MKT300 - W05 - Class Notes PDF

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lecture notes for chapter 5 of marketing ...

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o Future Example #3: 

Imagine you work for Yeti branded coolers. You entered the market with introduction of your high-end coolers, enjoyed by campers, fishers, and hunters for their durability and quality of keeping products warm or cold. Your brand has gained a lot of success that you decide to start a line of camping gear such as tents and sleeping bags. This is a logical brand extension. You already protect your consumers food by keeping it warm or cold in your coolers. Why not extend those expertise and that brand image to also protect your consumers by keeping them warm and protected in their tents and in their sleeping bags.

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Portfolio Management Challenges o It might dilute your brand and create brand meaning confusion. If you have your hands in too many unrelated pots, consumers might become confused  Example:  Think of Virgin. They started as a record shop and has since expanded to be an internet and cell phone service provider, a bank, an airline, a radio channel, a spaceflight company, etc. the direct meaning behind the brand starts to lose a bit of meaning after a while. o Brand proliferation can increase cost of inventory, logistics, etc. without immediate increase in revenue o To protect from all this, brand extensions needs to be incremental and logical progressions. o Risk of cannibalization

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Cannibalization o A reduction of sales from one product due to the introduction of another o It can be planned  Example: the introduction of the iPhone 12 will cannibalize the sales of the iPhone 11. o It can be unplanned  Example: Apple introduces the iPad as an in-between of the iPhone and MacBook in efforts to get a larger consumer base who saw an iPhone as being too small and a MacBook as being too large and powerful. However, they subsequently see a drop in MacBook and iPhone sales as new consumer opt to just get an iPad instead of both a MacBook and/or an iPhone o It can relate to a Sales Location

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Example: there is a Starbucks at the ground level of Ryerson University’s TRSM building. If they opened up a Starbucks across the street it will dilute the sales of the original location as for some people the new location is more convenient for them.

o Calculating Cannibalization rate  The rate at which the sales of a new product are achieved at the expense of one of the firm’s other products Cannibalization Rate (%) = (sales lost from existing products) / (sales of new products) o Example:  Starbucks currently sells 5,000 coffees per day at the TRSM location. They believe that by opening a store across the street, that location will sell 3,000 coffees per day. However, the TRSM location will only sell 3,500 coffees per day. What is the cannibalization rate? Sales lost from existing products = Old sales – new sales Sales lost from existing products = 5000 – 3500 = 1500 Cannibalization rate = (1500) / 3000 = 0.50 = 50% o Calculating Break-Even Cannibalization Rate  This tells us the maximum sustainable cannibalization rate.  If the break-even cannibalization rate (BECR) is less than the cannibalization rate, then that means our old product is being replaced at a rate that is not sustainable and we will make less money. However, if our Cannibalization rate is below the BECR than we are making up for the loss in sales of the old with the new product  If the BECR is above 100% then the sale of our old product are being replaced with a product that makes us more money, so it is not a problem Break-Even Cannibalization Rate (BECR) = BECR = (New Product Unit Contribution) / (Old Product Unit Contribution) o Example:  Imagine we are Nikon and with our D3200 model camera, we have a unit contribution of $100. However, we are release a new, slightly more advanced model (the D3500), where we make a $75 contribution per unit. What is the BECR? BECR = 75 / 100 BECR = 0.75 = 75% o Taking the reciprocal of this formula tells us how many more of the new product we need to sell to make up for the lost sales of the old product = (old product unit contribution) / (new product unit contribution)

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= 100 / 75 = 1.33 Therefore, we need to sell 1.33 times for of the D3500 in order to cover the lost contribution of the old D3200

1. Portfolio MGMT Case Example Car brand Audi offers several lines of vehicles designed to appeal to different segments. Their primary line of car from base model to more advanced is the A-series (A3, A4, A5, A6, A7, and A8). The price structure of these options are as follows. Product Line

MSRP

Contribution Margin

A3

$31,100

10%

A4

$37,800

12%

A5

$43,900

15%

A6

$54,900

18%

A7

$72,000

22%

A8

$83,900

24%

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Similarly, BMW has a line of cars from base model to more advance is the Series 2, 3, 4, 5, 6, and 7. However, on the more advanced end, the prices do not really compare, specifically, the BMW Series 6 starts at $87,900 and the Series 7 start at $99,800. To compete with the higher end BMWs, Audi is considering 2 options/scenarios: 1. Reposition the A8 to compete more directly with the BMW Series 7, increasing the price to $87,900 while maintaining the 24% contribution margin. 2. We maintain the A8 line, and add the A9. We estimate that this vehicle will be priced at $93,900 and provide a contribution rate of 22%.

