Strategies to fight low cost rivals - London Business...

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MarketingIssue 9 October 2008

Strategies to fight low cost rivals

Price checkUsing price to awaken

consumer thinking

Place your betsThe success of Betfair

PLUS: Value Merchants

– how to create superior value in

business markets

Pricebusters

Customer Focused Marketing: The Key to Unlocking Profits Aligning customers and market strategy Dates: 2-7 November 2008, 31 May – 5 June 2009, 8-13 November 2009

Market Driving Strategies Create new markets through innovation Dates: 9–14 November 2008, 14-19 June 2009, 15-20 November 2009

For more information contact our Client Services Team on +44 (0)20 7000 7391 or email [email protected]

Marketing Fundamentals Examine and critique core marketing principles Dates: This is an evening programme (once a week from 12th January 2009 until 16th March 2009)

For more information, contact the London Business School Centre for Marketing via email: [email protected]

London Business School Tel +44 (0)20 7000 7390 Email [email protected] www.london.edu/

Economic downturn?Time to address the marketing challenges facing your organisation

London Business School’s marketing programmes will provide you with the knowledge and tools needed to market successfully during uncertain times.

“By far the single most important thing marketers can do to boost the bottom line is improve the way they price. Interestingly, while firms continue to spend a lot of money trying to reduce costs or bolster revenue, very little attention is paid to optimising price.”page 14 Marco Bertini

All enquiries to:Centre for MarketingLondon Business SchoolRegent’s ParkLondonNW1 4SAUnited KingdomTel +44 (0)20 7000 8627Email [email protected]

Contact >>

In this issue

News and forthcoming events

Strategies to fight low cost rivals Companies have only three options: attack, coexist

uneasily, or become low-cost players themselves. None of them is easy, but the right framework can help you learn which strategy is most likely to work, says Nirmalya Kumar.

Value Merchants: Demonstrating and Documenting Superior Value in Business Markets An excerpt from a new book by James Anderson, Nirmalya Kumar and James Narus.

About Betfair A look at this company launched in 2000 and now

the world’s number one online betting exchange.

Marketing Insight interview: Anton Bell Paddy Barwise talks to Director of Central Marketing

Anton Bell about the role of marketing and branding at Betfair.

Introducing Marco Bertini London Business School Assistant Professor

Marco Bertini discusses the effect that price can have on consumers’ judgments and preferences and suggests how pricing can be used to solve some of the issues facing marketers today.

Using price to awaken consumer thinking... ...and impact buying behaviour. Marco Bertini develops the findings of recent research on the psychological aspects of pricing.

Centre for Marketing contact information

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3Issue 9 October 2008

Marketing Insight Issue 9

New faculty appointments >>

Forthcoming Event Centre for Marketing

12 November 2008

Price Discrimination Strategies

Anja Lambrecht London Business School

A company can price discriminate between customers with a high and a low willingness to pay by offering multiple pricing plans. Such plans differ in their monthly fee, their usage price and possibly the number of free units. For example, mobile phone companies offer many different cell phone plans ranging from none to unlimited free minutes. Web hosting companies charge different monthly fees depending on the amount of web space and bandwidth. Insurance companies typically charge a flat fee per month but experiment with pay-as-you-drive insurance. This seminar highlights several strategies that companies can use to price discriminate with optional pricing plans and evaluates the

Rajesh K. Chandy

BA (Madurai Kamaraj) MBA (Oklahoma) PhD (Southern California)

Professor of Marketing

Rajesh K. Chandy joins London Business School on sabbatical leave from the University of Minnesota, where he holds the James D. Watkins Chair in Marketing, and served until August 2008 as Co-Director of the Institute for Research in Marketing. Chandy served (with the CEOs of 3M, IBM, Microsoft, Medtronic, and UPS) as a member of the US Secretary of Commerce Advisory Committee on Measuring Innovation in the 21st Century Economy. His areas of expertise include innovation, technology management, and marketing strategy. His research and publications on innovation have received several awards, including the Journal of Marketing Harold Maynard Award for contributions to marketing theory and thought, the American Marketing Association Early Career Award for Contributions to Marketing Strategy, the AMA TechSIG Award for the best article on Technology and Innovation, the Marketing

Science Institute Alden Clayton Award for the best marketing dissertation proposal, and the Mary Kay Award for the best marketing dissertation. Fortune magazine described his findings on innovation as “an unorthodox and bracing set of management principles.” He serves on the editorial boards of Journal of Marketing Research, IEEE Transactions on Engineering Management, Journal of Marketing, International Journal of Research in Marketing, Journal of the Academy of Marketing Science, and Marketing Letters. Chandy has received a number of teaching awards, including the Outstanding Professor of the Year Award, the Award for Excellence in Teaching, and the Outstanding Faculty Dedication Award at the Carlson School of Management, University of Minnesota.

Rajesh K. Chandy

John Mullins

BA (Lehigh) MBA (Stanford) PhD (Minnesota)

Associate Professor of Management Practice in Marketing and Entrepreneurship

John Mullins is an Associate Professor of Management Practice in the Entrepreneurship and Marketing groups at London Business School. He earned his MBA at the Stanford Graduate School of Business and his PhD. from the University of Minnesota. An award-winning teacher, John brings to his teaching and research 20 years of executive experience in high-growth retailing firms including two ventures he founded and one he took public. Since becoming a business school professor in 1992, John has published three books, numerous cases and more than 40 articles in a variety of outlets, including Harvard Business Review, the MIT Sloan Management Review, and the Journal of Product Innovation Management. His research has won national and international awards from the Marketing Science Institute, the American Marketing Association, and the Richard D. Irwin Foundation. He is a frequent speaker to audiences in entrepreneurship and venture capital.

