}

This

module is important because it provides the bridge between the strategic concepts discussed
in previous modules and the tactics we use to implement strategy such as product, price, place
and promotion actions. In this module, we'll cover several learning objectives. We'll explain
how to forecast future sales. We'll describe how to use predictive analytics. We'll describe how
to use data mining to gain insight, explain how to utilize balanced score cards and identify
critical success factors for supporting KPIs. We start by defining business operations as the
prostheses, actions and decisions that enable us to enable tactics from strategy. Such
operations can have a wide impact and are often the responsibility of the marketing
department. Typical analytics related business operations include sales forecasting, predictive
analytics, data mining and critical success factors. We can apply sales forecasts to several
purposes. We need it for manufacturing departments, so we can tell them how many products
to produce. We need it so we can calculate the break even point for price. We need it to
estimate the type and quantity of distribution channels. We need it to select our promotion
vehicles. Indeed, the type of promotion vehicle we select will vary depending on if we make
just 10 units of each item or 10 million units of a consumer packaged goods. We also need
sales forecasts so we can track actual versus expected sales, and we need it for support
operations so we know how many staff members we will need. In this module, we'll cover 4
different common forecasting methods. Time series, causal analytics, trial rate and diffusion
models. Time series forecasting methods leverage the existing sales history to extrapolate
future sales. They are best for rapid predictions for short term future sales. As we'll see,
they're quick and easy to generate but because they're extrapolations, they're not very
accurate. Causal analysis methods seek to identify the underlying causes of sales to predict
future sales. They're best for indepth analyses. They often require immense amounts of data,
time and money but can yield high accuracy. Trial rate methods use market surveys of initial
trials to predict future sales. They are best for the introduction of new products and services,
especially consumer package goods and stable markets. Market surveys can require significant
resources but the method produces good results. Last, but not least, diffusion model methods
seek to predict adoption rate of brand new innovations based on analogies of similar markets
and conditions. They are best for introduction of revolutionary new products and services
where no sales data is available. They require little on the way of resources but do require
significant skill to apply. We'll cover each method in this module. With 4 different methods
from which to choose, how do we decide which one to use? We decide using 5 different
criteria.

Accuracy, data availability, life cycle stage, resources and time arising. If we need high
accuracy, we'll most likely need to use causal analysis. If we face a limited data availability, we
would be best served with time series or diffusion methods. If we're in the introductory life
cycle phase, we should use trial rate or diffusion methods. If instead, we're in the maturity
phase, we're much better off using time series methods. Resources are almost always an issue.
Causal analysis requires tremendous amounts of time and money, as well as data to execute.
Whereas, time series methods require hardly any resources at all.

The time horizon is also important. If we seek to just forecast ourselves a few months out, we'll
be safe using time series. If, however, we want to forecast ourselves for a longer time period,
we'll need to turn to causal analysis or diffusion methods.
Speaker 1: We will be applying regression analysis in this module so this lecture gives a brief
background on regression. In this module we'll be explaining how to forecast future sales,
describing how to use predictive analytics, describing how to use data mining to use insight,
explaining how to utilize balanced scorecards and identifying critical success factors for
supporting KPI's. Many of these require regression analysis so we'll be covering that in this
lecture.
Regression analysis consists of a four step process, from verifying data linearity to launching
data analysis, to selecting regression analysis to imputing the regression data. We demonstrate
the process with an example. In our example we wish to study the relationship between
customer spending and customer income. In the graph we see that someone making $25,000
in income can be expected to spend about $ 8,000, whether it is for a new car or a used car or
whatever, this is the level of spending we can expect for that level of income. We want to
express tis relationship as an equation. Regression analysis is ideal for this purpose. The first
step of the regression process we plot out the data and verify that the data is fairly linear.
Microsoft Excel uses a least squares algorithm to plot a straight line through the data so it's
often a good idea to plot out the data first to ensure data linearity. Had the data not been
linear, we would need to use more complex non- linear methods. In the least square method
Excel calculates the distance between the data points and the proposed line through the data
and keeps adjusting the line until the square of the distance is minimized. In step two of
regression analysis process, we launch the data analysis functions. To launch data analysis in
Microsoft Excel, click on the data tab and then click on the data analysis icon in the tool bar.
For Microsoft Windows versions of Excel you might need to enable data analysis through the
excel options button on the upper left. For Apple Macintosh versions of Excel you will need to
use an Excel plug- in for data analysis such as Step+ available at analysistsoft. com.

You will also find a link to the plug-in on the instructor's website stuffonsorger. com. In step
three of the process we select the regression function from the list of data analysis tools and
then click the OK button. In the final step we input the regression data. For the top box labeled
Input Y range we enter the cell range for the dependent variable data. The dependent variable
is the response variable, such as sales, revenue, spending or another variable which is the
objective of our marketing efforts. For the Input X range box we will enter the cell range for
the independent variable data. The independent variable, or variables, is the set of data that
we know. For example in Chapter one we showed a typical advertising effect of this model
where sales was represented by the Y variable and advertising budget was represented by the
X variable. Once we click the OK button Microsoft Excel will provide a number of statistics.

One of the statistics it provides is the coefficient of determination also called R Squared. R
Squared is interpreted as the goodness of fit between the line drawn between the data and
the data itself. It varies from zero to one where zero represents no fit and one represents a
perfect fit.

In between those two extremes we often see R Squared right around 0.3 which is common for
social science studies and 0.6 which is common for marketing research. Only in very controlled
scientific applications do we see R Squared values as high as 0.9.

Microsoft Excel provides other statistics. It supplies the standard error which is the standard
deviation of the coefficient, T- Stat the coefficient divided by the standard error and P- value
the probability of encountering the same T- value in random data. Of these three statistics the
P- value is the most important. We want to check our P- values to make sure they are less than
five percent.

In other words the chances that our results are wrong and that our proposed model is just the
result of random data are less than five percent if P is less than five percent. In our example
we desire to find an equation to express the relationship between customer spending and
customer income. At the top of the slide we repeat the graph we showed at the beginning of
this lecture. We then showed the statistics Excel provides. We see that Excel calculated the Y
intercept as 449.339 and the income coefficient as 0.290749 with a P value of the income
coefficient of about two percent.

Because the P value is less than five percent, the proposed model is not just the results of
random data. On the bottom of the slide we see the standard equation of a line as we covered
in Chapter One. In our case spending is equal to the Y intercept plus the income coefficient
multiplied by the income variable. Plugging in our values we see that the equation that
describes the data can be expressed as spending equal to 449.339 plus 0.290749 multiplied by
income. With our new equation we can predict the amount of money a customer will spend
based on their income. We'll be using regression analysis and sales forecasting as well as other
sections of the book.
Speaker 1: In this lecture, we started coverage of sales forecasting modules with the time
series and causal analysis forecasting methods. In this module, we'll be explaining how to
forecast future sales, describing how to use predictive analytics, describing how to use data
mining to gain insight, explaining how to utilize balanced scorecards, and identify critical
success factors for supporting KPIs.

Now, onto time series and causal analysis. We start with time series methods. We use the
analogy of technical stock analysts. Technical stock analysts study stock trends over time to
predict their future direction.

Looking at the slide, we can see stock price bars indicating the stock price range over a period
such as a day. Bands showing dash lines are inserted above and below the price bars to
indicate a trend. Note how the trend can change over time. We'll demonstrate the process
with an example. On the left side of the slide, we see some raw sales data over seven periods.
Our objective is to forecast sales for the next period, period 8, and the right side of the slide,
we see a plot of data. We apply a regression analysis to the data to obtain the three values
shown at the top of the side. The R squared value is 0.5, which is quite good considering that R
square has a maximum value of 1. The intercept is 103.1, which is where the line crosses the Y
axis. Looking at the plot below, we can make out that it does indeed cross a little below the
midpoint between 100 and 110. The slope is 4.85, which we interpret as the coefficient for the
time variable. We use the familiar equation for the line that we learned in module 1 to state
that sales is equal to the intercept value plus the slope or time coefficient multiplied by the
time in periods.
Substituting our regression values into the equation, we get 103.1 plus 4.85 multiplied by time.
For time period 8, we get that sales is equal 142.0. Looking at the plot, we can confirm that
142 does indeed sit on our regression line. Sometimes we have so much variation or noise in
the data that we have difficulty making out the trends. In such cases, we can filter out the
noise using smoothing techniques. Two such techniques are often used. One is simple moving
averages where we arithmetically average out data over a number of periods. One popular
method is the three- period moving average or 3PMA, which averages out the data over three
periods. On the upper left of the slide, we can see the calculations to arrive at the smooth
values. We calculate the average over three periods by adding the data over three periods and
dividing it by three. On the upper right of the slide, we see the resulting data. Note that the
points now hug the line closer than before. As an alternative smoothing technique, we can use
exponential smoothing. Exponential smoothing is similar to the 3PMA technique but through
the use of exponents it weights recent data more heavily than past data. Exponential moothing
is popular because we often care more about recent data than what happened in many, many
years earlier. We move now to forecasting using causal analysis. If time series investing is
analogous to technical investing, then causal analysis is analogous to value investing. In value
investing, investors seek to find intrinsic characteristics of companies, which can cause
significant stock growth. Thus, causal analysis examines the root causes of market phenomena
to predict that will happen in the future. For example, we consider the stock price of Apple.
The slide shows a chart of the stock price over time. Note that the stock tends to increase after
the launch of each successive new product such as the Apple iPhone 1 and iPhone 4. We can
predict, then, that the stock price could continue to climb as Apple continues to release new
popular products. Several factors can drive sales. This slide just shows a few. We start with the
factor shown in the left hand side. Market conditions can affect sales. Examples include
unemployment levels, personal income, gross domestic product, interest rates, and other
related variables. For example, sales for consumer goods declined during the prolonged
recession of the late 2000s.

The competitive environment, such as new products or pricing for competitors, can also affect
sales. For example, airline sales such as those with United Airlines, can be affected when
competitors announce deep discount fare wars. New products and services can certain affect
sales with new products introduced and new features being added. For example, we saw how
Apple stock price was propelled by its continuous stream of new innovations.

Strong brands can drive sales as well. For example, automaker Audi emphasizes luxury
attributes in its brand to increase sales. We continue with additional candidate causal factors.

Changes in distributions such as new retail stores can drive sales. For example, income tax
preparation company H& R Block expanded into new geographical areas to increase sales.

Promotions certainly can boost sales. For example, insurance company GEICO and other
companies make extensive use of social media and other promotional tools to increase sales.
Quality sales experiences can affect sales, especially regarding the competency and
courteousness of the sales staff. For example, Nordstrom department stores maintain skilled
salespeople to provide ease of shopping by buyers. Support during and after the sale can also
affect sales. For example, some Dell computer customers complained of poor customer
support with its outsourced centers. Pricing can impact sales, such as sales discounts and
rebates. For example, Walmart maintains everyday low pricing or EDLP to ensure high value
for customers. We now demonstrate causal analysis with an example. The slide shows a typical
sales data set indicating the time period, the level of sales generated during that time period,
the degree of market awareness for the company and its offerings, and the number of retail
locations to sell to customers. We notice that sales gradually increase as the company
increases its market awareness and number of locations. We seek to establish an equation that
will allow us to predict sales if we make a change, such as increasing the market awareness yet
further or opening an additional store. To find out how market awareness and number of
locations affects sales, we run a regression analysis against those two values. The regression
analysis is similar to that time for time series except now we have two independent variables
instead of one. Two independent variables are market awareness and number of locations. We
apply regression analysis techniques to obtain our R square and intercept values. Because we
had two independent variables in our model, in this case market awareness and number of
locations, we have two coefficients, one for each variable. We create our familiar equation,
stating that sales is equal to an intercept value plus coefficient one multiplied by market
awareness plus coefficient two multiplied by number of locations. We substitute the values
given from our regression analysis to arrive at our equation that sales equals negative 1.44 plus
0.028 multiplied by market awareness plus 0.043 multiplied by number of locations. For
example, if we were to maintain brand awareness at 90% and open two new retail stores for a
total of 10 locations, our sales would increase to about 1.56 million dollars.
Speaker 1: In this lecture, we continue our coverage of sales forecasting models with the trial
rate forecasting method. In this module, we explain how to forecast future sales, we describe
how to use predictive analytics, we describe how to use data mining to gain insight, we explain
how to utilize balance scorecards and we identify critical success factors for supporting KPIs.
Now on to the trial rate method.

