Said Business School MBA
Marketing
Hilary Term 2007
Week 1:
Overview of Marketing
David Arnold
Introduction – the course
• To apply a marketing perspective to strategy
development
• To develop an understanding of key concepts and
decision options in marketing
• To refine decision-making skills in marketing, and
the ability to express the results of marketing
analysis
Principles of courses
• Marketing is a thinking process more than a body
of knowledge
• Conceptual basis of marketing (objective # 2)
delivered by notes. You read beforehand, we can
discuss in class
• Emphasis in class on skill development (objective
# 3). Extensive use of cases. Thorough pre-class
analysis of cases expected.
This Session
• A framework for marketing
• Two examples of great marketing in
practice
• Core concept – value
• Where is marketing going?
• What dies it take to be good at marketing
strategy?
What is a marketing strategy?
• IT IS NOT:
- An objective (increase shareholder value by x )
- A functional policy (“put a Coke within arm’s
reach of the world”, cost leadership
- A general focus (“stick to the knitting”)
- An outcome of strategy (“command a 10%
premium over market average”, “achieve x%
market share”)
What is a marketing strategy?
• IT IS:
How the organization will create and capture
value
• And it considers:
Customer need (source of value)
Competitor offers (source of differentiation)
Company resources (source of advantage)
Collaborators (source of market access/power)
Marketing Analysis (The 4 Cs)
Customers
Company
Company
Competitors
Creating
Value
Market
Segmentation
Capturing
Value
Product &
Service
Positioning
Target
Market
Selection
Marketing Mix (The 4 Ps)
Product &
Service
Place/
Channels
Promotion
Pricing
Sustaining
Value
Channel to
market
Customer
Acquisition
Customer
Retention
Profits
Source: adapted from Note on Marketing Strategy, HBS 9-598-061
The core concept is value. . .
Value
=
Perceived
benefits
-
Benefits
e
e
lu
Va
q
a
ui v
le
in
l
e
nc
e
Price
Perceived
Price
The value proposition is….
Precise benefits
to which group
at what price
The value proposition is….
Precise benefits:
a sense of superiority from wearing sports gear
used by winners
to which group
ambitious youthful people world-wide
at what price
300% premium to basic athletic shoes
Think Value Proposition,
not Product
Contribution to Cost
A
25%
Contribution to Benefit
A
20%
B
40%
15%
15%
10%
B
30%
C
20%
D
15%
C
D
10%
E
E
Eliminate A and C: Inferior Product,
Better Value Proposition
Contribution to Cost
A
25%
Contribution to Benefit
A
20%
B
40%
B
30%
C
20%
C
15%
D
15%
D
15%
E
10%
E
10%
Marketing as an economic
compromise
Salesperson
Addressable
TV ad in
World Cup Final
Broadcast
One-way message
Two-way with
time lag in response
Two-way with
instant response
Marketing as an informational
compromise
Demographics
Psychographics
What the
customer
wants
Strategy – Marketing customer value
Product scope
Broad
Share of customer -> Economies of scope
Broad product line
Narrow
Market
scope
Broad
Strategy – Marketing Product Value
Product scope
Broad
Share of market -> Economies of scale
Narrow product line
Market
scope
Narrow
Broad
ON BEING GOOD AT MARKETING
•
Insistence on good market data
Refusal to accept generalizations from personal preferences
•
Ability to stick with the basic questions (e.g. what are we selling? to whom?
how much do they value it?) and not get lost in tactics
•
Understanding of role and objectives of all actors in the marketing system
•
Sensitivity to change
Commitment to continuous improvement of value proposition delivered to
the market
•
Ability to frame tactical decisions in a strategy for business growth, including
interface with other functions and the implications of marketing investments
Rohm & Haas: problem diagnosis
‹ Goal:
adoption of new product
‹ Obstacles:
users don’t care
distributors are threatened
contact with 150,000 users
Problem = Goal + Obstacle
Rohm & Haas:
fundamental concepts
‹
‹
‹
‹
‹
‹
‹
Buying behavior: different in the two segments (large and
small users)
Value: great product which creates value but R&H cannot
capture the value
Value pricing – first rule of pricing
Channel design: who will do the selling, stocking, etc.
Channel management: aligning incentives (distributor
indifference price)
Cannibalization (at distributor level)
Push vs. pull
Marketing analysis process 1
‹ Always
start with analysis of customer
behavior: which segments buy what,
how/where do they buy, what do they
value, how do they use/consume
‹ Quantify whenever possible
‹ Look for size/scale to assess opportunity of
challenge: size of segment or channel, and
growth trend
Marketing – first basic model
Marketing revenues
Sales = Customers x Frequency
Marketing costs
Look for economics of individual customers or product lines
Benchmark against market, e.g. market shares
Marketing analysis process 2:
data that is always relevant
‹ Market
potential and dynamics
Sales = Customers x Frequency
Think customer acquisition and retention
‹ Channel
economics
Cost, margin, price data for each
channel member
Look at efficiency, control, value creation
Marketing – second basic model
Manufacturer
Intermediary 1
For each player, map
- purchase cost
- handling costs
- resale price
Intermediary 2
Who is capturing value?
End user / consumer
Said Business School MBA
Marketing
Hilary Term 2007
Week 2:
Marketing Thinking
David Arnold
Buying Behavior
Decision making unit (DMU)
Decision making process (DMP)
Are we giving each player the
right assistance at each stage
of the process?
Can we improve the process
(e.g. reduce search costs, provide
samples)? Should we change
whom we target?
Buyer
User
Influencer
Lodgekeeper
Decider
Need stimulation
Search
Purchase
Repeat purchase
Reinforcement/service
Trade-off behind segmentation
models
DEMOGRAPHICS
Easier
information,
i.e. more
feasible to
gather
PSYCHOGRAPHICS
Product and
Buying
Preferences
More
accurate
information,
i.e. better
customer
insight
So…always better to peel the onion as far as you can and, only
then, carefully specify surrogate measures
Why Segment?
Customers who share a category
need differ in specific features that
they value and how they want to buy
Increase value created
by tailoring offering to
particular preferences
Opportunity for
differentiation
Company gains strategic
advantage through relevant
and differentiated offering
Customer insight
ƒ A single discovery of something
enlightening about customer needs
and values which our brand can
address to gain competitive
advantage
ƒ Alternatively – marketing done
properly
Customer insight - banking
ƒ Customers prefer their relationship
manager to come from their own ethnic
background
ƒ Customers are price sensitive in their
purchase of business banking services, but
not price elastic
ƒ Business customers see internet banking
as cost saving, not as value added
Challenge: Translate research “findings” into true
customer “insights”
Findings
Most people find the vomiting from the chemotherapy worse than the pain
Insight
The fear of the treatment is worse than the disease itself
Message
To help maintain my personal dignity
Health Claim
Zofran helps prevent vomiting associated with chemotherapy more than any
other anti-emetic
SADAFCO:
marketing models in competition
• SADAFCO
- Intensive distribution in
bagalla
- High investment in
captive freezers and
supply chain
- Target: impulse purchase
of stick products
- Local brand with wide
dairy portfolio
• MULTINATIONALS
- Selective distribution in
emerging supermarket
channel
- Huge advertising and
promotional budgets
- Target: home
consumption, inc. tubs
- Global ice cream brands
SADAFCO: the result
• SADAFCO remains market leader, Nestle
and Unilever withdraw, Mars hanging on
• Enabling conditions for MNC model are
absent / under-developed:
women shopping in supermarkets
acceptance of ice cream as adult food
distribution control systems “asset
integrity”
Key issues - SADAFCO
• MNC entry based on assumption of change: enabling
conditions (supermarkets, media) are new
• Check robustness of these change assumptions
(supermarket is for take-home segment in ice-cream)
• What will drive the market: investment in A&P, new or
local products, new distribution? How fast/slow can this
occur?
• Stage of national economic development may not correlate
with stage of market development
The market entry decision
What are key drivers of marketing model?
Are enabling conditions in place for this marketing model?
What is the cost of entry?
What is the cost of waiting?
Is risk/control trade-off appropriate?
Example: Vietnam market assessment
Key drivers of
marketing model
Enabling
conditions
Notes
Chemical
• Sales personnel
• Sophisticated
customers
• Management
• Relationships
Sports
• Brand awareness
• Development of sports
fashion
• Media
• Premium customers
• Control of retail
Children
• Distribution
• Price
• Brand awareness
• Developed distribution
• Middle class market
• Collaborators: food
chains, movies, etc
• Low cost-to-serve
• Strong local HR
required
• Industrial customers
present early
• Strong competitive
pressure
• Attractive
manufacturing base
• Niche accessible in
cities
• No competitive
pressure
• Break-even probably
highest, building mass
market
• Culture of control
Said Business School MBA
Marketing
Hilary Term 2007
Week 2:
Marketing Thinking
David Arnold
What is marketing?
• Marketing is a managerial process, driven by what
we call the marketing mindset.
• The domain of marketing is the relationship
between an organization and its customers and
market.
• The desired output of the process is value creation
for the organization’s customers, and the capture
of some of that value for the organization.
