1° Course: Marketing Analytics: Marketing Measurement

Strategy

In this session we will give an introduction to marketing analytics. Upon

completing this lecture you'll become familiar with definitions, drivers, and advantages of
marketing analytics; definitions, styles, forms, and variables used in models; definitions,
families, and dashboards of metrics.

How do we define marketing analytics? One broad definition states: marketing analytics as
data analytics for marketing purposes from data gathering to analysis to reporting. But that
definition is quite vague, so we prefer the following definition instead.

Marketing analytics is the state of techniques and tools that provide actionable insight. By
techniques and tools we mean models and metrics. We'll define models and metrics later, but
now, understand that models refer to decision tools such as spreadsheets, and metrics refer to
key performance indicators to monitor the state of the business. In a way, models and metrics
are analogous to common items found in an automobile. Metrics are similar to automotive
gauges, and you see some on the left. They monitor the situation and help diagnose problems.
For example, a driver could like down at her dashboard and notice that the temperature gauge
was reading high.

Based on that information she could diagnose that something was wrong with the cooling
system. Models, on the other hand, are similar to global positioning systems, also known as
GPS units. Models show a representation of reality to help you decide on a course of action; so
does a GPS. Modern GPSs represent reality in that they show the roadways in your current
location. They help you decide on a course of action by presenting relevant information so you
can make decisions. For example, the GPS unit could notify the driver of snarled traffic ahead
and she could decide to use an alternate route. As we'll show in the course, one should take
care in how metrics are interpreted. For example, aircraft returning from battle in World War II
showed significant damage from bullets, such as holes in the tail section.

Military leaders interpreted this observation as a requirement to reinforce the damaged areas.
Statistician Abraham Wald interpreted the same observation differently, recommending to
reinforce the non-damaged areas. He stated that the observations included a selection bias.

That is, it only included the aircraft that returned, not those that did not make it because they
were damaged too badly. Therefore, be careful how you interpret data. Now we turn to
several trends that are driving the adoption of marketing analytics in organizations across the
globe. First we see the trend of increasing accountability for marketing performance. CEOs
expect their marketing departments to improve productivity and reduce costs. Second,
organizational emphasis on data- driven presentations is increasing the need for analytics to
back up proposed new plans. Third, data is increasingly being stored online, also known as the
cloud. With online data storage we get increased speed and convenience when accessing data.
Fourth, many marketing departments have reduced resources, forcing them to do more with
less, making the most of every marketing dollar. Fifth, thanks to initiatives to capture customer
information, companies are awash with data. The big question is: What do we do with all that
data?

We analyze it of course. Marketing analytics offers us many advantages.

First, it can help drive revenue, positioning the marketing department as a profit center
instead of a cost center, second, it can save money. CEOs will no longer tolerate the old
approach where marketing [ sent out 04:02] campaigns hoping for results.

Now marketing analysts can predict the outcome of their efforts. Third, executives trust
numbers. Analytics is thus a powerful tool to persuade executives. Fourth, we can even apply
analytics tools to sidestep politics in some cases. Some CEOs do not appreciate marketing
departments, especially if they themselves do not have a marketing and sales background. But
virtually every CEO appreciates revenue, and analytics can deliver revenue when used
effectively. Last but not least, analytics can encourage experimentation by allowing marketers
to test multiple scenarios before proceeding. That way they can make their mistakes on paper
where they have little to lose. We now turn our attention to models and metrics. We can
define a model as a simplified representation of reality to solve problems. We simplify reality
to make models easier to use. For example, we can examine an advertising effectiveness
model. The graph shows that sales revenue increases as we increase advertising spending
levels.

That should come as no surprise, but we can see that the effectiveness begins to level off once
we hit the spending level marked by the letter a. After that point we actually start to lose
revenue. We can imagine that this level of spending would create a super-saturation effect
where consumers are overexposed to ads and thus less likely to purchase from the company.
The purpose of the model is to evaluate the impact of its input variables. In our case we can
assess how advertising affect sales. Models help us make decisions. They provide guidance on
our marketing actions. In our advertising effectiveness model we can see that we do not want
to spend beyond the level represented by a, or we risk losing money. Models come in different
styles.

We start with styles. Styles tell us how the models are expressed. As we can see in the image,
they can be expressed in three different ways. First, they can be expressed verbally. For
example, in the advertising effectiveness model shown on the previous slide we could state
the expression " Sales is influenced by advertising." Second, models can be expressed
pictorially in graphs or charts. For example, we saw the plot of sales revenue vs. advertising
spending level in the previous slide. Third, models can be expressed mathematically. In our
advertising example we could state that sales equals a plus b multiplied by our advertising
level. We strive to express models in the mathematical style whenever possible. Models also
come in different forms. Forms tell us about the power of the model. At the lowest level is
descriptive forms. Descriptive forms simply describe the marketing phenomenon. At the next
level comes predictive forms. With predictive forms we can determine the likely outcomes
given certain inputs. This is the classic what if spreadsheet exercise.

For example, we might say " What if we increased advertising spending by 10%."

With a model in a predictive form we could see the resulting sales level. At the highest level we
find normative forms. Normative forms help us decide on the best course of action to
maximize our objective given the limits on the input variables. Instead of what if, we can "
given x where x is a certain situation, what should I do?"

In the course we'll discuss variables.

Variables are defined as something that can change, such as advertising and sales.
Independent variables are a type of variable whose value affects the dependent variable. Think
of independent variables as the input to the model. In our advertising effectiveness model
viewed earlier the independent variable would be advertising spending. Independent variables
are classified as controllable or non- controllable.

Controllable variables represent things we as marketers have some degree of control over. For
example, marketers can control variables such as advertising spending levels, features of the
product we sell, stores in which we sell the products, and so forth.

Conversely, we have no control over non- controllable variables. Non-controllable variables

include areas such as customer age, economic conditions, and so forth. Dependent variables
represent our marketing objective, which we can think of as output. In most for- profit
companies our marketing objective would be related to revenue, such as sales revenue, units
sold, profit, and so forth. In not- for- profit companies we could have related objectives such as
donations generated, pledges made, and so forth. In this slide we review the terminology
around the most basic of models, the linear response model. Here we have only one input
variable, similar to the advertising effectiveness model we reviewed earlier. As usual, our
output variable is revenue- related, in this case sales revenue. We express the linear response
model as y equals a plus b multiplied by x. Where y is our dependent variable, here
representing sales revenue, a is the perimeter called the y intercept, b is the coefficient to x
which we can interpret as the slope of the line, and x is the independent variable which in our
case is advertising. As shown in the graph, the y intercept is level of you when x equals zero.
The graph also diagramically shows slope, defined as the rise divided by the run of a line.

We'll be using this nomenclature throughout the course. We end this module by introducing
metrics. We define metrics as business- oriented key performance indicators. Examples include
sales per distribution channel, cost per sale, profit for sale, and so forth. Metrics help us
monitor and improve marketing effectiveness, allowing us to take corrective action as
necessary. For example, we could track marketing expense as a percentage of sales. If we're
trying to maintain a constant spending level of 10% of sales, we could monitor it. If it creeped
above 10% we could make a note of that event and reduce our spending levels to bring it back
down to our target value. It is rare that companies only track a single metrics. Metrics families,
which are groups of controlled metrics, are more common.

These families of metrics offer diagnostic and predictive information beyond that provided by
a single metric. Examples include sales metrics families such as sales per industry, sales per
product, sales per month, and so forth. Metrics dashboards are groups of relevant metrics and
metrics families displayed in graphical form.

Marketing automation systems such as those offered by Eloqua, Marketo, and Pardot, as well
as sales force automation systems such as those of Netsuite and Salesforce. com offers metrics
dashboards as part of their core functionality. We close the module by looking at our check for
understanding. Number one: Do you understand the definitions of marketing analytics,
models, and metrics? Number two: Can you discuss the advantages and trends driving
marketing analytics?

Number three: Can you explain model variables, model styles, model forms, and the linear
response model equation?
Speaker1: Welcome to the second lecture in chapter two Market Insight. In this lecture Market
Sizing, we discuss how the size of market. By sizing we mean determining the total monetary
amount of a category of products or services by a market. In general we make the assumption
that consumers will purchase all the goods and services created by an industry. We have
several learning objectives one is to understand the difference between markets and products.
Two is to assemble a go to list of data sources. Three is to practice sizing with reports, Top
Down and Bottom Up techniques, and four is to identify trends using the PESTLE and Porter 5
forces techniques. Many people are interested in a size of markets.

Marketing departments are interested because they need market sizing techniques to size
potential new markets and to calculate the share of their company's revenues as a percentage
of the total market.

Operations department such as product manufacturing and service delivery organizations are
also interested.

Manufacturing departments need to know how many units to make and service delivery
organizations need to know how many people to hire to provide services to customers.
Channel partners need to know market sizing so they know how many units to move to
distribution channels such as how much shelf space to allocate in retail stores. Finally, financial
services organizations are interested especially if the company is being funded by venture
capitalist also known as VC's. Many VC organization wants to see large and growing market to
justify funding, often they want to see markets in the range of five hundred million dollars to
one billion dollars. Market sizing has many applications, we discuss some here from market
segments we used market sizing to determine the number and size of markets segments. From
market share we need to know the total market size for us to determine the size of the market
our revenue represents. For Adoption Rate we need to know market size to see if our product
or service adoption rate is keeping up with the industry average. Market sizing is also used for
Life Cycle, by estimating market share periodically we can determine if we're in a growth or
decline phase of the cycle. We can also use periodic market share estimations to identify
upward or downward trends and take advantage of them. Sales forecasts are defined as the
amount of sales revenue in organization will make in the coming term off in one year. It is
often interesting to compare the company's sales forecast with the overall market size. As
sales rise, we need to hire more sales people giving us another application for market sizing.
Keeping with our sales team our market size will often determine the type of distribution
channels we employ. For example, huge market such as those for softdrinks will justify large
complex distribution channels or niche markets often just used to direct distribution. Finally
we can examine the market sizing growth rate to assess whether we wish to continue our
investment in the market or to explore a new area. So far we covered how to estimate the size
of a market by finding analyst reports or rather a similar secondary research that includes
market sizing information. We now move to the next market sizing technique called the Top
Down Approach, in the Top Down approach we start with the large general market and
multiply by successive factors to obtain the size of the market you want to estimate also called
the objective market. The best way to explain the process is by example we do that in the next
few slides as we state in the previous slide the Top Down approach begins with the large
general market.
This slide show some typical large general markets, for example if we wanted to size a market
related to individuals in the United States such as estimating the size of revenues for product
in the consumer package good industry we would start up with the total population of the US.
If we want to calculate the revenue from a particular medical procedure in the United States
we could start with total US health care expenditures. If we wanted to calculate a product
suitable for motorcycles in the United States we could start with the total number of
motorcycles in the US. We demonstrate the top down process here's an example. Here we see
to estimate the market size for Eco- Friendly Dental Floss. We start by determining the
relevant over all population value because the product is relevant to all Americans we use the
total population of the United States. Next we multiply that figure by factor number one which
is the percentage of Americans who floss daily. According to American Dental Association that
percentage is about twelve percent. We then move to factor number two which is the number
of users per year which we assumed to be three hundred and sixty five assuming daily flossing.
In factor number three we multiply by the amount of product consumed per used, most
people used about one foot per floss. In factor number four we multiply by the price for one
usage of floss. In this case we examined the retail price for a package of floss and then divide
the price by the number of feet of floss included in the package. In the final factor, factor
number five we multiply by the percentage of people who generally choose eco- friendly
products.

According to an article by management consulting firm McKinsey eco- friendly laundry

detergents and household cleaners account for about two percent of all cleaning product sales
so we will use two percent for the percentage. In the final step, step seven we multiply all the
numbers together to arrive at our market size of eight point one million dollars per year. In the
previous example we looked at the market size for the entire United States, what if we just
find the portion of US? Say Ohio in that case we would use the area market to man method
which we demonstrate on the next slide.

To determine the market size for eco-friendly dental floss in the state of Ohio, we could just
multiply the total US size by the percentage of people living in the United States. But we might
believe that population alone is not representative so we can estimate the area market size
using a weight average of multiple factors. In this slide we show how to calculate area market
size using a weight average of retail sales value which we weight by sixty percent in population
which we weight by forty percent. According to the United States Census Bureau Ohio
residents purchase about one hundred and thirty eight point eight billion dollars in total retail
value per year compared to three point nine two billion dollars for the US overall.

Dividing the two numbers this gives us a three point five four percent. Ohio has a population of
eleven point five million people compare to three hundred and eight million for the United
States accounting for a three four seven percent of the total population. We calculate the area
market demand by multiplying the factors by the weight.

In our case we multiply the weight for retail sales value or sixty percent by the percentage of
Ohio retail sales value relative to the US or three point five four percent and then add the
weight for population or forty percent by the percentage of Ohio population relative to that of
the US or three point seven percent to arrive at a total factor of three point six percent,
therefore we can say that the market size for Ohio would be about two point six percent of
that for the entire country. We now move to the next market sizing technique Bottom Up and
bottom up instead of starting with a large general market in multiplying by a succession of
factors to bring it down as we did in the Top Down we start with market segments and then
add the demand from each one to find the total market size. For example, in the caper movie
Ocean's Thirteen George Clooney and his gang fake an earthquake to break in to a new casino.
They fake the earthquake using a tunnel boring machine which is a six hundred ton machine
use to drill huge tunnels under the earth such as the channel between England and France. If
we were the marketing managers for tunnel boring machine manufacturing company we
would search for market segments that needed to drill huge tunnels. For example we could
look at segments such as large [inaudible 0:08:53] municipalities such as large cities and states,
major construction company such as Bechtel and sales to international markets. For example if
you go to portofmiamitunnel.

com you can see that the Port of Miami Florida used a tunnel boring machine in the
construction of its new tunnel. We would sum up the demand from all segments to determine
the total demand.

This slides summarize the process in three steps in step one, we identify relevant
organizations. In our tunnel boring example we look for organizations who would be in the
market for such as special machine. In step two, we determine the quantity of relevant
organizations. In our tunnel boring example let's say we had twenty organizations total
consisting of various municipalities, major construction companies and international markets.
In step three we multiply the quantity by the price to get the market size. In our tunnel boring
example we multiply the price which portofmiamitunnel. com tells us there's about forty five
million dollars, by the number of organizations say twenty, to get out market size of nine
hundred million dollars. In another example we can estimate the market for positron emission,
tomography, computed tomography or PET CT scanning machines. PET CT machines go for
about three million dollars each which only large health care organizations such as large
hospitals can afford. Large hospitals are defined as those with more than five hundred beds
with about two hundred and ninety such hospitals in the United States.

Multiplying three million dollars by two hundred ninety hospitals we get eight hundred and
seventy million dollars for the large hospital market segment. We could then look for demand
from additional relevant segments such as large urgent care facilities and their demand to that
figure. This slide shows a slightly modified approach that could be used for smaller businesses,
in this example you're the marketing for small Ad agency, you specialized in providing
marketing for professional services in the state of Arizona. In the first step you identify typical
segments which use your services such as accounting, engineering and legal services. The
second step you determine the number of relevant organizations, because you're in a small
business you probably interested not just the number of relevant organizations but in how
much demand they have per year.

Therefore you want to estimate the buy rate. Here we look up the NAICS quotes for
accounting, engineering and legal professions and their reported revenue in the state of
Arizona for recent period. Based on sales of your services to accounting organizations US made
to spend about two percent of their annual revenue on marketing. Similarly you find one
percent and three percent for engineering and legal services respectively. In step three, you
determine that accounting organizations have an annual demand of four hundred million
multiply by two percent for eight million dollars. You repeat the process for engineering and
legal and sum the three segments together to get an annual total demand of sixty one million
dollars. It is common to apply Bottom Up methods in situations with a limited number of
distribution channels such as retail stores. For example if your products sell in five stores you
could consider each of the stores as quote and quote segments and then just sum up the
demand for each to calculate the total demand. This method is especially useful when the
distribution channels can strain the amount that can be sold. For example Ferrari maintains
thirty nine dealerships in the United States, we can think of each dealership as a segment and
calculate the demand in each area, the dealership and then just sum them all together to
estimate the total market size.

Case Study: Market Sizing: Global Luggage Market

You have been promoted to Vice President of Marketing for ACME
Products. ACME sells various products to its customers in the United
States and abroad. ACME is considering entering the market to sell
luggage worldwide.

Based on your knowledge of market sizing from your Marketing

Analytics course, you decide to estimate the 2015 global market size
for luggage using the following methods:

 Available industry analyst reports

 Top-down estimation methods
 Bottom-up estimation methods
 Triangulation of data

Based on your market research to date, you have collected the market
data shown in this table:

Respuesta
Correcto:
The Statista analyst report given in the case study data set
estimates the market size as $31.62B.

Speaker 1: Welcome to module 3, Market Segmentation: Positioning. This module is

important because effective positioning is essential to business success. In this module,
we'll cover 4 learning objectives. The goals behind segmentation, targeting, and
positioning also known as STP, how companies position and reposition themselves in
markets, the tools available to marketing [ inaudible 00:00:24] for positioning, and how to
execute positioning using perceptual maps. We start this module by reviewing the concepts
and goals behind segmentation, targeting and positioning also known as STP. In segmentation
we subdivide the large general market into distinct market segments. The different segments
have different needs so marketers need to deliver different messages to each segment. One
advantage behind segmentation is increased customer satisfaction because we can target
more specific needs with the individual market segments than with the general market.
Another advantage is increased marketing effectiveness because we can deliver specific
messages to which the segment will relate. In targeting we select which market segments we
wish to emphasize in our organization. We cannot target every possible segment so we select a
handful of segments it makes the most sense for us to service. In positioning we develop
messaging, pricing, distribution and other elements to make consumers perceive that our
brand occupies a distinct and favorable position relative to competing brands.

We'll be focusing on positioning in this module. STP features a number of advantages. First, it
has what's known in the military as concentration of force. We can focus our core
competencies on relative market segments rather than dilute them over the general market.
For example Starbucks Coffee focuses on coffee aficionados who appreciate and are willing to
pay for premium coffee. They don't waste their time trying to be everything to everybody.
Second, we can increase customer satisfaction because consumers get what they want. Third
we can leverage our competitive advantage to market segments which appreciate.

For example rental car company Hertz has a competitive advantage of retail outlets in virtually
every major airport so it focuses on the frequent traveler market segment. On the other hand,
Enterprise has a competitive advantage of many non- airport locations so it targets local
rentals such as people whose cars are under repair. Fourth we can employ niche marketing
targeting specific segments with specific needs for example we can target this specific segment
of people who need to get their Apple iPhone screen repaired and fifth we can generate
higher profitability because we can target specific people willing to pay more unique products
and services fulfilling their exact needs.

In their book Positioning, authors Ries and Trout emphasize the importance of positioning
brands in the mind of the prospect. For example, when a person thinks of adhesive bandages,
they often think of the Band- Aid brand thanks to effective positioning efforts by their parent
brand Johnson & Johnson.

Similarly, many people think of Kleenex for facial tissue and Fedex for overnight shipping.
Different rental car companies emphasize different positioning approaches, each targeting a
different market segment. Hertz targets frequent business travelers by offering its rental cars
in many airports. Enterprise targets consumers with auto repairs and other temporary auto
needs by offering its rental cars in city centers. Thrifty targets relocated employees with its
multi- month rental program. Budget targets price conscious renters by offering rentals at a
discount and Xotic Dream Cars targets exotic car aficionados with its Ferraris and other super
cars.

Positioning is not static. From time to time we may need to change our positioning to address
current conditions. For example office supplies for Staples initiated the concept of the big box
office supplies store.
Because their stores had significant numbers of items, they positioned themselves around
selection with their messaging " Yeah, we've got that," but then OfficeMax, Office Depot and
other competitors joined the industry.

Staples could no longer claim a unique position on selection because the other big back stores
stocked similar if not identical items. In order to keep relevant to shopper's needs, Staples
repositioned itself around convenience using the message " That was easy." The perceptual
map is a graphical tool to understand consumer's perceptions of companies selling similar
products and services to the same market. Here we see a sample perceptual map for
household blenders at about the $ 40 to $ 60 price point according to test data from a major
consumer review magazine. To construct such a map, the magazine ran a survey of sample
consumers asking for their perceptions of different household blenders. In this case, the
magazine found that consumers evaluated blenders by comparing effective power and feature
richness between competing models. We then plot the results of the survey using power and
feature richness as the axis. We divide the map into four quadrants. In the upper left quadrant,
we see several competitors positioned fairly close to each other. In the quadrant, we see that
Kitchen Aid and Black & Decker are near each other. We interpret that observation by saying
that consumers perceived those brands as very similar to each other. On the other hand
consumers perceived the Cuisinart brand located in the lower right quadrant as significantly
different from both the Kitchen Aid and Black & Decker models.

In the second lecture in this model, we'll cover how to develop a perceptual map just like this
one. Perceptual mapping has several applications. First, we can identify clusters of people also
known as market segments of potential customers with similar needs. For example we might
find out fine chefs appreciate the feature richness of the Cuisinart brand so we call those
people the chef cluster. Second, we can assess our competition by noting the differences
between us and our competitors. Third we can identify new opportunities by looking for blank
spaces in the perceptual map. However we must proceed with caution. The blank spaces might
signal an opportunity others have missed or it might signify an area unwanted by consumers.
Fourth, perceptual maps serve as effective communications vehicles with company executives
because it graphically shows how consumers perceive the company relative to its competitors
and fifth, we could conduct period surveys to understand consumer perceptions over time
alerting us to changes requiring repositioning such as the Staples example we discussed
earlier. We end this module by covering different categories of mapping methods. We show 3
basic types. Perceptual maps, preference maps, and joint space maps.

Perceptual maps show consumer perception as we saw in the household blender example.
Preference maps indicate consumer preference designating not just what consumers perceive
but what they say they actually want. Joint space maps combine elements of perceptual maps
and preference maps along with other data.

We discuss each type. Perceptual maps are divided into attribute- based and similarity- based
types. Attribute-based perceptual maps are based on tangible descriptors such as effective
power, features, weight and so forth. Sometimes we are in situations such as fashion, food,
perfumes, electric goods, where attributes are not relevant. For example should we judge the
quality of couture clothing based on its weight? In such cases we employ similarity- based
perceptual maps which compare how similar consumers find one value versus another.
Preference maps show what consumers actually want. Such maps are divided into Ideal Point
types and Vector Model types. Ideal point types show a most preferred point such as a most
preferred level of spiciness in food striking a balance between too bland and too spicy. Such
maps are sometimes used in food and beverage studies. Vector Model types add a preference
vector for attributes that most people want such as performance, reliability, and convenience.
This course emphasizes perceptual maps over preference maps because we want to
emphasize that different segments have different preferences whereas preference maps strive
to show the one true preference. Joint space maps combine multiple features in one deal.

We can ask consumers for their perceptions and preferences and plot them on one map. In
such a map we include a preference vector for the ideal choice. We can also use external
analysis methods where we include the results of external analysis in our maps. For example,
we can include circles on the map whose size indicates the degree of importance of certain
attributes. In such instances, we can interpret the size of the circle as potential market share.
In the next lecture we discuss how to actually develop perceptual maps step by step.

