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Innovating to Drive Customer Lifetime Value

Published date: June 27, 2016 в 6:05 pm

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Imagine a hypothetical scenario where you’re forced to make a choice between innovating for Customer A or Customer B. Which one would you choose?
Well, it depends on how much they buy from you. If Customer A spends more money on your products than Customer B, you’d select that one. But wait a minute. What if Customer A costs you more in terms of selling and customer service. She may spend more, but you actually earn less on her than on the other customer. So then, you would switch because the net profit is higher.
But hold on. There’s one more factor you have to consider. You make less profit on Customer A, but what if you expect to retain her for a longer period of time than you retain Customer B? You make more profit on one sale from him, but if you can continue selling to this lady for the next ten years, then you’ll do much better.
The way you make this type of decision in reality is with a tool called Customer Lifetime Value, or CLV for short. CLV is a formula that helps an innovation manager arrive at the dollar value associated with the long-term relationship with any given customer. It tells you just how much a customer relationship is worth over a period of time.
There are various formulas to calculate CLV, and some are more complex than others. The simplest way to estimate lifetime value for a typical customer is the following equation:
(unit selling price – variable costs) X (number of repeat purchases per year) X (average retention time in years)
Let’s do an example. Imagine you’re selling men’s wallets. Your wallet sells for $89 and it costs you $29 to make a sell it. The typical customer buys a new wallet every three years, and you expect to retain him for an average of 20 years. The CLV formula gives us:
($89-$29) X (.333) X (20 years) = $400
So what? Well, calculating the CLV helps in several ways. First, it tells us that we wouldn’t want to spend more than $400 acquiring and retaining any one customer. Spending more than that and we start losing money. It also helps you decide which customers are more valuable to acquire and retain, like our example earlier.
CLV encourages innovators to focus on the long-term value of customers instead of investing resources in customers of lower value. And it makes you sensitive to how much you’re spending on acquiring and retaining customers and whether it’s effective.

The Courage to Be an Innovator

Published date: June 13, 2016 в 2:20 pm

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Dear Mr. Boyd,
My Wharton interview was conducted in a group format in which we were asked to conceive a new conference to host at the business school. We went around the table, each candidate offering a different idea on which topic would most effectively engage students and faculty. The ideas reflected the respective backgrounds of each candidate – a “Big Data” conference from an IBM analytics practitioner, a “Health and Wellness” conference from a self-described ‘yogi,’ a “Healthcare” conference from a healthcare consultant, and so on.
I was the last to offer an idea – an “Innovation” conference.
I continued to offer examples in which each candidate’s idea could be included within the theme of innovation. I suggested that students and faculty would not only benefit from appreciating the existing business priority to be continually innovative, but also by learning the tactical skills to become intentionally innovative themselves.
My interview group agreed on an “Innovation” conference, refined the idea, laid out the conference logistics, and pitched it to the interviewers. One month later, I was exploring Philadelphia with my family as an accepted member of the Wharton MBA Class of 2018.
You are one of the few people who have encouraged me to admit that I want to do great things in my life. I did not always have the courage to proclaim this. When I say it aloud, it fills me with energy. It makes me hungry to acquire knowledge, inspire breakthrough, and create impact. Thanks to you, I feel that I am on my way.
I thank you for your guidance, advice, and support over the years. I promise I will put it to good use!
Thank you!
Paul Carey, Jr.
Envelope Photo cropped