What is the marketing process?
• Marketing is about breaking down customerrelated business problems in a systematic and
particular way. This requires both analytic and
humanistic talents.
• And then devising imaginative and logical
“solutions” that seek to enhance the perceived
value of the market offering and the profits that
the company will realize.
Doing Marketing:
Four Iterative Steps
Analysis
Distill Key Issues
Assemble
clues from
which you
infer issues
and strategy
Specify the core
problem the solution
to which will lead
to meeting goals
Devise Strategy
Specify key changes
in marketing strategy
to resolve issues.
Devise Action Plan
Compose marketing actions
that creatively “execute” strategy
Elements of Marketing Strategy
Segment Market
Select Target Segment(s)
Compose Positioning (Brand Strategy)
Product and
Service Policy
Channel
Policy
Promotion
Policy
Pricing
Policy
Action Plan: Specific Marketing Activities that Flow from Strategy
Devising Marketing Strategy
• Identify those aspects of marketing strategy that
are “in play” to resolve key issues identified.
• Carefully specify how you would change (or,
occasionally, invent from scratch) those elements
so that your key issues will be resolved
– Test: If my firm adopts the recommended strategy, then
key issues will be likely be resolved and we will meet
our business goals
• Must also be actionable and feasible
Composing Action Plan
• For “soft” areas of the strategy..
– Creative leaps from “backstage” strategy to specific
brand expressions that will make strategy come to life
• For “hard” areas of the strategy..
– Analytic specification from general policy to optimize
economics (e.g., price, promotion)
• “Real world” gut check
– firm capabilities, competitive responses, etc.
What is a marketing plan?
• A marketing recommendation is a 3-part
argument:
– that the company should focus attention on a
particular marketing issue,
– that, to solve the issue, the company should
follow a particular strategy,
– that this strategy should be implemented in a
particular way (action plan items)
Suggested format
–
Purpose:
•
–
Key Issues:
•
–
For each element of the marketing strategy “in play” for the above issues (which will vary depending on
the case) state your recommended strategy or policy as specifically as you can in a declarative sentence
and then draw upon your analysis to provide a rationale for why this is the best approach for resolving
the issue versus other viable alternatives.
Action Plan
•
•
–
For each issue (one is good, perhaps two, rarely three), state the issue as specifically as you can in a
declarative sentence, and then draw upon your analysis to provide a short paragraph rationale for why
this is a key issue.
Marketing Strategy:
•
–
very short paragraph summarizing the business goals at stake and context.
For each strategy, offer ideas for how you could execute.
Fine to integrate Strategy and Action plan in one section.
Appendix: Supporting analysis
•
Only as needed, if there are analyses that lend themselves to calculation or figures.
Be Persuasive
• Linear, grounded argument written to convince
skeptical knowledgeable audience
– focused
• only include strategy elements that address issue
– compelling
• each element ground linked to key issue and grounded in analysis
– comparative
• argue why better than less effective options
– integrative
• built around strategy, coherent across marketing mix
• Use analysis to support argument for both key issues
and strategy. Best supported argument wins.
7 Tips
• Push for empathetic understanding of your customers.
Build this understanding into your plan. Imaginative leaps
into the lives and worldviews of your customers is the core
of marketing.
• Be specific. Craft your key arguments with nuance, push
for details. The biggest weakness is usually state issues
and plans in vague terms (e.g., “a quality strategy) Generic
vague strategy leads to generic actions that fail to add
value in the marketplace
7 Tips
•
Support your issues and plan with specific analysis and argument. Use
analyses that we learn in each class and in readings to buttress your approach.
This means providing supporting analysis and also arguments for your
approach versus reasonable alternatives if they exist. More detail is almost
always better.
•
Strategy is about focus. Avoid everything-but-the-kitchen sink
recommendations. Your plan should be tightly focused on resolving the key
issue(s) that you set up. Don’t go through the entire marketing plan
framework and fill in the blanks. Use only what you need. Better to detail a
few key ideas than to laundry list ideas of negligible relevance.
•
You are writing a marketing recommendation. Key issues = key marketing
issues; these need to be stated in marketing terms (not as financial issues, for
example).
7 Tips
• Great analysis and ideas can disappear with poor
communication. Your document should be coherent,
linear, logical. Points should build on each other in a
persuasive manner.
• On managing space limitations: if you run into problems
with word limits, don’t skimp on each section. Instead cut
back (or even delete entirely) the less important material:
setting up the context/stating the business goals and
providing an executive summary. You should cram in as
much detail as possible in the heart of the reco: setting up
the issues and resolving them with your strategy and action
plan.
How to Think Clearly about
Messy Marketing Problems,
Decide What to Do, and Present
Your Analysis and Action Plan in
a Way that Dazzles MBA ‘07.
Don’t rush to judgment. Resist the
urge to find the solution prematurely. Find
the problem first.
Sort the evidence. Fit evidence on
strategy into boxes labeled Customer,
Competition, Collaborators, and Company.
Fit evidence on tactics into boxes labeled
Product, Place, Promotion, and Price.
Use analogy. Remind yourself of other
cases with feature in common with this one.
In what ways might the analogies be useful?
How might they be false?
Analyze the evidence. Now dig a little
deeper into the facts. Combine pieces of
evidence. Examine ratios and comparisons.
Who is buying what? Where? Who is
spending and earning how much money?
Identify the strategy. Take a step back.
Look at the company. What is its strategy for
creating and capturing value? What’s the
core of the business: a proprietary asset, a
well-defined target segment, a strong
network of collaborators/channels, dozy
competitors? How well is the company
doing?
What is changing? Now go back to the
evidence and look for trends in the data.
What is changing in this model?
Define what it takes to grow the
business. Identify obstacles and enabling
factors.
Ask what it takes to convert and to
retain target customers. Consider the
flow from prospect to convert to adopter to
committed customer and ask where the
conversion process is blocked and what it
would take to unblock it.
Review the current positioning of
the unit’s offerings. Does the served
market correspond to the target market?
Identify the offering’s competition and
consider whether it is well differentiated.
Review the current tactics. For each of
the 4Ps, ask whether it is delivering value to
the target market commensurate with its
cost. Review also the organization’s
structure, incentives, and control systems.
Diagnose the problem. Look back over
everything done to this point and state the
problem. Do not confuse a statement of
unmet goals with a problem: doctors are not
rewarded for saying, “Your problem is that
you are not well." A problem is a set of
unmet goals linked to specific factors
impeding their attainment.
Now solve the problem. You may want
to redefine the business. Or pick another
target market definition. Or fix some of the
4Ps to deliver more utility to the target. Or
review the organization’s structure, reporting
relationships, incentives, control systems. Get
numbers support for your answer, perhaps
an estimate of the return on investment or a
break-even calculation or an income
statement.
Reality check. Is your solution practical?
Implementable,? Efficient? Profitable? Are
you pleased with it? Would you back it with
your career?
Present your recommendations.
Never reach a conclusion without saying how
you got there. Never make a
recommendation without explaining what it
will achieve. Make sure that every point
(sentence, paragraph, exhibit) makes a
distinct contribution. Check that nothing
contradicts anything else.
Said Business School MBA
Marketing
Hilary Term 2007
Week 3:
Promotion
David Arnold
Conceptual models of marketing
communications
all contain two basic elements
1
A model of the consumer behavior
process that results
in (repeat) purchase
Awareness-Knowledge-Attraction-Trial-Repeat
2
A range of communication tools
that can be used at
different stages of the process
Advertising
PR
Direct mail
Sales promotion
Integrated marketing communications – a major
goal for most companies – is when it works
properly
– The concept:
• Making a number of communications vehicles work together
seamlessly to achieve some overarching mission
– The obstacles:
• In most companies, sales, marketing and media relations are separate
departments with their own targets, budgets, and suppliers
• In many markets, it is difficult to track individual customers
The trends:
• Rising demand by top management for accountability in making
marketing investments
• New opportunities for tracking consumer response (data bases)
Acuvue (J&J) integrated marketing program
1.
Ted sees ad for Acuvue in Newsweek
2.
Mails back reply card
3.
Ted gets promotional packet from J&J
5.
Ted receives card from local optometrist
1
2
Johnson
&
Johnson
3
5
7
6.
10
Ted calls optometrist for appointment
4
8.
9.
Ted receives voucher from J&J for free lenses 8
Ted visits optometrist, orders lenses
11. Ted receives voucher for discount on second
pair of lenses
12. Ted orders second pair
6
9
11
12
Eye
Care
Specialist
The ‘black box’ theory of
marketing communications
“Advertising works over a period of time as a part of the
gradual evolution of the individual’s perceptions of a
brand and its relations to other brands. The effect of a
single isolated advertising exposure is likely to be
minimal in most markets.”
Alan Hedges, Testing to Destruction, IPA, 1988
“I know half my advertising budget is wasted. The trouble is,
I don’t know which half.”
