Why are Marketing & Sales Forecasts Usually Wrong?

Because forecasts attempt to predict the future they will always be wrong to some degree.  Problems arise with forecasts that are usually far off the mark and the resulting impact on a business.

Not that Marketing and Sales can’t or don’t attempt to produce a good forecast, but mostly because the process many companies use is the reverse of what it should it be to produce a good market-driven forecast.

“I skate to where the puck is going to be, not where it has been.” – Wayne Gretzky

The above quote from Wayne Gretzky succinctly describes the fundamental problem with the way many companies do forecasting – it’s primarily derived from what happened last year – what was sold based on where the market was, instead of where the market is going to be and what customers plan to buy.

Take the current state of business software companies as an example of this continuing wrong-headed forecasting by business, sales and marketing executives:

• Traditional on-premises business software vendors’ license revenues are down an average of over 30% for the most recent 12 months.
• Software as a Service (SaaS) business software vendors’ new subscription revenues are up an average of over 20% for most recent 12 months.

The announcements from on-premises vendors about their results are that the shortfall is due to the economic conditions.  But, the SaaS vendors are growing in the same economy and markets.  It seems that the on-premises vendors have deeply flawed forecasting and planning processes given the size and claimed unexpectedness of the shortfall.

Now there’s a flurry of announcements from on-premises vendors about plans to bring SaaS solutions to market.  But, marketers at these on-premises vendors have seen this trend toward SaaS coming since 2007 or earlier and many urged their companies to make investments and commitments for SaaS solutions some time ago.

So what happened?  More of the same.  The forecasting process usually starts with C-suite executives adding a percentage growth number to the previous year’s actual sales numbers.  Usually with no or minimal regard for market forecasts and changing conditions.  The Sales organization in turn is required to commit to make the number.  Sales then distributes the number through their hierarchy until everyone owns a piece of the commitment – the individual, team and organizational quotas.  After some negotiations, the numbers are locked in and marketing now has to somehow produce leads to support sales quotas produced by a flawed process.

And that’s where things begin to go wrong – right at the start:

• C-suite executives want more revenue with minimal incremental investment and pressure Sales to commit to these arbitrary forecasts.
• Sales want to do what they’re comfortable with and what worked in the past – sell more of the same stuff in the same manner.
• Marketing and Sales work hard to produce leads and sales, but they’re swimming against the market currents.
• Marketing knows that markets and buying preferences are changing, but it’s tough to get the right attention until the changes leap out and slap everyone with bad results from doing more of the same old stuff.
• R&D has a huge backlog and can’t tackle any new projects for at least 2 or 3 years.

Producing good market-driven forecasts is not rocket science.  Manufacturers do it well with robust forecasting, planning and scheduling processes that drive the business from end to end.  B2C companies have a much more robust and statistically accurate process that starts with Brand Managers developing market-driven sales forecasts and business plans which become the playbook for all areas of the business.

Seems to me that the fundamental problem is that many B2B companies, especially Information Technology companies are not really market-driven – see the Marketing in a ‘Market-driven’ company article for more information about what it means to be market-driven.

How do you deal with this forecasting issue and do you have any recommendations on what has worked for you?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Time: An Overlooked Difference between Marketing and Sales

Most of us in marketing have experienced this scenario – your company misses the just completed quarter’s sales targets – marketing and sales leaders are hauled into the CEO/COO’s office for a grilling to explore why this happened.  Inevitably, Marketing is thrown under the bus for not producing enough leads.  But there’s a disconnect that is frequently overlooked or disregarded – what marketing are working on today is not what sales are working on today.

Although the above statement may be intuitively obvious to anyone who stops to think about it, this time difference isn’t sufficiently considered for marketing and sales performance measurement.

Consider a manufacturing supply chain as an analogy.  There are planning, scheduling, procurement and delivery activities that happen in the inbound supply chain long before manufacturing can produce a product, and then there’s the outbound supply chain to ship and distribute the product for purchase by the eventual customer.  This total lead time from end-to-end is typically 3 to 12 months depending on the industry.  Manufacturers use Demand Planning to deal with synchronizing the supply chain lead time with anticipated future demand relative to when the finished goods will be purchased.

Marketing has a life-cycle of processes over an extended time period like a supply chain.  Consider this hypothetical example of a typical B2B marketing campaign process over a quarterly time increments:

• Q1 – marketing does research, analysis and testing to formulate the campaign value proposition, target market(s), offer, etc.
• Q2 – marketing develops the campaign content, materials, enablement resources, etc.
• Q3 – marketing begins executing the campaign.  First leads start coming in.
• Q4 – campaign in full swing – leads are coming in.  Sales get qualified leads for action.

