Week 1: marketing principle 1: All customers differ
Customer heterogeneity
➢ 5 Sources of customer heterogeneity
1. Big five traits: openness, consciousness, extraversion, agreeableness and neurotism
2. Life experiences
3. Self-identity: purchase goods will support their desired self-image
4. Marketing activities: firms attempt to build linkages between their brands and
prototypical identities as meanings
5. Functional needs
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Latent customer heterogeneity: potential differences in desires that are
unobservable and have not been manifested in different customer purchases or
behaviors
➢ Understanding customer heterogeneity is important to...
o Avoid the risk of losing customers and market grows and competitors
innovate or barries break down: this might lead to inefficiencies, lost sales
and financial decline
o Target multiple segments: firms can cater to different customers by offering
a variety of goods. This can be effective, but also costly and limitations or
barriers might prevent firms from meeting all needs
o Niche strategy:focus on a specific subgroup; strong brand loyalty and
expertise but limitations
o Low cost strategy: offer costs at lowest possible cost
➢ Approaches managing customer heterogeneity
o Mass marketing:
→ Undifferentiated marketing
→ Uses the media to appeal the entire market
→ Same single message, ignores customer heterogeneity
→ Reaching largest audience, largest sales revenues
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→ Lower profit and margins; high competition
o Niche marketing
→ Marketing efforts on well defined narrow segments of customers
→ Competitive advantage, price premium
→ Easier to predict future trends in a segmented market
o One-to-one marketing
→ Apply marketing strategies to specific customers
→ Extreme form of segmentation; unique product or service per
customer
→ Usually higher prices
→ Internet useful tool
➢ Segmenting, targeting, positioning approach
 Firm focuses on smaller, homogeneous segments of customers
 Segmenting
▪ Dividing the market into groups of similar characteristics
▪ Segment on the basis of unique needs and desires
▪ Identify key purchase attributes (needs or desires) that customers
consider when purchasing decision. Collect responses about the
importance of the attributes. Analyze data by grouping similar
questions and customers
▪ Needs similar withing group, but different across groups
▪ BASE: needs and desires / DESCRIPTORS: observable
characteristics that help find and classify customers
▪ Steps:
• Identify and refine potential customers needs and
descriptors
• Collect data from random assortment of potential
customers on importance of needs to purchase decisions
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Use needs to segment the market into homogeneous
customer groups
Name segment
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→ CLUSTER ANALYSIS: technique uses customer preferences to cluster
individual customers into a given number of groups
o Large set of heterogenous consumers into small
homogeneous groups
o We use this technique to discover how consumers differ and
cater to unique needs of chosen target consumer
o 2 Steps:
▪ Segmenting: subsample of customers with
homogeneous bases
▪ Describing: use descriptor variables to explain how the
subsamples differ, derive efficient targeting strategies
tailored to each subsample
o Criteria to assess the validity of the model:
▪ Identifiability: derived segments are good
representation of actual segments of customers
▪ Stability: are the derived segments likely to change over
time?
▪ Responsiveness: will each targeted segment respond to
the planned marketing strategies?
▪ Viability: can the firm achieve its financial objectives
with the planned segmentation scheme?
→ FACTOR ANALYSIS:
• Data reduction technique that can be used to identify a small
number of latent factors that explain the variable in a large
number of observed variables
• We use it to condense large pool of preferences or wants into a
short set of similar characteristics
• Process: we have a large number of measured variables from a
survey; factor analysis algorithm systezises these variables into
smaller sets of latent factors that capture the meaning of the
measures. Categorize measured variable by factor on which it has
the highest loading and interpret each latent factor
-retain; factors with eigenvalue greater than 1
-factor loading: strength of the association between the
variable and the factor
 Targeting
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Selecting best customer group
Each segment rated in two dimensions: market attractiveness &
competitive strenght
• Market attractiveness: external market characteristic that
make a segment strategically valuable to serve
• Competitive strength: relative strength of a firm compared
to competitors at maintaining and securing the share in a
segment
Criteria for an ideal target segment:
o Based on customer needs; customer care
o Different than other segments; little crossover competition
o Differences match firms’s competitiveness; firms can
execute withing resource constraints
o Sustainable; firms can keep consumers
o Customers are identifiable
o Financially valuable: valuable in the long-term
→ GE MATRIX: to visualize and select target segment
o Bubble size: size of the market segment
o X axis: competitive strenght
o Y axis; market attractiveness
 Positioning
▪ Improving your relative advantage in the minds of your
targeted group
▪ Changes in actual offering and perceived offering
▪ 3C’s as inputs: customer, company, competitors
▪ Every action affects your positioning: place, price...
→ Positioning strategies
o Perceptual maps: map depicts customer segments, competitors
ad a firm’s position in a space defined by purchase attributes
identified in the segmentation process
o Repositioning: a firms shifts its targeted marketç
→ Positioning statement:
o Captures how a firm hopes to appeal to customers in the
target segment
o 3 key questions:
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Who are the customers?
What is the set of needs that the product fulfills?
Why is this product best option to satisfy customer needs?
➢ STP APPROACH: helps firms address marketing principle 1 by segmenting
customers into relatively homogeneous groups, based on their individual
preferences. The firm selects segment that is attractive to target. Their
positioning activities should align all marketing strategies to match customer
preferences and influence their decision criteria. Best fitting solution for
targeted customers.
➢ CUSTOMER CENTRIC ALIGNMENT:
o Customer centric approach: company – wide philosophy that places
customers needs at the center of the firm’s strategic process
o This method ensures internal alignment
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➢ FRAMEWORK FOR MANAGING CUSTOMER HETEROGENEITY
Convert inputs into outputs
INPUTS:
- All potential customers: bases and descriptors. Perceptions of specific
brands, ...
