MKTG Midterm 1

Focus on the customers

customers buy the benefits/values not the products. Not all customers are created equally. Customer centric firms have a superior ability to understand, attract, and keep the most valuable customers.

Functional Integration

each function Amazon adds then enhances the value of the whole service.

Retention Rate:

((E-N)/S)*100 [E = # customers at end of period E = Start + gain - loss, N = # new customer acquired in period, S = # customers at the start of period ]

Profit=

(Unit contribution*Units Sold) - Fixed Costs

Assumption to modified CLV:

(a) margins are constant over time, (b) retention rate is constant over time, and © the length of the projection period is infinite.

Purchase Funnels:

AARRR (Acquisition, activation, retention, revenue, referral), [Awareness, familiarity, consideration, purchase, loyalty], {problem recognition, information search, evaluation of alternatives, purchase decision, post purchase behavior} These share shortcomings because not iterative

Customer Decision Process:

AIDA Funnel, Purchase Funnels, Loyalty loop

Loyalty

Active and passive. Loyalty trigger triggers you to buy again without going through the evaluation process again. Ex: subscription, insurance with autopay.

Simplified CLV:

Annual Contribution per customer * Years as a customer

In sum, customers are critical assets of a firm and their value should be measured and managed.

Customer lifetime value is a fundamental and quantitative measure of the financial consequences of the relationship a firm has with its customers. It provides a useful metric for judging both firm actions and financial market valuation.

Volume Market Share:

Firm Units Sold / Total Market Units Sold (The percentage of units accounted for by that firm, within the product category )

Key to defining marketing is

delineating its core business function, which helps define the specific processes and activities involved in marketing management.

Profit Impact:

impact of a product on company profits. Using profit, one can also compute the number of units that must be made or sold to achieve a specific profit target.

ROMI def:

is a measure of efficiency of the investment, can be expressed in terms of net income, sales revenue, market share, or contribution margin

Margin Multiplier:

r / (1+i+r)

Customer lifetime value:

the present value of all future profits generated from a customer. Arguments for treating customers as assets haven't affected business because the concept and models of customer lifetime value originated in the field fo direct and database marketing and continue to focus in this domain. Many applications require an enormous amount of customer data and sophisticated models. This has limited value to senior managers concerned about strategic management. Second, few attempts have been made to link customer value to the value of the firm -- a link that is essential if investors are to view customers as assets.

Dual value creation:

the process by which companies create value for customers and build strong customer relationships in order to capture value from customers in return

The aim of marketing is

to make selling superfluous.

Annual contribution =

unit contribution * units per customer per year

Sunk Costs:

when money has already been spent and is unrecoverable. Usually R&D expense, market research that already occurred in the past. Cannot be a factor in future decisions.

4 P's

"Marketing Mix" Product, Price, Promotion, Place. This is a tactical strategy. About optimal value proposition. Product solution, Price value, Place access, Promotion education.

The process of communicating the value of a product or service to customers is

advertising, not the definition of marketing, though this is how many define it.

Margin analysis:

analyze the margins through the value chain.

Offering value to customers:

functional, monetary, psychological

Revenue - costs =

profitability

Offering value for firms:

revenue, profits, CLV, user base, brand equity, net promotion through word of mouth, brand loyalty, cross-sell products,

Fixed Costs:

stays the same regardless of level of production (ex: rent, exec salaries, salaries in general (mgmt. + executives), R&D, Capex, legal and admin cost, insurance, mktg.)

The goal of marketing is

to create a product that sells, not to sell a product.

Framework Problem solving:

1. Generalize a specific problem to an abstract one that fits on a framework 2. Identify a framework that can help answer the specific problem and be used to find a solution 3. Apply the generalized solution from the framework to the specific problem

The Classic AIDA Funnel:

Awareness, Interest, Desire, Action By driving people through this funnel, it points to where we need interventions. Drawbacks: emphasis on influence/sales closure/acquisition and not customer experience and CLV. No post-purchase phase, no accounting for satisfaction or repeat purchase. Fails to capture all touch points (of where customers are meeting the product) because customers are more informed through digital/social channels. There are not feedback loops or iterations (for repeated action of buying). Shift from monologue (push influence) to dialogue (pull information). Biggest problem is not focusing on retention because the sale is what it's focusing on. Action is NOT the finish line.