Lord Lever, John Wanamaker,
AVERAGE ELASTICITES
– Advertising:
• A 10% increase in advertising produces a __% increase in sales
– Promotion:
• A 10% decrease in price via promotion produces a __% increase in
sales
– Price
• A 10% price cut produces a _% increase in sales
The effect of sales promotions
Sales
Equilibrium
sales level
Time
Promotion
Value Pricing, 1990-96
Competitor Trends
P&G Value Pricing Trends
120
140
110
120
100
100
90
80
80
60
70
40
60
90
91
92
93
94
95
96
50
40
Advertising
Net price
Deals
Coupons
90
91
Advertising
92
93
Net price
94
Deals
95
96
Coupons
Source: Ailawadi, Lehmann and Neslin,
Journal of Marketing, Jan 2001
Sample - Average Market Share Elasticities
a
Average Elasticities for
a
Independent Variable
PEN
USE
SOR
Share
Price
-.065
-.210
-.266
-.541
Advertising
.044
.005
-.010
.039
Deals
.162
-.017
-.053
.092
Coupons
.133
-.001
-.007
.125
Competitor Price
-.027
.128
.665
.766
Competitor Advertising
-.065
-.003
-.059
-.127
Competitor Deals
-.106
.063
-.081
-.124
Competitor Coupons
-.116
.035
-.124
-.205
Averaged across 118 brands in 24 categories
Source: Ailawadi, Lehmann and Neslin,
Journal of Marketing, Jan 2001
P&G Value Pricing - Summary
• P&G lost approx. 17% market share
• Market share loss mainly reflects lower
penetration rates
• Lower penetration rates reflect higher P&G net
price and increased competitor deals
• Increased advertising produced no corresponding
increase in “loyalty”
• P&G increased net profit estimated at $1bn over
1990-96
Conventional wisdom on marketing
effectiveness
‘Effective cover’
Probability
of purchase
Exposures
An alternative response function
Probability
of purchase
Exposures
Single source research
– 30% of ad campaigns produce 20% market share
gains in seven days. Another 40% produce 020% gains in seven days
– 50-70% of effect is from first exposure of ad
– Short term effects predict longer term effects
Source: John Philip Jones, The Ultimate Secrets of Advertising, Sage, 2002
When TV advertising works (metaanalysis)
– Weight is not enough:
• Increased weight without change in execution
has negligible sales effect for established
brands
– Status quo is not enough:
• Ads more likely to work when there are
changes in copy, media or in category
Source: Lodish et al, Journal of Marketing Research, 1997
When TV advertising works (meta-analysis)
– Trade display dominates advertising
• Sales effects of ads reduced by
increased merchandising
– Recall and persuasion measures
• ‘Unlikely’ that high ratings on these
measures correlate with sales
Source: Lodish et al, Journal of Marketing Research, 1997
Key takeaways
– The sales effects of marketing communications is the only
source of a return on investment. All other outcomes
(awareness, attitude) are surrogate or intermediary measures
– The content of marketing communications is more powerful
than the volume or weight
– Without short term effects, there are unlikely to be long term
effects
– Given diminishing returns, low intensity continuity is more
effective than high intensity bursts except for new
products/brands
Summary of what we know about
advertising effectiveness
– Advertising is mostly a weak force
– In such circumstances, advertising works defensively
– So, money is better spend on ‘drip’ basis
– Advertising works when there is news in the campaign (new product, new
copy,etc.,)
– In such circumstances, it works as a strong force and single exposures can
produce sales
Said Business School MBA
Marketing
Hilary Term 2007
Week 4:
Distribution Channels
David Arnold
WHY DISTRIBUTORS?
• Direct distribution is associated with:
- higher sales volume businesses
- new products
- high ticket items
- complex products
- stand-alone products (vs. bundled)
- concentrated customer base
- high purchase volume customers
DISTRIBUTION CHANNEL FUNCTIONS
‹
DEMAND GENERATION:
Promotion, sales calls, pricing
‹
PHYSICAL DISTRIBUTION:
Hold inventory, break bulk, offer assortment,
convenient availability, delivery
‹
FINANCING:
Assume inventory carrying risk,
extend credit
‹
PRODUCT SUPPORT:
Technical support, product customization,
after-sales service and support
‹
INFORMATION
Gather customer data
You can take out the distributor (disintermediation) but you cannot
take out these functions
DISTRIBUTION CHANNEL STRATEGY
•
THE GOAL
To maximize the value created and captured
•
THE KEY DECISIONS
To design the system (types and numbers of channels/outlets)
To allocate functions among players in the market network
To align interests among players in the market network
•
THE PROBLEM
Channel partners are both collaborators and competitors
DISTRIBUTION CHANNEL STRATEGY
The central tension is often between considerations of:
EFFICIENCY
Intermediaries exist because
they offer economies of scope
in going to market
EFFECTIVENESS
Producers have superior
customer sensing and product
design capabilities
The principal power source is the relationship with
the end customer
The most effective programs co-ordinate at intermediary
and end customer level (push and pull)
ANALYSIS OF CHANNEL POLICY
•
Begin with the downstream consumer
– Value and DMP x Segment
•
And work back up: Detail channel tasks x Segment
•
Assess economics and effectiveness in completing tasks by (potential)
channel partners and by company
– Direct vs Simple Channel vs Hybrid Channel
•
Apply customer analysis to channel partners (value and DMP)…
– Is there a bottleneck?
– Are economic interests aligned?
•
…while acknowledging that they are also competitors
– Does channel policy give away ownership of customer?
– How to maintain channel leadership?
Said Business School MBA
Marketing
Hilary Term 2007
Week 5:
Product Policy and Innovation
David Arnold
HOW TO FORMULATE
PRODUCT POLICY
– Two first steps:
• Map product usage by segment/channel
• Map contributions by product line
– Look for interactions inter/intra line(s):
• Negative, e.g., cannibalisation
• Positive, e.g., halo effect, trading up
– Look for break points between products, using default rule of one line per segment
– Look for gaps in the market (not gaps in the product range)
– Look for evolution of product offer
– Reduce variety (cost to company, confusion to market) unless market justifies extra products
Product depth and breadth and
marketing strategy
Vertical product policy:
Top of product line in lead market(s), with rest of line
according to market development, = segmentation by
timing.
Example: ?
Challenge: ?
Horizontal product policy:
Adapted product range for sustainably different
markets, based on local customer research.
Example: ?
Challenge: ?
The evolution of value
V=B-C
Perceived Value = Benefits - Costs
Customers expect
Improving value
proposition
Customer
wearout,
seek new
benefits
Costs rise
as vendor
seeks better
product margin
Value migration is inevitable..
• At best, it is consumer wearout:
commoditization (technology markets)
boredom (brand or image markets)
• More often, it leads to a shakeout, as an innovator
produces:
a better value proposition
a fresher idea for existing customers
a new idea (which involves being different)
The disruptive technologies model
Performance delivered
by present technology
Performance
Performance
absorbed by
mainstream
market
Disruptive technology
Time
Source: Christensen
What is a disruptive innovation?
A new product or service that established players
cannot or will not offer to their major customers
It cannibalizes
current
OR
product line
It offers a
lower level of
performance
or service
OR
It carries
lower margins
than current
product line
Disruptive innovation
•
•
•
•
•
Mostly undertaken by small players
Mostly starts at bottom end of market
Targets mass / middle market
Disrupts existing industry business model
Improves customer value proposition
reconfigures existing value chain, often
sidestepping major cost driver
Looking for potentially
disruptive innovations
Examine the
supply chain:
What doesn’t
work very well?
Who captures the
most value
Examine the customer experience:
How does this fit into their life?
What is the experience of buying and using it?
The Product Life Cycle
SALES
Introduction
Growth
Maturity
Decline
Range of
modular products
serving wants (segments)
Integrated
product
solving customer
need
TIME
Customers
Innovators
2%
Early Adopters
14%
Majority
68%
Laggards
16%
Product
Policy
Basic
Only
Augmented
and
Improved
Extended
(Lines and
Brands)
Consolidated
Range
The adoption of innovative products
– Relative advantage
– Compatibility
– Complexity
– Divisibility
– Communicability
Source: Everett Rogers, The Diffusion of Innovations
=
Factors that
accelerate market
adoption of
innovations
Said Business School MBA
Marketing
Hilary Term 2007
Week 5:
Sony Eye Toy debrief
David Arnold
Sony Eye Toy: building blocks of
analysis…
TV
PS2 console
NEW USERS:
Entry point is
Eye Toy +
associated games
Eye Toy
Games
CORE GAMERS:
Entry point is
console + games
…lead to problem statement
This is a product extension (because you need a console
to use the Eye Toy), but…
Is it a market ‘extension’, or are Eye Toy users not
interested in consoles and established games?
If there is little synergy between these segments, as case
suggests, Eye Toy users will not drive further sales
of traditional console-based games, and may even be
put off by costs of console.
Notice (again) the value of digging
for deep customer insight
•
•
•
•
•
•
Gamers consume ‘solo’, Eye Toys in social groups. Gamers go online for
company.
Gamers are sedentary, Eye Toys are active.
Gamers go beyond reality in games, Eye Toys are constrained by reality.
Games interact via (complex) control unit, Eye Toys interact hands-free.