John’s best-selling trade book, The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan (2e, London: Prentice-Hall/FT 2006), is the definitive work on the assessment and shaping of entrepreneurial opportunities. John is also co-author of Marketing Management: A Strategic Decision Making Approach, 7th edition and Marketing Strategy: A Decision Focused Approach, 5th edition. John has consulted and taught executive education on four continents for a variety of organisations both large and small, including the African and European Venture Capital Associations, Eastman Kodak Company, the International Finance Corporation of The World Bank, the International Planned Parenthood Federation, Kenya Airways, Phoenix Equity Partners, Pumpkin Ltd., Roche Diagnostics, Time Warner Communications, the Young Presidents’ Organization, and numerous others.

John Mullins

Forthcoming Events Executive Education

Executive Workout Launch Events Be the first to experience first-hand a taster of our new 2-day programmes, network with other senior executives, meet and learn from world-class faculty.

After Hours A series of informal evenings when senior business executives can meet with the

London Business School Executive Education senior management team. Each evening includes a keynote seminar followed by a networking drinks reception.

October 2008 Executive Workout Launch Event, London Wednesday 1 October 08.00 – 9.30am With Steve Currall, Visiting Professor of Organisational Behaviour and Entrepreneurship

After Hours with London Business School, hosted by Allen & Overy, FrankfurtTuesday 14 October 18.30pm onwards

With Steve Currall, Visiting Professor of Organisational Behaviour and Entrepreneurship

November 2008 Executive Workout Launch Event, LondonMonday 17 October 18.30pm onwards

With Dominic Houlder, Adjunct Professor of Strategic and International Management

After Hours with London Business School, ZurichMonday 17 October 18.30pm onwards With Zeger Degraeve, Professor of Decision Sciences

Other cities we will be visiting in 2009 include: Paris, Amsterdam, Dubai, Abu Dhabi, Copenhagen, Milan and London

profitability of such pricing strategies based on results of multiple research projects. We discuss questions such as why customers and companies benefit from a “flat-rate bias”, how customers’ uncertainty about usage contributes to profits, when it may be profitable to switch customers to new tariffs and whether companies should offer so-called rollover minutes.

For more information and to register for any of the events listed, please contact either Rebecca or Kate in our events team: [email protected] or visit www.london.edu/execed/events/

For full details and to register, please visit www.london.edu/marketing/

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News

When market leaders do respond, they often set off price wars, hurting themselves more than the challengers. Companies that wake up to that fact usually change course in one of two ways. Some become more defensive and try to differentiate their products—a strategy that works only if they can meet a stringent set of conditions. Others take the offensive by launching low-cost businesses of their own. This so-called dual strategy succeeds only if companies can generate synergies between the existing businesses and the new ventures. If they cannot, companies are better off trying to transform themselves into solution providers or, difficult though it is, into low-cost players. Before I analyse the various strategy options, however, I must dispel some myths about low-cost businesses.

The sustainability of low-cost businesses Be it in the classroom or the boardroom, executives invariably ask me the same question: Are low-cost businesses a permanent, enduring threat? Most managers believe they aren’t; they’re convinced that a business that sells at prices dramatically lower than those incumbents charge must go bankrupt.

Successful price warriors stay ahead of bigger rivals by using several tactics: they focus on just one or a few consumer segments; they deliver the basic product or provide one benefit better than rivals do; and they back everyday low prices with superefficient operations to keep costs down. That’s how Aldi, the Essen-headquartered retailer that owns Trader Joe’s in the U.S., has thrived in

the brutally competitive German market. Aldi doesn’t pamper customers. Its stores

display products on pallets rather than shelves in order to cut restocking time and save money. Customers bring their own shopping bags or buy them in the store. Aldi was one of the first retailers to require customers to pay refundable deposits for grocery carts. Shoppers return the carts to designated areas, sparing employees the time and energy needed to round them up. At the same time, Aldi gets the basics right. There are several checkout lines, so wait times are short even during peak shopping hours. Its scanning machines are lightning fast, which allows clerks to deal quickly with each shopper. Most retailers follow local pricing, but every Aldi store in a country charges the same price, which reinforces the chain’s image as

a consumer champion. Aldi sells products far cheaper than rivals do (their average markup is 13% while that of most European retailers is 28% to 30%) and according to European market research firms, the chain had a 20% share of Germany’s supermarket business.

As Aldi’s story suggests, the financial calculations of low-cost players are different from those of established companies. They earn smaller gross margins than traditional players do, but their business models turn those into higher operating margins. Those operating margins are magnified by the businesses’ higher-than-average asset turnover ratios, which result in impressive returns on assets. Because of those returns and high growth rates, the market capitalisations of many upstarts are higher than those of industry leaders, despite the larger equity bases of the latter.

Interestingly, low-cost companies stay ahead of market leaders because consumer behaviour works in their favour. If a business gets a customer to buy its products or services on the basis of price, it will lose the customer only if a rival offers a lower price. Since the discounters win all their customers because of the prices they offer, they don’t have to worry about traditional rivals that always charge premiums. Only new entrants with even lower cost structures can compete with the price warriors.

The futility of price wars The moment a company spots a low-cost competitor, it would do well to ask itself this question: Is our new rival targeting a segment we don’t want to serve or will it eat into our sales? If the new entrant has set its sights on customers no other business serves, incumbents needn’t worry—for the moment. They can observe without engaging the competitor. That wait-and-watch strategy often works for companies that market products for people at the very top of the pyramid, such as wines, perfumes, and cosmetics.

Even when market leaders copy the critical elements of low-cost players’ business models, they are unable to match their prices. That’s because the individual elements of the model don’t matter as much as the interactions among them.

Slashing prices usually lowers profits for all incumbents without driving the low-cost entrant out of business. I learned that firsthand while serving as a consultant to a European telecom-equipment provider that was competing against traditional rivals as well as a low-cost Asian competitor for a multimillion-dollar contract in Africa. All the bidders kept cutting prices in

Strategies

cost rivalsto fight low

Nirmalya Kumar

Over the past five years, I’ve studied around 50 incumbents and 25 low-cost businesses. My research shows that ignoring cut-price rivals is a mistake because it eventually forces companies to vacate entire market segments.