This course emphasizes perceptual maps over preference maps because we want to
emphasize that different segments have different preferences whereas preference maps strive
to show the one true preference.
How to choose criteria:
Speaker 1: In this lecture, we examine how to develop attribute- based perceptual maps. The
learning objectives of this module are to define and explain, segmentation, targeting, and
positioning, to explain positioning companies in markets, to identify different positioning tools
such as preference maps and the subject of this lecture is to execute positioning using
perceptual maps. Developing perceptual maps is a five step process, starting with identifying
the selection criteria, conducting market surveys, graphing the data, formatting the data, and
interpreting the map. We discuss each step in turn. In the first step we determine what
evaluation criteria consumers use when they select and purchase products and services. For
example if I'm purchasing a new cell phone, I would consider screen size, battery length and
other factors when deciding which one to buy. This slide shows some typical criteria and the
polar opposites for each. For example if style is a criterion some people might prefer a
traditional style which we could designate on the survey as a score of one on a ten point scale
and some people might prefer a fashionable style which we could designate as a ten on a ten
point scale. Someone between those two extremes would rate a four, five or a six. Similarly
degree of ruggedness sought could vary from delicate and fine to rugged and durable. We can
add other criteria such as size, economic orientation, and comfort orientation as needed. How
do we find out all of those criteria? Well that's the subject of the next slide.

To find the criteria consumers use to evaluate products and services, we generally start by
conducting secondary research to find the terminology consumers use as well as their typical
purchasing behavior. We often look at existing reviews such as those done by J. D. Powers,
consumer reports and online evaluation websites to find what people are looking for when
they buy certain products and services.

Typically we'd also conduct primary research using customer interviews, focus groups,
behavioral tests and other means to learn firsthand how people evaluate products and
services.

Now that we know the evaluation criteria that consumers use to purchase products and
services, we conduct a market survey to determine how they perceive competing brands. Just
to be clear, we often need to conduct two market surveys. One to find out the criteria and
another one to find out how different brands rate against those criteria. In this slide, we show
the results of a market survey done for competing brands of household blenders at about the
forty dollar to sixty dollar price point. The two evaluation criteria were features and effective
power. A score of one on features meant that it had few features whereas a score of ten
meant that it had many features. A score of one on effective power meant that it crushed ice
very slowly whereas a score of ten meant it crushed ice very, very quickly. Again the data
presented in this chart represents the perceptions held by consumers who completed the
survey. For example, consumers felt that the Cuisinart BFP- 703CH model had many features
and moderate power whereas the Waring WPB80BC had few features and high effective
power. In step three, we plot the data. In Microsoft Excel, we would highlight the data table,
click on insert graph and select the X Y scatter plot graph type. The result is a simple X Y scatter
plot with each point representing consumer perception for a particular brand of blender. This
graph is technically accurate but needs some formatting work to make it a more effective
communication tool. In step four, we format the graph. We start by removing any existing
legends and removing the horizontal grid lines and axis values. We add labels for each brand
using the text box function from the insert tab. We bring out the outline of the graph more
clearly by drawing a big rectangle over the entire plot and then clicking on the no fill option.
We then draw four equal size rectangles within the big rectangle we just drew. In some cases,
we might wish to highlight a particular quadrant by adding shading such as we see in the graph
in the high power, feature rich quadrant in the upper right. In step five, we interpret our
perceptual map.

We see that several brands are competing in the basic features, high power quadrant. We see
that some brands are perceived very similar to each other such as Kitchen Aid and Black &
Decker because they're near each other on the map. We also notice that some quadrants have
only one brand such as Sunbeam in the lower left and Cuisinart in the lower right. Being along
in the quadrant can be desirable because it means that consumers perceive you to be the only
brand with that combination of attributes. For example if you were a chef who wanted many
features, you could be naturally drawn towards the Cuisinart. You would not perceive the
blenders in the other quadrants as relevant substitutes. The [ blank 00:05:15] quadrant on the
upper right poses a challenge. The quadrant could represent a new opportunity where
somehow all existing brands never thought of building a high power, feature rich blender or it
could represent an unprofitable venture where such a machine would cost too much to make.
Whenever we see blank spaces, we must ask ourselves why. In our final slide for this lecture,
we check for understanding. After reviewing the material, you should know the definitions of
segmentation, targeting and positioning and the advantages we gain from each. You should
also be able to explain positioning and re-positioning. We can apply different tools to different
situations and you should know how to apply which when.

Lastly, take the time to practice developing perceptual maps on your own so you gain
understanding on their creation and use. They can be very helpful especially in today's
crowded, competitive markets.

Case Study: Positioning

You are the marketing manager for (fictitious) ACME Sporting Goods.
ACME specializes in winter sports, such as snowshoeing, cross-
country skiing, and downhill skiing. ACME is considering entering the
market for snowboards. It faces competitors Brand A, Brand B, Brand
C, and Brand D. Each is an established manufacturer of snowboards.
You study secondary research and conduct primary research to find
that the top two criteria consumers consider when purchasing
snowboards (within a certain size and price range) are shape and flex.
Shape refers to the profile of the board when viewed from the top, and
can vary from directional (ride in one direction only; designed for fast
downhill runs; rated as 1 out of 5) and twin (ride in either direction;
designed for park or pipe riding; rated as 5 out of 5). Flex refers to the
degree to which the snowboard deflects under load, and can vary from
soft flex (rated as 1 out of 5) to stiff flex (rated as 5 out of 5).

You can conduct a survey comparing the perceptions of snowboards of

those of your competitors and your proposed new product. The table
below shows the results.
Module 3

1° and 2° for market entry or market exit:

3° for market growth:

Metrics for market entry:

Metrics for market approach:

Speaker 1: Welcome to Module 4, Business Strategy: Strategic Metrics, Lecture One. This
module is important because it gives us the tools to measure our performance in market
related, brand related, customer related and product related areas. In this module we'll cover
several learning objectives, the strategic scenarios facing most companies, the metrics to
measure performance for each scenario and how to measure brand-related, customer- related
and product-related performance. We start this model by reviewing the analytics approach to
strategy. In the diagram we can see that we start out with strategy. We identify three typical
strategic scenarios in this module. We then implement the strategy with the marketing mix
and business operations to achieve results in the marketplace.

We measure those results using a strategic metrics which is the focus of this module. This slide
shows three typical strategic scenarios. Companies start by deciding whether or not to enter
the market, called the market entry scenario. Having decided to enter, companies must then
decide how to engage with the market called the market approach scenario. Companies then
strive to grow in the market, called the market growth scenario. The market entry strategic
scenario can be divided into market entry and market exit. In market entry we apply our
competitive advantages to the characteristics of the proposed market.

For example, Diaspora and other companies decided to enter the social networking market
when it saw that market growing quickly. In market exit, companies decide to leave flat or
shrinking markets or those suffering from intense competition. For example, Siemens decided
to leave the radiation therapy market due at least partly to the intense competition it faced
from Varian Medical. Companies entering markets can enter by growing capabilities in house
called organic growth or by acquiring another organization who already has those capabilities
called acquisition- driven growth. Having decided to enter a market, companies must now
decide how they wish to engage with the market.

According to professor and author Michael Porter, they face three distinct choices, cost
leadership, differentiation and focus. In cost leadership, companies strive to leverage low cost
operations to keep profits high. For example, Southwest Airlines flies only one type of aircraft,
the Boeing 737, to keep operations costs low. In differentiation, companies strive for
profitability by convincing buyers that their offerings are unique. For example, the New York
Times emphasizes its unique writing style to attract readers. In the focus approach, companies
strive for profitability by specializing in one particular area.
For example, Sunglass Hut specializes in nothing but sunglasses in its retail stores. Now that
we've entered the market and decide our approach to it, we must grow if we wish to survive.

Igor Ansoff proposed four key growth methods: Market penetration, market development,
product service development and diversification. In market penetration, companies grow
revenue by increasing sales of existing goods and services to their existing market. We can
grow by targeting competitors, by targeting the frequency of usage and by targeting the
revenue per order. For example, Expedia encourages shoppers to book hotels at the time they
book airlines thus increasing the revenue per order. In market development, companies grow
by increasing sales of existing offerings to new markets. For example, Dunkin' Donuts
expanded geographically to increase its sales. In product service development, companies
grow by increasing sales of new products and services to existing markets. For example,
cosmetics maker L'Oreal markets multiple types of hair color products to customers. In
diversification, companies grow by increasing sales of new offerings to new markets. For
example, GE markets multiple products to multiple markets.

We use different metrics for different strategic scenarios. We cover metrics for each in the
next slides. For market entry and exit, we measure market size and market growth rate. For
market size we calculate the potential revenue available in the market. For example, the
smartphone app market is estimated to be about 15 billion dollars in size.

To estimate the size of the market, we use the techniques we covered in chapter two. For
market growth rate, we conduct a periodic evaluation of the market size to monitor if it's
increasing or decreasing. For example, word processor company Wang Laboratories failed to
notice a shrinking demand for stand alone word processors as customers migrated to general
purpose personal computers for this task instead. To measure our effectiveness in market
approach, we measure revenue and profit. We start with revenue. Companies typically
examine a variety of revenue reports such as the ones listed. Total revenue tracks to see how
our company fares against its competitors. Revenue by business unit is used by large
companies to track revenue of its various businesses or business units to identify the success
of each. Revenue by product or service is used to discover the most popular offerings.

Revenue by geographic region is used to identify areas of high [ inaudible 00:05:41] sales.
Revenue by segment is used to determine the popularity of our products and services with our
targeted segments. We continue our discussion on metrics for the market approach by
examining profit reports. Profit is defined as revenue minus costs. Similar to what we saw in
revenue, we can run several different types of profit reports. Typical ones include profit by
business unit, profit by product or service, profit by geographic region and profit by segment.
Basically we can run profit reports whenever we know both revenue and cost information. One
first step to calculating profit is calculating contribution margin. We define contribution margin
as the selling price per unit minus the variable cost per unit all divided by the selling price per
unit. Variable costs include the parts and labor and other related expenses related to making
one unit of output. We examine contribution margin to see how much net money we make
from each unit we sell.

We can define ROMI, also known as the return on marketing investment, as the revenue from
marketing multiplied by the contribution margin divided by marketing spending. We then
subtract a 1 from the calculated value. ROMI tells us how efficient we are with our marketing
spending. For the market growth strategic scenario, we measure growth rate. We can look at
growth in sales from one year to the next called year- over- year growth or year- on- year
growth or consider growth over longer periods where we use compound annual growth rate
pronounced CAGR. For year- over- year revenue growth calculations, we subtract the
difference in revenue from the end of the year to its start called the ending value and divide by
the revenue at its start called the starting value. For example, in its 2011 annual report, Apple
stated 65.2 billion dollars in revenue in 2010 and 108.2 billion dollars in 2011. We calculate the
year- on- year growth as 108.2 billion less 65.2 billion all divided by 65.2 billion for a growth
rate of 66% which is a commendable value for such a large firm. For CAGR we divide the
ending value by the starting value and take that value to the power of 1 over the number of
periods and then subtract 1 from the entire result. On the slide the upper pointing arrow is
called a carat and signifies an exponent. For example, if we started with $ 100,000 in revenue
and ended three years later with $ 150,000 in revenue, we would calculate the three year
CAGR as 150,000 divided by 100,000 taken to the 1/ 3 power and then subtract 1 to get 14.5%.
If this appears complicated, don't worry. Microsoft Excel provides a function called XIRR which
automates this calculation and spread sheets.

Metrics for the brand, product

Speaker 1: In this lecture, we discuss metrics to measure supporting strategic functions such as
brand, customer and product service related functions. Our learning objectives are to identify
strategic scenarios facing most companies, to explain metrics to measure strategic- level of
performance, to understand metrics to measure brand, customer and product- related
performance, the last three of which will be covering in this lecture.

We start our supporting metrics by examining brand- related metrics. Here we see brand
recognition and recall.

Brand recognition is defined as the ability to confirm a prior exposure to a brand. For example,
as we walk down the supermarket cereal aisle we recognize the Kellogg's cereal box due to the
extensive marketing done by the company. Brand recall is defined as the ability to retrieve the
brand from memory. For example, when consumers face a plumbing problem such as a
clogged sink, many think of the brand Roto- Rooter. Again thanks to the extensive marketing
done by the company. Brand recall is especially important for services such as plumbing repair
services because consumers do not have triggers to remember services such as walking down
an aisle of different services. An addition to recognition and recall, we have depth and breadth.
Depth is defined as the ease with which a brand comes to mind.

For example, many people think of General Electric or GE when thinking of home appliances.
Breadth is defined as the range of usage scenarios for a brand. For example, bus operator,
Greyhound, has a familiar brand and so has good depth but many professionals do not use it
because they don't see at as a viable option for cross- country travel, preferring instead to fly
so therefore, it has low breadth. We measure the relative strength of brands using the brand
equity index. The index is computed by multiplying effective market share by relative price and
durability. The effective market share is defined as the weighted average of the brand's market
share and all segments, weighted by each segment's proportion of sales. Basically, it's a
popularity score. Relative price is the price of our brand versus that of other brands. For
example, one of the reasons that Apple can charge more for their PCs then those of
competitor Dell is because Apple's brand is so much stronger. Durability is defined as the
percentage of customers who continue to purchase the brand in the following year. Durability
is, therefore, a lot like customer retention. Speaking of customer retention, we use that
concept for calculating customer lifetime value. Customer lifetime value or CLV lets know how
much a customer is worth to us. It is especially important in cases where we wish to hold an
ongoing relationship with a customer such as Netflix wanting to have consumers continue to
subscribe to its services.

CLV is defined as the margin multiplied by the retention rate divided by the term 1 plus
discount rate minus the retention rate. Margin is defined as the revenue generated by the
customer less the cost it takes to service the customer. Discount rate is the cost of capital for
the organization. It's similar to an interest rate on a loan.

Retention rate is defined as the percentage of customers who remain loyal over time. For
example, if the margin is $ 72 per year, the retention 99.5% per year and the discount is 5%
per year, we can calculate CLV as $ 72 multiplied by 0.995 divided by 1 plus 0.05 minus 0.995
for a total of $ 1,302. 55. Therefore, that customer makes $ 72 a year for us is worth 1300 over
time. Customer profit is a similar concept to CLV in that it seeks to acknowledge customer
value. It's defined as customer revenue minus customer costs. Most companies seek to
maximize customer profit. Some take active roles to encourage customer profit. For example,
American Airline's Advantage Customer Loyalty programs places customers in multiple tiers
depending on their customer profit.

Customers who fly extremely often are placed in the top tier which is called Executive
Platinum. Executive Platinum customers are rewarded with free upgrades, free trips and other
perks to encourage them to stay with American.

Even though Executive Platinum customers represent only a fraction of travelers, they
generate a disproportion amount of profit for American. Customers in the next level such as
those with Gold and Platinum status are encouraged to move up to Executive Platinum status.
Customers with no status are in the bottom tier such customers can be unprofitable to serve
so companies often add extra charges such as baggage fees to ensure profitability. For many
companies development of their products and services is critical to their success.

Companies can measure development performances development process metrics and

development innovation metrics. Development process metrics measure a company's ability to
leverage their competitive advantage and product or service development. This slide shows
four typical categories for such metrics. Customization capabilities measure the ability to tailor
products and services to customers in situations. For example, Dell and other PC
manufacturers allow customers to configure PCs to their liking using online configuration tools.

Customization capabilities can include modular designs, configuration systems, flexible

manufacturing and just in time inventory. Low cost development capabilities measure the
ability to deliver goods and services at low cost. For example, Boeing applies special methods
known as design from manufacturing or DFM and design for assembly or DFA to reduce costs
in aerospace manufacturing in its F- 18 fighter attack jets. Besides DFM and DFA, we can take
advantage of supply chain efficiencies and purchasing capabilities to lower cost. Quality
orientated development capabilities ensure that companies produce a high quality products
and services. For example, Oneida Healthcare conducts ongoing training for surgical staff so
that they can deliver top quality healthcare. Quality oriented development capabilities include
certifications in training, employee involvement, quality assurance and personnel recruiting to
ensure high quality. Responsiveness development capabilities ensure that companies can be
attentive to customer needs. For example, social gaming company, Zynga, creates new
software versions called builds every day to ensure that their customers are always playing the
latest and greatest games. Responsiveness development capabilities include speed of
development, attentiveness to needs, specialized training and equipment, and market
feedback. Product service innovation metrics measure a company's ability to innovate.
Innovation is more than just fixing mistakes and errors in products and services, companies
wanting to be considered innovative must always be developing a mix of new offerings. The
mix should include breakthrough products, next generation products, major enhancements,
minor enhancements and corrections.

Breakthrough products are those that change industry as the original Apple iPhone did when it
launched in 2007. Cellphones never looked the same after the introduction of the first iPhone.

Next generation products are significant advancements such as Apple move from the iPhone 3
to the much more powerful and elegant iPhone 4. Major enhancements consist of noticeable
improvement such as the introduction of the Apple iPhone 4S with its automated assistant,
Siri. Minor enhancements extends products to new groups of users such as the increase of
available memory in the Apple iPhone from 8GB to 16GB catering to the memory demands of
people who like to bring along large number of photos and songs.

Corrections, also known as bug fixes, address problems with products. For example, Apple had
a problem with the antenna in its iPhone 4 product which it fixed in later releases. We
recommend dividing each development project into one of the five categories discussed and
tracking the percentage of each type of project over time in the manner of that shown in the
table.

Here we see that the company starts the first quarter, in quarter one, with 5% of development
resources dedicated to developing breakthrough products, 10% in next generation products,
15% in major enhancements, 40% in minor enhancements and 30% correcting problems found
by customers for a total of 100%. In quarters two and beyond, the company has shifted its
focus to a more strategic outlook increasing its emphasis on breakthrough, next generation
and major enhancement projects and decreasing its emphasis on minor enhancements and
corrections. In this module, we learned terms related to basic strategic scenarios such market
entry, market approaches and growth. We also learned the relevant metrics to apply for each
of those scenarios. We covered metrics to measure our brand and customer performance as
well as development process metrics and innovation metrics.
Case Study: Strategic Metrics: Consumer Electronics Industry
You are the marketing manager for Acme Headphones, a (fictitious)
progressive manufacturer and seller of bass-heavy headphones for the
U.S. market. Acme Headphones faces its greatest competitor in Dr. X
Headphones, who manufactures and sells bass-heavy headphones to
the same market. You plan to assess and monitor strategic metrics for
both Acme and Dr. X to understand Acme's competitive advantages
and understand the strengths and weaknesses of Dr. X. To calculate
the metrics, you collect the data shown in the table below.
2° Course: Competitive Analysis and Market Segmentation
Competitive analysis-- here we introduce the topic and focus on competitive information
sources.

Upon completing this lecture, you'll become familiar with the following-- competitive
information, meaning gathering information for use in competitive analysis, competitive
analysis where we apply different models to analyze competitive situations, and competitive
actions where we decide on various defensive and offensive tactics.

What kind of benefits do we get from competitive analysis?

While I work with many clients and have seen different types of benefits from working with
them. First, we can detect new entrants coming in and out of the market and prepare for their
arrival. Second, we can keep abreast of the latest developments to avoid surprises. Third, we
can predict what competitors will do based on their past behavior and market situation. Next,
competitive analysis is like an early warning system that gives us time for corrective action
such as adjusting prices based on the competitive threat. Fifth, part of compelling analysis is
understanding how your customers perceive you.

Sometimes they can surprise you with the organizations they view as competitors.

And, sixth, we can apply the lessons learned from other companies such as Nokia's failure to
keep track of competitors in the smartphone market and avoid problems.

The competitive analysis process entails three steps-- information where we gather
competitive intelligence, analysis where we seek to understand the intelligence, and action
where we decide what to do.

We cover each of these areas in the remaining slides in this module. We start a discussion with
information. We state at least six useful sources.

The first source is the website of the competitor such as dermagist.com if we were studying
anti-wrinkle cream companies.

We can use website to learn about their products, their management, and so forth.

The second source is financial analysts, such as Dun & Bradstreet, Morgan Stanley, and others,
which is especially useful for private equity firms because those firms typically do not publicly
report their financial information unlike public firms.

The third source is industry analysts, such as Forrester, IDC, Nielsen, and others, which cover
the industry and the players in it.

The fourth source is trade publication often run by dot-orgs, which represent the industry.
They can provide an unbiased view on the industry and its happenings.

The fifth source is web traffic measurement tools, such as those from Alexa, which we'll cover
in the next slides.

The sixth source and this shortlist is those dealing with social media. Social media information
can be timely, but it can often be wrong. So use this information with caution.

In today's online world, information on web traffic to competitor sites can prove useful to
assess the role that the websites play in competitive strategy and the effectiveness of that
strategy. Using web traffic analysis tools, such as Alexa, marketers can access various website
details such as search volume, audience demographics, and so on. For example, we can
represent anti-wrinkle cream manufacturer Dermagist. We can enter the word Dermagist into
the Alexa engine to find out data for our own company. We can repeat the process with the
website uniform resource locators or URLs for our Dermagist, such as competitors like Lifecell
Skin, and 7 Minute Lift. Alexa and many other online tools offer limited functionality for free
and require ongoing payments to upgrade to pro accounts offering more functionality.

Google offers two helpful tools to assess the competitive landscape, as well as overall trends
over time. The first tool is Google Alerts. To use Google Alerts, we enter our topic of interest
and the type of data desired, such as news, blogs, video, et cetera.
We select how often we wish to receive alerts, provide our email address, and click on the
Create Alert button. Google will now deliver alerts relevant to the topic entered. In our case,
we enter the topic Dermagist to see what the world is saying about our company.

Google also offers its Google Trends tool. To use the tool, we enter the category name in the
search box. In this case, the category is wrinkle cream. After entering the terms and hitting
Explore, Google gives us an event timeline, a list of significant events relating to the term, and
the premier regions and languages associated with the term. When used regularly, Google
Trends can help us keep abreast of significant developments in the category.

To recap the previous slides, we have covered five types of competitive information sources.

Company websites can provide us with company specific information, such as details on
products and the management team. Financial analysts can provide detailed financial data.
Industry analysts often cover the industry in general and market leading firms in particular.
Web traffic analysis is useful to see how traffic varies over time, for example, after the
introduction of a major new product by a competitor. And social media analysis can show what
social media channels are saying about our competitors.
SWOT must be done for each principal competitor, from its POV.

This lecture covers analyzing competitive information.

We can divide the market into two types—direct and indirect competitors. Direct competitors
offer similar products and services into our market. Indirect competitors also offer similar
products, but they can be intended for different markets, i.e. customers. Principal competitors
are a subset of direct competitors. They represent the companies on which to focus our
efforts.

We decide on which companies to focus on by using the three criteria on the next slide.

We apply three criteria to determine which companies will make it to the level of principal
competitors.

In this section, we consider the example of companies manufacturing lawn mowers for the
consumer market.

The first criterion is that of time horizon. Most companies consider a planning cycle of one
year, so we're less focused on companies that might be three to five years away from
producing competitive product.

For example, companies producing electric lawnmowers are still plagued with range and
power problems that are not likely to be solved in the coming year, making them not very
essential to include as primary competitors.

The second criterion is the stage and the product life cycle. We tend to include, as principal
competitors, companies with products in the same stage as our own products. For example,
Lawnbotts manufactures robotic lawnmowers for consumer use. We would not generally
include them as primary competitors because such products are still in the infancy stage and
will have a long way to go before they'll become a threat to established law mower brands.

In the third criterion, we tend to be more likely to consider indirect competitors if we see rapid
technological change, such as that for smartphones. In our lawnmower example, the basic law
mower design hasn't changed much since 1920, making us less likely to look outside of our
closest competitors.

Now that we've identified our principal competitors, we'll apply multiple models to analyze the
information we have gathered thus far against those competitors. We briefly review for
relevant models in the coming slides. Except for the SWOT analysis, the models have been
already covered in detail in earlier sections so we provide only a summary of each and this
section.

We start with the PESTLE analysis, where we investigate the political, economic, social,
technological, legal, and environmental situations for the market, seeking to identify potential
trends.

