Said Business School MBAMarketing

Hilary Term 2007

Week 1:Overview of Marketing

David Arnold

Introduction – the course

• To apply a marketing perspective to strategy development

• To develop an understanding of key concepts and decision options in marketing

• To refine decision-making skills in marketing, and the ability to express the results of marketing analysis

Principles of courses

• Marketing is a thinking process more than a body of knowledge

• Conceptual basis of marketing (objective # 2) delivered by notes. You read beforehand, we can discuss in class

• Emphasis in class on skill development (objective # 3). Extensive use of cases. Thorough pre-class analysis of cases expected.

This Session

• A framework for marketing• Two examples of great marketing in

practice• Core concept – value• Where is marketing going?• What dies it take to be good at marketing

strategy?

What is a marketing strategy?• IT IS NOT:

- An objective (increase shareholder value by x )

- A functional policy (“put a Coke within arm’s reach of the world”, cost leadership

- A general focus (“stick to the knitting”)

- An outcome of strategy (“command a 10% premium over market average”, “achieve x% market share”)

What is a marketing strategy?

• IT IS:How the organization will create and capture value

• And it considers:Customer need (source of value)Competitor offers (source of differentiation)Company resources (source of advantage)Collaborators (source of market access/power)

Customers Company

MarketSegmentation

TargetMarketSelection

Product &ServicePositioning

Marketing Mix (The 4 Ps)

Product &Service

Place/Channels Promotion

Pricing

CustomerAcquisition

CustomerRetention

Profits

CreatingValue

CapturingValue

SustainingValue

Marketing Analysis (The 4 Cs)

Channel tomarket

CompetitorsCompany

Source: adapted from Note on Marketing Strategy, HBS 9-598-061

The core concept is value. . .

Value = PerceivedPrice

Perceivedbenefits -

Benefits

Price

Value equivalence line

The value proposition is….

Precise benefits

to which group

at what price

The value proposition is….

Precise benefits:a sense of superiority from wearing sports gear

used by winnersto which group

ambitious youthful people world-wideat what price

300% premium to basic athletic shoes

Think Value Proposition,not Product

Contribution to Cost Contribution to Benefit

A

B

C

DE

25%

30%

20%

15%10%

A 20%

B 40%

C 15%D 15%E 10%

Eliminate A and C: Inferior Product, Better Value Proposition

Contribution to Cost Contribution to Benefit

A

B

C

DE

25%

30%

20%

15%10%

A 20%

B 40%

C 15%

D 15%E 10%

Marketing as an economic compromise

One-way message Two-way withtime lag in response

Two-way withinstant response

Broadcast

Addressable

TV ad inWorld Cup Final

Salesperson

Marketing as an informational compromise

What thecustomerwants

Demographics

Psychographics

Strategy – Marketing customer value

Narrow Broad

Market scope

BroadProduct scope

Share of customer -> Economies of scope

Broad product line

Strategy – Marketing Product Value

Narrow Broad

Market scope

Broad

Share of market -> Economies of scale

Narrow product line

Product scope

ON BEING GOOD AT MARKETING• Insistence on good market data

Refusal to accept generalizations from personal preferences

• Ability to stick with the basic questions (e.g. what are we selling? to whom? how much do they value it?) and not get lost in tactics

• Understanding of role and objectives of all actors in the marketing system

• Sensitivity to changeCommitment to continuous improvement of value proposition delivered to the market

• Ability to frame tactical decisions in a strategy for business growth, including interface with other functions and the implications of marketing investments

Rohm & Haas: problem diagnosis

Goal: adoption of new productObstacles:

users don’t caredistributors are threatenedcontact with 150,000 users

Problem = Goal + Obstacle

Rohm & Haas: fundamental concepts

Buying behavior: different in the two segments (large and small users)Value: great product which creates value but R&H cannot capture the valueValue pricing – first rule of pricingChannel design: who will do the selling, stocking, etc.

Channel management: aligning incentives (distributor indifference price)Cannibalization (at distributor level)Push vs. pull

Marketing analysis process 1

Always start with analysis of customer behavior: which segments buy what, how/where do they buy, what do they value, how do they use/consumeQuantify whenever possibleLook for size/scale to assess opportunity of challenge: size of segment or channel, and growth trend

Marketing – first basic model

Sales = Customers x Frequency

Marketing costs

Marketing revenues

Look for economics of individual customers or product linesBenchmark against market, e.g. market shares

Marketing analysis process 2:data that is always relevant

Market potential and dynamicsSales = Customers x FrequencyThink customer acquisition and retention

Channel economicsCost, margin, price data for each channel memberLook at efficiency, control, value creation

Marketing – second basic model

Manufacturer

Intermediary 1

Intermediary 2

End user / consumer

For each player, map- purchase cost- handling costs- resale price

Who is capturing value?

