October 28, 2010 It’s Time To Bury The Marketing Funnel

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October 28, 2010It’s Time To Bury The MarketingFunnelby Steven Noblefor CMO & Marketing Leadership ProfessionalsMaking Leaders Successful Every Day

For CMO & Marketing Leadership ProfessionalsOctober 28, 2010It’s Time To Bury The Marketing FunnelMarketers Must Embrace The Customer Life Cycleby Steven Noblewith David M. Cooperstein, Mary Beth Kemp, and Corinne J. MadiganExec uti v e S u mma ryMore than a century after its first use, marketing leaders still turn to the “marketing funnel” to describethree key aspects of their work: consumer psychology, marketing mix measurement, and the businessvalue of marketing. However, as marketing has grown more complicated over the past decade, the funnelhas struggled to continue to reflect reality. Forrester believes the funnel’s value as a framework is finished,and a new model — the customer life cycle — provides a better fit with modern marketing, as it putsthe customer at the center of the effort, involves the entire brand experience, and describes an ongoingrelationship with the customer. Just as the funnel infused every aspect of marketing historically, thecustomer life cycle will transform how marketers talk and think about their discipline in the digital world.table of Contents2 The Century-Old Funnel’s Influence Is StartingTo Fray3 The Customer Life Cycle Better RepresentsToday’s Marketing ProcessThe Customer Life Cycle Recognizes ThatMarketing Is ContinuousThe Customer Life Cycle Helps Companies MapMarketing’s Core ChallengesWHAT IT MEANS9 The Rise Of The Customer Life Cycle Will CastMarketing In A New Light10 Supplemental MaterialN OT E S & R E S O URCE SForrester interviewed nine vendor and usercompanies, including Avis Budget, Betfair,Commonwealth Bank Of Australia, Hill Holliday,JDA Software, JDW (The Charlotte Agency), JWT,Philips, and Virgin America.Related Research Documents“Mapping The Customer Journey”February 5, 2010“Marketing Mandate: Connect The Dots”December 14, 2009“Executive Q&A: Customer Lifetime Value”March 11, 2009 2010, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best availableresources. Opinions reflect judgment at the time and are subject to change. Forrester , Technographics , Forrester Wave, RoleView, TechRadar,and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Topurchase reprints of this document, please email [email protected] For additional information, go to www.forrester.com.

2It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership ProfessionalsThe century-old funnel’s influence Is Starting To FrayMore than a century after Elias St. Elmo Lewis created the attention, interest, desire, and action(AIDA) model of customer persuasion, the marketing funnel still influences today’s marketingleaders. Why? It simplifies the language marketing leaders can use to describe three key aspects oftheir work: consumer psychology, marketing mix measurement, and the business value of marketing(see Figure 1). However, marketing has grown more complicated over the past decade, mediachoices have exploded, and consumers have asserted themselves more visibly than ever before. Thefunnel struggles to account for many of these new realities. In particular:· Consumer behavior is less funnel-like than previously thought. Fifty-three percent of USonline consumers now say that they research products online that they subsequently buyoffline.1 By researching products online, consumers expose themselves to brands they mightnot have previously considered, enlarging their consideration set at exactly the point where,according to the traditional funnel, it should narrow. Likewise, consumers don’t reach the end ofa simple linear funnel after a purchase. If they are repeat customers, they will loop back into thepurchase journey without the marketer having to rebuild awareness.2· Loyalty and word of mouth are not represented in the funnel. The funnel encourages themarketer to focus on the purchase. It only supports loyalty as the final step in the funnel — afterpurchase — rather than asserting that a business must earn and retain loyalty across everycustomer interaction. Likewise, the funnel does not accommodate activities like word of mouth(WOM) effectively. At best, a marketer might note WOM as a factor that creates awareness orpreferences. However, the funnel does not call out the connection between repeatedly delightingcustomers who then advocate for the brand with positive WOM.3 It encourages marketers tobias their mix toward the next sale, not the brand experience.· The funnel neglects customer lifetime value and profit. The goal of business is profit, andsmart marketers support this goal by increasing sales within the customer segments with thegreatest lifetime value. However, the traditional marketing funnel is a pure volume-basedactivity model that represents a customer as a customer and a sale as a sale. To understandmarketing’s true role in creating business value, it needs a model focused on customer lifetimevalue, not on sales volume as the funnel portrays.October 28, 2010 2010, Forrester Research, Inc. Reproduction Prohibited

