Glossary

 

Acquisition Cost

The cost of acquiring a new customer; often 5 to 10 times the cost or retaining an existing customer. The higher a company's customer retention the lower its marketing and sales expenses since the cost of acquiring new customers to replace lost customers is lower.

Advertising Elasticity

The percentage change in volume sold per 1 percent change in advertising expense. A study of 128 advertising elasticity's produced an average advertising elasticity of 0.22, with very few advertising elasticity's greater than 0.5. An advertising elasticity of 0.22 means that for every 1-percent change in advertising expenditures, the volume sold would change by 0.22 percent

Average Selling Price

This is the price end users pay after any normal customer discounts. In business product-markets customer discounts make the average selling price lower than the list price. In consumer markets the list price is often equal to the average selling price (e.g. McDonald's hamburger) except when customer discounts are routinely given (e.g. car sales).

Average Unit Cost (Unit Cost)

The average cost to manufacture a product that includes materials, labor and allocated manufacturing overhead.

Barriers to Entry

These are barriers that prevent a company from entering a market. These barriers could be regulatory, technological, require certain assets, or be based on experience. High barriers to market entry favor higher levels of industry profits.

Barriers to Exit

These barriers prevent a business from exiting a market due to unique assets, legal and moral commitments. High barriers to exit lower industry profit potential while low barriers to exit raise the potential for higher industry profits.

Brand Reputation Metric

This metric captures the importance of a brand or company reputation with respect to customer value. Brand reputation is often used as a signal for product status and superior quality. Brands with strong reputations for quality and/or status are often sold at a premium price as customers will pay more for the brand name.

Breakeven Market Share

This is the breakeven volume (see definition) divided by market demand. It is the market share needed to achieve breakeven profits.

Breakeven Volume

This is fixed expenses divided by margin per unit. It is the volume needed to achieve breakeven, or zero, profits.

Captive Customers

These are customers that are dissatisfied with their current product but cannot switch for a variety of reasons. Reasons can include lack of substitutes; compatibility with other systems, the cost of switching is too high.

Competitive Performance Metric

This is an overall performance metric for a product. It can be measured with a rating scale (e.g. from zero to 10), or a relative scale where the company rating is divided by the average for competitors and multiplied by 100. A relative score of 100 would be average while a score of 115 would mean the product is 15% better in performance than the average competing product.

Competitiveness Metrics

These are metrics that measure the competitive position of a company or product relative to competitors based on product performance, service quality, company reputation, cost of purchase, and customer value.

Competitor Price Response Elasticity

This is the percent change in competitor's prices in response to a 1 percent change in a company's price. The average competitor price response elasticity is estimated to be .70. This means the average competitor changes their price .7 percent per 1 percent change in the company price.

Conjoint Analysis (measurement)

This marketing analytic is useful in determining price sensitivity, the value attached to product and service performance as well as estimating the value of your product-price position compared to the product-price position of competitors.

Cost of Ownership Value Price

A price is selected based on the difference between the cost of ownership between two competing products and a meaningful level of customer savings. A value price could be higher than a competitor's price when their total cost of ownership (including a higher price) is lower than competitors.

Cost of Ownership

This is the cost of owning a product over the life of a product. These costs can include acquisition costs, financing, insurance, usage costs, maintenance & repair, disposal costs as well re-sale value. A product with a high price and significantly lower cost of ownership offers to many an attractive economic value.

Cost of Purchase Index

This is a weighted average index based on price and other costs of purchase such as installation and usage. It can be measured using a rating scale and average for cost of purchase components. A relative metric can also be used where the company score is divided by an average for several competitors and multiplied by 100. A relative cost of purchase index of 80 means that product has a cost of purchase 20% lower than the average competitor.

Cost-Based Pricing

This is a pricing process that starts with the cost of a product and the price determined based on a desired profit margin. For example, a cost of $50 and desired margin of $50 would require a cost-based price of $100. If the product is sold through channels of distribution, the price is marked up at each stage of distribution. A cost-based price has nothing to do with what customers would pay for a given product.