- Your company : SWOT analysis
- Your competitors: SWOT analysis
OUTPUTS:
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Industry segmentation
Target segment: attractiveness of a local segment, firm’s relative strength,
pereption of the target group
o Discriminant analysis: build a model and identify firm’s ability to identify
a cluster or segment using accessible demographic variables
o Classification analysis: technique that reports a % accuracy at predicting
a customer segment for a given set of demographic variables in order to
apply a segment prediction to a group of no surveyed customers
Positioning statement
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Week 2: marketing principle 2: All customers change
Customer dynamics
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Managers developing marketing strategies must account for static variation VS
dynamic variation that arises as customers change over time
Segmentation of customers is the best tool to deal with customer heterogeneity,
however, customers in a once homogeneous group develop very different
preferences
CUSTOMER DYNAMICS: changes in customer preferences that occur over time
o Firms must understand sources of customer dynamics and adapt to retain
existing customers and address future needs to improve firm performance
➢ Sources of customer dynamics
o Discrete life events: events that have immediate impacts on many aspects
of customers purchase decisions
▪ High rate
o Aging effect: changes in persons’ preferences as they grow older
▪ Slow rate
o Customer learning-effect: process where users of a particular good
become more familiar with the product and thus are more likely to
repurchase in the future
▪ Rate of change: medium
o Product lifecycle: how customers purchase criteria and merketers’ actions
tend to change as the product category matures.
▪ Rate of change: medium
o Changes in environment: changes in the economy, government
▪ Rate of change: slow to immediate
→ Interaction between sources might occur: indivi lifecycle interacts with life and
environmental effects
➢ Approaches to manage customer dynamics
o 3 categories listed by speed of response; low to fast
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Lifecycle approach:
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Uses generic customer stages of growth and their position in
the lifecycle to determine customer preferences and
associated strategies
• Advantages: simple and easy to use
• Disadvantages: averages consumers and assumes they follow
one curve and ignores causes of customer dynamics
• Customer lifecycle: predict shopping behavior and decisionmaking. How individuals typically change as they age and
reach common age-related milestones. A marketing strategy is
designed to cater to average customer in each stage
• Product lifecycle: 4 typical acceptance stages and the firm
marketing strategy should reflect the stage:
o Introduction: launch, high prices, relevant features
unknown
o Growth: product gains acceptance, retaining
customers, users comfortable with good, price
sensitive consumers
o Maturity: widely accepted product, market competitive,
profit reduction, niche segmentation
o Decline: destructive competition and changing
consumer needs, decline profits, firms exit the market
→ Learning effect can capture both customer and product
lifecycle
• Industry lifecycle: there are 5 stages
o Early establishment of its range and boundaries
o Innovation stage to set a “dominant design”
o Shakeouts stage: economies of scale
o Maturity: firm focuses on market share and cash flows
o Decline stage: sales decline for the industry as a whole
Customer dynamic segmentation approach:
• Apply some of the insights of marketing principle 1
• Focuses on understanding and segmenting customers based
on their migration patters
• The model considers where customers currently are and how
they are moving through different stages in their relationship
with a firm
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Evaluates existing customer's behaviors or needs to
understand temporal differences (customers are temporarily
similar in each stage)
Key advantages:
o applies differences in customers to the issue of
customer dynamics
o managing customer dynamics into 3 stages matches
way firms think and customers’ temporal position in the
firm’s customer portfolio is relatively informative
ADV: combines lifecycle and segmentation methods, identifies
temporally homogeneous groups
CONS: segments not perf homogeneous
Acquisition, expansion, retention model (AER)
o Acquisition: stage of customers where first evaluate
and begin to deal with a firm or before the first contact,
they start to learn about a firm's offerings and how to
transact with the firm. Early customers have similar
needs
o Customer onboarding: planned process of introducing
new customers to a firm to improve their long term
satisfaction and loyalty. Successful onboarding
reduces costs, enhances cross-selling and increases
retention rates
o Expansion stage: firms try to upsell or cross sell to
expand sales and engagement with existing customers,
in addition to predicting and adapting to customers’
future migrating paths.
o Retention stage: deals with customers who are
migrating due to a basic propensity to switch. Some
retention strategies: increase switching costs,
enhancing brand loyalty that links product to a person’s
self-identity or relational ties...
Hidden Markov model analysis:
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Some of the disadvantages of AER model can be overcome if
the firm has data reflecting customers behavior over multiple
periods of time
HMM: statistical model that can uncover “states” of customer
behaviors as well as those state evolve
o Uses changes in past customer behavior to identify
customer states and model the probability of transition
among those states
o Different types of behaviour coonsumers might exhibit
at different points in time
o Each “state”: common behaviors exhibited by some
groups of customers at some point int their relationship
with the firm
We use this to understand the dynamic states of customer
relationship with a business, dynamically segment customer
bases, predict when a customer might change states, seek to
build customer relationships
INPUTS: customer behaviors, firms actions
OUTPUTS: nr of feasible states in the data, transition
probabilities, initial prob that a customer is in a state,
conditional probability of a behavior given customer’s hidden
state, effect of marketing in moving customers across states
STATES:
o Transactional state: low levels customer trust,
commitment, dependence and relational norms
o Transitional state: higher profit potential, cooperation
and growth of sales, short stay
o Communal state: trust, commitment, profit potential,
cooperation and sales growth
o Damaged state: low levels of trust and commitment
and very low relational norms and cooperation
Lost customer analysis:
• Firm contact customers that have migrated away to identify
the cause of this change, then it works backward to fix the
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problem and ensure other customers do not leave for the
same reason
Data of past cuatomer = rich info
Lost customer as diagnostic tool
BUT, by the time the firms collect the data, customers already
gone and takes a significant number of customers lost to
realize the strategy is not working
Strengths: regular intervals for contacting lost customers to
identify reason of transition
o If the lost customer is in the target segment:
▪ Fix the problem
▪ Retention strategies to build brand and
relational loyalty
o If the lost customer not in the target segment:
▪ Evaluate an expansion strategy to address new
subsegments of customers
▪ Change acquisition criteria to avoid paying
acquisition costs for poorly fitting customers
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Choice model analysis:
• Model that predicts the likelihood of observed customer
choice or responses using data about that customer’s
characteristics and past behaviors as well as the firms
marketing interventions.