Competitors

Competitive analysis, market space, positioning: how a firm's offerings are perceived relative to the competitive offerings

Increasing Customer Base CLV:

Customer Acquisition: identify the best customers and target them to justify the acquisition costs acquire more of these customers. Customer Expansion: Increase margin and data mine for cross-selling. Increase incentive to buy or react to environment change from data to react to increase cross selling. Customer Retention: biggest driver of CLV, most impactful driver, increasing satisfaction and loyalty helps retention, increasing switching costs like building subscriptions, bundles, so that it's harder to exit.

Customers

Customer needs, key decision and value drivers, segmentation (demographic, geographic, psychologic, etc.), targeting, customer lifetime value (CLV)

Customer Equity:

Customers bring direct value through money, relationship value through their retention, informational value through their data as customers, and communication value through word of mouth/net promotion. Understand the financial and strategic value of customers

Company

Development of distinctive and hard to imitate resources - value proposition, and SWOT = Strengths and Weakness (internal factors), Opportunities and Threats (external factors)

2 Key drivers of satisfaction:

Equity/ Fairness and Expectations/Disconfirmation. Account for majority of variability in satisfaction

Sales/Revenue Market Share:

Firm Sales / Total Market Sales (The percentage of sales accounted for by that firm, within the product category )

Customer Market Share:

Firm customers / total customers (The percentage of customers the firm has relative to the total customers. Always ask what the market is)

Break-Even Volume (BEV):

Fixed Costs/ Unit Contribution

We again used companies' financial reports and related data to estimate customer acquisition costs, annual margins and retention rates.

For CDNow's customer acquisition strategies to make economic sense, the lifetime value of its customers should be significantly more than their acquisition cost. Increased competition and the nature of the internet (where shopping at a competitor is a mouse-click away) make it difficult to maintain high customer retention. Therefore only for the most favorable margin and retention rate and the lowest estimate of acquisition costs are the economics profitable, and then just barely.

Marketing plan:

G-STIC: 5Cs situational analysis, Goal (objectives), Strategy (target, value proposition), Tactics (marketing mix product/offering, price, place/distribution, promotion/communication), Implementation (execution, organization, schedule), Controls (metrics, evaluation, monitoring).

Passive Loyalty:

Habitual, no word of mouth, open to switching (switching cost)

Collaborators

Partners, suppliers, distributors, platforms, etc. Leverage strengths to reach common goal

Equity/Social Exchange Theory:

People evaluate a transaction according to the rewards and costs, which corresponds to the positive and negative things derived from the exchange. All rewards minus outputs, then compare to expectations and alternatives to get a relative aspect. You want things to be fair same high rewards from same cost. Highest satisfaction when you have a sense of fairness of the exchange. Human care about fairness not ripped off or rip others off.

Margin def:

Relative measure of assessing unit contribution compared to selling price expressed as a %.

Retention or discount rate greater effect on CLV:

Relatively bigger jumps when r decreases, so retention rates affect CLV more than discount rate.

Unit Contribution =

Revenue per unit - variable costs per unit (for best buy: $1000 (revenue) - $900 (price) = $100)

Margin:

Unit contribution / Revenue per unit

Custom Customer Journey Map:

Visual depiction of customer's interaction with an organization, Horizontal axis pre-service period, service period, post service period; plot touch points based on customer research, Vertical axis emotional (positive/ negative); activities, touchpoints, experiences, KPIs

Not all customers stay with a product the same length of time or have the same annual profit.

You may need to calculate separate CLVs for different years or different groups of customers to answer some of the questions.

