Class 11 - MKTG
Products: a product is anything that can be offered to a market that might satisfy a want, need or
desire.
Brand: more than 1/3 of global stock market value is attributable to brands.
Top 10 global brands outperformed the market over last 10 years.
What is a brand? “A name, term, sign, symbol or design, or a combination of them intended to
identify the goods and services of one seller or a group of sellers and to differentiate them from
those of the competition.
Economics:
- A signal of unobserved quality
- A form of commitment to quality
Psychology:
- Nodes in memory, associative networks
- Vehicle for self expression, group membership
Types of brands:
- Corporate brands
- Corporate parent brands: the use of a single brand name for the sale of two or more related
products.
- Distinct product brands
- Sub-brands
- Co-brands
- Ingredient brand
Retailing:
- National brands
- Regional brands
- Value brands
- Private labels
Benefits of private label?
• High margins for retailers
• Strong private label as element to position the retailer: with private branding, you create your
own unique image, which begets a marketing identity and promotes stronger customer
recognition and loyalty.
• Loyalty: private label branding is one way to build customer loyalty from people who like your
products.
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Branding: how to build a brand?
Brand awareness —> Brand consideration —> Brand evaluation —> Brand loyalty
• Brand awareness: extent to which a brand is recognized by potential customers, and is
correctly associated with a particular product. It is the primary goal of advertising in the early
months or years of a product’s introduction.
When building a brand you need to find a way to increase awareness.
• Brand consideration: brands in the initial-consideration set can be up to three times more likely
to be purchased eventually than brands that aren’t in it.
Number of brands that as individuals we include in the consideration set is not high.
• Brand evaluation: two-thirds of the touch points during the active-evaluation phase involve
consumer-driven marketing activities, such as internet reviews and word-of-mouth
recommendations from fiends and family, as well as in-store interactions and recollections of past
experiences.
2 potential situations:
- Create a new brand: a variety of brand elements can be chosen that inherently enhance brand
awareness or facilitate the formation of strong, favorable, and unique brand associations:
• Brand name: the name should ne simple and easy to pronounce and memorize, distinctive, it
should reflect the benefit of the product (e.g. Duracell, Red Bull, etc.), it should elicit a mental
image (e.g. Red Bull, Apple, etc.)
• Logo
• Symbol
• Character
• Packaging
• Slogan
- Revitalize a brand: build on the essential values and identity of the brand to enhance them in
new contents, or modify previous brand identity / create a new one.
E.g. of revitalization: Apple, Lego, Old Spice, McDonald’s
Brand equity: it is a set of assets (and liabilities) linked to a brand’s name and symbol that adds
to (or subtracts from) the value provided by a product to a firm or that firm’s customers.
Equity is associated to the concept of price.
Price premium: brand equity is the “residual” all else equal. It can also be determined from relative
prices.
Inverse demand function: p = f ( Q; Z; B; X )
with Q = quantity vector; Z = vector of attributes; B = brand; X = general economic factors that
affect auto demand.
Brand equity: measure of a brand’s value.
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Dimensions of brand equity:
- Brand loyalty: loyal customer base is important. Loyal customers are willing to pay more, they
are usually satisfied customers. Loyalty leads to a reduction of marketing costs, increases the
bargaining power towards the distribution channel (e.g. retail stores). Through your loyal
customer base you can attract new customers (to word-of-mouth) and you can react to
competitive actions of competitors more easily.
- Brand awareness: “mere exposure” effect, it implies that it is going to be more likely that you
like something simply because you are more familiar with it. Brand awareness is fundamental in
order to be included in the consideration set.
- Perceived quality: main purchasing reason, main positioning strategy. It allows a premium
price strategy.
- Brand associations: through a mental map you can find elements that reinforce associations.
Core brand associations are a set of abstract associations that characterize the 5-8 most
important aspects or dimensions of a brand. They can serve as a basis for brand positioning.
Brand associations can facilitate information retrieval, allow an effective differentiation strategy,
help to create a positive attitude toward the brand. They represent the elements on which to
base a brand extension strategy.
- Other brand assets (e.g. patents, trademarks, franchising, etc.).
Possible outcomes of positive brand equity:
- Greater loyalty, less vulnerability to competitive marketing actions and crises
- Larger margins
- More elastic response to price decreases, more inelastic response to price increases
- Greater trade cooperation and support
- Increased marketing communication efficiency and effectiveness
- More favorable brand extension evaluations
Brand extension: extension of the brand in a new product category.
An established brand name lends instant credibility and positive associations to the line
extension.
The success of brand extensions is difficult to predict. The degree to which positive associations
transfer to the brand extension is called “FIT”.
“FIT” is the perceived congruency/fit between the original business and the new business in
which the brand wants to enter. It is important in determining the brand extension success.
Advantages of extensions:
- Enhance the parent brand image
- Improve strength, favorability and uniqueness of brand associations
- Improve perceptions of company credibility
- Bring new customers and increase market coverage
3 dimensions for a successful brand extension:
1. Fit: is it a logical fit for the brand? Will consumers grant us permission to go there?
2. Opportunity: is it a large enough category of business? As a newcomer, a brand extension will
likely capture only a small market share.
3. Leverage: does the brand bring something new and distinctive to the table? Does the
extension product give consumers a good reason to change their buying habits?
Risks of extension: extensions can fail and erode the quality of the brand.
Moreover, extensions can potentially result in the following costs costs:
- Cannibalize sales of the parent brand
- Hurt the image of the parent brand
Product positioning: it is the “act of designing the company’s offering and image to occupy a
distinctive place in the target market’s mind”.
Where you intend to be in the target consumer’s mind vis-à-vis the competition.
E.g. Coors Light: Cool beer and Super cool beer.
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Segmentation —> Targeting —> Positioning
Segmentation:
1. Identify segmentation variables and segments
2. Profile segments
Targeting:
3. Evaluate segments attractiveness
4. Select segments
Positioning
Different positioning strategies:
- Positioning based on product benefit (e.g. price, quality, etc.)
- Positioning based on user category (e.g. baby shampoo, etc.)
- Positioning based on against competitor (e.g. Listerine, Sky, etc.)
- Positioning based on time/situation (e.g. KitKat, etc.)
- Positioning based on lifestyle (e.g. Mini Cooper, etc.)