In trial rate forecasting, we predict sales by examining the results of initial trials of new
products and services along with repeat sales of existing buyers. We need to know four
equations as listed on this slide. They govern trial rate, repeat rate, penetration and projection
of sales.

Trial rate is something the number of people who have purchased the product or service in a
certain time period such as one year divided by the population. Repeat rate is defined as the
number of people who purchased the product or service in the current period divided by those
who brought it in the previous period. The penetration in period t means the amount of
product or service we sold in the current time period. We can calculate it by adding the sales
we achieved in the previous period, which we arrive at by multiplying the penetration rate of
the previous period with the repeat rate of the current period with those of the current
period. We can project sales in a certain period by multiplying the penetration by the average
frequency of purchase by the average units of purchase. If this doesn't make sense now, don't
worry. We are going to go over an example in the next slides. We demonstrate the technique
with an example. The Acme Dog Walking Service Company provides dog walking services for a
small town of population 5000.

Customers enjoy the service, so Acme boasts a repeat rate of 90%. Acme decides to conduct a
trial of a new dog grooming service to supplement its dog walking service. The trial covers 100
people over a one- month period. To calculate the trial rate, we will divide the number of first-
time purchasers by the population, or 100 divided by 5000 to get 2%. To get the penetration,
we add the customers we have so far to the customers we expect to gain in the current period.
In our case, we add the 100 customers in the previous period where we expect to keep 90% of
them with the 80 customers we expect to get in the current period to get 170 customers. We
continue the example here. During the trial period, Acme finds out that the average customer
owns 1.5 dogs and gets them groomed once a month. Acme plans to charge $ 50 for its
grooming services.

We can calculate the projection of sales for the current period by multiplying the penetration
by the average frequency of purchase multiplied by the average units of purchase. In our case,
we had already calculated the penetration as 170 customers. We multiply it by the average
frequency of purchase which is one per month multiplied by the units per purchase which is
1.5 units per purchase to get 255 units expected to be purchased. We can translate the units
sold into dollars by multiplying units by the price per unit to get $ 12,750. A survey such as the
one conducted by Acme typically includes three sections, qualification, body and classification.
Qualification questions determine if the respondent is relevant for our study. Body questions
ask for the main information we want to know.

We ask classification questions to classify our respondents into segments. At the bottom of the
slide, we see a typical intention to buy scale, varying from definitely no intention to buy at the
left to definitely will buy at the right. We look at our example of Acme survey in the next slide.
This slide shows the Acme survey. At top, we have the qualification section question where we
ask if the respondent owns a dog. If she does not, she is excused because she is not relevant to
our study. In the body section, we ask basic information such as the number of dogs they own,
how frequently they have it groomed, their likelihood to buy grooming services from Acme,
awareness of different dog grooming services and the pet store they visit the most. The last
section of the survey includes classification questions including questions on sex, age and
household income. Acme runs a survey and finds that the survey respondents own 1.5 dogs on
average and grooms them every eight weeks or half a time per month.

10% stated they would definitely buy the service and 20% probably would. 20% said they were
aware of Acme and 30% said they visited pet store one. Using the data, we can calculate trial
volume using one of the equations associated with the trial rate forecasting method.

The equation states that trial volume can be calculated by multiplying population by
awareness, by availability, by purchase intention, by units per purchase. Of the terms in the
equation, the intention to buy is the most interesting. Survey respondents tend to exaggerate
their likelihood to buy, so we need to discount the values given. One good way to discount
intention to buy values is to create a weighted average of definitely buy and probably buy
scores. One example is to add 80% of definitely buy and 30% of probably buy as shown in the
slide. We can substitute our survey results into the equation to find that our trial volume is
forecast to be 63 units.

Using another equation available to us with the trial rate forecasting method, we can calculate
repeat volume as the trial population multiplied by the repeat rate, in turn multiplied by
repeat unit volume per customer and repeat occasions. In the equation, we can calculate trial
population as population multiplied by awareness and availability. The equation makes sense
because the results reflect the percentage of the population aware of the product or service
and have it available to them. We substitute our values to calculate a trial volume of 300
people in our case. They enter our trial population of 300 people into the repeat volume
equation along with our repeat rate of 90%, the repeat unit volume per customer of 1.5 units
per purchase and repeat occasions of 0.5 purchases per month or once every two months to
arrive at 2430 units per year. We add the repeat volume to the trial volume of 63 units we
calculated on the previous slide to get 2493 units in the first year as our trial rate forecast.
Speaker 1: In this lecture, we continue our coverage of sales forecasting models with a
discussion on diffusion models. When we talk about diffusion, we mean the rate at which new
inventions are adopted or diffused into society. In this module, we explain how to forecast
future sales, we describe how to use predictive analytics. We describe how to use data mining
to gain insight. We explain how to utilize balanced scorecards, and we identify critical success
factors for supporting KPIs. Now, on to diffusion methods. New inventions get diffused into
society by being adopted by different categories of individuals overtime. For example, consider
the adoption of the original Apple iPhone 1 introduced way back in 2007. In the beginning,
innovators adopted this new device, unfazed by the high price and lack of a track record.

Early adopters adopted it shortly later. Both groups were intrigued by the possibility of the
new device. They showed it to their tech- savvy friends and colleagues, also known as the early
majority, who then adopted the device.

The early majority flashed their new devices to others, and eventually, the late majority who
are slow to adopt new technology, bought the new phone as well. Only when virtually
everyone had one did the laggards consider the purchase of the device because they are the
most reluctant to adopt new innovations. Two types of people execute the diffusion of
innovation, and their personalities differ greatly.

On the left, we see innovators. They seek new ideas for their own interests. They do not care if
other people have adopted the new innovations. They count for only 20% of sales and are the
first to adopt a new product or service. On the right, we see imitators. They wait until others
have adopted before they consider adopting for themselves. This trait is similar to the concept
in psychology known as social proof, where people look to what others are doing when
deciding how to behave. Imitators account for the vast majority of sales or 80%. This slide
shows a very typical adoption curve. Note the S shape, where adoption starts out very slowly
at first as a few brave innovators try out the new innovation, and then accelerates in the
middle as imitators start to buy, and then levels off at the top when most people have adopted
the new innovation. When adoption starts out slowly, as it does here, some force generally
stands in the way of adoption. For example, when cellphones first came out, adoption was
slow. That's because a single cellphone is not very useful. Who are you going to text? Then as
more phones got adopted, each cellphone became more desirable because a network was
being established among cellphone users. As we'll see in a later slide, this is known as the
network effect, and it's one of the primary causes of slow adoption rates. In rare cases, some
new innovations enjoy steep adoption curves. In such cases, the value of the innovation is self-
evident and nothing stands in the way of adoption. For example, when the first washing
machine became commercially available in the early 1900s, consumers flocked to buy it. It was
obviously better than washing clothes by hand and didn't count on other people buying similar
washers for it to be useful. Frank Bass developed his version of diffusion models and
characterized it with the Bass equation shown in this slide. We can see that adoption,
symbolized by the components on the left side of the equation, is subject to the two terms on
the right side of the equation. The right side shows P and Q over M multiplied by A of T. P is
defined as the coefficient of innovation, which numerically quantifies the degree to which
innovators drive adoption. Q on the other hand is defined as the coefficient of imitation, which
specifies the degrees to which imitators drive adoption. Note that the Q term also includes
existing adopters.

In other words, imitators look to existing adopters when deciding whether to adopt the new
innovation for themselves. In the cellphone example, we'd expect a low value for P and a high
value for Q since adoption was driven by imitators, and not by innovators. The opposite would
hold true for our washing machine example. In the equation, M stands for the potential
market or the ultimate number of people likely to adopt the new innovation. We find M using
the market sizing methods we covered in Chapter 2. How do we find P and Q? We start by
examining market situations that are similar or analogous to the one our new innovation faces
and then apply the P and Q values for that situation toward our own. This slide shows several
typical types of market conditions relevant to the Bass diffusion model.
We start with the situation of conflicting standards. This conflict occurs when different
competitors introduce different technical formats or standards. It happened when the VCR was
introduced, with VHS and Beta both making a bid to become the news standard. Eventually,
VHS won but the conflict slowed the rate of adoption for home video. It happened again in the
2000s when HD DVD and Blu- Ray both fought to be the new standard for high resolution
video. Blu- Ray eventually won but the battle slowed down the adoption of high resolution
video so much that people turned to streaming instead, giving a pyrrhic victory to Sony and its
Blu- Ray. Therefore, if we face a situation where different competitors each advance their own
standard, we can take advantage of history and apply the P and Q values of previous similar
situations. In the case of the VCR, the P value, which represents the early adoption from
innovators, was approximately 0.00637, and the Q value, which represents the later adoption
from imitators, was 0.7501. Note how low P is and how high Q is. Whenever we see P much
less than Q, we know adoption will take a long time. That's typical for adoption when some
type of barrier exists. In this case, the barrier is competition getting in the way of overall
market adoption. We turn next to the fee- based content market situation, where companies
wish to make money by distributing content through networks. For example, we might wish to
charge for online content through a special portal sometimes referred to as a pay wall. History
tends to repeat itself so it's not surprising that we can find a similar situation from the past. In
this case, we can look at the introduction of cable TV offering content to viewers when they
were accustomed to getting it for free. In the case of cable TV, P was approximately 0.0000001
and Q was 0.5013, which tells us adoption was quite slow indeed. The next market situation is
the requirement of high investments to adopt a new innovation. For example, the introduction
of some type of cloud- based software that required customers to install expensive internet
security provisions. This type of barrier will slow adoption. As an analogy, we can look at the
introduction of compact disc players in the 1980s, which required studios and radio stations to
adopt digital- based recording and playback technology. In the case of CD players, P was
0.0017 and Q was 0.3991. We would therefore apply those P and Q values if we believed our
innovation required a high financial commitment to adopt. On the right of the slide, we see the
situation of market timing. Sometimes buyers are just not ready for new innovations. For
example, bank customers were slow to adopt automated teller machines or ATMs when they
first came out. ATMs came out before the widespread use of internet- based banking and
customers at the time were accustomed to conducting banking in person. As a result, the P for
ATM adoption was only 0.00053 and Q was 0.4957. Whenever we force people to change their
behavior, we risk slow adoption. Network effects is one of the most common market
situations. We face network effects whenever the value of an innovation increases as more
people adopt it. We discussed this effect already with cellphones. It occurred again with fax
machines. After all, what good is just one fax machine? For example, if your company is setting
up a new type of social network, whose value increases with increasing number of users, akin
to Facebook, LinkedIn, Twitter and similar offerings, you will face network effects. The final
market situation we cover here is the most rare of all. It is the case when the innovation
provides a clear, compelling reason to buy and nothing stands in the way of adoption. As we
discussed, consumers quickly adopted clothes washers when they first came out because the
value they provided was so great and because they did not face network effects, conflicting
standards or any other obstacle to adoption. To execute the Bass diffusion model, we start by
understanding the market situation. Often we'll fall into one of the six situations just
mentioned. Next, we look up the value for P and Q. Many tables including P and Q values for
numerous past inventions are available online. Just conduct an internet search for Bass
coefficients.
In the third step, we determine M, the size of the market. Use the same methodology we
discussed from Chapter 2 to estimate the market size. In step 4, we execute the Bass model.
An internet search for Bass model Excel will expose many free Excel models. In the final step,
we interpret the results. That's the subject of the next slide. When applying the Bass diffusion
model, we recommend creating three cases, including a baseline case, a best case and a worst
case. The baseline case represents the output of the Bass model using the nominal values we
found for P and Q based on analogous market conditions. We recommend also creating a best
case where we increase the P and Q values by 20% and a worst case, where we decrease them
by 20%. The graphs vividly illustrate what could happen. For example, the baseline case shows
a 50% adoption in about 7 years. The best case trims the time to about 5 1/ 2 years and the
worst case increases the time for adoption to about 9 years. 9 years is a long time so do what
you can now to accelerate the adoption. We recommend developing multiple forecasts, each
using a different method and then averaging them all together to arrive at an informed
estimate. Apply different weighting in the averaging process if some estimates are significantly
more valid than others. We recommend comparing the final value to existing sales history and/
or an estimate from your sales force as a sanity check to ensure that you're close to reasonable
value.
Speaker 1: In this lecture, we discuss applying predictive analytics and data mining techniques
to uncover clues in data. In this module, we explain how to forecast future sales, describe how
to use predictive analytics, describe how to use data mining to gain insight, explain how to
utilize balanced scorecards and identify critical success factors for supporting KPIs.

