New Model for Marketing

31 August 2005 |

Introduction: A new model for marketing

The proliferation of brands and channels is forcing companies to restructure their marketing efforts significantly.

David C. Court The McKinsey Quarterly, 2004 Number 4

Mae West once said, "Too much of a good thing is wonderful." Today's chief marketing officers would hardly agree. McKinsey's marketing and sales practice recently spoke with more than 40 CMOs from a range of companies around the globe. Their biggest concern, they told us, is that an explosion of customer segments, products, media vehicles, and distribution channels has made marketing more complex, more costly, and less effective.

Evidence of the new proliferation lies all around us. Consider the growing fragmentation of customer segments. Modern society is at once more multicultural, because of immigration, and more divided, because income groups have polarized into rich and poor. Both trends create additional and more distinct customer segments. At the same time, intense competition and hunger for growth have pushed, and supply chain innovations have allowed, today's companies to target ever more demanding customers within ever smaller segments. The product and service options available to customers of consumer industries from packaged goods to financial services have therefore doubled or even tripled.

As sub-brands and line extensions multiply, so do the messages and the media required to sell them. Twenty years ago, big companies used one advertising spot on three television networks to reach 80 percent of the US population; now they need up to 20 messaging and media programs to get the same reach. Marketers do benefit from some of the new communications vehicles, but since few of them are scalable as yet, marketing programs have become complex and difficult to measure.

Finally, distribution channels such as the Internet, product resellers, big-box retailers, and third-party telesales providers have become important for companies that sell to consumers and businesses alike. Many telecom providers, for instance, require up to four channels to reach their diverse customer base. The increasing number of channel choices further fragments their sales efforts while escalating the potential for channel conflict.

All of these factors, taken together, have dramatically pushed up the complexity and cost of managing a marketing program just when boards and CEOs have been pushing their chief marketing officers to improve the return on marketing expenditures. No wonder more than half of the CMOs we talked with said that a major restructuring of marketing models will be needed to solve this Rubik's Cube of segments, products, channels, and media in a profitable way.

The new model will force companies to change many of their marketing paradigms. Although customers will still come first, for example, no marketer can meet their every need. It will be necessary to focus on a few of the available customer segments and to serve them with fewer brands, lest an ever growing number raise complexity costs all the way from product development to promotion. In "Making brand portfolios work," Stephen J. Carlotti Jr., Mary Ellen Coe, and Jesko Perrey discuss ways marketers can develop a segment-driven approach to building stronger, more distinctively positioned brands—and increase the return on marketing outlays.

Marketers must also address the overall cost of serving consumers and businesses. "Steering customers to the right channels," by Joseph B. Myers, Andrew D. Pickersgill, and Evan S. Van Metre, argues that proliferating distribution options have given many companies less control over the way they do business with the people who buy their products and services. In the future, these companies will need to reshape when and where they interact with customers.

Rethinking brand portfolios and tackling channel migration are of course just two of the challenges that the proliferation of segments, brands, messages, media, and channels poses for marketers. As our discussions with CMOs around the world continue, we look forward to exploring further aspects of those challenges and to sharing our findings with you here.

About the Authors

David C. Court is a director in McKinsey's Dallas office.

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Research in Brief

Mitigating channel conflict

Some partners are more important than others.

Girish Nair and Darren Pleasance

The McKinsey Quarterly, 2005 Number 3

Situation

Conflict between channels is a perennial issue that every sales group faces,¹ and one that is increasingly relevant to high-tech companies. These businesses have traditionally sold their hardware, software, and networking products through a combination of distributors, resellers, and retailers. In recent years, however, sales through direct channels have grown as fast as, and in some cases faster than, those through traditional stores or resellers. Strong online sales by Dell and others have inspired many high-tech vendors, including one particular hardware maker, to invest in Internet sales channels.

Complication

Pursuing a direct-sales channel can alienate a company's sales partners, who see the shift as a threat to their revenues. For the hardware maker, a negative reaction from an important retail partner was enough to delay—and almost derail—the company's ambition to sell its products over the Web. Indeed, this retailer threatened to develop its own competing brand of products if the manufacturer pursued direct sales too aggressively. Such a move on the retailer's part would have hurt the manufacturer's revenues before the direct channel could compensate for them.

Resolution

The manufacturer looked for creative ways to maintain its profitable relationships without abandoning its direct-sales effort. It evaluated the relative importance of each partner and channel (exhibit) as well as its contribution to each partner's revenues and profits. Through this analysis, the manufacturer was better able to estimate the likely reaction of its partners and to develop strategies to retain the most important ones. Certain relationships required more attention. The manufacturer decided to exclude a lucrative product line from its Web-based channel, for instance, in order to preserve an important retailer's revenues. Furthermore, the manufacturer gave customers the option of ordering products over the Web or picking them up at the partner's store, thus giving the retailer an opportunity to sell related products and services. The exercise prompted the manufacturer to reduce the number of sales partners it employed, ensuring that even if total sales through retailers declined, its most important partners wouldn't be hurt.

Implications

This type of channel conflict often seems paralyzing. If manufacturers view it as a chance to review and prioritize their sales partners, however, they may find that the real risks are more manageable—and less daunting. To maintain or improve profitability for all parties, a manufacturer must not only communicate clearly to its valued partners its need to embrace direct-sales channels but also attend to these relationships.

About the Authorsc Girish Nair is a principal in McKinsey's Seattle office, and Darren Pleasance is a principal in the Silicon Valley office.

Notes ¹For more on managing channel conflict, see Joseph B. Myers, Andrew D. Pickersgill, and Evan S. Van Metre, "Steering customers to the right channels," The McKinsey Quarterly, 2004 Number 4, pp. 36–47.