The importance of positioning: no matter how commonplace a product may appear, it does not
have to be a commodity. Every product, every service can be differentiated.
Positioning is not just clever slogans or gloss.
What we push on our customers, it is what customers will realistically grant us.
It is not a one-time activity or a way to make our product superior, it is about finding a superior
position in the minds of customers.
Basic tool: perceptual maps
A perceptual map is a visual representation of how target customers view the competing
alternatives in a low-dimensional (e.g. 2) space.
Each axis represents a specific dimension which should be important for the customer.
Representation useful to identify potential business opportunities.
Major uses of perceptual maps:
1. Identify differentiation opportunities
- to create tangible or intangible differences on one or two key dimensions in order to
distinguish a focal firm from its main competitors
- looking for a “hole” in perceptual space
2. Understand the market structure of product categories as perceived by customers
- have brands carved out their own space or is competition high?
- what brands are near me in perceptual space?
- if we are not positioned where we want, how do we get there?
3. Evaluate a new product concept in the context of existing brands in the market
- where does the new product sit compared to existing brands?
- develop a name for a new product, see where you are on a perceptual dimensions and
create name consistent with that perception
Building a perceptual map: what do we do in practice?
1. Identify key dimensions of differentiation/similarity between a brand/product and its main
competitors
2. Create a map: techniques (using customer-data) that enable managers to visualize their …
3. …
Faults of perceptual maps?
They are too simple, usually two dimensions are not enough.
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How can we overcome these problems?
To identify the axes, two possible methodologies to collect information on consumers perception
of products are available.
- Attribute-based method
We can characterize a product taking into consideration more than one attribute (e.g. phones
have many attributes).
1. We need to select a set of brands of interest.
2. We need to decide the set of relevant attributes on which to capture consumer perceptions
(e.g. four attributes).
3. We must ensure that consumers are familiar with the brands that are to be evaluated (e.g. video
presentations, images or previous experiences).
4. Respondents (target customers) evaluate each brand in terms of the four attributes.
Principal component analysis: the number of attributes can be reduced to a smaller number of
dimensions that are linear combinations of the original attributes. If some attributes are highly
correlated, it means that the information contained in the original attributes can be represented by
creating just N (e.g. N = 2) new dimensions.
- Attribute-free method
Respondents provide an overall evaluation of similarity between pair of brands.
This evaluation is used to derive spatial positions in a multidimensional space that reflect these
perceptions.
Multidimensional scaling: it is a mathematical technique that helps implement this analysis of
similarity perceptions with minimum information loss.
Similarity data reflect the perceived similarity of two objects from the respondents’ perspective.
A perceptual map is obtained from the average similarity ratings.
We don’t ask about specific attributes.
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Class 12 - MKTG
Purpose of communication: through communication organizations seek to influence both
psychological variables (e.g. brand awareness, emotional reactions, knowledge of product
characteristics, etc.) and behavioral variables (e.g. trial, purchase acceleration, brand loyalty, etc.).
Marketing communications are used not only to obtain psychological and behavioral reactions,
but also to interpret the strategies that we need to put in action in order to obtain the reactions we
need.
• Inform, persuade, incentivize, remind consumer od product purchase
—> Transaction (short-run; tangible)
• Contribute to brand equity: establish the brand in memory, develop strong, favorable and unique
associations
—> Relationship (long-run; intangible)
Elements of the communication mix:
• Advertising: any paid form of non-personal communication about an organization, product,
service or idea by an identified sponsor.
Possible forms: print ads, broadcast ads, pop displays, packaging inserts, brochures, billboards,
product placement, etc.
Advantages: advertising can reach masses of geographically dispersed buyers. You can have a
high message content control. Consumers tend to view advertised products as standard and
legitimate. Buyers know that purchasing the product will be understood and accepted publicly.
Potential problems: it can be very costly, it is impersonal.
Potential channels/media: commercial/cable tv, internet/web/social media, etc.
How do different channels/media differ? In percentage of the target reached, in selectivity, in
costs, in reliability, in possibility to use tools to capture attention, in prestige of the media.
• Direct marketing: any communication form that sends messages directly to a target market
with the anticipation of an immediate or short-term response.
Examples of direct marketing: catalogs, mailings, e-mailings, custom banner ads, etc.
• Sales promotion: communications activities that provide extra incentives to consumers to
achieve a short-term objective (e.g. coupons, etc.)
Examples of sales promotions are: discounts, sampling, points and rewards, etc.
• Publicity/public relations: communications for which the sponsoring organization normally
does not pay.
Examples are positive interventions for social reasons can be advertised on television programs,
radio shows, etc.
• Personal selling: communications and promotions made by company’s salesperson.
Examples are sales presentations, sales meeting, incentive programs, free samples, etc.
Stages of consumer readiness
Need recognition > awareness > knowledge/comprehension > attitude/interest > trial > repeat
Which stages do you wish to influence with your marketing communication?
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Integrated marketing communications (IMC): to utilize a number of communications in a
consistent, complementary way.
Guidelines:
1. Adopt a consistent brand model
2. Coordinate media among communication platforms, among advertising media, within
advertising media
3. Leverage memory retrieval cues:
- common theme
- brand slogan
Mini case:
In 2002 BMW launched a mini model in the USA thought for residents in urban areas, who cares
about trends, fashion, and who want a small car with a price under $ 20,000.
BMW had a budget of only $ 20 million for the launch.
An unconventional use of advertising urban posters, newspaper ads, etc..
Promotional events were made in 21 US cities, where mini was advertised in unusual spaces
This campaign generated a waiting list of nearly 6 months.
How to obtain an effective communication?
• Macro model of the communication process
• Micro models: response hierarchy models
Macro model
Steps in developing effective communication:
1. Identify the target audience
2. Determine the communication objectives
3. Design a message
4. Select the message channel
5. Select the message source
What are the key elements that characterize the communication process?
- Source (sender): studies show that the message’s impact on the target audience is also
affected by how the audience views the communicator.
We can choose celebrities or professionals.
Kelman (1961) identified three characteristics of successful marketing communications
sources:
• Source credibility: role of testimonial, experience and reliability, consistency.
• Source attractiveness:
• Source power
- Message: the communicator has to figure out an appeal or theme that will produce the
desired response.