Now on to predictive analytics. Several trends are driving the use of predictive analytics in
companies. First, data storage is becoming cheaper and more convenient with the advent of
cloud based storage in computing. Second, many companies amass data in the past resulting in
a wealth of available data. Third, companies are always looking for new ways to grow revenue,
so they're open to new techniques such as predictive analytics. Fourth, predictive analytics
offer the rich new toolset that can give companies a competitive advantage.

Companies can apply predictive analytics in a variety of industries. Airlines can apply to predict
which maintenance is essential for, to prevent aircraft failure and the expense of downtime
that results. Banks can apply predictive analytics to predict which customers can best pay back
their loans. For example, the Frize Corporation produces the FICO score which stands for Fair
Isaac Corporation to establish creditworthiness of individuals.

Collection agencies can predict which customers will pay. E- commerce companies can apply
predictive analytics to predict which products will sell best with others and so called cross
selling situations. Companies can use the techniques to identify the most profitable customers
and ensure they get top service. Companies affected by fraud can apply predictive analytics to
predict fraudulent claims to keep cost low. Healthcare organizations can predict at- risk
patients and insurance companies can assign prices to policies very accurately which can help
to win new business over other companies that simply apply the same prices to everyone.
Predictive analytics solutions often use data mining techniques. In this slide, we cover the basic
approach to data mining. For example, suppose we want to identify our most profitable
customers in the United States those that represent the top 10%. We start by selection where
we filter out irrelevant data. In the course of our example, we'll going to be filtering out all non
US customers. Second, we conduct pre- processing where we remove obvious errors in the
data. In our example, we'd remove any duplicate records a process known as deduping. In the
third step, we transform the data as necessary which can include operations such as sorting,
pivoting, aggregating and merging. In our case, we might need to merge sales records from
two large divisions into one single database for analysis. We then mine the data, meaning we
seek to find patterns in it. In our example, we might sort customers into multiple profitability
categories from most profitable to least profitable. In the last step, we interpret the data
where we form judgments based on the data patterns. In our case, we might find out that only
a handful of customers account for large amount of profitability. We might consider a special
program to keep those customers happy and increase the chances that they remain with our
company. We can select from several different data mining approaches based on a situation.

Association rule learning works well when we seek to find associations in data. For example, in
cross selling applications we want to find products and services to sell along with other
products. We apply classification techniques when we need to sort data into different
categories especially when we have some knowledge of the patterns. For example, companies
apply classification techniques to filter out unwanted email also known as spam.

Clustering works well when we wish to identify patterns in data and have no prior knowledge
of patterns. For example, we could use clustering to identify market segments and use that
knowledge to offer different products and services to different segments to maximize revenue
and customer satisfaction as we saw in chapter three. Regression approaches seek to find
relationships between variables. For example, we could use regression analysis to set prices
within one of the segments we identified during clustering.
Speaker 1: In this lecture, we discuss balance scorecards and critical success factors to
translate general, overall company strategy to specific metrics.

In this module, we explain how to forecast future sales. We describe how to use predictive
analytics. We describe how to use data mining to gain insight. We explain how to utilize
balance scorecards, and we identify critical success factors for supporting KPIs. Now, on to
balance scorecards. In the balance scorecard, Kaplan and Norton developed the approach to
balance company assessments between financial measures such as revenue and profit and
non- financial measures such as the ability to develop and launch new products. The balance
score card translates general company goals such as a desire for growth, and to specific
objectives across the organization.

This slide shows some typical perspectives used by the balance score card. The first is
customers or companies seek to minimize wait times, maximize products and service quality,
ensure strong customer service and deliver their offerings at the lowest cost possible. For
example, Southwest Airlines prides itself in delivering customer value with its low fares, no
seat assignment policy and no baggage fees. Financial measures include areas such as
profitability, growth, and shareholder value. For example, hair care giant, L'Oreal, has been
acknowledged for being fifth in the world for shareholder value creation.

Innovation learning measures include our ability to learn internally and apply those learnings
to improve our efficiencies. For example, computer hardware manufacturer Nvidea has
acquired the ability to efficiently manage and launch dozens of different new products. Last,
but not least, internal process measures include the core competencies we need to maintain
competitiveness in our markets. For example, social company Zynga, developed its core
competency in development speed to respond to the dynamic market of social gaming.

Companies can examine critical success factors, or CSFs, to measure their success in the
market, as well as internally. We use key performance indicators, or KPIs, to measure how well
we are doing relative to our CSFs. This slide show 4 types of critical success factors, industry,
strategy, environmental and temporal. Industry critical success factors refer to competencies
required to stay competitive in the company's industry.

For example, cell phone provider, Verizon, must maintain competencies in customer attention
to stay competitive. Strategy refers to the critical success factors based on the strategy of
individual organizations as opposed to the entire industry. For example, the Cupcakery focuses
its efforts on the cupcake niche of the larger, baked goods industry. Environmental critical
success factors emphasize competencies to respond to changes in the environment including
effects from political, economic, social, technological, legal and environmental actions. For
example, solar panel installation companies face high costs for their materials, so they're
turning to homeowner leasing instead of homeowner purchasing to address those costs.
Temporal CSFs focus on success factors to address internal organization changes. For example,
companies can prepare for the stresses some decisions can cause such as the decision to
expand to new markets to develop new products, or to execute a major reorganization. To
develop our critical success factors, we go through a 5 step process diagrammed here. The
process involves establishing the company's primary objectives, listing of the candidate critical
success factors, or CSFs, selecting the final CSFs, identifying the relevant key performance
indicators, or KPIs, to measure progress toward the CFS, and then tracking KPIs it finds critical.

We explore each step with an example in the next slide. To execute critical success factors, we
start by establishing the primary objectives and the strategy to achieve them. For example,
suppose a company decides on the strategy of market development to achieve growth. We
then list out all the candidate critical success factors concerning all the possible competencies
we'll need to achieve our objectives. In our market development example, we would list out
CSFs in industry, strategy, environmental and temporal areas. In the third step, we narrowed
down our list to the final 3 to 5 CSFs we believe are essential to success. In our example, we
might decide that customer service and perhaps a few other areas are absolutely essential to
master. Fourth, we identify the key performance indicators, or KPIs, we need to monitor,
assigning one or more of them to each CSF. In our example, we could decide to establish
customer satisfaction rates as a KPI to measure customer service performance. In the final
step, we track the critical KPIs to evaluate our execution of the critical success factors. In our
example, we could track customer satisfaction over time. In this module, we covered different
techniques to forecast future sales. We also addressed the benefits and approaches to
predictive analytics and data mining. To translate company general goals to specific objectives,
we looked at balance scorecards. Closing out the module, we covered how to set up critical
success factors to execute strategies and key performance indicators, or KPIs, to measure our
success toward achieving our critical success factors.

Case Study: Business Operations, Forecasting: Dallas Real

Estate
The year is 2015 and you are the marketing manager for Acme Realty,
a real estate company specializing in listings in Dallas, Texas. You
have been asked to create a quick forecast for the coming year. You
have collected a data set with the average house sale price over the
past few years and assembled it into the table shown below.
Tips for Solving Problems 1 and 2:

 We suggest conducting a regression analysis to solve problems

1 and 2. In your regression analysis, be sure to use the years as
values in your calculations.
 If you choose to solve by plotting the points in Excel, we have found
that Scatter Plots and their associated trend lines give reliable results,
but line graphs (including the one that some versions of Excel
recommend) may not.
 With regards to the y-intercept, it will be the point in your model that
represents what the sales price would have been in the year 0 (i.e., more
than 2000 years ago). Many students have instead been coming up with
an answer that represents the sales price from the year 2009. We
believe this error is due to the way some versions of Excel are depicting
a line graph of this data. When you calculate the y-intercept, if your
answer seems more appropriate for 2009 than for 0, please reconsider
your calculations before selecting an answer. 
Notes:

 US-English conventions are used for numbers. Periods (.) are

used to separate whole numbers from decimals and commas (,)
are used to separate thousands.
 Be sure to use the data exactly as it is presented in the
table. Use the years as values in your
calculations/regression analysis. 
 Several of these questions ask for estimates, not exact calculations. This
means you should select the answer that is closest to the results of your
calculations.  
 Use standard confidence level of 95%.
 You only have one opportunity to answer each question.
This

module is important because price affect adoption rate, image, profitability and so many other
aspects of business. Price is one of the principle elements people consider when purchasing
new products and services.

In this module, we'll cover several learning objectives. We'll review different pricing techniques
and show when to use them. We'll explain the process of checking profit impacts of different
prices. We'll explain pricing models for consumer business markets.

We'll define price discrimination and its effect on profitability. We start this lecture by setting
up an ongoing example for this module. The fictitious Acme Light Bulb goes to market with
three products. It sells a premium priced light emitting diode or LED light bulb under the Acme
LUX brand name. The Acme LUX is unique in the market for emitting natural light while
conserving energy. It sells a midline halogen light bulb to kitchen and bath specialty retailers.
At the economy level, it sells Compact fluorescent light bulbs or CFLs to home improvement
stores such as Home Depot and Lowe's. As we discussed lecture one in this module focuses on
reviewing different pricing techniques covered in the alphabetical order. We began with the
creaming pricing techniques sometimes also called skimming. This techniques sets prices high
during the launch of new products and services. For example, Panasonic used creaming pricing
when it launched its new 3D televisions. The company was the first to market so it didn't need
to worry about competitors undercutting its high prices. The advantage with this techniques is
that it can help companies recoup their development cost. The disadvantage is that they must
drop prices as soon as lower price competitors enter the market. In Acme's case, we can use
creaming pricing for its LUX premium LED light bulb. Acme could charge $ 3 for the bulb even
though consumers can purchase similar incandescent light bulbs for $ 1. The second pricing
technique is demand- based pricing.

