BUAD479 Midterm

what is product demand?

total volume of a firm's product which will be purchased by a particular consumer group, in a particular time period, in a particular marketing environment, under a particular marketing program

what is market demand? what is it heavily dependent on?

total volume that would be bought by a particular consumer group, in a particular time period, in a particular marketing environment, under a particular marketing program (for all products in a given category) heavily dependent on both the external marketing conditions (ex. European gas is much more expensive, may lose some members of market due to this) facing the firm as well as the firm's investment in marketing activities *even if there is no advertising, there is still a market who will go out and buy a car

what are the components in analyzing a company?

understanding company cost structure, understand company goals, mission and vision, understand company personnel, etc.

describe the competitive advantage analysis. What is a competitive and sustainable competitive advantage?

*highlight the core competencies of a company to outline both tangible and intangible assets or "capitals" of the firm competitive advantage - something that the company does or can do that is of value to consumers and that competitors cannot match sustainable competitive advantage one that persists over time

what does product demand depend on?

- firm's level of marketing expenditures compared to competitors' marketing spend levels - effectiveness and efficiency of the firm's marketing expenditures versus competition

what are the steps in the consumer buying process?

Problem recognition, information search, evaluation of alternatives, purchase decision, post-purchase behavior

what are the key assumptions of this equation?

- churn and retention rates do not change over time - possible for customers to remain with the firm over an infinite time horizon

what are some business uses of CLV?

- clearly define objectives - determine effectiveness of alternative marketing strategies - deploy segment services based on CLV for different segments of customers - forecasting future impact of improved customer satisfaction - allocating resources for market communication - identifying investment areas for improving customer service - designing loyalty programs - early warning systems to detect increasing defection rates - allocating and rewarding sales resources - developing effective marketing campaigns - reactivating inactive customers - allocating resources for complaint management - prevent customer defection - deploying win-back strategies - mergers and selling or buying companies - the annual report

what is involved in the collaborators and complementers analysis - who are these people?

- collaborators are the companies/people who help firm in marketing product to consumers such as suppliers, distributors and retailers - Complementers are the companies/people who also benefit when the firm sells its product such as other companies who sell products which are complementary to ones the firm sells (Bose music speakers for iPods)

what are some other factors, outside of the five forces, that need to be considered?

- industry growth rate (high rate does not guarantee profit) - technology and innovation (advances not enough to make an industry attractive)- new bases of rivalry could amerge - government (not good or bad for industries) - complementary products and services (not good or bad for industries)

what are some of the key principles in marketing?

- products are bought, not sold - different strokes for different folks - have a strategy - Use the 4 P's to organize marketing operations - the numbers have to work - markets change - keep marketing programs legal and ethical

what are some of the primary marketing strategy activities?

- segmentation, target market selection, and determination of desired positioning - develop a plan for marketing mix needed to achieve positioning and facilitate exchange *these all need to create, capture and sustain value

what is the process of strategy?

- start with understanding the mission (purpose and values) - in order to create objectives (specific targets) and goals that are quantifiable and measurable that can be controlled/adjusted - strategy (integrated concept of how we will achieve objectives) - implementation (specific actions, timeline) - GANT chart outlines these in order to implement strategy

describe analyzing the company

- understand a firm's business model - what does company do and how does it make money? - Analysis of firm's competitive strategy

What are the four components of Marketing?

creating, communicating, capturing and sustaining value for long term success through maintaining relationships

what are the three factors that drive CLV?

1. customer acquisition costs 2. customer profitability 3. customer longevity

Describe analyzing the context through the six external environments that impact the business model

1. demographic environment - understanding the current and future state and direction of the population in the market such as census an other data 2. economic environment - understanding macro and microeconomic conditions facing consumers in the market 3. Socio-cultural environment - understanding prevailing world views, political and social ideologies, value systems, traditions and rituals and fashion/taste system 4. political/legal environment - make sure company is operating within the legal and common business practice and how laws/political practices can enable or hinder company's potential growth in various markets 5. technological environment - how technology is affecting consumers and their purchasing needs and habits 6. natural environment - understanding consumers connection and concern for the natural world, how product and operations you rely on affect natural environment

what are porter's five forces for determining segment structural attractiveness?

1. industry competitors (segment rivalry) - who are the competitors in your space? 2. buyers (buyer power) - more competitors, higher buyer power because buyers have more choices 3. suppliers (supplier power) - where there is a lot competition, supplier has more power because they have more people that they can sell to and choose. but the more suppliers, industry has power since they can chose which ones to go to 4. potential entrants (threat of mobility) - ex. cell phones have high barriers of entry 5. substitutes (threat of substitutes) - more available, more competitive

what are the three constraints in estimating market demand?