There are three types of appeal:
- Rational appeals: relate to the audience’s self interest, they emphasize the functional benefits
of the product.
- Emotional appeals: attempt to stir up either negative or positive emotions that can motivate
purchase. Negative emotional appeals (e.g. fear) threat you of negative consequences or of
social disapproval. There is a curvilinear relationship between fear and persuasion. Emotional
appeals that try to exploit humor are risky because they might be unappreciated, ephemeral or
may distract attention.
- Moral appeals: they are directed to the audience’s sense of what is “right” and “proper”.
They are often used to urge people to support social causes
Message structure: the communicator needs to handle three message-structure issues
1. One-sided (+) vs two-sided argument (–)
2. Presentation order of the argument: strongest arguments first or last?
3. Amounts of informations: how much information do organizations have to “communicate” in
the message that receiver will assimilate? There is a risk of overload.
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The name of the product can be repeated within ads (within the message) or across (in several
occasions)
Say it again: messages are more effective when repeated.
Repetition: when and how often?
We need to define the optimal number of exposures:
What portion of the target you want to achieve? What level of repetition? When placing ads?
Wearout: that level of advertising which corresponds to the point at which an individual, or
group of individuals fails to respond to the advertising stimulus.
Individuals get saturated with numerous level of exposures.
A solution to wearout could be media planning.
Media planning:
- Continuous: the message is repeated (across) in several occasions over time
- Blitz: higher quantity for a lower period of time
- Pulsing: short high quantities and longer low quantities are alternated. Flighting and
continuity combined together
- Flighting: similar to pulsing, but high peaks are intermittent, with gaps in between
- Channel: choosing media.
Personal communication channels: two or more people communicate directly with each
other (face to face, phone, email, chat on the web).
Short distance between source and receiver, an immediate feedback and direct contact.
Non-personal communication channels: media that carry messages without personal
contact or feedback. They include major media, atmospheres and events.
Great distance between source and receiver, there are 2 or more channels, and indirect contact.
Traditional mass communication model: firm —> content —> medium —> individuals
Now individuals can interact with firm, with content and with mediums.
- Receiver: receivers determine the outcome of marketing communication efforts.
How does the receiver respond to communication?
There are there different stages: cognitive stage, affective stage and behavioral stage.
Models of advertising response have a hierarchical nature: this implies that there is a forced
sequence.
E.g. exposure > perception > understanding > positive attitude > recall > purchase behavior
The role of involvement:
How are stimuli processed?
Two factors: motivation and ability to process
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The elaboration likelihood model (ELM): purpose explains different ways of processing
stimuli.
Central route: high involvement and high capability (critical factor: message content)
Peripheral route: when?
The peripheral route is used when the message recipient has little or no interest in the subject
and/or has a lesser ability to process the message.
Being at the low end of the elaboration continuum, recipients do not examine the information as
thoroughly.
Indirect information is more persuasive (e.g. testimonial, celebrities).
Peripheral route:
- Involvement (high vs low)
- Use of celebrities
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Class 13 - MKTG
The price of a product/service is due to several factors:
- Marketing strategy
- Coordination between different functions
- Revenues
- Consumers
Why is pricing so complex? —>
The role of marketing strategy in pricing
Price must be consistent with the marketing strategy
- Price discrimination: same costs, different prices.
It occurs when firms sell the same good to
different groups of consumers at different prices.
- Price tiers: different costs and different prices.
WTP: willingness to pay
(E.g.12)
Perceived value: it is a measure of how much
a customer is willing to pay for a product or service.
Economists call this concept the reservation price.
It is the most someone is willing to pay for a product, or the price at which the product is
eliminated from the customer’s budget.
Perceived value is heterogeneous among customers.
Feasible price range:
It stands between perceived value (monopoly)
and costs (perfect competition).
The portion that lies between perceived value and actual price is customer surplus.
The portion that lies between costs and actual price are profits.
Two problems with single price strategy:
1. You might leave money on the table: some customers are willing to pay more.
2. You might pass-up profit: some customers were not served even though the firm could have
served them at prices above the variable cost.
Conditions for the success of price discrimination:
- Each segment must differ with respect to willingness to pay
- Segments must be accessible/addressable (either with active or passive programs)
- Segments must be separable (or build fences with minimum “leakage”)
By discriminating prices I can obtain a higher volume in terms of profits.
Perfect discrimination: totally discriminating prices. Every customer is charged with his
willingness to pay.
Different types of price discrimination:
• 1st degree: consumers pay their WTP, company extracts all consumer surplus.
• 2nd degree: customers self-select different price point (e.g. pricing structure for a particular
good based on the number of units sold). Price customization is achieved through the choices
customers themselves make.
• 3rd degree: sellers are able to segment its customers into two or more separate markets.
Each market is defined by unique demand characteristics:
- the firm attempts to pursue different prices for different customers
- requires active (versus passive) programs to identify customer segments and price
customization
Value pricing strategy: the company decides to offer a particularly good value for the customer.
This method allows to acquire loyal customers by applying a low price.
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Price decision: four steps
1. Assess the perceived value of the customer base:
- Economic approach: value-in-use
- Other approaches
2. Assess the customers’ price sensitivity
3. Consider competition
4. Assess the customers’ psychological response
STEP 1 - Assess the perceived value of the customer base
- Economic approach: value-in-use
- Other approaches (direct, indirect)
Economic value concept (EVC): it represents what a customer will actually pay for a product or
service that delivers value in excess of its closest competitor.
Value-in-use: maximum amount a customer should be willing to pay, assuming that he is fully
informed about the benefits of the product and the offerings of competitors.
Cost of the best alternative: the price of perceived closest substitute.
Differentiation value: value of a product’s attribute difference between your offering and the
closest substitute (+ or –)
EVC = cost of the best alternative + differentiation value
Calculate perceived value: EVC
What do we need?
a. Identify the price of competitor/the best available substitute (benchmark)
b. Identify all factors that differentiate the considered product from the benchmark
c. Determine the economic value to the consumer of the differentiating factors
d. Sum the reference value and the differentiation value to determine the total economic value to
customer
It is fundamental to communicate the economic value to customers.
Do not assume that customers know the economic value.