Gamers like ‘games’, with competition, but Eye Toys like activities as well as
‘games’
PLUS we see different demographics, price points, etc
ALL SUGGESTS THAT THESE ARE QUITE DIFFERENT
SEGMENTS WITH LITTLE OF THE SYNERGY ON
WHICH THE PRODUCT STRATEGY IS BASED
Sony Strategy Options
3: DIVERSIFICATION =
new Eye Toy offer as TV
enhancement without console
1: PRODUCT DEVELOPMENT
= target gamers to drive new game
sales and extend PS2 life cycle
New
1
3
PRODUCTS
Current
2
PS2
Current
New
MARKETS
2: MARKET
DEVELOPMENT
= extend PS2
installed base, open
new game revenue
streams
Bottom Line and Takeaways
•
•
•
Huge initial success, but Groove disappoints:
Only sells to 1/25 Eye Toy owners
Probably below break-even
Could just be bad marketing: Play €60 for camera + 12 games, Groove
€40 for 1 game
Could be that initial success driven by promotion and give-aways, but
fundamental problems lie below, i.e. Eye Toy users don’t like console
and lose interest, console gamers don’t like it
QUESTION: It’s a product extension from a company
that thinks in systems and life cycles, but have they
thought hard enough about market segments? Perhaps
a bolder diversification strategy might be where the
Eye Toy brand ends up…
Said Business School MBA
Marketing
Hilary Term 2007
Week 6:
Pricing Policy
David Arnold
MARKET CHARACTERISTICS
FIRM POLICIES
Price - core concepts
•
PRICE SENSITIVITY
The importance of price as an
attribute in the purchase decision
•
PRICE ELASTICITY
Responsiveness of demand to
change in price
•
PRICE DISCRIMINATION
Different prices to different segments
to maximize value capture
•
PRICE BUNDLING
Single price offered for multiple
products
•
PRICE STRUCTURE
Division of total price into component
elements, e.g. lump sum, pay-as-you
go
Examples of price policy in action
• Line item pricing
– low ticket price in emerging markets
• Yield management
– airline seats
• Reverse pricing
– Priceline.com name-your-own price
• EDLP (everyday low pricing) vs Hi-Lo
• Fixed vs. variable, razor/blade
– Mobile phone charges
• Price as positioning statement
– Stella Artois “reassuringly expensive”
Note the power of pricing to add
value in the customer context
• Value pricing = ‘right’ price depends on customer-specific
criteria
• DMP: when searching is for price info, price structure can
add value
• Segmentation: price signal can prompt customers to selfselect into segments
• Pricing can influence behaviour
• Price and buying behaviour can be the difference between
segments
Pricing model
Pricing must aim to optimise the company’s economic value
CUSTOMER VALUE
MAX PRICE
Customer
willingness to pay
CUSTOMER
SURPLUS
Competition
can lower
perceived value
Price
PRODUCER’S
VALUE CAPTURED
MIN PRICE
Company total
economic cost
COMPANY COST
Marketing
can raise
perceived value
Customer-based
“What will the market bear?”
Three approaches
to price-setting
Competitor-based
“What do competitors
charge?”
Cost based
“What margin should we
make?”
Best practice in pricing
1. Price discrimination – different prices for
different customers
2. Price sensitivity – best practices to reduce
the price-sensitivity of customers
3. Prices of new products
Price discrimination
• First Degree
– Unique price per customer, auction, haggling,
• Second Degree
– Price/quantity, price/time relationship
• Third Degree
– Segment or channel based
Best practices to reduce
price-sensitivity
•
Reference price effect
– present higher price options first
– help customers notice high competitor prices
•
Difficult comparison effect
– Make it hard to compare with competitors
– Use different charging metrics (Leasing)
Source Thomas T Nagle
Strategy & Tactics of Pricing (1994)
Best practices to reduce
price-sensitivity 2
• Switching cost effect
– Ensure customers understand the financial
costs, risks, business disruption of changing
suppliers
– Build psychological switching costs
• Price/quality effect
– Ensure the customer understands the higher
benefits of higher spec solutions
– Build quality image with fact-based evidence
Best practices to reduce
price-sensitivity 3
• Fairness effect
– Perceived unfairness creates price sensitivity
– Link price increases to service enhancements or
investments
• Framing effect
– Discounts are always preferable to surcharges
Pricing - some managerial rules of thumb
•
•
•
•
•
•
•
•
Cutting price is easy, raising price is difficult
Changing price is easier than changing price perception
In open markets, prices decline over time, absent innovation
In most markets, price customization is under-used
Price competitors cluster into tiers in most markets. Competition
more intense within tiers than between tiers.
Customers usually value transparency (i.e. they know the total
price at point of purchase) and choice and control
Customers face transaction costs (searching for information,
executing purchase) which can be both a barrier to initial purchase
and barrier to later switching
Competition on price alone usually leads to value-destroying price
wars and eventual commoditization
Said Business School MBA
Marketing
Hilary Term 2007
Week 7:
Branding
David Arnold
Some of the world's strongest
brands ...
„
Coca-Cola
Sony
McDonald's
Microsoft
Some of the world's strongest brands
...
„
Coca-Cola
„
Accountants
Toyota
„
Engineers
McDonald's
„
Marketing managers
Microsoft
...provoke the same
reaction
Recognition
Judgments on characteristics
and qualities
Basis for decisions
Two basic truths about
branding
1. Brands belong to customers
- Brand meaning (= market position) is co-created
- Only new brands can be created by
companies
2.
Branding happens anyway
- Managing it is optional
Brands Have Many Authors
The Firm
Popular Culture
Brand
Stories
Brand Culture
Brand
stories
Shared, taken-for-granted brand
stories, images, and associations
Brand
Stories
Brand
stories
Influencers
Customers
Brand Identity Template
ESSENCE – brand promise,
E
always
applicable
CHARACTER ELEMENTS –
core brand values
BRAND BENEFITS and
ASSOCIATIONS –
tangible and intangible,
inc. support for brand benefits
For example
Cleanliness
Experience
Scene
Skin Care
problem-solution Megaperls
Orientation
Longterm Color
Gel
Protection
well being
(internal care)
Characteristic
Perfume (smell
of cleanliness)
Environmental
friendly
(german)
Technology
Recommendation
(from generation to
generation)
Innovation
Superior Cleanliness
and Care
trust /
security
social
recognition (external care)
Mainsteam
orientation
(broad mass of
society/
bandwagon)
Family
values
external
representation
Omnipresence
Tradition /
History
Partly
authoritarian
An example of raw material:
‘pathway’ research
Health/long life
(12)
8
Material
living quality
(78)
Responsability for
next generation
(17)
Leisure time
orientation
(29)
Social contacts
(9)
Wellbeing(52)
7
Open for
contacts
(27)
17
73
29
Protects
environment
(24)
Money for
other things
(73)
Time for
other things
(29)
24
73
29
Save money
(73)
Saving
time (29)
23
15
12
11
Feel secure
(31)
Feeling
well
(42)
7
Laddering study Persil users
Avoid
sickness
(8)
Personal
contribution to
environment
protection
(24)
23
Detergent i
can trust
(27)
9
Environmental
friendly
(23)
8
No pretreatment
necessary
(15)
7 10
16
13
Laundry
can be used
for longer
(15)
15
27
mileage
(49)
10
Traditional/prooven
brand
(17)
Easy to
dose
(12)
Good
price/performance
ratio
(26)
11
Well-gromed/
Orderly appearance(50)
8
19
12
10
19
10
less shopping Less
efford
washing
(20)
efford
(15)
11
Ingredients
biodegradable
(7)
Give a good
impression
(20)
9
13
12
Brilliant white Fibredeeplaundry clean laundry
(26)
(7)
Feeling of
cleanliness/
freshness
(20)
I smell well
(9)
12
No residues
in laundry
(10)
Laundry smells
well
(40)
10
39
cares/protects
laundry
(24)
Clean
laundry
(25)
12
25
Clear/shining
colours
(13)
stainless
(25)
Absolute
stainless
(33)
Pleasant scent
(41)
12
23
29
23
Colour
protecting
(13)
Good washing
power
(23)
Best washing
power
(29)
7
26
Dissolves well
(10)
Fresh scent
(26)
How Branding Benefits the Consumer
‹ Reduce
search costs: brands as (simplification)
aids in decision-making
‹ Reduce
risk (economic/socio-psychological):
brands as assurance of quality and signals/badges
of value
‹ Transform
the consumption experience: brands as
sources of pleasure and utility derived from
ownership and usage
Managerial implications of the theory
‹
Reduce search costs: brands as
(simplification) aids in decisionmaking
FOCUS and CONSISTENCY,
the two “golden rules”
‹
Reduce risk (economic/sociopsychological): brands as
assurance of quality and
signals/badges of value
PRODUCT/SERVICE
QUALITY – product performance
in blind tests remains best
predictor of brand performance
‹
Transform the consumption
experience: brands as sources of
pleasure and utility derived from
ownership and usage
Be proactive in managing the
few key SALIENT ATTRIBUTES
or consumer “TOUCHPOINTS”
When Branding Most Benefits the Consumer
‹ When
quality is unpredictable
‹ When customer is unfamiliar/inexperienced
‹ When alternatives are difficult to compare
‹ When dealing with a credence good or service
‹ When product is socially visible and important
‹ When category may be overlooked
Said Business School MBA
Marketing
Hilary Term 2007
Week 7:
Branding
David Arnold
Conceptual basis of CRM
•
•
•
•
Relationships not transactions
Economies of scope not economies of scale
Multi-period not transaction by transaction
Value creation and value capture may not
be simultaneous
CRM Approach
• Gather data
• Segment customers and prospects by..
