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MM Summary

Strategic Insight in Three Circles, pg 47

Three circles in right positioning give good insight to what strategy internal and external means First circle: Thing about what customers value and why - Exploring deeper values can open managerial eyes and reveal new opportunities for value creation Second circle: The teams view of how customers perceive the companys offerings - Overlap between circle 1 and 2 shows how well the companys offerings are fulfilling needs - Customers unexpressed problems can become a source of relationship building and growth opportunity Third Circle: The teams view of how customers perceive the offerings of the companys competitors Overlap between 1 and 2: our points of difference - How big and sustainable are our advantages? - Are they based on distinctive capabilities? Overlap of all three: Points of parity - Are we delivering effectively in the area of parity? Overlap of 1 and 3: Their points of difference - How can we counter our competitors advantages? Form hypotheses and test them by asking customers

Beating the Market with Customer Satisfaction, pg 49

To improve customer satisfaction, start with customer service Customer service tends to suffer on long term goals when under financial pressures Companies want to meet the short term demands of Wall Street Research shows that customers are fed up with bad service and that increased satisfaction has a positive impact on spending, cash flow and performance. Study by Claes Fornell - Relationship between customer satisfaction and financial success - Created a hedge portfolio in which stocks are bought long and sold short in response to changes in the ACSI (American Customer Satisfaction Index) ACSI is an indicator of economic success that reflects levels of customer satisfaction with goods and services from about 200 companies in over 40 industries. More than 65000 interviews a year Todays stock valuation methods fail to incorporate the kind of information that forms the basis for making stock trades in the ACSI portfolio. If they did, the ACSI would closely track the S&P 500.

The implications of the ACSI study will differ from one company or industry to another. - Businesses with long purchasing cycles changes in customer satisfaction will take a while to make a difference in sales etc - Service-intensive industries when satisfaction increases, customer behavior will quickly change, leads to them recommending the brand to others

A Note on Consumer Market Segmentation, pg 51

The goal of market segmentation is to partition the total market for a product or service into smaller groups of consumer (Segments) based on their characteristics, their potential as consumers for the specific product or service in question, and their differential reactions to marketing strategies. Ways segmentation aids marketing decisions - Identify groups of comsumers to whom they could target marketing efforts - Helps to avoid trial and error methods of strategy formulation, tailoring of the strategy is possible - Aids in the implementation of the marketing concept - Provides important data on long-range planning The rationale and Assumptions Underlying Segmentation - Not appropriate in every marketing segmentation - Often there are clusters of consumers within the total market that are relatively homogenous with regards to products and services - Each different market segment can be said to have its own demand curve Assumptions underlying Market Segmentation - Because consumption behavior is generally not random, it is possible to identify groups - Once the market has been segmented, the marketer can select the best segments whose needs they can fulfill, and so concentrates on this segment - If more than one segment is desirable, then different marketing strategies will be designed for both Criteria for segmentation (the defined segments are) - Internally homogenous - Identifiable - Accessible - Have effective demand The marketer much choose the segmentation dimensions that are more appropriate for the situation Dimensions on which to segment the market - Find dimensions that are most clearly predictive of probable purchase and product/service use - 2 main classes o Consumers background characteristics Who the customer is as individual o Consumers market history How they used the product/ how they shopped for it What they have done in the marketplace - Segmentation procedure

Appraisal of consumer descriptors to Define the factors for differences Discriminate the major segments Choose the most promising segment Detail characteristics of target group

Important factors and variables for market segmentation (Consumer background) 1. Geography oldest and basic descriptor, not sufficient alone 2. Demographic basic, included as a factor in most segmentation, important for media decisions 3. Psychographic personality traits, perceptions, attitudes, social roles; Useful as has direct link to purchase motivation and product usage 4. General Life-style correlation of demographic and psychographic, activities and interests; gives rich, multi-dimensional profiles, integrates variables into pattern Important factors and variables for market segmentation (consumers market history) 1. Product usage brand loyalty, attitudes; gives a good understanding of present situation 2. Product benefit expectations of product performance, needs fulfilled; useful if product can be positioned in a number of ways 3. Decision-process shopping patterns, price/outlet/promotions; used in conjunction with consumer characteristics to identify individuals involved Final definition of market segments will be mostly based on one or two factors - One on characteristics and one on behavior - Other factors used to support or enrich Remember - Because there are different individuals with different demographics or behaviors, doesnt mean its a true market segment - Dont define different life-styles unless they have differences towards your product - Segments must be clear, but also help predict differences in consumers reaction to marketing strategies that will be developed - Segmentation is an iterative procedure Segmentation Analysis and Application - Steps in segmentation 1. Define the purpose and scope of the segmentation 2. Analyze total market data 3. Develop segment profiles 4. Evaluate segmentation 5. Select target segment 6. Designing the marketing strategy for the target segment 7. Reappraisal of segmentation See page 55 for more details on this one. It is nicely summarized there. Segmentation helps reduce risk in the market place by: o Providing a rich profile of target customers customize marketing strategies o Planning tool to identify open segments and market opportunities, creating a picture of the consumer market for new developments

The Case Method of Instruction, pg 69

What are cases for? - Cases are best to show problems that might arise - Teach diagnosis - Isolating problems to use tools and techniques learnt - Teach habits and attitudes - Teach elusive skills needed What is a case? - A statement of conditions, attitudes, and practices at a time in an organizations history. - Describes challenging problems - Gives some, not all facts - Written so that you have to rearrange facts and interpret them - Some facts are irrelevant The contract in a case class - Has rules, most important ones are: o Prepare you need a point of view, a course of action o Participate prepare icebreakers o Adapt defend your point, but if you are wrong, move on Preparing a case before class - Ask a standard set of questions to appraise the situation, make sure you dont overlook something - Probe carefully into the problems - Reach a diagnosis and propose a course of action (treatment, tests or both) - First read it through to get the big picture, then slow to get the points o What business are we in here? o Think about the facts youhave o Think of other cases that are similar o Formulate the problem o Group discussion, bounce ideas off each other Discussing a Case in Class - Opening speaker should present a statement of the problem, defend it, and present a overview of a solution - Then let others speak - Tailor your contribution to the discussion in the moment - Aim to be concise, cogent, compelling, distinctive - Listen and be willing to shift your position - Dont start too late - Analysis should be relevant to a decision - Particular final solutions are not what matter, rather that you learn something from the logic of the analysis The job of the instructor - Build and focus conflict - Clarify conflict - Sets the path of discussion - Delivers a wrap up

Conclusion - Case class is risky - Cooperation to find the line between overcontrol and chaos

Note on Low-Tech Marketing math, pg 71

Basic terminology - Types of cost o Profit = revenues taken in costs incurred o Fixed costs (look it up if you dont know it yet) o Variable costs (ditto) o Variable cost per unit often in marketing cases o Variable costs change per total output (see page 72) o Most marketing cases, we assume that the variable cost is constant - Margin calculations o Unit margin or unit contribution = per unit revenue variable cost per unit o Margin in percentage = (unit margin/revenue per unit)*100 o Selling price = cost/ 1 (%margin/100) o Margin structure for a distribution channel See figure 2, pg 73 Break-Evens - Recovering fixed costs o BEV (break-even volume) the number of units sold which enables a company to cover its fixed costs o BEV = fixed costs/ margin per unit - Changes in fixed costs o Same type of calculation to see what other potential investments would have to yield to be worthwhile Changes in Margin per Unit o Can see the impact of changes in the unit margin Market Size and Share - Useful to convert the BEV into a share of market number - How you define the market changes this of course - Need to select an appropriate time horizon Impact of Price Decisions - See figure 3, pg 76 for drivers of profit - If looking at different prices, need to know the sales volume required to maintain the total margin - Increases and decreases have highly leveraged effects - Effects are most pronounced when VC are high and unit margins are small Using the numbers - Numbers become significant when there is a benchmark to compare them to - Benchmarks are developed by understanding market size, growth rate, and competitive activity - Requires intuition

Strategies to Fight Low-Cost Rivals, pg 101

Companies have the options o Attack o Coexist uneasily o Become low-cost players themselves Companies must invest a lot of time, money and people to fight rivals Obsession with traditional rivals has blinded companies to the threat from low-cost competitors These competitors offer products and services at a lower cost, by using forces of deregulation, globalization and technological innovation Most companies behave as though low-cost competitors are no different from traditional rivals or as though they dont matter Responses from market leaders o Set off price wars, damaging themselves more than competitors o Become more defensive differentiate their products o Launch a low-cost business of their own. Last two are called the dual-strategy

The sustainability of Low-Cost business - Are low-cost businesses a permanent enduring threat? - Successful price warriors stay ahead of bigger rivals by using tactics: o Focus on one or a few consumer segments o Deliver the basic product or provide one benefit better than rivals do o Back everyday low prices with superefficient operations to keep costs down - Aldi success o Small product range o Small stores o Sells more of each product than rivals Lower price negotiation o High quality products o Agile supply chain o Side streets, where property is cheap o Display products on pallets o Customers bring own shopping bags or buy them in store o Pay a refundable deposit for trolleys o Several checkout lines o Fast scanning machines o Countrywide pricing o Third most trusted brand after BMW and Siemens o Average markup is 13% where most retailers are at 28-30% o 20% share of german supermarket business - Low costs have a different pricing, lower gross margins, but higher operating margins - High asset turn over ratios impressive return on assets - 12 of top 25 richest people have low-cost business money - Low-cost companies stay ahead of market leaders because consumer behavior works in their favor - If customers buy only on price, they will go to the next competitor that offers a lower price - See page 104 for the framework for responding to low-cost rivals

The Futility of Price Wars - Question: is our new rival targeting a segment we dont want to serve or will it eat into our sales? - If not, dont need to worry about them, for now o wait-and-watch strategy o Works for companies at the top of the pyramid - Most low-cost players alter customer behavior permanently, getting people to accept fewer benefits at lower prices - Consumers are becoming cynical about brands, and can research online - Pricing below cost is illegal in many countries - When market leaders copy critical elements of low-cost models, they are unable to match prices. Interactions between elements are most important When Differentiation Works - Forms of differentiation o Design cool products o Continually innovate o Offer a unique product mix o Brand a community o Sell experiences - Three conditions determine their efficacy o Dont use these tactics in isolation o Persuade consumers to pay for benefits o Companies must bring costs and benefits in line before implementing it - Strategies that help an established player coexist with low-cost rivals can work initially, but as consumers become more familiar with low-cost options, they tend to migrate to them Dealing with Dual Strategies - Business models of low-cost appear simpler - Companies should set up low-cost operations only if the traditional operation will become more competitive as a result and the new business will derive some advantages that it would not have gained on its own - Low-cost operations offer customers a small number of products, through cost efficient distribution channels - The low-cost business needs to have its own name - Low-cost should be housed separately - Common ownership often imposes constraints on low-cost operations - Dual strategy only delivers results when the low-cost operation is lauched offensively to make money o Old and new business should compete with each other Switching to Conquer - If no synergies between traditional and low-cost option o Can switch from selling products to selling solutions o Can convert to low-cost players - Selling solutions o Basic products become commodities, now solutions can be sold o Expand the market to customers who are willing to pay for the benefits o Transforming current business model

Working with customers to understand their problems before designing their solutions o Manage customers processes and increase their revenues or lower costs and risks o Selling products as a part of the service results in pricing being less transparent Switch to low-cost models o Unlikely as will still have a profitable, although shrinking, business to manage o Need to acquire capabilities that are different to currently There will always be two kinds of consumers o Those who buy on price o Those who are partial to value

Customer-Based brand equity, pg 127

What makes a brand strong? How do you build a strong brand? Customer-based brand equity model (CBBE) o Incorporates theoretical advances and managerial practices in understanding and influencing consumer behavior. o Approaches brand equity from the perspective of the consumer Two important questions marketers face o What do different brands mean to consumers? o How does the brand knowledge of consumers affect their response to marketing activity? Power of a brand lies in what customers have learned, felt, seen, and heard about it CBBE:the differential effect that brand knowledge has on consumer response to the marketing of that brand o Differential effect Differences in consumer response If no differences = commodity o Brand knowledge Brand equity depends on what resides in the minds of consumers o Consumer response to marketing Reflected in perceptions, preferences and behavior choice of brand, recall of points from an ad, response to promotions, evaluations of brand extensions Perceptual maps: visual tools to portray perceptual differences among brands expressed by consumers Brands have an impact on results of blind taste tests

Brand Equity as a Bridge - Consumer knowledge drives the differences in terms of brand equity - Brand equity provides a strategic bridge from past to future - Brands as a reflection of the past o Marketing as investments in what consumers learned, felt and experienced o The quality of investments is more NB than the quantity Can even overspend, if not done wisely - Brands as a direction for the future o Brand knowledge created dictates appropriate and inappropriate future directions o Consumers decide which are appropriate, future of brand lies with consumers - Other factors can influence brand success o Employees

o o o o

Suppliers Channel members Media Government

Making a Brand Strong: Brand Knowledge - Brand knowledge is key to creating brand equity creates differential effect - Associative network memory model views memory as consisting of a network of nodes and connecting links (nodes = stored info, links = strength of association) o Brand knowledge as a node o Brand awareness is the strength of the node or trace in memory o Brand image is the consumers perceptions about the brand, or associations o Brand image is different for all, but common parts overlap, and this is the brand image Sources of Brand Equity - CBBE occurs when the consumer has a high level of awareness and familiarity with the brand and holds some strong, favorable, and unique brand associations in memory - Marketers must convince consumers that there are meaningful differences among brands - Brand Awareness o Brand recognition Consumers ability to confirm prior exposure to the brand (will they recognize the brand as one to which they have already been exposed?) o Brand Recall Consumers ability to retrieve the brand from memory when given the product category, the needs fulfilled or purchase or usage as a cue Eg, cereal Kelloggs Brand recall is NB for service and online brands o Advantages of brand awareness Learning advantages Influences the formation and strength of associations First step: register the brand in the minds of consumers Consideration advantages Consumers must consider the brand whenever they are making a purchase for which it would be acceptable Very few loyal customers, but brands in a set they would normally buy Choice advantages Can affect choices between brands in brand set In some cases: buy brands that are more familiar, well-established Elaboration-likelihood model: attitude change and perceptionconsumers may make choices based on brand awareness considerations when they have low involvement (lack purchase motivation, or purchase ability) o Consumer purchase motivation: choosing a bran is not a lifeor-death decision for many consumers. A lack of perceived differences

Consumer purchase ability: dont have the knowledge or experience to judge product quality even if so desired. Consumers use shortcut (heuristic) to make their decisions Establishing Brand Awareness Increasing the familiarity of the brand through repeated exposure More elements marketers can reinforce, the better Repetition increases recognizability Improving brand recall requires linkages in memory to product categories or other purchase cues Ways to pair brand with product category Logo Slogan Symbols Characters Packaging Shock advertising with bizarre themes invariably fail to create strong category links because the product is not prominent in the ad. Create ill will. Seem desperate. Brand Image Link strong, favorable and unique associations with brand in memory Brand associations not only through marketing, also experience, other information and media, word of mouth, assumptions or inferences Strength of Brand Associations The deeper a person thinks about product info and relates it to existing brand knowledge, the stronger the resulting brand associations will be Two factors that strengthen association Personal relevance Consistency with which it is presented over time Factors that affect the strength and recallability of brand association Brand attributes Brand benefits Direct experience create the strongest brand attribute Word of mouth NB for restaurants, entertainement and personal services Advertising creates the weakest associations Favorability of Brand Associations Choose best position for brand Convince customers that the brand possesses relevant attributes and benefits Desirability delivered by the product Convenient, reliable, effective, efficient, colorful Desirability how relevant, how distinctive, how believable Deliverability actual or potential ability of the product to perform, prospects of communicating that performance, sustainability of the actual communicated performance over time Uniqueness of Brand associations Sustainable competitive advantage or unique selling proposition Non-product related attributes more easily create unique associations Strong and unique associations are critical to success A category may share beliefs and associations overall attitudes

Certain attributes or benefits are prototypical for a category (red for ketchup) Product category attitudes can be a particularly important determinant of consumer response Associations may be situation dependent

Building a Strong Brand: the Four Steps of Brand Building 1. Ensure identification of the brand and an association of the brand in customers minds with a specific product class or customer need a. Brand identity (who are you?) 2. Firmly establish the totality of brand meaning in the minds of customers by strategically linking a host of tangible and intangible brand associations with certain properties a. Brand meaning (what are you?) 3. Elicit the proper customer responses to this brand identification and brand meaning a. Brand responses (what about you? What do I think or feel about you?) 4. Convert brand response to create an intense, active loyalty relationship between customers and the brand a. Brand relationships (what about you and me? What kind of association and how much of a connection would I like to have with you? ) Brand building blocks - See pg 140 for pyramid ( cant really see it clearly in my copy) - Brand Salience o Measures awareness of the brand o Depth and breadth of awareness Gives the product an identity by linking brand elements to a product category and associated purchase and consumption or usage situations Depth how likely the brand is to come to mind and ease at which is does Breadth the range of purchase and usage situations in which the brand element comes to mind - Product category structure o How product categories are organized in memory o Products in a hierarchy Highest level: product class Second: product category Third: product type Lowest: brand information o Consumers make decisions in a top down manner - Strategic implications o Depth and breadth matter o Key question: not whether consumers can recall the brand, but WHERE they think of it, WHEN they think of it, and HOW easily and HOW often o Increase the breadth its a good idea! o More difficult to change existing brand attitudes than the remind people of their existing attitudes - Highly salient brand is one that has both depth and breadth of brand awareness Brand Performance - Product is at the heart of brand equity - Need to have a successful product for successful marketing

Brand performance: how well the product or service meets customers more functional needs quality, utilitarian, aesthetic, economic Five types of attributes and benefits underlie brand performance 1. Primary ingredients and supplementary features 2. Product reliability, durability, and serviceability 3. Service effectiveness, efficiency and empathy 4. Style and Design 5. Price Reliability: measures the consistency of performance over time Durability: expected economic life of the product Serviceability: ease of repairing the product Service effectiveness: how well the brand satisfies customers service requirements Service efficiency: the speed and responsiveness of service Service empathy: the extent to which service providers are seen as trusting, caring etc Performance may also depend on sensory aspects Pricing policy also plays a role

Brand Imagery - Depends on extrinsic properties incl ways to meet the customers psychological or social needs - Way people think about a brand abstractly - Intangible aspects of a brand - Four main intangibles 1. User profiles 2. Purchase and usage situations 3. Personality and values 4. History, heritage and experiences - Set of brand imagery associations is the type of person or organization who use the brand o Demographic factors Gender Age Race Income o Psychographic factors Attitudes toward life Careers Possessions Social issues Political institutions - Set of brand imagery associations tells consumers under what conditions or situations they must use the brand o Location o Formal or informal o Brands take on personality traits - Five dimensions of brand personality 1. Sincerity (down-to-earth, honest, wholesome, cheerful) 2. Excitement (daring, spirited, imaginative, up-to-date) 3. Competence (reliable, intelligent, successful) 4. Sophistication (upper class and charming) 5. Ruggedness (out doorsy and tough) - Personality formed through advertising, actors in ad, tone of ad, emotions or feeling used

User imagery and brand personality not always inline o Though are most likely to be related Can characterize brand associations making up the brand image according to three dimensions o Strength o Favorability o Uniqueness The order of these dimensions is also important, as without the one, you cant have the other Brand meaning is what helps to produce brand responses Brand responses in two categories o Brand judgments (head) o Brand feelings (heart)