This techniques sets prices to maximize profit based on consumer demand for the product or
service. For example, Amazon. com adjust prices incrementally over time to establish
relationship between price charged and quantity ordered also called the demand curve.

It then calculates the optimal price to maximize profitability. We'll cover how to do this
yourself later in the module. The advantage of this technique is that it allows companies to
maximize profit. The disadvantage is that it requires continual price changes to build the
demand curve. For Acme, they could monitor the quantity of product it sells at different prices
to build their demand curves and then use them to maximize profits. The third pricing
technique is everyday low price, also called EDLP. In this technique, we set prices consistently
low to attract price sensitive shoppers. For example, Wal- Mart uses everyday low pricing to
emphasize good value. The advantage of this technique is that it can reduce supply chain cost
by maintaining a relatively constant flow of product, avoiding the rushes in volume caused by
deep discount sales. The disadvantage is that retailers can't temporarily boost sales by holding
a sale. In Acme's case, the consistent prices reduce spikes and demand and avoids attracting
new competitors to join the industry which could happen if we sold at extremely high prices.
The fourth pricing technique is going rate pricing, which sets prices to align with those of
competitors. For example, gasoline stations in the same area often sell gas at similar prices. If
they did not, drivers would switch to whoever sold gasoline the cheapest. The advantage of
this technique according to some is that it reflects the so- called collective wisdom of the
industry. The disadvantage is that there's no guarantee the industry is wise. Just because other
companies charges certain price, consumers might be willing to pay more. In our Acme
example, it's likely that Acme will need to sell its CFL light bulbs at about the same prices
competitors charge. Acme would employ a going rate price in this case because CFL light bulbs
are commodity and retailers can simply switch to another vendor if their prices are much
below those of Acme's. The fifth pricing technique is called markup when applied to products
and cost plus when applied to services. The technique is simple just calculate the unit cost and
add an arbitrary percentage such as 20% to arrive at a final price. For example, attorneys,
contractors and consumer packaged goods often use this method. The advantage of this
technique is that it's very simple to implement and that many customers see it as fair. The
disadvantage with this method is it does not reflect the market value of the goods and
services. To calculate unit cost, we add the variable cost to the fixed cost allocated over unit
sales. Variable cost is defined as the cost of labor and materials to manufacture each unit.

Fixed cost are defined as the cost that remain fixed as we increase the number of units
manufactured. Examples of fixed cost include rent, insurance and depreciation. They don't
increase as we make more units. Unit sales are defined as the number of units that we sell.

The techniques uses the equation of unit cost, divided over the term one minus the market
percentage. Acme tells us that their variable cost is $ 10 per bulb, their fixed cost are $
400,000, the unit sale estimate is $ 40,000 and their desired market percentage is 20%.
We substitute the value into our equations to calculate the unit cost at $ 20 per bulb and the
market price at $ 25 per light bulb. Penetration pricing is our sixth technique, it sets prices low
to attract new customers and expand market share. For example, Procter & Gamble and
Unilever use penetration pricing to expand in new areas. The advantage with this technique is
that companies can use it to quickly grab market share in new areas. For example social media
companies wanting as many users as possible simply price registration into the new network as
zero. The disadvantage is that it rarely results in the highest possible profitability. In the case of
Acme, they could consider cutting the price of its CFLs to very low levels in order to gain
market share. Of course if we sell below cost, we'll actually lose money.

The seventh pricing technique is prestige pricing. The technique sets prices high to signal high
quality status. For example, Rolex sets prices very high to align with its luxury brand. The
advantage of this technique is that it allow companies to charge high prices. The disadvantage
is that companies must be vigilant with the brand ensuring high brand equity. Acme could
apply prestige pricing to its LUX light bulbs. It could justify prestige level pricing by emphasizing
its differentiation over other light bulbs, saying its high illumination levels and natural
spectrum lighting. Target return pricing, the eight pricing technique we discuss in this module,
is very similar to markup or cost plus pricing. The technique sets prices to achieve company
defined returns on investments. For example, industrial supply companies often use target
return pricing. Just as we sell with market pricing, the advantage is that it is simple, the
disadvantage is that it doesn't reflect the value that the market assigns to the company's
products and services. We calculate unit cost using the same method we covered in markup
pricing. To calculate the target return price, we add the unit cost to the multiplication of ROI
with investment divided by the unit sales. In Acme's case, the unit cost is $ 20 per bulb, seems
before, and the target return price is $ 24 per light bulb, $ 1 less than it was with the market
method. The ninth pricing technique is tiered pricing. Where we set prices at different price
points to reflect the different levels of features or quality. For example, Big O Tires offers
Good, Better and Best oil change packages at escalating price points. The advantage with this
technique is that we can charge forextra features and services. The disadvantage with this
technique is that it can take a skilled sales person to explain the customers the added value
provided by each tier. In the case of Acme, it could sell its LUX led light bulbs in three tiers.
Offering three increasing levels of light output at three increasing price points from 150
lumens for $ 10 to 800 lumens at $ 20, to 1700 lumens at $ 30. The 10 th pricing technique we
cover in this module is value in use. In this technique, we set prices based on the product or
services value to the customer. For example, ceramic coating company Rhino Shield sells its
paint- like product to homeowners guaranteeing the product will not flake off in 25 years. Even
though the product cost more, homeowners can save money in the long run because they
don't need to paint their houses often. The advantage of this technique is that it can extract
the maximum value for the product or service. The disadvantage is that it can be difficult to
calculate the value in use or VIU price. We'll show how to apply the technique in the next slide.
This slide show is an example of how to execute value in use pricing. Here Acme wants to
calculate the price its charged for its LUX led light bulb given that last 24 months in difficult
environments, which is four times as long as the six month life given by existing light bulbs. At
the top of the slide, we see the data provided by Acme, note that this particular application
requires significant labor to change at all the light bulbs, costing $ 20 per bulb for each of its
100 light bulbs. We start the process by calculating the total annual cost customers face for
light bulbs. We showed the equation with two terms. One for parts, and one for labor. Parts
cost is calculated at 100 light bulbs multiplied by $ 5 each, multiplied by two changes per year,
since the bulbs only last six months. Labor cost are calculated by multiplying 100 light bulbs by
the labor per bulb or $ 20 multiplied by two changes per year. We add the two terms together
to arrive at $ 5,000 per year. To calculate the VIU for our new LUX led light bulb, we substitute
the term VIU for price and then set the equation equal to $ 5,000. Therefore, the VIU price we
calculate makes the customer in different as to the solution since they're still out of pocket for
$ 5,000 whichever one they choose. Sovereign for VIU, we get $ 80 each. We could consider
selling the new light bulb for lower price such as $ 60 showing how customers can save money
over the long run even though the light bulb has such a high price. The 11 th and final pricing
technique we cover variant pricing. Variant pricing, we set different prices for different
variants targeting different segments. For example, automotive company Volkswagen AG sells
different branded cars to different segments charging different prices. Volkswagen sells it
traditional VW cars such as the Golf and the Jetta to economy minor consumers at relatively
low price points. It sells it Bentley automobiles such as the continental flying spur to luxury
mining customers at premium prices. It sells its Lamborghini automobiles such as the Gallardo
to sport- minded customers at super premium prices. The advantage of this technique is that
we can extra higher prices than if we charge the same price for all our goods. The disadvantage
is that companies must stock many variants to meet many needs. For example, in 2015,
Volkswagen AG sells through no less than 16 brands including VW, Audi, Porsche, Lamborghini
and so forth. Volkswagen even sells motorcycles through its Ducati brand. It Acme's case it
could target customers who value durability and charge premium pricing for its highly durable
LUX led light bulb along with its CFL and halogen light bulb variants at lower price points.
In this module, we cover different techniques to assess the profitability impact of different
prices. We show 3 different methods, break even, net present value and internal rate of
return. In this module, we have different learning objectives. One is to identify different pricing
techniques and when to use them. Two is to explain the process of checking profit impacts of
different prices. Three is to explain pricing models for consumer business markets and four is
to define price discrimination and its effect on profitability. We continue now with pricing
assessments. We start with break even. We calculate the number of units to break even using
a 5- step process as shown on the slide. We start by calculating fixed cost. In Acme's case they
have a fixed cost of $ 200,000 for the project. Next we calculate the variable cost. Acme
reports a variable cost which includes parts and labor a $ 10 a unit. In the third step we
calculate the unit cost by adding the variable cost to the fixed cost divided by the number of
unit sales. For Acme we get $ 10 for the variable cost, $ 200,000 for the fixed cost and 20,000
units to be sold for unit cost of $ 20. In the fourth step we select a price to assess. Here we
decide to test a price of $ 40 per unit. To calculate break even we apply the formula of dividing
fixed cost by the term price minus unit cost. In Acme's case we divide $ 200,000 by 40 minus $
20 to arrive at 10,000 units. We can compare this quantity with the sales forecast to determine
how long it will take us to reach break even. The second pricing assessment tool in this lecture
net present value capital budgeting. Net present value or NPV is a method to summarize a
stream of future cash flows into a single number. We calculate net present value using a 5-
step process. We demonstrate the process using the example continuing with Acme. In this
case Acme wants to find out if its LUX LED bulbs will meet the organizational objective of
generating a 10% return on investment. In the first step, we determine the initial investment.
Acme tells us they expect an initial investment of $ 250,000 which equates to a negative $
250,000 cash flow in year 0. In the second step we select a price to assess. Acme wants to
charge $ 40 per light bulb so we test that number. In the third step we forecast unit sales.
Acme tells us they expect to sell 2000 units in the first year, 2500 in year 2 and 3250 in year 3.
In the fourth step, we calculate the cash flows resulting from our unit sales. They multiply the
price per unit by the unit sales to [ inaudible 00:03:23] $ 80,000 in year one, $ 100,000 in year
2 and $ 130,000 in year 3. In the fifth step, we calculate net present value. Net present value
simply adds up discounted cash flows for each year so our equation consists of 1 term for each
year. The form is always cash flow in the numerator with 1 plus the interest rate raised to the
power of the year in the denominator. For example in year 0, we have negative $ 250,000 in
the numerator and 1 plus 10% to 0 power in the denominator. In year 1, we have $ 80,000 in
the numerator and 1 plus 10% to the 1st power in the denominator. We continue the process
until all the cash flows are represented and then we add up all the terms to reach the total
NPV. In Acme's case we get $ 3043. $ 3043 is greater than 0 which means that the rate of
return is greater than the 10% specified. How much more? We will find out how to calculate
the exact amount in the next method. The third and final pricing assessment tool is the
internal rate of return capital budgeting method. It is identical to the NPV tool except that
instead of being given a rate of return to exceed, we calculate the actual rate of return.

