CHAPTER 16
Market-Based Management and Financial Performance
Customer satisfaction is a leading indicator of company
financial performance. Stocks of companies with high
ACSI scores tend to do better than those of companies
with low scores.
— American Customer Satisfaction Index
University of Michigan
This quote is a great way to initiate a discussion on the ways that market-based management and metrics like
customer satisfaction affect financial performance and shareholder value. You could create two hypothetical
companies –one with strong MBM and high customer satisfaction and one with poor MBM and low customer
satisfaction. Why would the first company would be more profitable and produce greater shareholder value
than the second company?
Introduction
A communications business serves a market consisting of some 1 million small businesses. Its market share is
30 percent, its average annual revenue per customer is $250, its average margin is 70 percent, its annual
marketing and sales expenses are $10 million, and its operating and overhead expenses are $35 million. The
business has assets of $50 million (20% accounts receivable, 10% cash, and 70% fixed equipment).
Compute the business’s net profit (before taxes) by systematically building from customer volume to total
sales, to gross profit, to net marketing contribution, and finally to net profit.
Discuss why a loss of 100 customers might go unnoticed by this and similar businesses, and then compute
the reduction in net profit due to the loss of those customers. Add to the discussion the reasons why
marketing, operating, and overhead expenses would likely not decline if the business were to actually lose
the 100 customers.
Discuss (conceptually) how a loss of 100 customers would impact shareholder value. Try to direct the
discussion so it covers not only the loss of cash flow, but also the cost of replacing those customers to
maintain a 30 percent market share.
Teaching Objectives
Show how market strategies affect both net profit and assets, and hence, return on assets.
Delineate the linkages between customers, market strategies, and financial performance metrics (ROC,
ROA, and ROE), and shareholder metrics (EPS, EVA, and the PE ratio).
Present examples of the ways market strategies impact profitability and shareholder value.
Market-Based Strategic Thinking
1. Why is it important for Stericycle to understand the profit impact of market strategies?
As a growth company with a strategy to grow market share in a growing market, it is essential that
Stericycle understand how its market strategies are performing with respect to profit impact.Customer
Market-Based Management Copyright © 2012
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Apple 2010
2. What should be the role of the net marketing contribution in the development of a market strategy
for Levi Strauss?
The net marketing contribution, as shown in Figure 16-9, is where a business’s profit emanates. From the
various net marketing contributions produced by a business’s various marketing plans, fixed business
3. Why is net profit often a misleading indicator of the profit impact of a market strategy for a
company like General Motors?
GM has tremendous non-marketing expenses that can drastically lower its net profit. Net profit itself is not
a good indicator of marketing profitability because a business’s marketing team has little control over fixed
4. Why are percentage metrics such as marketing ROS and marketing ROI important in explaining a
company’s marketing profitability?
These metrics are normalized as percentage metrics. As percentage metrics,the marketing ROS and
marketing ROI for any one of a company’s divisions, business units, or products can be compared to any
5. How would you use the graphic on this
chapter’s first page and Figure 16-4to
assess Apple’s 2010 marketing ROS
(27.5%) and marketing ROI (323%)?
To assess Apple’s marketing ROS and
marketing ROI for 2010, we need to know the
company’s operating income as a percentage
6. How does market demand for a company like Netflix affect its net marketing contribution and
operating income?
Market demand drives volume for a given level of market share. For Netflix, volume is measured in terms
7. Explain how Stericycle’s market share gain affected its net marketing contribution, net profit, and
return measures of performance.
Referring to Figure 16-5 for Stericycle’s gains in market share and to Figure 16-12 for the company’s gains
Market-Based Management Copyright © 2012
Sixth Edition –40– Pearson Education, Inc.
Instructor’s Manual– Chapter 4 Publishing as Prentice Hall
Actually, when we plot this relationship, we see that the NMC has increased at a faster pace than market
8. How will Netflix’s net marketing contribution and marketing ROI change if it succeeds with a plan to
increase revenue per customer?
With sales of $3.2 billion and 23.8 million
customers,Netflix’sannual revenue per customer can be
estimated at $134.Increasing the average revenue per
9. Why would companies with higher levels of customer satisfaction produce higher stock price
indexes than those with low levels of customer satisfaction, as shown in Figure 16-7?
Businesses with higher levels of customer satisfaction are more profitable for the following reasons:
1. High customer satisfaction corresponds to higher customer retention, and higher customer retention
creates higher levels of customer value (lifetime value).
10. Why would a company with declining customer satisfaction not notice any immediate change in
sales or profit?
Dissatisfied customers often cannot switch to competitors’ products until the next purchase. Think about a
car, a PC, or any productthat is purchased for relatively use over a relatively long period and which has a
11. How do investments in customer retention contribute to higher levels of profit performance?
As illustrated in Figure 16-8, an investment made to improve customer retention can have a dramatic
positive impact on profitability. Improving customer retention from 80 to 90 percent is no simple task and
12. Why should shareholders and Wall Street analysts be interested in a business’s customer
retention?
Customer retention can have a meaningful impact on profitability and shareholder value. If Wall Street
analysts understood the impact of customer retention, they would stay away from or sell the securities of
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13. Explain how the net marketing contribution of a market strategy affects return measures of profit
performance.
For return of sales (ROS), return of assets (ROA), and return on equity (ROE), the numerator of each
measure is the net profit (after taxes). The net profit is derived from the net marketing contribution minus
14. How do changes in customer retention affect shareholder measures of performance, such as
earnings per share?
A business whose customer retention improved from 67 to 80 percent would see an exponentialincreasein
profits. Earnings per share are simply profits (after tax) divided by the number of shares owned by share
15. How does a market strategy affect the assets of a business? Why should a change in market
strategy change the accounts receivable and inventory? When will the fixed assets change?
Accounts receivable is money owed to the business resulting from customer purchases. Thus, customer
selection in part determines the size of this asset when customers are slow in paying their bills. Inventory is
16. How would you use the net marketing contribution for a company like Clorox to forecast net profit
and earnings per share?
Figure 16-12 illustrates how Stericycle’s net marketing contribution drives net profits and earnings per
share. The same could be done for Clorox or any company. Most of the expenses after calculating the net
17. Why should a market-oriented business with a passion for customer satisfaction produce higher
levels of earnings per share and, therefore, have greater shareholder value than a business that is
not market oriented?
A business with a strong market orientation will seek to attract, satisfy, and retain customers who enhance
profitability. With a strong market orientation, these businesses are able to lower their marketing and sales
Market-Based Management Copyright © 2012
Sixth Edition –42– Pearson Education, Inc.
Instructor’s Manual– Chapter 4 Publishing as Prentice Hall