– category spending, lifetime value
– loyalty/switching
– cost-to-serve
• Design offering
– Lock in most valuable customers, and those prone to loyalty
– Cost structure so that all customers are profitable
– Incentives to attract switchers at a profit
• Experiment, Redesign
CRM only works when…
• Organization has a proprietary,
individualized, up-to-date database
• Organization has ability to customize
offering
• Inter-customer contamination effect can be
managed
Business Data Decision Matrix
High
Rewards
Strategy
Personalization
Low Payoff
Acquisition
Theoretical
Repurchase
Frequency
Low
Low
Source: Reinartz, Kumar, HBR 2002
Degree of
Customizability
High
Customer Strategy
• Customers
- Customer not fully
aware of what they
want
- Competition is to
create value
- Inter-order activity is
designed to gain
insight into unmet
needs
• Orders
- Customer knows
what they want
- Competition is to
satisfy that demand at
best value point
- Inter-order activity
designed to keep us in
the race
The Difference Between
Customers and Orders
What do we need to do today?
Order
Selection
Return per scarce
resource unit
(A Control View)
Core competence
(A Strategic View)
Customer
Selection
What is our long-term vision?
Designing Customer
Management Strategies
• Understand the nature of customer benefits offered
– Economic and tangible versus non-economic and
intangible
• Develop a plan on how to build each customer
relationship over time
– Foot-in-the-Door or All-at-Once
• Understand the link between value created and
value extracted
Said Business School MBA
Marketing
Hilary Term 2007
Week 8:
Summary
David Arnold
Marketing - course summary
1. Marketing Frameworks
FRAMEWORKS
2 The Big Picture - Value Creation and Capture
BIG PICTURE
3. Eight Big Ideas Encountered in Multiple Cases
4. Marketing Numbers - A Quick Recap
5. Exam Grading Guide
EXAM
NUMBERS
8 BIG IDEAS
FRAMEWORKS
Marketing Frameworks
Marketing Analysis (The 5 C’s)
Customers
Company
Market
Segmentation
Compe titors
Collaborator s
Target
Market
Selection
Creating
Value
Con text
Product &
Ser vice
Positioning
Marketing Mix (T he 4 P’s)
Product &
Ser vice
Place/
Channels
Capturing
Value
Promotion
Pric ing
Sustaining
Value
Customer
Acquisition
Customer
Retention
“... The goal of the marketing process is to
assemble a detailed understanding of customers
and prospects, and to use this knowledge to
organize the firm’s market offering.”
Source: course description
Profits
Figure A: Schematic of Marketing Process
Not e on Marketing Strategy, H BS c ase 9-598-061, p. 2
How to Think Clearly about
Messy Marketing Problems,
Decide What to Do, and Present
Your Analysis and Action Plan in
a Way that Dazzles MBA ‘07.
Don’t rush to judgment. Resist the
Doing Marketing:
Four Iterative Steps
Analysis
Distill Key Issues
Assemble
clues from
which you
infer issues
and strategy
Specify the core
problem the solution
to which will lead
to meeting goals
urge to find the solution prematurely. Find
the problem first.
Sort the evidence. Fit evidence on
strategy into boxes labeled Customer,
Competition, Collaborators, and Company.
Fit evidence on tactics into boxes labeled
Product, Place, Promotion, and Price.
Use analogy. Remind yourself of other
cases with feature in common with this one.
In what ways might the analogies be useful?
How might they be false?
Analyze the evidence. Now dig a little
deeper into the facts. Combine pieces of
evidence. Examine ratios and comparisons.
Who is buying what? Where? Who is
spending and earning how much money?
Identify the strategy. Take a step back.
Devise Strategy
Specify key changes
in marketing strategy
to resolve issues.
Look at the company. What is its strategy for
creating and capturing value? What’s the
core of the business: a proprietary asset, a
well-defined target segment, a strong
network of collaborators/channels, dozy
competitors? How well is the company
doing?
What is changing? Now go back to the
evidence and look for trends in the data.
What is changing in this model?
Define what it takes to grow the
business. Identify obstacles and enabling
factors.
Ask what it takes to convert and to
retain target customers. Consider the
Devise Action Plan
Compose marketing actions
that creatively “execute” strategy
flow from prospect to convert to adopter to
committed customer and ask where the
conversion process is blocked and what it
would take to unblock it.
Review the current positioning of
the unit’s offerings. Does the served
market correspond to the target market?
Identify the offering’s competition and
consider whether it is well differentiated.
Review the current tactics. For each of
the 4Ps, ask whether it is delivering value to
the target market commensurate with its
cost. Review also the organization’s
structure, incentives, and control systems.
Diagnose the problem. Look back over
everything done to this point and state the
problem. Do not confuse a statement of
unmet goals with a problem: doctors are not
rewarded for saying, “Your problem is that
you are not well." A problem is a set of
unmet goals linked to specific factors
impeding their attainment.
Now solve the problem. You may want
to redefine the business. Or pick another
target market definition. Or fix some of the
4Ps to deliver more utility to the target. Or
review the organization’s structure, reporting
relationships, incentives, control systems. Get
numbers support for your answer, perhaps
an estimate of the return on investment or a
break-even calculation or an income
statement.
Reality check. Is your solution practical?
Implementable,? Efficient? Profitable? Are
you pleased with it? Would you back it with
your career?
Present your recommendations.
Never reach a conclusion without saying how
you got there. Never make a
recommendation without explaining what it
will achieve. Make sure that every point
(sentence, paragraph, exhibit) makes a
distinct contribution. Check that nothing
contradicts anything else.
FRAMEWORKS
Marketing Analysis (The 4 Cs)
Customers
Company
Company
Competitors
Creating
Value
Market
Segmentation
Capturing
Value
Product &
Service
Positioning
Target
Market
Selection
Marketing Mix (The 4 Ps)
Product &
Service
Place/
Channels
Promotion
Pricing
Sustaining
Value
Channel to
market
Customer
Acquisition
Customer
Retention
Profits
Source: adapted from Note on Marketing Strategy, HBS 9-598-061
FRAMEWORKS
On Being Good at Marketing
•
Insistence on good market data
Refusal to accept generalizations from personal preferences
•
Dogged persistence in returning to the basic questions (e.g. what are we selling?
to whom? how much do they value it?). Always seek to start with data on customer
buying patterns and behavior.
•
Understanding of role and objectives of all actors in the marketing system
•
Sensitivity to change
Commitment to continuous improvement of value proposition delivered to the market
•
Appreciation of the wider business constraints on marketing, and the implications of
marketing investments
•
Ability to frame tactical decisions in a strategy for business growth
BIG PICTURE
Value Capture and Creation
Value created and captured through marketing
Understand
customers
Offer customized
value proposition
Strategy
= target market
+ value proposition
+ defensible asset
Integrated marketing
mix to deliver and
capture value
Build defensible
advantage, e.g.
brand, service
network
Tactics / Programs
= design 4Ps to make offer
easy to understand
easy to purchase
consistent with behavior
consistent with expectation
8 BIG IDEAS
Segmentation
DEMOGRAPHICS
Which segments are:
growing?
declining?
emerging?
Easier
information,
i.e. more
feasible to
gather
Are there better ways of
segmenting the market,
i.e. getting closer to what
the customer actually wants?
PSYCHOGRAPHICS
Product
and
Buying
Preference
s
More
accurate
information,
i.e. better
customer
insight
8 BIG IDEAS
Buying Behavior
Decision making unit (DMU)
Decision making process (DMP)
Are we giving each player the
right assistance at each stage
of the process?
Can we improve the process
(e.g. reduce search costs, provide
samples)? Should we change
whom we target?
Buyer
User
Influencer
Lodgekeeper
Decider
Need stimulation
Search
Purchase
Repeat purchase
Reinforcement/service
8 BIG IDEAS
Value Pricing
Formulating pricing policy
VALUE
How much value is created
by the product/service
for the user?
Price to user/consumer
Skim
Incentive for user
(to buy) and intermediary
(to distribute)
Price to intermediary
Producer’s value
captured
Penetrate
Price discrimination (or
customization): if different
segments value the product
differently, can it be priced
differently to each segment?
How much of the created value
can be captured by the provider,
intermediary, and user?
Competition
can lower
perceived
value
COST
Variable cost
Marketing
can raise
perceived
value
8 BIG IDEAS
Extending the Product Offer
customized and wide
reaching service
Can the product be augmented,
e.g. bundling, service?
Early in the product life cycle:
is the product easy to adopt?