It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership ProfessionalsFigure 1 The Funnel Simplifies Thinking About Three Important Aspects Of MarketingConsumer psychologyMarketing mix effectivenessAwareness of brandAdvertising reachConsideration of brandClick-through ratesPreference for brandLoyalty to brand57495ConversionPass-on ratesMarketing value creationTotal addressable marketQualified leadsBuyers/lifetime valueRepeat customersSource: Forrester Research, Inc.The Customer Life cycle BETTER REPRESENTS TODAY’S MARKETING PROCESSDespite its problems, the funnel has remained a pillar of mainstream marketing thought. However,Forrester believes the funnel’s value as a framework is over, and a new model — the customer lifecycle — provides a better fit with modern marketing (see Figure 2).Forrester defines the customer life cycle as:Customers’ relationship with a brand as they continue to discover new options, explore their needs,make purchases, and engage with the product experience and their peers.The customer life-cycle model is a better fit for how leading marketers conceive, execute, andmeasure in the 21st century because it:· Puts the customer at the center of marketing. At the heart of the customer life cycle is thecustomer, the target for all of the dollars spent and programs created. Modern marketers focuson customers continuously, obsessing about their experiences and their lifetime value. VirginAmerica took this to heart when it designed the cabin and the marketing around customers’expressed interests and markets these with trivia contests that remind fliers of what they wishedfor. 2010, Forrester Research, Inc. Reproduction ProhibitedOctober 28, 20103

4It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership Professionals· Involves the entire brand experience. Everything the company does — in the store, on a Website, or at the call center — affects the customer’s perception of the brand. Avis Budget considersevery impression of the logo online or offline as both a brand impression and a direct responseopportunity. A range of other influences — from customer reviews to media coverage andcompetitor actions — also colors that picture. By expressing the full scope of modern marketing,the customer life cycle encourages marketers to focus on the total brand experience, not justtraditional activities.· Describes an ongoing relationship. Smart marketers realize a successful sale doesn’tautomatically generate loyalty — it’s something they must earn and work to retain. JDASoftware recognizes this and, even in a business-to-business (B2B) context, uses social mediaand other channels to identify satisfied and dissatisfied customers. When marketers do thiswell, they can inspire satisfied customers to share their experiences with their peers — furtherstrengthening the brand. The customer life cycle shows a world in which marketers must earnand retain this goodwill by investing in customer relationships.Figure 2 The Customer Life Cycle Is A Better Fit With Modern EnPreferencePurchaseLoyalty57495October 28, 2010yBuSource: Forrester Research, Inc. 2010, Forrester Research, Inc. Reproduction Prohibited

It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership ProfessionalsThe Customer Life Cycle Recognizes That Marketing Is ContinuousThe customer life cycle surrounds the customer with the total brand experience across fourrelationship phases, simultaneously addressing key issues in customer psychology and experience,marketing mix performance, and business value creation (see Figure 3):· Discover. Every customer must discover a brand, product category, or personal need — theinitial trigger that leads to a new or repeat purchase. These events — which can range fromrunning out of soap, which creates the need to restock, to seeing an iPad commercial, whichcreates the desire for a tablet computer — drive the discover phase. Customers are quicker todiscover brands through positive WOM as well as good distribution and media.· Explore. In this phase, customers explore your brand — and their other options. When theyvisit the online store and read product information, compare ingredients or performancemetrics, or handle products in a well-crafted shop environment, they are immersing themselvesin the explore phase. When buying a magazine, this phase might involve the moment it takesto scan the newsstand. When buying a car, it might involve long conversations with salespeopleand friends, multiple Web searches, test drives, and many other thoughtful events — all criticalaspects of the total brand experience.· Buy. Customer experiences during this phase include product availability, inventory lookup, andsatisfaction with the checkout process. It also includes the actual price paid, the perceived value,and the experience with the sales channel if there is a problem. Whether the sale is via an onlinestore like Amazon.com or direct from the manufacturer’s site, the marketer must stay close tothe brand experience in these channels, including in-store customer service and the call center.Even vending machines, like Redbox Automated Retail (redbox.com) for movie rentals, are partof the brand experience.4· Engage. After buying a product or service, customers engage with brands in many ways. Toinspire loyalty and WOM, companies must engage the customer regardless of the touchpointsthe customer uses. Owners of a Wii, for example, may engage Nintendo by playing Wii Fitnessagainst friends, discovering that the latest version of Halo is only available on a rival platformat GameStop, getting a replacement paddle under warranty, or calling Nintendo for customersupport when they have trouble connecting the console to the Internet. 2010, Forrester Research, Inc. Reproduction ProhibitedOctober 28, 20105

