Exam 1- Marketing Strategy

List the first principle of marketing strategy and the key marketing decisions.

#1: All customers differ- Managing customer heterogeneity #2: All customers change- Managing customer dynamics #3: All competitors react- Managing sustainable competitive advantage #4: All resources are limited- Managing resource tradeoffs

What do you need to balance marketing resources across?

- Customers (STP) - Acquisition, Expansion, and Retention stages (AER) - Brand, Offering, Relationships (BOR) - Marketing mix elements (4 to 7 Ps)

Examples of marketing strategy being key to long-term financial performance:

- Grow market size (new products and services, lower prices) - Grow share (better products and services than competition, higher loyalty to retain, and/or steal customers with acquisition strategies) - Better prices and margins (improve loyalty, brand image, relationships, products, targeting of high margin customers) - Reduce costs (WOM, brand, relationships, retain with loyalty)

Latent customer heterogeneity can stem from several constraints:

- Legal constraints (government regulations, patents) - Economic constraints (prohibitive prices, due to the size of the market or the costs of providing) - Technological constraints (only way known to make something) - Innovative constraints (no firm has yet identified and satisfied the need)

Why are firms targeting smaller & smaller segments? (All Customers Differ)

- Matches inherent customer desires (real, perceived) - Faster response to customer trends and changes - Technology enabled (more economical to target/customize) - Only limited by tradeoff efficiency (cost) versus benefit of better match to need (solution)

SCA must meet 3 conditions:

1. customers care 2. company does "it" better than competitors 3. hard to duplicate

What are the outputs to marketing principle #2: All Customers Change?

AER- Segmentation of Customers: customer personas, needs and CLV f personas, why and how they migrate AER Positioning Statements: How best to position the firm in each persona/AER stage AER strategies: what marketing strategies work best for each persona/AER stage

Dynamic-based segmentation is sometimes called the...

Acquisition-Expansion-Retention (AER) model because it captures customers entering the firm's portfolio and expanding over time, even as other customers slowly leave

What helps explain variation in firm's performance?

Addressing smaller and smaller units of analysis

What is the marketing principle #1?

All Customers Differ -> Managing Customer Heterogeneity

First Principle #3: All Competitors React

Competitors are always copying successful strategies and innovating new ones. - Only one firm remains from the original Dow 30 firms - Given enough money and time, most strategies can be copied

Define marketing strategy

Consists of decisions and actions focused on building a sustainable differential advantage, relative to competitors, in the minds of customers, to create value for stakeholders.

Segmenting

Consists of dividing the market into groups where: customers within groups have very similar needs (homogeneous) and customers across groups have different needs (heterogeneous) Needs: Needs and benefits desired by customers for your offering- segment on needs/benefits not descriptors Descriptors: Observable customer characteristics that help you find and classify customers (e.g., gender, age, income, size, education, etc.)

What are some different things that cause customers to change?

Consumer needs change: cars (Buick), clothes, food, financial services, and healthcare as consumers age Trigger events: marriage, kids, job change, finances, move, graduation, acquisition, new managers, legal changes Industries/market change: experience curve, diffusion, competitive responses, overproduction

What are barriers termed and critical to? (Principle #3: All Competitors React)

Sustainable competitive advantage (SCA) and are critical to long-term, superior financial performance

What are firms doing since all customers differ?

Targeting smaller & smaller segments Mass marketing -> niche marketing -> 1-to-1 marketing Competitive race as firms target smaller segments

What is CLV?

The "value" added by an individual customer, to the company CLV approach is a form of customer-centric accounting where firm's value is the sum of all it customers' CLV

T/F. Nearly everything you do impacts your positioning

True - Channel (place), price, promotion, product

Retention stage

deals with customers who migrate not because of a mismatch in the core offering or a life event but because they have a basic propensity to switch, in pursuit of "greener pastures"

CLV accounts for varying profits across customer.. beyond 80/20 rule

firms earn 150% of their profits from 30% of their customers CLV captures these difference in your existing customers so you can acquire, expand and retain the "best customers"

What are the approaches & processes to marketing principle #3: All Competitors React?