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ValueMerchants:Demonstrating and DocumentingSuperior Value in Business Markets

order to best the Asian rival’s offer, which proved to be the lowest after every round of bidding. Eventually, the telecom giants discovered that the Asian company had offered a 40% discount on the lowest price the customer could negotiate with its rivals! Not surprisingly, the low-cost company won the contract. In addition, although the telecom giants would not have made profits on their lowest bids, the Asian contender seemed likely to do so.

When differentiation works When businesses finally realise they can’t win a price war with low-cost players, they try to differentiate their products in a last-ditch attempt at coexistence. Companies, we’re told, should adopt the following approaches: Design cool products, as, say,

Apple and Bang & Olufsen do. Continually innovate in the

tradition of Gillette and 3M. Offer a unique product mix, like that of

Sharper Image and Whole Foods. Brand a community à la Harley-

Davidson and Red Bull. Sell experiences, as Four Seasons,

Nordstrom, and Starbucks do. Three conditions will determine their efficacy.

First, smart businesses don’t use these tactics in isolation. Second, companies must be able to persuade consumers to pay for benefits and the ability to do so usually depends on the products they sell. And third, companies must bring costs and benefits in line before implementing the differentiation strategy. Dealing with dual strategies When companies discover that the low-price customer segment is large, they often set up low-cost ventures themselves. Because of their years of industry experience as well as their abundant resources, incumbents are often seduced into believing that they can easily replicate cut-price operations. Moreover,

the business models of such rivals appear to be simpler than their own. In the 1990s, for instance, all the major airlines launched no-frills second carriers—Continental Lite, Delta Express, KLM’s Buzz, SAS’s Snowflake, US Airways’ MetroJet, United’s Shuttle—to take on low-cost competition. All these second carriers have since been shut down or sold off, showing how tough it is for companies to use the dual strategy.

Although most executives don’t realise it,

companies should set up low-cost operations only if the traditional operation will become more competitive as a result and the new business will derive some advantages that it would not have gained as an independent entity.

Another factor that affects incumbents’ low-cost businesses is the allocation of resources. When disruptors are new ventures, they face market tests of their capital needs. Subsidiaries face internal resource-allocation processes that optimise different criteria—both for legitimate reasons, such as higher margins and lower risk, as well as illegitimate ones, such as power and politics. Consequently, the parent may end up starving the new unit.

Switching to conquer If there are no synergies between traditional and low-cost businesses, companies should consider two other options: they can switch from selling products to selling solutions or, radical though it may sound, convert themselves into low-cost players.

Switch to solutions. Since low-cost players turn incumbents’ basic products or services into commodities, existing companies may be able to succeed by selling solutions. By offering products and services as an integrated package, companies can expand the segment of the market that is willing to pay more for additional benefits. Solutions offer several advantages: They include a large service component, so it’s hard to evaluate the quality of the solutions

various companies provide. Over time, the seller develops a deep understanding of the customer’s business processes, so the customer finds it difficult and costly to change suppliers. Furthermore, since low-cost players have limited product ranges and service capabilities, they cannot offer solutions.

Despite the popularity of this strategy, making the changeover is difficult. Many companies, such as Boots, Compaq, Xerox, and Uniys, didn’t succeed because they assumed that selling solutions required modifying their existing business models rather than transforming them.

Switch to low-cost modelsIn theory, a company can consider switching from a high-cost to a low-cost business model. In practice, such a transformation is unlikely because the incumbent will have a profitable albeit shrinking business to maintain. Moreover, switching to a low-cost business model means acquiring capabilities that are different from the company’s existing competencies. It’s hard to imagine many market leaders having the stomach for that.

Low-cost players will continue to mushroom, and some will succeed. However, there will always be two kinds of consumers: those who buy on the basis of price and those who are partial to value. Therefore, there will always be room for both low-cost players and value-added businesses. How much room each will have depends not only on the industry and customers’ preferences, but also on the strategies traditional businesses deploy. If incumbents don’t take on low-cost rivals quickly and effectively, they can blame no one for their failure but themselves.

By James C. Anderson, Nirmalya Kumar and James A. Narus

This article is an abstract from the author’s research, which can be read in its entirety in Strategies to Fight Low-Cost Rivals, Harvard Business Review, 84 (December 2006), 104-12.

Purchasing managers in business markets are becoming increasingly sophisticated in their strategies and tactics. Increasingly held accountable for reducing costs, purchasing and other customer, managers don’t have the luxury of simply believing suppliers’ claims of cost savings. A relatively easy and quick way to obtain savings is for purchasing managers to focus on price and obtain price concessions from suppliers. To enhance their negotiating power, purchasing managers attempt to convince suppliers that their offerings are the same as their competitors, so that they could be easily replaced.

In the face of such pressure, suppliers cave in and match competitor prices. It is a rare commodity in business markets to find firms that do business based on demonstrably superior value.

Big idea: Prices are transparent, value is opaque. The book presents a methodology for how to demonstrate the value of your firm’s offering versus the next best alternative in monetary terms.

Value merchants versus value spendthrifts

A value merchant recognises the supplier’s own costs and the market offering’s value to the customer and works to obtain a fair return for both the supplier firm and customer firm. The value merchant stands in stark contrast to the all-too-common value spendthrift, who

squanders the superior value of the supplier’s market offerings while getting little in return.

Doing business based on demonstrating and documenting superior value is, indeed, a rare commodity. Yet it doesn’t have to be so. By adopting the customer value management approach presented below, value merchants can prevail when they encounter challenges.

Conceptualise value focuses on the fundamental building block of the customer value management and addresses questions like: What do we mean specifically by “value” in business markets? How does one define points of difference, points of parity and points of contention vis-à-vis the next-best alternative?

Formulate value propositions begins with analysing what potential changes in the market offering customers would value most vis-à-vis the next-best alternative. This is used to develop a value proposition to aspire to, and qualitative research is conducted to refine the value proposition.

Substantiate value propositions provides a methodology for persuasively substantiating value propositions to customers.