Great Innovators Focus More on Post-Purchase than Pre-Purchase

Published date: May 30, 2016 в 6:20 pm

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What products or services have you purchased that are your absolute favorites? Can think of a few? My bet is that you can think of a few because those products did everything and more than what you expected. Your satisfaction after consuming those products is very high. That’s one reason why the last step of the buying process, the post-purchase phase, may be the most important in the study of consumer behavior. Let’s learn more reasons why and what you as the innovator can do about it.
First, think about what’s going on in the consumer’s mind at this point in the process. They were motivated to buy a product, they used all their skills and knowledge as a consumer to properly research it and do the purchase. They have a lot of time, money, and emotional commitment to this product. And now they’re home, and there’s the product, almost staring at them out of the shopping bag. Remember our discussion about risk? The consumer is thinking: did I do the right thing? Will this thing work the way I wanted it to work and will it be worth the money I paid for it? In other words, the consumer already has already formed a basis for evaluating the product’s performance. A yardstick so to speak.
When they actually use the product, three things can happen. The product works better than expected. It delivers additional benefits they didn’t know about or it delivers expected benefits better than they expected. If that happens, the consumer reaches a state we call “delighted.”
But if the product works in a way that exactly matches their expectations: no better and no worse. In that case, the consumer will be satisfied with the purchase.
Of course, we’ve all had the experience where the product or service performs lower than expected. Now there are two things that can happen here. One is the customer just accepts it as is. In this case, the product has reached a minimum level of performance to keep it, but just not what they were hoping for. Or, worst case, the consumer will be dissatisfied. It performs below even the minimum acceptable level.
Where a customer lands is critical to the innovator because it will affect whether they repurchase the product, whether they complain about the product, and how they give word of mouth advice to others about the product, positive or negative. You, as an innovator, have a role to play no matter where the consumer lands.
If customers are delighted or satisfied, consider doing the following. Congratulate them for making a great choice. People like being reminded what good consumers they are. Also, this is the time to take credit for delivering on the brand promise. This is also a good time to ask them for a testimonial or to post a positive comment on social media. And finally, make sure it’s easier for them to repurchase the product. Perhaps give them a special order line or a trial discount on future products.
If the customer is dissatisfied, try to find out why? Were their expectations too high because of some misinformation on your website? Did the product fail or did they use the product the wrong way? People will complain if two conditions are meant: they believe the problem was somebody else’s fault other than their own, and they believe the complaint will result in some action. People won’t waste their time otherwise.
Truth is you want complaints because that gives you as the innovator a chance to get in there, make it right, and salvage the relationship. The worst situation is they’re not totally satisfied, and they just disappear.
Great innovators pay the most attention to the post-purchase phase because after all, that’s the moment of truth on whether you’ve created and kept a customer.

Want to Innovate? Make Sure You Have a Seat at the Table

Published date: May 23, 2016 в 6:22 pm

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For most companies, the top marketer, usually called the chief marketing officer, is part of the senior leadership team and sits on the executive committee or management board. In other words, marketing has a “seat at the table.”
But here’s the challenge. If you let things slip in terms of your team’s skills and effectiveness, you’re going to lose that seat. If marketing is seen as weak or ineffective, over time, other departments will slowly start stealing away your responsibilities. If left unchecked, your department will dwindle, leaving your team little more than a sales support function.
Here are some examples. Imagine you have a talented marketer in your department who handles sales forecasts used by manufacturing to decide how much product to make. She leaves to take another role, and her replacement is just not as good. Eventually, the manufacturing team will step in and take over forecasting. Hey, they’re doing it because they need to get the job done.
This could happen in other areas. Pricing could go to finance. Product development goes to R&D. Distribution slips away to the supply chain group. Marketing promotions goes to Corporate Communications, and so on. You’re left with a bunch of junior marketers who do nothing but create sales aids. Not good.
The biggest challenge is that many people believe that anyone can do marketing. Other groups see the marketing department as a great development opportunity for their staff.
For example, the national sales manager wants to give division sales managers new challenges and experiences. They apply for a job in marketing despite having no marketing skills. Other departments do the same thing. Over time, you end up with a marketing department that, by design, is operating at less than 100% effectiveness. You’re in trouble.
Here’s what you can do about it. First, you have to build a marketing department that is seen as having a strong core – it has solid people, strong processes, it meets its obligations, and it positions itself as leading the charge against the competition. That means you have to focus on getting the right talent and building competency within your team.
You have to create an amazing team of people with leadership skills so other departments see marketing as the hub of all company activity.
You must change people’s perception of marketing-as-a-cost-center to marketing-as-an-investment- center. Money spent on marketing will yield a sound return on investment. That means you have to deliver on your promises.
So evaluate your current situation, your talent pool, and your responsibilities. Create a plan to build a strong marketing core. Then go and get back that seat at the table.