• Use the model to determine a customer’s most likely choice
when faced with many product alternatives
o Or to determine the most important factors influence
choices
o OR to segment and target customers according to their
similarities in their choices
• INPUTS: strenght of attributes of each option, dep and indep
variabl
• OUTPUTS: binary; chooses or not the option
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Customer lifetime value approach (CLV):
• Approach to manage customer dynamics
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Attempts to capture the true contribution of each customer by
determining the discounted value of the sales and costs
associated with this customer across the expected migration
paths followed during its relationship with the firm
It accounts for customer heterogeneity because it is
calculated at individual level and customer dynamics as
discounts cash flows in the acquisition and expansion stages
while integrating cross selling and retention expectations for a
customer predicted migration trajectory
Need: insights into probable future migration paths
CVL provides necessary infor to make option AER decisions;
manage profitability by selection right target customers and
resource allocation
AER strategies focus on max CVL
Firm’s value = sum of each customer overall value: customer
central firm
CVL = (Mi – Ci) / (1-ri + d) -Ai
Mi: margin of customer i in $
Ci: annual marketing cost customer i
Ri: retention rate
D: discount rate %
Ai: acquisition cost
→ If negative: inactive customer
→ If positive: active customer
→ Method quantifies future discounted profitability of a customer
 RFM variables put customers in rank-ordered groups based on their value
in past year: simplified version CLV. RFM analysis for segmentation. 3
readily available customer behavior
o R: recency or time elapsed since last purchase
o F: frequency of purchase in last period
o M: monetary purchase in last period
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 Customer referral value (CRV): lifetime value of a customer bringing you
another customer: highest CLV do not always generate highest CRV
➢ Framework managing customer dynamics
o INPUTS: your customers, past marketing programs, lost customers
o Approaches: AER, lifecycle, lost customer, dynamics segmentation, CVL,
HMM, Choice model
o OUTPUTS: Segmentation of customers, AER positioning statements, AER
strategies; what strategy works best for each segment?
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Week 3: marketing principle 3: All competitors react
Managing SCA sustainable competitive advantage
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Managers need to anticipate competitors immediate and future reactions and build
barriers
Manage SCA to ensure long term success
First firms need to focus on targeted customers, then build SCA
➢ Sustainable competitive advantage
o SCA: firm can create more customer value than competitors for the same
set of products or service categories. Other firms find difficult to replicate
the strategy
o Criteria good SCA:
▪ Customers care about what SCA offers
▪ The firm does it better than competitors, which generates relative adv
▪ SCA hard to duplicate or substitute
➢ Marketing based sources of SCA
o BRANDS
▪ Brand image resides in consumers' minds, difficult to duplicate
▪ Facilitates habitual buying through awareness
▪ Provides identity benefits to consumers
▪ Most effective in large consumers markets
o OFFERINGS
▪ Cost benefits, performance adv
▪ Access to distribution channels
▪ Most markets, technology-based business
▪ R&D relevant to development of innovative products
o RELATIONSHIPS
▪ Trust, commitment and interpersonal reciprocal bonds hard to
duplicate
▪ Business-to-business markets, services of complex products
▪ Two-way communication important
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→ Often these 3 sources work synergistically to give a firm strong relative position
➢ Competitive reactions; fundamental assumption marketing strategy
o Adaptation and significant investment important for SCA
o Competitors displace firms by overcoming their SCA in many ways:
▪ Technical innovations disrupt existing offerings
▪ Exploit changes in customers’ desires due to cultural, environmental
or other factors (brand becomes less relevant)
▪ Indvidual entrepreneurship constantly seeking better ways to solve a
problem
▪ Me too copycats improve the effectiveness of an existing execution
➢ Evolution
o Strong customer relationship
o Industrial revolution: brand as signal of quality
▪ Mass production; economies of scale
▪ Geographically dispersed consumers
o Technology revolution: offerings and innovations key sources of
differentiation
▪ Digital and knowledge products
▪ Fest technological change and turbulence
o Services revolution: all 3 BOR strategies essential for success, relationship
more important
▪ Economy moves from products to services
▪ Disintermediation removes middleman between producer and
consumer
➢ Approaches managing SCA
o Customer equity preference
o Total lifetime values of current and future customers, which is the sum of
a firm’s brand, offering and relational equities;
▪ Total discounted lifetime values of all of its customers
o Customers as financial assets, measured and managed as any other
firm’s asset
o BOR equities; firm’s customer equity and strongest barrier SCA
o BOR equity:
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Relationship equity: set of relational assets and liabilities
linked to boundary-spanning employees and the social
network associated with the offering and experience that
add or subtract from value provided by the firm offering
▪ Brand equity: set of brand assets and liabilities linked to a
brand; name and symbols add or subtract value from
offering
▪ Offering equity: core benefits relative to costs of an
offering, stripped of any influence from brands or
relationships
o Brand; measured using consumer preferences or sales
o To get the relative size of SCA: track brand equity over time
o Brand equity: incremental preference a product’s marketing effort
receives solely due to its brand identification
o Adding each customers’ equity generates the firm’s overall equity
→ Experiments: procedure undertaken by managers to discover, test or
demonstrate a marketing hypothesis
o Reveal causes and effects; assign randomly customers to
treatment and control groups and see how sales vary when a
marketing strategy is implemented
o Natural experiments
o To determine causal effect between specific BOR investment and
marketing outcome and choose among BOR strategies according
to their financial impact
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➢ Framework for managing SCA
o INPUTS:
▪ Positioning statement
• Answer 3 key questions, objectives of the firm
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• Target segment ; external consumer
• AER ; existing consumers
AER strategies
• Process to reach objectives presented positioning statement
• Key guidance invest to acquire and keep customers
• What strategies work best for each AER stage?