Tailor market offerings demonstrates how a deep understanding of customer value can be used to construct segment-specific market offerings as naked solutions with options. This

allows more refined targeting through various levels of service and enables suppliers to capitalise on differences between customers.

Transform sales force to value merchants challenges suppliers to transform their sales forces from selling on price to becoming value merchants.

Profit from value provided is all about how companies can profit from the superior value they provide customers. Although it is natural to think first of price premiums, there are also three other means of obtaining a fair return from customers for value provided in business markets: a more profitable mix of business, a greater share of the customer’s business, and the elimination of value drains and value leaks.

This content is taken from the new book, Value Merchants: Demonstrating and Documenting Superior Value in Business Markets by James C. Anderson, Nirmalya Kumar and James A. Narus

It brings together years of consulting experience and research to provide the reader with a detailed explanation of customer value management and how to implement it. Discover the required tools to develop new strategies that shift the focus from pleasing customers by reducing prices to retaining customers by demonstrating superior value.

Available to purchase through Harvard Business School Press and Amazon


Feature ?

“Successful price warriors stay ahead of bigger rivals by using several tactics: they focus on just one or a few consumer segments; they deliver the basic product or provide one benefit better than rivals do; and they back everyday low prices with superefficient operations to keep costs down.”

It launched the betting exchange concept with cutting-edge technology in June 2000. Co-founders Andrew Black and Edward Wray were named Ernst and Young Emerging Entrepreneurs of the Year in 2002. The company has since become global and runs from bases in London, Malta, and Tasmania.

Central to Betfair’s success is its technology which allows it to manage risk perfectly.The result is that punters can choose their own odds and effectively bet against each other. Betfair’s bookmaking model results in odds which, according to one study, are on average more than 20 percent better than the prices offered by conventional bookmakers and offers genuine ‘in-running’ betting - this means customers can bet on an event after it has started. Betfair charges a small commission between 2-5% on net winnings. Losing customers pay no commission. Betfair launched its own Starting Price (SP) in December 2007 allowing customers to take SP odds set by customer demand instead of being dictated by the bookmaker.

Betfair offers betting on over 50 different sports and events from 122 different countries. Horse racing is the dominant sport, then soccer and tennis. Cricket and golf are growth areas. Others include reality TV and financial markets.

The Betfair Games portfolio has expanded to diversify its revenue streams in what is a highly competitive market. Multiples and Accumulator Betting was launched in 2007 for customers to have the chance to win across selections with a range of accumulator betting options. This runs from Malta and has been a significant area of growth and investment. In addition, Betfair Poker was launched in 2004 and is now the exclusive sponsor of the World Series of Poker Europe in London. It’s the result of a three year partnership with Harrah’s Entertainment to stage the first World Series of Poker event outside of Las Vegas. Betfair Casino was launched in October 2006 with an innovative ‘zero lounge’ which means the games have no house edge.

The Betfair mobile product was launched in 2006 allowing in-play betting on the betting

About Betfair Betfair is the UK’s biggest online betting company with over 1,800,000 registered customers and over 500,000 active users.

exchange. The company bought and rebranded ‘Mobet software’ from the Scottish IT company Rapid Mobile to enable secure transactions to be carried out on a mobile network. Betfair Australia was awarded a betting exchange licence by the Tasmanian Gaming Commission and began operating in 2006. In 2007, the £10m launch of ‘Tradefair’ enabled betting on financial markets with a white label agreement signed with London Capital Holdings to produce a spread betting product. It means the company now employs over 1,200 people across its bases in Hammersmith, Stevenage, Hobart and Malta.

With over 350 engineers, Betfair has one of the fastest and most resilient betting platforms, completing 5 million transactions per day – more than all of Europe’s stock exchanges combined - and 99.9% of the bets are handled in less than a second. Oracle views Betfair as one of its top five customers in the world today, alongside eBay and Google. There are automated price feeds to third parties for mobile, automated trading or historical data. The API (Application Programming Interface) to third parties integrates the exchange with participants in the Developers Program to build customised tools and interfaces for Betfair sports exchange.

Betfair’s aim is to be the unassailable choice of the punter by providing the best value, service and protection. Betfair has a long-standing policy of not accepting US customers, funds or bets and was not affected by UIGEA (Unlawful Internet Gambling Enforcement Act) passed in 2006, restricting internet gambling financial processing.

In the UK, Betfair pays tax in exactly the same way as every other bookmaker: a gross profits tax at 15%. This allows all bookmakers to compete on an even footing and ensures a well regulated and safe environment for all punters. In the 2007 budget, Gordon Brown set the Remote gaming duty’ at 15% in line with the rate of general betting duty.

Betfair works closely with governments and regulators to provide transparency. It has a 40 strong Integrity Team which monitors betting patterns and records details of every bet and currently has 32 Memoranda of Understanding (MoU) with sports governing bodies to share information about betting patterns and customer behaviour.

At the 2007 tennis tournament in Sopot, Poland, Betfair voided £3.4m bets between Martin Vassallo Arguello and Nikolay Davydenko following suspicious betting patterns during the match. The information provided by the Integrity Team to the Association of Tennis Professionals was key to the Gunn and Rees report ‘Environmental Review of Integrity in Professional Tennis’ in May 2008.

Betfair has received two Queen’s Awards for Enterprise: 2003 for Innovation and 2008 for International Trade. In 2004, it won Company of the Year at the Confederation of British Industry Growing Business Awards and in November 2005, it retained its title as Company of the Year at the CBI Growing Business Awards.

“Betfair completes 5 million transactions per day – more than all of Europe’s stock exchanges combined.”


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How has the brand developed over time?We have always been keen to differentiate ourselves from the traditional bookmakers and our early strap line, ‘Sharp minds Betfair’ was intended to be aspirational and inclusive. We found this approach excluded the more recreational segments of the marketplace and some bettors believed that we weren’t relevant to them. Currently, our aim is to promote both the relevance of our gambling proposition - through scale, value and choice - whilst reinforcing the key P2P differentiator of our sportsbook offering, which is betting against other people. In summary it’s a superior offering and hence, ‘Betting as it should be’.