6It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership ProfessionalsFigure 3 The Customer Life Cycle Links All Phases And Considerations In MarketingTypicalprogramelementsDiscover Word of mouth Advertising Media relations Coupons Physical retaildistributionExplore Web site design Store placement Sales training Test-drive programs Influencer relations Free-trial programs Presales telephonesupport Package labelsPsychological andexperientialconsiderationsPrinciple:Focus on how yourcustomers typicallydiscover brands andtheir attitudes andexperiences at this stage.Example:Use ethnographicresearch to uncover therole of medicalprofessionals ininfluencing babyproduct purchases.Marketing mixefficiencyconsiderationsPrinciple:Measure how manycustomers you reach andhow effectively youtransition them fromdiscovery to exploration.Example:Test how many of youremail recipients clickthrough to your Web sitefrom direct versus partneremails.Principle:Focus on how yourcustomers typicallyexplore their optionsand their attitudes andexperiences at this stage.Example:Use analytics to discoverthat visitors often searchfor safety informationwhen they visit yourWeb site.Principle:Principle:Focus investment onMeasure how effectivelythe customer groupsyou support and retainwith the greatestcustomers during thepotential lifetimeexplore phase, andvalue.measure how effectivelyyou transition them from Example:Reduce the cost ofexploration to purchase.providingExample:information usingMonitor how manyinquiries to your call center online distribution.lead to a sale.Buy Web site designPrinciple: Store designFocus on how yourcustomers typically buy Sales trainingand their attitudes and Pricing andexperiences at this stage.promotionsExample: In-pack informationUse secret shopper Deliverystudies to check thatsales clerks are friendlyand helpful.57495October 28, 2010Principle:Measure how effectivelyyou convert customersduring the buy phase andtransition them frompurchase.Example:Measure the efficiency ofdifferent placements in thestore and impact of varyingthe size of the “Buy” button.Business valuecreationconsiderationsPrinciple:Focus investment onthe customer groupswith the greatestpotential lifetimevalue.Example:Shift funds fromprint advertising topremium sportssponsorships basedon customerresearch.Principle:Focus incentives onthe customer groupswith the greatestpotential lifetimevalue.Example:Visit customers intheir homes whenselling high-marginproducts.Source: Forrester Research, Inc. 2010, Forrester Research, Inc. Reproduction Prohibited

It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership ProfessionalsFigure 3 The Customer Life Cycle Links All Phases And Considerations In Marketing (Cont.)TypicalprogramelementsEngage Technical support Customercommunities Loyalty programs Advocacy programs Supporting theecosystem around aproduct, such as thegames ecosystemaround the Wii Remarketing toexisting customersPsychological andexperientialconsiderationsBusiness nciple:Focus investment onMeasure how effectivelyFocus on how yourthe customer groupsyou support, inspire, andcustomers typicallywith the greatestengage with each other engage your customers.potential lifetimeand your products and Example:value.brands.Track how manyExample:Example:customers becomeProvide 24-houradvocates for your brandUse surveys andusing Net Promoter Scores. personal technicallistening platforms tosupport to your topfind out if your most5% of customers byloyal customers sharelifetime value.positive experienceswith their friends.57495Marketing mixefficiencyconsiderationsSource: Forrester Research, Inc.The Customer Life Cycle Helps Companies Map Marketing’s Core ChallengesAs we said earlier, the funnel simplifies three key issues in marketing: consumer psychology,marketing mix measurement, and the business value of marketing. Marketers can tie the customerlife cycle to these three key issues to map their approach to marketing in today’s world. However,each of these areas is inherently complex. Marketers must embrace this complexity and use thecustomer life cycle to show links between the overall strategy and specialized thought in each ofthese areas (see Figure 4). This includes:· Customer journey mapping to truly understand triggers of customer interest. Customerexperience professionals create multichannel personas and support them with customer journeymaps that visually illustrate customers’ processes, needs, and perceptions throughout theirrelationship with a company.5 These maps are based on ethnographic research rather thanuntested models of customer psychology based on the funnel.6 In the auto business, for example,the test drive is a critical moment in the customer journey. Auto industry chief marketingofficers (CMOs) need to remap this marketing activity from the consideration phase in thefunnel — sorting out options — to the explore phase of the life cycle and measure the impactthat improving the test drive has on overall sales and satisfaction.· Metrics-based marketing — to optimize the total brand experience. Most companies measureconversion rates within discrete channels like Web sales or in-store. Forty-nine percent believein offering seamless handoffs between channels, and 22% say that they can effectively implement 2010, Forrester Research, Inc. Reproduction ProhibitedOctober 28, 20107