Brand Judgments - Customers personal opinions about and evaluations of the brand - Four important judgments o Quality judgments Overall evaluations of a brand Most important attitude relates to quality and customer value and satisfaction o Credibility The extent to which customers see the brand as credible in terms of three dimensions Perceived expertise Trustworthiness Likability Whether consumers see the company behind the brand as good at what it does, concerned about its customers and likable o Consideration Depends on how personally relevant customers find the brand Unless they give it serious considerations and deem it relevant, customers will keep a brand at a distance Depends on strong and favorable brand associations o Superiority The extent to which customers view the brand as unique and better than other brands Critical to building intense and active relationships with customers Brand Feelings - Customers emotional responses and reactions to the brand - Related to social currency evoked by the brand - Transformational advertising: advertising designed to change consumers perceptions of the actual usage experience with the product - Emotional branding pg 149 figure 2-8 - Six important types of brand building feelings 1. Warmth soothing types of feelings, calm, peaceful (eg, Hallmark) 2. Fun upbeat, amused, lighthearted, joyous, playful etc (eg, Disney) 3. Excitement energized, experiencing something special (eg MTV) 4. Security safety, comfort, self-assurance, no worry (eg Allstate insurance) 5. Social approval others look favorably on their appearance, behavior etc (eg Mercedes)

6. Self-respect feel better about themselves, pride, accomplishment, fulfillment (eg Tide laundry detergent) ultimately what matters is how positive an experience is

Brand Resonance - ultimate relationship and level of identification that the customer has with the brand - resonance describes the natures of this relationship and the extent to which consumers feel they are in sync with the brand - characterized in terms of o intensity o level of activity engendered by this loyalty - four categories of brand resonance 1. Behavioral loyalty a. Repeat purchases b. The amount of share of category volume attributed to the brand c. Lifetime value is NB 2. Attitudinal attachment a. Beyond having a positive attitude b. View the brand as something special in the broader context 3. Sense of community a. Identify with brand community b. Online or offline c. Eg, Apple, Harley-Davidson, Jeep 4. Active engagement a. Willing to invest time, energy, money in the brand beyond what is needed for purchase b. Eg, join a club c. Customers become brand evangelists - Two dimensions to brand resonance o Intensity strength of attitudinal attachment and sense of community o Activity how frequently the consumer buys and uses the brand, and other activities other than purchase Brand-Building Implications - The CBBE model provides a road map for brand building - Five important branding tenets o Customers own brands True measure of brand strength is the way consumers think, feel, and act Strongest are brands with evangelists The power of the brand and its ultimate value to the firm reside with customers o Dont take shortcuts with brands More explicitly marketers recognize the steps and define them as concrete goals, the more likely they will give them the proper attention and fully realize them so they can provide the greatest contribution to brand building o Brands should have duality Appeals to both the head and the heart Strong brands blend product performance and imagery to create a rich, varied, but complementary set of consumer responses to the brand Provides consumers with multiple access points while reducing competitive vulnerability

Brands should have richness Brand meaning, creating bonds to the brands Both breadth and depth Brand judgments begon with positive quality and credibility perceptions Brand resonance provides important focus Priority for decision making about marketing To what extent is marketing affecting key dimensions of brand resonance? Consumer loyalty? Attachment? Community? Engagement? Some brands will be more meaningful to consumers than others

Creating Customer Value - Customer-brand relationships are the foundation of brand resonance - Customer relationship management o Customer relationship marketing (CRM) uses data systems and applications to track customer activity o Synthesizes all customer touchpoints to support future customer interactions o CRM requires installation of sophisticated hardware and complex software o Some use web based CRM o NB to take the customers point of view into account - Customer equity o The sum of lifetime values of all customers Affected by revenue, acquisition costs, retention and cross-selling (Blattberg and Deighton) o Optimal balance between what marketer spend on customer acquisition and what they spend on customer retention 1. Measure expected contribution towards offsetting fixed costs 2. Discount the expected contributions to a NPV at target rate 3. Add together discounted, expected contributions of all current contributions o Vital question for new products: will it increase customer equity? o Eight guidelines as a means of maximizing customer equity 1. Invest in highest value customers first 2. Transform product management into customer management 3. Consider how add-on sales and cross-selling can increase customer equity 4. Look for ways to reduce acquisition costs 5. Track customer equity gains and losses against marketing programs 6. Relate branding to customer equity 7. Monitor the intrinsic retainability of your customers 8. Consider writing separate marketing plans for acquisition and retention costs (Rust, Zeithami and Lemon) o Customer equity: the discounted lifetime values of a firms customer base o Customer equity made up of three components and key drivers 1. Value equity: objective assessment of utility of brand a. Drivers are: quality, price and convenience 2. Brand Equity: subjective and intangible assessment a. Drivers are: customer brand awareness, customer brand attitudes, customer perception of brand ethics

3. Relationship equity: tendency to stick to the brand, above and beyond objective and subjective assessments a. Key drivers: loyalty programs, special recognition and treatment programs, community building programs, knowledge building programs o Three components of customer equity vary in importance by company and industry o Advocate customer-centred brand management to firms with the following directives that, they maintain, go against current management convention: Make brand decisions subservient to decisions about customer relationships Build brands around customer segments Make your brands as narrow as possible Plan brand extensions based on consumer needs Develop the capability and the mind-set to hand off customers to other brands in the company Take no heroic measures to save ineffective brands Change how you measure brand equity to make individual level calculations (Kumar and colleagues) o Marketing contacts across various channels influence CLV nonlinearly o Each customer varies in their lifetime value to the company Relationship of customer equity to brand equity - Think of a matrix o Brands and sub brands on one side o Customer segments on the other side - Effective brand and customer management take into account both of these - Customer equity perspective emphasizes bottom-line financial value created o Benefit is quantifiable measures o Less prescriptive about specific marketing activities o Does not always fully account for competitive response and the resulting moves and countermoves o Can overlook the option value of brands and their impact on revenues o Customer equity and brand equity are related - CBBE says brands create value by eliciting differential customer response to marketing activities - Brand equity emphasizes the front end of marketing programs (intangible value potentially created) - Customer equity emphasizes the back end of marketing programs (realized value in terms of revenue) - A brand is ultimately only as good as the customer it attracts - Retailers know the importance of both brands and customers

Discounts can be dangerous, pg 227

Discounts during tough economic times o People cant afford to spend, so charge less to keep them buying Discounting is effective when done wisely and strategically o Get consumers excited about a product o Encourage them to buy more o Help your short-term bottom line Consumers want good value for their money Price has an important role in determining perceived value

If you discount purely to boost sales, buyers may begin to question value Discounting can hurt the brand in the long term There are safe ways to lower prices o Discount something that does not hurt the core brand Couples the appeal of a discount with an implicit message about the core brand

Mind Your Pricing Cues, pg 283

Most items that consumers buy, they dont have an accurate sense of what the price should be Less than half the customers in a store knew the price of the things they were putting into the trolley o Most underestimated o Many didnt even want to guess One would expect this information gap to be a major stumbling block for customers o Customers also need to know the prices of other items, in others stores and what the future price might be Customers rely on the retailer to tell them if they are getting a good deal or not Pricing cues that retailers use o Can effectively build trust, and convince them to buy your product o Or can breach trust, reduce brand equity and give rise to law suits

Sale signs - Appear near to the item, and scream bargain - sale next to a price, even without changing the price can boost sales by 50% - Retailers dont always use the signs honestly o Can get caught out, then its bad news - Stores often exaggerate discounts by inflating the regular prices - So, why trust sale signs? o They are accurate most of the time o Cases where its not true happens less o Customers are not easily fooled - The more sale signs used in a category, the less effective those signs were at increasing demand - Putting sale signs on more than 30% of items diminished the effectiveness - Placing sale signs on many items can increase demand for them, but decrease overall demand Prices that end in 9 - Denotes a bargain - Think you might ignore it, but not. - Increase demand by raising the price from $34 to $39 - Making prices end in .99 increases demand - Having a 9 at the end, allows customers to think whether they are getting a good deal - Are prices that end in a 9 truly accurate as pricing cues? o Some reserve prices that end in a 9 for their discounted items Esp apparel o Some use 9s in all products, regardless of sales

If there is already a sale sign, the 9 is irrelevant

Signpost Items - There are some benchmark prices on things we buy regularly - Eg, coke, movie tickets - This impression guides the idea of the prices of other items o Supermarkets often discount on prices of coke, and charge more for other items - Select items that are accurate, popular and complementary - Price cuts should not be linked to something in the market, or other events, that give an explanation to them, rather than the idea that the store is priced low - There are few legal concerns with this approach o There is not explicit claim Pricing Guarantees - Price matching: tactic used in retail markets, where the store promises to meet or beat any competitors price - Can also refund the difference of items already bought in the past 30 days - Customers find these price matching techniques reassuring - Not all stores really do meet the lower prices - Some see price matching as a way to decrease competition - Supplier can promise customers that they wont sell to any other customers at a lower price - Good tactic when consumers have poor knowledge of the prices of many products in a retailers mix - If the terms of the deal are too complicated, it will undermine the guarantee - Only small amounts of products sold need to be comparable to make it effective Tracking Effectiveness - To track effectiveness, they should be implements systematically - Three important concerns tend to be overlooked o Long run impact of cues o Focus more on customers perceptions of price rather than on their perceptions of quality o Marketers often fail to act - Consumers trust retailers pricing cues, and so place themselves in a vulnerable position Cue, please - Only use cues where they have the highest effect - Use cues on items that: o Customers purchase infrequently o Customers are new o Product designs vary over time o Prices vary seasonally o Quality or sizes vary across stores - Customers less informed about price levels will be most responsive to cues

Quality has its own cues - Retailers must balance their efforts to cultivate a favorable price image with their efforts to protect the companys quality image - Few sale signs in industries where quality perception is highly important o Eg. Good medicine never goes on sale

Your Loyalty Program is betraying you, pg 343

Many companies are stopping their loyalty programs An old customer retained is worth more than a new customer won Many aspects of loyalty programs that are difficult to get right o Clarifying business goals o Engineering the economics of reward structure o Creating incentives good enough to change behavior, but not so generous that they erode margins o Consumer psychology

What can a Loyalty Program Reasonably do? - Define what should be gained from the effort - What a loyalty program CANT DO o Create loyalty - What Loyalty programs CAN DO o Keep customers from defecting Barriers to exit Customer lock-in o Win greater share of wallet Consolidation of purchases Give the customer a reason to steer more of that business into one sellers hands (points for purchases) Useful if it is the first program of its type in the market Possible to prevail with the right reward structure o Prompt customers to make additional purchases Create incremental demand, spurring purchases that otherwise wouldnt have been made Effect of multi-tiered loyalty programs (silver, gold, platinum) A valued reward can lead consumers to accelerate their purchases Works well for goods and services that have a flexible consumption and can be increased easily o Yield insight into customer behavior and preferences Insights about general buying behavior Seller can target promotions Require a dedicated staff of analysts and substantial investments in data augmentation o Turn a profit Any company with a broad customer base and excess capacity could consider leveraging its loyalty program (selling air miles to give as a gift to other company consumers for example) Critical concern is arriving at the right price per reward point

Any given program must be designed for a specific goal, and priorities must be set among them

The levers of Loyalty - Designing a loyalty program is straight forward o Attractive to customers o Not too expensive - Several components are difficult to design well o Divisibility of rewards The number of discrete reward-redemption opportunities provided Customers prefer highly divisible programs, as they provide many exchange opportunities and so reduce award waste Managers like low divisible programs as it locks customers in The right level of divisibility will factor in the expected yearly program usage and the amount of company differentiation o Sense of momentum The further along customers are in a loyalty program, the more they will use it Best designed programs include endowed progress a push to get things moving Customers must see the reward as earned by their behavior or the tactic will have little effect o Nature of Rewards Respond more to incentives that promise pleasure, than to purely cash bonuses In experiencing the reward people come to have pleasant associations with the brand Sticky rewards stick in the recipients mind, reinforcing the relationship Slippery rewards are mundane and tend to slip from memory o Expansion of relationship Buy one get 10 free A customer who likes a product enough to buy it 10 times would be expected to purchase it again More valuable to a company is a program that expands the consumers repertoire of purchases Instead of giving the 11th cup of coffee for free, add a pastry to the 10th o Combined-currency flexibility A program in which consumers never redeem points would be very inexpensive to offer but little interest To attract, a program must lead to redemption Small amounts of miles seem trivial to consumers, so would rather pay and add a small amount of miles than pay fully with miles So, to spend these different type of currencies in small amounts with cash is more appealing Different for expensive flights Mistakes to avoid - Loyalty programs typically founder on some simple mistakes o Dont create a new commodity

If your program is the same as discounting, you basically are paying people to buy and so, creating disloyalty Almost all loyalty programs have upped the amount of alternative currency to encourage sales, but this is not sustainable in the long term Dont reward the disloyal Typical grocery card, rewards card owners, rather than loyal customers. Also, cashiers swipe a dummy card Should reward the use of the card over time, rather than on a given purchase occasion Dont reward volume over profitability Loyalty should not be measured on number of purchases only Keeping track of the customers profitability is NB Dont give away the store No need to cut into profit margins if a customer can be made happy with a costless reward Eg, preferential treatment Can also provide coupons, rather than discounts. Dont promise what you cant deliver Must make sure that the rewards given are better than those situations of a regular customer Can clearly see if the first class ticket line moves faster than the others Customers compare extremes with extremes, not averages

Keep the Faith - Loyalty programs are ingenious marketing tools when done properly - To ensure it works, start by making clear what the program is expected to do - A successful program depends on competent and consistent execution

The Right Way to Manage Unprofitable Customers, pg 351

A customer who calls you every day is less profitable than one who pays on time and never calls ou Customer divestment: a company stops providing a product or service to an existing customer Becoming a more common strategic option for many firms Some firms take advantage of segmentation approaches and technologies that make it easier to focus on retaining the right customers and to show problem customers the door Four common reasons why business terminate relationships with end users o Declining profitability of specific customers o Lower productivity of employees as the deal with unprofitable customers o Changes in capacity to serve large volumes of customers o Shifts in a companys business strategy Not something that managers want to mention publicly Collateral damage of divestment can be high o Sending customers to competitors o Damage relationships with high-value customers you retain o Violate ethical or legal obligations to customers Before divesting o Reassess your present relationships o Educate unprofitable customers o Renegotiate the value proposition

o o

Migrate customers to other partners or providers Then only terminate relationships

Why Divest? - Four critical reasons why to divest o Profitability Esp in insurance To Stem losses o Increase employee productivity and morale Rude and obnoxious customers can affect employees ability to get work done o Capacity constraints Lack expertise, physical capacity, or financial resources Underestimate customer demand o Natural, intentional consequence of their evolving strategies Decide to stop offering certain products and services Exit entire businesses To correct for past strategy miscues When is Customer divestment Risky? - Not only profits that are at stake - If have high fixed costs, place an extra burden on remaining clients - May loose valuable sources of information, experimentation and innovation - Competitive dynamics change - Customers may feel insecure - Can be viewed as discrimination - Frontline employees suffer fewer employees needed - Employees worked hard to nurture client relationships, which are now broken - A companys treatment of its customers sends out a powerful message about how management treats their employees - Ethical and legal issues Managing the Divestment Process - Transaction must be mutually beneficial - Value provided exceeds value extracted divest - Need to do everything to restore equilibrium - Customer divestment framework o Reassess the present customer relationship Review all information Has the customers need changed? Has the business focus changed? Would the customer benefit from another service the firm supplies? Sometimes companies have misjudged customers Customers may be unaware of services available, and so, dont spend o Educate Customers Manage their expectations If all information is given, they will need less assistance What are the customers relevant knowledge gaps? What is the best way to fill them? B2B more feasible for education than B2C

Educated customers are less likely to blame a company if their relationship with it dissolves o Renegotiate (dont just communicate) the value proposition Renegotiation is an outgrowth of the reassessment and education processes and is especially attractive in markets where the company can offer different pricing and services strategies for different customers Explicitly engage customers in a dialogue about the value proposition Are we really negotiating with customers or simply issuing dictates? Have we built into the price all the benefits provided? Are customers aware of total value proposition we offer? Renegotiations in B2B market typically involve long lead times and comprehensive reviews of all facets of a relationship o Migrate customers Companies can unilaterally reconfigure the customer relationship What other offerings out there would better serve this customer? Is the customer willing to move? General idea: to persuade customers to use an entirely reconfigured service level that is compatible with the present value they bring to the company o Terminate the customer relationship Deliver the news in a way that minimizes negative fallout for the company Key: get customers to recognize that these discussions are mutually beneficial In B2C, customers reported being angry, frustrated, embarrassed Careful of word of mouth damage Advance notice is NB Notify customers by phone, rather than mail Consumers pay attention to reasons of divestment and assign blame accordingly Customers are not commodities that can be acquired and disposed of at will

Strategic Brand Valuation: A Cross-Functional Perspective, pg 117

-Using brand valuation information, managers can assess the effect of brand expenditures on attributes of brand equity rather than simply monitoring changes in market share. Accountants in particular can provide essential data. -One of the most effective ways for accountants to provide useful information for marketers is by conducting periodic brand valuations. -Using the brands value as a measure of its success can help estimate the effect of management decision such as those generating short-term expenditures and long-term benefits. -Brand valuation allows managers to appraise the efficacy of brand expenditures in terms of the enhanced or diminished value of the brand itself. -One of the most effective means for a firm to bring accounting and marketing closer for the purpose of strategic brand management.

-Because of the difference in focus and a lack of understanding of the mutual benefits of cooperation in information collection and management, there has been no beneficial free flow of information and ideas between marketers and accountants in many firms. Life cycle costing ignores traditional financial reporting periods and aggregates the cost of a product over the life of the item in the market-place. Target costing considers not only the actual production cost, but also estimates the long-term cost of competing in the marketplace (involves cutting the existing production cost by improving the process). Customer costing can be used in customer profitability analysis to determine how profitable various customer segments are. (Uses historical costs, but concentrates on the costs to serve each customer separately). Brand valuation is more comprehensive than a costing technique because it relates to outcomes and incorporates projections of future income and cash flows. Brand equity is created by a combination of brand loyalty, name awareness, perceived quality, brand associations. And other proprietary assets such as competitive advantage created by the brand. ..Brand valuation quantifies the benefit of brand equity to the owner of the brand. Brand valuation is particularly useful in that it is not solely a means historical. Cost-based measure, but also allows a mean to incorporate future results. It provides a firm with a measure of performance that describes the magnitude of the asset of the brand in relation to the entire organization. The value of the brand will exceed the value of the tangible assets, thus reinforcing the need for strategic attention. The process of brand valuation encourages different departments to share information and work together. An effective brand valuation requires input from a broad spectrum of functional areas. The Managerial Implications of Brand Valuation Brand Valuation and Marketing Professionals -The ability to prove over time the effects of a decision to expend funds in the short term. -Justification of the expenditure may be a particular problem when managers performance incentives are based on short-term results. with brand valuation, the projected change in the value of the brand can be used to assess the need for the expenditure. -Brand valuation is an ideal measure for countering short-term issues and helping determine performance and rewards. -Provides marketers and accountants with a common focus in brand planning.

-Instead of focusing on short-term cost minimization or revenue maximization, a more holistic view of the brand can result from product managers taking a more integrated approach in maintaining or maximizing the value of the brand.

Brand Valuation and Accounting -Brand valuation is ideal for bridging the gap between external and internal reporting. -The process of brand valuation allows accountants to arrive at a measure useful for performance evaluation and illustrates how corporate wealth stems from brand management activities. -The brand value helps determine inter-company transfer prices. -Brand valuation can also aid accountants involved in budget allocation decision making. The process of determining the strength of the brand sued in the valuation could also yield valuable information for this spending allocation. -Valuing all of the brands immediately shows the relative importance of the brands in the portfolio in an objective manner. Allocation decisions can then be based on the relative benefit to brand value that each brand is likely to receiv as a result of the expenditures.