Educating customers is important when the product delivers a stream of benefit over time (e.g.
positioning)
If we can not use the EVC approach, an alternative can be collecting information through:
Direct approaches:
1. Opinion of experts (manager/salesforce)
2. Survey (direct/indirect)
3. Field experiment
4. Look at the historical data pattern
Other options could be:
- Asking willingness to pay (WTP)
- Examples of surveys with direct questions about the WTP
Indirect approaches:
- Conjoint analysis: which of the following options would you select?
2
Brand
Apple
Sony
LG
Price
$500
$300
$400
Resolution
480x720
720x480
1280x800
Size
Small
Medium
Large
We have three brands: many features (e.g. price)
You can create combinations (factoring, a subset of combinations) to make the customer select
an option indirectly.
We know willingness to pay, despite the features and the brand.
- Analysis of historical data:
- Data from supermarket scanners
- If prices have varied over time, you can analyze how they have changed and share profits
- Economic models
STEP 2 - Assess the customers’ price sensitivity
Price elasticity: it is used to measure the degree of market response.
Conceptually: the degree of responsiveness of sales volume to a change in price.
Verbally: percentage change in sales volume divided by the percentage change in price.
Mathematically:
E = % change in demand / % change in price = ∆Q/∆P * P/Q
Absolute value of E > 1.0 —> Price is ELASTIC —> PRICE↑ REVENUE↓ - PRICE↓ REVENUE↑
Absolute value of E < 1.0 —> Price is INELASTIC —> PRICE↑ REVENUE↑ - PRICE↓ REVENUE↓
Price elasticity of demand is useful when we have to decide how much of the strategic gap to
capture.
Perceived value
- Penetration pricing:
• Leaves less of the market for the competition
• Low margins less attractive to new entries
• Strong choice when scale effects exist
- Skimming pricing:
PP
Price
Cost
• Appropriate for product categories that are characterized by perceived price-quality
relationships
• Appropriate when little chance of future competition exists
Perceived value
• Appropriate early in PLC
Price
SP
STEP 3 - Consider competition
Cost
Who are my competitors? What will they do if I change the price?
The competitive situation of a market influence the actual possibility for a company to select
prices.
Incorporating competition
In a competitive pricing environment, it is not sufficient to simply know one’s own-price elasticity
and costs.
Competitors’ price reactions, if they have cross price effects on sales, will change the net volume
response that a price change produces.
Drivers of net price elasticity are:
- Own-price elasticity (eii) <0 —> eii = ∆Qi / ∆Pi * Pi / Qi
[ i = us ]
[ j = them ]
- Cross-price elasticities (eij) >0 —> eij = ∆Qi / ∆Pj * Pi / Qj
- Competitive reactions
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E.g. Cross-price elasticity:
- Competitor j lowers price by 10%
- Our volume declines by 5%
The cross-price elasticity of our sales with respect to competitor j’s price is 0,50
—> eij = % change in demand / % change in price = 5% / 10% = 0,50
Estimating cross-price elasticities
- Conjoint analysis: extend market simulation analysis to include cross-price effects.
- Historical sales data: regression analysis to include competitors’ prices as additional variables.
P
H
G
Y
Vulnerability
P
-2,80
1,1
0,3
1,2
2,6
H
1,05
-4,59
0,3
1,21
2,56
G
1,2
0,88
-4,26
2,43
4,51
Y
1,08
0,74
0,7
-4,3
2,52
Clout
3,33
2,72
1,3
4,84
P, H, G, Y = brands
Cross-price elasticity: rows
Clout: sum of pricing effects of brand i on competitors [e.g. brand P’s 3,33 clout results from
summing its effect (cross-elasticities) on other brands]
Vulnerability: sum of competitors’ effect on brand i [e.g. brand P’s 2,6 vulnerability results from
summing the row effects from other brands]
Cross-price elasticity of brand G with respect to a price change by Brand P is 1.2
G is a weak brand (highest vulnerability)
Philadelphia
Store brand
Philadelphia
-1,1
(n.s.)
Store brand
2,31
-3,52
Cross-price elasticity of store brand with respect to a price change by Philadelphia is 2,3
Cross-price elasticity of Philadelphia with respect to a price change by Store Brand is 0
(Philadelphia is not affected by a price change of the store)
Reasons for competition escalation and price wars:
• Objectives based on market share or other competition-oriented benchmarks (e.g. stay #1 in
the industry) instead of profitability
• Overestimate customer sensitivity to price
- Fail to recognize that only 20-35% of customers in most markets fall into the “price sensitive”
segment
• Underestimate cross-price effects
- Competitive set too narrowly defined (e.g. “they aren’t a competitor, they don’t have a full line”)
- False belief in insulation from competitors
• Market share myth
- Myth: market share —> profitability
- Reality: sustainable competitive advantage —> increased market share
—> increased profitability
No direct casual relationship between market share and profit
The myth encourages price cuts which lead to lower profits
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Price wars and consequences
Competing firms focus on price because it is easy to cut prices.
Many companies find themselves in a descending spiral where it seems the only way to do
business is to decrease price.
When competitors enter a price war:
- Customers become more price sensitive
- Customer reference prices are diminished
- Customer expectations about what a fair price is gets distorted
Not every competitive price reduction deserves a reaction:
- If a response is required, use something other than price if possible
- Avoid strategies that force competitors to respond with even lower prices
- If a price response is required, make it as limited and surgical as possible
STEP 4 - Psychological aspects of price
Assess the psychological reactions of the customer base
Reference price is a standard price at which the observed price at which the observed prices are
compared. Buying decisions are influenced by the differences between the prices and the
reference price.
It is based on past prices of a brand, competitors, experience, etc.
It may depend on:
- Context effects and fairness issues
E.g. how much are you willing to pay for a coke in:
- the school vending machine?
- an exclusive club?
- a really hot day?
- Price discrimination
Companies use “cues” to influence the overall pricing perception.
E.g. price of certain good (e.g. Pizza Margherita); price as a signal of quality (e.g. Illy).
—> Threshold price point: depending on the price of other alternatives, this can strongly affect
your choice.