Long term technological, regulatory, socioeconomic trends
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• Can disrupt SCA, changing environment, future trends
o OUTPUTS:
▪ SCA description: roots long-term competitive adv
▪ BOR strategies
• Brand strategies, offering innovation strategies and
relationship marketing strategies
o APPROACHES: brand, offering and relationship equity stack, AER strategy
and BOR equity grids, brand and relationship mgt and innovation process
▪ Multivariate regression, choice models, field experiments and
conjoint analysis
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Relationship-based SCA (ch. 7)
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Relationship marketing; process of building and maintaining strong customer
relationships which can produce relationship equity
Relationships more effective when services
Customer relationship management (CRM): managerially relevant, organizationwide, customer focused application of RM, using IT to achieve performance
objectives
➢ Relationships as a SCA
o Relationship equity: set of relational assets and liabilities linked to
boundary-spanning employees and the social network associated with the
offering or experience that add or subtract from the value provided by a firm
offering
o Relational based decision making
o Focus on relationship marketing as result of trends
o Consumer want trust
➢ Relationship marketing theory
o Commitment and trust central to strong business relationships
▪ Commitment: desired to mantain a valued relationship
▪ Trust: confidence in a relationship partner’s reliability and integrity
▪ Enhances cooperation and financial perfomance
o Reciprocity and gratitude contribute to the effectiveness of RM strategies
o 3 determinants of exchange performance: dimensions that affect the
relationship exchange:
o Relationship quality: diverse interaction characteristics, trus,
gratitude... capture unique aspects of the relationship
o Relationship breadth: number of relational bonds with exchange
partner. Many interpersonal ties; provide info, profit opportunites...
o Relationship composition: effective seller relationship portfolio with
many diverse contacts, not just authorities
➢ Benefits relationship equity
• RM activities help build relationship equity, which influences customer
behavior, improving seller’s financial outcomes
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4 mechanisms:
o Cooperative behaviors: coordinated actions between partners for a
mutual goal, increasing flexibility and adaptation. Trust essential
o Relational loyalty: customers provide benefits due to their relational
attitudes and ties with the seller or its employers. Relationships
positively influence this loyalty, risk reduced
o Referrals : communication by a customer about a seller to others.
Relational bonds increase willingness providing referrals
o Empathic behavior: impact on a customer or relational partner’s
behavior based on their sensitivity to the seller’s situation. Customers
who like their sellers will likely attribute failures to external effects
➢ RM strategy; building and mantaining relationships
o Building: several RM factors affect relationship and relational equity
▪ Conflict
▪ Sellers's expertise: knowledge, experience
▪ Communication: amount, frequency and quality of shared info
▪ Relationship investment: time, resources and effor investments
▪ Similarity: common values, goals
▪ Dependance
▪ Relationship duration
▪ Interaction frequency: # interactions per unit of time
o Mantaining: preventing bad more effective than promoting good in long run
o Perception of unfairness and betrayal; stronger impact on
relationships
▪ Damage cooperation, flexibility and performance leading to
punishments
o Some firms actions might encourage those behaviors; loyalty
programs create imbalances
o Key: prevent negative perceptions, while continue encouraging
positive RM practices
➢ Factors affect customers’ desire for relationships
o Address heterogeneity to allocate RM resources across custoomer portfolios
as RM not affective for all customers
o RM to address uncertainty
o Relationship orientation, desire to engage in a strong relationship
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Low; RM strategies might impose costs without providing equivalent
benefits
o Key factors:
o Relationship proneness: some customers naturally included to
engage in relationships
o Exchange and product uncertainty: higher uncertainty increases need
strong relationships
o Product category involvement and dependance
o Relational norms: value placed on relationship within a context
o Relationship centric reward system
o Services
o B2B markets
o Emerging markets
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➢ Relationship dynamics and lifecycle stages
o Relationships operate according to lifecycle process, during which they
develop, shift and dissolve according to path dependent stages
▪ Exploratory/early stage: limited confidence in partners ability and
trustworthiness
• Gratitude, communication and competency based strategies
to build reciprocity norms
▪ Growth/developing stage: escalation of reciprocated transactions
and increased affective attachment produce trust, commitment and
satisfaction
• Bilateral investments to exploit the relationship
▪ Maturity/mantaining stage: partners calculative trust replaced by
knowledge and affective based trust, communication and other
relational norms reinforce common goals
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Avoid neglecting customers by affecting communication and
investments to limit unfairness
Decline/recovery stage: in response to specific events
• Use communication and compromise options to rebuild
relationships and move beyond exchange based solely on
dependance
➢ Managing relationship based SCA
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o Building relationship equity:
▪ Two steps:
1. Develop a strong foundation supports the relationship building
and maintenance
2. Implementing targeted relationship marketing and loyalty
programms
a. Social RM program: focus on social engagement and
personalized experiences, lead to repeat sales
i. Stronger bounds with salespeople rather than
with the firm
b. Structural RM program: provide customers with
convenience and productivity, offer long term value.
Provide investments that customers might not make
themselves
i. Personalized services
c. Financial RM program: involve discounts, giveaways
and special offers, competitor easily match this
incentives. Provide economic beneftis
i. Customers might be less loyal
o Maintaining relationship equity:
▪ Negative event can overshelm an accumulation of positive activities
▪ Long-term RM success depends more on preventing the bad than
promoting the good
▪ Negative activities twice as strong an effect as positive activities
▪ Companies sometimes engage in actions generate and encourage
perceptions of unfairness or betrayal
▪ Managers should find antidote revising RM and loyalty programs to
make the benefits of targeted customers less visible
➢ Measuring relationship equity
o Relationship equity; key measure of the effectiveness of relationship
marketing effots should be regularly assessed for continuous improvement
o Lifecycle stage metrics to measure assess relationship equity
o Link RM programs to CLV
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→ Multivariate regression: statistical approach used to quantify the sign and
magnitude of the relationship between a focal dependent variable (marketing
outcome) and several independent variables (marketing efforts).
1. We can discern whether a particular marketing intervention truly
influences a marketing outcome
2. Learn the sign of the relationship between marketing intervention and
an outcome
3. Multivariate regression helps researches compare the relative
strength of multiple marketing interventions
4. Multivariate regression, we can control for confounds
→ Discrete Choice Models: statistical model used to analyze or predict individual
decision-making behavior, when the choices are discrete or cetegorical in
nature.