Now add the typical B2B sales and/or buying cycle of 3 to 9 months or longer on top of that and we’re in Q6 or Q7 or later when deals are planned to close for leads generated by this campaign.  So if Q7 sales didn’t make quota, marketing wasn’t working on the same leads or deals for Q7 as sales was.  That doesn’t exonerate marketing from some responsibility for the problem.  However, what these quarterly sales review meetings seem to miss, is not to look at what marketing did in the quarter in question (Q7 in this example), but what marketing did in Q1 through Q4 that led to the Q7 outcome.

Some questions executives could ask considering the time differences for a more relevant discussion and productive outcome from the review process:

• What was the original analysis for the campaign(s) that produced leads that should have generated sales in the quarter under review?
• What was the anticipated customer demand in the plan and how was it determined?
• What changed in the meantime?  Economic factors, buying cycles, customer budgets, competition, market shifts, etc.
• Did the campaign execute as planned and produce the expected results?
• Were adjustments made to the campaign as unanticipated external or internal changes occurred?
• Are sales selling according the campaign value proposition and reasons customers expressed interest?

That meeting is also a good opportunity to look forward for the next couple of quarters with the same questions to anticipate potential problems and proactively make adjustments. Also review what plans marketing have in the early phases of the campaign process that will drive sales activity 3 to 5 quarters from now.

Is this lead time difference an issue for you?  If so, how do you handle it?  Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Should You Provide Pricing Information on a B2B Website?

Providing specific pricing details is de rigueur for B2C eCommerce websites. Most B2B websites don’t provide details because pricing is usually complex based on many variables, combinations, configurations, and other factors specific to each buyer’s circumstances. Competitive exposure is another claimed reason for not publishing prices, but B2B companies already know competitors’ prices from other sources. Pricing is something that prospective buyers always want to know.

The problem is that website visitors and prospective buyers want to know whether a product/service/solution is within their budget range before they consider further exploration. Many B2B companies provide some guidance by indicating applicability by type of business, industry or company size – e.g. solutions for small business, mid-size companies or large enterprises. That’s a good approach, but website visitors still have no real understanding of the price range. There is anecdotal evidence that website visitors will leave to explore alternatives if they can’t get at least some basic understanding of prices.

The question of whether to provide pricing on B2B websites depends on the specific circumstances of a company/product/service/solution and common practices in the market(s) served. It’s also not a binary question. The question is really whether there are ways that B2B websites could provide some pricing information to satisfy the immediate needs for website visitors so that they continue to consider that company/product/service/solution and possibly initiate some follow-up response.

Many B2B websites want their website visitors to initiate contact to get additional information such as pricing, but the majority of website visitors are reticent to do that because they’re not ready to deal with a salesperson yet, nor do they want their contact information in another marketing database. In most cases, B2B website visitors are not looking for precise prices, just a general indication of price ranges relative to their needs.

What should you do?

• Although providing pricing information on a B2B website may not be an absolute necessity, there are good reasons to investigate whether you should do it and in what manner.
  
• If you can provide pricing in a relatively straightforward manner, consider doing it. This is obviously a decision that goes beyond marketing into the entire organization.
• Don’t publish a complex pricing formula, matrix or calculator. Providing a complicated pricing algorithm might be worse than not providing any pricing.
• If appropriate, provide a simple calculator for estimating general price ranges.
• Providing sample prices for typical situations or configurations may be adequate. The key is to provide sufficient samples for website visitors to find one that resembles their requirements and business.
• Provide an easy mechanism for users to submit basic parameters to request a price estimate which you can turn-around in 24 hours. But don’t ask for a long list of intrusive contact information details to discourage use of the request service.
• Have a sales support hotline link on the website for providing real-time information based on getting the necessary qualification data.

If you do make any changes for providing pricing information on your B2B website, track response rates before and after to determine the impact of pricing availability.

How to do you handle providing pricing on your B2B website? Have you made any changes and seen any beneficial results? Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Should you disregard or include ex-customers in your marketing plans?

The previous post ‘How many customers do you have? Really.’ identified 8 distinct groups of customers based their current status. Two of these groups that rarely receive as much attention as they should are:

• Customers don’t exist – the customer company doesn’t exist for various reasons.
• Customers not using – customers that don’t use your product/service/solution.

Why should you pay attention to, and spend marketing resources on ex-customers? Because, firstly you can learn valuable insights and secondly there is potential revenue from your ex-customers. Most companies tend to disregard ex-customers because they view them as a lost cause and it’s too unpleasant or difficult to communicate or deal with ex-customers. But they’re missing out on a significant opportunity to improve their business by learning from ex-customers. And there is still potential revenue to harvest.

Customers that no longer exist – nothing you can do about customer companies that shut down, go out of business, merge, get acquired or cease to exist for whatever reason. However, there were people inside those companies that used your product, maybe even liked your product. These people have moved on to other companies, they know about your product/service/solution, you probably have their names in your database. Find out where they are now and reconnect. Someone with a positive previous experience with your product/service/solution can be a valuable contact to market and sell into the company where they currently work.