1. market minimum - certain level of demand for the product that would occur without any marketing spend 2. market potential - at this point, marketing expenditures become ineffective at generating incremental demand because the market has been tapped out (dependent on external marketing environment) 3. market demand in dollars

how does getting a full idea of structure help managers with strategic action?

1. positioning (finding a portion of industry where competition is weaker) 2. anticipating and exploiting shifts in forces and shaping balance of forces to create new industry structure - open up new needs and new ways to serve existing needs

what are the two ways to reshape industry structure?

1. redividing profitability in favor of incumbents (share of profits towards industry competitors instead of other forces) 2. expanding overall profit pool (reduce share of profits that leak to suppliers, buyers and substitutes or are sacrificed to deter entrants) - pool grows when demand grows, quality rises and costs and wastes are reduced or eliminated by improving coordination in supply chain

what are the seven major sources of barrier entry?

1. supply-side economies of scale (deter entrant to come in on a large scale or accept a cost a disadvantage) 2. demand-side benefits of scale (network effects - buyers willingness to pay increases with number of other buyers who patronize company and limits willingness of customers to buy from newcomer) 3. customer switching costs (buyers face) 4. capital requirements (investing in large financial resources) 5. incumbency advantages independent of size (incumbents may have cost or quality advantages not available to potential rivals such as locations and brand identities) 6. unequal access to distribution channels (new entrants must secure distribution of product or service) 7. restrictive government policy (can hinder or aid new entry, amplify/null other barriers)

what are the two primary activities of analyzing customers?

1. understanding consumer needs driving consumption (needs analysis) 2. decision making process consumers undergo (decision making process analysis)

what are the three methods for collecting and analyzing information about the internal and external marketing environments?

5 C's analysis, Porter's Five Forces Analysis, SWOT analysis

what is CLV in terms of survival probabilities? what does this equation assume?

CLV = [sum of (m x st)] - AC t represents the period (month or day) st is the probability that a customer maintains the relationship with the firm in period t assume churn rates and retention rates do not vary over time

what is the basic customer lifetime value formula? who are the best customers

CLV = m * L - AC m - contribution margin generated from a customer in a year (or other time period) L - expected purchasing life of the customer (measured in same time period as "m") AC - upfront costs of acquiring the customer best customers are less expensive to acquire and generate more profit in each period they choose to be a customer and choose to be customers for long periods of time

what is this formula assuming infinite time periods

CLV = m* [1+i/1+i-RR] - AC

what is the simple formula for this?

CLV = m/CR - AC

how does the CLV formula change when incorporating the present value of future cash flows?

CLV = sum of [(m * RR^t-1/(1+i)^t-1)] - AC this formula is equivalent to the more basic formula if discount rate is assumed to be 0 - discount expected contribution margin becomes smaller in the future due to the time value of money

how do you calculate CLV of a market segment? what is an example of when this would be sued

CLV of an average customer x number of customers in the market ex. assessing whether women are more profitable than men, whether Internet customers are more profitable than retail customers, whether US customers are more profitable than Canadian customers, etc.

how can marketers capture and create value?

Create value by satisfying needs Capture value by pricing accordingly with brand identity and how much customers are willing to pay

what is customer longevity?

Duration that the firm is able to retain the customer - largely a function of customer loyalty *based on the costs of switching

what are EOM and FOB?

EOM - end of month FOB - free on board - expressing the physical location where certain responsibilities for transportation and damage-claim litigation pass from seller to buyer

How do firms generally compete?

Generally compete by: 1. lowest costs 2. unique/superior performance that are valuable to a large part of the market 3. focusing on a small segment/niche and knowing how to meet needs

describe the process of needs analysis

Outlining potential customers who have a need for the product and understanding their needs and preferences needs include: utilitarian, symbolic, emotional and social needs the product fulfills in the lives of consumers *analyze direct and indirect benefits that consumers receive from using the product and emotions they feel will give insight on how much consumers will value the product (rational or irrational needs)

why is profit impact different from profit? what is the formula for this? what happens when profit impact is 0

Profit impact is not profit since there may be a few other costs yet to be charged against the product - ex. taxes profit impact = (unit margin x units produced and sold) - fixed costs when profit impact = 0 - break even quantity

what is the spotlight matrix?

