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Negotiating as emotion management
Prof. dr. W.F.G. Mastenbroek
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Competitive strategy
Partnering for competitive advantage
Pieter Klaas Jagersma


introduction

All companies face the challenge of understanding and influencing the clients buying decisions. Partnership management is the most effective tool for handling this major challenge, and has been a frequently debated topic for many years. It has moved in and out of favour as companies have struggled with different ways of handling their client bases. Partnership management is now once more a hot topic in many companies, yet relatively few have a sharp understanding of the ingredients for success.

This article gives greater depth to a main message: be (more) aware of the vital importance - in terms of added value - of proactively managing the relationships between your company and its external environment in general, and your clients in particular.

partnership management: what's in a name?

Ever cheaper and more powerful IT and targeted media are allowing companies to seek new answers to old questions, such as: are my clients sufficiently different to justify tailored offerings; can I deliver these offerings profitably; is my current organization/staff able to deliver them to the client; if not, how should I reorganize?

Contrary to popular belief, the answers do not lie in specialized technical areas like IT, neural networks and multimedia. These are classic strategic questions that all companies have always asked. In a sense, all of them are about partnership management.

The ideal situation can be described as follows: when you have a good ongoing relationship, you can use what you know to capture and retain a large share of client value without appearing intrusive. Partnership management takes many names and forms: Continuous Predictive Management (CPM), Continuous Response Marketing (CRM), Continuous Relationship Management (also CRM), et cetera.

Every definition involves creating value through iterative attempts to deliver individually tailored and integrated solutions to client problems. Partnership management is a management approach that seeks to build close relationships between a company and its (most attractive) clients in order to encourage them to concentrate a disproportionately large proportion of their value with that company.

In a sense, a partnership is an intermediate option between a merger and a contract, a long-term trust-based relationship providing unique benefits to both parties, thus enhancing the industry profit.

Effective partnership management develops its target programs and timing using a hypothesis-driven approach combined with substantial fact-based analysis. Partnership management entails developing and continuously updating the companys knowledge of existing and forecasts of future needs for each client, and tailoring the value proposition as closely to those needs as makes economic sense. Partnerships deliver bottom-line value and strategic advantage. They neutralize the market share implications of pricing by improving the product/service offering and refocusing customer attention away from price.

Partnership management often leads to breakthrough results: improved client value based on product/service offerings, an antagonistic relationship replaced by a partner-like relationship and a competitive moat regenerated by continual upgrading of the partnership.

Several leading companies are delivering strong financial performances by applying partnership management precepts. Some companies collect and use extensive amounts of information about individual clients as a basis for targeted actions that increase realizable client value at all stages of the relationship. Other leading edge companies use partnership management techniques to boost both revenue growth and returns.

partnership management dimensions

Partnership management involves moving away from traditional mass marketing towards more targeted, more timely and deeper relationships.

Each of the three underlying dimensions of who?, what?, and when? should be examined to gain a good understanding of best practice in the area.

Who?

Partnership management is based on an orientation to client profitability rather than product profitability. Its data-driven approach bases actions on their tested and proven ability to increase revenues. This view also involves focusing on those clients with the greatest value-building opportunities.

Often the economic cost of tailoring partnership management activities is most lucrative with the top 20 percent of your market. This view of value potential combines both overall category value and your companys ability to capture value.

What?

Partnership management identifies client relationship stages and marketing levers that facilitate differentiated communication with clients. By putting this knowledge to use, you can stimulate sales to target client categories, capture a disproportionate share of the value of these clients, and do so very profitably.

When?

When to act can mean being responsive, predictive, or both, as circumstances dictate. The partnership management view of the importance of timing can substantially redefine activities, in terms of both identifying attractive businesses and suggesting the value of targeted retention activities.

benefits for companies

Companies frequently have difficulty assessing the potential value of partnership management. However, a number of analyses and insights can be used to help demonstrate the benefits of partnership management strategies:

  • Understand the customer base . Many companies have a limited understanding of the profitability of different client segments, the depth of their relationship with each client, and the importance of specific client segments to their firms overall financial performance. Developing this understanding further frequently provides significant new insights and often creates a strong incentive to launch a partnership management effort.
  • Benchmark best practice . To assess the potential benefits of a partnership management strategy, your organization can quantify the gap between your performance and industry best practice along the critical dimensions for a partnership management strategy. The most significant challenge in these analyses is to identify the relevant benchmarking dimensions.
  • Conduct market research . While benchmarking against national or international averages helps identify the potential partnership management opportunities, some companies have found that quick market research analyses provide compelling insights into specific local benchmarks and competitors.