→ Network theory:
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Week 4: marketing principle 3: all competitors react
Offering-based sustainable competitive advantage
→ Offering: captures tangible products and intangible serivces provided by the firm
o Represents the core of its customers value proposition and crucial for
generating value through better functionality, lower cost or innovative
solutions
- Allocate resources to R&D to improve offerings
- Innovation: process of creating substantial new value for both customers and the
firm by altering key dimensions of the business
o Critical role ensuring survival of the firm
o Innovative products or unique experiences
o Involves change leading to differentiation and SCA
o Innovations easy to copy
 Innovation radar: framework captures many ways a firm can innovate by defining
the innovation space by what, who, how and when aspects:
o What: change what the firm offers; offering, platform, solutions
o Who: change who the customer is; customer, experience, value capture
o How: change how the firm sells to customers; processes, supply chain,
organization
o Where: change where to sell to customers; brand, network, presence
 Best beats first
➢ Benefits offering equity:
o Offering equity: the core value that the performance of the product or
service offers the customer
o A product similar to competitors’ creates little value or SCA
o Barriers short duration
o New offerings enhance short term and long term value of the firm
▪ Better performance to customers
▪ Customers switch from competitors to innovator
▪ Brand enhancement
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Potential benefits offerings; customer, employee and market
expansion
➢ Offering and innovation strategies:
o Marketing contributes to and defines offerings and innovation strategies in
two main ways:
▪ Helps the firm develop innovative offerings by collecting customer
input and forecasting trends
▪ Responsible for launching the new offering to customers to generate
sales with acceptable profit levels
➢ The stage-gate approach:
o Stage-gate development process: process most firms rely on to increase the
speed of their offering development and enhance their likelihood of success,
while also reducing development costs
▪ Divides development into stages
▪ In each stage, the feasibility of the new development project is
evaluated from multiple perspectives: customers, financial,
technology
• Evaluators cannot be part of the project to avoid designer’s
curves bias
▪ Plenty of opportunities to cancel the project at early stages; better
resource trade-off decisions
▪ Less risky and easy evaluation offerings pass stage gate quickly
→ Stages:
o Concept and Definition: potential ideas, concept and feasibility
assessment, project definition
o Design and Development: process design and developments and
financial feasibility
o Validation and production: market launch planning, product
manufacturing and validation; evaluation of launch plan
o Final audit: final product assessment, reflection previous steps
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➢ Repositioning strategies:
o Innovation can result from repositioning an existing offering, removing or
adding features
o RED OCEAN VS BLUE OCEAN
▪ Red ocean strategies:
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Red markets very competitive, low prices and incremental
innovations, known market place
• Claim differentiation
• Low profit levels
• Must beat existing competitors
• Attempts to capture a portion of existing market demand
Blue ocean strategies:
• Less competitive but risk of failure
• Less numerous but more radical and repositioned offerings
focused on creating new markets
• Success; higher profit levels
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New market with less competition
Transforms image of competitors brands, features become
negative attributes in new market
Create new market demand
Introduction of unexpected features and change value
proposition
➢ New technology-based innovation strategies
o Technological innovation can undermine a firm’s leadership position in a
market, even if it is doing everything else well
o Sustaining technologies: technology exploited by market leaders (to
improve the performance of established products) , which produce
continuous incremental improvements over time.
o Disruptive technologies: technology that presents highly different price and
performance characteristics or value proposition. Complete different way to
deliver products or services
▪ Initially underperforms established products
▪ Difficult recognize threat of a disruptive technology
▪ Performance trajectory much steeper than for a sustaining
technology
▪ Small customer segments initially
▪ More risk
▪ Underperform established products in the short term
➢ Launching and diffusion innovative offerings:
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o Offerings fail to meet business objectives for 2 reasons; poor design or poor
launches (diffuses slowly as it is not appropriately targeted, positioned or it
is no competitive)
o Success of a new launch; how fast and extensively it diffuses
o Two main category factors determine most effective launch strategy
▪ People-based factors
▪ Product based factors
▪ These influence innovation diffusion
➢ People based factors
o Classify consumers into groups according to their propensity to adopt new
products and persuasive arguments will prompt them to adopt
o Adoption lifecycle; 5 groups of potential users
▪ Innovators; first to adopt
▪ Early adopters: see benefits of new technology
▪ Early majority: pragmatic consumers, need to be convinced
▪ Late majority: want more evidence
▪ Laggards: want more evidence and hard to persuade
o Crossing the chasm; process of a new firm successfully moving from early
adopter to majority groups. Gap between early adopters to majority
o Psychology of adoption:
o Social proof: looking at others way to determine what to do
o Authority: sense of respect for authority and status
o Scarcity: when availability is limited place more value
o Prospect theory: perceived value for an objective gain or lost
➢ Product based factors
o Product characteristic can explain variation in the speed of diffusion
o 5 factors:
▪ Relative advantage: perceived high relative advantage of a product,
better than existing offering
▪ Compatibility: how consistent new products are with their existing
values, uses and experiences
▪ Complexity: difficult to understand or to use
▪ Trialability: opportunities to try an offering, free samples
▪ Observability: offering benefits are highly visible to others
➢ Managing offering based SCA
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o Steps:
1. Firms must develop an offering / offering portfolio that provides
customers with the largest relative advantage among all competitors in
the market
a. Significant advantage speeds diffusion
b. Stage-gate development process to speed their development and
reduce costs
2. STP the new offering in a way that accounts for people and productbased diffusion factors
3. Firms need to manage customer migration from innovators and early
adopters to early majority stages
a. Accelerate product acceptance and ensure launch success;
devote R&D resources and marketing to a few segments and
persuade gatekeepers who will persuade the rest.
➢ Research approaches for designing and launching new offerings:
o Conjoint analysis:
▪ Conjoint design: attributes and levels, type of conjoint selecting
profiles
• Willingness to pay:
▪ Conjoint analysis: recovering part worth utilities, identify segments.
Respondents rate several profiles and use linear regression to recover
part worth utilities (underlying value of each product attribute) : rating
= b0 + b1*topping ...
