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Chapter 6 (Offerings)
Marketing Principle #3
All Competitors React Managing
Offering-based Sustainable Competitive
Advantage
Introduction
Takeaways
“Innovation is the only way that Microsoft can keep customers happy
and competition at bay” (Ballmer)
Today, innovation is the number one strategic priority at 40% of
companies versus 19% in 2005 (BCG)
86% of senior managers believe that “innovation is more important
than cost reduction for long-term success” (Bain)
However: short-term business pressures often undermines
innovation
CEOs want returns from marketing in 6-12 months
Resources taken from long-term initiatives tohit short-term targets
Accounting practices for market-based assets impact decisions
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© Palmatier, 2017, Marketing Strategy, Palgrave. ISBN: 9781137526236.
What Is Innovation?
Innovation Rader
Captures many different ways a firm can innovate; helps define the innovation
space according to what, who, how, and where
Presence Solutions
Change where Provide a total
products are sold solution
Experience
Supply chain Change Changing who
Change supply customer the customer
Changing
how to sell to
chain Processes Customer interactions is
HO
Change
HO
customers Change
customers to
W
W
operating
processes target
Offering
Brand
(WHAT) Platform
Networking Solution
Presence Customers
(WHERE) (WHO)
Offering
(WHAT)
Brand Platform
Networking Solution
Presence Customers
(WHERE) (WHO)
Offering equity refers to the core value that the performance of the
product or service offers the customer, absent any brand or relationship
equity effects
New offerings also can help the firm acquire new customers or enter new
markets when they offer similar performance but at a lower price
Offering new and innovative products tends to enhance the firm’s brand,
even if customers don’t buy the new offering
Introduction
Takeaways
Many good products fail to achieve their set financial objectives due to
poor product launches
Initial
ideas
New Product
The concept and The design and development The validation and production The audit stage consists of
definition stage consists stage consists of product and stage consists of continued final product and product
of an initial screening of process design and development. market launch planning and assessments. It often
all potential ideas, Financial feasibility product manufacturing and includes some reflection on
concept assessment, considerations also are pertinent, process validation. It also may the previous steps.
project definition, and including testing of price points include test marketing and
feasibility assessment. and customer acceptance. evaluation of launch plans. 18
© Palmatier, 2017, Marketing Strategy, Palgrave. ISBN: 9781137526236.
Example: Tata Motors (India)
Tata Motors innovated the Nano, the cheapest car in the world, launched
in 2009 at a sale price of just $2,000
The ultimate product cost less to build and thus was affordable in the
Indian market, but perhaps even more important, it turned out to be
better suited to busy Indian traffic patterns, which require quick and
frequent maneuvering
The advantage of this strategy is that it generally does not require a new
technology or invention, and marketers thus can to take the lead in these
efforts
© Palmatier, 2017,
Marketing Strategy,
Palgrave. ISBN:
9781137526236.
(Kim and Mauborgne) 21
21
Example: Cirque du Soleil (Canada)
Cirque du Soleil raised prices and redefined their target market. Rather
than children and families, it sought to appeal to adults, couples on dates,
and business clientele
Incremental
enhancement High-End Customers
Incremental
enhancement
Low-End Customers
Time
Digital to Optical
Caller ID
MAIN STREAM CUSTOMERS
Analog to Digital
Time
(Christensen)
Source: Christensen
© Palmatier, 2017, Marketing Strategy, Palgrave. ISBN: 9781137526236. 28
New Entrants Usually Win the Battles
of Disruptive Innovations
Digital to Optical
Caller ID
MAIN STREAM CUSTOMERS
Analog to Digital
VOIP
Time
(Christensen)
© Palmatier, 2017, Marketing Strategy, Palgrave. ISBN: 9781137526236. 29
Mini-Mills Took 50% Share by Starting
with Low-End Rebar
55%
STEEL
T S TEEL --
25-30% SHE E
QUALITY
2 %
A L ST EEL – 2
TUR
STRUC
15%
%
& RODS – 8
, BAR
ANGLE
12%
R– 4%
REBA
7%
% IN TONS
(Christensen)
© Palmatier, 2017, Marketing Strategy, Palgrave. ISBN: 9781137526236. 30
Transistors Were First Used in New
Markets
Performance
Different t ub e s
Performance Vacuum
Measure
op roc essors
r
ip Mi c
M e mory ch
IC ch ip Time
s to r
Transi
Time
Non-consumers or
Non-consuming contexts
Sonotone 1952
Sony 1955 31
© Palmatier, 2017, Marketing Strategy, Palgrave. ISBN: 9781137526236.
