.