We consider the example of household blenders. For political forces, we examine government
effects on the market, such as proposed tariff reductions on Chinese imports which could
increase the threat level of Chinese small appliances. For economic forces, we consider the
effect of economic conditions such as the reduction in purchases during the recession that
began in 2008. For social forces, we examine the impact of social trends, such as BlendTec and
other innovative companies taking advantage of the power of social media. For technological
forces, we consider technological advances in the field such as Waring and Cuisinart
introducing electronic controls for its blenders. For legal forces, we examine legislation
affecting the use of products, such as Kansas forbidding the use of blenders in some situations.
For environmental forces, we examine environmental concerns such as the Environmental
Protection Agency, or EPA, promoting the recycling of small appliances and other goods.
We continue with the Porter 5 Forces analysis, named after Professor Michael Porter of
Harvard University. In the 5 Forces Analysis, we study five key forces that can shape markets
and predict future conditions.

The first force is that of new entrants, such as the flood of new manufacturing companies
entering the appliance market, which can drive down profits. The second force is the intensity
of rivalry between the top two to three companies in the industry. In our case, the market is
fragmented with no clear dominant winner so rivalry effects are only moderate. The third force
is pressure from substitute products, which tend to drive down profits. In the case of blenders,
few effective substitutes exists. Spoons, whisks, and other such products are little match for
blenders. The fourth force is the bargaining power of buyers. Thanks to the information and
availability of the internet and the deep recession starting in 2008, buyers now dictate prices
for nearly every consumer good. The final force is the bargaining power of suppliers. Due to
the glut of manufacturers in the industry, no one supplier controls a large share, and thus little
supplier bargaining power exists.

We cover perceptual maps in the market segmentation area, so we'll cover them only briefly
here. This slide shows a typical perceptual map, in this case for household blenders at the
common price point of about $50. The map is laid out with the axes of effective power and
feature richness. The math is based on actual data gathered by consumer magazine Consumer
Reports. We can see in the map that the survey respondents' perception of KitchenAid is in
close proximity to that of Black & Decker, which means that respondents see little
differentiation between the two. The lack of differentiation can mean that respondents are
unwilling to pay much more for one or the other because they see the two brands as pretty
much identical. By comparison, Cuisinart stands alone in the feature rich low power quadrant,
making it a good choice for the market segment of amateur foodies.

The final tool in the arsenal is the familiar SWOT analysis, starting with the strengths,
weaknesses, opportunities, and threats of the principal competitors. One problem most
SWOTs have is that marketers simply list all the strengths they can think of for their own
company. That's a haphazard approach which could lead to overlooking key strengths and
weaknesses. We recommend instead listing all of the key functions of the organization as
shown in this slide. For example, we examine leadership, finance, strategy, and so forth.

In our case of consumer blenders, we start with a company named Jarden, which makes the
Oster and Sunbeam blenders, as well as other familiar consumer products, such as Mr. Coffee.
Next, we identify short-term and long-term opportunities and threats. For example, Jarden can
develop social media campaigns to promote their products to consumers. We repeat the
SWOT process for all the principal competitors. As part of the SWOT process, we want to
identify areas of core competency for competitors. The areas can be any of the typical ones
listed on company organization charts, such as the one shown in the diagram. This slide shows
an example of different kinds of strengths for each organizational function shown in the org
chart. For development, social gaming company Zynga holds great skill in engaging online
audiences using their development expertise. For finance, search giant Google has ample cash
assets, allowing it to purchase virtually any company it finds a threat, which is a formidable
advantage. For human resources, diversified manufacturing company General Electric grooms
its management talent using its well known internal programs. For information technology,
insurance company Allstate leverages IT for improved risk management in its insurance
policies. For operations, fast food company McDonald's ensures that its famous fries taste the
same all over the world because of its insistence on strict adherence to operational guidelines
given to its franchisees. For sales, industrial supply company Graingers provides consulting to
business users to help them select the products they seek. For service, department store
Nordstrom delivers on reputation for excellent service.
After analyzing the competitive data, it's time to take action. We can select between defensive
and offensive actions, based on our situation.

In this lecture, we cover both scenarios, starting with defensive actions.

In defensive actions, we defend ourselves against competitive threats. We cover defenses

against common competitive attacks here. Starting at the top, bypass attacks are those where
competitors develop products and services that bypass or ignore the current thinking of the
market. For example, Nintendo faced Microsoft and Sony in video game console competition.
Instead of trying to out-graphic the graphics-intensive competition, Nintendo bypassed the
competition with this focus on the user interface, which we now know as Wii, as well as the
Wii controller. To defend against a bypass attack, companies should expand market
opportunities into new areas.

In the second type of attack, called encirclement, companies attack competitors by encircling
them with superior forces and assets. For example, Bank of America employed encirclement
strategy to attack competitors by emphasizing its vast number of automated teller machines,
or ATMs.

In flank attacks, competitors attack weak areas of companies in the market. For example, HP
known for its server product line, could execute a flank attack against networking hardware
company Cisco. To cover flank attacks, companies should address their weaknesses knowing
that competitors will exploit them. In frontal attacks, companies meet competitors head on,
fighting against their primary strength. And that's exactly what happened when desktop
software giant Microsoft competed against Google by launching its Bing search engine. To
counter frontal attacks, companies should consider diversification to avoid risk of exposure to
any one area.

In guerrilla attacks, competitors strike at random. For example, some smaller companies attack
competitors by posting misleading comments on the competitors' social media channels. To
defend against guerrilla attacks, companies must constantly be on their guard, vigilantly
monitoring operations to stop guerrilla attacks before they get a chance to do great harm.
We can predict what type of attacks our competitors will make by examining where their core
competencies lie. The chart in the slide shows some typical examples.

If companies have great expertise in development, finance, or marketing and sales, as

Nintendo did, they are fairly likely to execute a bypass attack.

If companies have competencies in finance and operations, such as those of Bank of America,
we can predict an encirclement attack will occur.

If companies are strong in development and marketing, they'll likely use them as part of flank
attack.

When companies are really strong in finance and sales, they have the ability to execute a
frontal attack.

And when companies have strength in human resources, whether they have hundreds or
thousands of personnel at their disposal, we can predict a guerrilla attack.

We're not limited to defensive positions only. We can also take offensive positions. In general,
the most common ways are to enter a new market segment as automaker Skoda did, to
execute a new go-to-market approach as Lenovo did with different channels for different
segments, or to create differentiating functionality as hotel operator Westin did with its
Heavenly line of mattresses, pillows, and bed sheets.

Go-to-market strategies can be a powerful method of taking offensive action. We show several
examples on this slide. For example, we can bundle different products and services together to
tailor our offerings to different segments as automaker General Motors did. We can offer our
products and services through multiple distribution channels as Nike does, selling its products
virtually everywhere. We can structure our products and services to permit interval ownership
to reduce overall ownership costs as flight operator NetJets does with its business jets. We can
also offer leases instead of demanding payment upfront as Ford does with its leasing plans.
Some cellular service providers offer prepaid plans, such as Virgin Mobile, allowing customers
lower prices by having customers pay before the services are used. Last but not least, we can
offer rental of our products and lieu of outright ownership as apparel renting company Rent
the Runway does with its haute couture line of clothing.

In this module, we identified several sources of competitive information. We recommended

that marketers test out each source to find their own set of go-to sources for competitive
intelligence. We also showed how one can apply that competitive intelligence toward a
competitor by understanding the market better using PESTLE, Porter, and other analyses. We
closed the module by showing how to decide on specific defensive or offensive competitive
actions.

Case Study: Competitive Analysis: Casual Apparel Market

You have been promoted to Vice President of Marketing for ACME
Clothing. ACME Clothing manufactures and sells high-end athleisure
clothing, similar to that manufactured by garment company Lululemon.
The athleisure category within the casual apparel industry features
athletic-inspired garments. Consumers find athleisure clothing
appealing. For example, you notice that net revenue for Lululemon
increased 16% to $1.6 billion in fiscal 2012 for Lululemon (source:
Lululemon investor page). If you are not familiar with athleisure
clothing, you will likely need to research the category so you can
answer the questions.
In this module, we'll cover the following topics, strategic scenarios, where we identify strategic
options from which to select, strategic decision models, where we select the most effective
strategic options, and strategic metrics, where we evaluate performance based on key
performance indicators.

This slide introduces a feedback model of company marketing.

We start with our company's strategy. We implement that strategy using the marketing mix
and business operations.

The marketing mix is often referred to as the four P's, and is the set of product, price, place--
that's distribution-- and promotion approaches we plan to deploy to execute the strategy.

We measure the results of our strategy using strategic metrics. We use the term "strategic
metrics" here to emphasize their big-picture nature. Based on the metrics, we adjust our
marketing mix elements, business operations, and even strategy as necessary to ensure we're
meeting organizational objectives.

We apply the feedback from our strategic metrics to monitor the effectiveness of our strategy,
and make changes if necessary.

This figure recognizes that most organizations must first decide if they want to enter a
particular market, or if they want to leave one of their existing markets.

Once in the market, organizations must decide which approach they wish to take to succeed in
that market. Do they want to lead through differentiation, through cost leadership, or through
a focus on a niche. Having decided on their general approach, they must then decide how they
wish to grow revenue in those markets.

We cover each scenario in the coming slides.

The graphic summarizes the market-entry strategic scenario.

In the market-entry scenario, organizations must decide whether or not to enter a new
market. Conversely, they can decide to exit an existing market they no longer find attractive.
Companies enter new markets when they determine they can leverage their competitive
advantages to take advantage of strong market demand.

Companies can enter markets by growing their internal processes and product service line to
accommodate the new market. This is often referred to as organic . Growth Alternatively,
companies can enter new markets by acquiring companies already in that market. This is
referred to as acquisition-driven growth.

Companies exit flat or shrinking markets that hold little customer demand or those suffering
from intense competition. For example, European radiation therapy company, Siemens, at
Siemens.com, exited the radiation therapy market as it struggled with arch-rival Varian
Medical Systems.

This chart summarizes the market entry and exit models. Note how the chapters are listed so
you can learn more about each of those topics.

After deciding to enter a market, organizations must decide on the generic approach they plan
to pursue within that market. When considering the generic approach to a market, we find it
useful to adopt the generic strategy model introduced by Harvard professor Michael Porter in
this book Competitive Advantage; Creating and Sustaining Superior Performance.

In the book, Professor Porter discusses three generic strategies to suit different markets and
organizational objectives, cost leadership, differentiation, and focus.

In a cost leadership strategy, we evaluate the potential core competencies available to the
organization that give it a competitive edge in saving costs.
For example, airline carrier Southwest Airlines keeps costs low by consolidating operations on
only one type of aircraft, the Boeing 737. The operation would reduces spare parts or
inventory and maintenance costs.

With differentiation, the organization emphasizes unique areas that make its offerings stand
out from those of competitors in ways that customers value. The uniqueness translates into
higher prices demanded for its products and services. For example, New York Times
newspaper readers perceive the in-depth coverage and unique writing style of the paper to
differentiate it away from others.

The focus generic strategy targets usually go after niche markets using cost or differentiation

approaches. For example, sunglass retailer Sunglass Hut specializes in selling only sunglasses
to consumers.

Once companies have entered a market and decide on the generic approach to it, they'll seek
to grow the amount of revenue they gain from that market. According to market researcher H.
Igor Ansoff, companies face four different ways to grow, market penetration, market
development, product service development, and diversification.

In market penetration, organizations grow by increasing sales of existing products and services
to existing customers.

In market development, we target growth by increasing sales of existing products and services
to new markets.

In product service development, we grow by developing and introducing new products and
services to the market with the intent that our customers buy them in addition to existing
products.

And in diversification, we combine market development and service development.

And we show examples of each approach on the next slide. This slide shows we can grow four
ways, through market penetration, market development, product service development, and
diversification.

In market penetration, an example would be Expedia, which encourages shoppers to buy both
the airline and the hotel together. Again, same products to the same market.

In market development, we think of Dunkin' Donuts expanding their footprint internationally,

always going to new markets.

For product service development, we think of companies like L'Oreal with a constant stream of
new products coming out to cater to existing markets.

And diversification, we can think of industrial manufacturer GE that markets multiple new
products and services to multiple markets.

Decision models:
Earlier in the chapter we showed different strategic options available to organizations given
different strategic scenarios. Now we have to decide which options to pursue. For that we turn
to decision models.

In this section we cover three decision models to address some common organizational
situations. Specifically, we've found that most decisions on strategic alternatives fall into one
of three types--those with multiple consideration criteria, those with high risk and such
uncertainty, and those with a mix of hard and soft data.
For decisions involving multiple consideration criteria, such as market entry and exit, decisions
around customers, and organizational changes, where we must gather the input of many
departments within large organizations, we recommend employing the Quantitative Strategic
Planning Matrix or a QSPM.

For decisions incorporating high risk and uncertainty, such as how to grow the company, when
to exit or enter a market, or which product or service to develop, we recommend the Monte
Carlo Analysis Model.

For decisions that incorporate a mix of hard and soft data, such as brand-based decisions,
decisions around what generic strategy to use, and customer-related decisions, we
recommend the Analytical Hierarchy Process.

And we're going to cover each of those three models and the next few slides.

In summary, the QSPM model is a systematic approach for evaluating different strategies. It's
often used for market entry/exit and other decisions. The Monte Carlo simulation incorporates
uncertainty in forecasting future results. It's often used for growth-based decisions.

The AHP model combines quantitative, hard numbers with subjective, soft criteria. We now
cover each model in detail. We start with the quantitative strategic planning matrix, known as
the QSPM. As we stated earlier, the QSPM decision model works well for situations involving
many evaluation criteria.

The model can assign different weights to different criteria to reflect the priorities of the
decision and is perfect for situations where we want to incorporate the input of many, many
stakeholders in the organization.

We apply the model using the five steps shown on this slide. First assigning strengths and
weaknesses, then determining the opportunities and threats with these strengths,
weaknesses, opportunities, and threats acting like decision criteria, much like a SWOT analysis.

We then assign weights to the criteria and multiply assessments for each criteria to calculate
the assignment scores and total them up to compute the QSPM spreadsheet and make the
final decision between multiple choices. We'll review a typical example on the next slide.

We demonstrate the QSPM process by reviewing a typical example. We wanted to decide

between the organic growth option and the acquisition growth option when entering a new
market. The slide shows a completed QSPM spreadsheet for the organic growth option. We
start by holding a meeting, inviting all the relevant stakeholders for the decision. We ask them
to select the key strengths, weaknesses, opportunities, and threats, or SWOT criteria, to
evaluate when making the decision. We also ask them to state the importance weights for
each criteria, and we'll be applying the same SWOT criteria for both alternatives or options. For
example, the stakeholders might believe that a wide product line is a desirable strength, and
they decide on a 15% weight.

In another meeting, the stakeholders evaluate the degree to which each option fulfills the
criteria, which QSPM labels with the term "attractiveness." In this case, the company has
decided to evaluate the choices on a 1 to 5 scale, similar to Amazon.com ratings where 1 is
very poor and 5 is very good. For example, the stakeholders have decided that the organic
growth option rates an attractiveness score of 2 on the scale of 5, which is a fairly low score.
Perhaps the stakeholders believe that the time required to create multiple products for a wide
product line is excessive.

We multiply the weight by the attractiveness score to calculate the total attractiveness. For
example we multiply 15% by 2 obtain 0.30 for the first criterion. We repeat the process for the
remainder of the criteria and add them up to calculate the total attractiveness score. In this
case we get 6.00 for the organic growth option. We then repeat the process for the acquisition
option. The key factors or decision criteria, as well as their weights, remain constant, so we get
a fair evaluation of the two choices. The individual attractiveness scores vary, of course,
because the stakeholders are now evaluating the acquisition option. For example, we go back
to the wide product line and the stakeholders have decided that the acquisition option rates
an attractiveness score of about 3 out of 5, because an organization that we acquire could or
might already have an existing product line that we could leverage.

Just as we did with the organic growth option, we multiply the weights by the attractiveness
scores to calculate the total attractiveness scores for each criterion and complete the QSPM
spreadsheet by summing up the individual attractiveness scores to calculate the overall total
attractiveness score for that option.

In our case, the acquisition option results in a total tracking the score of 5.55. Because that
value is lower than the 6.0 score we calculated in the organic growth option, the QSPM
recommends that the organization proceed with the organic growth option.

In today's dynamic market, marketers cannot count on certainty, but marketers still must
make decisions, so the Monte Carlo simulation, named after the casinos at Monte Carlo in
Monaco, incorporates random elements to address uncertain and risky situations.

To execute Monte Carlo, we start by declaring three typical scenarios-- a weak market such as
an economic recession, a typical market with average conditions, and a strong market. Having
declared the three scenarios, we calculate what the expected company results would be for
each scenario. We declare the uncertainty variables and the uncertainty functions.

In many cases, the fixed costs, such as rent, are are certain. The unit price is often uncertain,
because it depends on market conditions. The unit cost is also uncertain, because it can
depend on manufacturing tolerances.

The uncertainty functions in cases where we want to examine profit is defined as the unit price
minus the unit cost, less the fixed costs, all subtracted from the unit sales.

We then run the Monte Carlo simulation to get the simulation results and we show a typical
example I'll put in the next slides. In our example, our organization estimates we'll sell only
40,000 units in a weak market, which increases to 50,000 in a typical market and shoots up to
60,000 when the market is strong.

Based on past history, we find that unit prices vary from $22 per unit in weak markets to $18
and strong markets, perhaps because we can drop or unit cost due to economies of scale that
come with increased sales and thus sell our products for less.

Manufacturing tells us that unit cost can vary between $9 and $11 per unit, depending on
machining tolerances, irrespective of market conditions.
Fixed costs such as rent remain fixed. We enter the data into the Monte Carlo simulation tool
and arrive at the results shown in the next slide. This slide shows a typical output plot from a
Monte Carlo simulation.

Letters A, B, C, and D denote different scenarios, each with their own probability of occurring.
Scenario A shows a small probability of losing a substantial amount of money due to the
possibility of weak market conditions and high unit costs. Scenario B denotes a breakeven
condition where we don't make any profits but we don't lose any money, either. Scenario C
shows the most likely scenario, i.e. the one with the highest probability, where we make a
moderate profit. and scenario D indicates the possibility that we can make a substantial profit.
Because the overall graph skews right, we would make the interpretation that this project
looks pretty good and that we should move forward with it.

We close our discussion on strategic decision models with the analytical hierarchy process or
AHP. In AHP we first declare our decision goal. For example, we could declare that we want to
decide on which generic strategy alternative—cost leadership, differentiation, focus-- to apply
a new market. Next we gathered the selection criteria. Our case is typical of those used with
AHP in that we have both hard data and soft data. Our hard quantitative data consists of the
potential profitability for each alternative. Our soft or psychological criteria consists of our
rating from 1 to 10 the degree of alignment each alternative has with the organization's
competitive advantages.

In the final step, we execute the AHP models. Due to the complexity of the AHP mathematics,
we recommend the use of statistical software programs such as our SPSS or SAS In this module
we covered strategic scenarios where we identified strategic options from which to select and
strategic decision models, where we select the most effective strategic options.

Case Study: Strategic Models, Hospitality Market

You are the marketing manager for Acme Hotels, a nationwide hotel
chain. Acme Hotels plans to enter a new market with one of its mid-
priced hotel properties. The company must decide whether it should
build the hotel through its own network of contractors (the organic
growth alternative) or acquire a hotel property from a competitor (the
acquisition alternative).
    
Each alternative has its own set of strengths (S), weaknesses (W),
opportunities (O), and threats (T). Weights for strengths and
weaknesses must total to 100%. Similarly, the weights for opportunities
and threats must also total to 100%. You plan to apply the quantitative
strategic planning matrix (QSPM) approach to decide on the best
alternative.

To support the decision-making process, you assemble the data set

shown in Table 1 below, based on management weighting of various
criteria and independent assessment of the two potential properties.
The scores vary from 1 (poor) to 5 (excellent). We apply the same
evaluation weights to both alternatives. Table 2 explains the evaluation
criteria and why the organic alternative was scored higher/lower than
the acquisition alternative.
In this section, we're going to discuss some of the purposes and benefits of segmentation, talk
about some segmentation approaches, along with their variable techniques. And by the end,
you'll be able to look at regression-based orientation and cross-tab segmentation, including
two a priori and post hoc segmentation techniques.

We start by reviewing the concepts and goals behind Segmentation, Targeting, and
Positioning,

also known as STP. In segmentation, we divide the large general market into distinct market
segments. The different segments have different needs, so marketers need to develop
different messages for each segment.

One advantage behind segmentation is increased customer satisfaction, because we can target
more specific needs with the individual market segments than with the general market.
Another advantage is increased marketing effectiveness, because we can deliver specific
messages to which the segment will relate.

In targeting, we select which market segments we wish to emphasize in our organization. We

cannot target every possible segment, so we select the handful of segments it makes the most
sense for us to service.
In positioning, we develop messaging, pricing, distribution, and other elements to make
consumers perceive that our brand occupies a distinct and favorable position relative to
competing brands.

STP features a number of advantages.

First, it has what's known in the military as concentration of force. We can focus our core
competencies on relevant market segments, rather than dilute them over the general market.
For example, Starbucks coffee focuses on coffee aficionados who appreciate and are willing to
pay for premium coffee. They don't waste their time trying to be everything to everybody.

Second, we can increase customer satisfaction, because consumers get what they want.

Third, we can leverage our competitive advantage to market segments which appreciate it. For
example, rental car company Hertz has a competitive advantage of retail outlets in virtually
every major airport, so it focuses on the frequent traveler market segment. On the other hand,
Enterprise has a competitive advantage of many non-airport locations, so it targets local
rentals, such as people whose car is under repair.

Fourth, we can employ niche marketing, targeting specific segments with specific needs. For
example, we can target the specific segment of people who need to get their Apple iPhone
screen repaired.

And fifth, we can generate higher profitability, because we can target specific people willing to
pay more for unique products and services fulfilling their exact needs.

Segmentation links customer needs to marketing actions. Examples of customer needs include
quality, durability, cost savings, time savings, style, and many, many others. Just a few
examples include segments of people placing high value in quality, such as the market of
people paying premium prices for Rolex Swiss watches; people desiring long-lifed durability in
their products, such as travelers who purchase Briggs and Riley luggage; cost-sensitive people,
such as those interested in Geico ads for saving 15% on auto insurance; and style-oriented
people, such as those who appreciate the extra style of Apple products. And again, this list is
just a small subset of the many, many market segments available.

We use several criteria when determining how to select segments, as summarized in the
figure. Marketers should seek to satisfy all criteria when selecting segments. Internal
homogeneity means that individuals in the segment respond similarly to marketing efforts. For
example, if we selected price sensitivity as a segmentation variable, we would expect everyone
in the thrifty group to be budget-oriented. External heterogeneity means that individuals in
one segment behave differently from those in another segment. Again, if we selected price
sensitivity as a segmentation variable, we would expect the spending habits of the thrifty
group to be different from those in the big spenders group.

With parsimony, we mean that marketers should strive to segment the market in as few
groups as possible. Often when we exceed 10 groups or so, we start to run into diminishing
returns between the benefits provided by segmentation and the time and effort required to
reach out to all those segments.

In accessibility, we want to ensure that we can effectively reach people in the market segment
with our market actions. For example, we can access a segment, such as sports car enthusiasts,
through many means, such as sports car magazines, websites, et cetera. But it would be
difficult to access a segment such as people who like the color blue, because we have no direct
means of reaching such a segment.

For size, we want sufficient potential profitability to make the segment worthwhile to pursue.