▪ Modeling methodology with which marketers can design and develop
new products by thinking of products as bundles of attributes and
then determining which combination of attributes is best suited to
meet the preferences of customers
▪ Product design requires making tradeoff decisions. Ask for tradeoffs
and use realistic settings or diffusion scenarios
▪ Products represented as bundles of attributes, levels of each
attribute define the product
▪ Improve decision making and avoid unsuccessful launches
▪ Evaluate value of different attributes and design and optimal new
offering for a targeted customer segment
▪ Test marketing and experimentation to try out different launch
scenarios
• Diverse locations: empirical model provide forecast of national
and global sales
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•
Ensure marketing and production match expected demand
→ Part worth difference between 500$ and 600 $ phone = 25, each part-worth unit
is worth 100:25=4 $. Thus, dollar value of one unit of utility is 4$. Compute the
$ value of utility for rest of attributes to determine willingness to pay.
→ Attribute importance: attributes PW-utility range /sum all attributes range of
PW-utility
➢ Bass model
o Seeks to predict diffusion
o Model that uses social contagion to predict adoption rates of new products,
also capturing product-based factors such as pricing and advertising levels
o Only first-time purchases
o Combines the coefficient of innovation, which reflects a person’s propensity
to adopt a product independent of the number of previous adopters; the
coefficient of imitation or propensity to adopt based on existing adopters
and size of the market
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Week 5: marketing principle 3: All competitors react
Managing brand based SCA
Brand: name, design, term and symbol or any other feature that identifies one seller’s
good or service as distinct from those of other sellers
Brand elements: elements used to identify a brand, including its name, symbol, package
design and any other features that sere to differentiate that brand offering from
competitors
➢ Brands as SCA
o Build brand awareness and images among customers can produce a strong
barrier
o Brand related benefits stem directly from the firm’s strategic positioning:
positioning statements MP1 and MP2 key info design brand
o Brand equity: set of brand assets and liabilities linked to a brand, its
name and symbol that add or subtract value provided by the firm’s
offerings
▪ Sum of all the customers lifetime value (CLV) associated with all
future and existing customers that can be attributed to a firm's brand
o Can influence customers behavior and brand equity captures the value of
those behaviors to the firm
o Brand equity lies “in the mind of the customer”, difficult to copy, but also
difficult to change
➢ Associative network memory model of brand equity
o Human mind is a network of nodes and connecting links
▪ Key characteristics of brand, which influence its brand equity capture
as nodes and linkages
o Brand awareness or familiarity: ability of a customer to identify a brand
indicated by how recognizable the elements associated with the brand are
▪ Frequency at which people name the brand
o Brand image: customers’ perceptions and associations with the brand are
represented by the links of brand name node to other info nodes in the
model
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o Many ways to strengthen or build positive linkages to a brand node, to ensure
that the brand identity matches the ideal positioning in the target market
o Brand strategy starts by building awareness, then build positive linkages to
nodes to establish an identity that matches target customers’ needs in a
cost-efficient manner
➢ Benefits of brand equity
o They can improve firm’s sales, reduce costs and make it more difficult for
competitors to encroach on the firm business
o Brand can change how people think, difficult for customers ignore brand
effects; change customers’ actual experiences
o Sales growth, profit enhancement, and loyalty effects
▪ Brands easier attract new customers, who perceive less risk, higher
quality... when strong equity
▪ Easier launch new products when strong brand equity as it provides
protection
▪ Profit is enhanced by reducing costs or charging higher prices
▪ Easier access to sales channels
▪ Customers more loyal; favorable attitudes that skew customers
perceptions and behaviors
▪ Repeat or habitual purchases
• True loyalty: loyalty manifested in consumers’ positive feelings
and actions
• Spurious loyalty: loyalty manifested in ambivalent or negative
feeling; first opportunity they will switch brand
• Latent loyalty: loyalty when customers express positive
attitudes but fail to buy a firm good due to lack access or
prices beyond mean
➢ Brand strategies
→ Brand positioning
o It reflects how and where the firm hopes to appear in customer minds
o It reflects additional aspirational goals of the brand including awareness,
key associations
o Positioning statements capture the essence of the brand’s desired image
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o AER strategies based on different customer personas and stages offer
further insights but should remain consistent across personas and
stages; differentiated brand strategies not so feasible
o Elements necessary to build brand strategy:
▪ Brand objectives: what the firm needs to accomplish as
performance outcome
▪ Brand awareness: describes the firms’ desired level of recognition
as demonstrated by target customer ability to recall a brand name
▪ Brand relative advantage captures brand’s points of difference or
key ways it differs from its competition: Points of parity: aspects if
the brand that might not be unique but still required by customers
in the target market
▪ Brand sustainability: how the brand is going to maintain its relative
advantage over time, by generating an exceptionally high level of
awareness among difficult-to-reach decision makers or
maintaining a though-to-achieve but strong image that matches
target customer’s self-identity
▪ Brand image: high level abstract perspective on the brand
network, according to what comes to customers’ minds when
they think of the brand
▪ Brand associations: describes specific words, colors, logos,
emotions linked to a brand
▪ Brand identity: pulls it all together and describe who the brand is
→ Brand architecture:
o Defines both rationale and structure among the firm, its products and its
brand / product extensions ; how the brand is used at different levels in
the organization
▪ House of brand architecture: branding style where a firm focuses
on branding each major product with its own unique set of brand
elements
▪ Branded house architecture: branding style uses a single set of
brand elements for all products and services provided by the firm
▪ Endorsed brand strategy (hybrid brand structure): strategy that
suggest the approval and imprimatur of the brand
▪ Sub branding (hybrid brand structure): strategy assign some major
product categories
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→ Brand expansion
o Describe efforts that firms use to launch new offerings by leveraging an
existing brand, whether through line or category extensions
o New brand offering that is in the same product / service category but
targets a different segment of customers
▪ Brand line extensions: new brand offering that is in the same
product category but targets a different segment of customers,
usually with slightly different set of attributes
▪ Brand category extension: new offering moves to a complete
different category
• BENEFITS:
o Accelerate new product acceptance by reducing
perceived risk
o Lower cost new product launches by building on
established brands
o Reduce time needed to build brand
o Increase probability of gaining channel access by
reducing perceived risk
o Help enhance image of parent brand by linking
newer product
o Expand size of the market the firm canaccess
➢ Guideline to improve success brand extensions
o There must be perceived fit between parent brand’s image and the
extension on dimension relevant to customer
o Brand extensions can be stretched further if done incrementally
o Higher quality brands typically can be extended further
▪ Vertical extensions: planned process where a firm changes an
offering’s price and performance positioning over time.