SWOT analysis can be used for analyzing business opportunities Spotlight matrix - SWOT tool which lists market attractiveness against organizational competence company should either enter those industries which are highly attractive and where the company has some core competence

when should a SWOT analysis be conducted? what is it?

SWOT analysis is performed after the buyer analysis in formulating a marketing strategy. The strategy should try to exploit strengths and opportunities and defend against the weaknesses and threats identify critical factors that affect the firm takes information generated by 5 c's and porters five forces to look for patterns across data, analyze and interpret it

describe the decision making process analysis

Series of five stages: 1. Problem recognition (understanding when, where and how consumer needs arise and aspects that cause consumers to realize they have a problem that needs to be solved) 2. Information search (understanding sources of information consumers use to learn more about available options) 3. Evaluation of alternatives (attributes or features of the product most important to consumers when choosing among brands or products) 4. Purchase decision (where do consumers go to purchase and what influences do they encounter during purchases) 5. Post purchase evaluation (how do consumers assess if the product purchased was the right product)

what is unit contribution?

contribution per each item sold which is used to cover fixed expenses, overheads and marketing costs associated with the product to provide a profit - how much you make from each product after taking out variable costs

when is the threat of substitutes high?

always present since they place a ceiling on prices it is high when it offers an attractive price-performance trade off to the industry's product and buyers cost of switching to substitute is low *need to differentiate products or customers will buy product with lowest price

How do marketers go about analyzing what is going on?

analyze internal environment - customers and company - good understanding of what company has to offer, customers to target, position relative to competition and customer their decision making process (microenvironment) external environment - competitors, collaborators, context/environment - do not have control over competitors, collaborators or context/environment but they may have control over you (macroenvironment)

how are annual profits generated calculated?

annual profits generated is calculated by subtracting the total variable cost of the products the customer buys from the total revenues obtained in CLV analysis - the contribution margin is the correct profit measure to use

what is selling price?

cost of an item + margin margin should be expressed either as a percentage of cost or percentage of selling price

what is big data?

capturing data to better understand customers - ex. Amazon suggested purchases which increases transactions with customers

describe the relationship between market demand and marketing expenditures

certain amount of spend that demand increases rapidly, then once potential market is reached, further marketing dollars are a waste because there is no more market to attain *companies introduce new products once the previous product hits decline in the product life cycle (introduction, growth, maturity, decline)

what are variable costs? give some examples

change depending on the amount of product produced and sold raw materials, labor, commissions, shipping costs, packaging costs, inventory-holding costs, promotions (such as coupons)

What is involved in a competitors analysis?

competitive analysis involves identifying and analyzing companies who compete with the firm by delivering a similar product to consumers or an alternative solution to consumer needs analyzing business models, strategies, advantages and marketing strategies of each firm

what is consumer behavior and how does it align with the key to achieving organizational goals?

consumer behavior - study of consumers and exchange processes involved in acquiring, consuming and disposing of goods, services, experiences and ideas - what drives consumers to act in a particular way? need to determine needs of target market and deliver the desired satisfactions more effectively and efficiently than competitors

what are the 5 c's of the strategic marketing analysis?

customers, company, competitors, collaborators and context such as the political, social, economical, environmental and legal environment

how do you calculate dollar share and what does it measure?

dollar share measures percentage of the dollar market that our firm has captured dollar share = product demand in dollars/market demand in dollars or dollar share = product dollar sales/market dollar sales

when do powerful buyers have negotiating leverage?

if there are few buyers or each one purchases in large volumes in relation to size of vendor, industry products are standardized (substitutes available), buyers face few switching costs, when they can integrate backward

explain the calculation of survival periods after the first period

in each subsequent time period, customer could choose to end the relationship and therefore, survival probability is modeled as decreasing over time - for every year after the first year, multiply survival rate of the previous period by retention rate - each additional year, less likely that customer will be attained by the company series of survival probabilities useful in CLV analysis to determine the expected contribution margin in a given period

in what ways should retaliation be expected?

incumbents will retaliate by cutting prices to retain market share, industry growth is slow so newcomers can only take existing market share from incumbents - industries are valuable when they are unattractive to firms not already participating in industry due to high entry barriers (also attractive - low exit barriers)

what is a fundamental rule to remember about CLV?

invest if the projected increase in customer's CLV as a result of running marketing program is greater than the cost of the marketing program

what does CLV analysis do for managers?

it enables the estimation of the cost of acquiring a customer and to compare that to the expected benefit of that customer's business during his/her purchasing life

what portion of that formula represents the discounted expected contribution margin from a customer in period t

m * rr^t-1/(1+i)^t-1

how would market demand be calculated using build-up method?