Therefore steps 1 through 4 of the Acme example are the same as what we found for NPV. In
the fifth step instead of entering 10% for the interest rate, we enter the term IRR for internal
rate of return. We solve IRR to get 10.6% which indeed is greater than the 10% minimum
required by Acme.
In this module, we covered different topics to consider when pricing to ensure high
profitability. We have different learning objectives in this module. First, we want to identify
different pricing techniques and when to use them. Second, we want to explain the process of
checking the profit impacts of different prices. Third, I want to explain some different pricing
models for consumer business markets and fourth, to define price discrimination and its effect
on profitability. We focus on the final two objectives in this lecture. We start the lecture with a
discussion on demand curved and elasticity. Elasticity is defined as the percentage change and
the quantity demanded divided by the percentage change in price. We can interpret elasticity
graphically by studying demand curve. Typically, when prices are high, consumers purchase
fewer items. Conversely, consumers buy more items when prices are low. If the difference in
quantity purchased is significant, we refer to this condition as elastic demand, where the
elasticity is greater than one. For example, if we find our favorite blue jeans on sale for only $ 5
a pair, we might stock up and buy several pairs. If they cost $ 500 a pair, we'll might likely
choose to buy none at all. In the case of inelastic demand, consumers purchase approximately
the same quantity regardless of price. For example, if your automobile's fuel tank is near
empty and you find the only gas station around for miles, you're willing to pay almost any price
to fill up. In this case, elasticity is less than one. We can apply elasticity to calculating the price,
resulting in maximum profit. The top of the slide displays a table showing typical shopping
behavior. When we charge $ 10 for a good, consumers buy five of them. When we charge $ 50
for that same good, consumers buy only one. We can calculate the elasticity by dividing the
percentage change in quantity by the percentage change in price. We know the values of our
two end points, P1Q1 and p2Q2 and substitute them in the equation shown to derive an
elasticity of 0.20, which is less than one, so is relatively inelastic. Although the actual
calculation results in a negative number, most sources use the convention of dropping the
minus sign and using the absolute value instead. We extend our discussion on demand curves
to determine the optimal price to change when generating a maximum profit. On the left side
of the table, we repeat the price and quantity behavior we discussed on the previous slide. We
calculate revenue by multiplying the quantity sold by the price. The unit costs us $ 20 to make
so we calculate the total cost by multiplying the quantity by the constant price of $ 20.

We obtain profit by subtracting cost from revenue. In the profit column on the right, we see
the ranges of profit at different price points, obtaining a maximum value of $ 40 at a price of $
40. Note that the maximum profit is not at the point of maximum price because consumers
purchase fewer units at that high price. So far, we have discussed on business to consumer
pricing techniques but many companies sell to businesses so it makes sense to discuss B to B,
or business to business pricing as well. In general, businesses apply three different types of
pricing techniques; cost plus, channel driven, and value based. Cost plus methods are the same
as what we covered in B to C pricing. Channel driven pricing is pricing driven by distribution
channels. For example, businesses selling through B to B channels, such as value added re-
sellers or VARs, are often bound by the going rate those VARs pay for goods and services
similar to the ones your company offers. In this way, channel driven pricing is akin to the going
rate pricing technique we covered earlier. The third technique is value based pricing, which is
similar to prestige pricing in consumer markets. The customer, which in this case, is a business,
perceives high value from the product or service you offer and is willing to pay premium prices
to get it. Companies using value based pricing methods must ensure that their customers see
their offerings as highly differentiated from others in order to successfully use the technique.
Businesses can choose from several different pricing models, depending on the goals they wish
to achieve. This slide shows several popular methods. The first is auction based pricing, where
companies discover the market price by auctioning products, similar to the process on ebay.
This model is used quite a bit for used equipment. The second model is inner price perpetual
license pricing. This model adopts an all you can eat policy, allowing users to use the product
with few limitations. Companies formally used it for enterprise software but per user pricing is
much more common now. The third model is per system pricing, where customers are charged
according to the number of systems on which the software is installed. The fourth model is the
per user pricing model, which charges by the number of people using the product.

Shared benefit pricing charges on a percent of the gains the customer enjoys based on usage
of the product. This model is rarely used because it can be difficult to accurately assess the
benefit to the satisfaction of both the manufacturer and the customer. The sixth model is
usage based, where customers get charged by the hour or some other time increment. Some
companies combine multiple pricing models, for example, enterprise software company Sales
Force combine per user and usage based pricing with a typical license starting at a price per
user per month. Price discrimination. Different people facing different circumstances place
different values on the worth of the same goods and services. What if we could capture that
value, allowing us to change prices to the maximum amount people are willing to spend?
That's one of the themes around price discrimination where we adjust prices to fit certain
types of people and situations. We discuss six typical applications here. We start with channel
pricing, which adjusts prices according to the distribution channel used. For example, people
have a choice of purchasing soft drinks at a supermarket for less than 50 cents a can or
purchasing them from a vending machine for almost $ 2 per can. Demographic pricing gives
different prices for different ages of people. For example, some movie theaters offer discounts
for senior citizens. Geographic pricing changes pricing according to the physical location of the
customer. For example, concerts typically charge more for orchestra seating than for
mezzanine seating.

Occupational pricing adjusts prices depending on the vocation of the customer. For example,
some organizations give discounts for military personnel. Quantity pricing changes pricing
depending on the amount purchased. For example, fast food customers can super size their
order for a lower cost per ounce of food.

Temporal pricing adjusts price based on the time the customer consumes the service. For
example, hotels drop room prices for off- peak travel times. This slide vividly shows the profit
impact of price discrimination. Acme produces its high quality Luxe LED lamp and sells it to
three markets; industrial facilities, retail stores, and art galleries. According to the United
States census bureau, the US has 300,000 manufacturing facilities, 46,000 retail stores, and
6,700 art dealers. ACME estimates that 1% of manufacturing plants would be interested in
purchasing the ACME Luxe at $ 40 and 2% would buy it at $ 30. Similarly, 20% of retail stores
would buy it for $ 40 and 15% at $ 50. 80% of art galleries would purchase the Luxe at $ 40 and
60% at $ 80. The top table shows what would happen if we sold the ACME Luxe LED to all of
the markets at a fixed $ 40 price. For example, 1% of industrial plants would purchase the bulb,
multiplied by the 300,000 plants in the US, multiplied by the fixed $ 40 price, less the $ 20 unit
cost, to arrive at $ 60,000 profit before expenses. Similarly, we get $ 184,000 for retail stores
and $ 107,200 for art galleries, for a total of $ 351,200. On the bottom table, we see what
would happen if we sell the lightbulb at different prices to different markets.

We sell the bulb to industrial plants for $ 30, generating $ 60,000 profit before expenses. We
sell the lamp to retail stores for $ 50, generating in turn $ 7,000, and to art galleries for $ 80,
gaining $ 241,200. We sum up the amounts for each, $ 508,200 for a 45% increase in profit
over the fixed price scenario. Hence, the advantage to price discrimination is the significant
profit it generates. The disadvantage is trying to prevent arbitrage, ie. The sale from one
market to another just to lower prices. For example, the US government and pharmaceutical
manufacturers worked hard to prevent the sale of drugs from Canada, where they are much
cheaper, to the United States. In this module, we covered different pricing techniques and
when to apply them. We also discussed different pricing assessment tools to check the profit
impact of different prices. We explained pricing models for both consumer and business
markets, and we ended the module by discussing price discrimination and its effect on
profitability.

Case Study: Price Analytics: Light Bulb Industry

You are the marketing manager for Acme Lamp Company. Acme
specializes in the manufacture of lamps (light bulbs) for industrial
applications. You are in charge of launching Acme’s new LED-12 light
emitting diode (LED) lamp. The LED-12 uses an array of 12 high-
intensity LEDs to replace a standard medium-base incandescent lamp.
As part of the launch plan, you must select a price. You have the data
shown in the table below.
Module 3: Promotion Analytics
This module is important because promotion activities often consume the greatest time and
budget of marketing departments. In this module, we'll cover several learning objectives. We'll
explain how to estimate the total budget. We'll describe how to allocate that budget across
vehicles. We'll talk about different performance metrics for both traditional media and
tracking metrics for social media. We start by reviewing some typical promotion vehicles. In
Direct Marketing, we target individuals directly through email and other channels. For
example, Apple sends ads via email promoting new products. For Events and Experiences,
companies hold or sponsor events to promote the brand in relevant settings. For example,
Jeep sponsored the 2012 Winter X Games to promote its off road vehicles. With Internet
Advertising, firms use banner ads or popup ads in websites with high traffic to generate
interest in sales. For example, RadioShack places ads for cell phones on Yahoo webpages. In
Location- based Social Networking, we specialize in advertising the relevant businesses in the
area near the user. For example, Foursquare is used to promote local restaurants and other
businesses. For Print Advertising, companies place ads in magazines, newspapers, and other
printed vehicles. For example, Maybelline places ads for cosmetics in fashion magazine such as
Vogue. We close out the list of some typical promotion vehicles here. In Public Relations,
companies engage in activities to build and maintain their reputation with stakeholders. For
example, the UK- based Royal Mail cover the painting of British post boxes to commemorate
2012 Olympic athletes. For Radio Advertising, companies use commercials on the radio often
30 to 60 seconds long. For example, Motel 6 uses radio advertising to target travelers in cars.
With Search Engine Marketing, also called pay- per- click or PPC marketing, ads show up in
search engine page results. For example, ads for Lowes can show up in search engine results
for washing machines. In Social Networking Sites, organizations fund paid advertisements on
popular social networking sites. For example, companies such as Facebook, LinkedIn, Twitter,
and others offer paid advertising. Last, but not least, for Television Advertising, companies run
commercials between television shows. For example, Geico commercials feature the Geico
gecko to sell insurance. In this section, we cover how to estimate the budget for the entire
amount that we wish to spend on promotion. In the next module, we show how to allocate
that budget over some of the vehicles we just discussed. We face five popular ways to
estimate budget. In the Percentage of Sales method, we set promotion budget as a percentage
of company annual revenue. For example, LegalZoom estimates that many companies spend
between 9 to 12% of its sales on marketing. For the Affordable Method, companies set the
promotion budget to whatever the organization can afford. For example, during the 2000's
recession, some companies faced financial difficulties and slashed their marketing budgets.
With the Competitive Parity Method, companies seek to set their promotion budget to match
that of competitors. For example, the Big Three auto makers GM, Ford, and Chrysler often
match spending levels. In the Objective and Task Method, we set our promotion budget to
achieve specific promotion objectives. For example, this approach is popular with the
consumer packaged goods industry.

With the Models- based Method, companies set their promotion budgets using predictive
models. For example, this approach is sometimes used in long standing firms and mature
industries.

We cover the models further in the coming slides in this module. We start our coverage of
promotion budget estimation methods with the percentage of sales method. This is a very
common method where companies set the promotion budget as a percentage of the previous
year's sales revenue.