1. Cost-based approaches -Historically based, this approach is the valuation technique that complies with standard accounting practice for valuating assets. Provides little future-oriented information that is useful in the brand management process. -A fundamental problem with the cost-based approach is that all brand-related costs that were previously expensed must be included Yet it is often difficult to identify the costs that were not directly attributable to the brand, but were expensed in support of it. -The time horizon used to start collecting the costs may be a problem in the case of mature brands because many of the costs may be difficult to identify. 2. Market-based Approaches -Externally focused approach; based on an estimation of the amount for which a brand can be sold. -This method requires being able to determine a market value. -Has the advantage of including a perspective external to the firm, it is much more realistic if a similar brand exists in the marketplace for comparison purposes.

3. Income-based Approaches -The valuation process involves determining future net revenues directly attributable to the brand and then discounting to the present value using an appropriate discount rate. Two methods to determine net revenues: a) Compare the brands price premium to a generic product this method can overvalue smaller brands that are very highly priced, and under-value high-volume and lower-priced brands. b) Method estimating the annual royalties associated with the brand, as in a licensing agreement. This is more applicable to brands competing in international markets. Once the revenue attributable to the brand has been isolated using one of the above methods, future revenues from the brand are estimated.

4. Formulary Approaches -Interbrand (a big brand consulting company) developed its formulary approach in the context of external financial reporting, but indicates that the approach to vluation is also very suitable for internal management purposes. -Interbrand strives to consider only factors that relate directly to the brands identity -Once brand profitability is determined, a multiplier is attached to the calculation. -The multiplier is created from an evaluation of brand strength based on:

Leadership -Ability of the brand to function as a market leader and secure the benefits associated with holding a dominant market share. Stability -Brands that retain their image and consumer loyalty over long periods of time are valuable than brands without such stability. Market -Better brand can be in better product markets, being able to generate more sales. Internationality -Brands that are international in scope possess the potential to expand the bramd Trend -Ability of the brand to remain current in the perception of consumers)

Support -Brands that have been managed and supported by the organization over time (valuable) Protection -Brands that are more protected by registered trademarks are more valuable.

-The formulary valuation process allows for the most comprehensive assessment of all areas that have the potential to affect the ability of the brand to generate value for its owner. Capitalization of Brand values -The underlying rationale for attaching a value to a brand is grounded in accounting principles regarding intangible assets. -Brand constitutes an asset and should be reflected on a balance sheet. -The value of brands that are acquired through the purchase of a business can be capitalized and amortized as goodwill. -The value of goodwill is calculated as the excess of the purchase price over the value of the physical assets.

-Practice suggests that the process of brand valuation can be extremely useful to a firm even if the results do not appear on the balance sheet.

-Brand valuation appears to be the most promising technique capable of illustrating the importance of the brand to managers while also bridging the different orientations between marketers and accountants.

-The use of brand valuation can help foster a recognition of a common goal for individuals in pursuing strategic objectives. Each discipline can contribute a substantial amount of expertise to the brand valuation process.

Strategic Channel Design, pg 295

When choosing distribution channels, companies need to rely on design principles that are aligned with their overall competitive strategy and performance objectives.

-The firms overall strategic direction must guide changes in channels.

Forces for Change Three forces are now changing the customary rules of channel management: 1. Proliferation of customers needs -Firms will distribute directly when they want to closely control selling, serving, and pricing or have only a few readily identifiable customers. -When the market requires a variety of related goods in small quantities, companies prefer to use intermediaries because of their wide coverage (due to economies of scope and scale), experience, and specialized distribution in their industries.

3 Factors contribute to mass customization, and hence, market fragmentation: a.) Expanding capabilities for addressability and variety b.) Channel diversity c.) Customer expectations

The new ability to address customers in small groups encourages channel diversity. Addressability and diversity together raise customer expectations, and these expectations put further strain on distribution channels.

2. Shifts in the balance of channel power -The increased concentration of channel structures has adverse effects on suppliers profitability. All the elements underlying buyers power in the Porter industry-forces model enhanced bargaining power, more knowledgeable buyers and credible threats of backward integration favor the intermediaries or end buyers. -Analysis reveals that both manufacturers and retailers have lost power to the consumer. -Big resellers enhance their relative power by increasing their knowledge of: 1. Their suppliers cost 2. Their own operations 3. Their customers needs. 3. Changing strategic priorities Increasingly, companies are handing off noncritical activities or functions so they can concentrate on enhancing their competitive position. In rationalizing organizational and channel structures, firms are guided by: 1. An emphasis on understanding and responding to customer real requirements in order to deliver superior value.

2. A willingness to cross artificial boundaries within the organization and challenge how all activities and processes that comprise value-adding processes, such as order fulfillment, are linked. 3. An effort to perform activities where they make the most sense.

-The new linkages require relationship management skills and careful negotiations. Both participants must realize durable mutual benefits in financial terms or hard-to-quantify benefits due to risk sharing or the pooling of expertise and market knowledge.

Implications for Channels -Most distribution channels are subject to a combination of shifting patterns of commitment, vertical compression, horizontal diversity, and functional decomposition.

Shifting patterns of commitment -Many firms have dismantled or downsized their corporate distribution arms and outsourced the functions to third parties. So many firms are experimenting with new arrangements. -Because these arrangements investments on both sides, they resemble strategic alliances.

Vertical Compression -Flexible manufacturing systems allow suppliers to produce small lots at only a marginally higher cost than scale-efficient large orders (thus compressing the layers of the vertical channels). -New forms of direct channels are emerging, and indirect channels are getting shorter with fewer intermediary layers. -With quick-shipment distribution logistics, retailers no longer lose time in ordering directly from the suppliers. -In an intensely competitive environment, the extra margin saved at the master-distributor level can become a price advantage at the customer level. -Newer, more nimble competitors may choose the cost-efficient alternative of eliminating the master distributor. If this entrant succeeds, the supplier with the master-distributor channel will lose revenue, share, and profits.

Horizontal Diversity - More effective firms sacrifice thorough planning for experimental action by generating large numbers of options but not thoroughly analyzing.

- An effective firm launches many small experiments or trials. Carefully analyzes only a few options, and reacts quickly to feedback from the experiments. - In this distribution, this means experimenting with many different ways of reaching the market. - A strategic option is a companys small investment in an operation that creates the right but not the obligation to take further action. Because options buy time and knowledge, they are probes; although they may be costly, they prevent more expensive mistakes and indicate where to commit resources more heavily. - Options are even more valuable (over turbulent environments) when they cant be imitated quickly or easily and provide lead time over competitors. - While firms may find themselves trapped in an inappropriate delivery system, the best they can do is to alter their channel systems incrementally to align them with customer expectations. - Because channel relationships are very difficult for competitors to duplicate or match, these options have substantial value.

Multiple channels reflect the range of channel options available to buyers and suppliers. -this approach is often the only way to provide market coverage. Different customers with different buying behaviors will seek channels that best serve their needs. -In managing multiple channels, companies demarcate products and models by channels, thus minimizing direct comparison. -Multiple channels are most prevalent in fast-changing market environments. -Crossovers are less common. -In coping with turbulence, channel diversity pays, but only if the arrangements are treated as options. -A bundle of options also allows a firm to move faster, as it recognizes and seizes opportunities. -Manufacturers should not seek multiple-coverage indefinitely: As environments stabilize, distribution arrangements should become fewer, more substantial, and more stable, and reflect a coherent, articulated channel strategy.

Functional Decomposition -Population ecology theorists argue that the generalist, being a jack of many trades, becomes a master of none. -Population ecology does not predict which specialists will survive- only that the survivors tend to be specialists. -A firm does better in uncertain environments by dealing through many specialists because specialists tend to be focused and, hence, more nimble than the manufacturer.

Composite Channels

-The difference between composite and conventional channels is the horizontal task allocation.: a team of channel partners, each specializing in a few tasks, satisfies the customers total needs. In the conventional channel, the hand-offs are vertical; each member performs the full channel functions that its immediate customers require. -The trend toward functional specialization is driven by customers desires to receive products and services in the most cost- and time-efficient manner.

-Because the channel member dealing with the customer no longer performs all channel functions, it cannot expect to receive a traditional margin of commission. -Composite channels are costly to monitor and administer and seem to work only in environments that can afford high channel margins. -In low-margin industries, composite channels seem to work only for market leaders. -For weaker suppliers, the coordination costs of the composite channel often exceed the benefits of its functional effectiveness.

Designing the Channel Strategy Channel supports the overall strategy: to enhance effective delivery of the customer value proposition. Requirements: 1. Effectiveness 2. Coverage 3. Cost-efficiency 4. Long-run adaptability

Assessing the Companys Situation A company should assess what customers are seeking from channels by asking: 1. What service attributes do the target customers value? 2. How can we use the differences in preferences to segment customers with similar needs? 3. How well do the available channels meet the needs of the segments?

Selecting Alternatives -A firm should rely on strategic design principles, subject to the constraints of prior strategic commitments resource availability, and rigidities to choose a channel arrangement.

1. Align channels with the overall competitive strategy by: -Designing channels from the market back, so the channel activities meet the anticipated requirements of the target market. -Creating barriers to competitive response. - Enhancing the delivery of superior customer value. 2. Decompose and recompose channels into integrated collections of functions. 3. Invest in learning. 4. Translate strategic choices into programs, projects, and near-term plans and establish controls for monitoring channel performance.

A channel strategy is a series of trade-offs and compromises that align the companys resources with what it should do to satisfy its target customers and stay ahead of competitors.

Rethinking Marketing, pg 335

Cultivating Customers -Building relationships (pg.337): Product-Manager Driven: Many companies still depend on product managers and one-way mass marketing to push a product to many customers. Customer-Manager Driven: Whats needed is customer managers who engage individual customers or narrow segments in two-way communications, building long-term relationships by promoting whichever of the companys products the customer would value most at any given time.

-Companies have powerful technologies for understanding and interacting with customers, yet most still depend on mass media marketing to drive impersonal transactions.

-To compete, companies must shift from pushing individual products to building long-term customer relationships. -The marketing department must be reinvested as a customer department that replaces the CMO with a chief customer officer, makes product and brand managers subservient to customer managers, and oversees customer-focused functions including R&D, customer service, market research, and CRM.

-These changes shift the firms focus from product profitability to customer profitability, as measured by metrics such as customer lifetime value and customer equity. -This organizational transformation will uproot entrenched interests and so must be driven from the top.

How to segment industrial markets, pg 59

Industrial segmentation can assist companies in several areas: -Analysis of the market -Selection of key markets -Management of marketing

The nested approach -moving from the outer nest toward the inner -moves from the more general, easily observable segmentation characteristics to the more specific subtle ones.

DEMOGRAPHICS The industry: knowledge of the industry affords a broad understanding of customer needs and perceptions of purchase situations.

Company size: e.g. small supplier of industrial chemicals, after segmenting its prospective customers on the basis of company size, will choose not to approach large companies whose volume requirements exceed its own production capacity.

Customer location: especially important when proximity is a requirement for doing business, as in marketing products of low value-per-unit weight or volume, or in situations where personal service is essential, as in job shop printing.

OPERATING VARIABLES (enable more precise identification of existing and potential customers within demographic categories)

Company technology: the technology used affects companies requirements for test gear, tooling, and components and thus, a marketers most appropriate marketing approach.

Product and brand-use status: to segment a market by its product and brand use. It is useful to segment customers on the identity of competitors (sellers may find it easier to lure customers from competitors that are weak in certain respects).

Customer capabilities: e.g. a company operating with tight materials inventories would greatly appreciate a supplier with a reliable delivery record. Some suppliers have been astute in identifying customers needing such support and in providing it in a highly effective manner.

PURCHASING APPROACHES (formal organization of the purchasing function, the power structure, the nature of buyer-seller relationships, the general purchasing policies, and the purchasing criteria)

Purchasing function organization: the organization of the purchasing function to some extent determines the size and operation of a companys purchasing unit.

Power structures: e.g. a vendor might find it useful to adapt its marketing program to customer strengths, using one approach for customers with strong engineering operations and another for customers lacking these.

Buy-seller relationships: a supplier probably has stronger ties with some customers than others.

General purchasing policies: Customers may prefer to do business with long-established companies or with small independent companies, or may have particularly potent affirmative action purchasing programs, or they may prefer to buy systems rather than individual components.

-Bidding is an important method for obtaining government and quasi-government business; but because it emphasizes price bidding tends to favor suppliers that, perhaps because of a cost advantage, prefer to compete on price.

Purchasing criteria: e.g. benefit segmentation in the consumer goods market is the process of segmenting a market in terms of the reasons why customers buyits the most insightful for of consumer goods segmentation because it deals directly with customer needs.

SITUATIONAL FACTORS (resemble operating variables but are temporary and require a more detailed knowledge of the customer; including order fulfillment, product application, and the size of order)

Urgency of order fulfillment: some companies found a degree of urgency useful for market selection and for developing a focused marketing-manufacturing approach leading to a hot-order shop (a factory that can supply small, urgent orders quickly).

Product application: can have a major impact on the purchase process, purchase criteria, and thus on the choice of vendor.

Size of order: market selection can be based at the level of individual line entries on the order form. Marketers can differentiate individual orders in terms of product uses as well as users. The distinction is important as users may seek different suppliers for the same product under different circumstances.

Conclusion: General Motors, for example, makes a distinction between product purchases- that is raw materials or components for a product being produced and non-product purchases. Urgency of order fulfillment is so powerful that it can change both the purchase process and the criteria used. An urgent replacement is generally purchased on the basis of availability, not price. The nests are a useful mental construct but not a clean framework of independent units because in the complex reality of industrial markets, criteria are interrelated.

BUYERS PERSONAL CHARACTERISTICS Marketers for industrial goods, like those for consumer products, can segment markets according to the individuals involved in a purchase in terms of buyer-seller similarity, buyer motivation, individual perceptions, and risk-management strategies.

-The level of risk a buyer is willing to assume. -Also on whether credit or blame for these will accrue to him or her. -Buyers who are risk averse are not good prospects for new products and concepts. -Data on personal characteristics are expensive and difficult to gather.

Other segmentations: -No segmentation -After-the-fact segmentation -Superficial segmentation -Obtuse, convoluted, and disorganized segmentation

-A company should not decide that the nested approach is not useful because data are lacking. -The segmentation process requires that assessments of analytic promise and data availability be made independently. -The outer-nest criteria are generally inadequate when used by themselves in all but the most simple or homogeneous markets because they ignore buying differences among customers. Overemphasis on the inner-nest factors, however, can be too expensive and time-consuming for small markets. -Achieve a sense of balance between the simplicity and low cost of the outer nests and the richness and expense of the inner ones by making the choice explicit and the process clear and disciplined.

Marketing management-customer profitability and lifetime value, pg187

Powerful databases and electronic data networks are allowing companies to collect concise information about customers and their buying patterns more effectively and efficiently than ever before E.g. internet, increased ability to track the behavior of individual consumers as they visit numerous web pages These capabilities offer exciting new opportunities to dynamically manage their customers bases Firms can now more accurately recognize and monitor individual customers to whom tailored communications and offers can be made Marketing activity is becoming more interactive and engaging In order to reap the benefits of detailed customer knowledge, firms need to systematically estimate the profitability associated with its use

Ultimate goal: develop highly committed customers who not only make repeat purchases and generate continual revenue streams, but also require minimal maintenance along the way Firms need to track initial acquisition costs and compare them to the profits to be generated over the customers` expected relationship with the company Allow marketers to decide which customers to go after, how to change the promotional mix as a function of past and recent transactions and, if necessary, which specific customers to discontinue serving Initial step of determining customer profitability is to have a clear sense of the relevant characteristics of customer activity Analysis of historical data can be very powerful in providing firms with information on the buying patterns of both new and existing customers Using this, the firm may choose to distinguish between segments of customers that exhibit similar characteristics and are hence expected to respond similarly to a given level of communication/promotion Taking into account the responsiveness of particular customers to certain offerings, the cost of making these offerings and the probability a customer is expected to keep generating revenue for the firm enables the calculation of customer profitability and lifetime value

Example: the catalog retailer Part 1: customer acquisition costs Page 188 Acquisition cost = (#of catalogs needed to get 1 customer)*(cost of sending a catalog) = cost of sending a catalog / response rate Additional comments o In some instances, the response rate is not given directly but can be calculated using other pieces of information: often refer to subsets of customers by the demand per book they generate: demand per book is the expected revenue from one mailed catalog. If the average order size is known, the response rate can be calculated by dividing these two quantities response rate = (demand per book/ average order size) o The retailer must also take into account that at some point all relevant names will be exhausted. To acquire new customers, the retailer can either move on to names expected to yield lower rates of return or attempt to find new sources of names that were not on the previous` broker`s list o The above calculation of acquisition costs can be generalized to other industry contexts

Part 2: customer break-even analysis Figure a on page 189 and table b on page 190 Cumulative profits per customers (net of acquisition costs)= total expected profit per customers - acquisition costs

In subsequent years, the cumulative profit per customer of the previous year are added to the total expected profit per customer of that year Additional comments: o In the calculations, the discount rate has been ignored. The discount rate allows the seller to control for the fact that money received in the future is not equal to the value of money received today o For simplicity, the analysis for total expected profit per customer assumes the retailer would cease sending catalogs to customers who drop out, in the same year they stop making purchases. In reality, a firm may send out the full number of planned catalogs prior to delisting a customer who does not make purchases in a given year o In some cases, gross margins are not explicitly given and one has to establish them by incorporating all costs associated with a purchase o In other cases, the net contribution appearing on a firm`s income statement may need to be adjusted for sales that eventually didn`t take place due to returns and cancellations (contributions * (1- sales returned))

Part 3: lifetime value analysis Establishing the total expected profit stream arising from each customer over the lifetime of his or her relationship with the company Page 191 lifetime value analysis for frequent and occasional buyers The retailer may decide to send more (or fewer) catalogs or targeted promotions to these buyers to see whether they increase profitability or, alternatively, may decide they are not worthwhile pursuing and drop them once identified To calculate aggregate profits, the retailer needs to know the size of each segment On page 192 is the formula for CLV Additional comments: please look on page 192 and 193

Strategic implications of customer lifetime value analysis Benefits from CLV calculations: o Understanding the potential value of customers and prompting firms to learn more about the patterns of individuals or groups of customers o This information allows the firms to devise optimal strategies for each customer, eliminate wasteful costs, and create a long-term perspective of the potential relationship with customers. Measuring CLV typically involves the use of historical sales data to allow detailed analysis of the profits customers are likely to produce across their lifetime CLV can be used to estimate the likely profitability of those customers a) Firing customers The company may be motivated to lose a percentage of the least-performing individuals In some cases, this can be achieved by simply raising prices for the less profitable products

There is a competitive advantage for firms that can retain high value customers with minimal costs, and detailed information about customer profitability allows a firm to identify weaker customers b) Rewarding customers A firm may chose to reward customers with discount vouchers or preferential services Identifying a firm`s best customers and investing in them can lead to higher loyalty and to improve sales Identifying cross-selling opportunities Firms can identify opportunities to offer additional or related products

CLV and relationship marketing the relationship between the customers and the firm typically evolves over time and is not static to enhance the mutual value created by the relationship, it may be important for the firm to recognize the different phases of the customers life cycle

Stage 1: prospects marketing effort is directed at attracting potential customers, who at this stage primarily develop expectations about the firm and its competencies this stage is critical for determining the long-term satisfaction and retention of a customers

Stage 2: first-time buyers after making their first purchase, customers have some experience to assess the value created by the firm`s products and services for them the risk of defection is typically high during this stage

Stage 3: early repeat buyers Customers who make a repeat purchase are more likely to buy again than first-time buyers. As their confidence in the firm grows, their perception of value from the product increases and the rate of defection is reduced

Stage 4: core customers The rate of defection in this stage is typically low, and customers will not defect unless they encounter a high level of dissatisfaction