Said Business School MBAMarketing

Hilary Term 2007

Week 2:Marketing Thinking

David Arnold

Buying Behavior

Decision making unit (DMU)Decision making process (DMP)

Are we giving each player theright assistance at each stageof the process?

Can we improve the process(e.g. reduce search costs, providesamples)? Should we changewhom we target?

BuyerUserInfluencerLodgekeeperDecider

Need stimulationSearchPurchaseRepeat purchaseReinforcement/service

Trade-off behind segmentation models

Moreaccurateinformation,i.e. bettercustomerinsight

Easierinformation,i.e. morefeasible togather

DEMOGRAPHICS

PSYCHOGRAPHICS

Product andBuyingPreferences

So…always better to peel the onion as far as you can and, onlythen, carefully specify surrogate measures

Why Segment?Customers who share a category need differ in specific features that they value and how they want to buy

Increase value created by tailoring offering toparticular preferences

Opportunity fordifferentiation

Company gains strategicadvantage through relevant and differentiated offering

Customer insight

A single discovery of something enlightening about customer needs and values which our brand can address to gain competitive advantage

Alternatively – marketing done properly

Customers prefer their relationship manager to come from their own ethnic background

Customers are price sensitive in their purchase of business banking services, but not price elastic

Business customers see internet banking as cost saving, not as value added

Customer insight - banking

Findings

Most people find the vomiting from the chemotherapy worse than the pain

InsightThe fear of the treatment is worse than the disease itself

Health ClaimZofran helps prevent vomiting associated with chemotherapy more than any

other anti-emetic

Message

To help maintain my personal dignity

Challenge: Translate research “findings” into true customer “insights”

SADAFCO:marketing models in competition

• SADAFCO- Intensive distribution in bagalla- High investment in captive freezers and supply chain- Target: impulse purchase of stick products- Local brand with wide dairy portfolio

• MULTINATIONALS- Selective distribution in emerging supermarket channel- Huge advertising and promotional budgets- Target: home consumption, inc. tubs- Global ice cream brands

SADAFCO: the result

• SADAFCO remains market leader, Nestle and Unilever withdraw, Mars hanging on

• Enabling conditions for MNC model are absent / under-developed:

women shopping in supermarketsacceptance of ice cream as adult fooddistribution control systems “asset integrity”

Key issues - SADAFCO• MNC entry based on assumption of change: enabling

conditions (supermarkets, media) are new

• Check robustness of these change assumptions (supermarket is for take-home segment in ice-cream)

• What will drive the market: investment in A&P, new or local products, new distribution? How fast/slow can this occur?

• Stage of national economic development may not correlate with stage of market development

The market entry decisionWhat are key drivers of marketing model?

Are enabling conditions in place for this marketing model?

What is the cost of entry?What is the cost of waiting?

Is risk/control trade-off appropriate?

Example: Vietnam market assessment Key drivers of

marketing model Enabling conditions

Notes

Chemical • Sales personnel • Sophisticated

customers

• Management • Relationships

• Low cost-to-serve • Strong local HR

required • Industrial customers

present early

Sports • Brand awareness • Development of sports

fashion

• Media • Premium customers • Control of retail

• Strong competitive pressure

• Attractive manufacturing base

• Niche accessible in cities

Children • Distribution • Price • Brand awareness

• Developed distribution • Middle class market • Collaborators: food

chains, movies, etc

• No competitive pressure

• Break-even probably highest, building mass market

• Culture of control

Said Business School MBAMarketing

Hilary Term 2007

Week 2:Marketing Thinking

David Arnold

What is marketing?

• Marketing is a managerial process, driven by what we call the marketing mindset.

• The domain of marketing is the relationship between an organization and its customers and market.

• The desired output of the process is value creation for the organization’s customers, and the capture of some of that value for the organization.

What is the marketing process?

• Marketing is about breaking down customer-related business problems in a systematic and particular way. This requires both analytic and humanistic talents.

• And then devising imaginative and logical “solutions” that seek to enhance the perceived value of the market offering and the profits that the company will realize.