Customers that have stopped using your product/service/solution – this can happen for a variety of reasons including dissatisfaction, new management preferences, a competitive product/service/solution that better meets their needs or many other reasons. Losing customers is painful and costly and has a direct impact on Lifetime Customer Value (LCV). The customers you have lost can provide valuable insights to prevent losing more customers by applying those lessons for improving or correcting whatever caused them to defect. Proactively taking action based on empirical research and analysis from these ex-customers can greatly improve retention and loyalty for current customers.

“The Customers you lose hold the information you need to succeed.” – Frederick F. Reichheld

Just as most companies do a win/loss analysis on current sales deals, you need a continuing Customer Defection Analysis program to gather information from ex-customers for business and marketing plans:

• The first step is to categorize the reason for defection – let the information from ex-customers guide you to the right categories rather than preconceived internal opinions.
• Identify the underlying causes in the ex-customers’ context, that led to the defection. Look for commonalities and trends to determine appropriate corrective action to avoid or minimize future defections.
• Get information about when they stopped using your product, what they’re using now, whether they’ll make the same decision again, etc.
• Determine what other useful and relevant information to gather for the Customer Defection Analysis based on your specific business/ product/service/solution circumstances.
• Identify possible revenue opportunities with these ex-customers:
• Can you provide paid services to help them migrate from your system to their replacement system? I know this sticks in one’s craw, but getting someone from your company into the ex-customer environment to provide services can yield significant insights in addition to the services revenues.
• Can you sell them something that is either complementary to their new system or addresses a completely different functional area of the business?
• Put them on the contact list for appropriate marketing programs to stay in touch and consider your business/product/service/solution for future needs.
• Although gathering information from ex-customers may seem difficult, most people are usually willing to share the reasons for the decisions. Don’t be defensive, argumentative, judgmental or try to rectify the past – just listen and learn.
• Being understanding, supportive and helpful during this information gathering process can put your business in a more favorable position for possible business opportunities with ex-customers.

Are you currently disregarding or including ex-customers in your marketing plans? Has this article given you food for thought to reconsider your practices in this area? Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Is the RFM customer analysis model relevant for B2B marketing?

Continuing the discussion about customer metrics and analysis from previous posts; this post explores the relevance of the RFM (Recency, Frequency, Monetary) customer analysis model for B2B marketers and businesses.

The RFM customer analysis model has been around for over 40 years and is commonly used by Retail, Database Marketing, Direct Marketing, Non-profits and other primarily B2C businesses and marketing organizations. I have personally only encountered minimal use of RFM in B2B marketing but believe there is value in using this model in some aspects of B2B marketing depending on the specific circumstances of a business.

The premise of the RFM model is straightforward:

• Recency – when did a customer last buy? Research shows that Customers who purchased recently are more likely to respond to an offer than those who purchased some time ago.
• Frequency – how many times has a customer bought? More frequent buyers are more likely to buy again.
• Monetary value – what is the value of their lifetime actual spend? Big buyers are more likely to spend more than small buyers.

The RFM analysis ranks each customer for each RFM factor on a 1 to 5 scale (5 is highest). The 3 scores together are the RFM ‘cell’ for each customer ranking their historical propensity to buy with a 555 customer ranking being the best.

The RFM model has limitations and risks such as:

• Historical behavior does provide indicators for future behavior, but it’s not truly predictive.
• Continually targeting high-scoring customers could annoy or alienate them.
• Neglecting lower-scoring customers that should be nurtured.
• Just analyzing the numbers without relating the RFM score to specific business, product and marketing events and circumstances.
• The 125 cell (5x5x5) RFM model is too granular – rather group scores into clusters or bands to get a better picture of what the data are communicating.

The RFM model could be a valuable marketing analysis and segmentation tool to complement and qualify other analysis and segmentation tools used by B2B marketers:

• Relating customer RFM scores to lifetime customer value (LCV) can provide insights for developing and improving revenues from existing customers.
• In addition to the RFM score, the trend or migration between cells over time can provide further actionable information for marketing.
• The RFM score trend over time for major customers or segments of similar customers can provide insights into changing buying behavior and revenue performance.
• Relating RFM scores to results for various campaigns can provide insights into the effectiveness and appeal of particular campaigns for different RFM segments of customers.
• Relating RFM scores to products or product categories. For example, if a customer buys something in a product category do they usually buy more in that category or does it lead to cross-sell opportunities in other categories. Or if they buy something of low monetary value does that lead to buying something of higher monetary value or vice versa.