To develop a full understanding of your existing client base, your company has to adress a wide range of issues concerning the profitability and depth of relationships with different client segments. Analysis of these issues can also help to illuminate the partnership management levers that may help to create the most significant value.

A first step towards understanding the customer base is assessing the profitability of different groups of clients. For most companies, a relatively small percentage of clients account for a disproportionately large share of profits.

Among your competitors, a small fraction of the clients account for over 100 percent of the profits, with the remaining clients actually, on average, losing money for the company. Such client profitability analyses focus companies on the importance of different client groups - a key first step in understanding the potential benefits of a partnership management strategy.

In addition, companies frequently have a limited understanding of the depth of the relationships they have with each client or the potential impact of increasing them. For example, a company may have strong relationships with a few clients, but a relatively limited "share of wallet" for many others.

This varying depth of relationship contributes to different levels of profitability for each segment, but also helps to demonstrate the potential benefits of developing a partnership management strategy to increase the number of relationships per client. If, for example, the depth of relationship could be increased in specific client segments, a company could generate significant incremental value.

These varying customer profitability levels demonstrate the importance of retaining the particularly attractive customer segments. The various analyses of the client base and the impact of different partnership management levers can be combined to demonstrate the potential impact of an overall partnership management strategy.

Another way to estimate the value of a partnership management strategy is to benchmark your performance against industry best practices along critical partnership management dimensions.

The primary challenge in these situations is to identify the relevant dimensions. These benchmark analyses help to illustrate, for example, the cross-selling opportunities that exist.

Conducting some quick market research can provide you with valuable information about the performance of your leading competitors. Market research can offer the following benefits:

  • It identifies the performance of leading competitors along relevant dimensions.
  • It provides local/product-specific benchmarks for analysis.
  • It provides insights into the drivers of customer behavior, and
  • It can be accomplished in a few weeks.

Market research illustrates the gap between your companys own performance and that of relevant local, national or international competitors.

client lifetime value analysis

Partnership management calls for an approach that will help you make strategic choices about where to invest your resources. Client lifetime value analysis (CLV analysis) is the primary analytical tool for making such decisions.

Some companies developing partnership management strategies to assess their overall franchise value in terms of the lifetime value of their clients. This framework is fundamentally different from the traditional view of assessing a companys value in terms of the individual product lines.

Performing the basic calculations for CLV is relatively straightforward; simply discount the cash flows received from a client over time. However, for a detailed CLV analysis other significant issues have to be addressed, such as the probability of product/service purchases, and estimated client retention levels.

The value of these client relationships varies widely across industries and among different client segments within industries, and in all cases substantially exceeds the value of individual transactions. While CLV analysis provides insights into the value of client relationships, it can also be useful in making resource allocation decisions about different acquisition channels, for example.

The first step in CLV analysis is to calculate the current profitability of individual clients and create client segments based on profitability estimates. Developing future potential profitability and consequently client lifetime value requires several additional pieces of information and assumptions. Each step in this process can be used to build understanding and will begin to provide strategic insights.

To summarize, client lifetime value in simple terms is the present value of the cash flows received from a particular client over time, less the cost of acquiring the client. The CLV concept helps your company to focus on the value you generate from specific clients, not from product groups.

developing partnership strategies

CLV analysis raises a number of strategic issues about the potential value that can be created by applying each partnership management lever.

The objectives of a partnership management strategy can be grouped broadly into three categories:

  1. Acquisition . Identifying and attracting the highest value clients, while discouraging the acquisition of low value clients.
  2. Promotion/cross-selling (usage stimulation). Increasing profitable usage, cross-selling other related goods/services and encouraging economical usage.
  3. Retention . Increasing the likelihood of retention of high value clients, encouraging reactivation of high value clients whose usage has declined, and discouraging retention for marginal to loss-making clients.

CLV analysis can help in defining the optimum client acquisition channels and timing. For example, you may believe that clients who are acquired as small companies are particularly attractive, but find through CLV analysis that they are actually unlikely to ever have a positive net present value. CLV analysis may show that acquiring these clients until theyre medium-sized creates significantly more value. 

CLV analysis, combined with some form of segmentation, also provides insights into promotional or cross-selling opportunities. Segmentation can shed light on the potential value of clients of different sizes.