Question: a. What are the pros and cons for each option? Solution b. Scenario 1: i. Pros: 1. when comparing between a BMW and Audi, consumers will more easily see the comparisons as the brands and their models now more closely match based on price, therefore making it easier to compare on other aspects

2. Would limit the need for a product redesign / limited the need for additional resources for creating, manufacturing, and marketing an entire new product. ii. Cons: 1. Repositioning all the models could cause confusion for existing consumers who are familiar with the product line and might be looking to buy another Audi. c. Scenario 2: i. Pros: 1. Adding a new product line (the A9) will allow for a more distinct positioning in comparison to the BMW. ii. Cons: 1. Adding a new line will risk cannibalization and not necessarily simply introduce and steal customers away from the BMW. This is because consumers of the A8 might now opt for the higher A9, and now sales of the A8 might decline.  

Question: d. Which option should we choose? Solution: e. We can conduct a Product Line Analysis i. Step 1: Estimate impact on total sales in the market and cannibalization of existing products ii. Step 2: Estimate Price and Costs to find contribution iii. Step 3: Calculate ROI for each option iv. Step 4: Make decision f. In the Excel Metric on D2L called “Product Extension – Audi.xls” we can see some possible scenarios and information to help us make a decision. i. we see that scenario 1 would decrease market share by 10% which after factoring in market growth, would decrease our revenue relative to before, resulting in a decrease pretax profit. Assuming a $1M investment to reposition everything, the ROI is -2757.3%. ii. Looking at scenario 2, we have to compare the anticipated decrease in sales of the A8 with the introduction of the A9 (cannibalization). This option results in a large decrease in sales of the A8, but a profit with the A9. The resulting ROI is still negative (491.7%), but less so than scenario 1. Therefore, with the increased competition of BMW, there is no “good” scenario, we can only go with the least painful, which is introducing the A9 (scenario 2).

2. Predictive/Descriptive Metrics Customer Retention Of the people who try our brand, how many will continue to purchase our brand? a. This can be calculated in terms of # of people, or purchase volume Example: b. Of 500 people who try our product, we expect 70% to continue buying it. The average person buys the product 4 times per month during the fall and winter (from September to March, or 7 months of the year). Repeat Volume = (Trial Population * Repeat Rate) * (repeat unit volume * Repeat Occasions) Repeat Volume = (500 * 0.7 = 350 people will return) * (4 x 7 = 28 purchases for each person) Repeat Volume = 9,800 units. Sales projections 

What do you anticipate your sales will be at a future time (t)? c. t represents the target time period. d. Therefore, if “t” is in the future and we are looking for Sales at time t (i.e., Salest) it is a Sales Projection. e. Also, if “t” is in the future then “t-1” represents the previous time period that we typically know because it has already happened. Salest = Penetrationt * Avg Frequency of Purchase * Avg Units of Purchase

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Things you need to know to calculate first! f. First-Time Triers: how many people we can expect from our target population to be trying our product for the first time in a given time period First-Time Trierst = Target Population Size * Trial Rate g. Penetrationt: how many customers we are retaining + new customers Penetrationt = (Penetrationt-1 * Repeat Ratet) + First-Time Trier h. Avg Frequency of Purchase: how often people buy our particular product? i. Average units per purchase: when they do buy, how much do they buy?

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Example: a. Betty’s Bakery makes packaged granola bars and they are trying to determine their sales projections for next month. Their neighbourhood has 500 households within walking distance, and anticipate that on average 2% of the households try their product per month for the first time. This month, they sold their granola bars to 100 individuals representing separate households, and they expect to get about 80% back again next month. The average consumer comes in twice a month, and buys two boxes of granola bars. Estimate Betty’s Bakery’s sales for next month.

First-Time Trierst = (500-100) * 0.02 First-Time Trierst = 8 Penetrationt = Penetrationt-1 * Repeat Ratet) + First-Time Trierst Penetrationt = (100 * 0.8) + 8 Penetrationt = 88 Salest = Penetrationt * Avg Frequency of Purchase * Avg Units of Purchase Salest = 88 * 2 * 2 Salest = 352 boxes Compounding Annual Growth Rate 