market demand = number of buyers in the market x annual quantity purchased by an average buyer x average price paid per unit *decomposing market into its composite parts, market size analysis requires you to make various assumptions

what is a market forecast?

market demand corresponding to a certain level of marketing expenditures (affected by company's spending and spending of competition) *spending on marketing expenditures to get the market forecast

how do you calculate market demand in dollars?

market demand in units x average retail price point in market *revenue is more important than units sold to companies

why is it difficult to calculate the economic effects of a marketing program?

marketers are forced to make assumptions through a sales forecast - assess realism of sales forecast by calculating its implications of a firm's market share (hard to determine what competition will do if we pull their market share)

what is the break even point? what is the formula for this?

means that revenue is just enough to pay for both variable and fixed costs incurred - what is minimally expected from a company - no profits or loss BEP = Fixed costs (or added costs) in dollars/unit margin in dollars point at which fixed costs = unit contribution x units sold

what is customer lifetime value?

metric that allows managers to understand the overall value of their customer base and to evaluate how well their management strategies are working

why is it important to incorporate the time value of money into the analysis?

money received today is more valuable than money received in the future it is important to think about contribution margins that a customer will generate over his or her expected lifetime as a series of cash flows that extend into the future

does high unit share indicate high dollar share?

no selling the most units does not indicate earning the most dollar revenue

what are the assumptions made when calculating survival probabilities?

that retention rate does not change over time however these do change for reasons such as economic/technological/social changes as well as company changes in aspects such as customer service

what is expected purchasing life equal to?

number of time periods that a customer is expected to continue the relationship L = 1/CR

Describe the external origin portion of SWOT analysis

opportunities - finding, developing and profiting from opportunities that arise in external environment that create new needs, markets or technologies threats - unfavorable trends or developments in external environment that can threaten current sales or profits or preclude the firm from pursuing new opportunities

what is the 5 c's analysis?

outlines five dimensions of marketing environment crucial for marketing managers to understand before they make decisions (customers, context, company, collaborators/complementers, competitors

who is the target market?

part of the available market the company decides to pursue with marketing activities after evaluating each segment's attractiveness ex. lexus vehicles - serving those looking for luxury cars, smaller subsection of available market based on capabilities to satisfy their needs

what is a penetrated market? what does the market penetration index measure and how is it calculated?

penetrated market - set of consumers who are buying products in a category market penetration index = market demand/# of customers in a potential market market penetration index measures percentage of consumers in the potential market who are currently purchasing a product in the category - low would indicate room to grow primary demand

what is the formula for unit contribution? what is profit margin?

per unit revenue (typically the selling price) - per unit variable costs = UC profit margin (unit contribution stated as a %) = (per unit revenue - variable cost per unit)/per unit revenue

what is a chain discount?

percentage link in the chain that is calculated on the price that is derived after the application of the prior link or links to the suggested retail price (40% off original price, than 5% off of that price)

what is the product (or brand) penetration index? how is it calculated?

percentage of consumers in a particular target market who are purchasing a particular product or brand product penetration index = product demand/# of consumers in the target market *demand for specific product

what is market share? why is this so important?

total number of units produced and sold by your company/total number of units produced and sold in the market can express in volume (units) or revenue (dollars) *most critical element to prove how a company will generate money

what is the churn rate (CR)? what is the assumption with this?

percentage of customers who end their relationship with the company in a given time period usually defined at segment level assumption - all individuals in the same segment have the same probability of ending the relationship - typically tracked by month or year - this also remains the same over the lifetime of the customer which is not necessarily true

what are some examples of the rivalry that exist between competitors? what are some examples of the intense rivalry

price discounting, new product introductions, ad campaigns and service improvements, frequent product introductions, dependent on basis of intensity and grounds on which companies compete intense rivalry - competitors are numerous or equal in size and power, industry growth is slow, exit barriers are high, rivals committed to business and leadership, firms can't read each others signals well because of lack of familiarity with one another

what is primary and secondary demand?

primary demand - total volume demanded by customers for a product category ex. automobiles - total demand for automobiles in a particular geographic market (total demand for milk) secondary demand - total volume demanded by customers for a specific brand or product (within a product category) ex. total demand that exists for a brand/model (subcategory - for example total demanded for 2% milk or horizon valley milk)

what is a survival probability (s)? what is it assumed to be in the first year

probability that a customer has a relationship with the firm during a given time period typically assumed to be 1 in the period that a customer is first acquired

how do you calculate product demand in dollars? why is this more accurate than estimating market demand?