Disruptive Innovations Occur in Either
Low-End of Existing or in New Markets
Low End Disruptions New Market Disruptions
Nucor’s steel mini-mills Bell telephone (telegraph)
Vanguard’s index mutual funds eBay online marketplace
Dell’s direct-to-customer business model Transistor radios
Why?
Cannot compete with existing, sustaining products
How it Works
In this view, a product consists of multiple attributes that together provide benefits to a customer. For example, a smartphone customer might
think about call quality, operating system, screen size, and camera quality benefits. If a firm decides to design a new smartphone, it cannot just
ask customers about what features they care about; most customers would say they wanted the best version of all the features. Instead, the firm
can simulate a trade-off: Would you rather have better camera quality or a smaller (or bigger) screen size? The trade-offs reflect how customers
actually make decisions, because few of them can afford the best options for all attributes in every product. Another basic assumption
underlying conjoint measurement is that customers cannot reliably express how they weight the separate product features when forming their
preferences. Instead, marketers need to infer these relative weights by asking for evaluations (or choices) of alternate product concepts, using a
structured process. Thus, during a conjoint exercise, rather than directly asking customers about the significance of product attributes, the
analyst uses a more realistic setting and asks customers to evaluate alternative scenarios or product profiles, each with multiple product
attributes. Then it is possible to infer the significance of each product attribute from the ratings that customers provide for each scenario,
reflecting their overall product preference. The conjoint formula is:
where P is the product bundle, comprising certain attributes; R(P) is the rating associated with product P; ij is the part-worth utility associated
with the jth level (j = 1, 2, 3, ..., kj) of the ith attribute; kj is the number of levels of attribute I; m is the number of attributes; and x ij equals 1 if the jth
level of the ith attribute is present in product P, and 0 otherwise.
With data collected from such a conjoint experiment, we can estimate the underlying value of each product attribute, or its part-worth utility
(ij). The estimated part-worth utilities from a conjoint analysis can provide the answers to many marketing questions, such as which product
configurations are optimal and how much market share an offering is likely to capture.
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DAT 6.1 Conjoint Analysis Example
Example
A smartphone manufacturer wants to design a new phone for its target demographic. The main product attributes the manufacturer
wants to focus on are camera resolution quality, screen size, and price. The manufacturer also wants to understand customers’
willingness to pay for the new smartphone. Thus, it designs a conjoint study for 250 customers to provide a product rating score (0 =
least preferred, 100 = most preferred) for eight alternative smartphones, according to their price, camera resolution, and screen size.
One of the eight products is provided here for illustration:
Price $500
Camera Resolution 5 MP
Screen size 2.5 inches
Your Rating (0 to 100, where 100 is most likely to buy):
With the rating scores from the 250 customers, the manufacturer can apply the conjoint formula and estimate the part-worth utilities
associated with each product attribute. Let’s say that our hypothetical customers, reasonably, prefer the $500 smartphone more (part-
worth = 25) than the $600 option (part-worth = 0). They also want an 8 MP smartphone (part-worth = 10) rather than a 6 MP one
(part-worth = 0) and a 6.5-inch screen (part-worth =20) more than a 5.5-inch one (part-worth = 0).
The part-worth difference between the 5.5- and 6-inch phone options (20 – 0 = 20) is twice as great as the difference between the 8
and 6 MP versions (10 – 0 = 10), so screen size appears twice as important as camera resolution quality. The part-worth difference
between the $500 and $600 smartphones was 25 (25 – 0 = 25), which implies that each part-worth unit is worth $4 ($100 = 25 units,
or 1 unit = $4). Noting that the part-worth difference between the 5.5- and 6-inch phone options was 20 units, the manufacturer can
estimate that customers are willing to pay $80 (i.e. $4 x 20 units = $80) more for a 6-inch screen than for a 5.5-inch version.
Thus, this manufacturer should produce a phone with 6 MP camera quality, a 6-inch screen size, and a price that is $80 more than the
base price of $500.