Cumulative Volume

It is the total volume produce to date since the first unit was produced. It applies mainly when estimating the experience curve cost for a new product. See experience curve cost for more discussion.

Customer Buying Power

This is the degree to which buyers control the buying process. Low buying power means customers have little room to negotiate price and terms of sale while high buying power is similar to a buyer's market.

Customer Life

This is the average number of years a customer is a buyer of a business's products or services.

Customer Lifetime Value

This marketing analytic allows you to compute the value of a customer based on their customer life (years) and profit they produce each year of their customer life. A discount rate is used to discount the cash follow along with an acquisition cost to compute a net present value. If the value is positive the customer is profitable given the discount rate used.

Customer Loyalty

These are very satisfied customers that intend to remain customers and are more likely to recommend a company's products to others. They often buy more, are more profitable and have a much higher customer lifetime value.

Customer Metrics

These are a variety of metrics that capture the customer's perspective. They include measures of customer satisfaction, customer retention, net promoter score, customer loyalty and customer lifetime value.

Customer Profitability

This can be measured by purchase, annually or over the lifetime of a customer. Each is a useful measure but the lifetime customer value demonstrates the profit impact of extending customer retention for profitable customers.

Customer Retention

This is the percent of customers retained from one year to the next. If a company starts the year with 10,000 but loses 2,000 customers its customer retention is 80% even if it ended the year with a total of 11,000 customers.

Customer Satisfaction

This marketing analytic can be used to create an overall measure of customer satisfaction. This is typically done such that customer satisfaction ranges from zero to 100. Other metrics such as "Percent Very Satisfied" and Percent Dissatisfied" are importance customer performance metrics.

Customer Value

This important marketing metrics can be measured many ways. In all cases when there is a meaningful customer value there is a meaningful difference between customer benefits derived from a product or service and the cost of obtaining those benefits when compared to competing alternatives.

Customerization Value Price

This involves presenting a company's full feature product at the highest price a customer could pay (not that anyone would). This is a the Reference Price. For each area of product performance and level of service price discounts are offered for levels of performance below the reference priced product. Customers configure their own product based on their performance needs and budget. Value is inferred by the difference between the price of the reference price and customer configured product and price.

Detractor Customer

These are customers that strongly recommend not buying a company's product. The Net Promoter Score (see definition) is the difference between Percent Promoters and Percent Detractors.

Elastic Prices

For every percent change in price the change in volume is greater than one percent. For example, an elasticity of -2.0 means volume would increase by 20 percent if prices were decreased by 10 percent.

Experience Curve Cost

This is the percent decrease in the average unit cost every time the cumulative production volume doubles. An 80% experience curve means that a unit cost of $100 at a cumulative production volume of 100,000 units would decrease to $80 per unit at a cumulative production volume of 200,000 units.

Fair Value Price

This is the price customers should expect to pay based on the relationship between price and overall performance when there are 5 or more competitors to compare.

Floor Price

This is a cost-based price. It is a financial metric that sets a price based on product costs and company desires for a certain level of product margin. This is a good benchmark for pricing. It sets the floor price. If market-based pricing strategy can not equal or exceed the floor price, the pricing strategy may need to be considered. There are volume considers in which a price lower than the floor price could generate higher levels of profitability. See market-based pricing.

Herfindahl Index

This marketing analytic produces a Market Concentration Index. It is based on the market share of the top four competitors. The more share the top four competitors hold the higher market concentration. In general, businesses in markets with higher market concentrations are more profitable than businesses in markets with lower market concentration (low Herfindahl Index).

Inelastic Prices

For every one percent change in price volume changes at less than one percent. A inelastic price of -.7 means that a 10 percent price increase would result in a 7 percent decrease in volume. When prices are inelastic a price increase will result in a reduction in volume but increase in sales and profits.

Lost Customer Complaints Index

This index captures the percent of dissatisfied customers that do not complain and stop buying from a company. Since most dissatisfied customers do not make the effort to complain, this percentage can be high for companies with low levels of customer satisfaction.

Market Attractiveness Index

This is a multi-factor index of market attractiveness. There are three major areas of market attractiveness (Market Demand, Competition and Market Fit) and three sub-factors for each area. All factors are weighted based on company situation and rated with respect to market conditions to produce an overall Market Attractiveness Index as well as scores for each of the three major area.