Innovating Through Partnerships

Published date: May 16, 2016 в 3:00 am

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Have you ever heard the expression, “Riding on the Coattails of Others?” What it means is – achieving success by associating with other people or groups. In sales and marketing, it’s another great way to create opportunities and improve your sales revenue. Let’s look at how.
To achieve success through others, you have to form partnerships, or what we sometimes call a joint venture. Each partner in the venture does something that benefits the other partner. That way, both sides have a good reason to be involved. In sales and marketing, there are many ways companies can help each other.
Just sharing information such as marketing research can be of value. For example, if your company collects information about consumer preferences and a non-competing company has different information about those same customers, you could swap the data and learn more about your customers.
A partnership can be formed to share sales leads with each other. When one company makes a sale, they give that lead to the other company so they can go in there and make a sale. This opens up a whole new source of leads to put into your sales funnel.
Co-marketing can become much more aggressive than just sharing information and sales leads. For example, each company in the partnership could promote and sell the other one’s products and services. If you sell real estate, you might want to co-promote with moving companies. Once you’ve established a strong relationship with your customer base, selling other company’s products can increase your revenue by taking commissions on those sales.
Finally, another great way a partnership can work is when the partners share resources like channels of distribution or training resources. The secret is to give your partner something that is inexpensive for you to provide but of great value to them, and vice versa.
The key is to pick the right partner and strike the right deal. A good partner is someone who does not compete with your company, but is closely related enough that customers would understand why the two of you are associated. Think about the profile of the customers you want to reach.
Ask yourself, what companies out there also sell to these people? What companies have insights about their buying habits and needs? Do they have a relationship with these customers, and do they have sales channels to reach them? If so, you’ve found an ideal candidate to partner with.
Now here’s a tip. You want to be careful that you don’t create a situation where your reps are distracted selling the other company’s products to the point where they miss forecast on your products. A simple way around that is to bundle the products together. That means putting two or more products together so the customer buys all of them at the same time. For example, if you sell vacation packages, you might bundle travel insurance with it.
So take a look at potential partners given the types of products and services you sell. Give them a call and discuss the possibilities. You’ll be surprised at the many advantages of riding on the coattails of others.

Growth Through Adjacent Markets

Published date: May 9, 2016 в 3:00 am

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Adjacent markets are a great source of sales growth if you can spot them and if you have the right skills to go after them. Let’s look at how you do it.
First, let’s understand what we mean by an adjacent market. It’s often confused with the term ‘white space opportunity.’ By adjacent, I mean markets that are close in proximity to what you already do or where you do it. I’ll explain this more in a minute. White space opportunities, on the other hand, are far away from your core business. By definition, they’re riskier and more expensive to tackle than adjacent markets, at least in my experience.
Now here’s a tip. The most common misunderstanding about adjacent markets is that it’s all about exporting your existing products to new customers. Not true. The secret to adjacent markets is to export your skills and capabilities, not products and services. It’s taking your core competencies and creating new value with new customers. Let’s dig in a little deeper.
Consider a company like Berlitz, the language company. It has thousands of associates who can speak two or more languages. The company offers language training, translation services, and so on. So we ask ourselves, what skills do they have that could create a new source of value? For example, when someone learns a new language, they often travel to countries where that language is spoken. They learn about the destination, tourist areas, and the culture. Could these skills be leveraged to offer travel advisory services? For Berlitz, it might be an attractive adjacent market.
Here’s another example. Bic is a French company that makes a wide variety of products like pens and disposable razors, mostly made of plastic. So Bic has a core competency in all things plastic – how to make it, mold it, package it, and so on. But to be a good adjacent market, it has to be more than just things made out of plastic. In this case, Bic would want to create new plastic products that can be sold in its existing distribution channels. That makes the sales growth opportunity less risky and more accessible.
Take Nike for example. When it goes after a new sport like mountaineering, it starts by selling athletic footwear in that sport. Once it establishes itself with the new customers and new distributors, it expands into clothing and apparel for that sport and eventually into the equipment used in the sport. Very clever.
So the keys to adjacent markets are skills and accessibility. But you should consider the same factors that you would use to evaluate any new market. What’s the competition like, how big is the opportunity in terms of volume and profits, and are there legal or regulatory barriers you’ll need to tackle.
So look at your company’s skills and it’s existing channels. Find new ways to use those skills in your accessible channels and you’re on your way to a new sales growth opportunity.

Outmaneuver: Out Think, Don’t OutSpend

Published date: May 2, 2016 в 3:00 am

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Look at any industry, in any market, and you’ll find the same strategy playing out everywhere. Companies compete with one another in a mindless race to the bottom, matching products and services feature for feature, competing primarily on price. This commoditizes markets and drives down prices and margins. But ultimately, no one wins—not even the consumer–as quality, service and differentiation suffer. We call this senseless strategy “Attrition Competition”, and it is derived from prevailing military strategy, which seeks to overwhelm competitors.
However, there is another way: maneuver strategy.
Maneuver strategy has been used by the military since King Leonidas and Genghis Khan, yet businesses all too often neglect it. In OUTMANEUVER the authors examine how maneuver strategies, based on speed, agility, insight, and innovation win the most in any market at the least possible cost, for companies of any size, in any industry.