LegalZoom states that many companies spend about 9 to 12% of their revenue on promotion.
Because promotion often accounts for most marketing spending, we often use the terms
promotion cost and marketing cost interchangeably. In terms of calculations, if Acme-
generated $ 100,000 in revenue in the previous year and if they spend 10% of revenue on
promotion, they would spend about $ 10,000 in the coming year. The Percentage of Sales
Method has the advantage that is very popular and easy to apply. It has the disadvantage that
represents circular reasoning. Marketing should drive sales, not the other way around. The
second promotion budget method covered here is the Affordable Method. In this method,
companies spend whatever they can on promotion. For example, in the recession starting in
2007, 2008, many companies slashed marketing spending to near zero amounts because they
needed to cut cost to survive. For Acme, is they budget $ 20,000 total for all expenses and they
spend $ 18,000 on fixed cost such as rent, they can spend the remaining $ 2,000 on promotion.
The advantage of the method is that companies cannot spend more than they have. The
disadvantage is it can be difficult to plan marketing activities when you don't know how much
money you'll have available to spend. Also, competitors will often take advantage of your lack
of marketing, sometimes referred to as going dark, and seek to steal market share from you. In
the Competitive Parity approach, we seek to match the promotion budget of our competitor.
For example, the so- called Big Three auto makers, GM, Ford, and Chrysler, are set to match
their promotion spending levels. The advantage of this approach is that you'll not be outspent
by competitors. The disadvantage of this approach is that by matching what others are doing,
you'll not likely to ever surpass them. In addition, your competitors might be spending too little
or too much, so copying them might not be wise. We show sample calculations in the next
slide. To calculate what competitors are spending on promotion, we look out for competitor
activity and promotion vehicles relevant to the market. For example, Acme has found that
customers in the market for light bulbs read print magazines, listen to radio commercials, and
watch TV commercials, so light bulb manufacturers promote their goods using those vehicles.
We can contact print magazine publishers, radio stations, and television stations to find out
their standard prices for commercials. We then count the number of times competitors
promote using those vehicles and then multiply the cost per ad by the quantity. We sum up
the budget spent on each vehicle to arrive at the total budget. In the Objective and Task
Method, we set our promotion budget according to the objectives we want to achieve. This
method is used in markets dominated by advertising the consumers, such as consumer
packaged goods or CPG companies. We demonstrate the eight- step plan using an example. In
step one, we set our objective. In this case, Acme wants to achieve a 10% market share in their
market of 40 million people for a total of 4 million people. In step two, Acme declares it once
reached 80% of its market with its ads for a total of 32 million people. By reach, we mean 80%
could be exposed to its ads. The third step, Acme states that it wants 25% of the people who
saw the ad to try the product. In our case, 25% of 32 million people is 8 million people. Acme
estimates that 50% of the people who try the product become customers, turning 8 million
tryers into 4 million long- term customers. In step five, Acme works with a media planner to
determine their objective will require 30 impressions or exposures over a four- week period.

Their corresponding gross rating points will be calculated as impressions multiplied by reach. In
our case, 30 impressions multiplied by 80% reach equals 2400 gross rating points or GRP. The
final step is calculating the budget. We multiply our 2400 gross rating points by the cost per
point in Acme's area. In metro areas, the cost per point can be high because consumers are
bombarded with so many ads. We calculate the budget as 2400 GRP multiplied by a cost per
point of $ 1800 to arrive a $ 4.32 million budget to achieve Acme's objectives. In the Model-
based Method, we set the promotion budget according to decision models. For example, the
ADBUDG model was introduced in 1970 to estimate required promotion budget. To implement
the model, Acme would estimate the market share for four conditions: at no advertising, at the
amount of advertising that just maintained share at its current level, at advertising reflecting a
50% increase in spending, and at saturation level where we assault the market with as many
ads as we can create. We use those four data points to building advertising effectiveness
curve. With the curve, our model, we can predict our market share in a proposed level of
spending. The advantage of the approach is that it attempts to build a rational decision model
based on data. The disadvantage of the approach is that the estimates for each of the four
points are somewhat arbitrary. If the estimates are wrong, the model will deliver inaccurate
results.
In this lecture, we cover how to allocate the promotion budget we just calculated over our
advertising vehicles such as Google ad words and social media. For the module, we have
specific learning objectives. One is to explain how to estimate the total promotion budget.

Two is describe how to allocate the promotion budget across vehicles. Three is to address
performance metrics for traditional media. Four is to describe tracking metrics for social
media. Here we describe how to allocate promotion budget across vehicles. The promotion
allocation model uses linear optimization to calculate the optimum allocation of budget across
promotion vehicles. It's an example of a normative model as discussed in chapter one. The
model takes an objective function and constraint equations as inputs and delivers the
maximized objective and other information as outputs. We cover the model in this lecture. The
linear optimization process entails four steps. In the first step, we calculate the vehicle
contribution, which is the amount of results generated per use of the vehicle. For example, we
could estimate the number of impressions or views delivered by each ad, and the next two
steps, we express our promotion objective and constraints in equation form. We cover how to
do that in the next slides. We then execute the model.
We start by discussing promotion constraints. The slide shows a few typical constraints. First is
budget. Almost every organization faces a limited budget, such as a certain amount of money
that can be spent each month on promotion. Next we face legal constraints, such as legal
regulations that cover that jurisdiction. Third we often face contractual constraints, such as
specific limits placed on us due to performance contracts with external agencies, and fourth
we must obvious company policies. We'll demonstrate the process using an example. In the
example, we promote our goods and services using three different promotion vehicles, direct
marketing, pay per click, and social media. In direct marketing, we send e- mails directly to
individuals we think will be interested in our offerings. In pay per click, we work with Google
and other search engines to display ads for our offerings when users search for relevant topics.
In social media, me insert paid ads on various social media platforms such as Facebook and
LinkedIn. We examine the performance of previous campaigns and discover that our direct
marketing campaigns result in 30 viewers per ad and that they cost $ 30 to develop and send.

Similarly, pay per click delivers 30 viewers per ad and cost $ 40 and social media results in 40
viewers per ad and costs $ 60. Our current personnel count in contracts with outside
advertising agencies gives us the capacity to create 30 direct marketing campaigns as well as
20 pay per click and 10 social media campaigns per month. In this slide, we show how to create
the objective function. We state that we want to maximize the number of impressions from all
promotion vehicles. The variable Z represents the objective quantity, in this case, the number
of impressions. Impressions come from direct mail, pay per click, and social media campaigns
represented by the variables D, P, and S, respectively. The coefficient for each of the campaign
variables are equal to the number of viewers per campaign as we discussed in the previous
slide. For example, we found that direct e- mail campaigns resulted in 30 viewers per ad, so we
place a 30 before the D. Therefore, our objective function is stated as Z equals 30 multiplied by
D plus 30 multiplied by P plus 40 multiplied by S. Similarly, we calculate our budget equation,
again using D, P, and S as the variables for direct e- mail, pay per click, and social media,
respectively. For the budget equation, the coefficients for each variable would be the cost for
each campaign. For example, the direct mail campaign costs us $ 30 per campaign, so we place
a 30 before the D. Let's say our company limits us to $ 2000 of promotion budget for month,
then the equation for budget would be what we spend, which is 30 multiplied D plus 40
multiplied by P plus 60 multiplied by S and ensure that amount is less than or equal to our
budget limit, which is $ 2000. We had stated we had the capacity to produce only a finite
number of campaigns. In our case, we can create 30 direct, 20 pay per click, and 10 social
media campaigns per month. We would need to hire more people or contract for more outside
services in order for us to create more. We express this constraint by simply stating the
campaign variable less than or equal to the limit. For example, D is less than or equal to 30,

meaning we cannot create more than 30 direct marketing campaigns per month. To run the
optimization model, we follow a three step process. We set up the model in a specific format,
we execute the model using Microsoft Excel's Solver function, and then we interpret the
results. We'll cover each step. This slide shows the format I recommend. In the first column,
we show the elements of the optimization model, including the rows for the changing cells,
target cell, and constraints. In the middle set of columns, we showed the information for the D,
P, and S parameters, which D, P, and S are variables that stand for direct e- mail, pay per click,
and social media campaigns. In the right side set of columns, we see the values for the target
cell and constraints. Microsoft Excel refers to variables as changing cells. In our case, the
changing cells are D, P, and S. Excel refers to the objective function as the target cell.
In our case, we would enter the objective equation in typical Excel equation form into the
target cell. In the constraint area, we place the equations for constraints in the left column
cells and enter the values for the constraint limits on the right side. I recommend placing all of
the numeric values such as coefficients in separate cells rather than hard coding them into the
equations. This way, if you find that the effectiveness scores or cost change, they're easy to
modify in the model. I also recommend placing ones in the cells corresponding to the D, P, and
S variables forming a diagonal. That way you can easily see which variables the constraints
refer to. In the next slide, we run the model by using Excel's Solver function. To run Microsoft
Excel Solver function, click on the data tab and then click on the solver function. For Macintosh
systems using Excel before 2011. com, go to solver. com and download the free app that will
add the solver functionality into Excel. Macintosh machines with Excel 2011 and beyond will
have solver already built in. Solver will open a dialogue box called solver parameters. Enter the
location of the target cell in the set target cell box. Enter the location of the changing cells in
the by changing cells box. We wish to maximize revenue, so click on the max button. For the
constraints box, you'll need to enter the constraints one at a time. To enter constraints, click
on the add button.

The add constraints dialog box will include three elements, cell reference, sign, and constraint
value. For cell reference, enter the location of the constraint equation. Recall we consolidated
all constraint equations in the left columns of the constraint section of the spread sheet. For
the constraint box, enter the location of the constraint value. Recall we consolidated all
constraint values in the right columns of the constraint section of the spread sheet. The middle
box is a pull- down allowing you to select from several options such as less than or equal to,
greater than or equal to, and so forth. Because we face maximize limits, we select the less than
or equal to sign. Then click okay. Repeat the process until all the constraints are added and
then click on the solve button in the solver parameters dialog box. Solver will populate the
spread sheet with the values it finds. It shows the number of D, P, and S campaigns needed to
maximize impressions. It also shows the value of the target cell, which equals the total number
of impressions. On the lower right, the spread sheet also shows that we ran against the limits
for D and P, but not for S. We discuss this topic further in the next slide. This slide shows the
results produced by Solver. The top table shows the summary, including the total cost per
vehicle. The bottom table shows the recommended number of campaigns to execute relative
to the capacity maximums. Note that we ran against the limits for D and P, but not S. Solver
refers to constraint situations as binding and non- constraint situations as non- binding. We
can interpret this result by stating that we have more capacity in social media than we need.

For example, if you had a staff of ten social media personnel executing one campaign each,
you'd have a capacity of ten social media campaigns. By stating that the social media amount
recommended is five with the maximum allowable of ten, we're in essence saying that five of
the ten people are doing nothing all day. We should therefore re- deploy those excess people
to doing something else. For example, we might train them to execute direct marketing or pay
per click campaigns. If we re- deployed those assets over those two areas, we could then rerun
the model with higher constraint values for direct marketing and pay per click and generate
more revenue as a result.
lecture, we discuss the definitions and interpretations of common metrics for traditional
promotion vehicles, such as print ads. The learning objectives for this lecture are to explain
how to estimate the total promotion budget, describe how to allocate the promotion budget
across vehicles, address performance metrics for traditional media, and describing the tracking
metrics for social media. In this lecture, we cover traditional media.