Segmentation typically provides the most compelling insights into the drivers of CLV. With an understanding of more characteristics, a company can begin to develop specific strategies that increase the value of these client relationships.

Finally, CLV analysis provides information on the impact of discontinuing existing clients.

Several layers can be used to achieve any of the three broad partnership management goals:

  • Service . Additional services which reflect client preferences and economic value can be offered with the main good/service in order to encourage purchase, profitable usage, and retention. Some companies provide loyal clients with special services (e.g., some companies organize exclusive seminars for their top clients).
  • Pricing . Pricing can be differentiated to address clients price value trade-off, to encourage the loyalty of the most valuable clients and to channel usage into cost-effective behaviors for low-value segments. Some companies use clients history and information about their competitors to design optimum target offers for each prospective client.
  • Cross-selling . Products and services can be bundled or linked in a way that increases their attractiveness to high value clients.
  • Event-based selling . Offers can be made in response to specific trigger events.

With creative combinations of program levers and goals, the opportunities for value creation are almost endless. Best-practice companies using partnership management often create a broad spectrum of strategies combining several levers and value-creation goals.

In summary, CLV analysis provides unique insights into developing a partnership management strategy. Specifically, CLV analysis helps you to understand the value created through client acquisition, promotion, and retention.

developing information systems

IT systems play a critical role in ensuring the high degree of integration required to implement partnership management.

I would like to share two key lessons I have learnt about building the information systems to support partnership management:

  • Most partnership management efforts turn into misguided attempts to build all-seeing, all-knowing stocks of data.
  • A value-driven approach to building IT capabilities for partnership management can deliver value faster and set the stage for continuous learning.

There are three main information systems requirements for effective partnership management:

  • A marketing database: to consolidate key data.
  • Analytical tools: to identify drivers of client profitability and potential and translate into actionable client segmentation schemes and predictive behavioral models.
  • Links to operating systems: to coordinate multiple, integrated communications and actions targeted at unique and often small client and product segments.

The marketing database aggregates all data required for effective partnership management. It provides fast, flexible access to data for different partnership management-related topics and supports the coding and processing of data for specific analyses, segmentation and proprietary modeling.

Analytical tools are required to "mine" the database. The purpose is to translate relationships between clients and transactions into transparent marketing-driven solutions. The result is increased efficiency of your existing marketing and management activities. Furthermore, it creates a platform for increased management effectiveness, by generating insights into company-specific client behavior which can become a basis for competitive advantage.

Partnership management requires links between database analytics and operations, in order to deliver the client insights won. This provides a basis for managing much greater complexity and customization while preserving closed-loop discipline.

key messages

  1. The strength of partnership management is derived from accepting long-term prices exogenous, then shifting the focus to client interactions from controllable dimensions of product and service offerings.
  2. Your company can create value through partnership management strategies in an almost endless variety of ways by pursuing three typical partnership management goals (acquisition, usage stimulation, retention) with the use of a variety of levers (including service, pricing and promotion).
  3. Developing partnership management strategies requires a clear understanding of the value creation opportunity and a continuous test-and-learn approach. The approach to developing strategies with clients will vary depending on your companys current client information and key executional skills, as well as its commitment to partnership management as a fundamental value creation initiative.
  4. Communicating the vision, strategy and mechanisms of (new) partnership management approaches, not only throughout your company but also to clients, is critical to success.
  5. Partnership management is an effective way of competing for share in a commoditizing industry. Price competition can be neutralized effectively. A deep understanding of the client is a prerequisite. A far deeper understanding of the clients business is required here than commoditizing industries typically have.
  6. The behavior of clients can be shaped by the effective use of a partnership.

These messages are important, because identifying the characteristics that make a relationship profitable and managing the portfolio so that more clients exhibit these characteristics is becoming the key driver of earnings growth in most industries.

To accomplish this, your company must set a cultural change in motion that allows every level of your organization to support a true partnership management approach:

  • Topmanagement/directors must embrace the idea and support it with a new set of incentives and career paths.
  • Front-line employees must change their criteria for success (compensation needs to be relationship-driven) and, as a result, the way they spend their time. Yardsticks need to be developed for tracking success in penetrating relationships, measuring client satisfaction, and managing relationship-level profitability.

Building an effective cadre of partnership managers will require an evolution of your companys understanding of and support for the role and value of partnership management.

Prof. dr. Pieter klaas Jagersma are entrepreneur, author and professor to university Nyenrode. He is in addition director of the Center for international business(CIB) of university Nyenrode. For more Article of Jagersma, click here


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