- SCA - Brand offering, relationship equity stack - AER strategy and BOR equity grids - Brand and relationship mgt - Innovation processes

Some generalizations on AER Strategies from CLV Analysis

1. AER strategy that maximizes CLV maximizes neither the acquisition rate nor retention rate 2. Investments in customer acquisition and retention have diminishing marginal returns 3. Under spending in acquisition and retention is more detrimental and results in smaller CLV than overspending. 4. A suboptimal allocation of retention expenditures will have a larger detrimental impact on long-term customer profitability than suboptimal acquisition expenditures

What are 5 sources of customer heterogenity?

1. Individual differences 2. Life experiences 3. Functional needs 4. Self-identity/image 5. Marketing activities

The five key elements that are critical to marketing strategy:

1. Leads to differential advantage over competitors 2. Sustainability 3. Ability to enhance firm performance 4. Customer perspective 5. Guides decisions and actions

What do companies need to build in regards to the first principle #3: All Competitors React?

Companies need to build a "barrier" to being copied, giving them time to adapt to innovation by others

List the segmentation steps:

1. identify and refine "pool" of potential customers' needs and descriptors (qualitative research) 2. Collect data from random assortment of potential customers on "importance" of needs/benefits to purchase decision 3. Use "needs/benefits" to segment the market into 3 to 7 homogeneous customer groups 4. Name segments (communication tool)

5 sources of customer dynamics

1. individual level: discrete life events, typical lifecycle and product learning effects 2. Product market level: product lifecycle 3. Environmental level: changes in economy, government, industry or culture

Industry lifecycle comprises of five stages:

1.Early establishment of its range and boundaries 2.An innovation stage to set a "dominant design" 3.The shakeout stage, marked by economies of scale, such as that smaller players get forced out 4.Maturity, when firms focus on market share and cash flows 5.The decline stage, when sales decay for the industry as a whole

What are the inputs to marketing principle #1: All Customers Differ?

3Cs- All potential customers - needs, demographics, size, growth, perceptions Your company - strengths and weaknesses, opportunities & threats Your competitors - strengths and weaknesses, opportunities & threats

Marketing Analytics #2: Cluster Analysis & when to use it

A data driven partitioning technique that can be used to identify and classic a large set of heterogeneous consumers or companies into a small number of homogeneous segments. Use it: To demystify customer heterogeneity by understanding preference commonalities across subsets of customers. To discover how consumers naturally differ and cater to the unique needs of chosen target consumer segments

Sustainable Competitive Advantages (SCA)

A firm has an SCA when it is able to generate more customer value than competitive firms in its industry for the same set of products and service categories and when these other firms are unable to duplicate its effective strategy.

What must a firm establish before they can build an SCA?

A firm must establish the sustainable position with a targeted customer group before they can build an SCA around that position

Define individual differences

A person's stable and consistent way of responding to the environment in a specific domain

What happens when you assume that all customers are the same?

A recipe for failure, at least in the long term, as competitors will better satisfy subsegments with more aligned offerings, leading to a downward spiral in which the firm has fewer, less profitable customers that are more costly to serve.

Define life experiences

An individual's life experiences capture events and experiences unique to his or her life that have lasting impact on the value and preference he or she places on products and services, which in turn affects preferences independent of individual differences

Define functional needs

An individual's personal decision weightings across functional attributes based on his or her personal circumstances

Perceptual maps

Analysis tool to aid in positioning decisions

What are the analyses to marketing principle #4: All Resources are Limited?

Anchoring adjustments, response models and experimental models

Marketing Principle #4: All Competitors React

Anticipating competitors' reactions now and in the future, and being able to build barriers that hold up against sustained competitive assaults, termed sustainable competitive advantages (SCA)

What does the first principles approach?

Argues that marketing strategy is the pursuit of solutions to four fundamental marketing problems and organizes all frameworks, processes and analyses to solve these problems

Lifecycle perspective: "Ok" first approximation

Assumes "all" customers, markets, products, industries move thru a sequential set of "stages" as they mature Applies a standard set of marketing tactics at each stage

Customer lifecycle

Attempts to capture how individuals typically change as they age and reach common age-related milestones

Acquisition stage

Begins with first contact, typically before the first purchase occurs, when prospects and early customers have similar needs

Sources of SCA:

Building brands and relationships - Awareness, image, status, meaning, reciprocity debts - Unconscious psychological barriers Innovative offerings - products, services and experience (value) - Patents, trade secrets, habits, switching costs - Costs, scale, location, first mover

What are the inputs to marketing principle #2: All Customers Change?