Stage 5: core defectors Many reasons, including the arrival of competitors with new products or enticing promotions and inconsistent delivery of service/quality by the firm, eventually cause some customers to switch suppliers

Relationship marketing assumes the possibility of creating and ongoing relationship with customers, and that customer satisfaction will be strong enough to create loyal or repeat buyers

Satisfied customers tend to be less price sensitive and are likely to remain loyal for a longer period

Marketing management principles of product policy, pg 119

Product, product mixes, and product extensions Product Product: anything that is offered to a market for consumption and that satisfies a need Can be classified along a number of dimensions: o The nature of customers` buying behavior Convenience goods: products are frequently purchased without much deliberation, are usually widely available Shopping goods: involves more planning and some comparison shopping by customers Specialty goods: relatively inelastic demand and little or no comparison shopping, only available in selected outlets o Level of involvement in the purchase process Low involvements: requiring little deliberation by customers High involvement: customers invest significant time and effort in the purchase process o Type of benefit: Functional or utilitarian benefits: have a logical, rational advantage Emotional, ego-expressive needs important to recognize that different customers may place the same products in entirely different classes products can be divided into tangible goods (i.e. physical products) and intangible goods (services, events, people, places, ideas) many products have both tangible and an intangible component marketers distinguish the core product and the augmented product: o core product: what consumers are actually buying, it serves a direct, primary benefit o augmented product: offers additional benefits (e.g. sense of treating yourself, make you feel to belong to a group of people etc) brands are a crucial aspect of most product offerings brands are names or symbols that marketers have introduced to make product differentiation concrete brand equity: term used for the positive effect that the brand has on a potential customer of a product; it reflects how much more consumers are willing to pay for a particular brand compared with a competing brand (or with a generic product) other important tools of differentiation: customer service, installation, repair and delivery services, warranties, credit possibilities as products mature and competitors are introducing me-too products that efficiently deliver the same core product attributes, firms can use such augmentations to create a sustainable differentiated offering

intangibles like brands and services are often particularly helpful differentiation tools because they are relatively hard to copy by competitors high costs and uncertain pay-off for such investments make competitors reluctant to match those expenses in the short-run when making product policy decisions, marketers must: o recognize the core customer need they intend to satisfy o verify whether their core product is ideally suited to satisfy that need and, if not, how it can be redesigned o understand how they can best augment the core product to create the bundle of benefits that will provide the most satisfying customer experience, and will shield the company from threats by competitors

Product mixes product mix: encompasses all product lines product line: group of items that serve a similar function each product line can be described in terms of its length, which refers to the number of items within the product line and depth, which refers to the number of versions of each product in line consistency of a product mix: the extent to which the product lines share relevant characteristics product lines can stretch out on a horizontal and vertical dimension o horizontal level: e.g. Snapple, they do not differ in an objective sense, it is a matter of consumer taste o vertical product line: products are more clearly delineated on a price/performance basis

Product line and brand extensions page 122 for Figure B: new products and brands line extensions: existing brands extended to new product forms in an existing product category when the firm adds an additional brand in an existing category, it engages in a multi-brand strategy when a firm adds a brand in a new product category, it seeks diversification in its products and brands

New product development new product development encompasses a number of general stages: o idea generation and screening o concept development and testing o physical product development and testing o commercialization exact nature of the development process differs greatly across industries, products and firms

some products are breakthroughs in that they establish a new product category but the majority of new products are entries into an established products category that firms hope will achieve success by being better than existing competitors four hallmarks of an effective process: o the voice of the customer Is heard throughout the development process: customer surveys, e.g., can be useful to gain insights into what the customer wants also shortcomings: when a firm intends to design a breakthrough product that goes beyond the target user`s current experience. In those cases the voice of the customer must be anticipated or sensed. Empathic design: user`s preferences are sensed through empathy with their situation rather than through explicit inquiry o substantial work is done before physical production begins, across firms` different functional areas (such as marketing, engineering, and manufacturing) o the process has real go/no-go decision points a proper process for new product development is often described as a funnel in which a number of ideas are generated and in each subsequent development stage, some are rejected while others pass the test and continue on, leading to an ever narrowing number of still-serving ideas o the process recognizes the firm`s distinctive competencies the process asses not only the product-market fit but the product-company fit as well as the market-company fit and considers how the firm`s capabilities correspond to those of its competitors and collaborators it is the customer`s perception of value that counts in new markets, when there is no directly competitive offering, the customer will define the value of a new product by comparing it to the old way in which the customer did things in existing markets, truly superior, differentiated products have a much higher success rate than me-too products

The product life cycle development: period before the product is introduced, investments increase while sales are nonexistent Introduction: initial sales growth is typically slow, but marketing expenses and other costs are high, leading to negative profits. Customers that enter in this stage can be characterized as innovators. The firm`s primary marketing objective in this stage is to create product awareness and trial Growth: sales rapidly rise in the growth stage. early adopters now join the firm`s customer base, and this growing market acceptance goes along with economies of scale and rising profits. Growing number of competitors, the firm is primarily focused on maximizing its market share Maturity: sales level peak, but sales growth slows down as the market saturates and competition further increases. It becomes less efficient to reach new costumers and more difficult to effectively market the product. Profit level off and the firm`s primary marketing objective is to maximize profits while defending market share

Decline: sales fall, profitability virtually disappears. Some competitors may exit the market at this stage. The firm`s objective is to reduce expenditures and milk the brand When a firm introduces an original product in a new market with a strong need for the product, the adoption process may be relatively quick However, when firms need to invest heavily in educating customers, sales may not take off and profitability may be difficult to achieve As far as the product strategy is concerned, it is often useful to focus on offering a basic product in the introduction stage, add elements of the augmented product and product extensions in the growth stage, extend and diversify the brand in the maturity stage and prune the product or brand mix in the decline stage

Managing product and brand portfolios Effective firms have a detailed product development plan and a vision of where they want to be over time There needs to be guiding philosophy about the desired extent of product proliferation, and how products will be added or deleted over time The key reason to have a product line rather than a single product is to be able to better serve multiple market segments concurrently. A lack of planning frequently results in a proliferated product line with poor coverage of the market segments In addition, it often leads to high level of competition between the company`s own product offerings cannibalization If the unit margin on the new product is better than that of the cannibalized item, this may not be as serious an issue Over time, product lines typically proliferate, as it is usually more difficult for firms to delete an item from a line than to add one There is a real danger: customers may feel abandoned or poorly served by the company and may even pressure the firm to take back previously sold items Similarly, channel partners may punish the firm by allocating less shelf space to the firm`s remaining products

How market leaders keep their edge, pg 95

Instead of trying to do all things well, they pick just one discipline best price, best product, or best solution and execute like crazy Why can Casio sell a calculator more cheaply than Kellogg can sell a box of cornflakes? Why do some companies endear themselves to us while other just don`t seem to know how to please? Customers today want more of those things they value if they value low cost, they want it lower That`s precisely why companies like Kellogg, Hilton etc are on a slippery slope: one or more companies in their markets have increased the value offered to customers by improving products, cutting prices, or enhancing service

Companies that can`t hold their own will be pushed off a cliff Today`s market leaders know that they have to redefine value by raising customer expectations in the one component of the value they choose to highlight E.g. casio established new affordability levels from familiar products BUT: e.g. Starbucks does not slide a cup of java under your nose any faster or more conveniently than anyone else Yet these companies are thriving because they shine in a way their customers care most about They have honed at least one component of value to a level of excellence that puts all competitors to shame Our research shows that a company mist find the unique value that it alone can deliver to a chosen market instead of trying to be all things to all people Three distinct value disciplines: operational excellence, product leadership, customer intimacy 1. Operational excellence: Operational excellence companies provide middle-of-the-market products at the best price with the least inconvenience Low price or hassle-free service, or both E.g. Wal-Mart, Dell Computer 2. Product leadership Concentrate on offering products that push performance boundaries Product leaders continue to innovate year after year E.g. Johnson & Johnson is a product leader in the medical equipment field Competition is not about price or customer service, It`s about product performance 3. Customer intimacy Focus on delivering not what the market wants but what specific customers want They cultivate relationships They specialize in satisfying unique needs, which often only they recognize, through a close relationship with and intimate knowledge of. The customer Proposition to the customer: we have the best solution for you, and we provide all the support you need to achieve optimum results, or value, or both from whatever products you buy Choosing to pursue a value discipline is not the same as choosing a strategic goal The selection of a value discipline is a central act that shapes every subsequent plan and decision a company makes, coloring the entire organization, from its competencies to its culture If a company is going to achieve and sustain dominance, it must first decide where it will stakes its claim in the marketplace and what kind of value it will offer to customers Then it can identify coe competencies and reengineer the processes that make up the operating model required to get the job done The success of these exercises depends entirely on whether and how well they are channeled toward the pivotal issue of increasing customer value, year after year

Winning through cost

Operationally excellent companies deliver a combination of quality, price and ease of purchase that no one else in their market can match They execute extraordinary well and their proposition to customers is guaranteed low price and hassle-free service, or both Example: price/costco There It saves you the hassle by choosing for you, the company`s consumer reports mentality leads to rigorous evaluation of leading brands and shrewd purchasing of just the one brand in each category that represents the best value Behind the scenes, the company follows an operating model in which it buys larger quantities and negotiates better prices than competing stores It carries only items that sell well The company`s information systems track product movement Example: Dell Dell has realized that he could outperform PC computer dealers by cutting them out of the distribution process By selling to customers directly, building to order rather than to inventory, integrating his company`s logistics with its suppliers` and creating a disciplined, extremely low-cost culture, Dell undercut Compaq and other PC makers in price while providing high-quality products and services These companies from the example have built an operating model based on four distinct features: 1. Optimized supply chain and basic services, and streamlined to minimize costs and hassle 2. Standardized operations, simplified, tightly controlled, centrally planned 3. Management systems that focus on integrated, reliable, high-speed transactions and compliance to norms 4. Culture that abhors waste and rewards efficiency

Winning with great products Companies pursuing product leadership continually push products into the realm of the unknown, the untried, or the highly desirable First, they must be creative : it means recognizing and embracing ideas that may originate anywhere Second, they must commercialize their ideas quickly Third, they must relentlessly pursue ways to leapfrog their own latest product or service Example: Johnson&Johnson It brings new ideas, develops them quickly, and then looks for ways to improve them J&J, like other product leaders, works hard at developing open-mindedness to new ideas Product leaders create and maintain an environment that encourages employees to bring ideas into the company and, just as important, to listen to and consider these idea, however, unconventional Companies that focus on product leadership see opportunity and rush to capitalize on it Companies excelling in product leadership do not plan for every possible contingency, nor do they spend much time on detailed analysis Their strength lies in reacting to situations as they occur Fast reaction times are an advantage when dealing with the unknown

Product leaders are their own fiercest competitors They must be adept at rendering obsolete the products and services they have created They realize that if they don`t develop a successor, another company will The operating model of the product leader is very different from that of a company that focuses on cost: 1. Focus on core processes of invention, product development, and market exploitation Loosely knit business structure Results-driven management systems, that measure and reward new product success and that don`t punish the experimentation needed to get there A culture that encourages individual imagination, accomplishment, out-of-the-box thinking, and a mind-set driven by the desire to create the future

Winning through customer intimacy A company that delivers value via customer intimacy builds bonds eith customers like those between good neighbors They deliver what a specific customer wants They make business of knowing the people it sells to and the products and services they need The customer- intimate company`s greatest asset is its customers loyalty They cultivate relationships They are adept at giving the customer more than he or she expects Example: cable&wireless It focuses principally on business clients They sought to differentiate themselves by providing the best customer support in the industry The company pins its success on choosing the customers it can serve best small to medum-size businesses They key is to segment the market vertically This enables the company to pitch specific customers with specialized services that no other company can begin to provide Local managers allocate it as they see fit, preparing budgets and sending them up the corporate ladder to keep supervisors informed The operating model of the customer-intimate company is quite different from that of business pursuing other disciplines: 1. Obsession with helping the customer understand exactly what`s needed and ensuring the solution gets implemented properly 2. Business structure that delegates decision-making to employees who are close to the customers 3. Management system that are geared toward creating results for carefully selected and nurtured clients we regularly come across managers who don`t buy the idea of having to narrow their operational focus: but we invariably find companies that don`t excel but are merely mediocre in the three disciplines look on page 100 for a table!

Change with your customers and win big, pg 67

Marketing management summary Companies should exploit an economic downturn by identifying and meeting emerging customer needs that competitors cannot or do not even see Customers need new types of offerings It is an ideal time to go on the strategic offensive and innovate Profitable innovation requires resegmenting your customers and creating new offerings that meet their new needs The essence of this strategy is differentiation Reconfigure your customer portfolio by deciding which segments to continue investing in, which to divest, and, especially, which emerging segments to target Example whole food: as its customers revisit their spending on food during the current downturn, the company should stop thinking of them as a single, generic segment The opportunities for further strategic segmentation seem innumerable, especially given that customers needs can vary from store to store Finding advantage in a general recession by reconfiguring customer-segment portfolios may be a novel strategy, but it has already helped individual companies in industries (rather than entire economies) under stress Disruptors have also used segmentation to make a killing while incumbents hunker down Segmentation can enable incumbents and potential disruptors alike to seize a greater share of an industry`s dwindling market capitalization as well Sustaining or growing your bottom line during such times will translate into a price-toearnings multiple that will outshine your competitors and, consequently, into an increased share of your industry`s total pool of capital While the competition mindlessly cuts costs, you should reconfigure your customer segments strategically to increase both market share and market capitalization

Marketing management summary

Marketing myopia, pg 13
Every major industry was once a growth industry In every case, the reason growth is threatened, slowed or stopped is NOT because the market is saturated, but because there has been a failure of management

Fateful purposes Example railroads They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business They were railroad oriented instead of transportation oriented Another example: Hollywood As with the railroads, Hollywood defined its business incorrectly It thought it was in the movie business when it was actually in the entertainment business Today, TV is a bigger business than the old narrowly defined movie business ever was

Had Hollywood been customer oriented (providing entertainment) rather than product oriented (making movies), would it have gone through the fiscal purgatory that it did? The author doubts it A thoroughly customer oriented management can do to keep a growth industry growing, even after the obvious opportunities have been exhausted Examples nylon and glass They have been thoroughly customer oriented It is constant watchfulness for opportunities to apply their technical know-how to the creation of customer-satisfying uses that accounts for their prodigious output of successful new products Aluminum has also continued to be a growth industry, thanks to the efforts of two wartimecreated companies that deliberately set about inventing new customer-satisfying uses What the railroads lack is not opportunity but some of the managerial imaginativeness and audacity that made them great

Shadow of obsolescence Example: dry cleaning Competitions did not come from a better way of cleaning, but from synthetic fibers and chemical additives that have cut the need for dry cleaning Example: electric utilities This is another one of those supposedly no substitute products that has been enthroned on a pedestal of invincible growth A score of nonutility companies are well advanced toward developing a powerful chemical fuel cell, which could sit in some hidden closet for every home silently ticking off electric power Also on the horizon is solar energy, again pioneered by nonutility companies To avoid this prospect, they too will have to develop fuel cells, solar energy, and other power sources Example grocery stores There used to be corner stores The supermarket took over with a powerful effectiveness Yet the big food chains of the 1930s narrowly escaped being completely wiped out by the aggressive expansion of independent supermarkets Executive of big chain: hard to believe that people will drive for miles to shop for foods and sacrifices the personal service chains have perfected and to which the consumer is accustomed If neighborhood stores would cooperate with their suppliers, pay attention to their costs, and improve their service, they would be able to weather the competition until it blew over It never blew over, the chains discovered that survival required going into the supermarket business In truth, there is no such thing as a growth industry the author belives Industries that assume themselves to be riding some automatic growth escalator invariably descend into stagnation Self-deceiving cycle: 1. The belief that growth is assured by an expanding and more affluent population

2. The believe that there is no competitive substitute for the industry`s major product 3. Too much faith in mass production and in the advantages of rapidly declingin unit costs as output rises 4. Preoccupation with a product that lends itself to carefully controlled scientific experimentation, improvement, and manufacturing cost reduction

Population myth The belief that profits are assured by an expanding and more affluent population is dear to the heart of every industry An expanding market keeps the manufacturer from having to think very hard or imaginatively If thinking is an intellectual response to a problem, then the absence of a problem leads to the absence of thinking If your product has an automatically expanding market, then you will not give much thought to how to expand it Example: petroleum industry They believed very strongly the beneficial consequences of an expanding population, while at the same time having a generic product for which there has appeared to be no competitive substitute The greatest single improvement the development of tetraethyl lead- came from outside the industry The big contributions made by the industry itself are confined to the technology of oil exploration, oil production, and oil refining The petroleum industry`s effort have focused on improving the efficiency of getting and making its products, not really on improving the generic product or irs marketing Its chief product has continually been defined in the narrowest possible terms The development of superior alternative fuels also comes from outside the oil industry Major innovations in automobile fuel marketing come from small, new oil companies that are not primarily preoccupied with production or refining The petroleum industry is pretty much convinced that there is no competitive substitute for its major product, gasoline or, if there is, that will continue to be a derivative of crude oil, such as diesel fuel or kerosene jet fuel The industry`s survival is owed to a series of miraculous escapes from total obsolescence of last minute In the days of kerosene lamp, the oil companies competed with each other and against gaslight by trying ti improve the illuminating characteristics of kerosene Then suddenly the impossible happened: Edison invented a light that was totally nondependent on crude oil Two great innovations occurred, neither originating in the oil industry When the prodigious expansion for gasoline finally began to level off in the 1920s, along came the miraculous escape of the central oil heater And when that market weakened, wartime demand for aviation fuel came to the resuce Gas revolution: the oil companies themselves should have made the gas revolution Partly because they knew that natural gas would compete with their own sale of heating oil, the oil companies pooh-poohed (haha) the potential of gas

As in the past, the industry was blinded by its narrow preoccupation with a specific product and the value of its reserves It paid little or no attention to its customers` basic needs and preferences Booming demand sent oil explores searching for more without sufficient regard to what the future really promised Management cannot find much consolation today in the rapidly expanding petrochemical industry, another oil-using idea that did not originate in the leading firms Oil has never been a conitnuesly strong growth industry It has grown by fits and starts, always miraculously saved by innovations and developments not of its own making There is no guarantee against product obsolescence If a company`s own research does not make a product obsolete, another`s will The best way for a firm to be lucky is to make its own luck That requires knowing what makes a business successful One of the greatest enemies of this knowledge is mass production

Production pressures Marketing gets neglected Mass production does indeed generate great pressure to move the product But what usually gets emphasized is selling, not marketing Selling focuses on the needs of the seller, marketing on the needs of the buyer Marketing is preoccupied with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering and finally consuming it A truly marketing-minded firm tries to create value-satisfying goods and services that consumers will want to buy Example: automobile industry Detroit was not convinced that people wanted anything different from what they had been getting until it lost millions of customers to other small-car manufacturers Detroit never really researched customers` wants It only researched their preferences between the kinds of things it had already decided to offer them For Detroit is mainly product oriented, not customer oriented The marketing effort is still viewed as a necessary consequence of the product- not vice versa, as it should be Ford was the most brilliant and the most senseless marketer in American history He was senseless because he refused to give the customer anything but a black car His real genius was marketing He invented the assembly line because he had discovered that at $500 he could sell millions of cars Mass production was the RESULT not the cause of his low prices His operating philosophy: the reduction of price comes first; we do not bother about the costs, the new price forces the costs down; the price is so low as to force everybody in the

place to the highest point of efficiency; we make more discoveries concerning manufacturing and selling under this forced method than by any method of leisurely investigation Instead of growing, the industry declines: it usually means that the product fails to adapt to the constantly changing patterns of consumer needs and tastes, to new and modified marketing institutions and practices, or to the product developments in competing or complementary industries Example oil industry again: Oil is trying to improve hydrocarbon fuels rather than develop ANY fuels best suited to the needs of their users, whether or not made in different ways and with different raw materials from oil Oil companies are more or less watching developments It has to think of itself as taking care of customer needs, not finding, refining or even selling oil Gas station is like a tax collector Hence, companies that are working on exotic fuel substitutes that will eliminate the need for frequent refueling are heading directly into the outstretched arms of the irritated motorist (that view gas stations as tax collectors) For their own good, the oil firms will have to destroy their own highly profitable assets No amount of wishful thinking can save them from the necessity of engaging in this form of creative destruction