So does the brand now have to stretch across different categories? Betfair historically was purely a sports betting exchange, but we also have Poker and Casino as part of our portfolio. Tradefair was launched in 2007 for those segments attracted to financial and spreads products and, more recently, Tai Kai, where you can set up your own tournaments and play against your friends for money or just for fun. Growing our brand from our primary Exchange heritage and moving from niche to mainstream has been our biggest challenge.

What’s the most exciting marketing innovation that you’ve undertaken while you’ve been there? Betfair continues to innovate, developing new products and businesses and expanding into new markets, so the Central Marketing Team are constantly faced with new challenges. In the past 12 months we embarked on two new partnerships, the main one being with Harrah’s Entertainment sponsoring the World Series of Poker Europe. In October we went to air with our first TV campaign and launched the Betfair Starting Price (SP) in November, which kicked off a 5 month multi-channel campaign delivering a series of new innovations from ‘the Betfair Stable’. This culminated in the Grand National activity which delivered a record number of new customers.

And this really helped building awareness of the Betfair brand? Brand investment has been central to the past 12 month’s marketing success with increased exposure on television extending our reach and driving growth in the UK and Europe. We have a very strong value proposition but the benefits of the P2P concept can be a difficult message to get across in a press ad, a poster or even online. TV has provided a richer medium to

communicate with different segments of the gambling population and show that we are relevant to everyone who wants to place a bet or gamble online. This is important when some of our competitors have decades of high street presence benefiting their online proposition.

What was the message from the TV?The TV campaign ran from October and used animation to represent the Betfair world - the scale of our community, betting against others online, providing value to the customer. Over three waves we have seen significant growth in spontaneous awareness, improved understanding of our portfolio and, importantly, a 70% increase in consideration.

What do you think are the mistakes people are making in marketing? Aligning creativity with empiricism, and

achieving clear measurable objectives, is fundamental to marketing effectiveness. Marketers are often focused on developing the big idea or getting the campaign out of the door and lose sight of the original objectives and the target audience. Constantly evolving and learning from successes and mistakes is critical to improving effectiveness and in a fast moving environment it can be difficult to stop and take stock of where these improvements can be realised.

Why are you supporting the Centre for Marketing at London Business School? London Business School is a great place for staying in touch with new thinking about business and marketing. Operating in new territory, it is vital to look at exemplars in other categories and apply learnings and best practice to our relatively unique model.

What brought you to Betfair?After Centrica sold Goldfish.com to LloydsTSB, I began looking for a new and fresh online environment that would continue my move away from financial services. When the Betfair opportunity came along, the company was a relatively new and successful enterprise with huge scope for global growth. I’d grown up around betting and gambling - my mum’s partner worked as an on-course bookmaker and I’d done a stint with William Hill when I was at university - so I was excited by the chance to be part of something that was revolutionising the gambling industry.

Tell me about the Insight function at BetfairBuilding the Insight capability at Betfair was my first challenge. I started with a couple of data analysts querying the new data warehouse and then grew to a strong team of Insight specialists responsible for customer understanding, behavioural analysis and modelling, consumer and market research, competitor and market intelligence. The aim was to bring these areas together to inform and drive business decisions.

What would be a typical Insight project?One of the first research projects we undertook was simply to understand what our customers thought about us. Our customer base consisted mostly of sophisticated early adopters who were very passionate about their betting and with it, the opportunity that we provided them versus the traditional bookmaker. We were looking

to grow our product portfolio and needed to prioritise this against customers’ perceptions of the values we stood for – being innovative, offering value, being fair and on the side of the punter and obviously, person to person (P2P). Talking to our customers provided some fascinating insights into their motivations and we were able to model their responses to the range of new product concepts. Further quantitative understanding revealed that our savvy sports betting customers were still playing more recreational products with our competitors, whilst exhibiting sophisticated behaviour on the Exchange, so it gave us confidence in our plans for future growth.

How has marketing evolved at Betfair?In the early days of the Exchange, customer acquisition was heavily driven by word of mouth but as our product portfolio has grown over the last four years, so has our marketing investment. Understanding the effectiveness of our marketing spend is critical as the product and channel mix evolves and we look to prioritise new opportunities. Our Finance and Insight teams work very closely with Marketing to stay on top of this.

As we grow, there is an increasing challenge to communicate effectively with our customer base. Targeting relevant and valuable communications to our customers, into an increasingly crowded email inbox, is something that we strive to improve. A solid understanding of customer life stage, value and risk is central to this activity.

Professor Patrick Barwise talked to Anton Bell about the role of marketing and branding at Betfair.

Marketing Insight interview:

Betfair 2004-presentDirector Central Marketing

Customer Acquisition, CRM, Insight, Planning and Delivery – across sports, casino, poker

Director/Head of InsightCustomer, consumer, competitor and market analytics and research

Centrica 2000-2004Group Insight Manager – Group CRM

Marketing, customer relationship management and insight role for Centrica Group – Goldfish, OneTel, The AA, British Gas

Capital One 1999-2000Senior Analyst/Project Manager

Marketing sub-prime financial credit products and new partnership development

London School of Economics and Political ScienceBSc (Econ) Econometrics and Mathematical Economics

Director of Central Marketing, BetfairAnton Bell

Curriculum Vitae >>

“The online betting exchange enables punters to choose their own odds and bet against each other”


Interview

“By far the single most important thing marketers can do to boost the bottom line is improve the way they price. Interestingly, while firms continue to spend a lot of money trying to reduce costs or bolster revenue, very little attention is paid to optimising price.” ”


Faculty Profile

What do you see as the main challenge for the marketing function today?One of the main challenges still faced by the marketing function today is accountability. For a number of years now there has been pressure on marketers to demonstrate the return generated by their investments. A lot of work has been done in that area. I can think of a number of important research papers and books that have provided useful insights. At the same time, I think there is still a considerable amount of work to do. More important, I am concerned about some of the reactive measures that marketers seem to be taking. Pressured to quantify their decisions, some marketers are reverting to actions that have little to do with customers. One example is segmentation. Segmentation is getting a lot more attention nowadays; however, marketers seem to favour more and more schemes that rely on easy-to-justify variables such as demographics and geography in consumer markets and account size or industry type in business markets – none of which really identify what customer needs exist in the marketplace. A second example is in pricing, the area I conduct most of my research and teaching in. Harsher economic times are putting pricing under the microscope. Unfortunately, marketers continue to base their pricing decisions on the costs of the products they sell. Again, this move is easy to quantify and justify, but neglects the key criterion: what is the customer actually willing to pay?