—> 9 at the end: psychological or odd-pricing
Prospect theory:
The practice of setting prices just below the nearest round figure is popular among manufacturers
and retailers (e.g. $4.99 instead of $5.00 or $99.95 rather than $100)
The increase in sales that results from a price cut from e.g. $1.00 to $0.99 is expected to be much
larger than that from decreasing $0.99 to $0.98 or from $1.01
Prospect theory: it assumes that losses and gains are valued differently, and thus individuals
make decisions based on perceived gains instead of perceived losses. Also known as "lossaversion" theory, the general concept is that if two choices are put before an individual, both
equal, with one presented in terms of potential gains and the other in terms of possible losses, the
former option will be chosen.
SUMMARY
The pricing mechanism should:
• Be consistent with the entire marketing strategy and the other 3 P’s;
• Base on the perceived customer value;
• Discriminate between customer segments with different.
Customer value and demand elasticity:
• Incorporate inferences about the market’s response to price, competitors’ reactions, and
channel member’s reactions;
• Consider the psychological effects of pricing.
5
Class 14 - MKTG
Distribution channel: customers must have access to your product or service to be able to
purchase it. The purpose of a system of distribution channels is to provide an efficient means of
getting your products to customers and customers to your products.
Intermediaries: someone that is in charge to develop the product to final customers.
We can have more than one auto between the company and the final customer.
Having intermediaries means reducing transactions costs.
Assume a market in which there are:
m producers
n consumers
Each contact costs b
The cost of a contact with a middleman is b0
When does a producer prefer to use middleman over direct selling?
What are the cost generated by a middleman?
What are the different types of channel of distribution?
Direct channel: you directly sell the product to the final customer
Indirect channel: you have an intermediary between you and the final customer
Distribution system can be described by:
- The type of relationship between the company and who owns the store/franchising
- The number of levels between the company and the consumer
- The type of channel: the touchpoint, the final connection to the consumer
Type of relationships and number of levels:
- Company selling directly to consumers
- Company selling through retailers
- Company selling through wholesalers
Retailer: a merchant middleman who is engaged primarily in selling to ultimate consumers.
Retailers becomes brands because they are in contact with the final customers: customer have to
choose their retailers as if they were different products.
E-tailer: a merchant middleman who is engaged primarily in selling to consumers online.
What is Nike distribution strategy?
- Retail
- Branded Nike town stores
- Nike.com
- Catalog retailers
- Outlet stores
- Specialty stores
Multichannel distribution system: strategy that offers the same brand through multiple channels to
final customers. By channel, we mean a customer contact point, or a medium through which the
firm and the customer interact.
Consumers can interact with companies through many channels.
Digital attributes: attributes that you can search online.
Products with non-digital attributes (e.g. groceries)
67% of consumers search for grocery information online, but only 26% of consumers purchase
groceries online.
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Products with digital attributes (e.g. books, smartphones)
Are distribution strategies effective? Opportunities and threats of a omnichannel strategy?
Opportunities
Threats
Right channeling: high margin channels can
produce a significant reduction in costs. Different
margins depending on the channel, it is better to
convince individuals to buy in specific channels
Cannibalization: profits cannibalization across
channels. Increase the number, same profits, more
channels
Customer satisfaction: provide customers a better
service/experience
Brand value erosion: the brand value could be
eroded if channels are not well managed
Expansion of customer base: the % of online and
mobile shopping has increased and continues to
increase … (see BCG report, Nielsen reports, …)
Channel coordination: the company should be able
to effectively manage different channels. Decrease
in consumer satisfaction, customer retention.
Increase profits
Multichannel jargon:
- Multichannel customer: customers using more than one channel to interact with companies
- Multichannel marketing: marketing strategies used to reach these customers
- Multichannel customer management: the design, deployment, coordination and evaluation of
channels to enhance customer value through effective customer acquisition, retention and
development
"If I had to pick the single word that's the most important for the next few years, it's going to be
multi-channel”
Omnichannel customer management: an extension of multichannel retailing, where the channels
have become completely integrated in order to offer the customer a seamlessly integrated
shopping experience.
Compared to the multichannel phase, omni-channel thus involves more channels.
(Mobile channels – disruptive change)
An important additional change is that the different channels become blurred as the natural
borders between channels begin to disappear.
Key dimension of omni-channel strategy: focus on the consumer, not on the distribution channel!
Customer decision process:
Problem recognition —> Search —> Purchase —> After-sales —> Post-evaluation
Different channels play a key role in decision-making of consumer buying.
1st challenge: integrating the data (47)
You are a runner, you want to change running shoes.
You notice a facebook post from Nike, you decide to visit Nike store.
You try shoes on, but you don’t want to purchase: you are not convinced.
You keep on running.
You have a running application: free, you don’t pay for premium account, so you have some adds.
You see an Asics add, you decide to subscribe to its newsletter and you receive an email.
You understand you want Nike shoes, so you log on the website, you customize your own pair
and receive it at home.
You receive it at home but one color of your pair is not exactly the same that you wanted.
You call and ask for a change.
They tell you that you can change them, you just need to go to the store the day after and you will
find the correct one.
You receive an email from Nike that asks you for a feedback.
Nowadays everything can be tracked.
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2nd challenge: evaluating channels
What is the contribution of adding a channel?
Given the current channel mix, what is the contribution of each channel?
What is the impact of eliminating a channel?
Some time ago, the problem was whether or not it was profitable to add a channel: will internet
cannibalize sales, or generate an incremental demand?
Nowadays, it is the reverse: companies are realizing that also being offline can be an advantage.
“There was a time when the online and offline businesses were viewed as being different.
Now we are realizing that we actually have a physical advantage thanks to our thousands of
stores, and we can use it to become No. 1 online”.
Amazon made a large investment into physical stores in order to grow.
(E.g. acquisition of Whole Foods)
What is the contribution of adding a channel?
- Physical: opening a store
There are a lot of information that I know if I want to open a store in a determined location:
- Of course I know who I will attract (Geomarketing)
- The market is confined to the area around the store
- Virtual: opening an e-commerce
Opposite situation:
- The market conceptually is infinite, everyone can buy
- I don’t know anything about potential customers. I need to study what I have to do in order to
attract customers
“The way we use the Internet is still largely shaped by the physical world.”
New customers tend to be acquired in locations that are contiguous to locations where you
already have customers. Why?
Two main drivers:
- Neighborhood composition; the people who live in a certain location are more similar on
average than people who live in different locations.
- Social exposure, influence, contagion: word of mouth, techniques (e.g. packaging, personalized
delivery trucks, etc.)