Dangers of R&D Another big danger to a firm`s continued growth arises when top management is wholly transfixed by the profit possibilities of technical research and development Example: electronics The greatest danger that faces the glamorous new companies in this field is not that they do not pay enough attention to research and development but that they pay too much attention to it They have vaulted to affluence on a sudden crest of unusually strong general receptiveness to new technical ideas They are growing up under conditions that come dangerously close to creating the illusion that a superior product will sell itself It is not surprising that, having created a successful company by making a superior product, management continues to be oriented toward the product rather than the people who consume it Because electronic products are highly complex and sophisticated, managements become top-heavy with engineers and scientists Marketing gets treated as a residual activity There is the bias of dealing with controllable variables The managements of the new glamour-growth companies tend to favor business activities that lend themselves to careful study, experimentation, and control the hard, practical realities of the lab, the shop and the books What gets shortchanged are the realities of the MARKET

Consumers are unpredictable, varied, fickle, stupid, shortsighted, stubborn and generally bothersome And this accounts for their concentration on what they know and what they can control The emphasis on production becomes particularly attractive when the product can be made at declining unit costs The companies are in the felicitous position of having to fill, not find, markets, of not having to discover what the customer needs and wants but of having the customer voluntarily come forward with specific new product demands Nobody seems as interested in probing deeply into the basic human needs that the industry might be trying to satisfy as in probing into the basic properties of the raw material that the companies work with in trying to deliver customer-satisfaction Markets sort of have a stepchild status: they are recognized as existing, as having to be taken care of, but not worth very much real thought or dedicated attention There was not a single apprehension that the oil industry`s affluence might be threatened or a suggestion that one new horizon might include new and better ways of serving oil`s present customers Example: oil industry The industry is implicitly defined as beginning with the search for oil and ending with its distribution from the refinery But the truth is, it seems to me, that the industry begins with the needs of the customer for its products The view that an industry is a customer-satisfying process, not a goods- producing process is vital for all businesspeople to understand An industry begins with the customer and his or her needs, not with a patent, a raw material, or a selling skill Given the customer`s needs, the industry develops backwards, first concerning itself with the physical delivery of customer satisfaction Then it moves back further to creating the things by which these satisfactions are in part achieved The irony of some industries oriented toward technical research and development is that the scientists who occupy the high executive positions are totally unscientific when it comes to defining their company`s overall needs and purposes They violate the first two rules of the scientific method: being aware of and defining their companies`problems and then developing testable hypotheses about solving them Selling concerns itself with the tricks and techniques of getting people to exchange their cash for your product It is not concerned with the values that the exchange is all about And it does not, as marketing invariably does, view the entire business process as consisting of a tightly integrated effort to discover, create, arouse, and satisfy customer needs Building an effected customer oriented company involves far more than good intentions or promotional tricks; it involves profound matters of human organization and leadership The company has to do what survival demands It has to adapt to the requirements of the market, and it has to do it sooner rather than later

No organization can achieve greatness without a vigorous leader who is driven onward by a pulsating will to succeed In business, the followers are the customers In order to produce these customers, the entire corporation must be viewed as a customercreating and customer-satisfying organism The organization must learn to think of itself not as producing goods or services, but as buying customers, as doing the things that will make people want to do business with it Unless a leader knows where he is going, any road will take him there

marketing strategy an overview, pg 25

A strategy is a plan of action designed to achieve certain defined objectives At the heart of any business plan is its marketing strategy Businesses exist to deliver products and services to markets To the extent that they serve this purpose well and efficiently, they grow and profit Other components of a business unit strategy must support the businesss marketing mission

Elements of marketing strategy Product/Market selection The most important choice made by any organization is deciding what markets it will serve with what products Product/market selection decisions commit the firm to particular customer groups, specific fields of technology and a certain competitive milieu Product: total package of attribute the customer obtains when making a purchase Product benefits might include: what the product does, the value of the brand name in terms of implied product quality and reliability Part of the products meaning may be convenience and/or the pleasure of the shopping experience Any list of product attributes may include negatives as well Example cars: repair frequency and cost may indeed be negative factors Industrial buyers may run the risk of poor product performance or the suppliers going out of business Thus, product meaning must be defined in terms of the full range of benefits, risks, and disadvantages the buyer obtains with purchase and use, including the buying experience What counts for strategic planning purposes is the prospective purchasers opinion and the value he or she places on the sellers product versus competitive offerings It is important to distinguish between perceived value (customers exiting perception of the product) and potential value (what the buyer can be educated to recognize) Market: a market is a pocket of latent demand New market opportunities may arise from a wide range of exogenous factors

Major source: new technology, population growth, increases in national and personal incomes Also societal needs such as crime prevention and health care Shifts in culture, style, public tastes in food, clothing, entertainment

Market segmentation A market segment is a set of potential customers that are alike in the way they perceive and value the porudtc, in their buying behavior and in the way they use the product Markets may be segmented along several dimensions:

Demography Relies on such factors as family income, age, sex, ethnicity, educational background as explanatory variables for differences in taste, buying behavior and consumption patterns In industrial markets, the size of the enterprise, its nature (e.g. for-profit, government etc) and type of industry (e.g. services, defense) are demographic variables They tend to explain patterns of buying behavior

Geography Are useful in both consumer and industrial markets Different areas of the country and different parts of the world may vary significantly in terms of market potential, compeititve intensity, product-form preferences and government trade regulations Another geographic variable is economic shipping distance In the case of high weight- or bulk-to-value products, plant location will define the market area The desire of the customer to be close to the supplier may effectively limit the market geographically With the increasing globalization of markets, geographic segmentation variables have declined somewhat in importance versus others

Psychographic variables Attempt to segment markets according to individual lifestyles and attitudes toward self, work, home, family and peer-group identity The comparable segmentation variable in industrial sectors might be corporate culture Some enterprises are greater risk takers than other and make have more to gain as early adopters of new products and technologies

Product application and use The way industrial purchasers use the product and how it fits into their processes and systems may provide the basis for market segmentation Business buyers of small planes for crop dusting or airline passenger service or executive jetting are in distinctly different market segments

Any one consumer may exhibit different purchasing behavior in buying comparable products if they are intended for different purposes It is also important to recognize that the market segmentation scheme appropriate at one stage in the development of a market may become obsolete with market growth and maturation Customers become educated in buying and using the product Demand increases and new competitors enter Not to continually revisit the task of segment delineation and look for new market opportunities is to risk significant loss in competitive position Market segmentations purpose is to delineate groups of potential buyers according to their needs, market potential, and buying behavior Having developed a segmentation scheme, strategic planners may select from among these those markets the firm may serve most creatively and profitably and to develop strategies for each Page 29 gives an overview of the segmentation variables

Product/market selection criteria Product value Market entry and development efforts must focus on those segments that value the product most highly Target those applications in which the product or service makes its greatest contribution

Long-run growth potential Ultimately market size and profit potential is key Growth potential estimates should factor in any follow-on market opportunities as well as the one at hand

Resource commitments Product/market choices often commit firms to heavy financial drains not only in marketing but also In production facilities and R&D Can the resources be made available to compete in some high potential market, and does the estimated return on assets justify the investment?

Competitive positioning It is useful to think of the market as a chessboard, with the squares representing different market segments Competitors are arrayed over the playing area, each seeking to occupy certain spaces with particular product offerings In the race to take segment positions, the advantage often lies with the first-mover, the one to get there first

It has the chance to develop market recognition, gain customer access, lead technology and end-product development and achieve scale economies in its manufacturing and marketing operations

Company-product/market fit New product/market opportunities need to be assessed in the context of existing business operations Will the firms reputation and brand name be of value? Will the proposed offering enhance the companys position with existing customers and its strength in dealing with its distributors and retail outlets? Example, American car manufacturers: only after foreign competitors made significant inroads on their markets in the US and abroad did the domestic manufacturers bow to the pressure of significant losses in market share and began making small cars

The art of pricing The prices of products and services are determined by the interplay of five factors:

Supply/demand The extent of supply relative to demand for a product or service is the most basic determinant of price The greater the supply of a good, the lower the price In general, basic levels of supply and demand are beyond the control of individual players Attempts to control supply are often made by monopolizing supply sources or forming cartels

Cost factors In pricing, cost sets the floor A supplier cannot for long continue to sell below the costs of making and marketing a product and still stay in business The relative level of fixed and variable costs also affect pricing strategy If such fixed costs as depreciation, R&D and sales are high relative variable costs (labor, materials per unit) maximizing sales volume becomes an important strategic objective in order to spread fixed charges over as many units as possible This explains why hotels and airlines offer substantial off-season price custs to try to fill rooms and seats, respectively In contrast If variable costs are relatively high portion of the total, maximizing unit margins is critical to profitability In all cases, low-cost producers have a substantial competitive edge It may also mean survival in periods of price war

Competition If cost factors ultimately set the floor for prices, competition establishes the ceiling

In the early stages, price competitiveness is usually moderate or nonexistent and intensifies as increasing numbers of firms enter the market Firms may legally respond to competitive price pressures in three ways: 1) by differentiating their products, 2) attempting to dampen intrabrand competition among their sellers, 3) exercising price leadership Product differentiation o Yields some degrees of freedom in pricing against competitive offerings o Any unique benefits the product offers may be translated into price premiums o A differentiated product may enjoy quasi-monopoly status if it is in demand and comparable competitive offerings are not available Intrabrand competition o Tends to put pressure on price levels as resellers of the same brand compete for market share in the regions they serve o Price competition at this level soon generates interbrand competition, and market price levels decline o A strong field salesforce working with resellers may also monitor resale prices and discourage price cutting o Seeking to influence resale prices does have legal implications, however, and should be carried out only with a clear understanding of the laws Price leadership o Typically falls on the industrys largest firm o Price leaders seek to set price levels in response to changes in supply and demand, product cost factors etc o If competitors recognize the leaders moves as beneficial to the industry and to their own bottom lines, they are likely to conform o If not, the leader must usually retract announced price changes or risk losses in market share Pricing in any industry is usually characterized by conscious parallelism As long as competitors do not communicate with each other directly and pricing moves cannot be constructed as predatory, price parallelism is legally acceptable and often essential for survival

Buyer bargaining power In price negotiations, buyers have strength to the extent 1) that they account for a significant portion of the sellers sales, and 2) that they have multiple options for meeting their procurement needs 1) creates high degree of dependency on the firms largest buyers 2) buyers are also in strong negotiating positions if they have multiple supply sources competing for their business and /or if self-manufacture is an option Sellers have negotiating strength to the extent that they offer differentiated products

Product value the worth of a thing is the price it will bring

If the price is lower than what the product is worth to the buyer, the seller sacrifices potential profit But customer value may vary considerably across market segments and from one buyer to another, depending on the priority each buyer may give to the products several attributes In the case of physical goods, sellers may attempt and often successfully to implement differentiated price strategies through cosmetic differences in the product In the long-run, successful price differentiation by market segment has to be based on functional product differentiation The risk in any price differentiation strategy, however, is that low-priced products sold in one market will make their way across segments into markets where higher prices would normally prevail This is the so-called black-market phenomenon

Skimming v. penetration pricing In entering new markets or introducing new products, sellers may elect to price high to reach those segments for which the product has the greatest value (skimming) and then bring the price down over time to tap other pockets of demand Alternatively, a strategy may be to price low to achieve high market share before competitors can react or to break into some existing market (penetration pricing) A skimming price approach is used largely to maximize unit profits in the early stages and sometimes to gain market experience at low market volume levels In contrast, penetration pricing preempts competition and allows the firm to gain learning curve experience so as to quickly achieve scale economies in manufacturing and marketing The cost of penetration pricing is the profit sacrificed by charging some market segments much less than they would be willing to pay The potential gains are large market share and a dominant competitive position Penetration strategy is generally regarded as the higher-risk strategy If it is to succeed, several conditions have to be met: o Product must be free of any defects that might create consumer dissatisfaction and incur large costs for repair etc o Production capacity must be in place to satisfy anticipated demand o Distribution channels must be available for reaching potential buyers o Lags between product introduction and general market acceptance would give competitors time to react!

Analyzing Consumer Perceptions, pg 81

Section 1: Data Collection and Profile Analysis

-The good old Likert scale and semantic differential scale.

-When analyzing perception data (what people see) as opposed to preference data (what people like), we usually are more willing to live with an assumption of homogeneity in responses across consumers. -If we are willing to assume perceptions are pretty much the same across respondents, we can then easily summarize the data by averaging it across all survey respondents. -After averaging across respondents, a useful visual representation is Profile Analysis, known more commonly as snake plot (pg. 84) -However, as the number of brands to be considered increases, snake plots can become an uninterpretable mess, and more powerful techniques are typically needed to yield the desired insights

Section 2: Perceptual Mapping Techniques When consumers perceptions of multiple competitors on multiple dimensions are of interest, more powerful analysis techniques help to make the data more meaningful Two types of mapping procedures, depending on the type of data collected from consumers: 1) ratings of items on prespecified attributes 2) judgments on overall similarity of pairs of brands.

Attribute Rating Method: a cell entry in the data matrix is the average rating of the competitor represented by the row on the attribute represented by the column.

Your Company Competitor 1 Competitor 2

Rating on Attribute 1 2 3

-The statistical procedure underlying this type of perceptual mapping is typically either factor analysis or discriminant analysis.

For a more intuitive sketch, look at Figure A (pg. 86)

Perceptual Map of Brand Imagery: Figure B (pg.87)

The arrows pointing at more or less the same direction is related, while the arrows pointing away 90 degree is totally unrelated. If the arrow is going to opposite direction, its capturing the fact that the brands on the market are currently perceived as trading off the two attributes.

In order to see the location of the brand on an attribute, you always drop a perpendicular from the brand to the arrow.

Overall similarity method: Limits In categories with competition driven by tastes, odors, or aesthetics, the attribute method breaks down. For such situations, an alternative is to ask the respondent to make judgments about the overall similarity of pairs of items.

Specifically, for N items, we require the respondent to rank the [(n)(n-1)]2 possible pairs of items from most similar to least similar.

On a multidimensional scaling (Figure C pg. 89), which tells how closely the distances on the map match up with the original input data. Note that we do not know what the axes are-but our knowledge of the category can help us to name them..

The overall similarity method thus allows us not only to map products but also infer the attributes used by the respondent in making distinctions.

Table B (pg. 90) summarizes the difference between Attribute Rating and Overall Similarity pretty well.

Section 3: Applying the Maps in New Product Development

Three major ways in which perceptual maps are used in marketing: 1) to obtain a better understanding of current positioning and market structure 2) to test where a new product being considered for introduction would be perceived 3) to provide direction R&D efforts to satisfy the wants of consumers better.

Purpose 1: Understanding market structure -Understanding where your company is seen relative to the competition facilitates this. -Perceptual maps can be a useful stimulus to opportunity identification. -Holes in the product space might be exploited as they may represent niches of the market which current competitors have overlooked and could be developed. -The maps indicate the vulnerability of competitors by showing how consumer perceive them.

Purpose 2: Perceptions of a Product concept -Perceptual maps can be used to test if consumers would perceive the concept or product as the firm intended. -Perceptual mapping can provide an answer the advisability of the strategy. -The map can be used after a product introduction to track the positioning. -Figure E pg. 92 shows the four zones of strategies. -Perceptual maps could be constructed after the introduction to test this hypothesis and aid in the determination of whether remedial action was necessary.

Purpose 3: Direction to R&D Efforts to Satisfy Customers Better -This requires formal representation of the ideal point of a customer (i.e. what point on the map represents the ideal combination of attributes for different customer groups).

-When we have attributes for which more is not necessarily better, we will want to represent explicitly these details.

Attribute approach: alter the input data collection phase to include the respondents ideal in the set of things to be rated on each attribute. Overall similarity approach: include the ideal as one of the objects in forming all possible pairs for similarity ranking.

Limitations of perceptual mapping

-It presents a static view. -While it may help a firm determine what it would like to do vis--vis the market, it provides no indication of the cost or likelihood of being able to achieve the desired positioning.

-Its not a substitute for management judgment but often provides valuable input and serves as a very useful focal point in strategic planning discussions.

Should you Launch a Fighter brand?, pg 111

A fighter brand is designed to combat, and ideally eliminate, low-price competitors while protecting an organizations premium-price offerings.

-The fighter brand also opens up a new, lower-end market for the organization to pursuer.

Five major strategic hazards that a manager must negotiate carefully in order to enjoy fighter brand success:

1. Cannibalization -You must ensure that I appeals to the price-conscious segment you want to attract while guaranteeing that it falls short for current consumers of your premium brand. -You must match your fighter brands low price with equally low perceived quality. -You must use those coordinates [consumer values] to deliberately miss one target segment while hitting the other. -A company must deliberately lessen the value, appeal, and accessibility of its fighter brand to its premium brands target segments. -Fighter brand offers a sufficiently differentiated proposition to innovate around the premium brand and strengthen its brand equity. -An accurate break-even analysis must account for cannibalization as well. -Test marketing is the best way to ensure that a fighter brand can compete with low-price offerings without robbing significant sales from its higher-price, more profitable sister brand.

2. Failure to Bury the Competition -Lack of competencies to win the kind of price war it was entering.

3. Financial Losses -In creating a very different kind of car company and a supereffective fighter brand, GM had also burdened Saturn with an overwhelmingly unprofitable business model. -GM centered on lowering costs at the expense of Saturns brand equity and ultimately its fighter brand effectiveness -Fighter brand success depends on more than initially matching the price and value of your intended enemy; you must also achieve those goals while attaining a sustainable level of profits. -Companies find themselves competing in the low-price sector against brands that probably originated there and that have evolved an operating model well suited to it. To meet that challenge a premium organization may have to strip back a fighter brands cost structure and alter its traditional definition of what constitutes strategic success.

4. Missing the Mark with Customers -The DNA of a fighter brand is potentially flawed from the very outset because it is derived from company deficiencies and competitor strengths, not a focus on consumers. -Its more common for fighter brands to focus excessively on rivals at the expense of consumers. -Managers focus should be immediately switch to the consumer segments that the new brand is targeting. Only then will it achieve the kind of consumer orientation ecessary to avoid a potentially fatal focus on competitors. -Qantas airlines planning process to launch fighter brand began not with internal benchmarking or an assessment of Virgin Blues operating model but rather with a series of focus groups.

5. Management Distraction -The opportunity costs of launching, managing, and then withdrawing an unsuccessful fighter brand can be even bigger than the financial impact. -Fighter brands do nothing to abate those other competitive threats. In fact, by siphoning away vital funds and management attention, they may actually render the premium brand more vulnerable. -The greatest cost of a fighter brand may be its propensity to cause managers to delay essential strategic decisions on their existing portfolio of brands.

Conclusion: -Think about how thoroughly a fighter brand might cannibalize premium brand sales, and make sure that the value equation between your two brands is suitably distinct in the mind of the customers.

