Content area
The sales and marketing integration has a direct and significant impact on customers and the revenue-earning potential of the organization. This research demonstrates the benefits of a close integration between sales and marketing and evaluates its impact on the organization performance. Sales and marketing integration is a complex and multi-faceted construct and hence requires strategic approach for its evaluation. This study aims to understand how to achieve sales and marketing integration by focusing its facilitators and controlling distracters. This study focuses on how collaboration between sales and marketing improves business performance rather than evaluating its consequences. Hence, this research focuses on drivers of sales and marketing integration for creating superior customer value. Various models of this paper aim at providing guidelines for sales and marketing managers for building competitive advantages by achieving sales and marketing integration.
Abstract
The sales and marketing integration has a direct and significant impact on customers and the revenue-earning potential of the organization. This research demonstrates the benefits of a close integration between sales and marketing and evaluates its impact on the organization performance. Sales and marketing integration is a complex and multi-faceted construct and hence requires strategic approach for its evaluation. This study aims to understand how to achieve sales and marketing integration by focusing its facilitators and controlling distracters. This study focuses on how collaboration between sales and marketing improves business performance rather than evaluating its consequences. Hence, this research focuses on drivers of sales and marketing integration for creating superior customer value. Various models of this paper aim at providing guidelines for sales and marketing managers for building competitive advantages by achieving sales and marketing integration.
Key Words : sales; marketing; collaboration, integration; organization culture, customer value proposition
Significant research efforts have been devoted to considering co-operation and collaboration between functional departments in organizations, based on the premise that interdepartmental collaboration is linked to improving business performance. However, relatively little attention has been paid to the interdepartmental relationship between sales and marketing as compared to other functional relationships with marketing. Only recently, sales and marketing interaction has gained more conceptual attention. Sales and marketing interface exhibits one of the most contentious relationships within organizations and is one that is attracting increasing attention from both academicians and practitioners.
The sales and marketing interface has a direct and significant impact on customers and the revenue-earning potential of the organization. Collaboration between sales and marketing may be important in reducing inter-functional conflict and creating high performance. There is need to have collaboration between sales and marketing to alleviate their behavioural conflicts. Hence, every organization should improve the relationship between sales and marketing.
The major objectives of this paper are firstly; to introduce sales and marketing integration as a process which combines the strengths of sales and marketing by shifting the focus to the customer; secondly; to demonstrate how such integration can leverage the strengths of sales and marketing, and meet the challenges of customer value creation in today's fast changing and highly competitive marketplace and thirdly; to suggest research framework of sales and marketing integration as well as methodology for calculation of customer lifetime value (CLV) for better understanding the interface of sales-marketing from inside-out. CLV measures the present value of all future profit streams of a customer across the entire customer life cycle. This study focuses on how integration between sales and marketing improves lifetime value of customers and ultimately business performance.
Literature Review
Previously the academic focus was more on marketing's interaction with other functions such as R&D or finance, and researchers did not differ between the sales and marketing functions at all (Kahn and Mentzer, 1998). Many researchers found sales-marketing interface as a rather unexplored area with either limited research study (Dawes and Massey, 2005) or not researched systematically and deeply (Homburg et al., 2008). Both sales and marketing may be following their own agendas, creating conflict, coordination problem, and ultimately great tension between the two groups. These issues can negatively characterize the interface between sales and marketing and may lead to conflict that is detrimental to collaboration (Dewsnap and Jobber, 2000).
According to Corstjens and Corstjens (1999), a lack of cooperation between sales and marketing has the potential to damage the overall success of the organisation. Both sales and marketing serve customers, with sales traditionally performing tactical tasks such as contacting customers, executing marketing strategies, and closing the sale in the field and marketing entrusted with providing support to salespeople and building consistent brand image in the marketplace (Matthyssens and Johnston, 2006). Improvements in collaboration and interdepartmental relations may reduce conflict as well as enhance the formulation of strategy (Menon et al., 1996). For success of the organization, market responsiveness and adaptability are important conditions and requires seamless integration of the organization's many functional parts. The overcoming of functional boundaries and (often) the development of cross-functional teams as important facets of customer focused organizations (Homburg et al., 2000).
Le Meunier-FitzHugh and Piercy (2007), studied collaboration between sales and marketing in business-tobusiness (B to B) setting and found that it is positively related to enhanced business performance. The research findings empirically established that a positive senior management attitude toward collaboration between sales and marketing, the reduction of interdepartmental conflict, the improvement of communications, the establishment of organizational learning, and effective market intelligence systems are important antecedents to effective collaboration between sales and marketing. Similarly, empirical study by Le Meunier-FitzHugh and Lane (2009) confirms that collaboration between sales and marketing has a positive and significant impact on both market orientation and business performance.