Frameworks help identify alternative

approaches to thinking about the decision task. In addition to helping formulate the problem, frameworks provide a generalized approach to identifying alternative solutions. Frameworks are general, so they help managers identify the optional solution to a particular problem

Annual contribution per customer:

average amount that a typical customer would spend with the business, with expenses subtracted!! Annual contribution = ($800*75%)/2

Customer centricity is the same as the outside-in strategy

by Day. created trend based on future needs apple mac got rid of disc drive. Customer centricity is not customer friendliness, treating all customers equally, customer relationship management (CRM) software/systems.

The reliance on generalized knowledge capture in frameworks

can help managers circumvent the trial-and-error approach to solving business problems

Variable Costs:

changes with the volume of production. (ex: raw materials, energy costs, marketing (fixed to introduce the initiative but variable with how many produced (Burger King)), transportation, salaries of assembly line workers, sales commissions)

Collaborator value:

collaborators in Uber are the drivers who are independent contractors, Cities are collaborators because Uber shares data with local gov. on transportation

Instead of increasing customer service across the board,

companies should differentiate levels of service depending on the lifetime value of its customers.

The goal to sell more things to more people more often for more money

describes sales, not marketing.

At different stages of the loyalty loop,

different things drive the majority of the choice.

Active loyalty:

emotional connection, brand advocate, net promoters

AS a strategic discipline, marketing is

first and foremost about creating value; the different marketing tactics -- such as sales, advertising, and promotion -- are the means for achieving the company's value-creation goals.

Frameworks build on already existing

generalized knowledge to facilitate future company-specific decisions. Many business problems can be generalized into a framework that can be applied to solving future problems.

The premise of customer-based valuation is simple:

if the lifetime value framework can estimate the long-term value of a customer, and we can forecast the growth in number of customers, then it is easy to value the current and future customer base of a company. To the extent that this customer base forms a large part of a company's overall value, it can provide useful insights to investors. Measuring customer lifetime value encourages managers and employees to focus on the long term rather than the short term. This shifts the mindset from products to customers and from a transaction to a long-term relationship orientation.

The typical method of converting retention rate

into expected lifetime and then calculating present value over that infinite time period overestimates lifetime value. The margin multiple (r/(1+i-r)) is low when the discount rate is higher (for a risky company) and customer retention is low (usually between 1.07 and 4.50). Conversely, this multiple is high for low risk companies with high customer retention rate. A growth of 8% per year for an infinite horizon is a very optimistic assumption and is generally unlikely to hold. Commonsense suggests that to acquire a customer a company should not spend more than the lifetime value of that customer.

Customer Centricity:

is aligning your entire company's development and delivery of products and services with the current and future needs of a select group of customers in order to maximize their long-term financial value to the firm (Fader). Need to identify the most valuable customer.

The average margin for each customer

is simply annual revenue minus operating expenses divided by the number of customers. The longer a customer stays with the firm, the larger the revenue stream and the lower the cost of doing business with them. It is possible for the retention probability of a customer to change every time period. The longer a customer stays with a firm, the more loyal and they have a higher retention probability. At the same time, increasing competitive activity can reduce customer loyalty.

The benefit of customer retention

is that increases in customer retention increase profits and increase customer lifetime value.

Customer Lifetime Value (CLV)

is the net present value of all future streams of profits that a customer generates over the life of his/her business with the firm.

This is simplified CLV because

it excludes discounting and doesn't have a probability factor when customers leave. Doesn't include discounting, retention rate, or segments with different values/lifetimes.

Implications of customer retention:

it highlights the importance of customer retention. The lifetime value framework provides guidelines on how much a company should be willing to spend to improve its customer retention, customer satisfaction or customer relationship programs.

Everyone in the organization has to

make decisions based on the impact on the customer.

The misperception of viewing marketing as a tactical activity

means companies don't harness the full potential to develop a comprehensive business strategy, they don't see how sales, advertising, and promotions fit together and relate to other parts of the marketing process, and this view does not address the question of what drives the individual marketing activities.

