Number 30: Spring 2005
Brand vs. Customer Architecture
Which are more valuable - your brands or your customers?
By Nick Wreden
Editor's comment: Companies pay too much attention to brands and how they drive profitability but it is consumers who drive revenue and profits according to this new article.
The choice represents an important strategic issue. If you answered brands, then you'll no doubt devote attention to increasing the value of your brands. You'll pay homage to such concepts as "brand equity," "brand image" and other buzzwords. You may even pay consultants who promise to refurbish your "brand architecture," defined by brand guru David Aaker as "that which organizes and structures a brand portfolio by specifying brand roles and the nature of relationships between them and their markets."
Unfortunately, that answer is wrong.
The answer can only be customers. Your salary, profit, equipment and even budgets for advertising and PR come from customers. Without customers, there can be no profitability, and without profitability, there is no business. By contrast, brands can have little relationship to the success or profitability of companies. Consider "Sock Puppet," Commodore, Skytrain and other brands or brand images that have died, not for lack of great branding, but for the lack of customers. GM recently announced that Buick and Pontiac may follow Oldsmobile to the brand graveyard, discovering, like so many others, that all the "brand equity" in the world cannot pay a single healthcare or other bill.
So it is time to re-evaluate the conventional wisdom that characterizes so much brand babble today. Instead of "brand equity" and "brand architecture," companies must now focus on customer equity and customer architecture(sm).
Customer equity represents the lifetime value of customers. It is an invaluable tool for determining the 20% of customers who generate 80% of profits, and for identifying the 15% of customers who, on average, are unprofitable. Customer architecture represents a structured methodology for identifying and delivering economic, experiential and emotional value to customers. Just as important, it is an invaluable tool for extracting value from customers, either through improved pricing or more cost-effective resource allocation.
Customer architecture is based on proven, well-defined strategies, goals, objectives and tactics. The strategy revolves around customer segmentation. Ideally, that segmentation is based on customer equity, but it can also be based on behavioral, geographic or even channel segments.
Once customers have been segmented in "gold," "silver," "bronze" or other categories, then the goal becomes differentiation. Products, services, pricing and operations must be differentiated according to the customer value to the brand. Special emphasis is given to the golden 20% who generate the bulk of profits.
Goals fall into six maximization categories: campaign, profitability, resource, knowledge, operational and results.
Campaign maximization involves various tactics to improve acquisition branding. Most campaigns today measure success by how many leads, prospects or customers are generated, without any consideration to the potential profitability of those customers. Why would you want to acquire an unprofitable customer, or one who might defect at the first opportunity? Based on the segmentation strategy and differentiation goals, campaigns are generally structured and executed to attract prospects who share the same characteristics of existing profitable customers.
Profitability maximization is based on brand penetration, an umbrella term for customer, account and product penetration. Customer penetration represents share of total customer spending in your category, while account penetration is the number of persons or units at a customer who are purchasing from you. Product penetration represents the range of offerings purchased.
Resource maximization results from customer planning, a two-step process. The first step is forecasting customer profitability growth, based on existing brand penetration and customer input. The second phase is matching resources, which range from sales force time to trade show party invitations, to increase the profitability of existing customers. Obviously, golden, or high-potential customers, will get the lion's share of marketing and sales resources.
The constant need to know customer wants, needs and, most important, how they hold you accountable, drives knowledge maximization. Knowledge maximization results from Six Sigma's "VOTC" (voice of the customer), customer councils and visits, product and other collaboration, interactive communications, etc.
The goal of operational maximization is customer-centricity. Customer-centricity involves more than segmented customer service. It also involves leadership and change management, R&D/product development and pricing. One overlooked area is compensation and pricing. Unless the organization, and especially the sales force, is compensated based on retention and customer profitability, they will continue to concentrate on acquisition, inevitably resulting in the 20% (or greater) customer churn that steals profitability.
Results maximization depends on measurement, measurement, measurement. By using surveys/audits, financial analysis, and operational and other reporting, companies must measure customer equity growth, retention, lead conversion, sales cycle length, responsiveness and other areas.
Do customers ever think about or care about your brand architecture? Does your "brand architecture" make a measurable contribution to profitability? Do customers really care that you have, in Aaker's words, "organized and structured a brand portfolio by specifying brand roles and the nature of relationships between them and their markets."
Not likely.
So all this means that you might as well play with Lego blocks as develop a "brand architecture," If you truly believe that customers represent the strategic foundation of your business, then invest in a customer architecture today. After all, without customers, even the most organized and structured "brand architecture" will collapse like a house of cards.
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© Nick Wreden / Through the Loop Consulting Ltd 1998-2005