  • Unlike attrition, maneuver never seeks to attack an incumbent in head-to-head competition. Instead, maneuver uses reconnaissance and insights to identify weaknesses and uses three strategies to attack those vulnerabilities:
  • Preemption: taking a valuable, unoccupied space before competitors are aware the space exists.
  • Dislocation: attacking an incumbent in a way that forces the opponent to fight with less than its full capabilities and on the attacker’s terms, causing the opponent to vacate part or all of a valuable position.
  • Disruption: upsetting an opponent’s detailed scheduling or planning, distracting an opponent from efficient execution, delaying a timely launch, creating confusion or havoc in an opponent’s capabilities.

OUTMANEUVER details a combination of military and business case studies to identify the relevant points of the strategy. Companies such as Zara, Tesla and Netflix have proven successful in the sea of sameness. Military tactics from the Civil War through the wars being fought in Afghanistan and Iraq today are identified to exemplify the strategy as well.
As the pace of change accelerates, as speed and agility become more important than size and strength, as new entrants disrupt existing markets, attrition strategy seems outdated.
OUTMANEUVER details this overlooked methodology; its focus on speed, agility, and innovation is the right strategy for the new emerging markets and companies of any size.
ABOUT THE AUTHORS:
JEFFREY PHILLIPS leads OVO Innovation, an innovation consulting company in Raleigh, North Carolina. Jeffrey has led strategy and innovation projects in a number of industries including pharmaceutical, high tech, financial services, insurance and medical products. He is the author of three books, including Relentless Innovation, and writes the popular Innovate on Purpose blog.
ALEX VERJOVSKY brings over twenty years’ experience in the consulting and technology sectors as both a consultant and entrepreneur. His most recent company, Castor Fields SAPI, reached over twelve billion dollars in sales. Prior to Castor Fields, Alex founded BioFuel Alternatives, a pioneer in the biodiesel market. Alex is a graduate of Columbia Business School.
 

Innovation Sighting: “Sweaty” Billboards That Fight the Zika Virus

Published date: April 27, 2016 в 7:32 pm

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According to the World Health Organization (WHO), the Zika virus is a global emergency. To fight it, humans have to find a way to kill the Aedes Aegypti mosquito.
Two marketing agencies in Brazil have designed a novel way to do just that. They call it The Mosquito Killer Billboard. It’s a great example of the Task Unification Technique, one of five in the innovation method called Systematic Inventive Thinking. Here’s how their innovation works:

The board releases a mixture of a lactic acid solution that mimics the smell of human sweat and carbon dioxide, which is in human breath. Its inventors have released the blueprint for free and are encouraging people around the world to make them. So far, they have installed two of the Mosquito Killer Billboards in Rio de Janeiro, in Brazil.
From the BBC:

“It’s impressive how many mosquitoes you can trap and how many lives you can save with this idea,” Otto Frossard from Posterscope told the BBC. Mr Frossard added that the board would cost “a few thousand Reals” (1,000 Brazilian Reals is $280/£194) to make. “I think anything that can be done to reduce the prevalence of the mosquito is a good thing,” said Dr Chris Jackson, a pest control expert at the University of Southampton. The insects are drawn to the aroma from the board from a distance of up to 2.5km away, the board’s inventors say.
“Particularly devices like this that attract and kill females that feed on blood, as it is only female mosquitoes that bite,” he explained. Dr Jackson said that, while the science behind the billboard was effective, putting them in public places and attracting human attention – as well as insects – could be a problem.

To get the most out of the Task Unification technique, you follow five basic steps:
1. List all of the components, both internal and external, that are part of the Closed World of the product, service, or process.
2. Select a component from the list. Assign it an additional task, using one of three methods:

  • Choose an external component and use it to perform a task that the product accomplishes already
  • Choose an internal component and make it do something new or extra
  • Choose an internal component and make it perform the function of an external component, effectively “stealing” the external component’s function

3. Visualize the new (or changed) products or services.
4. What are the potential benefits, markets, and values? Who would want this, and why would they find it valuable? If you are trying to solve a specific problem, how can it help address that particular challenge?
5. If you decide the new product or service is valuable, then ask: Is it feasible? Can you actually create these new products? Perform these new services? Why or why not? Is there any way to refine or adapt the idea to make it viable?
 