Online banner ads vs mail ads:

online is cheaper but a very small amount of people click on the ads and then of those who clicked a very small amount actually buy something. Acquisition cost analysis, however, focuses on the short term and ignores different retention rates from the two media. The positive brand equity effect of banner ads may lead to higher customer retention. This changes the conclusion that mail ads are better to a conclusion that banners have a higher customer lifetime value, so they are more valuable in the long run.

Although the investment banking community specializes in evaluating M&A,

our approach can be used to provide insights about these strategic decisions. Essentially our premise is that customers are one of the most important assets of any firm. If we assess the value of customers of a firm, it provides a guideline for its overall value.

CLV:

powerful because it computes how much a customer is worth to you.

Discount Rate:

rate used to determine present value of cash flow in a discounted cash flow analysis. Time value of money because of inflation and uncertainty, calculated by WACC or CAPM. We'll assume that it's 10%.

This view of marketing as an exchange that aims to create value for its participants is

reflected by this definition of marketing as a business discipline: Marketing is the art and science of creating value by designing and managing successful exchanges.

For most firms, the lifetime value of a customer is

simply his/her annual margin multiplied by a factor in the range of approximately 1 to 5 -- for many cases this factor is simply 4.

Economic Model (under equity theory):

subtract costs from rewards. Compare to expectations and compare to alternatives.

CLV formula assumes

that a customers stays with a firm for n periods with certainty. In general, a customer has a probability to switch or defect from the firm in any time period. As the customer base increases, more and more marginal customers who do not spend as much money with the company as the original customers are added, so the average revenue per customer declines over time. So profits for a customer revenue may not necessarily increase over time.

The 3-V Principle:

the optimal value proposition is one that creates customer value, collaborator value, and company value. It's the optimal value prop if it's a good value to customer and company. The added value is the collaborator value

Contribution represents

the portion of sales revenue that is not consumed by variable costs.

Customer Lifetime Value (CLV):

the value of the entire stream of purchases that the customer would make over a lifetime of patronage. Helps to decide whether to acquire an individual customer, retain or let go of an individual customer; acquire, retain, or let go of an entire customer base or company.

By offering an integrative view of the key marketing concepts and frameworks,

this book offers a systematic and streamlined approach to marketing analysis, planning, and management.

Goal of marketing is

to create exchanges that are deemed successful -- monetarily or otherwise (because technological leadership, customer satisfaction, and social welfare could also be the company's definition of success) -- by the participants in the exchange.

The goal of marketing is

to ensure that a company's offerings create superior value for target customers in a way that enables the company and its collaborators to achieve their strategic goals.

Evolution of Marketing:

vast majority of history was product centric build it and customers will come, make it better or cheaper to build scale. In 1950s - 1960s, Sales orientation began promotions and slick advertising. In 1970s, modern marketing was born with demand orientation desires of customers drive actions of the firm, market research to ask customers what they want (drawback is that customers don't always know what they want, shouldn't deliver what they want, curbs innovation). Idea of competition the companies will offer the same thing so no choice for customers, and companies can only compete on price, which loses money. In 1980s, there began competitor orientation game theory, out maneuvering competition, eye of the ball of importance. Now we are customer centric oriented (value marketing).

No longer product centric,

where firms compete on price and quality with the aim to build scale and lower price. This changed because technology: product lifecycles have become much shorter and firms can copy innovation very quickly (product differentiation isn't enough); global competition and disruption (uber in the taxi industry); customer power: highly informed and empowered customers (can check prices and quality reviews easily). This means we need a deeper understanding of our customer.

Once you run out of easily targeted people,

you have to cast a wider net for a larger range of less likely customers so at some point the acquisition cost will exceed their CLV.

Reasons for AT&T to consolidate:

1. Combining geographically fragmented markets into a national cable network helps achieve efficiency in infrastructure as well as marketing costs 2. It improves bargaining power in negotiations with content providers such as HBO 3. It puts the winners in a strategically enviable position in the battle for the last mile to consumers' homes to potentially beam voice, data, video on demand, interactive TV, and a host of other applications. For AT&T, in order to generate $1,050 in profits to simply recoup acquisition cost and break even, this requires a profit margin of 43.75%.

