I may have given the impression in my last post – “Half the input – less than half the output” – that cost concerns make us always spend less than needed to make the system deliver. Too little marketing; too little training; too little maintenance …
But that is not always the case. Sometimes we spend more – much more – than is useful.
Pointless sales effort.
A pharmaceuticals product manager wanted to know how best to allocate his sales-team effort. The drug in question had the largest share in a mature market.
He found that sales calls were not winning any new physicians – because physicians were mostly happy with whichever product they were prescribing. For the same reason, physicians were not being lost to rival products, either, even if they received no sales calls. And sales calls made no difference to physicians’ prescribing rate because all patients who needed drugs of this type were getting them.
So the best allocation was to shift the sales effort to other products, where it could make a difference. (Unfortunately, although this was the right answer, it was unacceptable – sales-effort levels for drug products were set on the rule-of-thumb that “share of voice” should at least match market share.)
Double the brand marketing spend.
The model I shared in the previous post showed how brand marketing spend pushes consumers up the stages of the “choice pipeline” until they become buyers of the product – ideally, loyal buyers. And marketing spend must be enough to push them up faster than they slip back down!
The results showed that spending half of the required marketing across all activities resulted in much less than half the number of active customers, and failed even to make the brand profitable.
So let’s double the spending rate instead!
This does not double the profit result, or even double the eventual number of active customers and sales. Yes, we get them faster, but look at the cost to profitability!
We should not be too surprised. We all know about “diminishing returns to marketing” – when every extra $ spent generates less than the previous $$$s we spent. After all, we must surely run out of new potential customers to win, and the last few will be harder to win than the first few.
(Although the previous post showed why, and when, there can be increasing returns – when every extra $ spent generates more than the previous $$$s we spent!)
The general principle here? It’s a function-specific (marketing) case showing that …
There are limits to what any business system can achieve, and limits to the effort and spend we commit to driving that system.
Class 6 of our course on building dynamic business models shows how to build a working model of this customer pipeline – and others (staff promotion, product development, asset maintenance). See free preview lessons here.
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