What is the single most important thing that marketing can do to boost the bottom line?By far the single most important thing marketers can do to boost the bottom line is improve the way they price. Interestingly, while firms continue to spend a lot of money trying to reduce costs or bolster revenue, very little attention is paid to optimising price. This is amazing to me because price is by far the most significant profit lever. A number of studies have shown that a simple 1% increase in price can increase profit by 10-12% on average. This kind of return is almost impossible with process re-engineering, advertising, product development, and other measures targeted at cutting costs or increasing revenue. A little sophistication in pricing can go a long way. To me this is the first thing marketers should look to improve.

How can companies improve the quality of their pricing decision?There are a number of steps firms can take to improve the quality of their pricing decisions. First of all, prices should not be set based on costs. This does not mean costs are irrelevant – far from it. Costs are important to understand the implications of pricing decisions. Beyond that, pricing policy needs to start from two key pieces of information: (1) the objective worth of the product we are selling, and (2) the perceived value of that same product to our customers. It is the job of marketing to quantify the benefits in a firm’s offering, measure the gap between objective and perceived value, and work hard to bridge that gap by communicating value in a way that customers understand.

An additional way to improve the quality of pricing is to make sure price policy is well integrated with the other marketing decisions. For instance, a deep understanding of customer needs through segmentation gives marketers the basic information for price discrimination – charging different prices to different segments. Unless firms understand where value is created, and how that value differs across groups of people, the prices that are subsequently set are never going to be optimal. Also, price needs to be calculated in conjunction with the other three “Ps” of the marketing mix. The marketing mix is just that: a mix. Better pricing decisions keep these other factors in mind: How should we structure our product line such that we can charge different prices for different models? What channels of distribution should be used to reach different customer segments with different prices? What promotional material do we need to develop to communicate the value we are selling and therefore justify the price we charge? And so on.

What is unique about the contribution of London Business School’s Centre for Marketing to the discipline of marketing?The way in which it integrates rigorous

academic research with practical relevance. All of the marketing faculty at the school have a strong interest in addressing problems that are important to practice. We definitely pride ourselves in doing things that we think managers find both interesting and useful. This is evident in the research questions we tackle

and in the way we teach our programmes and courses. As much as possible, we bring the insight generated by our research to the classroom. The feedback we then receive from the students is crucial to ensure we continue to study relevant phenomena.

What are some of the more interesting findings with practical implications of your research over the years?As I mentioned earlier, my main area of research is pricing. My work to date has looked at instances where price changes people’s perceptions of the products and services they buy. I find this topic very interesting because such an effect is not really supposed to exist. Price has nothing to do with the quality of a good. All it is supposed to do is index the terms of trade; that is, price “tells” consumers how much money they need to give up in order to make a purchase. My own research and that of other academics in marketing, psychology, and economics show that price can actually have a very strong effect on people’s judgments and preferences.

My article on page 16 demonstrates that price (the amount firms charge, the way firms present price, etc.) can influence how we perceive everyday goods. I have documented cases when the effect is driven by the amount of thinking we do or the attention we pay. The research of other academics has identified other explanations.

What are the main research areas you currently working on?

I am currently working on a number of interesting projects in the area of pricing and promotions. One project I am particularly keen on studies the relationship between assortment size and consumers’ willingness to pay. My co-authors and I have conducted four different experiments to date. The data tells us that consumers are willing to pay less for low quality products and more for high quality products when assortments are large. This polarisation of willingness to pay is puzzling because the evaluation of any product is supposed to be based solely on the merits of that good, not on the number of alternatives available. My co-authors and I believe this effect exists when consumers are uncertain about the value of an offering – a fairly common situation. When this is the case, we believe that consumers infer how important quality

Assistant Professor of Marketing, Marco Bertini discusses the effect that price can have on people’s judgments and preferences and suggests how it can be used to solve some of the issues facing marketers today.

Introducing Marco Bertini

Using price to awaken consumer thinking and impact buying behaviour

Recent research on the psychological aspects of pricing suggests that the relationship between price and choice might be more complex than originally thought. Marco Bertini and Luc Wathieu explore this further. Firstly they look at the way that price information is presented and how this can influence perceptions of value. Secondly they consider how overpricing can motivate consumers to think about the personal value of a new benefit, in turn affecting their likelihood to buy.

The practice of price partitioning has become increasingly common. Instead of charging a simple, all-inclusive price, firms regularly post sets of mandatory charges attached to various attributes of an offer. This phenomenon is not limited to predictable settings such as Internet sites and catalogues. Today, one can also find furniture stores breaking out the cost of sofa pillows and hotels charging a separate fee for room keys.

There are differing views on the effects of price partitioning on consumer behaviour. Some believe that price partitioning could increase demand because buyers tend to underestimate the total cost associated with multiple charges. Others, however, argue that price partitioning will decrease demand because multiple losses are generally more

painful than a single loss of equal monetary value and that advertising a partitioned price often triggers negative effect, which could consequent into boycotting of the brand and damaging word-of-mouth.

Price partitioning will not only impact on the perception of expenses, but also the perception of nonprice attributes; i.e. the benefits of the purchase. Consumers that are presented with an all-inclusive price are likely to concentrate their evaluation on the focal attribute of the transaction (DVDs, groceries, etc.). A partitioned price, on the other hand, increases the amount of attention paid to secondary attributes (shipping and handling, advance booking, etc.), which in turn affects preference and choice. It can sensitise consumers to features they might otherwise overlook.

