About 25 percent of XYZ’s customers switch to other carriers annually. It would be a major accomplishment if XYZ can reduce the churn rate since it costs at least $500 to acquire each new customer. Assuming that a customer produces a profit of $1,000 over the length of a 12-month contract, XYZ nets $500 (the $1,000 profit minus the $500 acquisition cost). If XYZ can get that customer to sign up for a second year, its net profit on that customer will rise sharply because XYZ incurs no acquisition cost for the second year. This will hold true even if the new, lower-priced calling plan results in somewhat less revenue from that customer.
One key to the success of the test is having sales reps approach the customer with a plan especially developed for them. It’s a two-pronged strategy: There’s a brand message (our carrier is great for your business); they follow that up with an individual contact from the sales reps so that customers feel the company is working for them. Says Harrison: “The message of this approach is, one, we care about you, two, we’re creative, and three, even though we’re small, we can be innovative in how we approach the business compared to our larger competitors. It’s mostly a price game, but we’re trying to be creative.
“We expect revenue to go down slightly with the new plans but we expect churn to go way down,” Harrison says. “The strategy is to lower the prices of the calling plans to try to secure the account for another year. But they won’t lower prices as much as competitors would. You don’t want competitors to take the initiative with ridiculously low prices and be forced to match it.”
Once XYZ determines if the plan is working, it will have to constantly refine the calling plans based on competitors’ offerings. While the pricing experiment is taking place, XYZ has simultaneously embarked on media advertising and sponsorship of sporting events to strengthen brand awareness. But Harrison stresses that XYZ is not advertising a set pricing structure because it wants to retain flexibility for its customers and does not want to be perceived as the market’s low-price player.
Snap, Crackle, Promotion
Les Moeller of Booz Allen describes his experience working on a project to establish a program that revamped the way the Kellogg Company, the venerable American packaged foods giant, uses trade promotions in its overall marketing strategy. In trade promotions, manufacturers make payments to grocers to display, advertise, and offer reduced prices on certain products at specified times.
Kellogg launched its Trade Promotion Excellence program (TPE) in the 1990s to increase the return on the $600 million it was spending annually on trade promotions. Kellogg knew almost nothing about the effectiveness of the thousands of promotions that took place every year. It created TPE under pressure, because at that time it was losing market share.
Booz Allen found that 59 percent of Kellogg’s trade-promotion events lost money for the company; the profit generated by the other 41 percent was almost entirely eaten away by the events that lost money. By spending trade promotion money differently, Booz Allen projected Kellogg could save at least $64 million a year.
TPE was a comprehensive program involving structural changes in the sales and marketing organization and business, and the application of new, sophisticated software tools. As a result of TPE, Kellogg shifted a large amount of money from trade promotions into brand building and new-product innovations. The company today continually looks to see whether promotion events truly contribute to sales growth and profitability. Perhaps most important, Kellogg’s sales culture has been transformed. A “value mindset” permeates the organization, according to Moeller. Today, hard financial data drives Kellogg’s marketing strategy, tactical decisions are decentralized and based on profitable growth, and compensation is tied to value creation.