CRM data- Your Customers - individual customer's sales, margins, costs, behaviors/needs over time/events Past Marketing Programs - sources of customers, past programs targeted at specific customers Lost Customers - Cause defection, characteristics of lost customers

CLV approach captures "true" contribution of each customer at any stage by accounting for:

Customer heterogeneity and dynamic effects Tradeoffs among AER strategies

What is customer heterogeneity considered? What must firms do?

Customer heterogeneity is a fundamental "problem" that all firms must address when developing an effective marketing strategy

What are the analyses to marketing principle #2: All Customers Change?

Customer lifetime value (CLV), Hidden Markov Model (HMM), Choice models, Factor, cluster, discriminant analyses

First Principle #2: All Customers Change

Customer's desires/needs for most products and services change overtime due to specific events

Why customer's needs vary?

Customer's needs vary not only due to inherent differences in people (heterogeneity) but also as people and markets change (dynamics)

What is the key to an effective marketing strategy?

Customer-Centricity

Define self identity/image

Customers actively seek products that they feel will support or promote their desired self-image

Define latent customer heterogeneity

Defined as potential differences in desires that are unobserved and have not become manifest in customer purchase preferences or behaviors yet

RFM analysis is "poor man's" CLV

Direct marketers have been using a simplified version of the CLV for decades, targeting customers to receive expensive catalog mailings.

What perspective do economist and management scholars tend to take?

Economists: industry-level perspective Management scholars: firm-centric perspective

CLV approach

Evaluates a firm's profit as the sum of each customer's lifetime discounted cash flows

Customer dynamic segmentation approach

Evaluates existing customer's behaviors/needs in each AER stage to understand temporal differences - customer are "temporarily" similar in each stage (assumption) - Matches marketing action domains (i.e., acquisition is often self-contained marketing domain)

Marketing Analytics #1: Factor Analysis & when to use it

Factor analysis is a data reduction technique that can be used to identify a small number of latent "factors" that explain the major variation in a large number of observed variables. Use it: To condense a large "pool" of potential customer needs, wants, and preferences in a short set of similar characteristics To reduce high correlation among predictors

What are the analyses to marketing principle #1: All Customers Differ?

Factor analysis, Cluster analysis, GE matrix, Discriminant analysis, Classification

What are the analyses to marketing principle #3: All Competitors React?

Field experiments, conjoint analysis, multivariate regression, choice models

Marketing strategy key to long-term financial performance: Chain Ratios

Firm's Sales Revenue= market demand * firm's market share * firm's average selling price Firm's Profit= firm's sales revenue * firm's gross margin - firm's sales & marketing expenses - firm's G&A expenses

Define marketing activities

Firms' attempts to build linkages between their brands and prototypical identities or meanings

First Principle #1: All Customers Differ

For most products and services customers vary widely on desires/needs. Even for "commodities" (e.g. coffee, water), grocery stores carry 60,000+ SKUs

Where did the idea of strategy come from?

From the military.

Marketing Analytics for STP: MA1- Factor analysis

Groups similar questions (purchase attributes) together to avoid biasing the further analyses

Why not just use "case" examples?

Hard to find a case example for every marketing problem. Often what works for "case firm" will for not work for your firm because: - different customers - different stage of product or industry lifecycle - different competitive situation - different resources

What are the approaches & processes to marketing principle #4: All Resources are Limited?

Heuristic approach, Attribution approach

What is a key requirement for making good marketing decisions?

Identify underlying factors on which the decisions depend

Segmenting, Targeting, and Positioning (STP) Approach

In order to better match heterogeneous customer needs, firms focus their efforts on small "homogenous" customer groups: Segmenting- Dividing marketing into groups of similar customers (slice the pie into pieces) Targeting- Selecting best customer group to sell to (picking the slice to eat) Positioning- Improve your relative advantage in the minds of your targeted customers (also address Marketing Principle 3 by building SCA)

These RFM (recency, frequency and monetary) variables put customers...

In rank-ordered groups, based on their value in the past year (not by modeling but by rank-order sorting)

What are the outputs to marketing principle #1: All Customers Differ?