Sales and marketing are different functions within an organization and usually have different goal orientations (Homburg et al., 2008). The sales-marketing interface may exhibit many negative features and are characterised by poor co-ordination, miscommunications, conflict, noncooperation, signs of frustration, distrust and dissatisfaction with the other group's performance, disharmony, and poor understanding of each other's roles, which inhibits achieving the benefits of collaboration (Dewsnap and Jobber, 2002). Improved sales and marketing interaction has a positive impact on corporate growth as well as on new product development (Ernst et al., 2010). With sales and marketing collaboration, firms will outperform competition; create added value as well as customer satisfaction.
Hence, there is a shift from focusing only on how firms can create competitive advantages through increased productivity within the value chain towards a perspective on how they can increase the quality of their customer relationship via better cross functional teamwork (Rayport and Jaworski, 2004). The creation of superior customer value through an effective sales and marketing relationship provides competitive advantage to the firms (Guenzi and Troilo, 2007). Sales and marketing interaction is important for overall performance and growth of business as their productive relations is linked to improved productivity, competitiveness, superior value creation, and market performance (Tjosvold, 1988). Paper works in this direction, and provides insights for enhancing sales and marketing integration. The ideas presented in this paper have the potential to enhance collaboration between sales and marketing and achieve better integration between them.
Sales and Marketing Conflict: Key Issues Following are major components of conflicts between sales and marketing:
A. Separate Identity
Although sales and marketing are sometimes considered being part of the same function with the same objectives, in reality they are often managed differently (Olson et al., 2001). Sales and marketing are usually structured and managed as two distinct departments with independent goals (Workman et al., 1998). Although there may be advantages in locating sales and marketing in close proximity (Dewsnap and Jobber, 2000), in many organisations sales and marketing are separated, sometimes geographically (Workman et al., 1998). Many organizations do not have a clear idea how sales and marketing should interact and relate (Krol, 2003). Problems arise with the sales and marketing interface when large, separate departments become independent silos that do not operate well together (Rouzies et al., 2005).
B. Communication Flow
Cross-functional integration requires employees from different departments of the organization to communicate and interact, in order to exchange work, resources, and assistance (Ruekert and Walker, 1987). Sales often complain about the lack of timely availability of information from marketing (Cespedes, 1994), while marketing reply that the information in which they invested time and money to gather it are not being used by sales (Moorman et al., 2007). To enhance bidirectional information flow among the different functional areas and decrease conflicts in communication, increased cross functional integration, more number of focused meetings and documented information exchange are needed (Kahn and Mentzer, 1998).
C. Goal Difference
The significance of goal differences on the effectiveness of the sales and marketing interface was highlighted by Guenzi and Troilo (2006). The goal differences may be a source of interdepartmental friction and its resolution are often the responsibility of senior management of the organization. The goal differences may be attributed to a lack of understanding of the importance of coordination on the part of senior management (Colletti and Chonko, 1997).
D. Conflict of time-frame
Traditionally, one of the most cited reasons of conflict between sales and marketing is the difference in the time frame they refer to in the processes of goal setting, resource allocation and performance evaluation (Strahle et al., 1996). Such differences obviously translate into conflicting priorities and inconsistent activities because sales primarily focuses on relationships, tactical and short-term objectives such as revenue targets (Cespedes, 1994) while marketing are highly analytical, data oriented, long-term focused and believe in building competitive advantage for the future and hence mainly adopts a strategic, longterm perspective such as brand building. Several researchers have also highlighted the difficulties created by the short-term orientation of sales goals conflicting with the long-term orientation of marketing (Montgomery and Webster, 1997).
Research Methodology
A two stage methodological approach is adopted in this research paper. The first stage involves establishing relationship between sales and marketing interaction and CLV by developing sales and marketing integration model. In the second stage, research focuses on development of a methodology for CLV calculation.
Sales and Marketing Integration Model
Sales and marketing integration facilitates firms to foster long-term relationships with customers based on customer satisfaction, trust and loyalty. Sales and marketing integration focuses on meeting customer needs and provide greater value to its customer than competitors. Trust is a cumulative process that develops over the course of repeated and satisfactory interactions with the firm. Customer trust will result in the customer's willingness to develop and maintain a long-term customer relationship with the firm and build solid customer loyalty. Customer trust has a positive correlation with customer loyalty. Loyalty causes customers to buy a particular brand, which improves the customer's value and ultimately the firm's performance. Customer loyalty can result in favorable operating cost advantages for firms, fewer markdowns, reduction in inventory and simplified capacity forecasting due to lesser fluctuations in demand.
