The PPH Formula Featured

5:45am EDT May 19, 2006
Historically, marketing and sales were considered more arts than sciences. Companies resisted applying hard measures because it was difficult to measure cause and effect. How could you isolate one marketing or sales initiative and attribute business success to it? As a result, the measurement of market strategy effectiveness was lost in the “Four P’s” of marketing.

For companies struggling in their marketplace, the issue is interpretation. How can an effectiveness measure be turned into action? Even for market leaders, the measurement can be a source of frustration. The issue here is one of selection of the right metric — or cause and effect — or the most appropriate metric to help keep the company out front in the market.

Smart Business asked Carl Cullotta, vice president and principal of Frank Lynn Associates, to outline how manufacturers and service providers can be more formulaic in approach to the problem. Cullotta suggests the PPH Formula as a diagnostic tool to first identify what limits market strategy effectiveness, then implement discrete changes to improve it and measure the results.

What is the PPH Formula, and how does it provide a measure of strategy effectiveness?
PPH is a formula that breaks market share into measurable components of product/service coverage (P), sales presence (P) and hit rate (H). Factored together, these three variables equate to market share (PxPxH=MS). By breaking your market share into these components, the limiting factors to strategy effectiveness can be quickly identified. And since it is a mathematical formula, the model provides a basis to measure the cost/benefit to any actions the marketer may take to try to boost strategy effectiveness.

What is product/service coverage?
It is a measure of the degree to which your product/service offering is considered a viable alternative to the customer. Assessing product/service coverage begins with understanding what the end user is buying — including physical product and the service/support provided around it. Product/service coverage determines whether your offering is viable from a form/fit/function perspective.

This assessment should include a review of product line gaps, especially if missing products are being purchased in conjunction with your product offering.

It should also include a look at price points. Consider the ‘good/better/best’ product positioning. Customers focused on a ‘best’ offering will rarely consider a ‘good’ product a viable alternative and vice versa. So if your product is 15 percent to 20 percent higher or lower than the alternatives, it calls into question whether you have effective product coverage for that customer segment.

What is sales presence?
Sales presence is a measure of how often the customer considers your offering at the time of making a purchase. Sales presence has several contributing factors.

  • Geography - Do you have appropriate sales/channel presence in the location where brand/source decisions are made?

  • Account - If present in the geography, does your sales organization and/or channel partner have a relationship with the account? Within the account, do you have access to the key decision-makers and decision-influencers?

  • Decision presence - Even if you have generated revenue with this account in the past, are you involved in the current purchase decision? Or is the account awarding business for which you are not allowed to compete?

Often, marketers mistake one of the above variables for effective sales presence. However, our experience suggests that all three are required to assure you are really being considered for purchase by the customer.

What is the hit rate?
The hit rate measures how often the sale is won. It is a reflection of how well your product/service offering and support align to the decision variables used by your target customer. It is a result of several factors considered part of the traditional marketing mix — brand preference, price preference, ease to do business with, product/service bundle, technical support, product availability and the manufacturer’s and channel partner’s reputation. For commodity products/services, market leaders find their hit rate in the 35 percent to 40 percent range. For more technical or engineered products/services, hit rates can be more than 70 percent.

How does the PPH Formula help?
It allows the marketer to define strategy at an actionable level. Product management can gain insights from the product/service coverage analysis. Sales management can gain direction from the sales presence variable. And the marketing organization generates guidance to its resource allocation from the hit rate assessment.

Limiting the effectiveness assessment to a territory and/or market segment basis allows for a change in your marketing approach away from the traditional one-size-fits-all strategy to an approach that employs individual strategies that are highly focused on targeted segments. The PPH analysis described in this article will help you strategize how to achieve measurable improvement in individual segments and measure your effectiveness during strategy implementation.

CARL CULLOTTA is vice president and principal for Frank Lynn Associates. Reach him at (312) 558-4823 or cpc@franklynn.com.