An emphasis on perceived benefits (rather than expenses) suits situations in which price partitioning increases demand as well as situations in which price partitioning harms demand. For instance, shipping and handling is a requisite in most online transactions, and the cost associated with this service typically varies little across vendors. A secondary attribute is neglected if price is all-inclusive but overemphasised

if price is partitioned. This could be an explanation for the “abandoned basket effect” that causes many online transactions to fall through once shipping charges are levied.

Secondary features that are relatively easy (difficult) to evaluate receive exaggerated (minimal) consideration under price partitioning. Spelling out what consumers “get” for their money through price partitioning might or might not be good business. If a product offering is mediocre in terms of secondary attributes, for example, firms might benefit by using all-inclusive prices to focus attention to the focal attribute. On the other hand, firms that offer commoditised products might use price partitioning to capitalise on the attractiveness of secondary features and distract attention from any weakness in the main value proposition.

It is not only the way in which a price is broken down that will awaken consumer thinking. Pricing a product at a level higher than may be initially expected can also motivate consumers to think for longer about a purchase and the personal value of its benefit.

When a firm introduces a new benefit of any kind, consumers are often unsure whether or not they need it or what the benefit is worth to them. Accounting for this uncertainty, firms normally offer an introductory discount or target a small group of more affluent or enthusiastic consumers. Alternatively companies can induce people to think by overpricing—pricing above what they initially want to pay, but not too high. Encouraging the consumer to make a more definite judgment about the personal benefit of a purchase will

intensify desire and willingness to pay, justifying the posted price premium.

Consumers’ motivation to think is determined by market prices in combination with other factors such as magnitude of the potential benefit, initial degree of uncertainty, and cost of thinking.

If the price associated with a unique additional benefit is low enough, consumers will buy without further questioning their prior impressions. An excessively high price, on the other hand, will discourage a quick purchase because the additional deliberation could reveal nothing to compensate for the extra cost. However, there does exist between these two extremes, a range of prices that should encourage consumers to think and gain clarity regarding the personal relevance of the offered benefit.

A sophisticated firm will acknowledge this phenomenon by adjusting its marketing strategy to better manage consumer deliberation. The firm should first consider pricing away from consumers’ initial willingness to pay and evaluate whether regressive pricing (closer to the market’s mean price) or transgressive pricing (farther from the market’s mean price) is optimal. Moderate overpricing is more likely to be optimal when production

cost is higher and consumers’ cost of thinking lower. The firm should then,

under certain conditions, empower consumers by reducing the cost of thinking through various forms of subsidy (e.g. product trial opportunities and projective advertising). Consumer empowerment enables the firm to price its product near potential value without letting incentives to think

interfere with the process of value extraction. Differentiated firms can use these tactics to take fuller advantage of the uniqueness of their offerings, earn greater profits, and enter markets despite cost disadvantages and consumers’ initial reluctance to take into account new dimensions of value.

It is apparent that the ways in which a price is displayed and the price point chosen will impact buyer behaviour. How it is done depends on the product being sold and the desired outcome of the transaction. Breaking down an expense can potentially stimulate demand by highlighting dimensions of differentiation that might otherwise go unnoticed. If, on the other hand, a supplier’s strength lies with a focal attribute or the product offering is mediocre in terms of secondary attributes, then an all-inclusive price might be well advised. Similarly, a firm’s ability to charge a price premium depends on the consumer’s cost of thinking and initial lack of prejudice. The effect of a higher price is not to select less-price-sensitive or higher income consumers but to trigger a polarisation of demand that induces a split between enthusiasts and the indifferent.

Potentially useful concepts arising from this work by Bertini and Wathieu include transgressive pricing, regressive pricing, and projective advertising or retailing, all of which derive from the view that one function of price and marketing communication is to stimulate thinking and deliberation. Information processing theories and behavioural decision research can be brought together to study marketing problems providing an interesting avenue for developing our understanding of consumer decision making.

This article is taken from the following two papers:• Attention arousal through price partitioning• Price as a stimulus to think: the case for wilful

overpricingBoth written by Marco Bertini, London Business School, and Luc Wathieu, ESMT European School of Management and Technology

Marco Bertini is Assistant Professor of Marketing at London Business School. His research focuses on the strategic implications of consumer behaviour, with particular emphasis on pricing policy and product differentiation decisions. Marco has also consulted to companies such as AstraZeneca, BT, De Beers, and Procter & Gamble. He teaches on the 5-day Executive Education programme Customer Focused Marketing: The Key to Unlocking Profits and on the 2-day Executive Workout: Pricing for Profit. For more information please contact the Client Services team on +44 (0)20 7000 7378

Are you aware just how much the price of a product or even the way that the price is presented to the consumer can affect buying behaviour?

“Consumers’ motivation to think is determined by market prices in combination with other factors such as magnitude of the potential benefit, initial degree of uncertainty, and cost of thinking.”


differences are by observing the number of alternatives firms are willing to market: the more populated an assortment is, the more important quality differences are expected to be, which in turn increases the willingness to pay.

A second project I am involved with is studying the effects of monetary incentives on the type of products people buy. We argue that incentives such as quantity discounts, bundling, referral bonuses, coupons, etc. change people’s frame of mind, making them much more price sensitive at the time of selecting a product.

Finally, I am working on a project with colleagues from Columbia and Duke that examines the quality of people’s choices when price is a factor in the decision. Marketers have known for quite a while that pricing can have significant psychological implications. Some of my past and current research has demonstrated that point exactly. In this research we study a more fundamental question: how good are people at making decisions when they have to process price? Common intuition would suggest that price is the easiest attribute to consider when making a purchase. After all, price is an ubiquitous, objective quantity. However, we repeatedly found that people make many more errors in judgment when price is presented. We attribute this counterintuitive result to two observations: (1) money is much more than a medium of exchange – we feel pleasure or pain just by receiving or spending money, and (2) unfortunately we don’t really have a good sense of how much pleasure or pain money brings us – this is because money has no specific inherent value beyond what we can buy with it.