8It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership Professionalsthis.7 Marketing must rectify poor cross-channel experiences in order to maximize conversionrates across channels.8 Commonwealth Bank of Australia, for example, now focuses onmeasuring as many handoffs as possible, such as the handoff between viewing a TV commercialand visiting the Web site. To embed metrics-based marketing into the marketing organizationas a whole, the CMO should use the customer life cycle to call out the conversion events that arecritical to the customer journey. For example, during the explore phase, this could be the bouncerate — the proportion of visitors to a Web page who leave without visiting other pages.· Customer lifetime value management — to guide the overall direction. One of the keys toderiving more value from marketing is to focus on the customers who offer the greatest lifetimevalue.9 When CMOs start using the customer life cycle to understand each of these customergroups, the natural next step is to focus on the life cycles that show the greatest opportunity toincrease lifetime value. For example, a high-end fashion label could find that the most profitablecustomer group includes those who discover new lines through WOM, while other customergroups respond to pricey ads, well-lit stores, or exclusive events. CMOs need to assess whotheir most important consumer groups are and target them based on an understanding of theirprocess of discovery and exploration.Figure 4 Use The Cycle To Show Links Between Marketing Strategy And SpecializationConsumer psychologyMarketing mix effectivenessMarketing value creationStudy customer journeys,including customer emotions,expectations, and experiencesat each point.Measure conversion rates andgoal attainment with everyhandoff between channelsand stages.Measure customer lifetimevalue and the impact ofimproving customer experienceand conversion rates.ercovDiselorExpPLACEHOLDERgegaEnyBuShare customer journeys with theentire marketing team usingthe customer life-cycle model.Map performance data tocustomer journeys using thecustomer life-cycle model.Use the business value of eachcustomer to prioritize segmentsthat add the most to thebusiness.Source: LEGO57495October 28, 2010Source: Forrester Research, Inc. 2010, Forrester Research, Inc. Reproduction Prohibited

It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership ProfessionalsW H AT I T M E A N SThe Rise oF the Customer Life Cycle Will Cast marketing in a new lightJust as the funnel infused every aspect of marketing historically, the rise of the customer life cyclewill transform how marketers talk and think about their discipline, including:· Communication between specialists. No one professional will be able to master all ofthe elements of the customer life cycle. The CMO will compose a diverse team of customerexperience, channel management, and customer intelligence professionals to explore thesequestions in detail. In order to facilitate these conversations, CMOs will insist that the marketingteam use the customer life cycle to explain each discipline’s unique view of the customer. Forexample, customer experience professionals will highlight the importance of the Web siteduring the explore phase for shoppers. Channel management professionals will measure thesite’s effectiveness during the buy phase, and customer intelligence professionals will ensureactivities in all of the phases are geared toward the company’s most profitable customers.· Customer-centric marketing teams. The traditional silos within marketing organizations— such as geography, product, and channel — are too narrowly focused to create a sharedunderstanding of the customer life cycle. CMOs will need to organize marketing into largergroups focused on a particular customer segment’s entire life cycle to align the team’sthinking around each group. Roles like the director of acquisition in the automotive industrywill be superseded by roles like the director of car-enthusiast marketing, whose team will bemade up of functional specialists focused on the consumer group composed of hobbyistsand rabid brand loyalists.· Agency lingo. Already, some CMOs attach personas as cover sheets to every agency brief, toensure all work is customer-focused. As the customer life cycle takes the place of the funnel,smart CMOs will use this model to further enhance agency communication. They will includeboth the persona and the customer life cycle with every brief and expect every agency torespond to their brief in the terms of the customer life cycle. For example, they will expecttheir public relations (PR) agencies to show how they will influence customers across thediscover, explore, buy, and engage phases and will view media coverage as just a meansto this end. Agencies will use these terms to define their programs and develop metrics todefine success in each phase.· The case for marketing to lead in decision-making. The funnel portrays marketing as aconveyer belt that does little more than funnel a good supply of customers to the business.But the role of modern marketing is to orchestrate the complete brand experience in orderto maximize customer lifetime value. To succeed in this complex, challenging task, marketingwill increasingly influence many other parts of the business to orient them around thecustomer. CMOs will use the customer life cycle to explain their strategy to their peers in theirC-suite and the chief executive officer (CEO). By showing that the total brand experienceinvolves more than just traditional marketing communication, they will demonstrate theirneed for companywide influence. 2010, Forrester Research, Inc. Reproduction ProhibitedOctober 28, 20109