-Check that you will be able to launch a fighter brand that is competitive enough to damage your enemy and profitable enough to continue to do so over the long hal. -Consider carefully the strategic implications of dividing your organizations resources during a period when focus and investment are critical.

if brands are built over years, why are they managed over quarters?, pg 197
Companies become so entranced with their ability to price and sell in real time that they neglect investments in their brands` long-term health Consumers are 50% more price sensitive than they were 25 years ago Seven out of ten managers cited pricing pressure and shoppers` declining loyalty as their primary concerns Brands are on the wane and it is tempting to blame the discount retailers Wal-mart and other powerful retailers have undoubtedly weakened some brands Example: Foot locker cut Nike orders to protest and then Nike cut its allocation of shoes to Foot Locker and consumers stopped shopping at Foot Locker since they didnt sell the shoes they wanted Nike, e.g. positioned themselves in the long term, maintained strong relationships with a variety of retailers and invested in brand equity Companies are paying too much attention to short-term data and not enough to the longterm health of the brand They routinely overinvest in price promotions and under invest in advertising, new product development and new forms of distribution

The Genesis of the Short-term view Suggestions: an abundance of real-time sales data that make short-term promotional effects more apparent, thus pushing manufacturers to over discount; a corresponding shortage of usable information to help assess the effect of long-term investments in brand equity, new products and distribution; and the short tenure of brand managers

Data are proliferating Before 1980s, brand managers had to wait up to 2 months to get sales numbers Changed with real-time sales data and made it possible to attribute a spike in sales to a price promotion The number didn`t say whether a given promotion was profitable For that assessment, they needed to compare sales at the discounted price with those that probably would have occurred without the promotion The help brand managers predict the level of sales in absence of a discount, and thus assess the immediate profitability of promotions, baseline sales models were developed

Baseline sales: estimates by extrapolating from periods where there are no price reductions or other kinds of promotions The profusion of data has had major consequences for the allocation of marketing dollars Trade promotion spending increased and growth occurred largely at the expense of advertising, whose effects play out over a longer time frame and are thus more difficult to measure The reallocation of spending away from long-term brand building and toward temporary price reductions was predicated on a short-term mindset Consequences of short-term sales approaches: changes in consumers behavior: o regular sales promotions encourage shoppers to wait for the next sale rather than purchase a product at full price o as more people make purchasing decisions exclusively on price, baseline sales eventually decrease and lift over baseline increases o from a short-term perspectives, this lift makes promotions look highly profitable, so managers push for more promotions o eventually, most of a product is sold at a discount and profit margins decrease o also, customers often stockpile a product if they think the price is particularly good o stockpiling can amplify the immediate effect of a promotion without increasing overall sales diluted brand equity o by focusing consumers` attention on extrinsic brand cues such as price instead of on intrinsic cues such as quality, promotions make brands appear less differentiated o consumers, over time, become more price sensitive and the product gradually becomes commoditized competitive response o when one firm increases its discounts, others usually follow suit o as a result, individual promotions increase but overall sales do no, further lowering everyone`s margins o research showed that the total impact of discounts is only 80% of their short-term effect, in contrast, the long-term effect of advertising can be 60% greater than its short-term impact o price sensitivity measured weekly is seven times higher than it is when the same data are assessed quarterly o weekly data recognize increases in purchases but ignore subsequent competitive price reactions and changes in consumer behavior

Long-term effects are harder to measure because long-term effects are more difficult to measure than short-term ones, few companies pay much attention to them research to help managers to take a longer view is increasingly available advertising has a small short-term effect on sales compared with the effect of a price promotion but a TV advertising campaign that does generate significant sales increases

during the first year will continue to do so for two more years, even if the ads are no longer being aired if a TV campaign does not have a significant impact during the first year, it will have no long-term impact TV ads are not difficult to justify on a short-term basis because: 1. Advertisers who test their ads in the market can isolate the campaigns that will increase revenues over the long-term, since ads that are successful in the short run also have a positive long-term effect 2. Even campaigns that do not do much to boost sales can increase margins by differentiating brands and thus allowing companies to raise prices Companies have paid even less attention to the long-term effects of distribution and new products than they have to the effects of advertising Results indicate that increases in the length and variety of a product line play a major role in boosting a brand`s baseline sales Moreover, increased product-line variety and distribution in leading retailers reduce consumers` sensitivity to price These results suggest that increasing variety and high-quality distribution raises sales and prices in the long run Despite the growing evidence that marketing strategies yield positive long-term returns, companies continue to manage their brands with a short-term perspective This orientation is exacerbated by Wall Street analysts who focus on quarterly figures to value firms and advise clients Because investors focus on those numbers and the link between discounts and the current quarter`s sales is transparent Thus, short term numbers drive out those that tell the fuller story

Brand managers have short tenures Any brand managers who takes a long-term perspective investing in advertising or new-product development is likely to benefit the performance of subsequent managers, not her own Scanner data have been available for decades now, so It should be easier, not harder, to take a long-term view of brands

A long-view dashboard In the short-term, discounts lift sales over baseline levels But baseline levels change in response to the marketing strategy Those changes signal a long-term shift in brand performance Higher baseline sales mean that consumers are buying more of a product at full price Quantity premium: whereas the baseline measure reflects only the volume sold when a product is not discounted, the lift-over baseline measure represents the difference between discounted and nondiscounted sales Smaller lifts reflect greater customer loyalty because loyal customers tend to buy regardless of the discount status

Therefore enjoy a price premium Quantity and price premiums reflect a brand`s long-term health If consumers pay less of a premium for the brand and baseline demand is decreasing, then the brand is headed in the wrong direction

The Three Faces of Consumer Promotions, pg 207

-This article delineates three ways through which a promotion affects a consumer, and provides guidelines to manufacturers and retailers to design more effective promotions. -Promotion may longer represent simply an economic incentive to purchase, but also have other effects on consumers deal evaluations and purchase intentions. -Conceptualizing the multiple routes through which a consumer promotion exerts an influence on consumers allows practitioners to consider such factors when designing a promotion. -Consumer promotions can be considered as pull promotions in that they directly entice the consumer to purchase the product, thereby pulling the brand through the channel. -Trade promotions can be considered as push promotions in that they provide incentives for the retailers to offer special deals and push the product through the channel. -Consumer promotions increase short-term sales both to news and existing customers. -Promotions may also encourage sales of complementary or other-related products. Figure 1 (pg. 209) summarizes the effect. The Candon, Wansink, and Laurent model (CWL) proposes that sales promotions provide utilitarian benefits including savings, quality, convenience, and hedonic benefits including value expression, exploration, and entertainment. Sales promotion positively and negatively influences consumers through three different routes: -Changing the economic utility associated with a product purchase (economic route) -Influencing consumers beliefs about the brand or industry (informative route) -Affecting the feelings and emotions aroused in the consumer (affective route) -By disentangling the routes through which a sales promotion can affect final sales, a manager should be able to reduce its negative effects. ECONOMIC ROUTE -Non-monetary benefits can accrue as well (e,g, derecasing the transaction time or effort required for a customer to make a decision) -The CWL framework incorporates these non-monetary costs under the construct of convenience, defined as the increased shopping efficiency attributable to reduced search costs in identifying the product required. -Hidden costs: stockpiling, increased consumption, increased increased search time required to find the best deal.

-Longer-term non-monetary costs could include a reduced choice set as customers make sub-optimal purchase decisions to avail of loyalty type rewards or if promotions serve to maintain premium prices as national brands cooperate implicitly to defend market share vs. private label competitors (negative effect).

INFORMATIONAL ROUTE -Consumer promotions can also lead consumers to generate inferences that they might not otherwise have drawn in the absence of the promotion. -Price promotions may lead to lower reference prices for that brand as compared to one that is not promoted an may backfire in the long run if the promotional price becomes the reference price against which the regular price is viewed unfavorably. -Price promotions lead to unfavorable quality and brand evaluations. -Consumers develop expectation of when a brand will and will not promote based on brands dealing patterns. -Increasing the value of a coupon frequently may not affect either deal evaluations or purchase intentions, and in special circumstances may backfire, leading to lower profits for the company. -They are contingent on brand image, consumer expertise, and presence of price information. -The mere presence of a display can lead to consumers inferring a price cut and buying more (positive). -It may erode brand equity via a deleterious effect on quality perceptions or via an increase in consumers price-elasticity. AFFECTIVE ROUTE -The general effects include the ambient effects of the shopping experience due to the hedonic entertainment and exploration effects as per CWL. -Specific effects include the inferences consumers make about themselves, such as feelings of being smart or lucky. -A price increase that is driven by a profit motive is perceived as fair, but a price increase that is driven by a profit motive is perceived as unfair. -Discriminated promotions may not be tenable in the long term as a greater proportion of current customers become aware of the punishment for being loyal. -Specific negative effects include the embarrassment of feeling cheap and the regret of missing out on a deal.

Conclusion The extent to which the informational value and affective aspects of a promotion affect deal evaluations, purchase intentions, and sales is contingent on managers controlling both contextual factors and features of the target market.

Consumer Promotion Profitability Promotion Profit = Incremental Units Sold on Deal x (MarginR Discount) + Undiscounted Incremental Units x MarginR Base Units Sold on Deal x Discount Promo Cost + (Positive vs. Negative Carryover Effects). -Creating a profitable promotion is much more difficult than increasing sales. -Incremental sales are influenced not only by the discount size (economic route), but also by the time and effort effects, informational effects, and affective effects. -Since many of the three effects are largely costless, promotion profitability is greatly increased. Managerial Design of Promotions (Promotional Features and Communication) -Managers make decisions about the design and communication of a promotion, which in turn influence how consumers process promotional information. Choice of product, target segment, type of promotion, and communication (Within each of these decisions there are a range of managerially controllable and uncontrollable factors that will influence the short-term and longer-term effectiveness of the promotion). -A promotional offer will cause fewer negative inferences regarding the brand or product quality in the case of experience-type goods or frequently purchased items. -In the case of new products or categories or markets without significant dealing by competitors, managers may need to use offer features such as deal restrictions to signal the value of the brand. -Its a guide to managerial action, but not substitute.

Building models for marketing decisions: past, present and future, pg 229
Introduction Five areas of model building in marketing: o An era characterized by the direct application of existing operations research (OR) and management science (MS) methods to marketing problems: 1950- 1965 o An era characterized by the adaptation of models to fit marketing problems. Capture market place reality better but they lack simplicity: 1965 1970 o In the era of implementable models there is an increased emphasis on models that are acceptable representations of reality and are easy to use: 1970- 1985 o In the fourth era, models are increasingly implemented, and there is an interest in marketing decision support systems. We also see here an increase in routinized model applications that results in meta-analysis and studies of generalizability of results: 1985 2000 o Changes in technology stimulate the growth of new exchange systems, and there is an opportunity and a need for new modeling approaches: 2000 -

The past Transportation of OR/MS methods: 1950 1965 OR and MS largely emerged during and after WW 2 with algorithms and processes applicable to production and logistics Initially, the emphasis was on the application of existing OR/MR methods for the solution of specific problems The tools include mathematical programming, computer stimulations, stochastic models and dynamic modeling The methods were typically not realistic and the practical usefulness of these methods in marketing applications was therefore limited Relatively large number of models was developed: descriptive, predictive and normative Descriptive models: o Describe decisions or other processes o Important subset is the set of stochastic consumer behavior models: purchase incidence, purchase timing, brand choice models (Markov models and learning models) Predictive model: o Lacks the explanatory variables that provide conditional predictions Normative models o Have a recommended course of action o Some models optimize an objective function simultaneously for multiple brands where the optimal value of marketing instruments are obtained from algorithms developed in game theory Many models have multiple purposes For example: Vidale and Wolfe propose a model of sales as a function of advertising expenditures that can serve as both a descriptive and a predictive model. The model is empirically based and it Is used to describe the effect of a constant advertising expenditure during some period. This description is used for (conditional) predictions of a pulse campaign. By adding cost and profit functions to the estimated demand function, Vidale and Wolfe obtain normative descriptions In this era, many models were developed for consumer durables and industrial products This period also includes the introduction of econometric methods into marketing for the estimation of demand relationships However, were hampered by the limited availability of relevant data

Models that fit marketing problems: 1965 1970 The second era can be characterized by the adaptation of models to fit marketing problems The resulting models are more representative of reality, but they often lack simplicity and usability A predictive model that received enormous attention by academics and practioners alike is the new-product growth model by Bass: He proposes that category sales of a new durable, assuming at most one unit purchased per customer, depends on innovators and imitations

He derived an expression for category sales as a quadratic function of cumulative (initial) purchases He showed that the estimated parameters from the early years of sales could provide excellent forecasts of the amount of peak sales and the timing of the peak Many models failed to consider the effects of competition, were static and only considered one marketing instrument

Implementable marketing models: 1970 1985 Increased emphasis on models that are acceptable representations of reality, and at the same time are easy to use Shift of focus from isolated decision problems to implementation and implementability Little states that a manager needs a decision calculus, i.e. a model-based set of procedures through which the manager can bring data and judgments to bear on the decisions at hand Little: models should be simple, complete on important issues, adaptive and robust In this era, much attention focuses on the specification of logically consistent market share models such as the MCI and MNL models A productive implementation strategy is modular model building Modularity means that the end result is obtained by outing together a set of sub models or modules The modular approach makes it easier for a user to understand how the model works and it provides the user with flexibility These advantages will facilitate adoption and use (implementation) of a model We also see the introduction of models parameterized with subjective (as well as objective) data If data are lacking or the available data have insufficient quality, a model that captures a decision maker`s judgments about outcomes under a variety of conditions can be helpful Other developments include strategic marketing (planning) models and marketing decision support systems The increasing availability of data offers opportunities for researchers to build models that advance our marketing knowledge and produce generalizable phenomena

The present Maturity The present era represents a level of maturity in model building for marketing decisions: o Some models have been applied many times in a somewhat standardized form o There is a recognition of opportunities for model-based automation of market decisions o The publication of empirical studies completed by different researchers who use different models and different data sets has facilitated the examination of similarities and differences between substantive findings o Existing models developed in one context are applied, and adopted, if necessary to new contexts

o o o o

o o

One reason for the rapid acceptance of model-based results is the experience gained by the marketing research community during the first three eras Also, the introduction of new B2B services Purchase measurement takes place by having households use plastic ID cards in all relevant outlets, which are equipped with scanners This unique setup provides clients the opportunity to improved decisions about (television) advertising content and weight (frequency) for new and estavlished products The increased availability of accurate and detailed marketing data has been an important force in the implementation of models These developments result in models that increasingly are parameterized on a large number of observations and account for errors in the data etc

Implementable models: some example of existing applications There are many examples of successful applications: Page 234 for a list of examples The era is also characterized by latent demand for models by firms In earlier eras the interface between model builder and model user was probably dominated by the supply side so that analysts offered their models to managers and had to convince the user of potential benefits Model acceptance by managers is facilitated if model builders can present convincing arguments ex ante why and how models will provide superior marketing decisions The statistical analysis of historical data can provide a convenient basis for routine decisions Examples of marketing decisions that have much potential for model-based automation: repetitive promotions and pricing programs, media allocation decisions, distribution programs etc

Empirical generalization In this mature era scattered empirical results are catalogued and generalizable phenomena are identified, resulting in laws of marketing Ehrenberg`s double jeopardy: smaller brands have fewer buyers. Buyers of smaller brands tend to make fewer purchases in a given period Leone and Schultz: the elasticity of (selective) advertising on brand sales is positive but small. In the past 10 years we have also seen an increase in the number of studies on price and non-price promotions

Applications to new contexts A very large part of the empirical model-based research in marketing pertains to consumer goods While this is a limitation, it is also true that the persistent modeling of problems in a restricted part of the economy facilities the discovery of empirical generalizations The successful application of models in one area will stimulate their use in other contexts

Examples: adaptation of a model of the influence of temporary price cuts on demand to a model of coupon effects The increasing attention to empirical modeling also focuses on questions pertaining to the retailer. Some of the research deals exclusively with the effects of marketing actions on measures of retailer performance while other research considers the interplay between manufacturer and retailer The complexity of real-world decisions often makes it difficult to identify the unique role attributable to models when strategic decisions are made The partnerships between manufacturer and retailer stimulate further shifts from modeling horizontal competition to the modeling of vertical competition and cooperation, from tactical (e.g. the effects of specific temporary discounts) to strategic (e.g. the benefits of discount policies) decision, and shifts from optimizing the profitability of a firm to the profitability of an entire supply chain The increasing use of models in the consumer goods area may also further stimulate the intensity of model building in services and B2B marketing There is an opportunity and a need for models to capture the multidimensional complexities that will pervade the internet-based decision-making process in B2B marketing

Model building process the nature of the model-building process can be characterized by the stages suggested for model implementation (page 236) 1) opportunity identification o The model builder evaluates whether the use of a model can improve managerial decision making o E.g. models of man: offer an advantage of consistency in model outcomes over subjective judgments o To the extent that the market structure and the relevance of variables are stable over time, or dynamics are properly captured, models of actual outcomes are favored over models of judgments for the prediction of future occurrences 2) model-purpose o The intended use of the model is defined o Models provide managers with what if simulation capabilities so that both short- and long-run effects can be documented, likely competitive reactions can be taken into account, and long-run profit implementations for alternative marketing actions can be considered o A shift in emphasis from descriptive to predictive and normative models is also reflected in the development of models that distinguish between the sources of sales increases, and category expansion developed a principle that decomposes the profit contribution variance into separate variances associated with the effects of single marketing instruments 3) model scope o We expect that models become more complex, more complete and integrated

Survey-based methods will be used continuously in a manner that resembles the continuous collection of purchase data o This will facilitate the joint use of diverse data sources and it will allow the customer focus that is so critical in todays environment to become fully developed o The business world has embraced the notion that the functional areas of the firm, such as marketing and production, should not act as independent units o The changing role of marketing in the firm or the re-engineering of the marketing function is reflected in models that link marketing decisions to other functional areas 4) data availability o AC Nielsen tracks sales, market share, distribution, pricing and promotional activities on a weekly basis in many countries o IRI offer InfoScan, a tracking service that provides weekly sales, price and storecondition data in food, drug and mass-merchandise o IRi also offers BehvaiorScan, which measures the effectiveness of TV ads and tests new products based on field experiments in up to six small markets o In Europe, consumer tracking and other services are provided by IRI/GfK, AC Nielsen and by other firms o All of these firms provide a variety of modeling services based on householdand / or store-level data o However, many clients do their own analysis or use other service providers for model building on market-level data o Since stores tend to differ in marketing activities, the use of aggregated marketlevel data not only covers up store differences but can also distort the estimation of average marketing effects if a non-linear model is applied to linearly aggregated data o With weekly store-level data showing performance aggregated across households visiting a store is not harmful for model building because households visiting a given store are exposed to the same marketing activities o However, the typical store-level model does not accommodate heterogeneity in household preferences and in sensitivities to marketing instruments o We emphasize that both household- and store level data can provide meaningful insights about marketing phenomena o An important advantage associated with household data is that household heterogeneity can be fully exploited o On the other hand, for relatively infrequently purchase goods, household data are often insufficient due to sparseness o New data sources emerge from internet surfing (and purchasing) and experimental time-series data such as, eye tracking data 5) model specification o It is argued that models should satisfy certain criteria to increase their chance of being implemented