Are You an Innovator? Take the Quiz

Published date: April 18, 2016 в 3:00 am

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Place a check mark beside the statement you agree with most.
1.     A. Innovation occurs by adding features to a product.
B. Innovation occurs by taking features out of a product.
2.     A. Innovation is finding problems that are solved by hypothetical solutions.
B. Innovation is finding solutions to difficult problems.
3.     A. I am more likely to innovate when I work alone.
B. I am more likely to innovate when I work in a group.
4.     A. Innovation is more about creating novel ideas.
B. Innovation is more about selecting the best ideas.
5.     A. When I innovate, I “brainstorm” ideas out of my head.
B. When I innovate, I apply patterns to find ideas.
6.     A. Innovating is predictable and not risky.
B. Innovating is unpredictable and risky.
7.     A. The ability to innovate is a gift that you are born with.
B. The ability to innovate is a skill that you can learn.
8.     A. I prefer ambiguity when pondering new ideas.
B. I prefer clarity when pondering new ideas.
9.     A. The Post-It Note is a good example of innovation because it was spontaneous.
B. The Post-It Note is a bad example of innovation because it was spontaneous.
10.     A. I feel responsible for innovating new ideas.
B. I feel others are responsible for innovating new ideas.
11.     A. Innovating is a random, improvisational, back-and-forth experience.
B. Innovating is a systematic, linear experience.
12.     A. Constraints on resources like time and money drive innovation.
B. Constraints on resources like time and money inhibit innovation.
13.     A. Homogeneous groups are more likely to innovate.
B. Diverse groups are more likely to innovate.
14.     A. Innovation can be scheduled. It can occur anytime I want.
B. Innovation cannot be scheduled. It occurs randomly.
15.     A. Innovation is an unstructured process.
B. Innovation is a patterned, “templated” process.
Scoring:
For odd numbered questions, give yourself one point for each “B” statement.
For even numbered questions, give yourself one point for each “A” statement.
How do you rate? Here is a general guideline:

  • 11 to 15 points: Consider yourself an innovator.
  • 6 to 10 points: Innovating is a mixed bag for you, but you may be headed in the right direction.
  • 0 to 5 points: Innovation is a mystery to you. Consider formal training.

The Division Technique: Cut Your Challenges Down to Size

Published date: April 11, 2016 в 3:00 am

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The division technique works by dividing a product or its components functionally or physically and then rearranging them back into the product. Division is a powerful technique in the SIT Method because it forces you to break fixedness, especially structural fixedness. Division forces you to create configurations by rearranging components in ways you were not likely to have done on with on your own.
To apply the division technique, you start by listing the product’s internal components. Next, you divide the product or one of the components. There are three ways you can do this.
First is functionally, where you rearrange along some functional role. Look at this example. A water sport company took the controls of the speed boat and then functionally divided them off and placed them into the handle of the waterski tow rope. Now, the water skier controls the movements of the boat without having a separate driver.
Next is physically, where you are cutting the product or component along any physical line. Physical division is different than functional in that we are actually making a cut along some physical line of the product itself or component.
RadioTake a look at this car radio. In this example, the faceplate has been physically cut away from the main radio. When you leave your car, you grab the faceplate by pulling it away from the main radio, and taking it with you. That makes the main radio completely worthless so thieves won’t break into your car to steal it.
And the third type is called preserving. That means you divide the product into smaller versions of itself. Each smaller unit preserves the characteristics of the whole. A real simple example of this is what you see here. Cupcakes are essentially smaller versions of a normal sized cake. Cupcakes
Many food manufacturers use this technique by taking a normal full-size product and then cutting it down into smaller individual portions. These smaller units have just the right amount of food needed by the customer. This saves them money, the product is easier to store, there’s less wasted food, and it gives the manufacturer more ways to sell its products.
So once you’ve rearranged the components, this now becomes your virtual product. Using function follows form, you visualize the virtual product. Then you identify potential benefits and target markets. Finally, you modify and adapt the concept to improve it.
The division technique cuts your biggest challenges down to size so you can see new innovative opportunities.
 

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