Since customer loyalty is considered to be the complement of trust, the degree of customer loyalty is an important consideration for firms. Customer loyalty has been recognized as an important source of sustained competitive edge in terms of customer retention, repurchase, and longterm customer relationships. Framework of Figure 1, shows relationship between customer trust, loyalty and long term customer relationship.
The need to create value in turbulent times has increased demand for new conceptual models and indicators to determine successful measures of sales efficiency and marketing effectiveness. CLV is the only metric that incorporates into one, all the elements of revenue, expense and customer behavior that drive profitability. CLV focuses on long-term profitability instead of immediate sales outcome. CLV depends on three main components of customer relationship - acquisition, retention, and crossselling. This metric also manages to score over other metrics by adopting a customer-centric approach instead of a product-centric one, as the driver of profitability.
CLV is a calculation of projected net cash flows that a firm expects to receive from the customer, adjusted to the probability of occurrence and are then discounted. The lifetime value of a customer for an organization is the net revenues obtained from that customer over the life time of transactions with that customer minus the cost of attracting, selling, and servicing the customer taking into account the time value of money (Jain and Singh, 2002). Although organizations are interested in knowing the CLV of their customers, they are also keen on identifying the factors that are in their control that could increase the CLV.
Framework as shown in Figure 2, describes how sales and marketing integrationof a firm influence customer behavior (such as customer acquisition, customer retention, and customer expansion in the form of cross-selling / up-selling), which in turn affects customers' CLV or their profitability to the firm. CLV of customers (current as well as future), often eventually forms a proxy for firm or enterprise value and share price. Flere, CLV is the dependent variable whereas sales and marketing integration is independent variable. Gupta et al., (2004) explicitly confirmed the positive link between CLV and firm value. The CLV of a customer represents the amount the customer will contribute to the bottom line of the firm over the span of the business relationship with them (Kumar and Shah, 2009). Hence, it cannot be seen in an isolated way but rather in the longterm relationship context occurring throughout the customer lifetime.
As the cost of acquiring customers is high, the profitability from a customer arises if customers make many repeat purchases. Customer retention is very much a function of customer loyalty, and hence, strategies that strengthen the relationship between the firm and the customer should improve retention. Many authors have documented the financial benefits to a firm of increasing retention rates (Gupta et al., 2004). Retention can be increased with better products and services, more competitive pricing, promotions, particularly value added ones, and increased brand value (Malthouse and Mulhern, 2008). Another study found that increasing customer retention rates by 5% could increase firm's profit by 2% to 9% (Gupta et al., 2004). As shown in Figure 2, sales and marketing integrationof a firm enhances customer trust, loyalty and satisfaction, strengthens customer relationship and ultimately increases CLV through customer acquisition, retention and expansion.
Calculation Methodology
CLV is influenced by retention rate, lifetime revenue of customer as well as profit margin. CLV provides the present value of a customer relationship over the lifetime with an organization, and is calculated based on a number of sales transactions with customers (Kumar and Rajan, 2009). The retention rate is the probability that an individual customer will remain loyal to the firm for the next period, provided that the customer has bought from firm on each previous purchase (Dwyer, 1997). Retention rate and life time tenure of customers are interrelated and are key drivers of firm's profitability. Retention rate or survival rate of customer is a measure of number of customers remaining in a user group over a specific period of time. Likewise, attrition rate or chum rate is a measure of the number of customers moving out of a collective user group over a specific period of time.
Retaining customers is a crucial function for any firm. Customer attrition impacts a firm in several ways. The primary impact is the loss of revenue from customers who have defected. Second, attrition results in the lost opportunity for the firm to recover the acquisition cost incurred on the customer. Third, the firm loses the opportunity to up-sell and cross-sell to customers who have defected, and this can be treated as a loss of potential revenue. Fourth, there are some lost social effects, such as influencing other customers on product/service adoption and potentially negative word of mouth. Further, firms must also invest additional resources to replace lost customers with new customers. This drains the firm's resources, which are already impacted by the loss of customers to competitors and puts an undue burden on the firm to break even (Kumar and Rajan, 2009). Customer churn can have an adverse effect on the profitability and even the survival of a business. An annual churn rate of 25% is the same as an annual retention rate of 75% i.e., on an average, 75% of the customers continues to remain customers in the next period. As calculated below, both imply a customer life time of 4 years:
Lifetime duration of a customer =[1/(1- retention rate)]
= [1/(1-0.75)]
= [1/(0.25)]
= 4 years
For a different retention rate of customers, change in customer lifetime duration is calculated and plotted in Figure 3. It is evident from the Figure 3 that any increase in retention rate after value of 70% results into steep rise in average customer lifetime (e.g. it increases by 20% with 5% increase in retention rate, i.e. from 70% to 75%). With increase in customer retention rate from 90% to 95%, average customer lifetime has increased by 100%, i.e. from 10 years to 20 years. A study by the Gartner group found that profits could be raised 100 percent by retaining another 5 percent of customers (Nairn, 2002).