Doing Marketing:Four Iterative Steps

Distill Key IssuesSpecify the coreproblem the solutionto which will leadto meeting goals

AnalysisAssembleclues fromwhich youinfer issuesand strategy

Devise StrategySpecify key changesin marketing strategy to resolve issues.

Devise Action PlanCompose marketing actionsthat creatively “execute” strategy

Elements of Marketing Strategy

Select Target Segment(s)

Compose Positioning (Brand Strategy)

Product andService Policy

PromotionPolicy

ChannelPolicy

PricingPolicy

Action Plan: Specific Marketing Activities that Flow from Strategy

Segment Market

Devising Marketing Strategy

• Identify those aspects of marketing strategy that are “in play” to resolve key issues identified.

• Carefully specify how you would change (or, occasionally, invent from scratch) those elements so that your key issues will be resolved– Test: If my firm adopts the recommended strategy, then

key issues will be likely be resolved and we will meet our business goals

• Must also be actionable and feasible

Composing Action Plan

• For “soft” areas of the strategy..– Creative leaps from “backstage” strategy to specific

brand expressions that will make strategy come to life

• For “hard” areas of the strategy..– Analytic specification from general policy to optimize

economics (e.g., price, promotion)

• “Real world” gut check– firm capabilities, competitive responses, etc.

What is a marketing plan?

• A marketing recommendation is a 3-part argument:– that the company should focus attention on a

particular marketing issue,– that, to solve the issue, the company should

follow a particular strategy, – that this strategy should be implemented in a

particular way (action plan items)

Suggested format

– Purpose:• very short paragraph summarizing the business goals at stake and context.

– Key Issues:• For each issue (one is good, perhaps two, rarely three), state the issue as specifically as you can in a

declarative sentence, and then draw upon your analysis to provide a short paragraph rationale for why this is a key issue.

– Marketing Strategy:• For each element of the marketing strategy “in play” for the above issues (which will vary depending on

the case) state your recommended strategy or policy as specifically as you can in a declarative sentence and then draw upon your analysis to provide a rationale for why this is the best approach for resolving the issue versus other viable alternatives.

– Action Plan• For each strategy, offer ideas for how you could execute.• Fine to integrate Strategy and Action plan in one section.

– Appendix: Supporting analysis• Only as needed, if there are analyses that lend themselves to calculation or figures.

Be Persuasive

• Linear, grounded argument written to convince skeptical knowledgeable audience

– focused• only include strategy elements that address issue

– compelling• each element ground linked to key issue and grounded in analysis

– comparative• argue why better than less effective options

– integrative• built around strategy, coherent across marketing mix

• Use analysis to support argument for both key issues and strategy. Best supported argument wins.

7 Tips• Push for empathetic understanding of your customers.

Build this understanding into your plan. Imaginative leaps into the lives and worldviews of your customers is the core of marketing.

• Be specific. Craft your key arguments with nuance, push for details. The biggest weakness is usually state issues and plans in vague terms (e.g., “a quality strategy) Generic vague strategy leads to generic actions that fail to add value in the marketplace

7 Tips• Support your issues and plan with specific analysis and argument. Use

analyses that we learn in each class and in readings to buttress your approach. This means providing supporting analysis and also arguments for your approach versus reasonable alternatives if they exist. More detail is almost always better.

• Strategy is about focus. Avoid everything-but-the-kitchen sink recommendations. Your plan should be tightly focused on resolving the key issue(s) that you set up. Don’t go through the entire marketing plan framework and fill in the blanks. Use only what you need. Better to detail a few key ideas than to laundry list ideas of negligible relevance.

• You are writing a marketing recommendation. Key issues = key marketing issues; these need to be stated in marketing terms (not as financial issues, for example).

7 Tips• Great analysis and ideas can disappear with poor

communication. Your document should be coherent, linear, logical. Points should build on each other in a persuasive manner.

• On managing space limitations: if you run into problems with word limits, don’t skimp on each section. Instead cut back (or even delete entirely) the less important material: setting up the context/stating the business goals and providing an executive summary. You should cram in as much detail as possible in the heart of the reco: setting up the issues and resolving them with your strategy and action plan.

How to Think Clearly about Messy Marketing Problems, Decide What to Do, and Present Your Analysis and Action Plan in a Way that Dazzles MBA ‘07.

