Midterm Study Guide PDF

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Study guide for first half of the semester...

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Marketing 300 Midterm Study Guide Units: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Business Objective Marketing Objective Source of Volume Test Marketing Segmentation Targeting & Positioning Connecting Strategy & Execution Product New Product Development Marketing Research Methods

Business Objective Lecture Notes

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Fundamental entity – brand level/perspective from which we conduct our strategic analysis/evaluate decisions o Reflect consumers’ perception of brand o Brand: “Name, term, sign, symbol, design, or combination of the above intended to identify the goods or services of one seller and to differentiate them from competitors” AMA Core competence – skill that we uniquely possess (intangible) o Leads to sustainable competitive advantage  Not having one doesn’t mean instant failure, but it does limit your ability to survive in long- run  Sometimes they’re hard to identify o Provides access to multiple markets o Input, not an output

Corporate culture, implicit learning, organizational coordination Requires continuous improvement  Short-run and long-run effect on profits if investments are neglected o Generates strategic assets, which then generate benefits for consumers (products)  Not all strategic assets are a consequence of core competencies  Patents that Google buys from IBM  Examples: core competence – strategic asset – benefit  Marketing – brand – awareness of benefit  Information dissemination – resources – information availability  Data collection/management – data – customer insight Core business o Consumer driven o There is a myopic tendency to define business based on products rather than consumer benefits  Movie vs. entertainment, newspaper vs. information  Apple dropped “computer” from name o For mass-producers, prospect of steeply declining unit costs is irresistible  Can vs. should (Singles) o Focus on selling rather than marketing when we need to get rid of inventory o Selling is NOT marketing  Marketing – viewing the entire business process as strategic effort to discover, create, arouse, and satisfy consumer needs o “Product becomes a consequence of the marketing effort, not vice versa” – Levit Goals o Simplify decision-making o Performance benchmark o How we want to organize our goals:  Hierarchy  Quantifiable  Benchmark  Realistic  Consistent (can’t simultaneously maximize sales and profits) o “Proceed as if your goal is to put everyone selling physical books out of a job” – Amazon o Caution:  Overly ambitious goals will stimulate dishonesty  Car repair company to make $150/hr found things that may or may not needed to have been fixed  Overly focus atention  Monkey business video Branding strategies (continuum, tradeoff between efficiency and flexibility): o Distinct  Umbrella (Hybrid in between)  Distinct – “House of Brands,” firm offers several products with distinct meanings, brands, logos, targeted to different audiences (e.g., P&G)  Low efficiency/simplicity, high flexibility o o

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Umbrella – “Branded House,” family of products that deliver same high-order benefit (e.g., Crest line of different toothpastes)  High efficiency/simplicity, low flexibility  Brand extensions are easier o Product line extensions (e.g., new flavors of Doritos) o Category extensions (e.g., Swiss Army starts selling clothes) o Introducing “branded variants” (e.g., Burberry – offering a highand low-end alternative of same product) – retain loyal customers  Benefits of brand extensions: o Alleviate boredom, but stay in product family o Billboard effect (rows and rows of Coke) o Pricing breadth o Lower cost ($30M to launch successful brand, $5M for extension) o Capitalize on placebo effects – people’s assumptions of new product based on existing brand o Risk minimization – new product probably won’t fail  Cons of brand extension: o Brand dilution (luxury car brand making a cheap, affordable car) o Overall brand damage from one product failure can be high  Exception: House brands (Kirkland) Hybrid – BMW Nike – umbrella brand

Questions we ask: Who are we? What are we trying to achieve? What business are we in? (fundamental entity) What are we uniquely good at? (core competence/strategic asset) Reading Notes – Marketing Myopia 

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Product vs. Customer orientation o Businesses will do beter in the end if they focus on meeting customer needs rather than selling products o Your customers don’t leave, you allow them to be taken o Product should be created as a result of marketing efforts  Seller takes cues from the buyer – product becomes a consequence of marketing efforts o Steps to becoming customer-oriented:  A great leader with the will to succeed  Customers will follow  Think instead of “selling products” as “buying customers” The myth of growth industries o Self-deceiving cycle of expansion then decay