1. Design study
Select attributes and levels (range and #)
Develop bundles (< 16 optimal)
Location of Program
Cost of Program
More than 30 miles from home
More than $20,000 per year Between 10 and 30 miles from
Less than $20,000 per year Within 10 miles of home
Best product for customer 1: Less than $20,000 per year, requires more than
10/hrs/week work outside of class, between 10 and 30 miles from home, and
is a top ranked business school. Ranking is most important and is over 12
times more important than cost (< or > 20k$).
requires more requires less
less than more than than than more than 30 between 10 not top 10
within 10 miles top 10 ranked
$20,000 per $20,000 per 10hrs/week 10hrs/week miles from and 30 miles ranked
of home business school
Respondents / year year work outside of work outside of home from home business school
Attributes and Levels class class
Respondent 1 5 0 11 0 16 19 0 0 65
Respondent 2 0 35 0 6 52 0 27 0 6
Respondent 3 19 0 19 0 0 31 56 0 7
Respondent 4 3 0 0 3 23 0 10 0 70
Respondent 5 0 24 55 0 0 3 0 0 18
First choice rule: each customer selects the product that offers
him/her the highest utility among the competing alternatives
Share of preference rule: customer selects each product with a
probability that is proportional to the utility of that compared to
the total utility derived from all the products in the choice set
Logit choice rule: alternative to share rule by using an
exponential weighted utility
Resolution
© Palmatier, 2017, Marketing Strategy, Palgrave. ISBN: 9781137526236. 45
45
Agenda
Introduction
Summary
Takeaways
- $200
Objective Losses Objective Gains
+ $600
V (-)
1) Relative to reference Endowment effect: people
point value things in their possession
2) Decreasing marginal
more than when they don’t
sensitivity have the item. Effect of loss of
item is larger than the gain
3) Loss aversion
(electric car).
© Palmatier, 2017, Marketing Strategy, Palgrave. ISBN: 9781137526236. 50
Implications of Prospect Theory
Adoption is often very slow
Especially, if consumer has to give something up (endowment
effect)
Developers’ curse
Employees often use new product and integrate new features into
their offering (increases “value” of feature) as compared to
consumers who haven’t used product
Results in a 9x difference in perceived value of feature
Categories of Innovators Early Adopters Chasm Early Majority Late Majority Laggards
Product First to adopt a Perceive the Gap More pragmatic, Demands even Need the most evidence
Adopters new offering; benefits of the between such that they more evidence to persuade
actively seek new technology early must be of the product’s
new and are willing adopters convinced that functionality
technologies to buy with just and early the new product and are harder
a few references majority really works to persuade
Adapted from Moore, G.A. (2006), Crossing the Chasm: Marketing and
Selling Disruptive Products to Mainstream Customers, 1st rev. ed., (New
York: Collins Business Essentials)
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Product-Based Factors that Influence
Innovation Diffusion
Another long stream of research, starting with Everett
Rogers, shows that specific product characteristics can
capture 40–80 percent of the variation in the speed with
which offerings diffuse
Changing each of the following five factors can alter the rate
of product diffusion, all else being equal
1. Relative advantage
2. Compatibility
3. Complexity
4. Trialability
5. Observability
Positioning Strategies
Make offering compatible to existing offering
Education and simplicity are key to messaging
Free samples, reduce risk, use warranty and trial periods
Enhance visibility of users, testimonials
Innovation Imitation
Product/ parameter parameter
Technology (p) (q)
B&W TV 0.065 0.335
Color TV 0.021 0.583
Room Air conditioner 0.010 0.454
Clothes dryers 0.073 0.389
Ultrasound Imaging 0.003 0.506
CD Player 0.028 0.368
Cellular telephones 0.005 0.506
Microwave Oven 0.018 0.337
Hybrid corn 0.000 0.798
Home PC 0.003 0.253
© Palmatier, 2017, Marketing Van den Bulte and Stremersch (2004) suggests an average value
Strategy, Palgrave. of 0.03 for p and an average value of 0.42 for q
ISBN: 9781137526236. 65
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Example: Forecasting DirecTV
Used Bass Diffusion model
Market size estimate from customer survey
Diffusion parameters estimated from managerial
judgments and analogous products (cable TV)
Results:
Five year forecasts made 3 years before launch
were, on average, -16% below actual
Forecast justified earlier launch of a satellite for
expanded transmission capability
Introduction
Summary
Takeaways
Introduction
Takeaways
Offering equity captures the core value that the customer obtains from a
new offering, absent any brand or relationship equity
New and innovative offerings increase firm value by providing more value
to customers (through enhanced performance or better performance for
the price), motivating customers to switch, expanding customers and
markets, and establishing a brand image as a leading, innovative company
Conjoint analysis can facilitate the design and launch of new offerings by
helping managers define the optimal product, according to the value
assigned to various product attributes by consumers. Bass models also are
helpful, because they use historical data related to the coefficients of
innovation and imitation to predict adoption rates