Later in the product life cycle:
does the product line need extending
to cater to increasing segmentation?
Watch out for disruptive innovations
that bypass cost structures of incumbents
and offer new value proposition
expensive
and undifferentiated product
8 BIG IDEAS
Push and Pull Promotion
Impact of Various Promotional Tools
Awareness
Push vs. pull: is the balance
effective?
Traditional
Advertising
Sponsorship
Liking
Trial
Are the different tools in the
communications mix
being used to facilitate
buying behavior?
Do we understand which
element of communications mix
is shaping perception and
behavior (e.g. shelf presence,
brand image)?
Trade
Promotion
Shelf Space,
Features,Displays
Consumer
Promotion
Adoption
Direct
Response
Advertising
8 BIG IDEAS
Channels to Market
Channel functions:
who is most effective?
Who is most efficient?
Are incentives aligned?
Can players be
re-aligned into
new “demand
chain’?
Are multiple/hybrid
channels necessary
to cover market?
Distribution channel functions
‹
DEMAND GENERATION:
Promotion, sales calls, pricing
‹
PHYSICAL DISTRIBUTION:
Hold inventory, break bulk, offer assortment,
convenient availability, delivery
‹
FINANCING:
Assume inventory carrying risk,
extend credit
‹
PRODUCT SUPPORT:
Technical support, product customization,
after-sales service and support
‹
INFORMATION
Gather customer data
A FIRM CAN CUT OUT THE DISTRIBUTOR, BUT
CANNOT ELIMINATE THE DISTRIBUTION FUNCTIONS
8 BIG IDEAS
Direct Customer Relationships
Relationship/1:1 Marketing
Requirements for direct:
customer-specific record
record of customer response
ability to adapt to that response
Needs Satisfied
Share of Customer -> Economies of Scope
Many
Broad Product Line
Customers
Served
Few
Key measures of direct marketing:
acquisition/retention cost
customer (lifetime) value
Relationship often driven by customer
preference regarding how business
is done (telephone, email, catalog)
leverage relationship through
wider product/service range
BUT don’t violate customer trust,
overdo selling efforts, or bundle
products which are not complementary
Many
8 BIG IDEAS
Colleagues or Competitors?
Customers have
simplified perceptions
for ease of information
processing
Different players in
the market system
have different goals
GET IT WRONG
GET IT RIGHT
Different elements
of the system
undermine each other
Different elements
of the system
are synergistic
NUMBERS
Useful marketing numbers:
a quick recap
• Market potential and dynamics
Sales = Customers x Purchase Amount
Identify market size, structure, growth
• Channel economics
Profit = Margin x Turnover
Identify value added at each level
Identify number of players at each level
• Profit and loss projections
- by year, product, market, segment, customer
- for new products/markets, break-even
NUMBERS
Useful marketing numbers:
a quick recap
• Elasticities (input-output)
when input data available, identify results of changes in
marketing activity e.g. price, salesforce, promotional spend
• Metrics of marketing performance
look for ratios, e.g:
advertising per market share point
sales per salesperson
contribution per outlet
Final Exam
EXAM
CRITERION
DESCRIPTION
1: SITUATION ANALYSIS
Analysis of case evidence to give snapshot of market
OUTPUT should be: - identification of key drivers of value in market
- assessment of market size and potential
LOOK FOR
- analysis/interpretation of case data, not just repetition
2: STATEMENT OF KEY ISSUES
Statement of the key market issues relevant to corporate goals:
- obstacles which need addressing, including competitors
- opportunities which are emerging
LOOK FOR
- sense of scale of problem/opportunity
- follows from Situation Analysis
3: MARKETING STRATEGY
Statement of plan for achieving goals, including at least:
- target market selection
- value created in those markets
- point of differentiation fom competition
LOOK FOR
- clarity and precision in statement
- identification of key sustainable leverage points
- sense of why this was selected rather than alternatives
4: MARKETING PROGRAM DECISION
Assignment question on marketing mix decision
Analysis of and recommendations regarding policy
LOOK FOR
- specific analysis using case data
- projections of results of these actions
- consistent with strategy
5: QUALTIY OF ARGUMENT AND IDEAS
Coherence and consistency of argument
Balance of ideas guiding argument and evidence supporting argument
LOOK FOR
- insight (not just repetition of questions or case data)
- convincing (evidence or illustration used in support) and coherent
EXAM
The best exam papers…
•
•
are easy to read, with every line/sentence/chart making a distinct point which is
immediately apparent
demonstrate rigorous reasoning in a way which makes the argument more convincing,
e.g. the analysis behind a conclusion is cited, as is the support for a recommendation
•Never reach a conclusion without indicating how you got there.
•Never make a recommendation without explaining why it’s the right decision.
•Make sure that every element (sentence, paragraph, chart)
contributes something different.
•Check the completed paper to make sure that nothing contradicts anything else
EXAM
Some questions to ask of a
marketing plan
•
•
•
•
•
•
•
•
•
Are customer perceptions and behaviors well understood?
Is there a clearly targeted customer segment?
Is the positioning clear? Are all 4Ps aligned behind it?
Are the marketing processes (buying behavior,
communications, distribution) aligned?
Are the customer acquisition and retention processes being
managed?
Are push and pull programs correctly supported?
Are intermediaries/distributors motivated?
Is the price right? Who captures how much value?
Is there a vision of how the plan will evolve as the market
changes and the business needs to keep growing?
To:
MBA 2006-2007
From: David Arnold
Date: 11th February 2007
Re:
Marketing Practical Work – Aqualisa Quartz
Administration
You will be receiving from Exam Administration a percentage grade for this
submission. This will later be weighted in calculating your final grade because, as
you know, this Practical Work will count for 40% of your final grade, with the final
exam accounting for the other 60%.
This note is intended to supplement that grade by giving you an indication of what we
were looking for in the papers; this supplements the case analysis we conducted in
class in Week 4.
I have not issued letter grades, but I have followed the grading conventions of the
MBA, i.e. 70%+ is ‘Excellent’ and potentially Distinction quality, 50% is ‘Bare Pass’,
and less than 50% is ‘Weak’ and potentially a fail. Grades of 55, 60, and 65 are steps
in the Satisfactory-Good range.
Overall, I was satisfied with the work, especially in view of the constraint on the
length of the paper, and the fact that it came so early in the course. Quite a few were
graded as ‘Excellent’, and only a handful were weak.
Overview
The objective of the assignment was to give you the opportunity to develop your skills
in producing a marketing recommendation based upon analysis of a marketing
situation. This is in line with the ‘learning-by-doing’ pedagogy of this course, and the
fact that you are working in teams is in line with the situation in most firms.
Remember that, like any recommendation, this should be an argument, which outlines
a course of action justified by situation analysis and evaluation of options. We are
looking for:
•
•
•
•
•
Interpretation of data to identify key drivers of market development
Identification of key issues facing firm
Clearly articulated strategy for addressing these issues
One or more specific actions that should be taken to implement this strategy
Consistency of argument, and insight into key issues
Above all, we value interpretation rather than description, focus on a few key issues,
and insight supported by logic. The heart of any marketing piece of work is insight
Marketing Practical Work 1 – debrief note
2
into the process of value creation by the firm, value perception by its customers, and
the market dynamics through which the value is allocated among the parties involved.
Aqualisa Quartz – Key Issues
As was covered in class, there are several key issues in this case. To be graded at
70% or more (distinction level), a paper would need to show an appreciation of all (or
nearly all) of these, with some supporting analysis or argument, woven into a coherent
recommendation for marketing action.
•
Value – the core concept of marketing, and the first building block of any
analysis. This case offers the opportunity to quantify the value created by
Quartz for both the plumber and the consumer. For the plumber, we can start
from the hours saved by the faster installation time. The same faster
installation is also the basis for the consumer savings. Beyond savings, the
plumber gains opportunities to expand the number of jobs taken, and the
consumer gets extra benefits such as ease-of-use, no excavation of the wall,
etc.
•
Decision-Making Process – the other vital building block is an understanding
of the decision-making process followed by the customer. This should reveal
the plumber as the vital gatekeeper of the market, involved in 73% of purchase
decisions. A secondary point, included in the best papers, is an appreciation of
the different segments, such as planned renovation vs emergency repair – this
is relevant because we can expect this to influence the decision-making
process and probably therefore the shower choice.
NOTE: the main failing of weaker papers was that they were not grounded in a
demonstrated understanding of these two fundamental building blocks.
•
Problem diagnosis – putting together these two areas, it should emerge that the
key obstacle to Aqualisa achieving its goals is the resistance of plumbers to
this innovation. This should be explained in the terms of the case description
(e.g. previous electronic showers have been unreliable, etc) and perhaps also
in terms of an empathetic understanding of the plumbers’ perspective, i.e. they
are in demand and feel no need for anything to change
•
Channels – good papers should relate the different channels to the different
segments and the different types of shower, offer a quantitative description of
market structure, and (most importantly), reach a conclusion about market
size, the scale of Aqualisa’s ambitions, and the implications for whom it
should target.