Even growth industries eventually come under a shadow (e.g., dry cleaning, oldfashioned grocery stores) o Four key beliefs:  Growing, wealthier population  No competitive substitute  Too much faith in low cost mass production  Preoccupation with controllable, improvable, cheaper product o Don’t get so caught up watching the success of your harvest that you fail to see the gathering clouds overhead Success of Henry Ford: o Mass production – marketing gets neglected o Mass production was the result not the cause of low prices (the low selling price drove the low costs) o While it was not as “scientific” as costs + margin = price, a low price forces people to efficiency to dig for profits Prevention – too often the absence of a problem leads to the absence of thinking Solution to myopia: look outside your product, find the alternative before your competitors do, expand your industry (transportation vs. railroad) o Employ “creative destruction” – destroy your own assets or discover the substitute by following your customer needs o Continued growth is a function of product innovation and improvement Complication: fill markets vs. find markets o In some tech savvy industries, marketing is viewed as a “residual” activity, much harder to measure than R&D “Stepchild treatment” – marketing is recognized as important but not given as much atention as the product/process Goods-producing vs. customer-satisfying o Goods-producing: find ways to make product  distribute product  satisfy customer needs o Customer-satisfying: identify customer needs  find ways to make product  distribute product “Unless a leader knows where he is going, any road will take him there” o

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Study Guide Notes       

Destiny perfume is an example of both a brand and category extension Billboard effects occur in supermarket aisles There is no Nike chicken because it would dilute the brand? Pharmaceutical company would prefer a distinct branding strategy – highly flexible, but low efficiency Hybrid branding – multiple umbrellas with multiple products under each umbrella (different from Unilever, which is distinct branding) Brand extensions are so appealing to companies because it’s $5M vs. $30M Core competency is intangible and culminates in a strategic asset (but not always)

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If you stopped airing commercials tomorrow, short-run profits would increase (lower costs, same revenues), but long-run profits would decrease (lower costs, lower revenues) How you define your core business affects who you consider competitors Beneficial goals: quantifiable, organized by hierarchy, realistic, consistent “Monkey business” video teaches us that when we are looking for something, we are likely to miss out on other things – we can overly focus our atention Henry Ford derived first the price consumers would be willing to pay, and then found the product cost in order to still make a profit

Marketing Objective Lecture Notes 

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Sales prioritized over building relationships because of cost o Cheaper to satisfy/retain existing customers than to acquire new customers o “Win-backs” are even cheaper than new customers Defining our customers: o RFM – Recency-Frequency-Monetary Analysis o Different industries will have different cutoffs for defining current customers o Combine purchase and attitude data to reveal that even profitable customers can be vulnerable  E.g., “active customer” could define anyone who has made a purchase in the last year Determining size of customer base: o Contractual vs. noncontractual  Contractual – observe the time at which customers become inactive (e.g., gym membership)  Noncontractual – do not observe time at which customers become inactive (e.g., deodorant)  Our area of focus Acquisition challenge: overcoming pre-existing brand loyalties o Cognitive and emotional atachment, despite situational influences and marketing efforts o Multiple types of loyalty can interact and even coexist, even though at some companies one will dominate o Heart  Emotional atachment  Consumed in public, identifies person consuming the product  Resistant to rational appeals  High involvement  E.g., sports fans, Apple fans o Head  High, rational/cognitive involvement  Can lead to heart loyalty  Rational appeals have a chance