Market Based Pricing

This process starts with the customer in an effort to determine what customers would pay for a product based on its performance and benefits relative to competing products. The market-based price is then discounted based on various channel and selling discounts to arrive at a net price. Margins are then determined based on the net price and average cost per unit.

Market Demand

This is the total market sales for a given market definition for one year. It can be measured in dollars or units. The market demand for personal computers could be measured in dollars or units per year worldwide, a region of the world such as Europe, or segment such as home users.

Market Development Index

This is a ratio of market demand to market potential. A MDI of 40 means that only 40 percent of a market's potential has been developed. As the MDI approaches 90 market growth rates slow considerably as market saturation approaches.

Market Growth

This is the year to year rate of growth in market demand. This could be measured in dollars or units with respect to rate of market growth. If units are growing at 10 percent per year but price are declining each year, the rate of growth in market demand in dollars is growing at a slower rate.

Market Potential

This is a estimate of the maximum volume sold when if all likely consuming units enter the market. The market potential for personal computers has been revised several times as PCs have come down in price and become easier to use.

Market Saturation

This occurs when the market demand is close to equal to the market potential. In most markets market saturation is never fully reached. The world wide car market is an example of a market near market saturation.

Market Share Index

The is a index based on a hierarchy of five market share performance metrics. The hierarchy follows a sequence of share performance metrics. For example, product awareness, product interest, acceptable price, product availability and purchase could be a sequence that has to occur for a purchase to occur. The better a business performs on each share performance metric the higher its market share index.

Market Share Leakage

These are areas of share performance in a share tree that have meaningful levels of share leakage due to low levels of share performance. For example, if product awareness at 40% was the first share performance metric in a share tree, then the business would have a share leakage due of 60% based on those not aware of their product.

Market Share

This can be measured in dollars or units. In both cases a business's market share is its sales (dollars or units) divided by market demand (dollars or units). It is possible a business could be the market leader based on units sold but not be the market share leader based on dollars based on differences in prices.

Marketing & Sales Expenses

This includes all marketing expenses such as marketing personnel, market research. Advertising, promotions as well as product management and all costs associated with selling and providing customer service for a product or product category.

Marketing Investment

This is the investment a company makes in marketing and sales expenses to achieve a particular strategic objective in a given product market. For example, the iPad will not sell itself. As attractive as this product is, the iPad still requires an investment in marketing and sales to fulfill Apple's market share objective for this product.

Marketing Metrics

These are performance metrics that tell us how a product or business is performing on a certain aspect of marketing. For example, customer retention of 67 percent means that a business is losing 33% of its customers each year. Improving this metric to 75% would normally improve the profits of a business.

Marketing Profitability

This is measured as Net Marketing Contribution (NMC). NMC is sales times percent margin minus all marketing & sales expenses. It is the net contribution to profits after all marketing & sales expenses are accounted for.

Marketing Return on Investment (ROI)

This is net marketing contribution (NMC) divided by the investment in marketing & sales expenses. This is typically done annually but could be done quarterly. The median Marketing ROI for Fortune 500 business is about 150%. This means for every dollar invested in marketing & sales the company produces $1.50 in net marketing contribution.

Marketing Return on Sales (ROS)

Net marketing contribution for a given time period divided by sales provides a ratio metric that measures marketing profits as a percent of sales. This allows a business to compare company Marketing ROS to the Marketing ROS of any business unit, region, product line or major product.

Moderately Elastic Prices

Elasticity's between -1.0 and -2.0 are considered moderately elastic. This means a price increase will result in decline in volume and sales and a price decrease will increase volume sold and sales. But, how gross profits change is not clear. For low margin product s a price decrease could increase sales but lower gross profits.

Net Marketing Contribution (NMC)

This is a measure of contribution to company profits after marketing and sales expenses are accounted for. It is computed as sales multiplied by percent margin minus all marketing & sales expenses.

Net Price

This is the price derived by a business after all discounts have been applied. For example, a shoe with an average selling price of $100 may have a net price of $50 after deducting retailers margins and all distribution costs.