•
Target market: Plumber or Consumer? As we discussed in class, a good
argument can be made either way here. It depends upon the assumption we
make about how we should deal with the plumber – should we go round them
by appealing to the end consumer (pull marketing) or attempt to win them over
via push marketing? If the former, we should expect to see the plan based
upon the pull power of showroom. If the latter, we should expect to see the
Marketing Practical Work 1 – debrief note
3
plan based upon the superior economic returns we can offer the plumber. A
subtlety here (which would push this analysis from satisfactory to excellent) is
to ask the value to Aqualisa of either the plumber or the consumer – obviously,
the plumber is worth a lot more, and the consumer may buy only one or two
showers in a lifetime.
•
Implementation – the better papers had concrete plans for implementation.
The most interesting areas, on which they tended to focus, were (i) the price of
the Quartz, related to value; (ii) the margins offered to the distribution
channels; (iii) the number and/or structure of Aqualisa salespeople given the
job of building the market for the Quartz. There are some indications in the
case that this is a rather sleepy industry, and that even Aqualisa’s salesforce is
somewhat averse to innovation – this can be the basis for a sales plan.
Please note that some of the issues raised by Harry Rawlinson in the class (e.g. the
management of the life cycles of Aqualisa’s product portfolios, or the evolution of the
digital shower into a corporate strategy of electronic water control throughout the
house) are not really evident in the case and therefore were not expected in the
assignments.
The best papers covered all or most of these areas – I appreciate that this is a lot to
cram in, given the space constraint, and graded accordingly, but quite a few papers did
cover all these topics. More importantly, they put together these elements into an
argument and plan, rather than offering disparate pieces of analysis.
Marketing
C209
Professor David Arnold
Mid-term assignment:
Aqualisa Quartz
Aqualisa Quartz
1
Aqualisa Quartz: bathroom nirvana or simply fool’s gold?
Introduction
Quartz offers a technological step-change which seems in principle to offer enhanced
value to consumers. In developing and bringing it to market, Aqualisa has been
commendably customer-focused, making considerable effort to understand what
consumers want and to refine its product accordingly. Notwithstanding its clearly
enhanced value to consumers, however, Quartz has failed to live up to expectations
since its launch.
In the analysis that follows, we focus on:
¾ how the UK shower market is structured and segmented, and how value is
appropriated;
¾ how Aqualisa’s current approach to marketing its new product fails to take
sufficient account of this context;
¾ how its approach might be improved to make Quartz the commercial success that
its value to customers merits.
Understanding the UK shower market: segmentation on price and
product type also extends to the channels
Mixer
and
power
showers
VEL: value
equivalence
line
Value to customers
Premium
Mid
Value
Electric
showers
Value customers tend to
opt for electric showers,
which they install
themselves. Mid-range
and premium customers
generally opt for mixer
and power showers,
which afford them higher
utility and require
professional installation
Cost
The UK market for showers segments into three: value, mid-range and premium.
Customers in the former segment tend to be highly price sensitive and to want a
basic shower; they attach little importance either to aesthetics or to shower
experience quality (since electric showers do nothing to improve – the mostly poor –
water pressure). This segment is served mostly via DIY stores, reflecting electric
shower purchasers’ general enthusiasm for taking advantage of such products’
relative ease of installation. For them, therefore, the cost of the shower unit itself
represents the bulk of the cost of installing a shower. Aqualisa captures about 16%
Aqualisa Quartz
2
of the annual market in this segment through its Gainsborough range; but although
volumes are high (180,000 out of a total market of 1.1M in 2000), manufacturer
margins on retail prices ranging from €95-230 are likely to be correspondingly low.
% of overall cost to customer
Customers in the mid- and premium segments tend to place value in both overall
shower quality and aesthetics (the “wow” factor). They tend to eschew electric
showers in favour of mixer and power showers and are prepared to pay much higher
prices (up to around €750). The fact that mixer and power showers usually need to
be installed by a professional plumber – typically taking two days – also adds
substantially to the overall cost to the customer of acquiring a shower: with plumbers
charging between €40-80 an hour, sixteen hours of labour can add between €6401280 to the bill. Even if we assume that, for a two day job, most plumbers charge
towards the lower end of this range, they still end up appropriating on average at
least half of the overall value of the customers’ purchase.
120
100
80
Labour
60
Cost of unit
40
20
For electric showers, mostly aimed at the
value end of the market, shower unit cost
represents the vast bulk of the cost to
the customer. For mixer/power showers
in the higher value segments, shower
unit costs can be exceeded by the costs
of installation.
0
Electric
Mixer/power
Shower type/segment
Aqualisa’s slice of the overall mixer and power shower pie in 2000 of 555,000
equates broadly to that of the electric shower market, with the majority of its 139,500
units sold under its Aquavalve brand (with its value brand, Gainsborough picking up
23,500). Manufacturer margins in this segment are much healthier (and can be
significantly more than 100% of a shower unit’s production cost). Finally, and
critically, distribution channels in this segment are rather different. For mixer
showers, independent plumbers install 54% of all showers purchased (with a further
20% installed by showrooms). In 73% of cases, the plumber exerts significant
influence over the choice of shower purchased (either by purchasing it direct or by
significantly influencing the customer’s decision). Plumbers source their showers
from trade shops, who are Aqualisa’s customers.
Marketing issues: why Quartz isn’t making a splash?
Our analysis points to two main issues which are impeding Aqualisa’s ability to
realise the expected sales volume from this innovative product.
Aqualisa Quartz
3
¾ Blockage in the channels
When consumers understand the Quartz offering, they are invariably bowled over by
its “wow” factor. It got rave reviews on its launch, and customer reactions when they
encounter the product in high-end showrooms is also impressive. This is testament
to the considerable effort that Aqualisa put into refining Quartz to reflect consumer
preferences over the three years of its development. This is all well and good. But
relatively few showers are actually bought through this channel (only 13% of total
sales of mixer showers in 2000). And Aqualisa’s products are only sold through 25%
of UK showrooms.
In any case, customer views of mixer showers have traditionally not played that
significant a role in the mixer shower purchase decision-making process. This
reflects the very influential role of independent plumbers in the distribution process;
and their traditionally extreme stickiness over the brand choice. The fact that
plumbers tend to stick with the brand they know – for convenience as well as cultural
reasons – means that once hooked they tend to be loyal customers.
The corollary is that it is hard to convince plumbers to shift allegiance to an unfamiliar
product (particularly one whose innovative electronic controls evokes connotations of
historic failure and unreliability). Aqualisa’s failure to date to confront plumbers with a
compelling reason to switch explains Quartz’s failure to gain traction. The company’s
predicament is made worse by the fact that, notwithstanding plumbers’ critical role in
distributing its products, they are available in only 40% of the trade shop outlets from
which plumbers source products.
¾ A lack of sales and marketing focus
The evidence suggests some ambivalence towards the Quartz products amongst the
sales and marketing team responsible for making it the commercial success that
Harry Rawlinson clearly believes it ought to be. Messrs Pestell and Denny express
some confusion about the place that Quartz should occupy amongst Aqualisa’s
product range, regarding it as a niche product that will not replace Aquavalve, the
company’s “bread and butter”. They do not seem conscious of the fact that, even if
overall volumes are static, the company has the opportunity to leverage the
enhanced customer utility offered by Quartz to move consumers along the value
equivalence line (thereby moving more of them into the higher margin premium
segment).
Nor do they seem alive to the possibility that Aqualisa may be able to exploit Quartz’s
innovative “wow” factor to generate brand and reputational value (thereby increasing
its share of a mixer and power shower market of which it enjoys currently a modest
16.5%). The fact that the sales staff spend 90% of their time on maintaining
relationships with existing clients – including their loyal plumber base – is also a
problem. Unless they are incentivised to develop new customers, they will not do so.
This may reflect a lack of focus at the top. Rawlinson seems clear himself of the
potential of Quartz’s disruptive technology to secure success in the market place.
But there is a question mark over the extent to which he has communicated this
through the company; and his preoccupation with the wider applications of
Aqualisa Quartz
4
electronics in the bathroom is unfortunate and potentially diverting given the rather
more pressing – and in any case logically prior – need to make Quartz a commercial
success.
Finally, the company’s existing sales and advertising literature fails either effectively
to articulate Quartz’s real selling point to customers or to capture the “wow” that
customers feel for the product when they see it in the showrooms. The message is
that Quartz will revolutionise showering: but the advert that we have examined
focuses on the product’s technical specifications rather than either its aesthetic or
functional benefits to consumers or its advantages to plumbers.
Marketing strategy: articulating the Quartz value proposition so that
plumbers cannot resist and generating pull from consumers
Quartz has to overcome plumbers’ predisposition to stick with what they know. That
means giving them a convincing – and hence soundly economic – rationale for
change. Aqualisa’s marketing effort has to date focused on the fact of Quartz’s ease
of installation, which can save up to 75% of standard installation time. Yet the
company does not seem to have developed the unanswerable logic that this will
enable plumbers to make more money. Indeed, currently Quartz runs the risk of
turning plumbers off: what interest could they have in pushing a shower from the
installation of which – on a per-unit basis – they stand to appropriate less value (in
absolute and relative terms) than is currently the case?