The Loyalty Loop:

1. Initial consideration set. a.Evoked short-list of brands to fulfill need/solve problem,. b.Influence of accumulated impressions: brand awareness, ads, previous experience, social influence etc. c.Brands in initial consideration set are 3X more likely to be purchased than brands added later: additional brands can be added during active evaluation. d.Brands here have an advantage over brands added later on 2.Active evaluation a.Customers add/subtract brands as they evaluate options. b.Most-influential touch points by stage of consumer decision journey, for competitors and new customers: in active evaluation, the store/agent/dealer interaction and past experience are the most effective touch points. c.How do things impact your evaluation? From textbook. Humans evaluate in a relative way, so reference points are important. d.Relative judgments have significant impacts Prospect theory people judge probability and value relative to reference points, and the pain of loss is ~2x the joy of the same gain. Losses loom larger than gains, creating loss aversion. Value is judged by changes relative to a reference point. e.The reference point can be malleable and psychological. Markets try to aggregate losses but disaggregate gains. 3.Moment of Purchase 4.Post-purchase experience a.Consumers collect info online AFTER purchase! This leads to opportunity to create retention and satisfaction b.Satisfaction performance/quality - not highly predictive, value ratio. c.Satisfaction 0 correlates with quality and satisfaction you have to factor in price (judging relative to price class), the perception is influenced by a # of things. A value ratio didn't crack the code to what drives satisfaction

Case prep:

1.Identify the core problem. a. Look at trends, opportunities, competitive threats. b. Trends: market share, sales volume, costs What is changing? What's causing the change? c. Opportunities: new product, new market, change marketing mix. d. Competitive threats 2. Analyze the situation a. Use frameworks and marketing math to guide the analysis (5Cs, segmentation, etc.)b. 5Cs, SWOT, PEST, 4Ps, Marketing math (unit contribution, break-even, market share, customer lifetime value). 3. Strategy and Implementation a. Choose a course of action, specific implementation and tactics b. Possible strategic options: evaluate target markets and positioning c. Implementation: 4Ps: Product, Place, Promotion, Price d. Targeting and positioning: who is the customer? How will the offering be positioned relative to competition?i. Consider alternatives: defend against other alternatives and defend against no action e. Tactical implementation: 4Ps f. Be realistic! Consider company resources and constraints, stay within the timeframe of the case

Disconfirmation

1.Satisfaction (or dissatisfaction) occurs when there is a discrepancy, either positive or negative, between our expectations and the product's actual performance. 2. Satisfaction (or dissatisfaction) occurs when our expectations are disconfirmed. 3. Sat = F(perceived performance - expectations) 4. Your expectations are driven by what you hear, pricing structure, reviews increase your expectations for fancy expensive places. 5. Never overpromise but meet and mildly exceed those expectations.

Return on Making Investment (ROMI):

Incremental Gain from investment / cost of investment

Customer centric approach:

It's a way of approaching business a philosophy, outside-in business orientation, organizational structure and focus creation of the Chief Customer Officer to systematically understand customer experience to facilitate acquisition, enhance satisfaction, increase retention, and reduce attrition; and levering CRM data and long-term metrics to create long-term metrics (or is it value?).

BEV def

It's the number of units you need to sell to cover total fixed costs. Use BEV to make decisions about new investments. Need 1 more unit than BEV to be profitable.

Context

Market potential and market attractiveness. PEST Political and legal, Economic, Social, and Technological.

Book def of MKTG:

Marketing is the art and science of creating value by designing and managing successful exchanges

5 C's:

Strategic Analysis (customers, company, collaborators, competitors, context)

Retention rate is one of the most difficult metrics to empirically estimate.

That's why many applications assume a retention rate or estimate a retention rate that is constant over time. We don't need to arbitrarily specify the duration that a customer stays because retention rate automatically accounts for the fact that the chances of a customer staying with the company go down over time. In addition to a low chance of retention after 10 or more years, the margins generated in year 10 or later are also worth far less than the margin earned today.