In segmentation, we use segmentation variables to segment the market and identify in which
group particular individuals belong. We denote two types of segmentation variables to help us
with this task, response variables and identifier variables.

Response variables describe how individuals in segments respond to marketing offers. We can
measure sales revenue, of course. But we can also measure other things, such as functional,
service, usage, financial, and psychological aspects. Functional response variables consider the
function of company products and services. Specific variables in this category include
performance, reliability, durability, quality, and so forth.

Service and convenience response variables study how company products and services deliver
service and convenience to their customers. Specific variables in this category include time
savings, ease of use, ease of purchase, convenience, location, and so forth.

Financial response variables focus on the monetary performance delivered by products and
services. Specific variables in this category include cost savings, potential revenue gain,
sensitivity price-related promotions, liability avoidance, and so forth.

Usage response variables consider how customers will use the product or service. Specific
variables in this category include the use case scenario or occasion, the usage rate, usage
frequency, application of the product or service, usage patterns, and so on.

And psychological response variables study how products and services affect psychological
aspects. Variables here include trust, esteem, status, and so forth.

We use identifier variables to categorize and describe the individuals in segments. For
example, Forbes magazine found that the segment of the population who purchases Porsche
911 sports cars is predominantly male at 87%, financially successful with a median income of
$390,000, and enjoys a lifestyle in which they can reward themselves for achieving major
milestones.

We can conduct market research to determine the correct identifier variables to describe
different groups.

Most times, however, we can use established identifier variable categories. Typical examples
include consumer demographics, such as age and income; consumer geographics, such as
country and city; and consumer psychographics, such as values, interests, and attitudes.
Similarly, we can use several familiar identifier variable categories, such as business
demographics, like industry and company size; business geographics, such as company
location; and business situational factors, such as the ability of the company to expedite urgent
orders. All these are for the business identifier variable side.

We characterize response variables as the dependent variables, because they represent the
behavior in which we're interested. We describe identifier variables as the independent
variables, because they represent variables which help explain behavior. The figure in the slide
shows the concept.
A priori, which is Latin for "from before," and post hoc, which is Latin for "after this," describe
the time at which the segments are declared, that is before or after the primary market
research and analysis. Both methods accomplish the same result in that they both enable us to
segment the market. But they take different routes to get there.

In a priori segmentation, marketers divide the market into segments before primary market
research and analysis are conducted. Generally, marketers apply a priori segmentation
techniques when they have existing knowledge from earlier experience about the bases for
assigning customers to segments.

In this approach, marketers specify the segmentation variables to use, as well as the number of
segments, in the hope that resulting segments behave differently in response to marketing
base variables such as product price, place, and promotion.

In post hoc segmentation, marketers hold little or no knowledge about the type of segments in
a particular market or even in the number, the quantity.

The post hoc approach determines the number of segments after research and analysis are
conducted. For example, a new product or service could require post hoc segmentation
techniques because of lack of earlier experience.

Complex markets often benefit from a post hoc segmentation approach because the segments
are not always clearly evident. A priori segmentation projects typically involve several stages.

In the first stage, we select segment identifier and response variables to study.

To select response variables, we consider which types of responses we wish to know, such as
usage. Similarly, we consider the types of identifier variables we could find useful such as
demographics, geographics, and so forth. For example, if we're doing a market segmentation
for hotels, we might select length of travel or visit as the response variable, and occupation as
the identifier variable.
Next, we design a survey sample to study. The survey sample is the set of individuals to whom
marketers will be sending the survey. In our hotel example, we could send out surveys to
readers of travel magazines such as Conde Nast Traveler.

In the third step, we gather the data, often using online tools such as SurveyMonkey or
Zoomerang. In our hotel example, we could ask respondents about their length of stays, as
well as their age, income, and occupation information.

In the fourth step, we form segments using a a priori segmentation techniques such as cross
tabulation and regression segmentation discussed more in the next lecture.

In our hotel example, we would determine if we can find a relationship between the length of
stay and the traveler's occupation.

In the fifth step, we establish marking programs that leverage the data we learned from the
segmentation process.

In our hotel example, we might find that the market segment that frequented luxury hotels are
often executives at international organizations who are not price conscious and appreciate the
perks and VIP treatment while on the road.

Post hoc segmentation processes, by contrast, are different. We'd start by conducting more
research into the market, and then evaluating the data to see what we can find.

Post hoc segmentation technique examples are discussed in the next lecture.

Marketers use either descriptive or predictive segmentation techniques depending on the

objective of the segmentation efforts. Marketers can use descriptive and predictive techniques
on both a priori and post hoc approaches.

Marketers apply descriptive segmentation techniques if the objective is to describe the

similarities and differences between customer groups. We study similarities and differences
among customers to market more effectively to them. One common a priori descriptive
segmentation approach is called cross tabulation analysis, which we cover in the next lecture.
Conversely, marketers apply predictive segmentation techniques if the objective is to predict
how changes in the independent variables will affect the value of the dependent variables. For
example, we might wish to know how advertising spending, which is an independent
controllable variable, affects sales revenue, which is a dependent variable. We achieve the
objective by studying the relationship between the two. One common predictive a priori
segmentation approach is regression analysis, which we'll cover in the next lecture.

The figure shows a simplified representation of several popular marketing segmentation

methods. The figure classified the methods by the point in time in which the market is divided
into segments, that is before conducting market research, or a priori, versus after conducting
market research, or post hoc. It also divides the methods by looking at the objective of the
segmentation. Is the objective descriptive or predictive? We're going to cover examples of
each of these methods when we go to the next lecture.
Cross tabulation is considered an a priori, descriptive segmentation technique, although it does
have some predictive qualities. The technique is often called cross tab for short. It is very
popular due to its ease of application. Cross tabulation is a procedure that cross tabulates two
variables, expressing their relationship in a table. The process thus describes our market
segments, allowing us to understand them more fully so we can market to them more
effectively. In cross tabulation, we follow a four-step process.

First, we gather market data, usually with a survey that collects response variable information
as well as identifier variable information.

Next, we examine the data to see if we can find any relationships between the response and
identifier variables.

We then build the table and interpret it. We're going to describe the process with an example.

In the next few slides, we will demonstrate the cross tabulation process, also called cross tab,
with an example.

Fictitious company Acme Restaurants wants to discover the segments existing in the market,
which is their local area.

Acme is especially interested to know how the segments vary with respect to the number of
times they dine out per month. Acme plans to focus its marketing budget on diners who like to
eat out often and not waste money on people who rarely, if ever, go out to eat.

In step 1, we gather the data by surveying the market. In this case, we could survey a local
community during a local town fair, asking individuals how frequently they dined out per
month over the past year.

Acme might also ask questions, identifying demographic variables such as annual income,
age,and occupation. This slide shows a small excerpt of the resulting data, with just three
respondents. Actual surveys can have hundreds or even thousands of respondents.
We move on now to step 2-- examining market data. A quick look at the data in the slide
reveals some market insight. We can see that dining frequency definitely does vary with
annual income.

You can see how greater annual income is associated with greater dining frequency. The
frequency does not appear to vary by age. Instead, age remained consistent despite a wide
range of dining frequency. The occupation variable appears to be redundant, because the
stated annual incomes correlate with the typical incomes expected from those occupations.

For large data sets, it can help to sort the data by the variable of interest-- in this case, dining
frequency-- to more readily perceive the underlying patterns.

We can construct a cross tab table as shown using a dedicated cross tabulation tool.
Commercials statistics software packages provide cross tab tools. Examples of such packages
include SPSS, which stands for Statistical Packages for the Social Sciences-- and that's sold by
IBM-- and MarketSight.

Sometimes for small data sets, we can just do the cross tabs manually by just counting the
number of respondents standing out four times a month that make $10,000 to $49,000 year
that look at $50,000 to $99,000 per year, and over $100,000 a year, and then dividing by the
total to get the percentages.

In step 4, we interpret the cross tab chart. The cross tab chart shows three distinct segments,
as shown in the slide. The first segment, which we're going to call Dining Misers, consists of
relatively low income individuals who dine out rarely. And that's defined as once a month or
less. Acme is not likely to target this segment because of its low revenue potential.

The second group, which we're going to call dining medians, consist of mid-income individual
dining out about once per month or maybe slightly less. The third group, which are called
dining mavens, appear to have the most attractive segment. Those individuals dine out about
once a week, so over four times a month.

They have relatively high income. With this knowledge, we would seek to increase the number
of diners eating at Acme by executing a campaign targeting these high income individuals.

Regression-based segmentation is an a priori predictive segmentation technique. In regression,

we seek to determine the relationship between independent variables and dependent
variables.

The discussion here assumes linear regression. The goal of regression-based segmentation is to
group different customers together based on the similarity they have and the relationships
between the independent and the dependent variables. For example, we might find that
customers within a certain age bracket have similar usage rates, which would indicate an
actionable market segment.

To execute regression-based analysis, we use a four-step process. We start by gathering macro

data to collect response and identify our variable information, just as we did with cross tabs.

Next, we examine the market data to find possible relationships. We execute the regression
analysis using data analysis tools, such as the Analysis Tool Pack provided with Microsoft Excel.
In the final step, we interpret the regression results for the problem we're trying to solve.

In the next few slides, we demonstrate the process using an example.

For example, we're using the case of fictitious company Acme Automobiles. Acme wants to
study people purchasing automobiles to find out if they can segment the general car-buying
market into actionable segments. In step 1, they gather the market data. For our example, we
connect an online survey asking a random group of individuals about how much they intend to
spend on their next automobiles. We also ask questions together-- demographic information,
such as age and income.

The slide shows an excerpt of the table showing spending levels and personal income for
several respondents. The respondents names here have been deleted for anonymity. In step 2,
we examine the market data. We prepare the market data for review by sorting it by the
dependent variable. Here, the dependent variable is spending, because it's our primary
interest. So we sort by it. The slide shows the sorted results. We can also follow strict operator
segmentation techniques where we would use pre-defined bands of independent variables-- in
this case, income-- to segment the market.

In our example, we see distinct segments in the $20,000 or $30,000 range, $55,000 range, and
the $150,000 to $200,000 income band. To see how income and spending varies within each of
the segments, we apply regression analysis.

Regression analysis follows a four-step process. In the first step, we verify that the data is
indeed linear. Linear regression demands that the data show linearity. We can quickly check
for linearity by plotting out the data. The slide shows an example scatter plot of spending
versus income for segment 1 with a dashed line superimposed over the data to estimate the
resulting relationship.

By examining the plot, we can quickly confirm to the linearity of the data, as evidenced by the
nearness of the data points in the dashed line we inserted in the figure. Had the points had a U
shape or other non-linear pattern, we would have to apply non-linear regression techniques.

In the second step, we launch the Data Analysis function within Microsoft Excel by clicking on
the Data tab and then selecting Data Analysis. Clicking on Data Analysis will reveal the Data
Analysis dialog box. We scroll down the various data analysis tools, select Regression, and then
click OK. In step 4, we input the regression data. Highlight the spending data in the
spreadsheet to input data into the Input Y Range box. We highlight spending because it
represents the dependent variable. Highlight the Income and Age columns to input data into
the Input X range box. Include the labels at the top of the columns-- Spending, Income, Age--
once selecting the data. Check the Labels box to let Excel know that labels are included in the
selection.

Do not check the Constant Equals 0 box, because we don't yet know that a regression constant
is 0 or not.

Check the Confidence Level box and enter 95% in the percentage box to indicate that we're
using a standard 95% confidence level and then click OK. We now interpret the regression
results.

Excel will open a new tab entitled Summary Output with the results of the regression analysis.
Excel displays the results in three tables—regression statistics, ANOVA, or Analysis of Variance,
and Coefficients. The primary statistic of interest in the first table is the r squared value.

The r squared value is also called the coefficient of determination and varies from 0 to 1. r
squared represents the degree to which the independent values explain the estimated
function-- in this case, a line through the data. if they explained that relationship perfectly in
that all the data points lie directly on the line, then r squared is equal to 1. If no relationship
exists, then r squared is equal to zero. In well-defined situations, such as scientific application
using precise instrumentation, r squared values can be very, very high-- sometimes 0.9 or
greater. In less manageable situations, such as social science studies, r squared values can be
small, such as 0.3. In most marketing research applications, values of r squared fall between
those two extremes, often near 0.6. Using the method described, we obtain the regression
analysis equation shown in the slide, which expresses spending as a function of income. In our
case, spending is described as a constant representing the y-intercept, 449.339, plus a
coefficient, 0.290749, multiplied by income. In addition to the intercept and coefficient for
income, Excel provides statistics data, including the standard error t stat value and p value. The
standard error is an estimate of the standard deviation of the coefficient.

The t stat is the coefficient divided by the standard error. We can think of the standard error as
a measure of the precision with which the regression coefficient is measured. Statistically
significant coefficients are large compared to 0. To determine if the value is large enough,
Excel compares the t statistic with values in the student's t distribution to calculate the p value.
The p value is the probability of encountering an equal t value in a collection of random data in
which the variable had no effect, also known as the null hypothesis. Marking researchers
generally regard 5% or less as the generally accepted point at which to reject the null
hypothesis.

With a p value of 5%, we have only a 5% chance that the results would come from a random
distribution. Of course, alternatively, we can state that with 95% probability that the variable
does indeed affect the model. In the case of our automotive example, our p value of only 2%
for the income coefficient does indeed satisfy the 5% cutoff, so we can state that the income
variable makes a significant contribution to the model.

We repeat the process for the other two segments-- that's segment 2 and segment 3-- and get
the regression coefficients shown in the slide. From the data, we observe that spending
behavior increases with personal income in all three segments, but at different rates.

Segmenting the market into the three segments allows us to pinpoint estimated spending
levels more accurately than if we had aggregated all buyers into one mass market.

I stated earlier, cross tab and regression-based techniques are examples of a priori techniques.
We now turn our attention to post hoc techniques. One very popular type of post hoc
technique is cluster analysis. Different types of cluster analysis techniques exist, but all have
two aspects in common. First, they all use a numerically-based index to indicate the degree of
similarity of two individuals. Second, all use the index to group individuals into homogeneous
segments using a defined clustering process. I show in this slide, we can choose from two types
of clustering methods. The first type is called hierarchical clustering. Hierarchical clustering
groups differently, forming it into a hierarchy from a top level to lower levels-- which is actually
called divisive hierarchical clustering-- and from the bottom up, called agglomerative
hierarchical clustering.

The result of hierarchical methods is a hierarchical structure similar to a family tree called a
dendrogram. Sometimes, they also call that a tree diagram. In dendrograms, roots branch off
into two branches, which in turn branch off into further branches, and so on. The second type
of clustering processes is called partitioning clustering. Partitioning clustering constructs
clusters by maximizing specific criteria. Ward's method is a popular example of agglomerative
hierarchical clustering. In Ward's, we start with individual elements and merge them together--
i.e. combine them-- into clusters. K-means is a popular example of partitioning clustering. In K-
means, we specify k-- the number of final clusters to expect-- and run the K-means algorithm.
The algorithm consists of three steps which continue to iterate until a stable solution is
reached. A stable solution is reached when individuals converge into specific groups and cease
to change groups. The first step in the algorithm is to determine the centroid coordinates. The
centroid coordinates define the location of the center of the system as calculated using a
weighted mean, similar to defining a center of mass in physics. Second, we determine the
distance of each individual object to the centric coordinates. Third, we form groups based on
the shortest distance from the individual object to the centroid. The mathematics behind
cluster analysis techniques can be difficult and time consuming to render through a tool like
Microsoft Excel. Therefore, we recommend using the Cluster Analysis functions built into
commercial statistical software packages instead.

Conjoint-based segmentation n is a post hoc predictive technique. The conjoint analysis

process reduces preferences for certain goods and services into the worth that particular
attributes hold for individuals. We sometimes call that a part worth. We then use the part
worth to segment the market. Conjoint-based segmentation holds the formidable advantage
that the resulting segments represent demonstrative preferences held by different groups in
the market.

This slide shows the conjoint analysis process for segmentation. We start by defining the
attributes. Attributes are characteristics of the company's product or service that customers
find relevant. We combine the attributes to form bundles. Bundles are different variations of
the product or service for customers to evaluate. In the data collection step, we gather
customer feedback on the bundles. Using the conjoint analysis process, we calculate the part
worth values that customers hold for the attributes. We could then apply that knowledge to
execute marketing programs, such as campaigns.

Many other market segmentation techniques exist to suit different conditions that marketers
might experience. Again, due to the advanced nature o the mathematics behind the models,
we recommend the use of commercial statistical software packages, such as SAS or SPSS, to
execute the techniques.

Just a handful of the techniques-- you can look at AID, CHAID, Cart, Logit, MNL, and
Overlapping techniques. AID, or Automatic Interaction Detection, it's similar to Ward's method
in that it also produces dendrograms. Unlike Ward's, though, it divides elements in a top down
fashion, not bottom up like Ward's does, which can be an advantage when you're trying to
discover underlying interactions among variables. CHAID is an extension of the AID technique,
which uses chi-square statistical techniques to select predictive variables. Cart extends AID and
CHAID by using regression analysis to further split each division into subdivision. Logit
segmentation-- also called multi-nomial logit, or MNL-- segments markets based on individual's
likelihoods to choose to purchase a good or service. In overlapping segments, we use
assignment weights to spread an individual across multiple segments. Again, these are just a
few of the many, many market segmentation techniques. We encourage the viewer to explore
market segmentation using one or more of the techniques shown in this video.

In this module, we covered an overview of market segmentation, targeting, and positioning,

citing the examples of the so-called STP approach. We also showed a summary of the different
segmentation techniques, introducing how the world of segmentation is split into a priori and
post hoc techniques and descriptive and predictive methods. We closed the module by
providing examples of several popular a priori and post hoc segmentation techniques.

Case Study: Market Segmentation, Pets and Pet Food Market

You are the marketing manager for Acme Dog Nutrition, an organic,
gluten-free food for active dogs.  You believe that not all dog owners
are the same. You seek to identify groups among dog owners, with the
objective of finding the group(s) who will appreciate the extra care and
quality found in every kernel of Acme Dog Nutrition. To that end, you
conduct a market survey using a 7-point Likert scale, asking each
respondent to state their agreement from 1 (strongly disagree) to 4
(neutral) to 7 (strongly agree). The statements are:

 S1: It is important for me to buy dog food that prevents canine cavities
 S2: I like dog food that gives my dog a shiny coat
 S3: Dog food should strengthen gums
 S4: Dog food should make my dog's breath fresher
 S5: It is not a priority for me that dog food prevent tooth decay or
cavitiies (reverse coded)
 S6: When I buy dog food, I look for food that gives my dog shiny teeth

You also collect age and gender data for use in later research. The
dataset, shown below, includes one row for the data from each
respondent. The first column shows the respondent number. The next
six columns show the responses to the market survey for statements
S1 – S6. The next three columns show the respondent’s age as an
integer, the age category (twenties, thirties, forties, etc.), and gender
(male or female). Note that the dataset consists of only 12
observations. Normally, we would record more observations, in
keeping with marketing research sample size calculations, and
certainly gather at least 20 observations. We reduced the number of
observations in this case to make the solution process easier.
Resuelto por cluster analysis método de Johnson
In this module, we cover the objectives to use when selecting segments to target, the
strategies to adopt when going to market with one or more segments, and how to market to
multiple segments.

To maximize potential revenue and minimize cost and thus increase profitability, we select
segments to target by maximizing three criteria, potential, alignment, and marketability.

In potential, we want to maximize profitability by targeting segments that have significant

financial potential. Therefore we seek segments which are large and growing, because they
can deliver more revenue than those which are small and shrinking. For example, the digital
entertainment market is a financially attractive market to target because it's large and
growing.

Step two is alignment. The products and services associated with the selected segment should
be corresponding or aligning with the company's mission, resources, and capabilities to
minimize the cost of entering the segment.

Entering new segments, even if they're large and growing, is risky for companies if they do not
align with the organization's competencies. For example, Hewlett Packard tried unsuccessfully
to enter the market for people wanting tablet devices with its Slate tablet in 2011. Its
capabilities were no match for rival tablet company Apple.

Step three is marketability. In marketability, the segments must be accessible, distinct, and
have the potential of responding favorably to our offering's value proposition. Here,
"accessible" means the ability to reach customers with messages. By "distinct," we mean that
different segments respond differently to marketing efforts. For example, cosmetics and
beauty products giant L'Oreal targets specific consumer markets with its Garnier and
Maybelline brands and to hair salons with its Redken brand products.

The selection of target segments plays a major role in an organization's market and product
service strategy. Organizations can apply one of five approaches to targeting depending on
their corporate objectives. In single-segment concentration, some companies choose to
concentrate their efforts on one specific market segment with one specific product or service.

The advantage of this approach is the focus that organizations can render on their market or
service. The disadvantage of this approach is that the company is exposed to market changes
in demand for the limited offering. For example, cosmetics maker Bare Essentials originally
only sold their Bare Minerals line of mineral-based cosmetics to the market of women who
prefer natural makeup.

In selective specialization, organizations market to several different segments, offering

different products or services to each. In this approach, each segment is essentially
independent from the rest, and sometimes no synergies exist. This approach is often the result
of mergers and acquisitions. The advantage of this approach is the potential profitability
additional segments and products can bring. The disadvantage is the lack of synergy among the
segments, making long-term strategy difficult. For example, software technology company
Selectica sells two different software product lines, sales configuration software and contract
management software, to two distinct markets with no significant overlap.

In product/service specialization, organizations specialize in particular products and services

and market those products or services to multiple segments. Companies using this type of
specialization can gain impressive knowledge and expertise in delivering their products and
services. The advantage of this specialization is the expertise the firm acquires. The
disadvantage is the exposure that the company faces if the product or service falls out of favor.
For example, the Starwood hotel chain specializes in delivering hotel lodging services to a
variety of different travelers.

In market specialization, organizations choose to specialize in a specific market segment, often

selling a wide variety of products and services to that segment. The advantage of this approach
is the expertise this specialization provides for this segment. The disadvantage is the exposure
the company faces if the market segment suffers a downturn. For example, American Hospital
Supply markets a wide variety of medical equipment and other medical supplies to hospitals
and other health care facilities.

In the full market coverage strategy, organizations serve multiple segments with multiple
products or services. The approach works best for very, very large organizations due to the
significant resources required. The advantage of this approach is the potential revenue it can
provide due to the wide span of operations. The disadvantage is the difficulty of managing
multiple products and services and multiple markets simultaneously. For example, enterprise
software vendor Oracle markets more than 100 different products to more than 20 different
industries.

We recommend selecting the segment specialization approach for a particular organization by

applying the principles of potential, alignment, and marketability discussed earlier.

Now that we've identified potential segments in the market and selected the segments to
target, we turn our attention to implementing the results of our market segmentation efforts
to market to those segments.

In this section, we discuss several different methods to market to target segments depending
on the organization's objectives. We start with full marketing mix campaigns. Here, many
organizations market their products and services using the complete marketing mix, product,
price, place, promotion. For example, perfume and luxury goods maker Chanel applies all of
the four P's when marking its perfume products.

Next is direct marketing campaigns. Companies using direct marketing techniques leverage
customer databases to sell directly to their customers. In the past, direct marketing would
consist of print catalogs being sent to specific lists of people. Today, print catalogs have largely
been replaced by online sites, but the approach is the same. For example, online retailer
Amazon.com tracks individual customer purchases and recommends related products to gain
incremental revenue. Amazon.com tells us that quote, unquote, "others who have purchased x
also purchased y."