Aqualisa needs to show plumbers why it is in their interests to recommend and install
Quartz. This comes down to demonstrating to them that, although they will do less
work on each installation, they will be able to charge higher hourly rates (that is
towards the upper end of the range); that they will be able to service at least three if
not four times as many customers (with demand pent up given current six month
waiting times); and that the work is so simple that they can use relatively inexpensive
apprentices and juniors to do the work. The table below illustrates how plumbers can
effectively double their revenues by installing four times as many showers and
charging premium rates for reduced time that they spend on each job.
Hours per installation
Plumber charge per hour
Total cost of plumber
Number of jobs in 48 hours
Total plumber revenue
Quartz
4
80
320
4
1280
Traditional mixer/power
16
40
640
1
640
Even if plumbers charge rather less, say €60 per hour, to install Quartz they will still
make more than they do at present.
The beauty of this is that it will allow Aqualisa to appropriate more of the value from
each shower unit sold than it does at present, both proportionately and – given the
increased selling price and margin that Quartz commands – without substantially
increasing the overall cost to customers. Indeed, compared to Aqualisa’s current
flagship Aquavalve 609, Quartz ought to cost customers as much as €175 less (once
Aqualisa Quartz
5
installation costs are taken into account) while delivering €50 more in margin to
Aqualisa.
Cost of shower
Cost of plumber
Total cost to customer
Quartz
850
320
1170
Aquavalve 609
715
640
1355
What Aqualisa, therefore, has the potential to do is move customers along Aqualisa’s
virtual value equivalence line – giving them increased value at an increased price –
without affecting overall the cost of what they are acquiring (a working shower) and
hence overall demand. All this shows that there is very little need to reduce the
product’s price in the market; indeed, if Aqualisa were to go down this route, it would
simply be increasing the amount of value that plumbers and showrooms could
appropriate to its detriment.
Quartz
VEL
Value to customers
Aqualisa’s
existing
products
By improving the
customer offering,
Quartz has the potential
to move customers
along the VEL for
shower units, improving
margins for Aqualisa,
without increasing
overall costs of installing
a shower for consumers
Cost
Aqualisa also needs to build on anecdotal experience which suggests that
consumers can be effective in influencing change-resistant plumbers. That means
capitalising on Quartz’s “wow” factor, generating pull from customers via the glossy
magazines and the showrooms where many mid - and premium end customers go to
get ideas, even if their subsequent intention is to source a shower via their plumber.
So what should Aqualisa do?
Aqualisa needs to deploy a combination of push strategies, designed to educate
plumbers and the trade shops that supply them of the compelling value proposition
that Quartz represents. And at the same time, it needs to generate a little pull from
customers “wowed” by its innovative and aesthetically pleasing features.
In practical terms this means:
Aqualisa Quartz
6
¾ educating the sales force on the importance of Quartz to the firm’s future and
encouraging it to market the product aggressively to existing trade customers,
including the pack of “pet” plumbers. Rawlinson needs to be clear with his top
team that the company cannot simply grow fat on the profits derived from its
current range; the fact that Quartz will deliver demonstrably higher margins
should make it easier to persuade them that – even if all it does is cannibalise
existing sales without growing market share – it will improve returns. He also
needs to stop tinkering with the R&D guys on the apparently endless
opportunities for digitising the bathroom; this sends the wrong signal to his people
and fails to convey the single-mindedness with which the company should be
seeking to market Quartz;
¾ actively incentivising the sales team to seek out new customers. Quartz’s
prospects are harmed by the fact that it is not sold in 60% of trade shops
(impeding a plumber’s ability to switch even if he should want to) and is absent
from 75% of up-market showrooms (which makes it harder than it ought to be to
generate favourable pull from impressed customers). The 90/10 balance of sales
team effort needs to be adjusted in favour of acquiring new customers,
particularly in the showrooms (on the basis that, if plumbers can be convinced,
they will exert their own pull on trade shops);
¾ taking the plunge and investing in the proposed advertising campaign. Aimed
directly at customers, this needs to be aspirational, majoring on the “wow” factor
whilst making clear that such a desirable shower can be acquired – once
installation costs are included – at little, if any, premium. We recommend that the
chosen media should be glossy lifestyle magazines (of the Homes and Gardens
variety), along with a below the line campaign through the showrooms.
Rawlinson needs to see the cost of such a campaign (up to €4M), and the dent it
would make in projected company profits (€17M) in context. With Quartz’s
margin of €275 (€345 for the power shower version), the company needs to sell
only around 14,000 over two years to recover its costs. Although significantly in
excess of the paltry number that it has sold to date, this amounts to only 2.3% of
total mixer/power shower sales via the showroom and trade shop channels.
Given Aqualisa’s existing share of this market, and the value of its Quartz
offering, this ought to be a target well within the company’s grasp. Investing in
advertising might also have the side-benefit of demonstrating to the sales team
the importance that Rawlinson places on them selling Quartz (if necessary at the
expense of its hitherto core products). This should also facilitate the development
of the Quartz/Aqualisa brand, which may have value when – as is surely likely –
imitator “me-too” products emerge on the market in the future.
¾ investing in the buy-in of the plumbers. They are very sticky and could provide
strong loyalty but must be converted first. Strong effort should be made to explain
the value proposition as outlined earlier of how they also can extract more value
by this installation. The company should consider advertising the product more
directly in the trade press, majoring on the favourable economics of its ease of
installation (rather than, as in its current literature, simply the time saved). This
might be bolstered by the initiation of a training programme designed to
demonstrate how simple Quartz is to install. In addition, the company might also
Aqualisa Quartz
7
offer an extended warranty on the product. By putting its money where its mouth
is, the company might successfully overcome plumbers’ concerns about the
reliability of electronically controlled showers.
What should Aqualisa avoid doing?
We do not recommend that Aqualisa targets the low-end DIY market. At one level,
this is as Rawlinson himself acknowledges, attractive: it accounts for very high
volumes of sales of basic showers; Aqualisa already has high penetration, with its
products already stocked in 70% of outlets; and the ease of Quartz’s installation may
make it attractive to DIY-ers hoping to avoid the need for professional installation.
But there are also real pitfalls. First, the volume of mixer and power showers sold
through this channel is relatively small (at 100,000 units less than one sixth of that
sold elsewhere). In any case, it is hard to see that customers primarily driven by cost
would be motivated to pay a price premium for Quartz’s much higher value offering.
This would leave Aqualisa having to reduce the price, which – given the low retail
prices prevalent in this channel – would significantly impact on its margins (potentially
rendering them nugatory). This would make it much harder to sustain price levels in
the other channels. On top of this, it is hard to see how a strategy of targeting the
product at that segment of the market that has traditionally eschewed the use of
plumbers would be compatible with a strategy that places wooing plumbers at its
heart.
Nor would we encourage Rawlinson to pursue the idea of targeting developers, for
the reasons that he himself articulates. Although volumes might be high, margin
erosion would likely be significant; and in any case, it is not obvious that such an
approach would generate much consumer pull, given the time-lag. That said, it might
be worth seeking to get Quartz installed in up-market boutique hotels, spas and
gyms. Volumes would be much lower – with a correspondingly less heinous impact
on revenues – and, with installation and exposure times much quicker, customers
demand might be more rapidly stimulated through exposure through such channels.
Finally, as already indicated, we do not believe that Aqualisa should reduce Quartz’s
price. To do so, given the economics outlined above, would unnecessarily cede
value to plumbers and merchants. With the company enjoying a two year window
before competitors catch up, it should seek to charge a premium price for a high
value product (accepting that it may have to reduce prices in due course).
Conclusion
Aqualisa is, as Rawlinson acknowledges, doing very well. Its profits in 2000
amounted to nearly 26% of turnover. But Quartz offers it the opportunity both to grow
turnover and brand and to position itself for the future. It should grab the opportunity
with both hands, investing serious effort in communicating in unambiguous terms the
product’s virtues to those who have such an influence in shaping customer demand
(plumbers); and those who are the ultimate customers (consumers). In doing so, the
company needs to recognise that Quartz’s features appeal to these different groups
in different ways; and its strategy needs to reflect this. For a company whose sales
and marketing budget amounted in 2000 to around 10% of turnover, there is scope
for upping its efforts in order to land what is an impressive prize. But increases in
Aqualisa Quartz
8
expenditure will not be sufficient; what is also necessary is a strategy which
communicates Quartz’s added value to plumbers (in economic terms) and to
consumers (in aesthetic and functional terms).
Aqualisa Quartz
9
ID (Group Leader) Grade
8190
8192
8194
8195
8196
8199
8200
8201
8202
8203
8204
8205
8206
8207
8208
8209
8211
8213
8216
8217
8225
8227
8230
8231
8247
8248
8252
8254
8288
8293
8298
8312
8323
8327
8328
8379
60
55
75
45
55
50
55
55
65
55
70
50
55
60
65
60
50
60
50
60
50
60
45
65
55
65
80
60
60
60
65
45
50
55
65
70