3rd challenge: customer behavior & customer profitability
Why the consumer chooses a particular channel?
What are the determinants triggering the process of channel choice?
How does the importance of these determinants changes across different phases of the decision
process?
Are there relationships between channel choice and customer profitability?
Customer profitability: the value of the customer.
Is there a relationship between channel choice and customer profitability? Yes.
Customers that use more than one channel are more profitable because they spend more.
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4th challenge: coordinating channel strategies (channel integration)
Are channels independent?
How can we develop synergies across channels?
How can we manage research shopping?
How coordinate with channel partners?
Which customers should be encouraged to use which channels, for which stage of the decision
process?
Show-rooming: i search offline but then I use the online channel to buy.
The “Researcher Shopper” phenomenon:
• Internet —> Store (web-rooming)
• Store —> Internet (show-rooming)
Mobile-assisted show-rooming: the utilization of another channel (mobiles devices) for the
purpose of in-store or online shopping. It covers a wide area of activities ranging from gathering
informations about the products (e.g. where to shop from, a comparison of retailer prices).
Take home omnichannel era:
- Channels play multiple roles and need to be managed
- Consumers are now used to interact through multiple channels
- Firms need to combine their channel offers being aware of the additional contribution of each
channels
- Multichannel customers can be created
Distribution system can be complex
Types of channel intermediaries: what does this imply?
Managing retail intermediaries channel conflict:
- Channel conflict: when each member of the channel is an independent business, retailers might
not behave according to the manufacturer desires.
- Key problem with independent channels: channel conflict.
- Each member has her own private interests or profits in mind
- Retail perspective may be more short term profits than the manufacturer
- National vs Local perspective
E.g.: Store brands entry —> if a store introduces its private brand:
- Higher brand margins for the retailers
- Equal/higher profitability for premium brands:
- Focus on differentiation and product innovation
- Do not decrease price, often increase it
- Lower profitability for second-tier brands: decrease prices, increase promotions
- Higher price sensitivity only for second-tier brands
Channel coordination
General principle: manufacturers must find ways to maximize total channel profits.
The incremental profits can be used in two ways:
- Absorbed by the manufacturer leaving the retailer or other down stream channel member
no worse than before.
- Shared with the channel members to reward them for providing better service.
The challenge is to get the retailers to “behave” in a conventional channel with independent
retailers
Double marginalization: the company need to end up with a strategy that takes into
consideration the presence of retailers in terms of positioning and in terms of strategy.
Manufacturers want to charge a high price to retailers, but this forces retailers to charge high retail
prices which means little demand.
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How to distribute: three types of distribution business models
- Intensive: everywhere at any time.
Aim: saturation coverage of the market by using all available outlets.
- Exclusive: sometimes, somewhere.
- Selective: exceptionally.
Aim: allowing the sale of their products only to a small circle of outlets.
Number of levels:
• Zero: Direct channels or Zero level channels, from manufacturers to consumers.
- E-commerce
- Bricks and Mortar stores
- Television home shopping
- Vending machines
• One level channel
• Multiple level channels
The dell case: in 1993 Dell decided to exit the retail channel and concentrate on direct
distribution.
What should a company do? Direct channels or indirect channels?
- Direct channels: when the product or service remains under the control of the company from
production to customer.
(+) Under the firm’s control sales force can be trained to deliver a particular message
(–) It is expensive
(–) Its reach is limited by its size
- Indirect channels: are independent parties paid by the company to distribute the product
(+) Can reach more customers
(–) Loss of control
Cost perspective: direct vs indirect
- It is important to estimate the costs associated with each option and choose the most efficient
solution
- The direct and indirect channels differ in terms of fixed costs and variable costs
Instances when direct channels are preferable:
- Possibility to “control” the market
- Information needs are high
- Customization is important. Customized training of salesforce
- Complex goods
- Purchase orders are large / Product sold should have a high unit value
Instances when indirect channels are preferable:
- Availability of the product is important
- One-stop shopping for many products is important
Distribution strategies:
- Pull strategy: it involves motivating customers to seek out your brand in an active process
—> “Getting the customer to come to you”
E.g. advertising, mass media, WOM, CRM, sales promotions and discounts, etc.
- Push strategy: taking the product directly to the customer via whatever means, ensuring that
the customer will find your brand at the point of purchase
E.g. trade show, direct selling to customers, negotiation with retailers to store your product,
packaging design to encourage purchase, point of sale display, efficient supply chain, etc.
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Class 15 – MKTG
Impressions: when an advertisement or any other form of digital media renders on a user’s
Key performance indicators:
- CPM: cost per (thousand) impressions = (cost / impressions) * 1000
- Click: refers to a user clicking on an advertisement
- CPC: cost per click = cost / clicks
- CTR%: click-through rate, it tells you the quality of an advertisement. How many people
clicked out of the total people that saw the ad? = clicks / impressions
The higher the clicks-through rate, the higher the people that will arrive at the landing page
(destination of the click), the higher the probability to sell
- Conversion: action that is counted when somebody interacts with an advertisement, and then
takes an action
- CR%: conversion rate = conversions / clicks
- Advertiser: the one who pays the money to get his advertisements shown. Also called “retailer”
or “merchant”
- Publisher: the one who gets money for showing the ads on his site/app. Publishers can be an
“affiliate” or “reseller”
Full-Funnel: a way to understand how users react to your advertising.
IMPRESSION
CLICK
Media agencies: manage the relationships and advertising activities, instead of advertisers.
E.g. WPP, Publicis Groupe, Havas Group, Omnicom Group.
Ad-networks: manage the relationships on the publisher side. They replicate the media agency
model on the publisher side.
There is many technology behind: need to be specific increases.
—> Affiliates: specific partners that focus on particular activities.
Programmatic: automation.
If I want to deliver huge volumes of ads across different devices/platforms/medias, I need to be
automated.
Programmatic means that an advertiser can directly reach a publisher through technology.
3 players:
- DSP: demand side platform - an online platform where you can buy ads. Here an advertiser can
plan its activities
- SSP: supply side platform - an online platform that allows publishers to manage their
inventories
- Ad exchange: market place for ads.
Programmatic: same concept as stock exchange. Alternative to media agencies, ad-networks,
affiliates.