For website marketing campaigns, many companies apply self-selection techniques when
developing website navigation. In self-selection, customers select their own segment based on
questions introduced on the website's homepage or other area. Customers then navigate to
the relevant section of the website dealing with their particular segment. For example,
networking giant Cisco includes navigation on its site to let its three target segments, large
businesses, mid-size businesses, and small businesses/consumers, help them find the products
relevant to each one of those three markets.

Retail marketing has to do with retail stores carrying hundreds if not thousands of different
goods, all for sale. Stores index the goods using something called Stock Keeping Units or
"skews," SKUs. Retailers address segmentation by displaying their broad assortment of SKUs
on accessible shelves and displays. By displaying the goods in this way, customers can perform
self-selectionand choose the product that best meets their needs. For example, a home
improvement warehouse store, the Home Depot, stocks multiple brands of popular categories
together to cater to virtually every segment. The paint aisle, for example, contains dozens of
different brands at different quality levels and price points, from inexpensive basic paint that's
probably less than $10 a gallon to premium Ralph Lauren paint, retailing for over $40 a gallon.

In this module we covered the objectives to use when selecting segments to target, the
strategies to adopt when going to market with one of those segments, and how to market to
multiple segments.

CASE STUDY: Market Segmentation: Targeting: Cosmetics

Industry
You are the marketing manager for Acme Cosmetics, a (fictitious)
manufacturer and seller of hair color and other cosmetic products.
Acme Cosmetics is a fairly young, small company with limited
resources. Acme faces major brands as competitors, such as Clairol,
L’Oreal, and Revlon. Acme needs to decide which market segment(s)
it wishes to target with its products.

Acme has identified four potential segments within the market for hair
color products. Acme has paired up potential Acme Cosmetics
products for each of the four segments:
3° Course: Marketing Analytics: Products, Distribution and
Sales
In this module, we cover several areas around conjoint analysis. We start with reviewing some
basic terminology around conjoint analysis. We then explain the conjoint analysis process,
demonstrating it with an example. We end the module by examining some of the many, many
applications of conjoint analysis.

Conjoint analysis uses specific terminology. We review some of the basic terms here. We start
with attributes. When we speak of attributes in conjoint analysis, we're referring to the
characteristics consumers consider when evaluating products and services. For example,
consumers shopping for tablet devices will consider operating systems, screen sizes, and
battery life. Next is attribute levels. Attributes can be present in various degrees called levels.
In our tablet example, consumers could consider the attribute of screen size in different levels,
10 inch, 7 inch, et cetera. Next is bundles. In conjoint analysis we consider products and
services as bundles of attributes. Conjoint analysis itself is a technique to examine the trade-
offs that consumers make to determine marketable combinations, or bundles, of attributes at
different levels . For part-worths, conjoint analysis decomposes overall preferences into values
that designate the utility, or usefulness, or worth of particular features. The conjoint analysis
approach calls these utility values part-worths. We close this slide with the term profiles.
Profiles are specific bundles preferred by customer segments. We'll be using this nomenclature
throughout the class.

This slide shows an overview of the conjoint analysis technique. We'll discuss each step in turn
and then demonstrate the technique with an example. First we prepare for conjoint. We
prepare for the conjoint analysis by identifying the evaluation attributes, assigning different
levels to those attributes, and forming bundles using combinations of the different attributes
at the different levels. Second is collecting the preference data. We're going to ask consumers
to state their preference for each bundle and then record the data. And the third step, we
code the data for analysis. We prepare the data for analysis by coding it in a special form for
ease of computation. Number four, we calculate the attribute part-worths by conducting that
conjoined execution, and then calculating the preference consumers have for each attribute,
which is called a part-worth. In step five, we apply the conjoint results. We interpret those
results of the analysis and apply them for marketing purposes. For example, we might use the
result to investigate possible market segmentation, or to estimate market sizing using a market
simulation technique.

In the preparation step, we identify the evaluation attributes, select the different levels
required for each attribute and then form bundles, what you call sort of candidate products, if
you will, for evaluation, by combining different levels of attributes. The figure on this slide
shows an overview. We start by identifying the evaluation attributes.

We recommend starting the process by reviewing available consumer evaluation sources,

including general sources and specialty sources, and then supplementing that information with
consumer surveys if needed. Having identified the attributes, we select the levels for the
attributes where we can leverage the information we learned from the consumer evaluation
sources.

In the third step, we form candidate bundles where we combine the attributes at various levels
to form bundles.

We demonstrate the conjoint analysis process with an example. Suppose we want to conduct a
conjoint analysis on behalf of Acme Espresso Machines, a fictitious maker of premium coffee
makers. To start the process, we would get a sense of the attributes consumers consider when
deciding on a new espresso machine to purchase. Often we'll want to confirm our information
by reaching out to consumers with surveys like that shown on this slide. The survey asked
respondents when purchasing an espresso machine, how important are the following
attributes? The figure shows a typical sample with entries for each of the four valuation
attributes included in the survey.
The survey examines the importance of those four attributes. The first attribute is the speed of
the machine as measured by the number of minutes the machine takes to make its drinks. The
second attribute is the capacity as measured by the quantity of liquid in cups, ounces, or liters
the machine produces in each cycle. The third attribute is price as measured by the
manufacturer's suggested retail price, or MSRP, for the machine. The fourth attribute is the
length of the power cord as measured in inches, feet, or meters. We analyze the results of the
survey and find out that speed, capacity, and price consistently rate as important or very
important, but that respondents do not find that cord length is important. Therefore, we
proceed with the conjoint analysis using three primary attributes, speed, capacity, and price.

Having determined the primary evaluation attributes, we need to select the levels for each.
Here we can apply our knowledge of espresso machines gained from our study in consumer
evaluation sources to develop the levels shown in the top chart. In the top chart we assign two
levels to each attribute. For example, we assigned two levels to speed, with Level 1 indicating
one minute or less, and Level 2 indicating times greater than one minute. In addition to the
numerically described attributes described in our example, we can also include non-numeric
values. For example, if respondents indicated color was an important attribute, we can include
it in our analysis.

To include non-numeric values, we'll need to assign codes to each level of attribute for
computational purposes. For example, we can code the non-numeric attribute of color as
shown in the bottom of the chart. In the bottom chart, we assign a number, 1, 2, or 3, to each
of the possible colors.

We now form bundles which represent candidate products for us to test. We form the bundles
using the three attributes we selected, varying the levels of the attributes. Marketing
researchers often refer to the bundles as cards because researchers in the past would use
three by five index cards to represent individual bundles. Researchers would then give the
cards to respondents for them to rate their preferences for each one. Our example includes
three attributes of two levels each, so we'll need 2 the power of 3 cards, or 8 cards as shown in
the figure. We now move on to the data collection step where we collect preference data for
the cards we created earlier.

We begin by selecting the type of technique we'll use to collect the data. We review three
commonly used techniques in this section. The first data collection technique we discuss in this
section is called pairwise comparison. In the pairwise comparison technique, respondents
compare pairs of options. In conjoint analysis, respondents compare two different cards and
tell us which one they prefer. Pairwise comparison has advantages and disadvantages relative
to other approaches. As an advantage, some respondents find pairwise comparison easier than
ranking. In ranking, researchers ask respondents to sort their choices in order of preference.

Many respondents find pairwise comparison easier because they only deal with two choices at
a time rather than the many simultaneous choices required for ranking. As a disadvantage,
pairwise comparison requires many, many comparisons to determine the relative preferences
for multiple items. We give an example of pairwise comparison on the next few slides.

The second data collection technique is called rank ordering. In this technique, we provide all
cards at once to the respondent, and ask the respondent to rank them in order of preference
from first choice to last choice. The advantage of rank ordering is speed. For small numbers of
cards, respondents can rank the cards faster than in pairwise comparison. But for a large
number of cards, the complexity ranking 128, or 256, or 1,048 cards can prove complex for
some respondents.

The third data collection technique is the rating scale. In the rating scale technique, we ask
respondents to rate each choice on an absolute scale such as 1 to 5, 1 to 10, or 1 to 100, where
1 indicates a very, very low preference, and 100 indicates a very, very high preference.

The rating scale technique enjoys several advantages. First, respondents can find it easier to
rate each alternative independently than comparing all possible choices and being asked to
rank them. Second, the technique simplifies computation using common spreadsheet tools
such as Microsoft Excel. One disadvantage with the scale is that we must be careful to explain
the rating levels to ensure consistency to make sure a 3 rating means the same thing to
everybody. And we'll discuss rating guidelines more in the next few slides.

This figure shows a typical pairwise comparison survey question. Respondents indicate their
preference for the left card, the right card, or their indifference to either card by marking the
relevant section on the form. The left card, card number 1, represents a candidate espresso
machine with fast speed, S1, small capacity, C1, and small price, P1.

In shorthand, we will refer to card number 1 as card number 1, S1, C1, P1. Similarly we can
express the right card as card 7, S2, C2, P1.

In the card showing the figure, the respondent preferred card number 1, so she marked her
preference on the left side of the form.

We now can study the results of several pairwise comparisons to gain an understanding of the
overall rankings of the various candidate choices. For example, the figure shows a typical
progression of pairwise comparisons and how we can interpret the ultimate ranking of choices
by the respondent. At each step, we can see how the respondent makes their choice clear,
leading to a final ranking. In our example, the series of choices made during pairwise
comparison results in a rank order of card 2 as number 1, card 3 as number 2, and card 1 as
number 3. When using the rating scale data collection technique, we recommend providing
guidance to respondents on how they should assign ratings to choices. The figure shows a
sample rating scale guidance tool for a scale of 1 to 5, 5 being best. The guidelines are fairly
consistent with the five-star rating system used on amazon.com rating reviews.

This slide shows the result of our data collection efforts for one individual. The first figure
shows preference data for each card along with the descriptions for each card, speed, capacity,
and price levels. In the data collection system, we used the rating scale system and asked
respondents to rate each card from 1 to 5, 5 being best. The second figure shows sample
identifying information we can use later for demographic, geographic, behavioral, and
psychographic segmentation.

To make our analysis run smoothly in computer-based tools such as Microsoft Excel, we need
to prepare the data for analysis by coding it in a special form. The coding includes two steps,
converting the data into binary form and removing of redundant data. The figure provides an
overview. We'll go over the details in the next slide.

We start by coding the data into binary form. Binary form allows only 0s and 1s. We used two
columns to represent attributes with two levels. We assign two levels to the attribute speed.
We'll designate Speed 1 as the first level and Speed 2 as the second level. We assign a 1 to
each true entry and 0 to each false entry. We repeat the process with capacity and price. The
top chart shows the data converted into binary form. For example, an espresso machine which
completes the preparation of its drinks in under 60 seconds would be coded as Speed 1 equals
1, and Speed 2 equal 0.

We code it as Speed 1 equals 1 because we have defined Speed 1 to indicate fast speeds. If
Speed 1 equals 1, then Speed 2 must equal 0 because our espresso machine cannot be both
slow and fast at the same time.

Similarly, this figure shows coded values for capacity, Cap. 1, Cap. 2, and price, Price 1 and
Price 2. We do not code preference because it represents a ratio. In this case, a rating based on
a scale of 1 to 5. We can extend the process from two levels, as in our example, to as many
levels as you wish. For example, the chart on the bottom shows a sample coding for three
possibilities for color, red, blue, and green. We can code the three levels with three columns.
In our example, Card A represents the product in a red color, Card B in blue, and Card C in
green.

In our espresso machine, the observant reader might wonder, well wait a minute, the data
here appears redundant. If Speed 1 equals 1, then Speed 2 must equal 0. Will this redundancy
cause a problem during computation, like when using Microsoft Excel? And indeed you are
correct. This is referred to as linear dependency. In regression analysis, we cannot allow one
independent variable to be perfectly predictable on the state of other predictable variables. To
resolve linear dependency problem, we simply omit one of the columns for each attribute. In
this case, we only need N minus 1 columns to express all the possible levels of the attribute
where N is the number of levels.

Because a redundant column for each attribute is completely dependent on the remaining
columns, we do not actually lose any information when we remove one column.

This figure on the slide shows the revised binary coding, for example, with one column
emoved for each attribute. We now calculate the preference consumers have for each
attribute, called a part-worth, using multiple regression analysis. The multiple regression
process fits a function that approximates the data for multiple variables, in our case, speed,
capacity, and price. The process fits a function by minimizing the sum of the squares of the
errors. The errors are discrepancies between the fitted curve and the given data. Just as we did
in chapter three, we can execute regression analysis using the regression function provided in
Microsoft Excel's set of data analysis functions. To launch data analysis, select the Data menu
tab, and then select Data Analysis in the area below the tab. The figure on the left shows a
simplified diagram of the process. And this description only provides general guidelines. The
exact procedure and layout will depend on the version of Excel that you're using. Once we
select Data Analysis, Excel presents us with the Regression dialog box shown on the right.
Select the Preference Data for Input Y because it represents our dependent variable.

For Input X, we select the three columns of data, speed, capacity, and price, because they
represent independent variables. Again, you're selecting three columns of data at the same
time. Keep the Constant equals Zero box unchecked because we'll have to evaluate our
constant for the Y-intercept. Click OK once you've got all the data entered. Microsoft Excel will
output a summary output table, a portion of which is shown in the table on the top. The
regression analysis indicates that our constant is 2.0 and our attribute coefficients for A1, A2,
and A3 are 1.75, negative-0.75, and 1.25 respectively. We plug-in the values for the constant in
the A1, A2, and A3 coefficients to arrive at the following preference equation. Preference is
equal to a constant plus A1 times Speed 1 plus A2 times Capacity 1 plus A3 times Price 1. Or
plugging in the values, you can also say Preference equals 2.0 plus 1.75 times Speed 1 minus
0.75 times Capacity 1 plus 1.25 times Price 1. The coefficients represent the utility the
respondent places on the attributes. Because A1, the coefficient of speed, is relatively large,
we assert that the respondent places a pretty high value on speed when selecting an espresso
machine.

The positive sign plus 1.75 indicates that the respondent prefers Speed 1, the fast machine
over the alternative, Speed 2, the slow machine. The negative sign in front of the coefficient
for Capacity 1, which is A2, the coefficient, shows that the respondent actually holds a
preference against the Capacity 1 machine, and instead they prefer the larger machine, which
is Capacity 2. The positive coefficient for A3, on the other hand, indicates a respondent
preference for the lower priced machine, Price 1, over the higher priced unit, Price 2.

In the final step, we interpret the results of the conjoint analysis, applying it for marketing
purposes. For example, we might use the results to investigate possible market segmentation,
or to estimate market share using market simulation. The figure at the top of the slide provides
an overview. We can correlate the data found in the analysis against the respondent's
segmentation data, demographic, geographic, whatever. The correlation will guide us and
segmenting the market, first in terms of identifying segments, and second in terms of
determining the messages for each segment. For example, suppose we asked each respond to
identify the purpose for which they intend to use the espresso machine, i.e. applying
behavioral segmentation during our day gathering process. We might discover that the
segment that indicates that quote-unquote, the machine will be "used at work" will have a
high part-worth utility for speed. Therefore, in our marketing communications to the work
segment we're going to emphasize the machine's speed. If sufficient demand exists, we might
even develop a special high-speed machine dedicated to that segment. We can also apply
conjoint analysis to estimate market share for new products and services. To do this we build
market simulators. We can think of market simulators as the collective voice of hundreds or
maybe even thousands of respondents with their preferences stored in a conjoint analysis
database. For example, if we plan to come out with a new model of espresso machine with a
particular combination of speed, capacity, and price, we could predict how many people would
prefer such machine using our respondent preference database.

Market simulators use choice rules to estimate market share based on the calculated part-
worths of the respondents. The most straightforward rule is the first choice rule, also called he
maximum utility rule. Other more advanced approaches include logit, and Bradley-Terry-Luce,
or BTL, models.The first choice rule assumes that respondents can choose or vote for only one
product, and that one alternative captures 100% of the share for each respondent. The first
choice rule is well-suited for high-involvement purchases. For example, consumers considering
the purchase of a new home would select the home that maximizes their criteria, i.e. provides
the highest utility value.

In this section, we used Microsoft Excel to demonstrate the process for a behind-the-scenes
view. We do not, however, recommend Excel for large-scale execution of conjoint analysis
projects. Instead, we recommend the use of commercial software packages such as those by
Qualtrics, by SAS, by Sawtooth Software, or by R. To check your understanding, check to see if
you can define the basic terminology around conjoint. See if you can explain the process of
conjoint analysis to make sense event. And see if you can find examples of the applications of
conjoint analysis in your own organization.
Case Study: Product/ Service Analytics: Conjoint Analysis: Acme
Espresso Machines
You are the marketing manager for Acme Espresso Machines, a small
manufacturer of premium coffee makers. You are in a market
dominated by several large manufacturers, including Breville,
DeLonghi, Gaggia, and Rancilio. To improve Acme’s competitiveness,
you plan to conduct conjoint analysis to understand the features most
in demand and predict the adoption rate of different proposed product
variants.

For this case, we will follow the same methodology as we did in the
conjoint analysis using R lecture, solving the problem using the
statistical programming language known as R. You can also learn
more about conjoint analysis with the recommended textbook for the
course.

Just as we did in the lecture, we identify three evaluation attributes

(speed, capacity, and price) with two levels each. We define the
attributes and levels as follows:

 Speed: S1: “Fast” (machine capable of brewing coffee in under one

minute)
 Speed: S2: “Slow” (machine requires 1 minute or more to brew coffee)
 Capacity: C1: “Single-Cup” (machine makes 1 cup of espresso at a
time)
 Capacity: C2: “Multi-Cup” (machines makes multiple cups at a time)
 Price: P1: “Budget” (machine price under $300)
 Price: P2: “Premium” (machine price $300 or more)

We create candidate products by bundling together the three attributes

we selected and varying the levels of the attributes. Some marketer
researchers call the bundles “cards” because the attributes are written
down on physical cards (like 3” x 5” index cards) to show to
respondents. In this case, we have 3 attributes of 2 levels each, so we
will need 2^3 cards, or 8 cards. Having established the cards, we
collect data using the rating scale method, asking 3 respondents to
rate each candidate product bundle on a scale from 1 (poor) to 5
(outstanding). The table below shows the results.
In this module, you'll be able to understand and explain decision tree terminology and
concepts. We're going to go over and explain the applications, advantages, and disadvantages
of decision trees. And you'll be able to calculate decision tree values and interpret the results.

We can apply decision tree models to situations where we must decide among multiple
product or service development projects or other decision alternatives.

Decision trees take the form of hierarchical tree diagrams where two or more branches
representing different scenarios connect to nodes, which are connection points where the
branches meet. The notes represent decision points where we must decide on one branch or
the other. The figure on the top shows an overview of the technique for decision three models,
and you can see the five steps in that figure. We follow our brief description with an example
demonstrating its use.

Step one-- establish decision choices. We start by establishing decision choices available to the
marketer. For example, we can decide between two alternative products. One that delivers
high revenue, but involves substantial market risk. Or one that delivers lower revenues at
lower risk.

Step two-- gathering relevant data. In the next step, we must gather the data for the
alternatives, such as the amount of revenue we can expect given strong, average, and poor
scenarios of market acceptance. When the market eagerly accepts our new product or service,
we can generate significant profits. But in poor scenarios, we make meager profits or could
even lose money. Typical data to collect includes the potential revenue, the probability of that
scenario occurring-- strong, weak, or poor-- and the costs associated with the scenario.
Organizations typically apply historical data and industry information for the probability and
potential revenue data. Cost will depend on the scope of the project.

In step three, we calculate the random node values. Random nodes and decision trees
represent random selections among multiple scenarios. The marketer has no direct control
over which scenario will occur. For example, if we launch a new product it has a certain chance
of winning and a certain chance of failing. To calculate the random node values, we calculate
the expected value for each scenario reporting to that node. We calculate the expected value
by multiplying the predicted outcome of the scenario by its probability of occurring.

In step four, we calculate the decision node values. Decision nodes and decision trees
represent situations where marketers must decide on two or more alternatives based on the
data available. Unlike random nodes, marketers have full control over decision notes. In the
last step, we select the winning alternative. We select the alternative with the highest net
expected value, i.e., the total expected value less the development costs as the winning
alternatives. We're going to demonstrate this process with an example now.

The figure on the left shows a typical example. If the organization develops a new product, it
must decide whether to apply its standard development budget toward it, to use a reduced
budget in an effort to cut costs.

If it decides to enhance an existing product instead, it will simply add new features to the
product. The figure shows two types of nodes connecting the branches together-- random
nodes and decision notes.

Random nodes represent chance nodes or uncertain nodes. They reflect the random nature of
the branches reporting to the node. In our cases, we have three random notes, and those are
all identified with a letter. A-- new standard budget, B-- user reduced budget, C-- enhance an
existing product. Each one of them incorporates a random selection among three scenarios.

Strong market reaction labeled as strong, average market reaction labeled as average, and
poor market reaction labeled as poor.

The marketer doesn't have control of which scenario will occur, hence the random
designation. Decision nodes on the other hand reflect situations where marketers must decide
on two or more alternatives based on the data available.

In our case, we have two. We have developed new product on the left and development
project design on the top. In the develop new product decision node, it asks us to decide
between two alternatives.

New standard budget-- A-- and used reduced budget, or B. Unlike random nodes, marketers
have direct control over decision nodes. And the thing on the left will represent possible
scenarios as rectangles at the very, very bottom.

In our case, the used standard budget path could result in strong, average, or poor scenarios.
The figure on the right, or the table on the right, summarizes the three decision choices-- A, B,
and C.

How do we establish the decision choices? We now gather the relevant data for each choice.
The table on the left shows the data for three different scenarios for new product
development with the standard budget. And the first scenario labeled strong market
adoption--customers react strongly to the new product quickly adopting it.

The result is substantial potential revenues. And the second scenario, the market reacts in a
more typical way with an adoption rate that's average for most product launches in the
company.

And the third scenario, customers react negatively with low adoption rates and low resulting
revenue. The probabilities for the different scenarios must sum to 1.0, or 100%.
The table on the right side of the slide shows the potential revenue for three different
scenarios of new product development with reduced development funding.

The data acknowledged the effect of the reduced budget by assigning a lower probability to
the more successful outcomes. For this example, the potential revenues remain unchanged.
The table on the left shows the predicted resulting revenue for developing an enhanced
version of an existing product.

The potential revenues have reduced substantially from the revenues generated by new
products. The revenues are lower due to the existing level of penetration within the market for
the current product.

Enhanced versions of existing products do not generate the same kind of excitement and
potential revenues as new products.

The table on the right shows expected development budget plan for the projects. The standard
budget shown in the table reflects the typical amount spent during previous development
projects of similar scope. The reduced budget represents efforts to reduce costs in the
development organization.

The budget to enhance the existing product, significant less than that for a new product. The
lower budget acknowledges the decreased amount of work and risk required to enhance an
existing product.

Now that we have the data that we need, we can calculate the values for each random node.
We determine the random node values by calculating the expected value for each scenario
reporting to that node, and then adding up the expected values. The table shown in the slide
demonstrates the process for new product development projects with standard budgets. We
calculate the expected value for each scenario by multiplying the potential revenue by the
probability of the scenario occurring.

We repeat the process for each scenario and then total the expected values.

In the previous slide, we looked at the random node value calculation for Alternative 1.

In Alternative 2, we repeat the same process that we did before.

Again, multiplying the probability by the potential revenue. We repeat the process for
alternative three. Again, multiplying the probability by the potential revenue to get the
expected value, and then summing up the expected values for the three different scenarios.

In steps four and five, we calculate the value for each decision node. We designate the value of
the decision node as the highest net expected value shown is net EV in the figure of the
alternatives reporting to it. We calculate the net expected value by subtracting development
costs from each alternative. For example, for the alternative used standard budget, we had
calculated the expected value as $326,000. We know from our data gathering that the
development organization expects to spend $200,000 for this alternative. Therefore, the net
expected value is $326,000 minus $200,000 equals $126,000. We repeat the process for the
other alternatives. The figure shows an expected value for the three alternatives.