Industry Segmentation - Customer segments, needs demographics and opportunity of each segment Target Segment - Detailed needs, demographics and value of target segment(s), discriminant function and relative perceptions Positioning Statement - Who (target segments), what needs/benefits, why (relative advantage & support)

Why is marketing strategy key to long-term financial performance?

Large amount of research documents its impact on financial performance, but many people don't realize the scope of influences on sales and profits

What are the approaches and process to marketing principle #2: All Customers Change?

Lifecycle approach Dynamic segmentation approach Acquisition, expansion, retention (AER) model Lost customer approach

What do segmentation and targeting need to account for?

Lifecycle changes/customer dynamics

Why a first principles approach to marketing strategy?

Managers are being overwhelmed with more and more analysis tools, processes and research technique, but hard to know when to apply each one

What are the outputs to marketing principle #4: All Resources are Limited?

Marketing metrics: marketing & financial metrics Plans and Budgets: budget size & allocation, time horizon

What can customer heterogeneity be?

May be latent or hidden.

What is the most basic issue facing managers?

Most basic issue facing managers, as they make strategic marketing decisions for their firms is that all customers differ

First Principle #4: All Resources are Limited

Most marketing decisions require tradeoffs across multiple objectives where resources are constrained and often interdependent

Marketing Analytics #3: Discriminant and classification analyses and when to use it

Multivariate statistical techniques used to determine how segments of consumers differ in their characteristics. Use it: To classify a large set of customers into small subgroups that have different characteristics. To predict or classify which subgroup a new customer belongs to, so as to better target marketing activities

What is the most difficult first principle of marketing to execute?

Of the four first principle of marketing, managing SCA may be the most difficult to execute.

What are the inputs to marketing principle #4: All Resources are Limited?

Positioning Statements: who, what, and why, overall and for each persona, across AER stages AER Strategies: what strategies work best for each persona across AER stages BOR Strategies: brand, offering/innovation, relationship marketing

What are the inputs to marketing principle #3: All Competitors React?

Positioning statements: targets (external customers), AER (internal personas) AER strategies: what strategies work best for each persona/AER stage Future Trends: technology trends, regulatory trends, socioeconomic trends

Positioning

Process of improving your relative advantage in the minds of your targeted customers. - Changing both your actual and perceived offering - Using all three "Cs" as inputs: customer, company, competitors

Product lifecycle

Proposes that various products go through four typical stages in relation to their acceptance by society: introduction, growth, maturity, and decline

Pros & Cons of lifecycle perspective

Pros: easy to apply, makes common sense Cons: misses many unique trigger points and migration paths (ignores temporal heterogeneity), inaccurate and/or ineffective for many firms

What are the three readily available customer behaviors that RFM analysis uses?

Recency or time elapsed since last purchase Frequency of purchases in last period Monetary purchases in last period

What are the outputs to marketing principle #3: All Competitors React?

SCAs: - Existing SCAs, why you win now - Future SCAs, how you will win in future BOR Strategies: - Brand strategies - Offering/innovation strategies - Relationship marketing strategies

What are the approaches & process to marketing principle #1: All Customers Differ?

Segmenting, targeting and positioning (STP) Perceptual/positional maps Customer-centric view

What determines a strategy's success or failure?

The customer

Define first principles

The foundational concepts or assumptions on which a theory, system or method is based

When to use Customer Lifetime Value (CLV) Analysis?

To identify which customers are worth acquiring and retaining. To determine where to target marketing programs to maximize the firm's return on marketing investments. To understand the "true" value of a customer to a firm, including both revenues and costs

Define customer heterogeneity

Variation among customers in terms of their needs, desires, and subsequent behaviors

Marketing Analytics for STP: MA2- Cluster analysis

groups similar customers together into segments

Expansion stage

has firms that are trying to upsell or cross-sell to expand their sales and engagement with existing customers

Customers change; failure to understand and address these dynamics will...

lead to poor business performance

The shift in focus from firm to customer by incorporating the customer's perspective represents a...

natural, long-term progression in strategy

Marketing Analytics for STP: MA3- Multiple discrimination analysis (MDA)

predicts true segment membership using demographic variables to facilitate targeting and positioning decisions

Repositioning

process by which a firm shifts its target market

Management scholars added two elements to apply the strategy concept to business:

the need to make the differential advantage sustainable and the idea that the objective of any business strategy is to enhance firm performance