Marketing Analysis for Customer
Value Management
An Overview
October 2004
Dilip Soman
Hong Kong University of Science and Technology
What is this course all about?
• Taking marketing beyond the 3C’s and 4P’s to the
creation and management of value
• Adding some science to what most people think is art
• Looking at the evolution of marketing thought and
applications over the time
• Looking at efficiency in addition to effectiveness
• Developing a modeling approach to structuring and
solving marketing situations
2
What is Customer Value
Management?
• Managing a business as a portfolio of
customers
• Adapting and delivering offering to meet
their needs
• Being able to measure and influence value
over time
• Developing internal systems to coordinate
offerings to the customer
3
Marketing Analysis: Our Roadmap
Overview: Customer Value Management (CVM)
Quantifying
Value
Services
Identifying &
Developing
Good Customers
Brand Value
Customer
Dynamics &
Loyalty
Value Pricing
Executing
CVM
Channel Value
4
Marketing Analysis: Our Roadmap
Overview: Customer Value Management (CVM)
Quantifying
Value
Identifying &
Developing
Good Customers
- Acquisition &
Retention Costs
- LTV and EVC
- RFM
- Market Research
- Database Mktg
Services
Customer
Dynamics &
Loyalty
Executing
CVM
- Marketing Budget
allocations
- Loyalty Programs
Brand Value
Value Pricing
- Brand Equity
- Brand Value
- Measurement
- Power Pricing
- Customization
- Dynamic Pricing
- Market Making
Channel Value
- Channel Pricing
- Downstream value
5
Marketing Analysis: Our Roadmap
1&2
Overview: Customer Value Management (CVM)
Quantifying
Value
Identifying &
Developing
Good Customers
3
3/4
Services
Brand Value
5
Customer
Dynamics &
Loyalty
Executing
CVM
4
Value Pricing
6/7/8
Channel Value
9&10
6
Course Web Page
Don’t forget the tilda
http://teaching.ust.hk/~mark690p/emba.html
NO “bm”
NOT www.bm.ust.hk
Lowercase
7
Evaluation 1
• Group Assignment
40 points
– Case analysis of Tweeter etc.
– Guidelines and format given in syllabus guidelines (5
pages of text + exhibits)
– No presentations
– Prepare your report in a Question / Answer format
– Due before class begins on Sunday, October 17.
• Groups will also work together on the pricing game
on Sunday!
8
Evaluation 2
• Final Examination
40 points
– Take home analysis of “The Medicines Company”
case (Case will be distributed next week)
– Preparation questions are given on pg. 7 of the
syllabus (5 pages of text + exhibits)
– Due Friday, November 5th, 2004 in the EMBA
office
9
Evaluation 3
• Class Participation
20 points
10
Marketing Analysis: Our Roadmap
Overview: Customer Value Management (CVM)
Quantifying
Value
Identifying &
Developing
Good Customers
Services
Brand Value
Customer
Dynamics &
Loyalty
Value Pricing
Executing
CVM
Channel Value
11
Marketing Analysis: Our Roadmap
1&2
Overview: Customer Value Management (CVM)
1) Emerging marketing philosophies
2) Marketing research and intelligence
3) Customer management
4) Relationship marketing and customization
5) An example
12
Marketing Analysis: Our Roadmap
1
Overview: Customer Value Management (CVM)
1) Emerging marketing philosophies
13
The Evolution of Marketing Philosophy
Product Orientation
Success will come to those organizations that
bring to the market goods and services that they
think will be good for the public.
Sales Orientation
Success will come to those organizations that best
persuade their customers to accept their offerings
rather than competitor’s (or none at all).
15
Marketing Myopia
• Inability to look beyond the product offering and to
consumer needs, Levitt (HBR 1960, 1975)
Company
Don’t want
Want
Black & Decker
Xerox
MTR
Airlines
Drill Bits
Photocopiers
Trains
Route network
Holes
Copies
Transport
Easy
Connections
17
The Evolution of Marketing Philosophy
Customer Orientation
Success will come to those organizations that best
determine the perceptions, needs and wants of
target markets and best satisfy them through the
design, communication, pricing and delivery of
appropriate offerings.
Company activities: Understanding customers,
continuous improvement, focus on quality,
measuring satisfaction
Elements of Marketing Strategy
• Product / Market Selection
– Segmentation, targeting, positioning
– Good positioning: Recall + Uniqueness +
Reason to buy
• The 3C and 4P framework
– Company, Customer, Competitor
– Product Policy and Brand Management
– Pricing Policy
– Place (Distribution) Policy
– Promotion (Communication) Policy
19
Marketing Analysis: Our Roadmap
1&2
Overview: Customer Value Management (CVM)
1) Emerging marketing philosophies
2) Marketing research and intelligence
18
Market Research
•
•
•
•
•
Reduces uncertainty
Provides basis for segmentation
Monitors changes over time
Can give reasons underlying behavior
But, could suffer from biases
19
Problems with Market Research
• Consumers may not have insights into their own
decision making processes
• Manner of asking question influences answer
(leading question, loaded question, social norms)
• Asking intention changes behavior
• Cost of marketing research is rising as labor costs
increase (data collection)
• The economies of scale are not very significant
(Video)
20
The Evolution of Marketing Philosophy
Intelligence Orientation
Success will come to those organizations that
understand each customer as a unique source of
demand and are able to create offerings that
maximize value to both customer and the
organization
Company activities: Information systems,
decision aids and decision support systems,
customer tracking, lifetime value assessment
Marketing Analysis: Our Roadmap
1&2
Overview: Customer Value Management (CVM)
1) Emerging marketing philosophies
2) Marketing research and intelligence
3) Customer management
22
Evolution in Customer Management
•
Tiered marketing: Customize based on
historical data
•
Prediction Models: Customize based on
predicted future consumption
•
Behavioral Shaping: Customize marketing to
narrow gap between predicted and observed
behaviors
25
Dilip’s variant of Amazon.com
Revenue Models for Marketing:
Where can we add value?