We determine the value for the decision node, develop new product, by observing that the use
standard budget alternative, or A, represents the highest net expected value. Therefore, we
assign the net expected value for use standard budget, or $126,000, to the develop new
product decision node.

We must now decide between develop new product and enhance existing product. We make
the decision by selecting the highest net expected value.

Because develop new product represents a greater net expected value-- $126,000—then
enhance existing product, or $23,000, we select develop new product. In are illustrative
example, we only considered two levels of decision nodes.

We can easily accommodate additional levels by extending the process. We recommend

preparing a hierarchical tree diagram like that shown to keep track of the net expected values
at each decision node.
Most organizations market several different types of products and services. We must decide
how to allocate investments, or resources, among the company's portfolio of products and
services. Investing the same amount for each would not make sense because we ignore the
higher potential profitability of winning products over losing ones.

Consulting organization Boston Consulting Group, or BCG, introduced its product portfolio
model for resource allocation in 1968. Despite developing many models over its lifetime, most
people know the Boston Consulting Group for its resource allocation model. In fact, many refer
to Boston Consulting Group's product portfolio resource allocation model as the quote,
unquote, "BCG model."

The objective of the framework is to promote investment into products and services that
command high market growth rates along with high relative market share. BCG defines relative
market share as the market share of a company relative to that of its principal competitors.
The framework categorizes products into four quadrants-- stars, dogs, cash cows, and question
marks-- according to the dimensions of their corresponding market growth rate and relative
market share.
We start with stars. The BCG model refers to products with high market growth and high
relative market share as stars. For example, the Apple iPhone became a star product for Apple
with rapid growth rates and high relative market share.

Next is dogs. At the opposite end of desirability, the BCG model refers to products with low
market growth and low relative market share as dogs. For example, some analysts portray the
Microsoft Millennium Edition operating system as a "dog" product due to its many technical
problems and resulting low adoption rates.

Third up is cash cows. The BCG models designates products with a relatively low market
growth rate but high relative market share as cash cows. For example, the Apple iPod digital
music player became a cash cow for Apple because of its high market share and relatively flat
market.

Fourth is question marks. The BCG model refers to products with high market growth rate but
relatively low market share as question marks. Some have criticized the BCG product portfolio
model as overly simplistic. The model relies heavily on increasing market share, which can be
expensive to achieve. In addition, the model considers market size a given. In practice, the
company might grow the overall market size. For example, analysts estimate the Apple iPhone
grew the overall size of the smart phone market.

In response to the limitations of the BCG model, some analysts point to the GE McKinsey
matrix as an alternative. The GE McKinsey matrix is similar to the BCG model in that its goal is
to allocate scarce resources by evaluating market conditions. The GE McKinsey matrix uses a
more complex methodology to arrive at its portfolio allocation recommendations, which might
result in improved distributions, but at the cost of more complexity and subjective weighting
scores.

To execute the BCG technique, we follow a five step process. First, we list out the products. In
our hypothetical example, we list them out as products A, B, C, and D. Second, we enter the
data, i.e. the market growth rates and relative market shares for each product.

Third, we assign a rating, high or low, according to the market. Assign high market growth rate
for products exceeding the average market rate of growth. Assign high relative market share
for products with market shares greater than the company's most important competitor.

Fourth, we assign a status-- star, dog, cash cow, or question mark-- according to the
combination of market growth rate and relative market share.

Then fifth, we allocate resources to each product based on its status. For example, stars will
warrant resource investment while dogs should be eliminated.

The table at the bottom shows a typical example. From the figure, we see that product A
commands a relative market share of 2.0, meaning that it holds twice the share of its principal
competitor. Product A also benefits from participating in a market with a swift growth rate of
12%. Because both the market growth rate and relative market share are strong, we identify
product A as a star and seek to invest resources into it. Product B, on the other hand, has
captured a relative market share of only 20%, or 0.2, of its principal competitor, placing it in a
weak position. In addition, the market is relatively flat, growing only 1%.

Therefore, we identify product B as a dog and recommend divesting it. The figure shows
product C with a strong 2.0 relative market share and a market with a moderate growth rate of
5%. The situation of market leadership and steady market conditions works well for producing
respectable cash flows from product C. Indeed, the BCG technique would label product C as a
cash cow and would recommend harvesting the cash to invest in product A.

Product D represents a problem. On the one hand, it is in a quickly growing market with a
robust 10% growth rate, making its prospects bright. On the other hand, it holds a relative
market share of only 0.2, placing it in a weak position in the market. The BCG technique would
identify product D as a question mark. In the case of question marks, we need to further
evaluate the situation surrounding the product to decide on the allocation of resources.

In this section, we review some basic but useful metrics for tracking sales, profitability, and
other results of products and services. We recommend applying the metrics to track how well
or how poorly the organization's products and services fare in the market.

To calculate the metrics we cover in this section, we'll need to gather the data shown in the
two table shown on the slide. The table at the top shows total revenue by month for different
products and services. The table at the bottom shows revenue in different markets for
different products and services. The different markets-- market one, market two, market
three-- represent different groups of people purchasing the same products or services.

We'll also need the costs to manufacture our products or deliver our services so that we can
calculate gross margins.

Having collected the required data, we can now apply it to assess key characteristics of the
organization's sales of its products and services. The slide shows a plot of revenue trends. We
plot out sales data over time to determine if we can assess certain trends.

The figure shows three typical trends. The first is steady rise. The sales data for product A
shows the first trend, a steady rise over time. We'll want to identify possible drivers to the
increasing sales.

Product B is declining. It shows the data demonstrating the second trend where sales decline
over time. We need to find out why. The third product, or product C, shows seasonal patterns.
The data shows that sales are strong in the winter and decrease in the summer. Such seasonal
patterns would be indicative of winter-oriented products and services, such as snow chains
and ski rental services.

Using the data we collected earlier, we can construct plots of market adoption. In the figure,
we see that product A performs significantly better than products B and C in markets one and
two, but performs poorly in market three.

Conversely, we can see that product C outperforms product A in market three. We can
conduct market surveys or even conjoint analysis to identify the attributes that make product
A such a hit in markets one and two, but less popular in market three. We can then apply what
we learned to new product development for markets one and two.

This slide shows a product success quadrant tool to analyze product service profitability in
graphical format. Using the tool, we can assess how each product contributes to organizational
profitability. In the figure, the gross margin, or GM, threshold of 50% represents a particular
organization's goals for gross margin. Different markets and organizations will have different
goals for gross margin. The four quadrant nature of the tool makes it appear similar to the
format of the Boston Consulting Group, or BCG, portfolio allocation model. Organizations
might find the product success quadrant tool to be more useful than the BCG model in
situations where market share data for competitors is not available.

On this slide, we review the tool and its usage. In the next slide, we discuss how to create the
tool in your own workplace. The tool characterizes company products and services into one of
four quadrants-- the superstar quadrant, the niche stars quadrant, the mass market quadrant,
and the concerns area quadrant. The superstars quadrant designates high levels of
profitability. The products or services in the quadrant are superstars in that they generate
significant revenue at high gross margin, resulting in robust profits for the organizations.

The niche stars quadrant designates product or services with good profitability, but relatively
low revenue. We refer to such products or services as niche stars because they're profitable
but don't generate high revenues because they're purchased by a limited audience.

The mass market quadrant designates products or services with high revenues and relatively
low profitability targeted to a mass audience. The products or services in the quadrant are
mass market in that they generate high revenues, due to the high unit sales, but at low gross
margins. Lower gross margins are often due to the presence of similar competitive products or
services, pushing down margins.

And the concerns area quadrant designates products or services with low revenues and low
gross margins. We must determine why the products or services in the quadrant are
performing so poorly. We can improve gross margins by increasing prices and/or decreasing
cost. We can improve revenue through improved promotion or distribution.

If we cannot improve the product or services revenue or gross margin, we should discontinue
it. For example, Apple reported a gross margin result of 47%-- a significantly high value for a
consumers electronics products-- on sales of $39.2 dollars in its 2012 first quarter results.

Such tremendous performance would land it squarely in the superstars quadrant.

To use the product success quadrant tool, we must calculate the gross margin for each product
or service. Product/service gross margin is defined as the financial contribution provided to the
organization by the sales of the product or service. Gross margin is typically expressed as a
percentage and is calculated by the formula of gross margin defined as the value of revenue
minus cost of goods sold divided by revenue times 100%. And that formula I just mentioned,
COGS, or cost of goods sold, represent the cost incurred in manufacturing the product or
delivering the service, and includes the cost of labor and materials to make the product as well
as other directly related costs, such as those for shipping. The table shows a convenient
tabular format to execute the product profitability tool. The figure shows entries for average
revenue--that's revenue averaged over one year or over one quarter- cost of goods sold, and
gross margin. We repeat the process for the various products or services in the organization.

Using the data in the table, we can plot the revenue and gross margin for each product or
service on the graphical format shown in the previous slide.

Early in the chapter, we discussed the ability of conjoint analysis to determine the attributes
that certain market segments prefer in our products and services. This section discuss an
alternative approach. The alternative approach applies paid search engine marketing, or SEM
tools, such as Google AdWords, to gauge respondent preference of different attributes. The
figure on the left shows the layout of the typical Google search engine results page or search.
Navigation within search products offered by Google, such as images, maps, videos, and so
forth, is shown either on the left, shown as left nav, or underneath the search box. Underneath
that are the featured ads with other ads shown on the right. Organic search results are
underneath the featured ads. We can extend Google to determine the interest level in various
product or service attributes. The image on the right demonstrates the approach. We test
three different AdWords ads to gauge respondent preferences for three different attributes.
Here, we have the example of fictitious company Acme Vacuum. In advertisement A, we're
testing the attribute of speed with our Turbo-Vortex design. We get 240 clicks and 12 buys or
purchases, indicating people are definitely interested in that kind of an attribute.

In B, or Hey Allergy Sufferers, we get 300 clicks but only 2 buys for our Hyper-HEPA filter
attribute, which indicates there's probably some disconnect between the original ad and the
actual product information. In advertisement C, or Vacuum Drapes Easily, we're testing the
attribute of accessories.

In this case, the EZ-DRAPE attachment. The test fared poorly, with only four clicks, none of
which resulted in a sale. Based on the results, we're going to summarize that speed is
something people want, that filtration is something people want, but that we need to work on
our landing page, and that accessories or attachments are not something that people want.

In this module, we covered three essential topics. In decision tree models, marketers can
select which of several different product or service development projects we want to pursue
based on the expected profitability each will provide.

In portfolio allocation, we decide how to distribute company resources among the company's
portfolio of products and services. And in the product services metric section of this module,
we showed several methods to track successful products and services using different metrics
and tools.

Case Study: Product Analytics: Resource Allocation Using the

BCG Matrix
You are the portfolio manager for Honda motor company. You have
been asked to consider the role that six Honda vehicles play in the
overall portfolio of the company. In the case, each Honda vehicle, such
as the Honda Accord, represents a different automotive category, such
as the Midsize category. The portfolio exercise asks you to consider
how the sales performance of these vehicles compares with that of
market leader Toyota for their respective categories. According to
Statista, total light vehicle sales (the entire industry) increased
approximately 11.1%. You have gathered the following 2010 sales
data for Honda, Toyota, and total sales and growth rates for six
automotive categories:
For the case study, assume that the entire industry consists of only
Honda and Toyota, that you would calculate market share by dividing
company sales for each automobile category by the total sales for that
category, and that you would calculate relative market share by
dividing the sales of Honda by those of Toyota. 

To solve the case study, calculate the market share and relative
market share and plot the data on to a Boston Consulting Group (BCG)
matrix. Follow the techniques covered in this module's lectures or the
recommended textbook.
In this module, we'll cover three important areas within distribution. We'll cover distribution
concepts and terminology that we found essential for virtually any company dealing in physical
products. We then introduce a new proprietary channel evaluation and selection model. We
close the module by discussing useful metrics for distribution.

In this section, we discuss the following types of distribution channel members-- non-internet
retailers, such as convenience stores and mass merchandisers; internet based retailers, such as
corporate websites and aggregated websites; non-retail or intermediaries, such as distributors
and wholesalers; and services based channel members, such as dealerships and internet based
services.

The figure on this slide shows different examples of non-internet retailers. Each type plays a
specific role and performs independent services for the company and the consumer. On the
next slide, we describe each one and provide examples. On this slide, we'll review several
types of non-internet retailers.

First is closeout retailers. Closeout retailers liquidate unpopular merchandise that didn't sell at
full retail prices in traditional mass merchandise stores, such as department stores. For
example, closeout retailer Big Lots features an ever-changing mix of this kind of merchandise.

Next is convenience retailers. Convenience retailers offer fast service, compared to

supermarkets, for convenience goods such as snack foods. For example, convenience store 7-
Eleven sells Big Gulp soft drinks, Slurpee drinks, and other fast food items.

Corporate retailers. Some corporations choose to manage locations owned by the corporation
itself, in addition to franchisee-owned stores, and other locations. For example, sports retailer
Nike operates Niketown retail stores in several states.

Dealerships. Dealerships specialize in motor vehicles, such as automobiles, motorcycles, and

power sports vehicles. In addition to sales to end users, they perform several other roles, such
as carrying inventory, negotiation for final price, service, and so forth. For example, Ford
supplies vehicles to about 3,100 dealers in the United States.
Franchises for products. Companies grant licenses to operate stores carrying the company's
brand and shows the operating principles to franchisees. Generally, franchisees own and
operate the stores, although many franchises include a mix of privately owned and company
owned units. For example, fast food franchise Taco Bell operates a mix of restaurants, with
80% private owned and 20% company owned.

Mass merchandisers. Mass merchandise retailers, such as department stores, sell a wide
variety of goods to end users. For example, department store Sears carries appliances,
automobile products, clothing, electronics, and many other categories.

Off-Price retailers. Off-Price retailers sell name brand merchandise for reduced prices. For
example, off-price retailer Marshalls became successful by buying manufactures discounted,
overrun, and closeout stock at a discount. The tactic allowed Marshalls to sell major brand
merchandise at prices 20% to 60% less than that of department stores, Specialty retailers.

Specialty retailers sell narrow assortments of goods to buyers looking for specific needs or
usages. Often, specialty retailers provide consulting and advice on applications for the niche
they serve. Specialty retailers will stock merchandise general stores don't carry in order to
accommodate unique customer needs. For example, specialty retailer Sunglass Hut focuses
exclusively on sunglasses and their accessories.

Here, we see two figures. On the left, we see examples of internet-based retailers, such as
aggregators, corporate sites, discount, and specialty sites. In aggregators, aggregators—they
sell multiple brands of goods. Many sell a wide variety of goods. For example, internet retailer
Amazon.com offers over 34 categories of goods on its website, such as Amazon Kindle ebooks,
cellphones, consumer electronics, and many, many more. As a testament to its selection, it
offers 76 different models of riding lawn mowers.

Corporate sites. Most consumer oriented companies maintain a corporate website to sell
directly to consumers. Companies sometimes offer unique models on their website not
available at retail stores. For example, computer maker Dell offers its computers at Best Buy,
to aggregated websites such as Amazon.com, as well as its own corporate website, Dell.com.
Ordering through Dell.com allows consumers to configure the machine to their specifications
and not be limited to the merchandise stocked at retail stores.

Discount. Discount internet retailers sell discount merchandise at discount prices. For example,
discount internet retailer Overstock.com sells housewares and other items at deeply reduced
prices. The retailer also features its online clearance center, their Clearance Bin, where
shoppers can find additional discounts.

And finally, specialty. Specially retailers focus on niche markets and categories. For example,
Tiger Direct specializes in online sales of high technology consumer products, especially
personal computers.

In this slide, we show non-retailer intermediaries. Non-retailer intermediaries generally either

assist retailers and consumer sales or sell directly to businesses. Only in rare cases do non-
retailer intermediaries sell directly to customers.

Intermediaries represent any organization involved in distribution between producers and

customers. We'll list four of them here.
First is distributors. Distributors purchase products from companies and then resell them to
businesses. Some distributors sell directly to consumers, but most do not. For example,
distributor Arrow Electronics sells to 120,000 businesses through a global network of more
than 390 locations in 53 countries.

Next is liquidators. Liquidators purchase all or most of the closeout stock of another company
and sell it to other businesses. For example, product life cycles logistics company GENCO
purchases surplus inventories of companies and liquidates them through a subsidiary, GENCO
Marketplace.

Value added resellers, or VARs, purchase products from others, add features or services to
them, and then resell the products to other businesses. Some VARs also sell to consumers.
VARs modify the products to make them more suitable for specific locations. For example,
distributor and value added reseller Tech Data launched its StreamOne Solutions Store to
optimize solutions for clients.

Next is wholesalers. Wholesalers purchase products from suppliers and then resell them,
generally in large quantities, to retailers. For example, wholesale Jacobs Trading Company sells
by the truckload to discount stores and other retailers.

Here, we talk about several types of services-based channel members. The first is company-
owned. Some businesses prefer to have their own branches instead of permitting independent
ownership by franchisees. For example, coffee retailer Starbucks operates virtually all its stores
as company-owned entities.

Next is dealerships. Dealership such as automotive, motorcycle, and [INAUDIBLE] dealerships

specialize in service at the point of sale. For example, plumbing repair franchise Roto-Rooter
operates both company-owned and franchisee-owned locations.

Internet. Organizations can deliver services over the internet where operations don't require
face to face organizations. For example, Go Daddy provides a number of internet-based
services such as hosting. Companies can operate different types and quantities of distribution
channel members depending on their goals. We identify three levels of distribution intensity to
meet those goals-- Intensive, selective, and exclusive. In intensive distribution, companies
saturate markets with their products or services. For example, cellular phone service provider
Verizon offers its cellular phones and plans in a wide variety of locations. In exclusive
distribution, companies limit themselves to only one type of retail outlet. The company often
owns and/or controls the retail outlet. For example, toolmaker Snap-On manufactures and
sells its lines of professional and grade tools exclusively through its Snap-On franchise.

Companies choose selective distribution as a middle ground between intensive and exclusive
distribution intensities. For example, fashion manufacturer Coach offers its line of leather
handbags, accessories, and other goods through only a handful of stores. This slide shows
channel members and the types of costs we can expect through distribution channel members.

The first is channel discount costs. Many retailers set their own prices for goods and services,
generally within guidelines set by manufacturers. Discounts and merchandise, such as those
for consumer sales promotions, are costs, in that they result in lower net sales amount.

The second one is Co-op advertising. Companies can choose to co-market their products or
services when advertising with distribution channel members, such as sharing the cost of a
Safeway weekly ad that features Dannon yogurt.
Logistics. Distributors expect manufactures to pay for any logistics-related costs to transport
and manage product inventory.

Market Development Funds, or MDF. Some manufactures choose to work with channel
partners to promote certain products and services, such as newly introduced offerings.
Manufacturers will prepare agreements stating the type of promotional activities channel
members will provide.

Sales Performance Incentive Funds, or SPIFs. Similar to MDF payments SPIF payments are
incentives paid by a company to a distribution channel member to promote certain products
and services. Unlike MDF payments, which get paid to the channel, SPIF payments get paid
directly to the sales people.

And the last is trade margins cost. Distribution channel members expect payments from
companies to carry their company's products and services.

Now, we talk about retail location selection. Many companies have found retail location
selection especially crucial to the success of their sales efforts. For example, Apple locates
some of its retail stores within the San Francisco Bay Area, such as San Francisco and San Jose,
as shown in the figure in the middle. Successful companies follow a three-step process for
selecting a new retail store location, as shown in the table.

We start with geographic area identification, where we identify the general geographic areas,
such as cities and towns, that contain the types of people we want to target. Marketers refer
to these areas as attractive markets. Marketing analysts often use geographic information
systems, or GIS, in conjunction with market sizing models, to find profitable general geographic
areas.

Having identified a general geographic area, the second step is to identify the set of retail
locations that will best meet the company's retail goals. Here again, we can use GIS systems, as
well as the gravity model, which we cover in the next slide.

The third step is to narrow down the set of retail locations for individual site selection. The
criteria for individual site selection will vary, depending on the company's objectives. We'll
discuss channel evaluation criteria to satisfy company objectives later.

Before the advent of GIS systems, the so-called gravity model was a popular model for
selecting the location of retail stores. The gravity model asserts that shoppers are attracted to
retail stores located with convenient access and maintaining a good image.

We use the word attracted, because the model presumes that stores pull in shoppers with a
force similar to that of gravity.

In the model, the term Convenient Access is generally interpreted as the distance from the
store to the center of a geographic area rich in potential customers. We can modify direct
distance measurements to reflect impediments to travel, such as bridges and areas of traffic.

The term Image in the model is interpreted as the size of the retail store. The model assumes
that larger stores translates to a greater image for shoppers, due to the greater variety and
lower prices larger stores offer.
The gravity model states that the probability of a store pulling in a customer is calculated by
dividing the size of a store by its distance from shoppers and then dividing the resulting
expression by the sum of simpler expressions for alternative store locations.

We can modify that by using the alpha and beta adjustment parameters, as shown in the
formula. Here, we see the formula on the right, where we see size of the alpha over distance
to the beta, all divided by the sum of the size of the alpha and distance of the beta of all the
alternative stores. Size refers to the size of the store and size of square feet or square meters.
Units of size don't matter, as long as you use consistently. Distance refers to the length in
kilometers or miles from the store to the center of the target market. Again, the units don't
matter, as long as they use consistency. Alpha is a parameter to adjust the degree of
importance the target market has for the size of the stores. The default value is one.

If we found our customers held a strong preference for large stores, we can increase alpha to
increase that's importance. In beta, similar to alpha, beta's an adjustment parameter to reflect
the degree of importance customers hold for the distance of stores. And then finally, sigma,
that's an operator that sums the expressions of all the sizes provided by distance for all the
stores in the consideration. In the next slide, we'll show an example. For example, discount
mass merchandise retailer Acme Mart, a fictitious company, plans to open a new store. Acme
Mart sells its target market in nearby small city. It has three locations from which to select,
store location A, B, and C. Store location A has a size of 5,000 square feet and is four miles
away.

Store location B has a size of 10,000 square feet and is five miles away. Store location C has a
size of 15,000 square feet and is eight miles away. We start by assuming our customers value
size and distance equally.

Therefore, we set our alpha and beta to one. We use the gravity model equations to calculate
the probability of attraction for each store, using a three-step process. In step one, we
calculate the expression, size to the alpha over distance to the beta, for each store. And we
arrive at the scores of 4.25, 2.0, and 1.88, respectively, for stores A, B, and C. In step two, we
sum the expression, size of the alpha over distance to the beta, for each store location, and
arrive at 5.13.

We continue with step three, on the next slide. Continuing our example, we move on to step
three. In step three, we evaluate the expression, size of the alpha over distance to the beta,
divided by all the sum, or sigma, of size of the alpha over distance to the beta, from all the
different stores. We calculate that for each store location and find 0.24, 0.39, and 0.37,
respectively, for the three locations. From the results, we see that Store B has the greatest
probability of customer visits, based on the gravity model. If we found that customers were
unusually sensitive to store distance, as might be the case in an urban area, we'd increase beta
to 2, for example, and re-execute the model.

The model's advantages and disadvantages. Some of its disadvantages is that people don't
always value short distances to stores. Sometimes customers will visit distant stores, if they
think the stores offer the merchandise they seek. In fact, many customers visit the outlet
stores on the outskirts of town, despite the many closer available stores, in the hopes of
finding a bargain.