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Hand  Habit/automated  Low involvement  Difficult to convince customers its worth making a change  First experience with the product is critical  Typically lower-ticket items  Can be disrupted by packaging innovations  E.g., table salt Emotional atachment vs. favorable attitude o Attitudes can be developed without interaction and are easier to overcome, no “separation distress” in absence of the product Emotional atachment vs. satisfaction o Satisfaction can occur immediately after consumption, emotional atachment takes longer Acquisition bias o Most companies devote majority of their promotional budget to acquiring new customers when most revenue/profit come from current, loyal customers o End up replacing existing, profitable customers with new, less profitable customers o Retention is crucial to keep customers and discourage competitive entry o While you focus on one, always keep the other in mind – success is correlated When considering company profit vs. time, it is typically assumed that loyal customers become more profitable over time o You should still offer discounts even when it is unprofitable for some customers  80/20 rule/Pareto principle – 20% of your customers bring in 80% of your revenue Benefits of loyalty: o Barrier to entry o Allows time to respond to competitor innovations o Protection against price atacks o Source of price premiums (additional amount customer will pay for specific brand, e.g., Nestle over Jewel brand) But does loyalty necessarily drive profitability? o Loyal customers believe they deserve the lower prices  More knowledgeable about the product, therefore more price sensitive  Just because they’re more loyal doesn’t mean they’re willing to increase WTP o There are important caveats (e.g., Barnacles) o

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Opportunity cost to re-evaluate may be too much Desire to avoid dissonance/second guessing

Short-term Customers

Long-term Customers

Hi Profitability

Butterflies

True friends

Lo Profitability

Strangers

Barnacles

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Two types of barnacles: low size of wallet / high share of wallet, high size of wallet / low share of wallet o Require vastly different strategies o Obtain info from surveys, secondary sources  Ease of collecting data depends on interaction frequency and type of interaction (direct vs. indirect – which means a third party is involved) Customer lifetime value – present value of all future profits generated from a particular customer and associated customers o Helps us determine how much we should pay to acquire them  Customer acquisition cost  Base profit + profit from increased purchases + profit from lower operation costs + profit from referrals + profit from price premium o Margin: annual revenue – operating expenses o Annual retention rate o Discount rate or cost of capital – 10-16%

Important notes about this equation: o The constant r does not imply that all customers have the same probability of remaining with the firm  Some will leave immediately, while others will become more loyal over time o Equation underestimates the true value of customers who become loyal (lower bound) o Negatively related to firms cost of capital Marketing objective: not an exclusive focus on acquisition vs. retention o Acquire who you’ll be able to retain

Retain happy customers who will help you acquire more through positive WOM (earned media) Examples of various marketing objectives: o Acquisition  Advertising to build awareness (Head On)  Leveraging awareness of existing category leader (e.g., McDonald’s “Four bucks is dumb” when it comes to coffee billboard) o Retention  Ads that focus less on the product (loyalty programs, Starbucks gold card) Loyalty programs: o Goldilocks – create incentives sufficient enough to change behavior, but not so generous to erode margins o Grocery store membership cards reward card ownership, not loyalty o Create barriers to exit – a “lock-in”  Sprint offers airline miles that disappear if you leave o Win greater share of wallet by consolidating purchases o Encourage purchases that wouldn’t normally happen with multiple tiers o Cannot overcome heart loyalty o Dynamic pricing/customer service – AT&T’s most profitable customers get personalized service while less profitable ones get automated service o Community building o *Only necessary for routine purchases, not like a wedding dress or Grand Piano Goal-gradient hypothesis: how eagerly you pursue a goal depends on how close you are to achieving it o Fill in first 2 punches of punch-card o

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Reading Notes – Marketing Objective   

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Fundamental entity, core competence, and goal all contribute to the marketing objective Business objective – profits/units sold Marketing objective – goal with respect to the customers o “It is the actions of individuals, not markets or industries, that will ultimately determine our fate” Source of all marketing revenues (often a transition from primary revenue to primary investment) o Acquired customers  Primary investment: enter new markets, atract new segments  Start-up or high growth firms o Retained customers  Primary investment: solidify position in marketplace  Well-established competitor o Cost to acquire is 5X more than to retain a customer Your definition of your customer comes from how you define your fundamental entity (one brand, or entire brand umbrella?)