Net Promoter Score

This is a measure of customer recommendation. It is measured as the percentage of promoters (those who strongly recommend a product to others) minus the percentage of detractors (those who strongly recommend against buying a product). Businesses with high net promoter scores have been found to produce higher rates of sales growth and above average profits.

Ownership Costs

Costs associated with acquiring, financing, installing, using, repairing, maintaining, and disposing are costs of ownership that occur over the time a product is owned. A product with a higher purchase price but much lower total cost of ownership could have a much larger economic value than a product with a lower purchase price and high total cost of ownership.

Passive Customers

These are customers that do not have a strong opinion on the recommendation of a product to others. They are part of the measurement of a Net Promoter Score.

Penetration Price

This is a low price designed to attract a large portion of the market. The price is set low to build volume and drive down the average cost so that a business can be profitable at a low price.

Perceived Value Price

When the perceived benefits of a product exceed the perceived price of that product there is a positive perceived value at that price point. If the price is too high and the price is perceived to be greater than the perceived benefits, the perceived value at that price would negative.

Percent Margin

Gross profit as a percent of sales is also percent margin. It is also the percentage of a price that is margin.

Performance Index

This can be an overall index of performance based on many product, service and company factors or it can be a single rating of performance. In either case the performance index can be based on a rating scale that ranges from zero to 5 or zero to 10, or a relative index based on the average performance of competing products.

Pocket Price

This is the price a company realizes after all discounts and transaction expenses that occur in the sales and distribution process. A product that is sold for $100 could have a pocket price of $40 after all sales discounts, transportation charges and accounting expenses (unpaid bills) are accounted for.

Price Elasticity

This is the percent change in volume per 1 percent change in price. If the percent change in volume is less that 1 percent per 1 percent change in price, the price is inelastic. If the percent change in volume is greater than 1 percent per 1 percent change in price, the price is elastic.

Price Leakage

The difference between the average selling price to end customers and the pocket price achieved by a business if the price leakage. The price leakage can be different for different customers which creates a price leakage bandwidth.

Price Rivalry

This is the degree to which competitors compete on price. Price rivalry is low when competitors compete on product quality and differentiation instead of price. Price rivalry is high when competitor competes mainly on price. Markets where price rivalry is low have been shown to be more profitable than markets where price rivalry is high.

Product Lifecycle

This is an evolution of product market demand over time. The personal computer emerged as a new product-market in 1980 and grew slowly until the 1990's when it entered the growth stage. Growth continued in the 2000's but began to slow as this product-market reaches maturity and slow growth.

Promoter Customers

Customers that strongly recommend a brand, product, or company to others are promoters. They help promote the recommend product by their endorsement. The percentage of customers that are promoters play an important role in a business's Net Promoter Score and sales growth.

Reference Price

This is price from which the price paid by a customer is compared. Most often the reference price is a higher price based on high levels of features, functions and performance. The greater the difference between the reference price and the price paid the greater the perceived value obtained by the customer.

Relative Cost of Purchase

Your cost of purchase (price plus other costs of purchase) divided by the average cost of purchase for competing products multiplied by 100 creates a relative cost of purchase metric. An index less than 100 would mean your cost of purchase is lower than average while an index greater than 100 would indicate a higher than average cost of purchase.

Relative Performance

A product or business performance rating divided by the average performance rating for competitors multiplied by 100 creates a relative performance metric. A relative performance of 123 for a ink-jet printer would mean that this printer is 23 percent above average in overall performance. A rating of 88 would mean the printer is 12 percent below the average for competing ink-jet printers.

Relative Price

Your price divided by the average price of competing products multiplied by 100 creates a relative price metric. A relative price of 115 would mean that your price is 15 percent higher than the average price for competitors. A relative price of 90 would mean that your price is 10 percent lower than the competitor average.

Retention Cost

The percentage of customers retained from one year to the next is a measure of customer retention. For example, if a local bank had 10,000 customers at the start of the year and at the end of the year 8500 of these customers were still with the bank, the bank would have 85 percent customer retention.