E.g. Google AdWords: DSP
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As there is a high need for specialization, programmatic did not break the market.
Ad server: folder where advertisers upload their ads, which are transferred/delivered to the final
destination.
Walled gardens (e.g. Google, Facebook, Amazon): they have their own solution for every part of
the digital ecosystem.
In walled gardens you need to log-in: they are able to link IDs to a name.
Omnichannel: companies that have the possibility to connect one person to many devices.
Dove Conviene: app that takes into consideration all prices and discounts in the market, and
advises you on the cheapest.
Tracking allows us to understand efficiency of ads, to know who delivered the service and how
much he should be paid.
KPI: key performance indicators, they are used for tracking.
Tune: tracks the “Click IDs” generated by the “Device IDs” because of Ads.
App stores do not share informations about whether “Device IDs” actually downloaded the app.
In order to understand if “Device IDs” dowloaded the app, I must match the “Device IDs” who
clicked with the “Device IDs” who log in the app.
Full-Funnel
and main KPIs
Main KPIs Tree
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Class 15 - MKTG
PROMOTIONS
The rise of omnichannel promotion and distribution
Archetypes of deal prone customers:
- Online deal prone customer:
Channels where procures price promotions: website, email, social media, mobile
Channels where uses price promotions: website, mobile
- Offline deal prone customer:
Channels where procures price promotions: print, shop, mail
Channels where uses price promotions: shop
- Omnichannel deal prone customer:
Uses every channel available, both for procuring and using price promotions
Sales promotion is an action-focused marketing event whose purpose is to have a direct impact
on the behavior of the firm’s customers.
- Trade promotion: promotion made from manufacturer to retailers, they provide incentives to
channel members.
- Retail promotion: promotion made from retailers to customers, they involve both price and
special displays.
- Customer promotion: promotion made from manufacturers to customers, they are often pricerelated, but can also be product-related.
Consumer promotions can be:
- Product based promotions:
- Sales
- Bonus packs
- Price based promotions: might affect the positioning of the brand.
- Sales price
- Coupons
- Refunds
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Couponing objectives:
- Direct impact on sales:
- Attract new tries
- Attract brand switchers
- Increase category consumption
- Maintaining or enhancing repeat purchase rates
- Defending market share by countering competitive promotional activities
- Retail trade related:
- Can gain in-store promotional support for the item on deal (more shelf-space, etc.)
- Motivate the sales force to sell more product to retailers
- More control on price: directly influence the retailer’s price of the item
- Integrate with advertising:
- Reinforce print/online media advertising
- Synergize with other marketing instruments
- Use a strategic tool:
- Anticipate competitive actions
- Price discriminate
- Mitigate a price increase
- Gain trial for the product
- Reach the appropriate group
What is the impact of promotions on sales?
Stockpiling: accumulate and maintain
an item for future use
Consequences of stockpiling —>
3 possible promotions:
- 3 for 2
- Free gift with purchase
- On pack coupon
Consequences of a 3X2 promotion:
- It is essentially a price-based promotion, it can have an implication in the perception off the
brand (it can cheapen the brand image)
- The promotion also has a sampling component: customers may select a hair-care product that
they would not otherwise have tried
- The real issue is: how accurate is the estimate of sales increase and the percentage of new
customers who would not otherwise have purchased the brand?
Impact of promotions:
- Accelerated regular purchases (positive): customers who buy the brand and exploit the
promotion in order to buy more
- Accelerated captured purchases —> new business for the firm
- Unaccelerated regular purchases (negative): customers who would have bought the brand in
any case
- Unaccelerated captured purchases —> new business for the firm
Summary:
Sales promotion is mainly short-term oriented, but can have an impact in the long-term.
Three kinds of promotions exist: customer promotions, trade promotions, retailer promotions.
Evaluating the effects on sales of promotions is important.
Promotions are being run on multiple channels, and need to be integrated across channels
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RELATIONSHIP WITH CUSTOMERS
Three main firm’s objectives:
- Acquisition: acquire the customer
- Retention: maintain the customer
- Satisfaction: satisfy the customer
CRM strategy: customer relationship management. It seeks to create more meaningful one-onone programs with the customer by managing detailed information about individual customers
(demographic, history, etc.) to maximize customer loyalty, satisfaction and to identify most
profitable customer (profitability).
The concept of satisfaction —>
Past experiences, word of mouth and advertising can create a problem of satisfaction.
Confirmation/disconfirmation theory: the final level of satisfaction depends on expectations
and experience. The difference between the two represent your level of satisfaction.
Customer satisfaction has an impact on profits.
Correlation between higher levels of customer satisfaction and higher stock prices.
Other side of the coin:
positive satisfaction has an impact on —>
Satisfaction represents the initial condition that may culminate with brand/firm loyalty.
Anyway, satisfaction does not imply loyalty:
- “Customer satisfaction is nice to have, but simply it is not enough if the goal is to have
customers who return”.
- “Satisfied customers aren’t necessarily loyal customers”.
- “90% customer satisfaction simply isn’t enough anymore”.
The relationship between satisfaction
and loyalty is not linear.
The competitive environment affects
the satisfaction-loyalty relationship.
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There are different types of loyalty —>
(Repurchase rate is a proxy for loyalty
but does not mean loyalty)
Switching costs:
- Real switching costs (e.g. I am not satisfied with this laptop but now I can’t afford to buy a
new one)
- Psychological switching costs (e.g. I am not satisfied with this laptop but I don’t want to buy
a new one and learn how to use it)
Customer retention
The retention rate (R) measures the percentage of customer who continue their relationship with
the firm in a given period (remember that I can retain both true and spurious loyalists)
The churn rate (CR) is the percentage of customers who end their relationship with the company
in a given period.
R = 1 – CR
Acquisition or retention?
- An average company loses 10 percent of its customers each year.
- Acquiring new customers can cost five times more than the costs involved in satisfying and
retaining current customers.
- A 5% reduction in the customer defection rate can increase profits by 25% to 85%, depending
on the industry.
Why retaining your current customer base?
1. It costs less to serve loyal customers
2. If you lose a loyal customer you lose his future cash flows
3. Willingness to pay of loyal customers is higher (premium price)
4. Amortization of acquisition costs
5. Loyal customers stimulate revenue growth: they increase purchase quantities over time (e.g.
cross-selling)
6. Positive word of mouth (or referrals)
Why loyal customers are more profitable?