Second disadvantage, not all customers want the largest possible stores. In fact, some people
want little boutiques.
And the third disadvantage, the standard form of the gravity model doesn't reflect the
implications of different modes of access, such as public transport. But the big advantage of
the gravity model is that it's fairly simplistic to use.

We're going to continue with the retail location selection. And we're at the point, now, of
identifying specific retail site selection options. And having found the general location, using
either the GS method or the gravity model, we're going to look at the individual retail location.
Each company will likely have different retailing objectives, making universal site selection
unfeasible. For example, a store that would work well for Jiffy Lube would not work well for
Kate Spade.

As we can see from the figure, we have many options available. In the next slide, we discuss
the different choices and provide examples for each. Here, we show some of the retail
location selections. We start with central business districts, or CBDs. They're unplanned
shopping areas near shopping centers. The locations work well for so-called urban brands,
such as Diesel brand jeans, in the 1990s and 2000s. Secondary business districts, or SPDs, are
similar to central business districts, but are smaller. That works well for specialty stores, such
as fashion apparel stores. Neighborhood business districts, or MBD, they're shopping areas
designed to satisfy the convenience needs of local neighborhood. We generally call MBD strip
malls, and we usually find convenience-oriented stores, like dry cleaners, in MBDs Shopping
centers or malls are centrally owned and managed shopping districts. They work well for chain
stores of major brands, such as clothing and footwear sales. Freestanding retailers, or
standalone buildings, with no adjacent retailers to share traffic. That works well for retail
environments that buyers perceive as destinations, such as specialty retailers. Agglomerated
retail areas are shopping districts which combine competing brands of one category. For
example, some buyers find the so-called auto malls, with multiple auto dealerships clustered in
one area, a convenient way to shop for a new car. Lifestyle centers feature trendy brands
associated with certain types of lifestyles, especially relatively affluent ones. The center
provide posh stores, such as Williams-Sonoma, Restoration Hardware, Pottery Barn, and so
forth. Outlet stores offer a method for manufacturers and retailers to dispose of excess
inventory, without the steep discounting of liquidation stores. For example, some outlet
centers include stores like Nordstrom Rack. In addition to the standard retail locations above,
many, many other options exist. For example, airports often sell books and magazines for long
flights, and hospitals sell flowers and other gifts to give to patients.
In this section we introduce a new proprietary channel evaluation and selection model. The
purpose of this model is to select a new retail channel member, like a new store.

We base the model in four categories; expected profit, customer acquisition, customer
retention, and customer revenue growth.

We define channel expected profit as the estimated revenue expected from the channel less
the actual costs. Channel customer acquisition is defined as the effectiveness that the channels
play in bringing new customers to the store. Channel customer retention captures the role that
distribution channels play in keeping the existing customers, ensuring they don't defect to
competitors. Channel customer revenue growth acknowledges the role that channels play in
developing new revenue streams from customers.
Marketers also call this revenue growth technique as growing share of wallet. We start with
customer acquisition criteria. We list four such criteria. For location, we covered earlier the
essential role that location plays in the selection of new stores. For example, if we had an
AM/PM convenience store, we'd want to put it near a busy intersection. For brand alignment
we want to make sure that the expectations of the brand match those of the store. For
example, luxury product manufacturer Hermes does not want to sell its goods at the local 7-
Eleven convenience store.

For physical requirements we want to make sure that the physical necessities such as parking
are available at the proposed new store. And for market-specific criteria we want to see if any
special requirements such as special types of skilled labor are available in the area. Having
acquired customers, we now have to retain them.

Look at three criteria for customer retention; support, feedback, and programs.

For support we want to assess the effectiveness of resolving customer issues with the new
store. For example, Amazon.com is known for providing good support. For feedback we want
to collect feedback from the retail stores. For example, the Container Store partnered with the
OpinionLab to collect comments from customers' use of the Container Store's online design
center tool. And for programs we want to look at the effectiveness of the customer programs
such as loyalty programs. For example, Neiman Marcus does that with its Incircle rewards
program.

In addition to growing revenue from acquiring new customers, companies can increase
revenue by growing the amount of money earned from each customer. Companies can sell
complementary goods and services to existing customers to increase customer revenue
growth. Sometimes this is called share of wallet.

Here we look at three criteria to do exactly that. The first one's consulting and guidance, where
we want to look at the effectiveness of consulting [INAUDIBLE] personnel for revenue growth.
For example, sports retailer Fleet Feet Sports specializes in providing expert guidance to
runners. And customers often buy entire running ensembles, not just shoes.

For customer-centered metrics our goal is to track revenue at the customer level. And hotel
operator Ritz Carlton does exactly that, tracking customer preferences that grow revenue. And
for channel growth we track the overall growth rate of the distribution channel itself. For
example, companies formerly sold through mass merchants, such as Montgomery Ward, to
maximize sales of its merchandise. But that's changed, right? The mass merchant distribution
channel has been shrinking due to competition from internet retail sales and other factors.

The goal of the model is to act as a structured decision-making tool for the evaluation selection
of new members such as retail stores. The input to the model include revenue and cost data as
well as the assessments of individual evaluation criteria described earlier.

The outputs from the model include expected profit as well as aggregate scores for the
customer acquisition, retention, and revenue growthabilities for each member.

To execute the model we follow a three-step procedure. First we assess individual criteria,
where we look at the scores for each criterion such as location and brand alignment.

Second, we calculate the total scores for each group of criteria. And third, we calculate the
grand total score. And we'll illustrate the process with an example.
The model uses three types of data in its calculations. The model uses financial data, such as
dollars and euros for expected profitability. The model uses evaluation data, such as ratings
from one to five for user assessments. And the model uses weights, such as 10% or 50% to
vary the importance of different criteria. Again, we'll demonstrate the different types of data
with an example.

We recommend stating clear guidelines for the rating criteria such as the guidelines shown in
the figure to ensure consistency among different reviewers. And here we can see exact
descriptions for five stars, four stars, three stars, and so forth. To calculate the expected
profitability, we must estimate the expected revenues and cost for each candidate distribution
channel member. We enter the values in the spreadsheet modeled after the figure shown in
the slide. The figure shows expected revenue for different products and services as designated
by Revenue 1 for product service 1 and revenue 2 for product serves 2.

We can expand the figure to include more products or services. Similarly, we estimate total
cost for each alternative. We complete the spreadsheet by subtracting cost from revenue to
arrive at a total profitability for each channel number. Because we don't want to mix up data
types, we need to normalize the expected profitabilities. To calculate normalized amounts we
find the sum of the expected profits for all channel members and then divide each channel
member by that sum. For example, if channel members A, B, and C generate expected profits
of $10, $20, and $30 respectively, we can add those up to arrive at a total of 10 plus 20 plus 30
equals 60. Next, we divide the profit by the sum to find normalized values of those three,
which is 10 divided by 60 is 16.6, 20 divided by 60 is 33.3, and 30 divided by 60 is 50.0% for
channel numbers A, B, and C respectively.

We look at our three categories of customer-based evaluation criteria. For each of the
evaluation criteria types we assign a rating from one to five stars assessing how well the
member achieves each criterion. For example, in location we might give it a five if it's a store
with good traffic and only a one if it's an abandoned mall with poor traffic. In addition, we
assign a weight for each criterion in the group. The weights are designated as capital letters,
such as weight and then parentheses L. And that stands for the weight for location. Weights
must total 100%. For example, we can assign a weight of 50% for location, 20% for brand
alignment, 20% for physical requirements, and 10% for market-specific criteria for a total of
100%.

To execute the process we recommend setting up a spreadsheet structure to capture the

evaluations and the weights just like we have here on the right-hand side of the slide.

We can then calculate the total scores as seen on the equation at the top, where total equals
the weight of location times location, the weight of brand alignment times brand alignment,
the weight of physical requirements times physical requirements, plus the weight of market
specific criteria or MSC times MSC. We can place those calculations in the cells within
Microsoft Excel.

We repeat the same process for the customer retention criteria and the customer revenue
growth criteria. Again, we multiply the various evaluation scores by the weights for each
category to get the total score for each channel member. We then calculate the grand total
based on the total scores from each evaluation category. The evaluation categories are
expected profit, customer acquisition, customer retention, and customer revenue growth. We
recommend building a spreadsheet model using the same structure shown in the slide. I'm
going to now demonstrate the process using a numerical example. We now demonstrate the
process using an example.

Acme Cosmetics, which is a fictitious company, manufactures and sells premium anti-wrinkle
face cream derived from a rare form of green tea. Sales at the existing retail store are doing
well. And we're looking to expand as a result. Acme Cosmetics just finished an evaluation of
three available retail store locations in its target area. It's narrowed down its choices to Store
X, Store Y, and Store Z. They've done some research and they presented the attributes in those
three candidates along with the weights that are shown for each group. And the weights that
are shown for each individual criterion within that group.

In addition to that, we can show the individual scores under each area. For example, location
was deemed as having a weight as 50%. Store X rated 80% in location because it had a great
location. Store Y was 60% because it had an average or slightly better than average location.
And Store Z was rated as only having 20% because it had a very, very poor location. All that's
under the customer acquisition group of criteria.

We calculate the subtotals for each store for each of the three evaluation criteria categories;
customer acquisition, customer retention, and customer revenue growth. To calculate the
subtotal scores we multiply the criteria by the criteria weights as we described.

We also calculate expected profitability. For example, Acme expects Store X to generate
$120,000 in revenue, abbreviated in the figure as 120 for brevity. We expect to get that for
brand number 1 of our anti-wrinkle cream that for revenue 1 is 120. Revenue 2 for brand
number 2 of our cream is 60. The store charges a rate of 50% of its total sales and costs.
Therefore, we calculate the cost associated with Store X as 50% of 120 plus 60 equals 90. We
finish the process by calculating the grand total. We calculate the grand total by multiplying
the subtotals found in each evaluation criteria subtotal.

And multiply those subtotals by the weights for those evaluation criteria category. For
example, Acme wants to emphasize expected profitability so it applies an expected rofitability
weight of 40%, shown as 0.40, and the weight or EP column by the expected profitabilities we
calculated above. Recalling that the total weights must equal 100%, Acme decides to split the
remaining 60% evenly among the three customer-related criteria, so we get 20% each. 20% for
customer acquisition, 20% for customer retention, and 20% for revenue growth. The table at
the bottom of the slide shows the suggested format for the calculations. When we do the
math, we see that the total for score X is the highest. So we pronounce it as the winner of the
evaluation given the criterion the weights selected by Acme. Now, had Acne selected different
weights, the outcome may have been different. This flexibility to accommodate different
business conditions is an important advantage of the channel evaluation and selection model
presented here.
In this lecture, we discuss different types of metrics that many marketing analysts find useful
when analyzing distribution channels. We start with metrics for multi-channel distribution,
where companies employ multiple distribution channels to reach customers.

We can track sales of company products and services through different channels, to compare
the performance of each. Marketers can use sales comparison charts to determine the
effectiveness of different types of sales channels. For example, we see the chart on the slide,
and that shows how sales vary by channel. Channel A shows retail stores' sales; Channel B,
internet stores; and Channel C, specialty stores.
The incremental channel sales chart on the slide shows an alternative approach. This slide
shows how each additional distribution channel member adds to incremental revenue. We can
use these charts to show how each channel adds to the overall company revenue.

A company selling into multiple markets, such as business and consumer markets, applied
different distribution channels to reach the different markets. Each type of distribution channel
has a set of characteristics that make it well-suited for a certain type of market.

Distribution channels selling to businesses, such as value-added resellers, or VARs, must have
the capability to modify products and services, to meet unique business demands.

Distribution channel members selling to consumers, on the other hand, such as retail stores,
must have the capability to provide easy ordering, returns, and customer support.

Here, we show an example with the networking company Cisco. It applies a multi-channel
strategy to target different markets, with different channels. Here at the top, we see Cisco's
strategy for multi-channel sales to consumers. Cisco services basic consumers through its
corporate consumer web store, through Amazon.com, and through Best Buy. It also services
it's more demanding mobile customers through its corporate consumer web store. The table at
the bottom of the slide shows Cisco's strategy for multi-channel sales to businesses.

Cisco generates the majority of its revenue from sales to businesses. , Therefore it applies a
robust set of distribution channels. Small businesses, for example, can order directly off the
Cisco.com website or from distributors. Enterprises can purchase from distributors or from the
value-added resellers, or VARs. More specialized businesses, such as service providers, and
industry specialists, such as health core organizations, order products through a value-added
reseller, due to the special requirements such organizations demand.

In this section, we cover metrics useful for tracking distribution channel effectiveness. We talk
about All Commodity Volume, or ACV; Product Category Volume, or PCV; and Category
performance Ratios, or CPR.

The All Commodity Volume, or ACV, metric measures the total sales of company products and
services in retail stores that stock the company brand, relative to total sales of all stores.

ACV is often used over a specific area, in a specific neighborhood, or city, or state. Two
formulas express ACV. The first declares ACV as a percentage. The second formula abbreviates
the expression to include only total sales of all stores carrying the company's brands.

The two formulas are distinguished by their units. The first uses percentages, the second uses
monetary terms, such as dollars and units. ACV and percentage units is just defined as total
sales of stores carrying the brand, divided by total sales of all stores.

Whereas in monetary units, it's just total sales of the stores carrying the brand. I'm going to
illustrate that metric with a numerical example.

To demonstrate ACV, Acme Cosmetics sells its products through a distribution network
consisting of two stores, Store D and Store E. The other store in the area, Store F, does not
stock Acme. Total sales of stores D, E, and F are $30,000, $20,000, and $10,000, respectively.

We calculate ACV, or All Commodity Volume, as the total sales of the stores that carry the
brand, divided by total sales of all stores. And we find that 30,000 and 20,000 divided by
30,000 and 20,000 and 10,000, for an ACV of 83.3%. The advantage of the All Commodity
Volume metric is that it provides a measure of the customer traffic through the stores that
stock the brand. It tells us if we're in the most popular stores, i.e., those with the highest sales.

The disadvantage of the metric—it doesn't tell us anything about sales in our category. That's
left for the Product Commodity Volume, that we'll discuss in the next slide. Product Category
Volume, or PCV, refines the ACV, or All Commodity Volume metric, by emphasizing sales within
the product or service category. Using the metric, marketers can understand the effectiveness
of different distribution channels in category sales. Product Category Volume is defined as the
total category sales by stores that carry the company's brands, divided by the total category
sales of all stores. And you see the formula on the slide. Total category sales by the stores
carrying the brand, over total category sales of all stores. And we'll demonstrate that in an
example in the next slide.

As we saw earlier, Acme Cosmetics sells its products through two store, Stores D and E. Stores
D and E sell $1,000 and $800 of Acme products, respectively. The other store in the area, Store
F, does not sell Acme products. Stores D, E, and F sell $1,000, $800, and $600 in the cosmetics
category, respectively. And we can calculate PCV by looking at the total category sales by all
the stores carrying the brand, divided by the total category sales of all stores, to find 1,000 plus
800 plus 0, divided by 1,000 plus 800 plus 600, for a PCV of 75%.

The advantage of the Product Category Volume metric is that it can provide an indication of
the effectiveness its channel partners have in sales within the category. The disadvantage is
that sometimes the data on category sales for the different stores can be difficult to collect.

In that case, we recommend physically visiting the stores and measuring the areas devoted to
the relevant category. We multiply those areas by the expected sales per area, such as sales
per square foot or sales per square meter, for the store, to arrive at the category sales for the
store. For example, department store JCPenney generates about $200 per square foot in its
retail stores. If JCPenney allocated 100 square feet to cosmetics, then we'd expect JCPenney to
earn $200 times 100, equals $20,000 in total sales for cosmetics.

The Category Performance Ratio is defined as the ratio of product category volume over all
commodity volume. In formula form, we set the following. That Category Performance Ratio is
Product Category Volume divided by all commodity volume. Again, we're going to explain in an
example on the next slide. Acme Cosmetics wants to know how its product category volume,
or sales in the category, for the relevant distribution channels compare to the market as a
whole. So we use the category performance ratio to compute this.

Again, the category performance ratio is product category volume over all commodity volume.
In this case, it's 75% over 83.3%, or 90.0%. This metric gives us insight into the effectiveness of
the company's distribution efforts relative to the average effectiveness of all categories.

Category performance ratios greater than one indicate that the retail stores in the company's
distribution network perform more effectively in the category than the market as a whole.

In our example, because 90% is under 100%, we can assert that the stores carrying Acme
Cosmetics demonstrate a reduced emphasis on cosmetic sales than the overall collection of
stores in the market as a whole.

In this module, we covered three important areas within distribution. We covered distribution
concepts and terminology that we found essential for virtually any company dealing in physical
products.
We then introduced a proprietary channel evaluation and selection model. And we closed the
module by discussing useful metrics for distribution.

Case Study: Distribution Analytics: Acme Cosmetics

You are the marketing manager for Acme Cosmetics. Acme
manufactures and sells a premium brand anti-wrinkle face cream
derived from a rare form of green tea. Some say that the green tea
gives the cream its unique rejuvenating powers. All you know is that
sales are strong. As a result, you have been asked to select an
additional retail location to increase sales further. The tables below
show the relevant data.
 Note:  US-English conventions are used in this course: periods (.) are
used to separate whole numbers from decimals and commas (,) are
used to separate thousands. 

To select the store with the maximum effectiveness, you will need to
build and execute the Distribution Channel Selection Model described
in the lecture and in the recommended textbook. Enter the following
weights into the model:

 Weights, General: Profit: 50%; Acquisition: 20%; Retention: 10%;

Revenue: 20%
 Weights, Acquisition: Location: 25%; Brand: 25%; Physical: 25%;
Market: 25%
 Weights, Retention: Support: 33%; Feedback: 33%; Programs: 33%
 Weights, Revenue Growth: Consulting: 33%; Metrics: 33%; Growth:
33%

To build the model, apply the following equations for each section.
Follow the format given in this module's lectures and in the
recommended textbook.

Expected Profitability:

 Profit = Revenue – Cost

Remember to normalize the profit data. To normalize the profit data,

divide the profit from each channel member by the total from all
channel member. The result will be profits for each member in
percentages rather than monetary units.
Customer Acquisition Criteria

 Total = Weight (L) * L + Weight (BA) * BA + Weight (PR) * PR +

Weight (MSC) * MSC
 Weight(L) = effectiveness of location in attracting new customers
 L = location score (given in the data)
 Weight(BA) = degree of fit between product brand and channel brand
 BA = Brand Alignment score (given in the data)
 Weight(PR) = degree to which channel meets physical needs, such as
size, garage access, etc.
 PR = Physical Requirements score (given in the data)
 Weight(MC) = degree to which channel fulfills market-specific criteria
 MC = Market=specific Criteria
Customer Retention Criteria

 Total = Weight (CS) * CS + Weight (CF) * CF + Weight (CP) * CP

 Weight(CS) = effectiveness of resolving customer issues
 CS = Customer Support
 Weight(CF) = degree of customer feedback from channel partner to
company
 CF = Customer Feedback
 Weight (CP) =effectiveness of customer loyalty programs for customer
retention
 CP = Customer Programs
Customer Revenue Growth Criteria

 Total = Weight (CAG) * CAG + Weight (CM) * CM + Weight (CG) *

CG
 Weight(CAG) = effectiveness of consulting to increase revenue per
customer
 CAG = Consulting and Guidance
 Weight (CM) = ability to track revenue at customer level
  CM = Customer-centered Metrics
 Weight (CG) = degree to which channel will grow over time
 CG = Channel Growth
Grand Total

 Total = Weight (EP) * EP + Weight (CA) * CA + Weight (CR) * CR +

Weight (RG) * RG
 Weight(EP) = weight for expected profit (given in the data)
 EP = Expected Profit
 Weight(CA) = weight for customer acquisition
 CA = Customer Acquisition
 Weight(CR) = weight for customer retention
 CR = Customer Retention
 Weight(RG) = weight for customer revenue growth
 RG = Customer Revenue Growth
In this section, we're going to review a proprietary ecommerce sales model that takes in
standard information as inputs and delivers essential information, such as the amount of sales
we can expect in the coming quarter or year, based on our proposed campaigns.

In the case of inexpensive goods and services, many merchants find it sufficient to post
detailed descriptions of their offerings on their websites. But for expensive consumer goods
and for business to business, or B to B goods and services, companies generally need to
advertise their offerings using multiple marketing campaigns.

In fact, many offerings will require multiple campaigns from the merchant before the customer
makes their decision to purchase.

In these situations, we need an ecommerce sales model. To that end we introduce a

proprietary ecommerce sales model. The model requires certain inputs, that we'll cover in the
next slide, and delivers several useful outputs, again, covered in later slides.

We start with the inputs. The sales forecast is the amount of sales revenue that the
organization expects to generate in the coming year. For example, the company might plan to
generate $40,000 in sales in the coming year. The average revenue per order, also called the
average order size, is the average amount consumers buy when they order goods and services
from the website. For segment sales splits, we acknowledge that most companies sell to
multiple market segments. We want to track the revenue each segment generates. In the
same way, we want to track the revenue each campaign generates, so it can be helpful to track
revenue generated by campaign, also known as the campaign. sales split.

With campaign conversion rate, we track the conversion rate of different campaigns, such as
direct marketing, pay per click, and so forth. The final input is the cost per response to execute
the campaigns. This is simply a matter of totaling all the costs associated with each type of
campaign. We discuss the outputs in the next slide.

The model produces three outputs. The first is sales prediction by segment. The model predicts
the amount of sales revenue we can expect to generate for each market segment. For
example, the model could predict we'll generate $100,000 in segment number one, as a result
of our ecommerce efforts. The second output is the budget required to execute those
campaigns. For example, the model could indicate that campaigns will require a campaign
budget of $20,000. And the third output is the spend to sales ratio. The inverse of this ratio,
i.e., sales over budget, represents the return on investment, or ROI, for the campaigns. For
example, the model could state that we can expect to spend about 10% of our sales amount
on marketing campaigns, to get a 10 to 1 ROI.

Several equations go in the calculations made by the model. For orders, the model calculates
the total number of orders required to generate the sales forecast by dividing the sales
forecast, in currency units such as dollars or euros, by the revenue generated by order, also in
currency units. For orders by segment, we multiply the total orders by the segment sales split,
that is, the percentage of sales predicted for each market segment to obtain the predicted
orders by segment. To calculate the number of responses, we divide the number of orders by
the conversion rate. We calculate the budget required to execute our marketing campaigns by
multiplying the number of responses by the cost per response. The cost for response can vary
by the type of campaign. So the model calculates budgets for each type of campaign
separately and then sums them together to obtain the total budget.
We determine the sales by segment by multiplying the sales forecast, which includes sales for
all segments, by the segment sales split. The model calculates the ratio of required budget, i.e.,
the marketing spending, to sales revenue by dividing the budget required to execute our
marketing campaigns by the sales we anticipate generating through our campaigns.

We now demonstrate the model, using a numeric example, a luxury electronic sales
ecommerce merchant, Acme.com, which is a fictitious company. It specializes in high-end
home theater and electronics equipment for discriminating home owners. Acme.com
estimates it'll generate $200,000 in sales over the next year, spread evenly throughout the
year. Because Acme.com specializes in high-end merchandise, it generates an average of
$1,000 in revenue per order. Acme.com sells to three segments. Segment one is early
adopters, which accounts for 50% of the total sales of Acme.com. Segments two and three are
mid-income pragmatists and value conscious shoppers, which account for 30% and 20% of
sales, respectively.