Sales and Marketing Integration: An Illustration
Consider a hypothetical illustration of a big retailer with sales and marketing integration issues. As there was no integration between sales and marketing functions of a retailer, there was major issue of delivering the right product to the right place at the right time. Hence, customers were dissatisfied because of non availability of desired products in desired quantity. Lack of integration between sales and marketing resulted into loss of customer satisfaction, trust and loyalty and deterioration of customer relationship. Hence, it translated into low customer retention rate, i.e. 50%. However, after resolving various issues of sales and marketing integration, retailer was able to achieve better customer satisfaction, built environment of trust and loyalty and ultimately increased customer repeat purchase and retention rate. Hence, with sales and marketing integration initiatives by retailer, retention rate of customer has increased
to 75%. Calculation given below shows impact of sales and marketing integration in terms of high retention and enhanced CLV. As calculated in Table 1, the major cost of customer acquisition for retailer was cost of customized catalog sent to potential customers.
Calculation
If 'M' and 'c' are relatively fixed across periods, then CLV calculation can be simplified by assuming an infinite economic life, which leads to:
(ProQuest: ... denotes formulae omitted.)
Where
CLV = Customer lifetime value
M = the margin of retailer generated by a customer in the year ($25) (As calculated in row '12' ofTable 1)
c = the cost of promotions targeted to the customer ($9) (As calculated in row '7' ofTable 1)
r = retention rate (75% or 50% depending on degree of sales and marketing integration)
d = discount rate for calculating Net Present Value (NPV) (10%)
AC = acquisition cost ($25) (As calculated in row '5' of Table 1)
CLV for both cases i.e. with sales and marketing integration (retention rate 75%) as well as during lack of sales and marketing integration (retention rate 50%) can be calculated with above equation. The only difference in calculation for both cases is change in the retention rate.
CLV (Without sales and marketing integration) = $1.67 and CLV (With sales and marketing integration) = $20.71.
As above CLV calculation is approximate value with assumption of infinite economic life, detailed stepwise calculation of CLV for both cases is given in Table 1.
As calculated in Table 1, sales and marketing integration has increased CLV by 435% from $4.28 to $22.94. Figure 4 shows stepwise decrease in customer retention rate because of sales/marketing integration issues and its impact on CLV. Notice how small increases in the retention rate have a dramatic effect on CLV.
Kraft USA: An Illustration of Sales and Marketing Integration
Kraft USA had created the capacity to tailor its advertising, merchandising and operations to the needs of stores' particular customers. Through sales and marketing integration, Kraft was able to create customer intimacy. Kraft decentralized its marketing operation to empower sales department. Trade marketing team at Kraft headquarters sorts and integrates information related to consumer buying behavior, demographic and geo-demographic data from various databases to supply sales teams with a repertoire of usable programs, products, value-added ideas and selling tools. With sales and marketing integration, Kraft was in position to pinpoint which store gets which product there by reducing inventory and delivering the right product to the right place at the right time (Treacy and Wiersema, 1993). With sales and marketing integration, Kraft was able to achieve higher customer satisfaction, trust, loyalty and intimacy.
Sales and marketing Integration: Major Benefits
The working relationship between the sales and marketing is often described as unsatisfactory, so that any improvement at the sales and marketing interface will have a positive effect on top and bottom line growth of the firm (Kotier et al., 2006). Good working relationship between sales and marketing enhances capabilities of the firm to adapt to the rapidly changing environment, as this requires cross functional support as well as even more focus on the customer (Malshe, 2010).
Illustrations
1. The Aberdeen Group (2002) found that sales repeatedly complained about support tools provided by marketing were inadequate, and marketing frequently accused sales of misunderstanding or misusing marketing collateral. It was estimated that as much as 80 percent of marketing's expenditures on lead generation were wasted/ignored as irrelevant or unhelpful by sales. Similarly, on the sales side, it was reported that 40 to 60 hours out of a typical salesperson's monthly efforts were devoted to redoing, collateral materials that marketing should have generated in the first places.
2. In 2011, the Netherlands based consulting firm Andeta Group, conducted research study on sales and marketing alignment for 160 business units in Europe and USA, and found that only 25% of the companies were having 'high' alignment between sales and marketing. In half of the surveyed companies, there were regular conflicts between sales and marketing.