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How can we quantify the value of a customer?
Customer information file (CIF):
Each CRM program starts with the creation of a customer database including information on:
- Past and current purchasing
- Contacts
- Response to marketing variables
- Value to the company
The CIF contains information on these variables over time.
We get a better picture of a customer as we accumulate more informations about him.
Who is a profitable customer? A person that over time yields a revenue stream that exceeds the
company’s cost stream for attracting, selling and serving that customer.
RFM analysis —>
A
A score is assigned to each category.
The lower RFM is assigned to the best
customer in each category.
Drivers of the RFM analysis: companies rate customers on the basis of three criteria
- Recency (R): indicates the date of the customer’s latest purchase or time elapsed (e.g. days)
since it occurred
- Frequency (F): the number of purchase occasions within a given period of time.
The most common interval is 12 or 24 months
- Monetary value (M): the total dollar amount of purchases placed during a given period of time
divided by the number of orders for the same period.
It represents the average order amount.
Total RFM score = R score + F score + M score
What is missing in RFM analysis? Costs
—> Limitation to this approach
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Customer profitability: in its most basic form, can be expressed as:
Customer profitability year1,I = (R – C) – AC
…where:
R – C = (Revenues – Variable costs) is the contribution margin generated from a customer in a
year (or another time period)
AC is the upfront cost of acquiring a customer
This definition of customer profitability misses two key factors:
1. Retention (the capability to retain the customers)
2. Time
The previous formula does not take the time value of money into account because it implicitly
assumes that the discount rate is zero.
The formula also does not take into account the risk of customer churn.
Customer lifetime value: it is a metric that lets managers to understand the overall value of
their customer base and to evaluate how well their management strategies are working.
It requires a database to track consumer behavior over time:
• Spending rate: how much money the (average) customer spends with you in each year (or t)
• The cost to acquire a customer
• Variable (marketing) costs (usually calculated as % of revenue)
• # of years the customer is likely to purchase (what percentage of customers keep buying from
you in the second and third years, etc. after they first come to you
Incorporating the time value of money
into CLV analysis:
• Assume we want to compute the
present value of a five-year customer
• We assume a 10% annual discount rate
—> You should not pay more than $173
to acquire a customer that you expect
to retain for five years.
Discount rate = i
We add to the previous formula the
multiplier = 1/(1 + i)t
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Impact of retention on CLV —>
Customer life expectancy: the number of periods that a customer is expected to continue the
relationship with the firm.
# of years = 1 / (1 – retention rate)
E.g.
Retention rate per year = 70%
CLV = 1 / (1 – 0.7) = 3.3 years
Incorporating the time value of money and retention into CLV analysis:
we add to the CLV formula the multiplier = R / (1 + i – R)t
With cost of money and retention rate, if we assume that the profits generated from a customer
are the same in each period, we can compute LCV:
M = (Revenues – Variable costs)
AC = cost of acquiring a customer
E.g. Spirit is a wireless communication service with 5 million customers:
1. The average marketing cost (including direct mail, free gifts and communication by Spirit’s
employees) to attract a new customer is $250.
2. New customers generate an average revenue of $550 and an average margin of $350.
3. On average, 67% of Spirit’s customers are satisfied.
4. Spirit retains all the satisfied customer.
5. However, 33% are dissatisfied and do not renew their yearly contract.
6. Supposing a the discount rate of 12%
Cost of acquiring a customer (AC) = 250
M = (Revenues – Costs) = 350
Retention rate (R) = 67%
Discount rate (i) = 12%
1. What is the customer lifetime value?
CLV = M * [R / (1 + i – R)] – AC = 350 * [0.67/(1 + 0.12 – 0.67)] – 250 = 271
2. What are the effects of improving initial satisfaction to 80%?
Satisfaction improved from 67% to 80%
LCV = 350 * [0.8/(1 + 0.12 – 0.8)] – 250 = (350 * 2.5) – 250 = 625
3. What are the effects of retaining half of defectors with a free phone?
Retention improves from 67% to 83.5% [(33%/2) + 67%]
LCV = 350 * [0.835/(1 + 0.12 – 0.835)] – 250 = (350 * 2.929) – 250 = 775
Both strategies strongly increase the customer lifetime value.
What are the limitations of this strategy?
1. The costs needed to improve service features provide the free cell phone
2. Whether you can really “buy loyalty” (are free phone “loyals” the same as satisfied loyals?
3. How competitors will react
4. Whether there are other (cheaper) options to increase retention (e.g. complaint service and
service recovery program)
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Summary:
Lifetime value benefits from:
1. Increased retention rate (making customers more loyal).
2. Increased spending rate (more sales from existing customers due to your new strategy).
3. Increased referral rate (getting one customer to recommend another).
4. Decreased marketing costs from better targeting, changing your channel of distribution, etc.
Customer lifetime value metrics are mainly used in relationship-focused businesses, especially
those with customer contracts.
E.g. banking and insurance services, telecommunications, membership businesses, B2B sector.
However, the CLV principles may be extended to transactions-focused categories such as
consumer packaged goods by incorporating stochastic purchase models of individual or
aggregate behavior.
SERVICES
Globally, services account for more than 80% of the GDP.
Many firms are purchasing services to replace products (e.g. document preparation, hosted
software, etc.).
Firms known for their manufactured goods are now generating strong revenues for services.
Service sectors:
- Government
- Private nonprofit
- Business
- Manufacturing
- Retail
How are services different from manufactured products?
A product is anything that can be offered to a market that might satisfy a want, need or desire.
E.g. physical goods, services, events, organizations, places.
Distinctive characteristics of services:
- Intangibility
- Inseparability of production and consumption
- Variability
Continuum of evaluation for different
types of products —>
How do customers determine whether
they have received good service from a supplier?
—> Servqual
It is a survey/questionnaire
Service quality dimensions:
• Reliability: ability to perform the promised service dependably and accurately.
• Responsiveness: willingness to help customer and provide prompt service.
• Assurance: employee’s ability to inspire the customer’s trust and confidence in the service
provider.
• Empathy: caring, individualized attention given by the firm and its employees to customers.
• Tangibles: appearance of physical facilities, equipment, personnel or printed materials.
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