Acme.com drives ecommerce sales, using three types of campaigns. Campaign A represents its
email newsletter, which helps drive 50% of the sales. It holds a 2% conversion rate and costs
$2.20 per response to create and distribute. 35% of Acme.com sales derive from pay per click,
or PPC, advertisements, using Google AdWords. Acme.com has found a 1% conversion rate
and a cost of $1.00 per response.

Acme.com also advertises through social networking, which accounts for 25% of the sales and
holds a 1.5% conversion rate and dollar 40 cost per response, We start the model by
calculating the results for each market segment.

The figure on the slide shows the Results table for segment one. Results tables for segments
two and three would be similar. We calculate the number of orders required to make our sales
forecast by dividing the sales forecast by the average revenue per order, to get 200 orders. We
multiply the total number of orders by the segment sales split, to find the orders by segment.
If we multiply the orders by segment, by the campaign sales segment, for Campaign A, to
arrive at the number of orders for Campaign A. We repeat the process for segments two and
three.

Because campaign A has a response rate of 2%, it'll take 2000 responses to get the 40 orders
that we need. Those 2000 responses will cost us $4,400, because each response cost is $2.20.
We multiply the sales in segment one by the campaign sales split in Campaign A, to get the
sales for segment one and Campaign A. We complete the table with the budget over sales
number by dividing the budget for each campaign over the sales generated by that campaign.
We then repeat the process for segments two and three.

The table on the left of this slide summarizes the results for segment one. Once we complete
the calculations for two and three, we can summarize results of all segments, as shown on the
table on the right. This model has several advantages. First, marketers can quickly and easily
use the model to predict the orders, responses, budget, and sales, for different market
segments.

Second, we can compare the predicted results of the model with actual results, and make
corrective actions, if necessary.
Third, marketers can change parameters, such as segment sales splits, campaign sales splits,
and conversion ratios, to calibrate the model to actual behavior, to maintain accuracy over
time.

The model also has several disadvantages. First, it doesn't take competition into account.
Second, the buying habits of market segments might change over the period of study.

Indeed, such factors can definitely occur over the long period, such as one year, covered by
this model. Marketers should keep these issues in mind, when applying the model.
In this section we examine sales, profitability, and support metrics, to understand the
effectiveness of market and sales efforts. We start with sales metrics. To comprehend sales
effectiveness at different levels, we introduce a hierarchy of sales metrics, starting at a high
level with sales to entire markets, down to sales to individual customers.

We cover sales at each level in the coming slides starting with sales at the market level.
Market level sales metrics measure overall sales in a market such as market share. By
examining market level sales metrics we can assess our degree of competitiveness in the
market. We can apply several metrics to assess sales at the market level.

First is market share. To determine market share we divide the sales revenue of the company
in a market by the total revenue from that market.

Many organizations monitor this popular metric. Second is relative market share. Relative
market share emphasizes our degree of competitiveness in a chosen market. The pie chart on
the slide is one way to illustrate the market share metric. For relative market share we can use
the vertical bar chart to compare the market share with companies A and B. Next is sales at the
geography level. Many companies sell their products and services into multiple geographic
areas. Especially for international sales it's essential to monitor sales by geography. We
measure the percentage of sales by geography by dividing the sales of that area by total sales.
We can also track the growth rate by subtracting the sales into particular geography at the end
of the year from those at the beginning of the year, divided by the sales at the beginning of
year. We'll see this same type of growth rate equation in many other growth metrics.

Next is sales at segment level. In the marketing analytics course we covered the importance of
market segmentation. We can track sales metrics at the segment level to understand how
different segments respond to our offerings. Similar to sales by geography, we calculate the
sales by segment by dividing the sales and to the segment by overall sales.

We calculate the growth rate by subtracting sales at the end of the year from sales at the
beginning, divided by sales at the beginning of the year.

Here we have sales at the channel level. Tracking sales of products and services through
different distribution channels allows us to compare the effectiveness of each. Distribution
channels can include organizations such as company retail stores, general retail stores, e-
commerce sites, and direct sales forces. We track sales by channel by dividing the sales into
each channel by the overall sales. We track sales by channel by subtracting sales at the end of
the year from sales at the beginning, divided by the sales at the beginning, to get the growth
rate of the sales by channel.

Here we have sales at the brand level. Companies invest considerable time and money
developing their brands. The resulting brand equity contributes significantly to company sales.

Consumers grow to trust and prefer brands with high brand equity, such as Apple, McDonald's,
UPS, and BMW.

We can calculate both internally focused, such as sales by brand, and externally focused brand
metrics, such as brand penetration. For sales by brand we divide the sales for each brand
owned by the company as they compared to total sales. We can also calculate the degree to
which the company's brand has penetrated the market population.

In this case we divide the number of customers who have purchased the company's brand with
the number of people in the target market.

Next we have sales at the product or service level. Organizations commonly report sales at the
product or service level for various reasons. First, we want to see how sales of different
products and services compare to find out how much money want to invest in their
development. Second, we need that information for production planning. Similarly service
providers need to track demand so they can build up their services capabilities, such as training
additional service personnel. Third, many companies hold their product managers accountable
for sales of their products. So we need those levels of sales to judge their performance. We
can calculate sales at the product service level by revenue and by units. We examine unit sales
because some decisions depend on knowing the number of units. For example, many
companies monitor the cost of sales at the unit level. We can calculate the percentage of sales
revenue each product or service contributes to overall sales. To do so we divide the sales
revenue of the product or service by total sales.

We can calculate the percentage of unit sales each product or service contributes to the
overall sales by dividing the units for the product or service over total units. We also show
some sample charts that track sales by product. The pie chart on the left illustrates the
percentage of total sales contributed by each of the company's five products, A, B, C, D, and E.
The vertical bar chart on the right displays the individual sales levels for the five products.

At the bottom of the hierarchy we have sales at customer level. And I should say last, but
certainly not least, customers are essential to business operations. In fact we can use a metric
called the customer lifetime value metric to express the total sales revenue expected by
particular customers through the lifetime of their relationship with the company. The
customer lifetime value metric captures the dollar value of a customer relationship projected
into the present using the concept of net present value.

Net present value uses the time value of money to convert a future series of sales into an
equivalent value today. The time value of money acknowledges money values change over
time due to the power of compounding interest. To calculate the CLV, or Customer Lifetime
Value, we multiply the customer margin by the customer retention rate, and divide that
amount by 1 plus the discount rate minus a retention rate. Customer margin is defined as the
amount of money contributed to the organization with each sale. It's calculated by subtracting
the cost of sales, which is advertising, from sales revenue. Retention rate expresses the degree
to which the organization can keep its customers for an extended period.

It's calculated by determining the percentage of customers continuing to do business with the
company over the time period of the calculation. The discount rate states the cost of capital
companies use to discount future cash flows. The customer lifetime value can be an effective
way to measure the sales contribution at the customer level.

For your convenience we summarize the various sales metrics in the table found in the slide.
Note the many areas in which we track sales, at the market level, at the geography level, and
so forth. Tracking sales at all those various levels can offer us insight into the entire sales
process.

In this next section we examine metrics to monitor and evaluate profitability. As we did the
sales metrics section, we break profitability metrics into a hierarchy. In the case of profitability,
though, we use fewer levels. We use fewer levels because we need both revenue and cost
data to calculate profit, and most companies capture cost information only at certain levels. As
the pyramid figure on top shows many companies track cost information at the company,
channel, product service, and customer levels. In the next few slides we discuss calculating
profitability at each of the levels. The first thing we look at is profitability at the company level.

Although many people in the organization track total profitability, marketers are most often
interested in gross margin. To calculate company gross margin, we subtract the total cost of
sales from total sales. We calculate the total cost of sales by summing the total amount of
direct material, direct labor, and company overhead incurred in producing the company
products and services. Many companies compute gross margin as a percentage, which divides
the company's gross margin amount we just computed by the total sales. For example, Apple
reported a company-wide gross margin of 40.5% in the Form 10-K in 2011, which is a very
impressive amount for consumer electronic products. Now we look at profitability at the
channel level. Companies with networks of distribution channels, such as manufacturers of
consumer goods, monitor and evaluate profitability at the channel level.

As you saw in the distribution analytics section, the sale of goods to consumers involves
multiple channel members, such as distributors, wholesalers, and retailers. Each member
charges for their value-added services by marking up the product with the margin for their
channel. Each member considers the next member in the distribution chain as their, quote
unquote, "customer". Thus wholesalers consider retailers as their customers. Conversely,
retailers consider wholesalers as their suppliers. Therefore we use the terms customer and
supplier when calculating channel margin metrics.

We can calculate the price at each point in the chain using the following three formulas. The
customer selling price is equal to the supplier selling price over 1 minus the customer margin
percentage. The customer selling price is equal to the supplier selling price plus the customer
margin amount. And the supplier selling price is equal to the customer selling price minus the
customer margin amount.

But we cover those variables and equations in the next slide. We're going to continue our
discussion of profitability at the channel level. Let me talk about the equations and the
variables they use. Customer selling price is defined as the price for which the distribution
channel member sells its products to the next member in the distribution chain, i.e.

It's customer. The supplier selling price is the price that the distribution channel member pays
to acquire the product. The customer margin amount is the monetary amount, such as dollars
or euros, that the channel member charges to move the product through their channel. The
customer margin percentage is the percentage markup the channel member charges to move
the product through their channel.

We'll demonstrate profitability of the channel level through a numerical example in the next
few slides. Examples are for a retailer. So we're going to demonstrate the profitability with a
numeric example. Acme Cosmetics manufactures and sells its green tea enriched wrinkle
cream through a distribution channel consisting of a distributor, a wholesaler, and a retailer.
The retail price of the cream is $10. Each channel member expects to make money from the
product because of the value that they add. The money comes from the margin each member
takes from the retail sales of the product.

We can show how the chain of margins affects the cost for which the manufacturer must make
the product. We start with the retailer. The retailer sells the jar of Acme wrinkle cream to
consumers for $10 each. The retailer adds the value of stocking, displaying, and selling the
merchandise. In return it expects to generator a margin of 40% of the cost to its customer,i.e.
the consumer. So when we calculate the margin, the margin amount is now $4.00, 40% times
$10 is $4. Next we examine the margins for the wholesaler, when the wholesaler sells the
product to the retailer.
So we continue our discussion as it flows through the chain, and we're now at the wholesaler
level. The wholesaler supplies the cream to its customer, which is the retailer. In this case the
wholesaler acts as the supplier and the retailer acts as the customer. We can calculate the
supplier selling price, i.e. the amount the wholesaler charges the retailer for the product, by
using the supplier selling price equation. As you recall the equation said supplier selling price
equals customer selling price minus the customer margin amount. In our case it's $10 minus $4
equals $6. Now we have to calculate the margin. So the wholesaler adds value by purchasing
larger quantities of goods from various producers, warehousing them, and reselling them to
retailers. For its services it expects to generate a margin of 25% of the cost to its customer,
which is the retailer. The margin amount is this $1.50, or 25% times $6, is $1.50. Now go to
next link in the chain, which is the distributor, which sells its products to wholesalers.

We're now at the distributor level. Distributor supplies the cream to its customer, the
wholesaler. Here the distributor acts as the supplier and the wholesaler acts as the customer.

We can look at that little image on the left to kind of keep track of things. We can calculate the
supplier selling price using the supplier selling price equation, that the supplier selling price is
equal to the customer selling price minus the customer margin amount, or $6 minus $1.50 is
$4.50. The next step is to calculate the margin earned by the distributor.

The distributor adds value by distributing goods from manufacturers. Distributors differ from
wholesalers in that distributors carry many different items, whereas wholesalers typically carry
large quantities of fewer items. For its services the distributor expects to generate a margin of
20% of the cost to its customer which is the wholesaler. The margin amount is this $0.90,
which we compute by saying 20% times $4.50 is $0.90. Next up we examined profitability at
the next level or final level, manufacturing.

We now end the discussion of profitability at the channel level with the end of the chain, the
manufacturer. Manufacturer supplies the cream to its customer, the distributor. We can
calculate the supplier selling price using the equation supplier selling price equals customer
selling price minus the customer margin amount, just as we have been doing so far. Or $4.50
minus $0.90 is $3.60. In terms of margin the manufacturer adds value by making the product.

For it services the manufacturer expects to generate a margin of 50% of the cost to its
customer or the distributor. The margin amount is thus $1.65, which is 50% of $2.60.
Therefore if the manufacturer expects make the 50% margin, it must not exceed the
manufacturing cost of $1.80. Which at first seems kind of low for a $10.00 jar of wrinkle cream.

This steep reduction is common for consumer goods which pass through multiple channel
members before they reach the hands of consumers. In fact because of high channel costs
some manufactures preferred to sell with direct channels, such as company owned internet
sites which sell directly to consumers. Next up is profitability at the product or service level.
Companies monitor and analyze profitability of their products and services.

Markers measure the contribution each unit makes to profit. The contribution is defined as the
sales revenue that the unit makes less the costs incurred to make it. We call this the unit
margin. Just as with gross margin at the company level, we can express unit margins as
amounts in dollar terms or as percentages. To get the unit margin we subtract the cost per unit
from the selling price of the unit. To calculate the unit margin percentage we dividing the unit
margin amount by the selling price per unit. For example, consumer electronics review site
CNET estimated that Apple generated product level gross margins of 49% to 58% on United
States iPhone sales between April, 2010 and March, 2012. Finally we have profitability at the
customer level. Companies seeking to benefit from long term relationships with customers
calculate and monitor profitability at the customer level. The customer profit metric indicates
which customers profit organization and which do not. To calculate customer profit we
subtract the total cost to serve each customer from the revenue generated from the customer,
as shown in the equation. We can then segment our customers into three groups. High
profitability, medium profitability, and low profitability. High profitability customers represent
an essential asset so companies should reward their continued loyalty. For example, airlines
reward top level frequent flyers with free upgrades and other incentives.

We want our medium profitability customers to ascend to the high profitability level. To that
end airlines frequently remind medium loyalty program members about the perks of the top
tier elite frequent flyer programs so travelers will aspire to grow to that level.

Companies often lose money on low profitability customers. They can cost more to serve than
the customers generating in revenue. To that end many companies such as airlines reduce the
cost of service by servicing them through low cost channels, such as the internet, or by
charging extra for some services such as baggage fees.

Next up is support metrics, and we start with customer satisfaction. Many companies measure
customer satisfaction to assess how well they fulfilled customers' expectations.

We discussed the traditional metric of customer satisfaction on this slide, and an alternative
model, the Net Promoter Score, on the next slide.

For customer satisfaction many companies measure customer satisfaction as the percentage of
customers whose survey ratings of experiences with the brand exceed specified satisfaction
goals.

Many surveys use a standard five point scale from very satisfied down to very dissatisfied.
Some surveys also measure the percentage of surveyed people who indicate that they would
recommend the company to their friends. Companies find several difficulties in measuring
customer satisfaction, and applying it, to predict future customer behavior. First, many surveys
suffer from response bias. In response bias survey scores do not represent the total population
because only very irate or very pleased customers feel motivated to actually respond to a
survey. Second, satisfaction scores could increase because dissatisfied customers are leaving
the brand. And third, customer expectations could rise over time, leading to a gradual erosion
of scores. To address some of those problems some companies are adopting the Net Promoter
Score metric described in the next slide.

Here we talk about the Net Promoter Score. Frederick Reichheld developed Net Promoter
Score, or NPS, to capture the relatively complex notion of customer satisfaction in a single
number. To calculate the Net Promoter Score companies issue surveys to their customers.

The surveys ask customers how likely they are to recommend the company or brand to a
friend or a colleague. The company collects responses and divides them into three tiers,
promoters, detractors, and passives. Promoters are people who provide a score of 9 or 10, i.e.
highly recommended. Detractors are defined as customers giving a score of six or less, i.e. not
likely to recommend. Passives represent the remaining customers. They're somewhat satisfied
but not particularly enthusiastic, and they have scores of seven or eight or so. We then
calculate the Net Promoter Score by subtracting detractors from promoters. High Net
Promoter scores suggest high degrees of customer satisfaction. Conversely, low NPS score
signal trouble. Companies should monitor their NPS values over time to detect any trends in
customer satisfaction, either positive or negative. The advantage of the Net Promoter Score is
that it summarizes the complex concept of customer satisfaction in a single metric. The
disadvantage of the score is that it suffers from the same problems as traditional customer
satisfaction surveys, namely response bias, population changes due to defecting customers,
and increasing customer expectations. For example, PC Magazine reported that Apple earned
the highest Net Promoter Score in several categories according to a 2010 study.

In this module we covered several topics. We covered the consumer sales process to analyze
and understand the process for greater insight. We then introduced a proprietary ecommerce
sales module which calculates online sales campaign effectiveness. Next we reviewed a variety
of metrics to track sales, profitability, and support activities.

CASE STUDY: Sales Analytics: Acme.com Online Electronics

Sales
You are the marketing manager for Acme.com online electronics sales.
Acme.com sells premium consumer electronics goods. One hot seller
is the “3 for 3D” bundle, which includes a 50 inch Samsung AMOLED
television, wireless 3D glasses, and an advanced speaker setup for 3D
sound.

You sell to three segments:

 Segment 1: High-income early adopters. This group wants the

very latest. It is relatively price-insensitive.
 Segment 2: Mid-income pragmatists. This group waits for the
verdict of Segment A before buying.
 Segment 3: Value-conscious shoppers. This group care more
about price than about the latest features.

You drive traffic from prospective customers (prospects) to Acme.com

using three sales campaign tools:

 Campaign A: Newsletter: Online newsletters discussing new

promotions, sent to list of opt-in prospects
 Campaign B: PPC: Pay Per Click (PPC) search engine marketing
(SEM), like Google AdWords.
 Campaign C: Social Media: Facebook and Twitter accounts
discussing consumer electronics news
After analyzing historic sales performance, you assemble the data
shown in Table 1.

Note:  US-English conventions are used in this course: periods (.) are

used to separate whole numbers from decimals and commas (,) are
used to separate thousands. 

To answer the questions in this case, you will need to build and
execute the E-Commerce Sales Model described in this
module's lectures and in the recommended textbook.

To build the model, apply the following equations. Follow the format
given in the lecture and in the recommended textbook.

Equations:

 Orders = (Sales Forecast) / (Revenue / Sale) * (Segment Sales Split)

 Responses = (Orders) / (Conversion Rate) Budget = (Responses) *
(Cost per Response)
 Budget/ Sales = (Budget Requirement) / (Sales)
Definitions of Variables:

 Sales Forecast ($): Revenue forecast for quarters, typically totaled for
fiscal year (operating year of organization)
 Revenue/ Order ($): Average revenue generated per order (sale), also
known as Deal Size or Order Size
 Segment Sales Split: Percentages of sales contributed by different
market segments
 Campaign Sales Split: Percentages of sales contributed by different
sales campaigns
 Conversion Rate (%): (Completed orders) / (Responses from qualified
prospects)
 Cost per Response ($): Average cost to generate response from
prospect, to propel them toward final sale

Note:  You only have one opportunity to answer each question.

Explanation
To arrive at the correct value, we can build the ecommerce sales
model described in the lecture and in the recommended textbook, and
then look up the value in the model. Alternatively, we can calculate the
value using the following method.
We are given the equation to calculate the total number of orders as
follows:
Orders = (Sales Forecast) / (Revenue / Sale) * (Segment Sales Split)
We insert the values for segment 1:
Orders = ($200,000) / ($1000) * 0.5 = 100 orders
Explanation
To arrive at the correct value, we can build the ecommerce sales
model described in the lecture and in the recommended textbook, and
then look up the value in the model. Alternatively, we can calculate the
value using the following method.
We are given the equation to calculate the total number of orders as
follows:
Orders = (Sales Forecast) / (Revenue / Sale) * (Segment Sales Split)
We insert the values for segment 1:
Orders = ($200,000) / ($1000) * 0.5 = 100 orders
We then multiply the total number of orders by the percentage of
orders that came from Campaign A. The case data gives us the fact
that 40% of all sales come from Campaign A, so we multiply the total
number of orders by 40% to get 40 orders

Explanation
To arrive at the correct value, we can build the ecommerce sales
model described in the lecture and in the recommended textbook, and
then look up the value in the model. Alternatively, we can calculate the
value using the following method.
We are given the equation to calculate the total number of orders as
follows:
Orders = (Sales Forecast) / (Revenue / Sale) * (Segment Sales Split)
We insert the values for segment 1:
Orders = ($200,000) / ($1000) * 0.5 = 100 orders
We then multiply the total number of orders by the percentage of
orders that came from Campaign A. The case data gives us the fact
that 40% of all sales come from Campaign A, so we multiply the total
number of orders by 40% to get 40.
We then divide the number of orders that came through Campaign A
by the conversion rate for Campaign A, as specified by our given
equation:
Responses = (Orders) / (Conversion Rate)
We substitute our values into the equation:
Responses = 40 / 2.0% = 2,000 responses.

Respuesta
Correcto:
To arrive at the correct value, we can build the ecommerce sales
model described in the lecture and in the recommended textbook, and
then look up the value in the model. Alternatively, we can calculate the
value using the following method. We are given the equation to
calculate the total number of orders as follows: Orders = (Sales
Forecast) / (Revenue / Sale) * (Segment Sales Split) We insert the
values for segment 1: Orders = ($200,000) / ($1000) * 0.5 = 100 orders
We then multiply the total number of orders by the percentage of
orders that came from Campaign A. The case data gives us the fact
that 40% of all sales come from Campaign A, so we multiply the total
number of orders by 40% to get 40. We then divide the number of
orders that came through Campaign A by the conversion rate for
Campaign A, as specified by our given equation: Responses =
(Orders) / (Conversion Rate) We substitute our values into the
equation: Responses = 40 / 2.0% = 2,000 responses. Now that we
know the number of responses for segment 1 through campaign A, we
can calculate the budget to get those responses. We use the equation
given to us: Budget = (Responses) * (Cost per Response) We
substitute the values given to us into the equation: Budget (Segment 1,
Campaign A) = (2000) * $2.20 = $4,400
Explanation
To arrive at the correct value, we can build the ecommerce sales
model described in the lecture and in the recommended textbook, and
then look up the value in the model. Alternatively, we can calculate the
value using the following method.
We are given the equation to calculate the total number of orders as
follows:
Orders = (Sales Forecast) / (Revenue / Sale) * (Segment Sales Split)
We insert the values for segment 1:
Orders = ($200,000) / ($1000) * 0.5 = 100 orders
We then multiply the total number of orders by the percentage of
orders that came from Campaign A. The case data gives us the fact
that 40% of all sales come from Campaign A, so we multiply the total
number of orders by 40% to get 40.
We then divide the number of orders that came through Campaign A
by the conversion rate for Campaign A, as specified by our given
equation:
Responses = (Orders) / (Conversion Rate)
We substitute our values into the equation:
Responses = 40 / 2.0% = 2,000 responses.
Now that we know the number of responses for segment 1 through
campaign A, we can calculate the budget to get those responses. We
use the equation given to us:
Budget = (Responses) * (Cost per Response)
We substitute the values given to us into the equation:
Budget (Segment 1, Campaign A) = (2000) * $2.20 = $4,400
We can calculate the sales amount:
Sales, Segment 1, Campaign A = (Sales Forecast) * (Segment Sales
Split) * (Campaign Sales Split)
We substitute the given values into the equation: = ($200,000) * (50%)
* (40%) = $40,000
Now that we know the budget required to generate the responses to
generate revenue for segment 1 through campaign A, we can calculate
the budget/sales ratio to assess our “effectiveness” in creating those
responses. We apply the equation given to us:
Budget/ Sales = (Budget Requirement) / (Sales)
Budget/Sales = ($4400) / ($40,000) = 11.0%
4° Course: Price and promotion Analytics
 }

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.