product demand in units x average price point of a firm much more accurate since it is specific to the product ex. manufacturer a (50%) and manufacturer b (50%) have same market share in units sold, difference is that manufacturer B has higher revenues ($2 - premium product) than manufacturer A ($1) therefore manufacturer b is a more valuable player in the market

when are buyer groups price sensitive?

product purchases from industry represents a large fraction of cost structure, buyer group earns low profits, industry product has little effect on buyers other costs, etc.

when will price competition likely occur?

products or services of rivals are nearly identical, few switching costs, fixed costs are high/marginal low, product is perishable, capacity must be expanded in large increments to be efficient

what does this formula assume?

profits generated from a customer are the same in each period and it does not take into account the time value of money since it assumes the discount rate is 0

how is present value of a stream of cash flows that will be received in the future calculated?

pv = sum of FV(t)/(1+i)^ t - 1 FVt = value of each cash flow at time t in the future i is the firm's annual discount rate (aka hurdle rate or opportunity cost of capital) - annual interest rate the firm could obtain by investing cash today

what is the retention rate (RR)

related metric that measures the percentage of customers who continue their relationship with the firm in a given period RR = 1 - CR

what are fixed costs? give some examples

remain constant regardless of the amount of product produced and sold rent, insurance, salaries, administrative costs, advertising expenses, marketing research, research and development/product development, product packaging, trade discounts/slotting allowances, trade shows, promotions (such as BOGO/samples), tours and visitors centers, capital expenditures

who is the available market?

set of consumers who have interest in, income for and market access to a particular product ex. lexus vehicle - all people who have money, authority or desire to buy an automobile (MAD principle) smaller subsection of potential market

who is the potential market?

set of consumers who possess some interest in a product or to whom the product is potentially relevant ex. lexus cars - potential market would be everyone that needs to travel from one place or another by automobile -- biggest market (may not be able to translate their interest into sales)

what is indicated by the distance between market minimum and potential?

shows whether market demand is sensitive or insensitive to marketing expenditures large distance - highly sensitive small distance - highly insensitive

how does this equation change if we are not assuming infinite time periods?

sum of rr ^ t - 1

how and when are suppliers powerful?

suppliers (provide raw materials it uses to make products and employees who supply labor to make products) power - capture more value for themselves by charging higher prices, limiting quality of services and shifting costs to industry participants powerful when it is more concentrated than the industry it sells to, when it is not dependent on a specific industry for its revenues, when industry participants face switching costs, suppliers have differentiated product, when there is no substitute, when they can threaten to integrate forward (sell directly to customers)

what is involved in the 5 tasks of the general framework for solving marketing problems?

task 1: what's going on - conduct marketing analysis to turn data on symptoms into useful diagnosis/information task 2: what should our goals/objectives be - determine what needs to be accomplished task 3: what is our strategy? - figure out segmentation, target market(s), positioning, formulate marketing mix task 4: How are we going to do it? - develop an implementation plan task 5: What will happen? - estimate likely costs and benefits

what do companies need to analyze when analyzing competitors?

the competitors strategies, reaction patterns, objectives, strengths and weaknesses

what is customer profitability? How does this change per customer?

the valuation of the maximum value that firm extracts from each customer on an annual basis *annual profits generated depend on the type of customer (price sensitivity, purchase frequency, etc.) as well as the costs incurred in serving the customer

what are customer acquisition costs? what are some examples of these

this is the direct consequence of asset acquisition strategies employed by the company to attract new customers to the firm ex. sales, promotions, advertising, sales force, etc. - avg. these out per customer

what is the purpose of porter's five forces?

understanding the underlying competitive dynamics of the industry that determine its profitability Michael Porter - identified five forces that determine five forces that determine the intrinsic long-run attractiveness/profitability potential strongest competitive forces - determine profitability

how do you calculate unit share and what does it measure?

unit share measures percentage of unit market demand our firm has captured unit share = product demand in units/market demand in units (based on forecast) or unit share = product unit sales/market unit sales (based on demand)

who are some of the participants in the business buying process?

users, initiators, influencers, gatekeepers, buyers, deciders, approvers, buyers

describe task 1

what's going on - conduct marketing analysis to turn data on symptoms into useful diagnosis/information underlying needs in the marketplace that can be satisfied taking in mind internal/external environment

Describe the 7 O's of Consumer Research

who constitutes the market - occupants, what does the market buy - objects, why does the market buy - objectives, who participates in the buying - organizations, how does the market buy - operations, when does the market buy - occasion, where does the market buy - outlets