We're going to cover several metrics for traditional media as shown in this slide. The first
metric is gross rating points, which is defined as reach multiplied by frequency. The second is
target rating points, which measures the exposure level of advertisements to specific target
markets. The third is reach, which is the number of people exposed to an ad. The fourth is cost
per thousand, which measures the cost per one thousand impressions. The fifth is cost per
point, which is the cost for one gross rating point. The sixth is impressions, which is equivalent
to exposures. The seventh is frequency, which is defined as the number of exposures per
individual for a specific time period. We discuss each metric further in the coming slides. We
start with reach, frequency, and GRP. Reach is defined as the size of the intended audience
targeted by the promotion. Frequency is defined as the number of exposures per individual in
the target market over a given time period. We generally do multiple exposures for any
campaign. In the first exposure, people seek to identify the object of the ad, thinking what is it.
In the second exposure, people seek to understand it, thinking what of it. Only in the third
exposure, do people think about perhaps buying it. GRP, or gross rating points, is defined as
reach multiplied by frequency. Target rating points are defined as the exposure level of ads to
a target market. We calculate TRP, or target rating points, by multiplying GRP, or gross rating
points, by the ratio of the target audience over the total audience. For example, we can
consider identical ads in Vogue and Elle magazines. Magazines provide data on their
circulation, and other related statistics, on their Websites, and in the portion of the magazine
called the mast head. The slide shows the statistics quoted by each magazine, showing the
total audience, total circulation, the gender percentage, the education percentage, and the
employment percentage. If our target is college educated employed women, we multiply those
percentages together to get 36.5% for Vogue, and 40.8% for Elle. If we have a GRP of 50, we
can calculate target rating points by multiplying the percentage of the target versus the overall
market by the GRP, or 36.5 multiplied by 50 to get 18.25 target rating points. CPM, or cost per
thousand, is a popular traditional media metric to measure the cost effectiveness of a media
buy. We calculate CPM by dividing the cost of the media buy by the size of the target audience.
In our Vogue example, you could check the publicly published advertising rates to learn that
Vogue charges $ 165,000 to run a 4 color ad to it's circulation of 1.25 million people. We
calculate CPM by dividing the cost of the media buy, or $ 165,000, by the target audience size,
or 1.25 million, divided by 1,000, to get $ 132.00. We will compare the $ 132.00 with the CPM
of other advertising opportunities to check it's cost effectiveness. The final metric we'll cover in
this lecture is cost per point, or CPP. CPP represents the cost to purchase a gross rating point
for our specific target market. We calculate CPP by dividing the cost of our media buy by the
vehicle rating. We're calling our example where we found the ratings for college educated
employed women for Vogue and Elle magazines. We show them on the table in this slide as
36.5 and 40.8 for Vogue and Elle respectively. To calculate the CPP, we divide the cost of the
media buy, such as $ 165,000 per ad in Vogue, by the vehicle rating, such as 36.5, to obtain the
CPP. In the case of Vogue, we get a CPP of $ 4,520, and for Elle we get a CPP of $ 3,627.
Therefore, we can view Elle as more cost effective than Vogue for our particular target market,
even though the circulation of Vogue exceeds that of Elle.

Module 3: social media

 In this lecture, we discuss the definitions and interpretations of common metrics for social
media promotion vehicles, such as promoting company products and services through
Facebook, Twitter, and other social networking sites. Learning objectives. In this module, we
cover several learning objectives, such as explaining how to estimate the total promotion
budget, describing how to allocate the promotion budget across vehicles, addressing
performance metrics for traditional media, and the subject of this lecture, describing tracking
metrics for social media. In social media marketing, we're often interested in tracking
conversion metrics.

Conversion is typically defined as converting an online visitor into a purchasing customer

through the use of compelling content and other techniques. But we should not feel limited to
only tracking purchases as conversions. Often, it can make sense to consider a wide variety of
online events. This slide shows a number of such events. Each one represents a method by
which people can engage with your brand. If your company sells high priced goods and
services, it's unlikely that one website visit will result in a sale. Instead, people need to be
convinced over time. For example, you might want to have them sign up to be notified of new
blog posts by signing up for a blog subscription.

Many other options exist, such as callback requests, contact forms, etc., depending on the
nature of the product or service and the goal of the company.

We can classify tools to measure social media metrics in three categories: built- in tools,
aggregators, and professional. Built- in tools refer to metrics capabilities included within the
social media of application suitable for small business or personal use. For example, Facebook,
LinkedIn, and Twitter each provide some limited metrics capabilities. Aggregators combine
metrics from multiple sources, which is also good for small businesses. For example, Hootsuite
and others combine data to get an overview of the overall social profile.

Professional tools are for the dedicated social media professional, and provide deep dives into
significant amounts of data. We'll cover each of these further in the next slides. We start with
built- in tools. This slide shows typical metrics for built- in tools. For example, Facebook
provides data on fans, subscribers, demographics, media, and interactions. LinkedIn provides
data such as profile views on standard personal accounts. Users can upgrade to pro accounts
to access more data. Twitter tracks the number of followers and other data.

Youtube tells users the total views and other data including viewership, compared to views of
videos of the same length. Social media aggregators give an overview of the social media
profile. Most are free, with upgrades available to pro accounts for additional data at additional
cost. For example, Hootsuite tracks brand mentions, and can let you analyze social media
traffic. Klout estimates level of influence. Social Mention tracks user- selected sources such as
Facebook and Twitter, and provides social media insight such as strength, sentiment, passion,
and reach.

Professional level tools are designed for dedicated social media professionals. Virtually all
require significant monthly or annual fees for use. For example, Cision is a social media
measurement tool tailored for public relations. Cymfony provides social media monitoring and
analytics. Radian6 is one of the market leaders, and was purchased by Salesforce. Com back in
2011. Indeed, many of the professional level social media measurement tools, such as those of
Scout Labs and Techrigy, have been acquired by other firms to give them a presence in the
profitable social media measurement market. When examining social media metrics, we
recommend considering them in relation to some type of hierarchy, such as that shown here.
At the bottom of the hierarchy, [ inaudible 00:04:28] pyramid, we find the viewing level. At the
viewing level, users simply view content, and do not participate in conversations. At the next
level, engagement, users engage in some way with the company website, blog, or other online
presence. At the third level, dialogue, users actively communicate with other users and
company representatives. At the highest level, referral, users refer products and services to
other, in a manner similar to word of mouth.

We discuss metrics for each level in the coming slides. This slide shows sample metrics for the
viewer level on top, and engagement level on the bottom. Metrics at the viewer level consist
of views by page, total views, and number of photos and videos viewed.

Metrics at the engagement level include user count, user growth, user relevance, and user
influence level. At this level, users do not participate in discussions, but they at least are
signing up as users, which can in itself be significant. We recommend monitoring the metrics at
a periodic basis, preferably monthly. At the dialogue level, we face a number of good metrics
we can use. We can measure activity, such as the number and depth of blog comments, the
amount of user- generated content, also known as UGC, the number of discussions using
hashtags, and the number of local spot check- ins. We're also interested in measuring other
dialogue indicators, such as brand discussions, dialogue levels, dialogue sentiments, and topic
intensity. Again, we recommend tracking each on a periodic basis. At the referral, or highest
level, we can measure referral level, referral influence, and referral depth. Referral level
measures referral actions, such as re- tweets and shares, as compared to the quantity of all
messages.

Referral influence examines the influence level of referrals relative to the average influence
level. Our goal with this metric is to see if highly influential people are discussing our offerings
and referring them to others. In referral depth, we measure the quantity of words in the
referral messages, and compare them to the average message length. Long referral messages
can indicate deep passion for the brand. In this module, we covered how to estimate the total
promotion budget, using different types of approaches. We also discussed how to allocate that
budget across various promotion vehicles, such as direct marketing, search engine marketing,
and social media. We closed the module by describing performance metrics and tracking
metrics for traditional media and social media.

Case Study: Promotion Analytics: Restaurant Industry

You are the marketing manager for the hottest new restaurant in town,
Acme. Acme’s top entrees include:

 Dish A: Braised Alaskan wild salmon with rice pilaf and grilled
asparagus
 Dish B: Grass-fed organic beef tenderloin with baked potato and
sautéed mushrooms in Cabernet sauce
 Dish C: Vegetable melee, with red and green peppers, organic
beets and artichoke hearts, over a bed of spinach, served with a
spicy balsamic vinaigrette
You use two promotion tools to drive business to Acme. The first tool is
Facebook (F) to target local diners. The second tool is Groupon (G) to
increase trial rate of new customers.

After analyzing historic sales and promotion data, you assemble the
data shown in the table below, including Audience/ Ad (the number of
people who viewed each ad, as well as Cost/ Ad (the monetary cost to
create and execute each campaign ad). F stands for Facebook
campaigns and G stands for Groupon campaigns.

You face several constraints, as summarized in the second table. Due

to limited capacity (ability to produce) of your advertising agency, you
cannot create more than a certain number of new advertising
campaigns per month. You also cannot exceed a certain marketing
spend (budget) per month.
Module 4: Business Strategy - Strategic Metrics
This module is important because you will learn how to apply analytics immediately in your
own organization. In this module we'll cover several learning objectives.

We'll show you how to understand and explain rapid decision tools, such as Pareto analysis.
We'll explain how to create and work with pivot tables. And we'll show how to increase your
communication effectiveness with data.

We start by covering the Pareto Prioritization Model. Vilfredo Pareto, an Italian engineer,
sociologist, economist, political scientist, and philosopher, observed that 80% of the land in
Italy was owned by 20% of the population. Therefore, we sometimes refer to the Pareto
approach as the 80/ 20 rule to indicate that a majority percentage of the results often 80%, are
often caused by a minority percentage of drivers, often only 20% or less. The top table on this
slide shows a typical customer data set with each row representing an individual customer.
From left to right the row includes the customer's name, the sales revenue attributable to the
customer, demographics information such as age, their address, and sometimes we include
psychographic information such as their attitudes and interests. To execute the Pareto
approach we sort the data set by the depended variable. In this case the depended variable is
sales so we sort by that. The bottom table shows the result. We see in the bottom table that
Gary Gamma and Alex Alpha account for a disproportionate amount of the sales.

In this case a total of $ 2400, which is 80% of the total. Whenever you're faced with a data set
that you don't know what to do with, the Pareto approach is a really good, easy way to start.
Here's another quick effective way to look at data. In this case we want to examine cross- sales
of products and services. This slide shows a common scenario. The company sells products and
services online. It's most popular offering is Product A, which many people purchase and put in
their E- commerce shopping cart as shown on the slide. To generate additional revenue the
company wants consumers to add related products, such as Product B, and related services,
such as Service C. For example, mobile phone providers could sell the mobile phone, which
would represent Product A, and then recommend a case for it, which would be Product B, and
a protection plan which would be Service C. Each cross- sales offering represents additional
revenue per order for the company. The table at the top of the slide shows a typical customer
data set for a cross- sale scenario. Each row displays the customer name, the total sales
revenue, and the sales for Principle Product A, Related Product B, and Related Service C. Just
as we did with the Pareto approach we sort the data set by the independent variable; in this
case total sales per customer. From the table we observe that 50% of Product B sales come
from cross- sales from A. That is our top customers Gary Gamma and Alex Alpha purchased a
total of $ 600 of Product B when they purchased Product A. We compare the $ 600 in the
cross- sale with Product A, against the $ 1200 total to get 50%. We also observe that the only
sales we get with Service C is when Product A is purchased. We come to the conclusion that
our top customers view B and C as essential related products. Therefore, we should market
Product B and Service C, and has that include Product A. The next approach we cover in this
section is the Supplier Selection Framework.