Sales Revenue

Also referred to as sales, this is the total revenue for a company or product for a given period of time. Income statements presented in annual reports start with the company sales for the years presented and then report all expenses in order to show their profits.

Service Quality

Like product performance, service quality can be measured with respect to overall service quality or be rated and weighted based on several aspects of service quality. This can be done with rating scales that typically vary from zero to 10, or relative service quality metric which are based on a company service quality score divided by the average service quality of competing companies.

Share Development Index (SDI)

The market share index (see definition) divided by the share potential index (see definition) multiplied by 100 creates a Share Development Index. An index of 30 means only 30 percent of a product's share potential has been developed. An index of 90 percent means their this not much room for further share growth.

Share Potential Index

Using the share tree (see definition) each share performance metrics in the share tree is set to its realistic achievable level of performance. The resulting market share index is the share potential index, the highest level of achieved market share index based on share performance metric assumptions.

Share Premium

This is the difference in target market share and breakeven market share (see definition). If the target share was 10% and breakeven share 8%, the share premium would be 2%. That is a small margin between breakeven and target performance; hence a riskier strategy with respect to profitability. A breakeven share of 3% and share premium of 7% provides much more room for actual performance and hence a lower profitability risk.

Share Tree

A share tree is a sequence of share performance gates that occur in a hierarchy of customer purchase. For example, in many share trees the first share gate is product awareness. This has to occur before a customer can express opinions with respect to interest and price. Each share gate offers a go vs. no-go condition. At the price share gate, the price is OK (the customer continues in the share tree equation) or the price is too high (customers exit the share tree equation at that point). Overall, performance creates a Market Share Index (see definition). It is not likely to equal actual market share but be a close approximation.

Skim Price

A skim price is a price set intentionally high to attract a limited demand of customers that will pay a premium price for a highly differentiated product. A skim price is often used for new, innovative products where production capacity is limited. By limiting demand at a very high margin a business can manage to be profitable with a small volume sold.

Standard Unit Cost

This cost includes purchase materials and direct labor but does not include any allocated manufacturing overhead. A toaster may have a standard unit cost of $3.00. After allocating fixed manufacturing costs to all units produced that average cost per unit could be $6.00.

Substitute Products

Products that can be substituted for another product is a substitute product. A push broom is a substitute product for those that cannot afford the price of a leaf blower.

Supplier Buying Power

This the power held by suppliers in buyer transactions. Companies selling to Wal-Mart have a low degree of supplier power. . Wal-Mart, because of their size, can control the prices, terms of payment and delivery requirements because they are large and offer a tremendous sales opportunity. ExxonMobil has a high degree of supplier power in selling their gasoline to small independents gas stations. When supplier power is high industry profits tend to decrease.

Total Contribution

This is volume sold multiplied by a product's stand unit cost (see definition). This produces a total contribution that goes to pay for manufacturing overall and all other expenses. The business's total contribution minus the fixed manufacturing expenses for any accounting period equals its gross profit. Total contribution is an important metric in understanding the true profitability of products. Sometimes products have a positive total contribution but negative gross profit. Eliminating these products when there is excess capacity would lower overall profits.

Value Map

A graph with price or relative price on the vertical axis and rated performance or relative performance on the horizontal axis creates a value map. A fair value line is determined based on the price and performance of competitors placed in the value map. Products or businesses are then placed in the value map based on their respective price and performance. This allows us to see how each product is positioned with respect to price, performance and value.

Value Price

Based on price and performance relative to several competitors we can compute a product's customer value. That value could be positive, negative or zero. A value price and performance are adjusted to achieve a desired level of positive customer value.

Variable Cost

This is the average cost per unit. The total variable cost is the average cost per unit times the volume sold. For example, the variable cost per running show might be $20, the average cost of making a running show at a given manufacturing volume. If the volume was 1 million shoes per year, the total variable cost would $20 million for that year.

Volume (unit volume)

This is the volume of units sold in a given accounting period. The accounting period could be monthly, quarterly or annually. Most often companies would report their volume sold annually. The Apple Annual Report each year reports the volume sold for its major product lines (Macs, iPods, iPhones, iPads, etc.).