▪ Brand extensions can be made upmarket (new product
differentiated some way) or downmarket (elevate and differentiate
parent brand)
➢ Managing brand based SCA
o 3 steps building brand equity
▪ Building high level of brand awareness
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▪
▪
Link brand name to brand’s points of parity and difference to define
relative advantage
Building a deep emotional connection or “relationship” between
brand and targeted customer; strong barriers
➢ Integrated marketing communications
o Process of designing and delivering marketing messages to customers while
ensuring they are relevant and consistent over time and channels
▪ Advertising: persuade customers to act, think in favorable way for
firm to increase awareness, effective in consumer markets
▪ Sales promotion: action taken by firm to promote sales or recognition
of its products
▪ Influence marketing; effective, but risky
▪ Public relations: build mutually beneficial relationships between
organizations and their public
▪ Events and experiential marketing: positive experiences for customer
through events that support face to face contacts
▪ Direct and interactive marketing:
• Direct marketing; funnels infor straight to customers, one
sided
• Interactive marketing; incorporates feedback from customers
▪ Word of mouth marketing: dissemination of info by individual
customers to build a firm’s product reputation and generate sales
▪ Personal selling: members of the firm / agents engage with customers
to advance firm’s interest and advance process of closing a sale
o Steps for a customer to be persuaded
1. Customer must be exposed to communication message
2. The message needs to capture its attention
3. The customer must understand desired marketing message
4. The customer needs to develop favorable attitudes toward the
message
5. The customer must generate intntions to act in accordance with the
info in the message
6. The person must actually behave in the desired way
 Think-feel-act model, consistency is key
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➢ Research approaches to understanding and measuring brand equity
o Approaches to measure brand’s health
▪ Brand’s audit:
• Evaluates a brand’s health to understand its streghts and
weaknesses
• Provides a foundation for designing and implementing brand
strategy
• Survey gathers customer feedback about a firm, experience or
brand by asking customers to respond to a series of questions
• Survey considers objectives, sampling, precision of the
questions, format survey or process
▪ Qualitative analysis
• Method that helps the firm refine its ideas with smaller
samples
• Risk of biases
o Case studies: evaluate single business situation and
tell in-depth stories, not generalizable
o Interviews: flexible, time-effective, support larger
sample sizes
o Focus groups: deep insights from small groups of
customers of aspects of the firm
o Observation: real time and undirected, uncover
unexpected insights
Begin with open ended question, then more brand-specific
questions
▪
Quantitative analysis:
• Method designed to test theories and ideas using data and
specific analysis techniques
o Larger sample sizes, typically qualitative analysis
o 3 major categories wealth techniques:
▪ Approaches focused on data reduction to
condense customer attributes, defined by
similarity
▪ Empirical approaches work to link variables to
outcomes or identify causes or drivers of desired
outcomes
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▪
▪
Other empirical models attempt to understand
tradeoffs among variables to optimize their mix
and maximize some specific outcome
Brand metrics
• Measure provides a nuanced way to measure brand
characteristics
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Week 6: marketing principle 4: All resources are limited
All resources are limited
•
•
•
Trade offs across multiple objectives, scarce resources get allocated
o Resource trade off: situation under which firms combine all the marketing
mix allocation decisions
If not managed well, risk of losing cusotmer segments or market share
Resource trade off decisions:
o Tough: change over time, depend on many factors and require difficult to
obtain info to be optimal
o Occur across all four MP on real time basis: make decisions in sequence
o Resources inherently limited; no one has unlimited funds or time to execute
strategies, critical finding right way to allocate resources
➢ Sources of resource trade offs
o Some firms make resource trade off decisions constantly for the following
reasons:
▪ Limited resources and resource slack
• Potentially utilizable resources a firm possesses that it could
divert or redeploy to achieve organizational goals
• Provides a firm with potential resources that enable it t change
its marketing strategy
• The amount they have depends on the economy
•
▪
▪
The slack must be shred and allocated across many marketing
needs
Changes in customer needs
• Market segmentation provides a description of the industry
segments
• Over time, size and attractiveness of each segment changes,
which mean the number of targeted segments might also
change
• Firms’ commitment to changes should also change
The lifecycle stage of a firm’s products
• Firms try to balance their product portfolios to keeo products
in all lifecycle stages and thus balance out resource needs
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•
▪
▪
▪
Introductory stage requires reource allocation to their launch
and advertising creating awareness.
• Growth, maturity and decline stages require different
allocations
• Changes in technology and the success or failure of new
product alter a firm's portfolio constantly
Changes in the product market landscape, due to entry and exit of
competitors
• When a firm moves into a reasonably advantageous position
competitors quickly react.