Revenue = Total market x Market share x Yield
Mkt Development
Value
Share / Competitive
Market Share = Trial Rate x Repurchase Rate
Store sales = Traffic x Transactions
Website Revenue: Clickthrough x Quality
26
The Customer Life Cycle
A
Prospect
Trial
Warm Prospect
Repeat Purchase
“Loyal”
Cheaper to serve
Referrals
R
Cross-purchase
Price premium
for value services
29
Cash Flow over a Customer’s Lifetime
6
5
4
2
7
Price
Premium
Increased Spend
3
1
Reduced Cost
Referrals
Base Profit
-2
Acquisition Cost
Years
30
Value Creation
The two sides of the value coin
EVC and LTV: Two sides of a relationship
Low
No basis for
relationship
Firm is good at
value creation
but poor at value
extraction
High
Value of Customer
EVC = Expected Value to a Customer
LTV = Lifetime Value of a Customer
Customers are
valuable to firm,
but may have no
incentive to
purchase
Bliss point for
sustainable
long term
relationship
Low
High
Expected Value to Customer
32
Lifetime Value of a Customer
V = Σt (Rt - Ct) / (1+ i)t
Net Value = V - A
Where
R = Revenue
C = Cost to Serve
T = Lifetime of the Customer
A = Acquisition Cost
Expected Value to Customer
The dollar benefit - in present value terms to your customer if he uses your product
instead of the best current option
30
Chicken Dilemmas
Cages
Feeding Trough
31
The Value of Experiences
• The Economics of Emotional Experiences
– Consumers are coherently arbitrary
– They fall prey to anchoring effects, and are
driven by market prices
– Value of experiences is a function of:
•
•
•
•
•
Trend over time
Unexpected benefits and ability to “read my mind”
End state
Peak experience (highlights)
Good (ambiguous?) positioning
32
The Causal Link
Product and Service
Value of Experience or EVC
LTV
33
Marketing Analysis: Our Roadmap
1
Overview: Customer Value Management (CVM)
1) Emerging marketing philosophies
2) Marketing research and intelligence
3) Customer management
4) Relationship marketing and customization
34
1-to-1 or Relationship Marketing
The Peppers and Rogers Principles
1) Identification: Without a unique identifier,
relationships are not possible.
2) Differentiation: Ask “why are customers
different’” not “why are products different?”
3) Interactivity: The goal should be to engage
customers in a dialogue
4) Customization: Mass customization technologies
are key.
35
How to Customize: Different Systems
1) Rule Based: Refinement and improvement of targeting
- Triggered promotions
- Individual reports
2) CASE (Computer Assisted Self Explication)
This screen collects data on cutoffs and importance weights of
attributes.
This screen measures tradeoffs between attributes (further validation
of the importance weights)
This screen collects data to validate the decision model
The agent makes recommendations…...
3) Endorsement: Decision is aided by providing information
or opinions to the customer
4) Collaborative Filtering:
- Since attributes are difficult to quantify, CASE may
be difficult to implement
- Instead, the agent profiles the customer and tries to
find others with the same profile
- The agent then recommends products that have been
purchased by similar customers
46
Marketing Analysis: Our Roadmap
1
Overview: Customer Value Management (CVM)
1) Emerging marketing philosophies
2) Marketing research and intelligence
3) Customer management
4) Relationship marketing and customization
5) An example
44
The Story of King Soopers
Micromarketing in the Grocery Business
45
King Soopers
• Supermarket chain - 86 stores in Colorado
• Division of Kroger in Colorado
• Three trends starting 1996:
– Growth of discounters
• Walmart, Target
– Category killers
• Petsmart, Wild Oats
– Eroding customer loyalty
• “Multiple shopping lists” behavior
• Strategies for reversing trends:
– Building bridges from core competencies (produce,
meat, dairy, foods + convenience) to other categories
– Focus on values offered in salient anchor categories
46
The Micromarketing Model
The Loyalty Program
1) Customer Tiers
2) Tiered Pricing
3) Card based
merchandising
2
1
Loyalty Card
The Relationship Program
1) Customized Promos
2) Customized Discount
3) Customized cross-ruff
merchandising
Card Marketing
1) Discounts and noclip couponing
2) Affinity partners
3) Super credit card
Database Management
4
3
1) Hardware / Storage
2) Data warehousing
3) Market basket analysis
4) Tracking and triggering
47
Summary
• Marketing is moving into an intelligence era
• Relationship marketing involves understanding the
need of each customer as a unique source of
demand
• The customer lifecycle captures various stages in
the evolution of this relationship.
• Profits and revenues can be raised by adding
value, not merely by increasing share or market
size
• Customization is important in businesses with
high levels of heterogeneity along needs and value
48
Summary
• The four key factors of relationship marketing are
identification, differentiation, interactivity and
customization.
– The first may be the trickiest
• A relationship approach is especially easy in
situations where:
– The nature of the products typically imply multiple
visits or contacts with the marketer
– Customers vary in needs and volumes
– Identification is easy, data is relatively easy to obtain
– A large fraction of customers value service
49
What is the PV of a perpetuity of $A? What is
the NPV if d = discount rate and g = growth
rate?
50