10It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership ProfessionalsSupplemental MATERIALCompanies Interviewed For This DocumentAvis BudgetJDW (The Charlotte Agency)BetfairJWTCommonwealth Bank Of AustraliaPhilipsHill HollidayVirgin AmericaJDA SoftwareEndnotes12Source: North American Technographics Retail Online Survey, Q1 2009 (US).McKinsey has proposed an alternative to the funnel in which consumers potentially loop through research,purchase, and product experience indefinitely. Source: D. Court, D. Elzinga, S. Mulder, and O.J. Vetvik,“The Consumer Decision Journey,” McKinsey Quarterly, June 2009.3Consumers rely on each other, often more than on marketing messages, when making their purchasedecisions. Although there is no magical group of consumers driving everyone else’s decisions, someconsumers are potentially more “socially valuable” than others. Firms can add a kick to their marketing playby getting those social consumers involved. See the February 27, 2008, “Redefining High-Value Customers”report.4Innovative marketers are reinventing how consumers engage with their products by transformingyesterday’s transactional vending machines into today’s powerful brand experience machines. Somecompanies, like Redbox Automated Retail and MooBella, have even created new business models usingadvanced vending technology. The lesson for marketing leaders is not just to add vending machines tothe marketing mix, but rather to tap into innovative technologies to create brand experiences that arepersonally relevant, locally dynamic, and unexpectedly rewarding. Forrester recommends using the fourconsumer P’s of Adaptive Marketing to help shape these new brand experiences. See the September 16,2010, “The Pop-Up Brand Experience” report.5Left to their own devices, companies often neglect customers. But they don’t need to. We recommend thatorganizations use customer journey maps to examine interactions from their customers’ points of view.Mapping the customer journey requires five steps: 1) Collect internal insights; 2) develop initial hypotheses;3) research customer processes, needs, and perceptions; 4) analyze customer research; and 5) map thecustomer journey. To get the most value from these journey maps, companies need to widely share findings,take action on insights, and sustain the learnings over time. See the February 5, 2010, “Mapping TheCustomer Journey” report.6Consumer psychology is a fully-fledged discipline with the science of psychology. However, a review of“hierarchy of effects” models, as the funnel-based psychological models are called in the literature, foundthat they were largely untested, in part because they were so vague that they were hard to test, but alsoOctober 28, 2010 2010, Forrester Research, Inc. Reproduction Prohibited

It’s Time To Bury The Marketing FunnelFor CMO & Marketing Leadership Professionalsperhaps because the scientific community has seen little value in testing them because of the self-apparentlack of rigor. Source: T.E. Barry and D.J. Howard, “A Review And Critique Of The Hierarchy Of Effects InAdvertising,” International Journal of Advertising, 1990.7Operating in a multichannel environment isn’t new, but it’s becoming increasingly complex. Customersspend more time online and increasingly use digital channels to do more than just buy goods — they nowroutinely use digital channels to gather information, transact, and obtain help. In response, organizationsmust incorporate more digital channels into their multichannel strategies and tactics, including mobile andsocial media. Succeeding won’t be easy: Few companies are committed to supporting effective multichannelexperiences. Companies that don’t address this effectively put the relevancy of their digital channels, andperhaps even their brand image, at risk. To create and sustain breakthrough multichannel relationshipsacross digital channels, eBusiness executives must deploy the right tools, like channel-appropriatecommunications, and rethink organizational structures to ensure that they are focused on the customer,not the channel. See the February 5, 2010, “Using Digital Channels To Create Breakthrough MultichannelRelationships” report.8Forrester’s Cross-Channel Review is a methodology that combines reviews of a firm’s Web site, IVR, phoneagents, and email service as well as the experience users have when moving across those channels. Of the 53reviews we’ve completed over the past three years, none of the companies received “Very good” scores, andonly three resulted in “Good” scores. The majority were either “Poor” or “Very poor.” See the January 21,2009, “Cross-Channel Design, One Channel Pair At A Time” report.9Customer lifetime value is a powerful metric that rewards marketers for understanding their relationshipswith their customers. But while it is one of the more valuable measurements for marketers, manycompanies either do not collect the data or do not properly act on the data. This document answers manyof the common questions associated with customer lifetime value and incorporating it into your customeranalytics framework. See the March 11, 2009, “Executive Q&A: Customer Lifetime Value” report. 2010, Forrester Research, Inc. Reproduction ProhibitedOctober 28, 201011

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(AIDA) model of customer persuasion, the marketing funnel still influences today’s marketing leaders. Why? It simplifies the language marketing leaders can use to describe three key aspects of their work: consumer psychology, marketing mix measurement, and the business value of marketing (see Figure 1). However, marketing has grown more .