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Heterogeneity in customer base: heavy vs. light users o Growth comes from purchase and volume frequency o Examine behavior and attitudes for light users especially RFM analysis – recency, frequency, monetary factors determine profitability of a customer on an average visit o Helps in segmentation analysis by assigning value to the customer Current customer can also purchase from competitors and at the extreme can become a former customer Types of advertising: o Acquisition:  Market leader  Educate consumers on category and brand benefits  Occasionally overcome competitor loyalty o Retention:  Customer loyalty programs  Reminder advertising  Continuity coupons  Product development – line extensions & improvements Trial–based promotion – our customer will try and like this and turn into a repeat customer (acquisition) Customer Relationship Management (CRM) – identify profitable customers and develop tools to keep them o Direct money toward non-price related retention activities, such as advertising and sales  If discount/promotion doesn’t enhance customer loyalty or prevent switching, you’re wasting money Tying it all together: o Acquisition: core competence of marketing/new product development, business goal is increasing revenue/market share o Retention: core competence of customer service/research, business goal is to increase profitability

Study Guide Notes    

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Current customers are defined by RFM criteria, which varies based on company Emotional atachment is neither satisfaction (too immediate) nor favorable attitude (doesn’t require consumption) With a big sale, some customers will be retained and some won’t (the r in the LCV equation is an average) – using a sale to atract a few “true friends” is worth also atracting many strangers Profitability and loyalty: strengthened by customer attitude – harder for competitors to steal them, effectively a “lock-in,” guaranteed high share of wallet; weakened by customer knowledge – believe they deserve lower prices, therefore more price sensitive Just because you know a company’s marketing objective (retention vs. acquisition) doesn’t mean that you know their source of volume (steal share vs. stimulate demand) “Intelligent alien test” – after watching a commercial, an intelligent alien could confidently tell you what the product does

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o If it fails, we know it’s retention o It is passes, it could be either acquisition or retention Probabilities of marketing objectives: o New – 100% acquisition strategy o Existing – could be either acquisition or retention We would prefer to invest in a Barnacle with low share of wallet, not low size of wallet Reward programs are generally more likely to influence the behavior of light users rather than heavy users (already at saturation) CLV negatively related to firm’s cost of capital Goal gradient hypothesis – how close people are to their goal

Questions we ask: Focus on acquisition or retention? Source of Volume Lecture Notes 

SOV is tied directly to the category definition, which is defined as the products with which a brand competes and which function as close substitutes o Defined with consumer benefits in mind o Example categories from Brand Keys:

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You can’t always infer a company’s full strategic focus (MO/SO from a single ad) and sometimes you can’t infer anything Main and dynamic variables o These will grow and evolve over time

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Main variable – point-of-parity – primary category benefit  Must have to compete in category o Dynamic variable – point-of-difference  Benefits that non-market leader offer to steal share from leader o Category leader:  Dominates on main variable, but is not limited to main variable  Prevents competitors from catching up with continuous innovation  True leaders create new offers to serve unmet/unknown needs Company’s intended primary source of volume: o Avoid “outcome bias” – judging a quality/goal of a decision based on the outcome of that decision; e.g., assuming a company meant to steal share if that is what resulted from their stimulate demand campaign o Stimulate primary demand  Expand the pie - bring people into the category  Category leader gains the most  Methods:  Price promotions o Usage rates  Inflexible – encourages people to stockpile  E.g., toilet paper  Flexible – actually works  E.g., yogurt, chips  Increase rate of sales o If you double the throwaway rate, you double sales o Must balance with notion of quality and consumer satisfaction  Highlight multiple uses o E.g., aspirin, Qtips o Steal share  Strategic choice for non-category leaders  Steal loyal customers from competitors (typically market leader)  Methods/marketing warfare:  Frontal atack o Atack fundamental aspects of leader (e.g., Pepsi tastes beter than Coke) o Challenger needs lots of resources  Flank atach o Atack a leader’s weak points/blind spots  Geographic weakness  Neglected segment  Convince multi-brand users to become...