The compounding annual growth rate (CAGR) factors in that the growth, over time, will vary exponentially. b. Therefore, if we grow 10% per year, our year-over-year difference in the # of units sold will increase. c. Example: i. My home brew beer company sold 1,000 units in 2019, and I want to see a 10% growth each year for 2020 and 2021. Therefore, to meet this, I will need to sell an extra 100 units in 2020 over the 1000 from 2019 (=1000 * 0.1 = 100). Therefore 2020 sales are anticipated to be 1100 units. But this means that I will have to sell an extra 110 units in 2021 (=1100 * 0.1 = 110). Therefore, anticipated sales for 2020 will be 1210 units (1100 + 110 = 1210) d. To determine the sales projections for a specific year in the future, I can manually run every calculation for each year on its own (as I did above) or use the following formula Value in Future Period = Current Value * (1 + CAGR) ^ # of periods from current to future e. Calculating CAGR CAGR = [(Ending Value / Starting Value) ^ 1/# of period] – 1

f. Example: i. Continuing my beer example from above…what if we didn’t know the CAGR was 10%? What if we just knew that our starting sales volume value was 1000 units and the ending amount in 2 years is anticipated to be 1210 units. Now what is the CAGR? CAGR = [(1210/1000) ^ 1/2] – 1 CAGR = (1.21 ^ 1/2 ) – 1 CAGR = 10%

 Conjoint Analysis Method for comparing preferences across a diverse set of attributes to find where people will make compromises g. Consumers: want to maximize utility h. Companies: want to maximize profit (typically) i. Conjoint Analysis finds a balance between the two 

In other words, products are made up of many different attributes, and when comparing different products, it is difficult for consumers to adequately weigh all these attributes, because some attributes may be better for one option, but another option might be superior in other attributes. For the consumer, they want to (typically) get the best overall option for the price they are paying. And for Companies, they want to make sure their option is chosen while still making as big of a profit as they can.

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Conjoint analysis is good for determining what consumers want.

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Conjoint analysis is good for marketers looking to launch a new product or add a product to a product line or have a brand extension. It can help marketers understand what attributes consumers value the most, and then can help them focus on developing products and campaigns that highlight those attributes.

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An important value to collect for each attribute is something referred to as an attribute’s “partworth”. Essentially…how much is that attribute (or part) with those specifications valued by consumer when making a decision j. This is usually expressed in relative terms k. Specification that are strongly preferred by consumers are then assigned higher scores. l. If a specification is less or not preferred, it might have a negative value. Taking the absolute value of all the partsworth of any positive specifications will total the absolute value of any negative specifications, resulting in a relative value of zero if you were to sum them up. 

Example:

m. Imagine very simply we live in a world where toilet paper only differed in terms of Price/100 squares and ply. We ask a sample population of consumers their preference for each attribute on its own to develop an understanding of its parts worth. Imagine it spits out the following results

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Attribute

Specifications

Partsworth

Price/100 squares

$1.33

0.75

Price/100 squares

$1.50

0.25

Price/100 squares

$2.25

-1.0

Ply

1-ply

-2.25

Ply

2-ply

0.75

Ply

3-ply

1.50

- From this, what is the total partsworth of a case of 2-ply toilet paper selling for $2.25 per 100 squares? (simply add up the partsworths) o 0.75 + (-1.0) = -0.25 What is the best option for consumers? o It would be the option with the combined attributes with the highest partsworth o This would be 3-ply toilet paper selling for $1.33 per 100 squares. o Total partsworth of (1.50 + 0.75 = 2.25) From this, we can also tell what attribute is more important based on the total spread from highest to lowest partsworth. Therefore the Ply is the most important attribute with a total spread of (1.5 – (-2.25) = 3.75)

This is a very simple example, only looking at two attributes. It does not take into account all the other attributes, such as brand preference, eco-friendliness, size, texture, scent, etc. and this is just a simple product of toilet paper. Imagine a more complex product like a computer or car. This also does not take into consideration the contribution margins of the company. The above example is obvious that a consumer wants the best quality product (e.g., 3-ply) for the lowest possible price…but for a company to produce that would likely mean that they are not making much of a profit. So there needs to be compromises. The conjoint analysis helps companies understand what product will do better. For example, using the above information, what will consumers prefer? 3-ply at $2.25 per 100 squares? Or 2-ply at $1.50 per 100 squares? o The results would indicate that consumers would prefer 2-ply at $1.50 per 100 squares (partsworth total = 0.75 + 0.25 = 1). Whereas 3-ply at 2.25 per 100 squares has a lower total partsworth (1.50 + (-1) = 0.5). o Therefore, even though ply seems like the most important attribute based on partsworth spread, when combining with the less important price, you can still have lower quality products outperform better quality depending on the price.

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The difficulty with a good conjoint analysis is finding accurate consumer data....