Do you use a RFM analysis in B2B marketing and if so, how has it worked for you? Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Aligning marketing investment and campaigns with customer segments

Following on from the previous post ‘How many customers do you have? Really.’ which discussed basic customer count and group segmentation; this post explores some ideas for analyzing the segmentation for more effectively aligning marketing investment and campaigns. This diagram depicts the previously discussed basic customer count segments:

The fundamental customer objectives for any business are straightforward – acquire new customers, retain existing customers and grow revenues from existing customers. The challenge for marketing is how to effectively do this within budget and resource constraints.

Given this simplistic overall view, the next step is to categorize customers by value. One measure of customer value is how much revenue you have generated from a customer versus the total potential revenue for that customer. Let’s call this Realized Value – the percentage of the potential revenue already realized. We can now categorize customers by realized value:

• Most Valuable – customers with 75%* or greater Realized Value. These are the customers you most want to retain and keep active.
• Most Potential – customers with 25-75%* Realized Value. These are the customers you most want to grow, keep active and increase buying frequency.
• Marginal – customers with less than 25%* Realized Value. Although these customers may have lots of Realized Value upside, it’s a more difficult group to develop.
• Least Valuable – these are the customers from hell – the one’s that cause more problems, are never satisfied and cost more to manage than the revenue they produce. They could fall anywhere on Realized Value scale.

*suggested percentage – use appropriate measures relative to your business specifics.

These four categories should provide a good indication which marketing approaches would be most appropriate for each within the context of your business and market.

Now overlay these four Realized Value categories with the customer count segmentation discussed in the previous post and you’ll have an interesting matrix of customer insights to make objective marketing decisions:

For each intersection in the above matrix you would define specific marketing objectives, engagements, campaigns and execution programs. That should provide targeted alignment to most effectively align your marketing investment to produce better results from your existing customer base.

The concept of Realized Value is related to Lifetime Customer Value (LCV) which was previously covered in several posts; How to determine Lifetime Customer Value, Strategic Insights from Calculating Lifetime Customer Value and Impact of Customer Retention on Lifetime Customer Value.

I have more ideas to share on the customer analysis topic in upcoming posts. How does this approach relate to what you’re currently doing? Do you think this approach could improve your marketing results? Do you use a Relative Value type of analysis? Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

How many customers do you have? Really.

For many B2B and Information Technology companies the number of customers is a common and often cited measure of success and implied market share. We’ve all heard claims of “we have 50,000 customers” or “we have 300,000 customers” or whatever the number. While this gross number may provide some intuitive measure of market presence and size to the casual outside observer it does raise questions. More astute observers such as Industry Analysts will want further clarification and breakdown of the number. Marketing needs to segment this number to align investment and campaigns with the reality of various segments in the customer base.

Although most B2B companies are generally reticent to disclose these segmentation numbers to outsiders, they are critical internally for targeted and relevant marketing to existing customers. However, many B2B companies struggle to produce accurate and dependable customer segmentation numbers. The data may be in different databases, variable record-keeping over the years, acquisitions, divestitures, product life cycles, time, staff turnover, etc. all contribute to the difficulty for producing more granular customer counts. Here’s a basic segmentation breakout that all B2B marketing groups should know:

• Customers who bought – this is the most frequently quoted external number of customers who ever bought a product/service/solution from the company. A mostly irrelevant number as actionable marketing data.
• Customers don’t exist – the customer company no longer exists for various reasons. Identify and flag these records accordingly in your database. Never delete any customer records, just use appropriate status flags.
• Customers not using – those customers no longer using the product/service/solution bought from the company. These are ex-customers and should be flagged and counted as such.
• Customers currently using – those customers actively using the product/service/solution they bought. Although this may seem like an obvious number to know, it requires a continuing customer contact program to keep track of active customers.
• Customers in continuity relationship – these are customers that send you money on a regular basis for license/maintenance/service/support/hosting/etc. It should be straightforward to identify this subset from billing records.
• Customers who bought recently – there are two subsets to track in this group; those who recently bought for the first time and those who recently bought again. The qualification of ‘recent’ depends on the cost and scope of the product/service/solution – anything from 12-24 months.
• Customers who bought multiple times recently – these are customers that have made multiple independent purchases during the ‘recent’ period. Although this group could be a third subset of the previous group of customers who bought recently, the frequency attribute is important and should be of particular interest for marketing.
• Customers with unknown status – take all the customers who ever bought and subtract all the other subsets leaving a group of customers with unknown status (the remaining yellow area in the diagram). For companies that are large, or have diverse products lines, or done acquisitions, or been around a long time, this could be a sizable group of customers.

Customer records must contain product/service/solution line item data to provide more relevant analysis. For example, a customer may no longer use one product line but they could have purchased another product line within the past year.

The obvious observation from this relatively straightforward list of customer segments is that we should be marketing to each group differently to be most effective.

I’ll continue discussing some ideas for analyzing and using this information in next week’s post. In the meantime, it would be interesting to hear how you approach this customer count challenge or other comments on this topic.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com