These model-building criteria, related to model structure, ease the use and implementation strategy will be generally accepted as the use of models becomes commonplace in many areas of marketing decisions making 6) model specification o In the first three eras of model building in marketing, the emphasis is on model building for a single brand specified at the brand level o Now we see models specified at the SKU level, covering multiple own- and other-brand items, where competition is defined at the product category level and sometimes covers multiple product categories o Due to vast improvements in the disaggregate nature of data and the continued development of theoretical and analytical models, we expect increased applications of: e.g. empirical game-theoretic models with an emphasis on horizontal competition and theoretical game-theoretic models of cooperation and vertical competition in the distribution channel, including web-based alternatives 7) parameterization o Increasingly sophisticated models and estimation methods allow managers to accommodate the details of individual activities o Researchers use non-parametric and semi-parametric estimation methods to allow the functional form of main and selected interaction effects to be determined by the data 8) validation o The use of diagnostic predictive validity will have its impact on the validation step o Diagnoses the role of data characteristics in validation samples on forecast accuracy o Benefits of diagnostic predictive validity: one can determine under what conditions one model tends to outperform another model; one can decompose the bias component into specific sources; etc Last three steps: cost-benefit considerations, use and updating If standardized models are implemented because the essence of repetitive decisions can be captured effectively, or a given model structure has wide applicability, the benefits of models increase If managers use a specific model, they gain experience with the model`s usefulness for decisions, and shared experiences will facilitate the identification of shortcomings Naturally, the cost of models decreases with standardization and enhance usage There are ample opportunities to increase the use of models for marketing decisions Any resistance on the part of managers can be overcome if managers actively play against the model so that conditional forecast accuracies can be compared Once a model is accepted, it is important for users to check the accuracy of conditional predictions on an ongoing basis Decision automation in marketing is facilitated by the development of advanced marketing management support systems

Researcher expect that during the next decade major developments in technologies to support marketing decisions will be geared to help managers process the information that is already available to them

The future New marketing Marketing is assumed to be about the use of four Ps to affect demand Modeling of causal effects on aggregate measure of demand will grow , they believe, because managers will recognize the positive benefits of demand function results on the probability of marketing investments Models can provide unbiased estimates of the marginal effects of changes in individual variables, whereas subjective judgments are subject to numerous biases At the same time, the market environment is changing rapidly in ways that make current assumptions untenable Increasingly, in both B2B and B2C markets, the customer has the opportunity to bid on prices To the extent that the effective price paid varies between customers based on,say, the customer`s price sensitivity, it is impossible to justify treating price as exogenous variable The validity of traditional model-based results is further reduced by the increasing use of those results by managers to differentiate the marketing programs between regions or chains and ultimately between customers Modelers should talk with the decision makers responsible for past marketin efforts so they understand they reasons for variation in marketing activities and have model-building efforts that reflect this understanding The internet and related technological developments facilitate the analysis of purchases at the customer level This presents further opportunity to improve our understanding of (heterogeneity in) the response to marketing activities An important advantage is that we can learn much more about individual differences and tailor marketing programs accordingly We propose that models in the future cover both strategic and tactical issues Although it is possible to track individual purchases under each of these value disciplines, the customer intimacy model makes this especially easy WebVan can learn from the web-based order process how individual households make decisions and it can focus on repeat purchase patterns Consistent with this idea is the general shift in marketing from a focus on brands to customers

New modeling approaches Future modeling approaches will reflect a new marketing paradigm: a firm selects those customers for or with whom it can offer products and services better than other firms can, and with whom it can develop long-term relations such that each customer directly or indirectly contributes positively to the firm`s expected profits Use of a simple framework that reflects the role the customer plays Six steps:

A) a firm should first identify preferences of potential customers for such benefits as quality, reliability, convenience, services and price Broad modeling such that firms can identify the market potential for alternative value disciplines B) individual choice behavior The models can combine category purchase (timing) decisions, brand choices and quantity decisions C)firms determine customer satisfaction Operationalized based on a comparison between benefits delivered by the firm (perceived by the customer) and customer expectations D) models of customer satisfaction can show the critical drivers of satisfaction A limitation of these models, however, is that satisfaction cannot be the ultimate goal For managerial purposes, changes in the benefits delivered need to be linked not only to expected changes in satisfaction but also to expected changes in repeat purchases and word-of-mouth New marketing models will focus on customer profitability as a function of retention, and retention as a function of reward programs etc E) through the explicit linkage of changes in the benefits delivered and changes in repeat purchase it is possible to determine the expected contribution of investments in products, services and other marketing support to expected profits Customers are treated individually in such a way that the traditional criterion marginal revenue = marginal cost applies to investments in individual customers F) we consider marketing investments in terms of their effect on the firm`s market capitalization The ultimate criterion is the valuation of the firm by investors, based on aggregated profits, revenues and growth Although models of customer satisfaction and repeat purchase intent are typically estimated from cross-sectional data, the desired customization of products, services and marketing support makes it critical for those models to accommodate heterogeneity so that customer profitability can be expressed at the individual level If we use the ultimate objective of shareholder value maximization, investments in marketing and in other areas need to be evaluated from the perspective of the expected contribution to market capitalization It will be helpful to quantify the preferences of selected shareholders and influential analysts with respect to alternative combinations of revenue growth, profit and other measures so that managers can choose among alternative investments in a manner that is consistent with this ultimate objective These proposed modeling approaches partly resemble existing efforts The adage is that it is a lot cheaper to retain an existing customer than to attract a new one will show up in investments considerations These ideas depart, however, strongly from the traditional market response modeling approaches Market share matters, but only as an end result, not as an objective or as a criterion variable

This is because it can only be defined when the market definition is known and relatively stable; in todays world the marketplace is rarely sufficiently stable In addition, the use of market share implies that all sellers included in the market definition compete more or less equally In todays environment, customer share should replace market share, customer manageress should replace brand managers Many B2B firms have long been guided by customer-focused principles With the vast increases in information technology it is now possible to apply these ideas in consumer markets Importantly, the focus on customer share and other customer-based measures will force the research suppliers to gather complete data on all expenditures in a given category The proposed change in focus, from aggregate measures to measures of individual customers, to the integration of hard (Trial, repeat, loyalty) and soft (preference, satisfaction) data and to linking the various elements so that simulations of the effects of marketing investments in individual customers on profits can be completed, will have the following effects: Marketing decisions will be considered explicitly in terms of the identification of target market characteristics that will increase the match between what consumers want and what suppliers provide Accomplished by mass customization of the product Sellers will also explore the opportunity to offer long-term contracts to individual customers based on models that capture the benefits of lock-in The result is that profit will increase because the closer match between supply and demand reduces price sensitivity, increases customer satisfaction and loyalty, and this enhances the customer lifetime value to the firm

Another perspective The internet-based market environment facilitates customization of products, services, prices and supporting programs However, if customers specific the product and service characteristics, indicate which prices they offer for those products, and request information at the time they are contemplating a purchase, many of the variables that have traditionally been treated exogenously become strategic decision variables Although we can imagine that the future allows manufacturers to deal directly with consumers and in this manner become more informed about consumer preferences and sensitivities than ever before, it is also plausible that new agents will provide essential services Electronic commerce will bypass at least some intermediaries so that consumers should be able t make their choices with less interference by sales people

The Buzz on Buzz, pg 251

Word-of-mouth promotion has become an increasingly potent force, capable of catapulting products from obscurity into runaway commercial successes. But to harness the considerable power of buzz, companies must reject five common myths..

Myth 1: Only outrageous or edgy products are buzz-worthy

Reality: Shrewd pharmaceutical companies are now taking a two-pronged approach to jump-start buzz among both doctors and consumers by carefully choosing scientists and physicians with high standing to conduct the clinical trials and to promote the new treatment.

Two criteria make it possible for buzz-worthiness:

1) Products ripe for buzz are unique in some respect. 2) Products need to be highly visible (easily seen by others?) -Pfizer, the maker of Viagra (even if impotence was a taboo subject), made erectile dysfunction, ED, a popular word, and transformed the undiscussable, to discussable,

Myth 2: Buzz just happens. Reality: Buzz is increasingly the result of shrewd marketing tactics in which companies seed a vanguard group, ration supplies, use celebrities to generate buzz, leverage the power of lists, and initiate grassroots marketing.

Luck had little to do with appearance of a BMW Z3 Roadster in the James Bond Flcik Golden Eye or the prominence of an apple laptop computer in Mission Impossible.

A grassroots strategy relies on early adopters who try to convert other people to turn them into users, too

Myth 3: The best buzz-starters are your best customers Reality: Often, a counterculture has a greater ability to start buzz.

Myth 4: To profit from buzz, you must act first and fast Reality: Copycat companies can reap substantial profits if they know when to jump in- and when not to.

Without having to invest time or money in product development, a copycat company can enjoy the rewards of buzz as a late participant . Myth 5: The media and advertising are needed to create buzz Reality: When used either too early or too much, the media and advertising can squelch buzz before it ignites.

Buzz-hungry companies need to refocus their marketing lenses on consumer-to-consumer communications be they verbal, visual, or didital. Thats where buzz is born,

let the response fit the scandal, pg 259

When products fail or companies behave negligently, customers perceptions and purchasing decisions will be adversely affected But executives are much more likely to be caught off guard by how far-reaching the aftershocks of a scandalous situations can be Example: Chinas dairy industry scandal in late 2008 Dairy farmers shifted a lower grade of feed which led to lower-quality milk that did not meet large dairies protein standards Distributors added the melamine, a substance that can mimic protein but is dangerous for human and animal consumption All this was aided by lax oversight of Chinese quality-control officials and local government officers Scandals can very easily extend beyond the original perpetrators and affect other companies in the value chain Although general guidelines for crisis management offer a useful starting point, the most effective responses are carefully and systematically calibrated to the characteristics of the brand, the nature of the scandalous event, and the companys degree of seeming culpability

A framework for managing scandals A four-step framework that allows executives to craft just-right, just-in-time responses to scandals

Step 1: assess the incident Not all negative events become scandals The likelihood of a full-blown public scandal, in need of an equally public response, goes up when the incident is surprising, vivid, emotional, or pertinent to a central attribute of the company or brand By contrast, if the incident is unsurprising, difficult to portray in a vivid and emotional manner, or tangential to the company or brand, reputation may go relatively unharmed, and the firm may make amends directly with the affected parties rather than respond publicly

The spillover effect A company own behavior does not guarantee protection from scandal Damage may occur via spillover from other companies, particularly those perceived to be similar on attributes central to the scandal Meanwhile, dissimilarity on a scandal attribute appears to offer companies protection from spillover In 2005, when a severed finger was allegedly found in a bowl of Wendys chili (urgh :-S), competitors did not take a hit, because the menu item was unique to that restaurant chain

The rebound effect When a scandal does spill over from one company to another, the publics attitude toward the original offender may actually become more favorable As consumers see it, why penalize the perpetrating company for a behavior that may be more widespread?

The consumers mind-set There is often a yawning gap between managers and consumers perceptions of a potentially scandalous event Customers knowledge of the business is somewhat limited, so they tend to react more emotionally and construe events more cynically When executives fail to understand the customers mind-set, their response to a problematic situation may fan the flames of scandal This may sound obvious, but it is critical for companies to look at individual incidents from the customers perspective Team membership, which may be largely preordinaied to save precious times when a disruption flares up, could include the CEO, legal counsel, heads of functions such as finance and operations, the firms top PR person

Step 2: acknowledge the problem If managers conclude that the company is likely to be affected by a scandal, it should immediately acknowledge the problem, expressing concern for any parties harmed and outlining the steps the firm is taking to investigate and to prevent further damage

Speed is important! Although prompt acknowledgement is necessary, it is equally important that specific details be reserved for the next step of the response, when the company has a better understanding of what really happened Company spokespeople should limit their early comments to describing how the problem is being investigated, and executives should show that they are doing what they can to prevent further harm as the facts unfold

Step 3: formulate a strategic response After delivering an immediate yet measured reaction an getting the facts of the underlying problem firmly in hand, the senior team must craft a strategic response to the scandal

False allegations If an allegation is proved false, the company should issue a strong denial Thats what Wendys did once the finger-in-the-chili incident was exposed as a customers ruse (thank god!) Denial is also a powerful weapon when a company is an innocent victim of spillover But denials muts be wielded with care: if a company issues one when spillover has not occurred, it may experience a boomerang effect that is, the denial might raise the very suspicion it was intended to correct

True allegations If an elleged wrongdoing proves to be true, addressing it is more complicated and will typically involve some combination of explanation, apology, compensation and punishment The precise mix of these elements depends largely on the perceived degree of calculation behind the ill deeds: were they intentional, negligent or accidental? When a companys connection is accidental, sincere apologies may be all that are needed In instances of negligence, financial compensation may be required to appease those affected When involvements in a scandal results from actions that are pereceived as intentional, the public may seek formal punishment of those responsible the loss of jobs, e.g., or even jail time

Step 4: implement response tactics Once senior management has decided on a basic approach to dealing with the scandal, marketing and communications specialists may be called in to help the team figure out how to implement the strategy The critical questions at this stage: which issues should b addressed, and at what level of detail? Who should deliver the response and with what kind of tone? Answers to these questions must be based not only on the substance of the scandal but also on customers perceptions of how the brand helps them achieve certain goals Some brands are viewed as helping consumers pursue promotion goals, which are related to achievement and accomplishment

Other banrds serve prevention goals, helping consumers avoid bad outcomes If a brand serves a promotion goal, then a scandal is likely to evoke sadness and disappointment and a desire among consumers for big picture information from spokespersons who can speak strategically about what should have been done to achieve a more favorable outcome If a brand serves a prevention goal, then the scandal may prompt anxiety and nervousness, along with the desire for granular information from a spokesperson who is knowledgeable specifically about what should not have been done that is, how the negative outcome could have been avoided

In these uncertain markets, the conditions are ripe for more corporate scandals, not fewer and that is despite businesses scrupulous efforts to become more transparent in their words and needs As managers struggle to recover from the global downturn , their focus on cutting costs increases the likelihood of cutting corners Combined with companies keen emphasis on developing strategic partnerships and outsourcing their noncore business tasks, makes it more difficult than ever for senior executives to control behaviors outside the company

Getting brand communities right, pg 267

Myth 1 A brand community is a marketing strategy Reality: A brand community is a business strategy For a brand community to yield maximum benefit, it must be framed as a high-level strategy supporting business-wide goals In 1983 Harley-Davidson faced extinction, but boasted to a top-level global brand 25 years later Central to this turnaround was the companys commitment to building a brand community: a group of ardent consumers organized around the lifestyle, activities and ethos of the brand Inspired, markets around the world are busy trying to build communities around their own brands In todays turbulent world, people are hungry for a sense of connection The problem is, many companies subscribe to serious misconceptions about what brand communities are and how they work The author identified 7 commonly held myths about maximizing their value for a firm

Beyond just changing its marketing programs, Harley-Davidson for example retooled every aspect of its organization from its culture to its operating procedures and governance structure to drive its community strategy The management recognized that the brand had developed as a community-based phenomenon the brotherhood of riders To reinforce this community-centric positioning and solidify the connection between the company and its customers, Harley staffed all community-outreach events with employees rather than hired hands Many employees became riders and many riders joined the company Decisions at all levels were grounded in the community perspective and the company acknowledged the community as the rightful owner of the brand Harleys community strategy was also supported by a radical organizational redesign as a result, community-building activities were treated not solely as marketing expenses but as companywide, COO-backed investments in the success of the business model

Myth 2 A brand community exists to serve the business Reality: A brand community exists to serve the people in it managers often forget that consumers are actually people, with many different needs, interests and responsibilities a community-based brand builds loyalty not by driving sales transactions but by helping people meet their needs for members, brand communities are a means to an end, not an end in themselves Example: Outdoorseiten offers an extreme example of how the needs of a community can actually give rise to a brand Their website originated as a venue where hiking and camping enthusiasts could exchange information about their shared lifestyle Eventually, the community created its own outdoorseiten brand of tents and backpacks The communitys brand grew not from a need to express a shared identity but from a desire to meet members specialized needs Often people are more interested in the social links that come from brand affiliations than they are in the brands themselves Example: facebook Robust communities are built not on brand reputation but on an understanding of members lives Putting the brand second is tough for a marketer to do, but its essential if a strong community is the goal

Myth 3: Build the brand, and the community will follow

Reality: Engineer the community, and the brand will be strong Three basic forms of community affiliation: pools, web and hubs (page 270) Members of pools are united by shared goals or values (think Republicans, Apples devotees) Decades of brand management theory have schooled managers ina pool-based approach to brand building Pools deliver only limited community benefits though, people share a set of abstract beliefs but build few interpersonal relationships Unless the affiliation to a brand idea is supplemented with human connections, community members are at risk of dropping out Web affiliations are based on strong one-to-one connections (think social network sites) Webs are the strongest and most stable form of community because the people in them are bound by many and varied relationships Members of hubs are united by their admiration of an individual (think Hannah Montana, lol) The hub is a strong albeit unstable form of community that often breaks apart once the central figure is no longer present But hubs can help communities acquire new members who hold similar values Hubs can also be used to create or strengthen a brand pool, a strategy Nike has used since its inception by associating with stars such as Michael Jordan To build stable communities, hub connections must be bonded to the community through webs

Myth 4: Brand communities should be love fests for faithful brand advocates Reality: Smart companies embrace the conflicts that make communities thrive Most companies prefer to avoid conflict But communities are inherently political, and conflict is the norm In groups need out groups against which to define themselves PlayStation gamers dismiss Xbox Community is all about rivalries and lines drawn in the sand The Dove campaign brought real women together worldwide to stand up against industryimposed beauty ideals Firms can reinforce rivalries directly or engage others to fan the flames Apples PC-versus-Mac ads spared not only Microsofts I am a PC countercampaign but also a host of YouTube parodies from both camps Some companies make the mistake of attempting to smooth things over Communities become stronger by highlighting, not erasing, the boundaries that define them

Myth 5: Opinion leaders build strong communities Reality: Communities are strongest when everyone plays a role Opinion leaders and evangelists play important and well-documented roles in social networks They spread information, influence decisions, and help new ideas gain traction But it is a misguided approach to community building Robust communities establish cultural bedrock by enabling everyone to play a valuable role Companies with existing communities can evaluate the roles and behaviors currently being demonstrated and identify gaps that could be filled to improve community function Recognizing that life changes often prompt people to reevaluate their affiliations, successful communities give members opportunities to take on new roles, alternate between roles, and negotiate tensions across roles in conflict without ever leaving the fold Nonprofit organizations are particularly good in this respect

Myth 6:

Online social networks are the key to a community strategy Reality: Online networks are just one tool, not a community strategy Myth 7: Forming an online community is often a knee-jerk reaction to the CEOs demand for a web 2.0 strategy Online communities get lots of buss and given todays enabling technologies it seems silly to pass up opportunities in the virtual world There is nothing wrong with listening to customers, but this is not a community strategy Online social networks can serve valuable community functions They help people find rich solutions to ambiguous problems and serendipitous connections to people and ideas However, the anonymity of web encounters often emboldens antisocial behavior And a huge chunk of life still takes place off-line Physical spaces play important roles in fostering community connections Communities that are developed in third places like gyms and coffee shops provide social and emotional support equal to or stronger than family ties A benefit that delivers price premiums of up to 20% Loreal strikes the right balance with its methodical approach The company maps it brands along two dimensions: 1) brands of authority versus brand of conversation and 2) mainstream versus niche brands Each cell in the grid suggests a different community approach

Successful brand communities are tightly managed and controlled Reality: Of and by the people, communities defy managerial control Excessive control has been the norm when it comes to community management From coca colas pulling of its beloved soda off the shelves in 1985 to Microsofts stifling of internal blogger Robter Scoble Community managers tend to put corporate interests over those of their customers Brand communities are not corporate assets, so control is an illusion Effective brand stewards participate as community co creators nurturing and facilitating communities by creating the conditions in which they can thrive Companies build effective communities through a design philosophy that replaces control with a balance of structure and flexibility Jump associates have identified nine archetypal community scripts that can used as a framework for such design (page 272) A script is a set of expected behaviors in a particular social situation Management reinforces this script to strengthen community identity and then gradually introduced elements of new scripts to enrich experience over time

Are you ready? Although any brand can benefit from a community strategy, not every company can pull it off Executing community requires an organization-wide commitment and a willingness to work across functional boundaries Community is a potent strategy if it is approached with the right mind-set and skills A strong brand community increases customer loyalty, lowers marketing costs, authenticates brand meanings and yields and influx of ideas to grow the business Through commitment, engagement and support, companies can cultivate brand communities that deliver powerful returns