Organizations that effectively integrate their sales and marketing activities are much more likely to achieve better corporate performance in terms of sales, profitability, market share and even customer satisfaction. Following are major benefits of sales and marketing integration:
A. Enhanced Return on Investment
Sales and marketing integration helps organizations to sense consumer demand and respond to it in real time and provides a superior consumer experience at every opportunity while also decreasing time to market, trimming overall costs and optimizing productivity. Integration of sales and marketing will enhance customer satisfaction. Customer satisfaction is an important driver of firm's profitability (Luo and Homburg, 2007). There is a positive influence of customer satisfaction on financial performance indicators of an organization, such as return on investment (ROI) and return on assets (ROA) (Anderson et al., 1994; Rust et al., 2002). According to Gruca and Lopo (2005), firm generates benefits for itself beyond the present transaction by satisfying a customer. These benefits arise from the positive influence of the satisfied customer's future shopping behavior. For example, satisfied customers are more loyal and over time impact their purchase intention (Anderson and Sullivan, 1993; Reichheld, 1996). Some of this increased level of purchasing is due to satisfied customers being more receptive to cross-selling efforts (Fornell, 1992). Fornell (2001) emphasizes that, "satisfied customers can be viewed as economic assets of the firm that yield future cash flows."
B. Understanding the efficiency and effectiveness of marketing communications and promotions
Firms with effective sales and marketing integrationare more likely to know how well channel partners participated in promotions schemes and how consumers responded to it. Thus, marketing department is able to know if the marketing communication and promotion plan met their ROI criteria and other objectives.
C. Improvement in the top and bottom line
Effective sales and marketing integration has strong impact on productivity and profitability of firms. It helps firms in creating the business value they seek. The primary forces for driving this are cost reduction and revenue generation achieved by superior performance of various cross-functional drivers of sales and marketing.
Research Implications and Recommendations
The argument for combining sales and marketing strengths is compelling. Organizations, which effectively link their sales and marketing operations, gain competitive advantage by differentiating not only the products and services, but also the underlying delivery processes. It has the capability to satisfy different customer needs with differentiated sales cycle and, therefore, provides great value to the customer. Sales and marketing have the overall common goal to understand customer needs and solve customers' problems better than the competitors by offering superior value to customers.
When working relations between sales and marketing are poor, the communication, coordination, and collaboration that are crucial for the provision of overall customer value proposition may be lacking. In this scenario, sales and marketing may divert their attention and effort from serving customers to internal issues like blame game for errors and shortfalls in the common goals. This paper suggests that integration of sales and marketing can help firms provide superior customer value by developing a mutual understanding of responsibilities, sharing ideas, information and resources, and working together as a team to resolve cross-functional problems of sales and marketing.
This paper supports the emerging view that sales and marketing are highly connected, and are pre-requisite for better customer value propositions. Effective integration of sales and marketing activities enhances customer satisfaction, builds customer trust and loyalty, establish long-term customer relationship and enhance CLV. The frameworks presented in this research provide guidance to sales and marketing managers who wish to enhance customer value proposition and improve their management efficiency.
Conclusions
There has been a drastic increase in the pressure on firms to find new ways to create and deliver value to customers through sales and marketing collaborative initiatives. Sales and marketing must work together in order to achieve organization goals as sales and marketing integration is increasingly recognized as a key driver for improving financial and operating performance. The absence of cross-functional integration may result in promises made by the firm's marketing department that have not been coordinated with sales, marketing promotions that are not synchronized with sales delivery schedules, and failure to deliver product by a firm in a specific requested format because it is not the most efficient way to do so. Without sales /marketing cross-functional collaboration, firms cannot be expected to respond optimally and promptly to customers' requirements.
As suggested in this paper, through an effective sales and marketing integration, firms could enhance overall efficiency by interlinking the sales and marketing operations, at the same time meet the long-term strategic goals, and maximize CLV. Future research may focus on a case based approach to quantify benefits of sales and marketing integration in terms of customer satisfaction, sales revenue and firm profitability. The main objective of this research is to gain a better understanding of the antecedents and consequences of sales and marketing integration to highlight benefits of enhanced CLV that may be associated with encouraging such integrative behavior.
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Dr. Pankaj M. Madhani
Associate Professor
ICFAI Business School (IBS)
IBS House, Opp. AUDA Lake,
Near Science City
Ahmedabad - 380060,
Email: [email protected]
Mobile No: 9662122075
Copyright School of Communication & Management Studies Apr-Jun 2015