The Supplier Selection Frames is an analytical way to select from multiple suppliers or vendors,
when deciding on a new service. For example, you might find yourselves in a position to select
a new public relations or PR agency. To execute the Supplier Selection Framework we create a
spreadsheet using a tool such as Microsoft Excel. In the left column we list the selection
criteria. For example, for a public relations agency many companies value industry contracts,
social media expertise, article opportunities and other related PR attributes. In the columns to
the right we enter the scores for the candidate PR agencies for each of the criteria listed. We
can use a fixed scale, such as 1 to 10, where 1 equals poor and 10 represents outstanding. For
example, PR Agency 1 could score an 8 out of 10 for industry contacts due to the many
contacts PR Agency 1 has accumulated over the years. The PR Agency with the highest total
score gets selected. To total all the individual scores we can use Straight Sums, Modified Sums,
or Weighted Sums. In straight sums we simply add up each score. For example, we would add
the individual scores for PR Agency 1 to arrival at a total of 35. In the Modified Sum approach
we still add up scores, but we can disqualify suppliers if they fail any one category. For
example, the cost structure for PR Agency 1 is very high and only received a score of one. We
could decide to disqualify them, even if they performed well in other categories. In the
Weighted Sum approach we can adjust the significance of certain criteria. For example, we
could weight the Cost Structure criterion higher than the other criteria if we believed it was
critical. Many consumers find numbers and metrics compelling. To that end we should
consider adding them to our marketing campaigns. For example, a food company such as
Swansons could develop an ad to boost sales of single serving meals sighting the statistic that
33 million Americans live alone.
The table on the slide shows several such statistics. We recommend monitoring media for such
items and collecting them for future use. When developing advertisements using metrics,
marketers could consider heightening their impact by juxtaposing numbers. For example, an
online university specializing in educating people wishing to change careers could run an ad
showing two juxtaposed metrics. One metric states that 80% of people over age 45 consider
changing careers. The other metric states but only 6% only do. We recommend adding a visual,
such as bar chart, to further emphasize the difference between the two numbers.
 In this lecture, we cover the background, execution and interpretation of pivot tables in
Microsoft Excel. Pivot tables are an elegant way to analyze and communicate data. Much of
the same functionality can be done by sorting, but pivot tables make the process much easier
and faster. In this module, we have several learning objectives including understand and
explain rapid decision tools such as Pareto analysis, explain how to create and work with pivot
tables the subject of this lecture, and identify how to increase communication effectiveness
with data. For pivot tables we start by examining a typical customer data set. Each row
represents one customer. For example, we can see that Alex Alpha accounted for a total of one
thousand one hundred dollars in sales, placed her order in January, selected product A and
used the retail store distribution channel. Suppose we want to see the total sales for each
product or product sales by distribution channel or some other view. We could sort the data to
obtain that view but we'll see how developing pivot tables is a much better alternative. To
build pivot tables in Microsoft Excel, click on the insert tab and select pivot table. The right side
of the slide shows the create pivot table dialog box that pops up.

Click on the [ radio 00:01:28] button marked select a table or range and then enter the cell
range of the data set. Most of the time Excel can sense the location and will pre- enter it for
you. Check to make sure Excel didn't assume incorrectly. Next click on the radio button marked
new worksheet. [ Building 00:01:49] the pivot table [ on 00:01:48] a new worksheet is much
cleaner than placing it on the existing worksheet. Once you're done click okay on the lower
right. Excel will build a pivot table field list and present it to you as a dialog box. It lists all the
fields of our data set which consist of the labels at the top of each column such as customer
and sales.

Because we want to see sales by product, we select the sales and product fields. This slide
shows the result. If we select the sales and product fields, we see that the table shows product
A and product B as rows. We see that product A delivered twenty four hundred dollar in sales
and product B delivered six hundred for a total of three thousand dollars. If we want to see
how those product sales varied over time, we could select the date field. This slides shows the
result when we select the sales, then product and then date fields. The table still shows total
product sales for product A and product B but now the sales are broken down by date. If we
want to see how our product sales by date varied over distribution channel, we would select
the channel field. This slide shows the result when we select the sales field, then the product
field, then the date field and then the channel field. The table shows sales for product A and B
broken down by date and further broken down by channel. For example, we see product B
total sales as six hundred dollars with February sales of four hundred dollars. One hundred
dollars of February sales came to us using the Internet channel and three hundred dollars were
sold through the retail store. Suppose we wanted to visualize the data in a different format
such as emphasizing channel over date. That is we want to show the total sales through each
channel and how those sales varied over time. To do this, we would select channel first and
then select date. This slide shows what would have happened had we selected the channel
field first and then the date field. Note that the table emphasize channel over date. For
example, product B sold a total of six hundred dollars with three hundred dollars sold through
our Internet distribution channel. Of that three hundred dollars, two hundred dollars was sold
in January and one hundred dollars in February. We can also view information by adding a
report filter. For example, the table currently shows sales by product and date. If we wanted to
see channel as well, we could right click on channel and select the term add to report filter.
This slide shows what happens when we invoke the report filter for channel. The dialog box
shows the different values for channel, in this case Internet and retail store as well as an all
option. We select okay to see the resulting table. This slide shows the resulting table with the
report filter. Note that the table still shows product sales by product and date and further
breaks out sales by channel with separate columns for the Internet and retail store sales
channels as well as a grand total column. We've shown only a fraction of the views possible
with pivot tables. We encourage you to build your own data set or start with an existing data
set from your organization and experiment building different views of data using pivot tables.
You'll be amazed by all the different views you can achieve and will quickly find pivot tables to
be an indispensable tool for analytic success.
In this lecture, we discuss how to communicate effectively with data. This information is
indispensable if you plan to communicate with organizational executives. In this module, we
have several learning objectives to understand and explain rapid decision tools, such as Pareto
analysis, to explain how to create and work with pivot tables, and to identify how to increase
communication effectiveness with data, which is the subject of this lecture. We start with
relatively simple charts. Pie charts are well suited any time you need to break down totals into
individual constituents. For example, we can use them for market share breakdowns, revenue
breakdowns, and marketing budget breakdowns such as showing how much was spent on
social media campaigns, search engine marketing campaigns, and so forth.

Alternatively, any time we want to compare data, we should think of vertical bar charts.
Typical applications include sales revenue comparisons, before- and- after comparisons, and
competitive comparisons. For example, the percentage of A, B, C, D, and E are the same in the
two charts, but notice how different they look. On the pie chart graph, the slices look relatively
equal. On the bar chart, one notices the difference much easier. Microsoft Excel offers several
choices on vertical bar charts. Some useful ones are shown on this slide. On the left, we see
the clustered column chart, which works well when we want to compare sets of data. In this
case, we can compare the sales of Product A with those of C and sales of D with those of E. In
the middle, we see the stacked column chart, which works well when we want to show the
contribution from multiple sources of sales, as is shown in the chart. On the right, we see a
variant of the stacked column chart, which expresses the constituents in percentage rather
than absolute form.

This is useful if you want to not disclose the actual values. This slide shows a horizontal bar
chart. This type of chart is not as popular as the vertical bar chart, in part because it can be
difficult to fit labels for increments on the horizontal axis, as is demonstrated on this slide. We
generally limit horizontal bar charts to two applications. The first application is for the situation
when we have long category names. For example, if our top bar had a long descriptor such as
Sales of Product A to the Internet Channel, the horizontal bar chart would allow us to write
that long descriptor horizontally instead of vertically, making it easier to read. The second
application is for tornado charts, which we show on the next slide. This slide shows an
example of a tornado chart. Tornado charts work well when we want to compare data from
two groups. For example, the chart in this slide compares data between males and females
further subdivided by age. Microsoft Excel does not offer a tornado chart graphing function. To
create a tornado chart, build a table with three columns as shown on the right of the slide. In
the left column, show the categories to be compared. In our case, our categories are different
age groups. In the middle column, show the data from one of the two groups to be compared.
In our case, we show males on the left side. In that column, add a minus sign to every entry.
That way, Excel will plot the data to the left of the zero line. In the right column, show the data
of the other group to be compared. We then ask Excel to create a standard horizontal bar
chart with the three columns of data. The result will be a tornado chart as shown on this slide.
This slide shows a line chart compared with a clustered vertical bar chart. Line charts work well
when we want to show trends, especially comparing internal data with other internal data or
with external data. To emphasize the storytelling ability from line charts for trends, we've
created a vertical bar chart shown at left with the same data. Note how easily one can detect
the trend of Product B sales increasing and Product A sales decreasing in the line chart versus
the clustered vertical bar chart. We specifically recommend not using the three types of charts
shown in this slide for general audiences such as company executives. From left to right, those
charts include a scatter chart, a doughnut chart, and a radar chart, sometimes also called a
spider chart. In fact, if someone presents data to you using one of the types shown, be
extremely wary. The presenter might be trying to confuse the issue by using such complex
chart types. We can add enhancements to charts to increase their storytelling ability. We often
start with simple words and numbers. By organizing the numbers into tables, we've already
made the data easier to interpret. By plotting the data, we've greatly increased its ability to be
interpreted. We can add headlines, chart arrows, and thresholds to the plots to further
increase their effectiveness. For example, the chart on the lower right tells the story that
Product 1 sales have increased by thirty percent, eventually exceeding a threshold of three
million dollars in sales. In the right setting, that could be an exciting story. We can use line
charts with multiple lines to compare the trends of different sets of data over time. We can
draw the lines using different line weights and treatments to distinguish between the data
sets. Thus, we can show breakdowns and comparisons between products, channels, forecast,
and competition. As shown on the slide, adding a headline, a trend arrow, and a threshold line
greatly increased the storytelling ability of the simple vertical bar chart. With the great power
of marketing analytics comes great responsibility. Some people will display data in unusual
ways to confuse or even mislead audiences. We take this time to make a personal appeal to
present data accurately and ethically. This slide shows a typical misleading example that we
call truncating trickery. A company runs a market survey asking, " Would you recommend
Acme products to others?" The results are nearly equal, with four hundred forty people saying
yes and four hundred eight people saying no. If we truncate the scale, we can distort the
difference to make it seem as if the Yes scores dominate over the No scores, as shown in the
chart on the left. The chart on the right shows the real picture. The scores are, in fact, almost
equal. The lesson here is clear. When you see truncated axes, be careful. Someone might be
trying to mislead you. We close the lecture with an example of data- driven presentations. This
slide shows a real- world example of someone presenting to an executive audience. The
situation involves vice presidents of their respective functions presenting to the head of their
division in a quarterly operations review. The review includes the vice president of
engineering, who has the responsibility of developing new products and is thus responsible for
delivering much of the company's revenue. The review also includes the head of the
professional services team, whose slide we'll see next, whose job it is to implement the
products that the engineering team has developed. In this slide, we can see how poorly the
head of engineering communicates the data. The VP presents some numbers such as
engineering resource types, but those values are not relevant to the key performance
indicators used by the head of the division. By contrast, the head of the division is primarily
interested in revenue. Remarkably, no mention of revenue is mentioned on this slide, despite
the huge role that revenue plays in the success of new products. The head of engineering
appears to be asking for more personnel, but the argument to get them is weak, so he's not
likely to get any additional people. By comparison, we notice the different format used by the
head of the professional services team. Instead of the busy word chart used by the head of
engineering, this slide shows a clear graph declaring the role the group plays in the generation
of revenue for the organization. The graph also shows the relationship between revenue and
the personnel needed to generate that revenue. The graph extrapolates the existing trend and
predicts that the group will run out of sufficient personnel at a future date, thereby limiting its
ability to generate incremental revenue. The head of the division finds the information highly
relevant because he's so focused on revenue. He immediately asks what can be done to
remedy the situation, and the head of the professional services organization assures him that
she is currently interviewing several new candidates to expand her group. This slide uses many
of the enhancements we discussed such as headlines, trend lines, and thresholds, and one can
quickly see the great storytelling ability of this approach. Bottom line, if you want to get ahead
in your organization, learn how to leverage the power of analytics. In this module, we covered
several tools that can be implemented rapidly for quick results such as Pareto analysis and
cross sales tools. We also showed how to build pivot tables and interpret their results. We
closed the module by examining several ways to increase one's effectiveness in communicating
with data.