• Counterattacks have potential to negate the impact of
incumbent’s advantage, often create secondary demand
o Secondary demand refers to firms stealing market
share from another firm rather than creating demand
Changes in the effectiveness of marketing activities
• Even if a firm is operating during a stable economic period,
with fixed consumer segments, homogeneous preferences
and no major competitiveness, the effectiveness of marketing
strategies changes over time
• Aggregated markets grow or less, depending on marketing
efforts
Key to success understanding how to allocate available resources as
most marketing strategies require significant investments
➢ All resources are limited; a fundamental assumption of marketing strategies
o Resource trade off strategies to optimize marketing strategy
o Resource allocation MP4 focuses on allocating resources across target
segments, personas and stages and for implementing strategies based on
previous MP 1-3
o Tradeoffs beyond financial resources involves managers’ time, marketing
messages and strategic decisions
o Examples:
▪ MP1: requires segmenting the market and using tools like GE matrix to
allocate resources across target segments
▪ MP2: involves allocating resources to manage customer migration
and CLV
▪ MP3: entails allocating resources to build and maintain SCA
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Rapid changes in external conditions demand adjustments in resource allocation
38
➢ Approaches for managing resource trade offs
• Evolution of approaches; two overlapping eras:
o Heuristic era
▪ Solve resource allocation problem using simple rules of thumb,
driven by intuition and judgement
▪ These are simple to understand and easy to use
▪ GE matrix
o Data era
▪ Period when firms started using historical data that reveal the link
between their past resource trade off decisions and outcomes,
such that they could determine the actual effect of certain
resources on specific outcomes
▪ Scientific approaches beased on data and empirical models
reveal whether each firm should continue or adjust its level of
resource commitment
▪ More data is now available to evaluate resource trade offs, data
drive apps
▪ 3 main trends contributed to the emergence of this era
• Resource allocation decisions have become more
complex, involving products, segments and markets
• Data driven resource allocation has become a cost of
doing business
• Marketing has come under more scrutiny, with increasing
demands for accountability to defend increased spending
justify budgets constantly
▪
▪
Natural evolution of marketing, reflecting technological advances
Data driven approaches are substituting heuristic driven ones
➢ Anchoring and adjustment heuristic approach
o A decision making process where an individual generally uses a prior
expectation (anchor) with which to form beliefs and updates the belief
(adjustment) based on new data that change the prior expectation
o Managers use “anchors” (base decision rules) for resource allocation, based
on past decisions
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o Managers adjust decisions over time based on feedback from marketing
outcomes reflecting their belief about the best course of action
→ Types of heuristic approaches
o Percentage of sales: allocate a fixed % of sales revenue to marketing
o Percentage of profits: marketing resources based on profits
o Historical method: set resources based on last years’s allocation, assuming
little market change; useful in stable markets
o Competitive parity: allocate resources to match competitor’s level, often
used in highly competitive markets
→ Limitations of heuristics
o Fail to account for the insights from MP 1-3
o %of sales methods violates MP1
o Historical methods; violates MP2
→ Why does it persist?
o Simple and easy to use
o Organizational inertia firms rely on heuristics, comfortable with existing
practices and desire for transparency in decision making
➢ Attribution approach
o Managers often face uncertainty in understanding how marketing resources
affect outcomes, as links between them are not always clear
o Attribution model helps to quantify the effect of specific marketing resource
changes on outcomes, allowing for better resource allocation
o Provides answers to key questions like; what’s the dollar impact of
marketing investments and profit maximazing level of investment
o 2 types of attribution models
▪ Experimental attribution
▪ Response model attribution
➢ Experimental attribution
o Involves controlled experiments to isolate the effects of specific marketing
action on outcomes
o Uses control groups to compare results between experimental and nonexperimental conditions
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o Components of the model:
▪ Intervention; key marketing action whose effectiveness the firm seeks
to document
▪ Outcome: key marketing gain for the firm implementing the
experiment
▪ Design: when, where and to whom the firm administers the
intervention
▪ Control group remains unchanged during the experimental process
→ Internal validity: set of checks allow one to decide an experiment is well
designed in the controlled setting
o The cause should precede the effect in time
o Cause and effect must be related
o No plausible alternative explanations exist for the observed
outcome
→ External validity: set of checks that allows one to decide an experiment is
well designed to replicate outside the controlled setting
→ Advantages: help isolate the impact of specific resources, ensures the
internal validity of results by controlling external factors
→ Challenges: deciding which factors to test, ensuring validity and
feasibility in certain scenarios
➢ Response model attribution
o Uses historical data and statistical models to analyze the relationship
between marketing resources and past outcomes
o Helps predict the effects of marketing resources on future outcomes;
mathematical model
o Inform the effectiveness of various marketing efforts or can even help
managers understand the long-term impacts of marketing rather than just its
effect on the same or subsequent period
▪ Can also capture synergistic effects across marketing efforts
▪ Need consistency in marketing efforts to ensure effectiveness
→ Advantages:
o Identifies patterns in marketing-resource effects
o Answers key questions like marketing elasticity
o Helps allocate resources more effectively by understanding the relatiove
impact of each resource
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o Captures competitive effects, such as how competitors’ marketing
impacts the effectiveness of your own
→ Data analytics:
o Statistical technique captures relationship between investment in
marketing resources and outcomes to assist with optimal allocation of
resources
o Historical data contains useful info; basic assumption past outcomes
relate future outcome
➢ Framework for managing resource trade offs
o Inputs
▪ Positioning statements: who customers are, what needs it fulfills, why
best option to satisfy needs?
▪ AER strategies: what strategies work best for each persona or stage
▪ BOR strategies
o Outputs
▪ Key challenge for resource allocation is selecting appropriate metrics
to guide decisions
• Financial metrics: measure direct monetary outcomes
• Marketing metrics: capture customer perceptions and
behaviors, offer insights into customer reactions, helping
identify reasons for fluctuating financial outcomes
• Intermediate metrics: valuable as they reflect customer
attitudes and change more quickly than financial outcomes,
allowing faster adjustments
▪ Types of metrics
o Customer delight: metrics like awareness, loyalty and market
share
o Advertising: metrics like impressions, click-through rates, cost
per lead...
o Pricing: metrics such as price elasticiy, brand equity and unit
margin
o Sales Force: metrics like lead conversations and cost per lead
→ 3 components of each resource allocation decision
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o Budget per marketing activity: size of the commitment the firm
makes to the marketing activity
o Allocation across categories: % split of the marketing budget for a
specific activity across underlying categories
o Time horizon: of the budget, involving the timespan for which the
firm commits to this marketing budget
→ Firm must use combination of financial and marketing metrics to
measure the success of their resource allocation decision
o Processes
▪ Steps
1. Identifying strategically relevant metrics
a. Define key metrics that will help track the effectiveness of
marketing investments
2. Assess the relationship between metrics and marketing resources
a. Understand how marketing resources influence identified
metrics; experimental methods, response models
3. Assess optimality of resource allocation decisions
a. Identify optimal level of investment for max return
4. Finalize resource allocation decision
a. Across categories and budget horizon
5. Apply allocation process across all marketing activities to create
unified marketing plan
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