Slicing and dicing your pricing, pg 291

Thanks to behavioral economics, we can now explain with greater precision how price presentation affects willingness to buy and satisfaction with the amount paid It all comes down to the familiar concept of highlighting customer benefits yet managers often ignore benefits and focus on cost when pricing products Our research shows that pricing components according to what customer value is much more effective Page 291 for an overview of the scenarios! The results suggest three guidelines: o Understand customers goals. Weve found, e.g. that someone whos hungry for pizza would rather pay full price for it and get a significant discount on wings than get a slight break on both

o o

Bundle low- and high-benefit components together, offering the low-benefit ones free only when market norms allow Work on changing perceptions of value. When we cued customers to the benefits of, say, high-quality installation, willingness to pay more for normally lo-benefit labor increased

The customer has escaped, pg 307

your customers used to get what they paid for, more or less just a few years ago, when typical retail shoppers went to a store and received advice on the size, style or purpose of a product, they almost always bought the product right then and there not anymore; Todays customers channel surf with abandon they routinely avail themselves of the services of high-touch channels, only to buy the product at the end point of another, cheaper channel the result is that companies are left with stranded assets physical and organizational capabilities, typically developed at great expense, that become more useless by the day research analysts suggest that as many as half of all customers now shop for information in one channel then defect from that channel when It comes time for money to change hands so instead of designing channels to capture targeted demographic segments, you must design them to support unfettered buyers behaviors whats crucial is that customers get what they need at each stage of the buying process through one channel or another and that, at the end of that journey, your company has not spent more money on customers than they have spent with you

Channel design as you know it traditional channel strategies proceed directly from market segmentation one common assumption is that people who share demographic characteristics tend to shop and buy in the same way, through the same, limited channels channel competiveness hinged on creating a set of product and service components that customers were thought to value a company strategically subsidized a few components of the buying process that added particular value to maintain a more attractive value proposition than the next company segmentation based on demographics led Merril Lynch and other money managers to offer separate sales channels for young, techno literate customers and older, high-net worth customers the arrangement initially made sense: Merril Lynch and other leading firms in the industry had held focus groups in which older, affluent customers said they had no interest in learning to trade on-line The problem was, they did learn The full-service customers were taking advantage of the companys advice and research, then making trades elsewhere on the cheap

The unfettered customer

Expecting discrete channels to serve static segments is no longer a sensible or sustainable option For a variety of reasons, customers have become detached from the channels that used to claim them The have been conditioned, largely by discounters like Wal-Mart and warehouse clubs, to hunt got bargains more aggressively As customers become more sophisticated about how companies market to them, they have become more strategic Customers are also better equipped with information and technology to make advantageous decisions Companies are newly naked; their products quality, availability and prices have become transparent, and any shortcomings are instantly broadcast to the world Meanwhile, of course, channels have proliferated The marketer who once sold through a chain of specialitity stores now also has a website and often a catalog Consider the situation in consumer banking, where the advent of a new channel, the automated teller machine, was expected to mean that the conventional channel, the brand location, would wither away Instead, the industry saw not a shift of transactions from one channel to another, but an explosion of transactions in both of them The net effect is that todays unfettered customers shop differently Marketers have long thought of the buying process as having stages: First, potential buyers gain awareness of the product or service and recognize the need for it Second stage, consideration, the now-motivated shoppers seek information about the available alternatives Third, the shoppers evaluate the alternatives and arrive at a preference Fourth, the decide where and how to purchase finally, the customers consider whether any post sale service will be required and whether the seller deserves repeat business the time and effort the buyer expends at each stage of the process depends on factors such as the nature of the product and perceived risks what makes shopping behavior new and profoundly challenging is that customers today are no longer marching through those five stages in the context of a single channel they are breaking apart integrated product-service packages and then cherry-picking, that is taking advantage of up-front information and support without making the purchase the company counted on to subsidize them

a new logic for channel strategy demographic segmentation can still tell you that people buy but demographics no longer tell you how people shop the only rational basis for channel design today is aggregate buyer behavior embodied in the entire buying process only by looking at how customers actually behave throughout the entire buying process can you see whether you are offering everything customers need

first, you use standard market research tools to discover how different customers go about shopping for, purchasing and then owning what you sell in many markets, buyers fall into four major behavior-based categories: Habitual shoppers o Tend to purchase from the same places over and over again in the same manner High-value deal seekers o Know their own needs and channel surf a great deal before buying at the lowest possible price Variety-loving shoppers o Gather information in many channels, take advantage of high-touch services, and then buy in their favourite channel, regardless of whether the price is the lowest available High-involvement shoppers o Gather information in all channels, make their purchase in a low-cost channel but then avail themselves of customer support from a high-touch channel A buyer may have more access to global sources of information and supply for some products than for others But buying behavior also depends on the shoppers particular circumstances He or she may shop differently for airfare and hotel accommodations when the travel is for business rather than when it is for a vacation Look on page 312 for an outline of the four kinds of buyers

Building new pathways Once you understand the various paths buyers follow as they move through the purchasing process, you have the necessary insight to design profitable channels to serve them The purpose of your go-to-market strategy then, must be to guide customers through the pathways you prefer Those pathways must reflect your customers behavior as they move from awareness through post sale service , but they also should influence specific choices customers make along the way Your goal is to make it easiest for a customer to follow a path that returns more value to you than you invest to support their activities along the way It is essential that you provide links between the activities along the pathway Many companies now feature dealer or retailer locators on their websites to help customers make the transition from preference to purchase

Open or captive go-to-market systems By providing strong incentives to use a designated pathway, companies can hold the customer captive, at least to the extent that the person wants to purchase their products or services Most companies will need to pursue a course that is somewhere between this fully captive channel and a fully open one In an open channel, customers freely pick and choose

They act as their own general contractors So an open strategy means unbundling your companys offerings and choosing to deliver only what you can expect to be paid for Good example of an open system: Toyota Toyota provides a link from its website to one operated by Edmunds, a trusted car ratings source The advantage is clear: customers recognize Edmunds as an objective third party and Toyota is confident that its offerings will compare favorably to competitors Many franchised dealerships even let customers see what they have in their inventory on their web sites By contrast, consider a more captive system that Staples assembled to serve its varietyseeking customers When customers visit a Staples store, they can purchase items in stock or use an internet kiosk to place an order Staples has invested a lot in its back office to support this more full-service channel for a good reason: it hold on to the customers

What are you capable of? What variables must be considered in selecting or devising the most efficient channel to the market? And what are your companys inherent strengths? Level of product and service integration o Some products need to be customized and others need a lot of servicing after they have been purchased o The more tightly bound the owning experience is to the buying experience, the more a captive system makes sense Assortment requirements o The customers desire or need for a broad range of complementary products or services when purchasing your companys offering will affect your ability to create a captive channel o When assortment is important, relatively open systems are essential Product availability o Some customers, after shopping and purchasing have an ongoing need for readily accessible spare parts or supplies o When you need to satisfy customers who cannot predict how much of your product or servce they will require, want to be able to buy the product locally, and need to replace spare parts immediately, then you would do as well to set up an open system Product quality assurance o Basic product quality is important to your customers, but it is not always critical to their actual buying behavior o When product quality assurance is essential, however, then relatively captive systems are often called for o The question about your companys inherent strengths will determine what your role in that system should be

o Is your primary competitive advantage a unique product or a process competence? Specializing in one phase of distribution o If you choose to participate in an open channel, and your companys competitive advantage comes from products or process competence, you should aim to be the best in one stage of the buying process Coordinating the information flows of many specialists o If you choose to participate in an open channel, and your competitive advantage comes from customer relationships, you can be the one to bring the market place to the customers door o This strategy works particularly well when there are many undifferentiated competitors playing the same channel roles when cooperation among players supporting the various channel ativities is low, or when the channel requires variety Combining several channel roles o If your customers are buying through a captive channel, and your competitive advantage comes from product or process competence, you may be able to deliver a set of activities that is more valuable than the sum of its constituent parts Exploiting customer relationships o If your customers are buying via a captive channel, and your competitive advantage comes from your customer relationships, you still may be able to specialize in a partcilar channel role even if you lack superior process efficiencies o In certain channel environments, it can be profitable to focus on particular activities that tightly control important relationships; e.g. leveraging customer relationships

Making it work Implementing your chosen strategy for dealing with the unfettered customer will require substantial changes between the different functional and business units in your own organization will also need to change Noah principle: predicting rain does not count, getting everybody on board is the challenge A shared understanding o Many people and groups in your organization deal with customers throughout the marketing and purchasing cycle o Do they share a sense of how customers are buying and how the company is going to market? o At Staples, the companys advertising slogan helps reinforce the strategy internally as well as promote its value proposition externally o Language that picks bricks-and-mortar against dot-com channels often creates international competition that hinders companies from dealing productively with unfettered customers Cross-channel performance metrics o Companies that reorganize to serve unfettered customers will need to rethink the metrics they use to measure and evaluate performance o Some companies will find it less meaningful to track market share, e.g. than to measure share of individual customer purchases a measure that counts participation in all channels

Most companies would benefit from developing a metrics that tracks the total cost to serve customers as they move from one channel to another o Adding an internet channel may well increase the cost of goods sold through traditional channels o That should not matter of the total cost to serve the customer for both channels is lower than it was before o But it will matter, if, thanks to the performance metrics you have established, business managers focus on the profitability of each isolated channel o The desire to keep incentive systems simple is understandable but it can be counterproductive when buying behavior is anything but simple New management information o To serve customers across channels you need to be able to see across the channels o Tracking purchasing behavior and total cost-to-serve requires accurate and timely information Targeted education and learning o Some companies use internal management and leadership development initiatives to foster the language and mind-set required deal with customers in multiple channels o Education in other companies is aimed at overcoming old habits and prejudices

Wisdom from across the channels Competition today exists not between single companies but between channel systems If a channel is underperforming, it is everybodys problem, not just the problem of the player who happens to be bearing the immediate brunt of the value poaching All channels are negotiated arrangements between essentially warring parties producers, distributors, and retailers who may have some goals in common but others that conflict never get between a dog and his favorite lamppost always keeps an in with the outs because you never know when they will be in again the art of statesmanship is to foresee the inevitable and to expedite its occurrence Never go between your customers and the way they want to shop Keep an in with all your outlets Try not to be too rigid about channel structures

A framework for customer relationship management, pg 317

The web allows companies to build better relationships with their customers than has been previously possible in the offline world By combining the abilities to respond directly to customer requests and to provide the customer with a highly interactive, customized experience, companies have a greater ability today to establish, nurture and sustain long-term customer relationships than ever before The flexibility of web-based interactions thus permits firms to choose to whom they iwsh to offer services and at what quality level Customer relationship management (CRM)

CRM products have been developed that do everything from track customer behavior on the web to predicting their future moves to sending direct email communications Worldwide market for CRM of $34 billion in 1999 Forecasted to grow to $125 billion by 2004 The need to better understand customer behavior and the interest of many managers to focus on those customers who can deliver long-term profits has changed how marketers view the world Today, particularly for the companys best customers, the tone of the conversation has changed from customer acquisition to retention This requires a different mindset and a different and new set of tools Acquisition usually dominates retention! Reichheld: demonstrated a dramatic increase in profits from small increases in customer retention rates 5% increase in retention has impacts as high as 95% on the net present value delivered by the customers Repeat customers generate over twice as much fross income as new customers Page 318: customer-based metrics on the market value of internet companies Three categories: customer attraction, customer conversion and customer retention Greatest leverage from investments in retention Problem: CRM means different things to different people What do managers need to know about their customers and how is that information used to develop a complete CRM perspective? Basic model on page 319 which contains a set of 7 basic components:

Creating a customer database Necessary first step is the construction of a customer database or information file For existing companies that have not previously collected much customer information, the task will involve seeking historical customer contact datafrom internal sources Ideally, the database should contain information about: Transactions o Complete purchase history with accompanying details Customer contacts o Today, there is an increasing number of customer contact points from multiple channels and contexts Descriptive information o For segmentation and other data analysis purposes Response to marketing stimuli o Should contain whether or not the customer responded to a direct marketing initiative, a sales contact or any other direct contact Companies have traditionally used a variety of methods to construct their databases The response rate for warranty cards is pretty low though! Service business are normally in better shape since the nature of the product involves the kind of customer-company interaction that naturally leads to better data collection

The challenge is to create opportunities for customer interaction and therefore data collection This can be from running contests to encouraging customer visits to web sites Exhibit 3 page 321 Framework for considering the problems in database construction Direct customer interaction and high interaction frequency: banks, telekom, retail Easy job constructing a database Indirect customer interaction and low interaction frequency: furniture, autos Have the most difficult job The rest is intermediate Unless you are in the high-direct box, you have to work harder to build a database Kellogs eat and earn program: children find a code on the cereals box and go to the website and enter some personal information And become eligible for free toys

Analyzing the data Traditionally, customer databases have been analyzed with the intent to define customer segments Their goals are to target the most profitable prospects for catalogue mailings and to tailor the catalogues to different groups More recently such segmentation approaches have been heavily criticized: taking a large number of customers and forming groups or segments presumes a marketing effort towards an average customer in the group There are tailored messages designed for small groups of customers too ( 1-to-1 marketing) , so there is less need to consider the usual marketing segmentation schemes The idea is to understand each customer and what he or she can deliver to the company LCV lifetime customer value The idea is that each row/customer of the database should be analyzed in terms of current and future profitability to the firm The past profit that a customer has produced for the firm is the sum f the margins of all the products purchased over time less the cost of reaching that customer Note that the mass advertising would not be part of this formula The cost could be assigned to individual customers by computing per customer dollar amount; but because it is the same for each customer, it would not affect the rank ordering of the customers in terms of profitability This obviously requires some assumptions about future purchasing, product and marketing costs as well as how long the customer can be expected to remain with the firm Increased profits can results from: Increasing the number of products purchases, by cross-selling Increasing the price paid, by up-selling or charging higher prices Reducing product marginal costs Reducing customer acquisition costs A new kind of analysis born from the internet is the clickstream analysis

Patterns of mouse clicks are examined from cyberstore visits and purchases in order to better understand and predict customer behavior

Customer selection If segmentation-type analysis are performed on purchasing or related behavior, the customers in the most desired segments would normally be selected first for retention programs If individual customer-based profitability is also available through LCV or similar analysis, it would seem to be a simple task to determine on which customers to focus The goal is to use the customer profitability analysis to separate customers that will provide the most long-term profits from those that are currently hurting profits This allows the manager to fire customers that are too costly to serve relative to the revenues being produced The 80/20 rule often holds in approximation: most of a companys profits are derived from a small percentage of their customers On what basis should these customer selection decisions be made? One approach would be to take the current profitability based on the above equation Customers with high LCV would be chosen, as this does a better hob incorporating potential purchases However, these customers are difficult to predict and you might include a large number of unprofitable customers in the selected group De-selected customers can spread negative word-of-mouth quickly, particularly in todays internet age

Targeting the customers Mass marketing approaches such as television and radio are useful for generating awareness and achieving other communications objectives but they are poorly-suited for CRM due to their impersonal nature More conventional approaches for targeting selected customers include a portfolio of direct marketing methods such as telemarketing and direct mail The new mantra 1-to-1 marketing has come to mean using the internet to facilitate individual relationship building with customers Extreme popular form is the use of personalized e-mails Because of permission based programs whereby customers must first opt-in or agree to receive messages from a company, direct email has become a very popular and effective method for targeting customers for CRM purposes Exhibit 4 on page 325 Shows that email is a very cost-effective approach to customer retention Through lower cost per 1000 names by using the companys own database and greater click through rates than those afforded by banner advertisements and emails sent to lists rented from suppliers, companies can reduce their cost per sale dramatically

Relationship programs

Relationships are not built and sustained with direct emails themselves but rather through the types of programs that are available for which email may be a delivery mechanism The overall goal of relationship programs is to deliver a higher level of customer satisfaction than competing firms deliver Managers today realize that customers match realizations and expectations of product performance, and that it is critical for them to deliver such performance at higher and higher levels as expectations increase due to competition, and marketing communications Also there is a strong positive relationship between customer satisfaction and profits Page 326 exhibit 5: a comprehensive set of relationship programs It includes customer service, frequency/loyalty programs, customization, community building and rewards programs

Customer service Because customers have more choices today and the targeted customers are most valuable to the company, customer service must receive a high priority within the company Programs designed to enhance customer service are normally of two types: Reactive service is where the customer has a problem and contacts the company to solve it Proactive service is a different matter; this is a situation where the manager has decided not to wait for customers to contact the firm but to rather ba aggressive in establishing a dialogue with customers prior to complaining or other behavior sparking a reactive solution Web-based service, e.g. LivePerson or HumanClick are bolt-on products that, when added to a companys web site, provide customers with the ability to interact with service representative in real time

Loyalty/Frequency programs Loyalty programs provide rewards to customers for repeat purchasing Half of the ten largest retailers in the US in each of the top seven sectors have such programs with similar findings in the UK Three leading problems with these programs: expensive, mistakes can be difficult to correct as customers see the company as taking away benefits and there are large question about whether they work to increase loyalty or average spending behavior It is also increasingly difficult to gain competitive advantage Loyalty programs can be very successful by increasing customer switching costs and building barriers to entry

Customization The notion of mass customization goes beyond 1-to-1 marketing as it implied the creation of products and services for individual customers, not simply communicating with them The idea is that is has turned customers into product makers rather simply product takers Some argue that such customization is cheap and easy to do with information goods Such customization is termed versioning


One of the major uses of the web for both online and offline business is to build a network for customers for exchanging product-related information and to create relationships between the customers and the company or brand Communities! The goal is to take a prospective relationship with a product and turn it into something more personal

Privacy issues There is an obvious tradeoff between the ability of companies to better deliver customized products and services and the amount of information necessary to enable this delivery Many consumers and advocacy groups are concerned about the amount of personal information that is contained in databases and how it is being used There is an increasing amount being collected as people browse the web through nefarious cookies While many argue that it is in customers best interests to give as much data as possible in order to take maximum benefit of what the web gas to offer, many disagree The opponents formalize their arguments in the following two options: Opt-in o In this case, web users must consent to the collection and use of personal data. This gives the customer more control over his or her own information and would help to build industry confidence o However, this substantially reduce the amount of information available Opt-out o A customer has to explicitly forbid the collection and use of personal data o Give more information but the customers bear the loss of control

Metrics The increased attention paid to CRM means that the traditional metrics used by managers to measure the success of their products and services in the market place have to be updated In a CRM world, increased emphasis is being placed on developing measures that are customercentric and give managers a better idea of how their CRM policies and programs are working Example: customer acquisition costs, conversion rates, retention/churn rates, customer share

The future of CRM Implementing CRM is still far short of ideal Everyone has his or her own stories about poor customer service and emails sent to companies without hearing a response More companies are recognizing the importance of creating databases and getting creative at capturing customer information Real-time analyses of customer behavior on the web for better customer selection and targeting is already here which permits companies to anticipate what customers are likely to buy

One way that some companies are developing an improved focus on CRM is thorugh the establishment or consideration of spitting the marketing manager job into two parts: one for acquisition and one for retention Some companies have appointed a chief customer officer CCO Possible marketing organizational structure on page 331 An alternative conceptualization is to create two jobs, customer managers and capability managers The former oversees the relationship with customers while the latter make sure that their requirements are fulfilled CEM = customer experience management The idea behind this is that with the number of customer contact points increasing all the time, it is more critical than ever to measure the customers reactions to these contacts and develop immediate responses to negative experiences These responses could include timely apologies and special offers to compensate for unsatisfactory service The idea is to expand the notion if a relationship from one that is transaction-based to one that is experiential and continues