Faculty Profile

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Media Watch: Publications for Marketing Faculty and Associates

Marketing programmes at London Business School

Competitive Response to Radical Product InnovationsAboulnasr K; Narasimhan O; Blair E; Chandy R, Journal of Marketing 2008 Vol 72:3 p 94-110.

What will neuroscience do for advertisers?Ambler T, Admap 2008 Vol 490:43 p 24-26.

Response to “International food advertising, pester power and its effects”Ambler T, International Journal of Advertising 2007 Vol 26:2 p 283-286.

What can advertisers learn from neuroscience? Ambler T, International Journal of Advertising 2007 Vol 26:2 p 151–175.

Value Merchants: Demonstrating and Documenting Superior Value in Business MarketsAnderson J C; Kumar N; Narus J A, Boston, Mass: Harvard Business School Press 2007.

Attention Arousal Through Price PartitioningBertini M; Wathieu L, Marketing Science 2008 Vol 27:2 p. 236-246.

The Dark Side of Choice: When Choice Impairs Social WelfareBotti S; Iyengar S S, Journal of Public Policy and Marketing 2006 Vol 25:1 p 24-38.

When Choosing Is Not Deciding: The Effect of Perceived Responsibility on SatisfactionBotti S; McGill A L, Journal of Consumer Research 2006 Vol 33:2 p 211-219.

Assessing the Economic Value of Distribution Channels: An Application to the Personal Computer IndustryChu J; Chintagunta P K; Vilcassim N J, Journal of Marketing Research 2007 Vol 44:1 p 29-41.

How to project customer retentionFader P S; Hardie B G S, Journal of Interactive Marketing 2007 Vol 21:1 p 76-90.

Estimating CLV using aggregated data: The Tuscan Lifestyles case revisited Fader P S; Hardie B G S et al., Journal of Interactive Marketing 2007 Vol 21:3 p 55-71.

Fast and frugal heuristics are plausible models of cognition: Reply to Dougherty, Franco-Watkins, and ThomasGigerenzer G; Hoffrage U; Goldstein D G., Psychological Review 2008 Vol 115:1 p: 230-237.

Getting Attention for Unrecognised BrandsGoldstein D G, Harvard Business Review 2007 Vol 85:3 p 24-28.

We don’t quite know what we are talking about when we talk about volatilityGoldstein, D G; Taleb N N, Journal of Portfolio Management 2007 Vol 33:4 p 84-86.

Mapping the Bounds of Incoherence: How Far Can You Go and How Does It Affect Your Brand?Kayande U; Roberts J H; Lilien G L; Fong D K H, Marketing Science 2007 Vol 26:4 p 504-513.

From the 4P’s to the 3V’sKumar N, The Marketer 2007 Vol 33: p 6-9.

Are Brands Dead? Kumar N; Steenkamp J.-B E M, Chief Executive 2007 p 40-43.

Private Label Strategy: How to Meet the Store Brand ChallengeKumar N; Steenkamp J.-B E M, Harvard Business School Press 2007.

Does Uncertainty Matter? Consumer Behavior Under Three-Part TariffsLambrecht A; Seim K et al., Marketing Science 2007 Vol 26:5 p 698-710.

Discovering “Unk-Unks”Mullins J W, MIT Sloan Management Review 2007 Vol 48:4 p 17-21.

Good Money After Bad?Mullins J W; Farneti I et al, Harvard Business Review 2007 Vol 85:3 p 37-48.

Marketing management: a strategic decision-making approachMullins J. W; Walker O C, Boston, [Mass]: McGraw-Hill/Irwin 2008.

Social Context and Advertising Memory Puntoni S; Tavassoli N T, Journal of Marketing Research 2007 Vol 44:2 p 284-296.

Why Some Acquisitions Do Better Than Others: Product Capital as a Driver of Long-Term Stock ReturnsSorescu A B; Chandy R K et al., Journal of Marketing Research 2007 Vol 44:1 p 57-72.

Branding from the inside outTavassoli N T, Brand Strategy 2007 Vol 214: p 40-41.

Would a Rose in Chinese smell as sweet?Tavassoli N T, Business Strategy Review 2007 Vol 18:2 p 35-39.

SAGE handbook of advertising Tellis G J; Ambler T, London: SAGE 2007.

Price as a Stimulus to Think: The Case for Willful OverpricingWathieu L; Bertini M, Marketing Science 2007 Vol 26:1 p 118-129.

Asymmetric Discounting in Intertemporal Choice: A Query-Theory AccountWeber E U; Johnson E J; Milch K F; Chang H; Brodscholl J C; Goldstein D G, Psychological Science 2007 Vol 18:6 p 516-523.

Managing the Future: CEO Attention and Innovation OutcomesYadav M S; Prabhu J C; Chandy R K, Journal of Marketing 2007 Vol 71:4 p 84-101.

London Business School’s faculty is world-renowned. With over 100 academics, drawn from over 20 countries, our faculty fosters global issues, develops innovative research and helps to shape contemporary business practice.

Customer Focused Marketing: The Key to Unlocking Profits2 -7 November 2008

Market Driving Strategies9 - 14 November 2008

Centre for Marketing Evening Programme 200912 January – 16 March 2009 (10 consecutive Mondays)

For more information please contact: Tel: 44 (0)20 7000 8627 Email: [email protected] www.london.edu/execed/marketing/ www.london.edu/marketing/

The Mission of the Centre for Marketing is to help improve the practice of marketing through rigorous and relevant research.


Marketing Programmes at London Business School

Contact Greg Kirwan:

Tel: +44 (0)20 7000 7381

Fax: +44 (0)20 7000 7371

Email: [email protected]

www.london.edu/execed/marketing/

“Pricing is the unsung hero in an organisation. Ensure that you realise and unlock it’s true potential.”

Marco Bertini, Assistant Professor of Marketing, London Business School

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