Don’t rush to judgment. Resist the urge to find the solution prematurely. Find the problem first. Sort the evidence. Fit evidence on strategy into boxes labeled Customer, Competition, Collaborators, and Company. Fit evidence on tactics into boxes labeled Product, Place, Promotion, and Price. Use analogy. Remind yourself of other cases with feature in common with this one. In what ways might the analogies be useful? How might they be false? Analyze the evidence. Now dig a little deeper into the facts. Combine pieces of evidence. Examine ratios and comparisons. Who is buying what? Where? Who is spending and earning how much money? Identify the strategy. Take a step back. Look at the company. What is its strategy for creating and capturing value? What’s the core of the business: a proprietary asset, a well-defined target segment, a strong network of collaborators/channels, dozy competitors? How well is the company doing? What is changing? Now go back to the evidence and look for trends in the data. What is changing in this model? Define what it takes to grow the business. Identify obstacles and enabling factors. Ask what it takes to convert and to retain target customers. Consider the flow from prospect to convert to adopter to committed customer and ask where the conversion process is blocked and what it would take to unblock it.

Review the current positioning of the unit’s offerings. Does the served market correspond to the target market? Identify the offering’s competition and consider whether it is well differentiated. Review the current tactics. For each of the 4Ps, ask whether it is delivering value to the target market commensurate with its cost. Review also the organization’s structure, incentives, and control systems. Diagnose the problem. Look back over everything done to this point and state the problem. Do not confuse a statement of unmet goals with a problem: doctors are not rewarded for saying, “Your problem is that you are not well." A problem is a set of unmet goals linked to specific factors impeding their attainment. Now solve the problem. You may want to redefine the business. Or pick another target market definition. Or fix some of the 4Ps to deliver more utility to the target. Or review the organization’s structure, reporting relationships, incentives, control systems. Get numbers support for your answer, perhaps an estimate of the return on investment or a break-even calculation or an income statement. Reality check. Is your solution practical? Implementable,? Efficient? Profitable? Are you pleased with it? Would you back it with your career? Present your recommendations. Never reach a conclusion without saying how you got there. Never make a recommendation without explaining what it will achieve. Make sure that every point (sentence, paragraph, exhibit) makes a distinct contribution. Check that nothing contradicts anything else.

Said Business School MBAMarketing

Hilary Term 2007

Week 3:Promotion

David Arnold

Conceptual models of marketing communications

all contain two basic elementsAwareness-Knowledge-Attraction-Trial-RepeatA model of the consumer behavior

process that results in (repeat) purchase

1

A range of communication toolsthat can be used atdifferent stages of the process

2

Advertising PR Direct mail Sales promotion

Integrated marketing communications – a major goal for most companies – is when it works

properly– The concept:

• Making a number of communications vehicles work together seamlessly to achieve some overarching mission

– The obstacles:• In most companies, sales, marketing and media relations are separate

departments with their own targets, budgets, and suppliers• In many markets, it is difficult to track individual customers

The trends:• Rising demand by top management for accountability in making

marketing investments • New opportunities for tracking consumer response (data bases)

Acuvue (J&J) integrated marketing program

Johnson&

Johnson

EyeCare

Specialist

4

7 10

1. Ted sees ad for Acuvue in Newsweek 1

33. Ted gets promotional packet from J&J

55. Ted receives card from local optometrist

6

6. Ted calls optometrist for appointment

88. Ted receives voucher from J&J for free lenses

99. Ted visits optometrist, orders lenses

1111. Ted receives voucher for discount on second

pair of lenses12

12. Ted orders second pair

22. Mails back reply card

The ‘black box’ theory ofmarketing communications

“Advertising works over a period of time as a part of thegradual evolution of the individual’s perceptions of abrand and its relations to other brands. The effect of a single isolated advertising exposure is likely to beminimal in most markets.”

Alan Hedges, Testing to Destruction, IPA, 1988

“I know half my advertising budget is wasted. The trouble is,I don’t know which half.”Lord Lever, John Wanamaker,

AVERAGE ELASTICITES

– Advertising:

• A 10% increase in advertising produces a __% increase in sales

– Promotion:

• A 10% decrease in price via promotion produces a __% increase insales

– Price

• A 10% price cut produces a _% increase in sales

The effect of sales promotionsSales

Equilibriumsales level

Time

Promotion

Value Pricing, 1990-96

Source: Ailawadi, Lehmann and Neslin, Journal of Marketing, Jan 2001

P&G Value Pricing Trends

406080

100120140

90 91 92 93 94 95 96

Advertising Net price

Deals Coupons

Competitor Trends

40

50

60

70

80

90

100

110

120

90 91 92 93 94 95 96

Advertising Net price Deals Coupons

Sample - Average Market Share ElasticitiesAverage Elasticities for

Independent Variable PEN USE SOR Share

Price

Advertising

Deals

Coupons

Competitor Price

Competitor Advertising

Competitor Deals

Competitor Coupons

-.065

.044

.162

.133

-.027

-.065

-.106

-.116

-.210

.005

-.017

-.001

.128

-.003

.063

.035

-.266

-.010

-.053

-.007

.665

-.059

-.081

-.124

-.541

.039

.092

.125

.766

-.127

-.124

-.205

a

aAveraged across 118 brands in 24 categories

Source: Ailawadi, Lehmann and Neslin, Journal of Marketing, Jan 2001

P&G Value Pricing - Summary

• P&G lost approx. 17% market share• Market share loss mainly reflects lower

penetration rates• Lower penetration rates reflect higher P&G net

price and increased competitor deals• Increased advertising produced no corresponding

increase in “loyalty”• P&G increased net profit estimated at $1bn over

1990-96

Conventional wisdom on marketing effectiveness

Probabilityof purchase

Exposures

‘Effective cover’

An alternative response function

Probabilityof purchase

Exposures

Single source research

– 30% of ad campaigns produce 20% market share gains in seven days. Another 40% produce 0-20% gains in seven days

– 50-70% of effect is from first exposure of ad

– Short term effects predict longer term effects

Source: John Philip Jones, The Ultimate Secrets of Advertising, Sage, 2002

When TV advertising works (meta-analysis)

– Weight is not enough:

• Increased weight without change in execution has negligible sales effect for established brands

– Status quo is not enough:

• Ads more likely to work when there are changes in copy, media or in category

Source: Lodish et al, Journal of Marketing Research, 1997

When TV advertising works (meta-analysis)

– Trade display dominates advertising

• Sales effects of ads reduced by increased merchandising

– Recall and persuasion measures

• ‘Unlikely’ that high ratings on these measures correlate with sales

Source: Lodish et al, Journal of Marketing Research, 1997

Key takeaways– The sales effects of marketing communications is the only

source of a return on investment. All other outcomes (awareness, attitude) are surrogate or intermediary measures

– The content of marketing communications is more powerful than the volume or weight

– Without short term effects, there are unlikely to be long term effects

– Given diminishing returns, low intensity continuity is more effective than high intensity bursts except for new products/brands

Summary of what we know about advertising effectiveness

– Advertising is mostly a weak force

– In such circumstances, advertising works defensively

– So, money is better spend on ‘drip’ basis

– Advertising works when there is news in the campaign (new product, new copy,etc.,)

– In such circumstances, it works as a strong force and single exposures can produce sales

Said Business School MBAMarketing

Hilary Term 2007

Week 4:Distribution Channels

David Arnold

WHY DISTRIBUTORS?

• Direct distribution is associated with:- higher sales volume businesses- new products- high ticket items- complex products- stand-alone products (vs. bundled)- concentrated customer base- high purchase volume customers

DISTRIBUTION CHANNEL FUNCTIONS

DEMAND GENERATION: Promotion, sales calls, pricing

PHYSICAL DISTRIBUTION: Hold inventory, break bulk, offer assortment,convenient availability, delivery

FINANCING: Assume inventory carrying risk,extend credit

PRODUCT SUPPORT: Technical support, product customization,after-sales service and support

INFORMATION Gather customer data

You can take out the distributor (disintermediation) but you cannottake out these functions

DISTRIBUTION CHANNEL STRATEGY

• THE GOAL

• THE KEY DECISIONSTo design the system (types and numbers of channels/outlets)To allocate functions among players in the market networkTo align interests among players in the market network

• THE PROBLEMChannel partners are both collaborators and competitors

To maximize the value created and captured

DISTRIBUTION CHANNEL STRATEGY

The central tension is often between considerations of:

EFFICIENCYIntermediaries exist becausethey offer economies of scopein going to market

EFFECTIVENESSProducers have superiorcustomer sensing and productdesign capabilities

The principal power source is the relationship withthe end customer

The most effective programs co-ordinate at intermediaryand end customer level (push and pull)

ANALYSIS OF CHANNEL POLICY• Begin with the downstream consumer

– Value and DMP x Segment

• And work back up: Detail channel tasks x Segment

• Assess economics and effectiveness in completing tasks by (potential) channel partners and by company

– Direct vs Simple Channel vs Hybrid Channel

• Apply customer analysis to channel partners (value and DMP)…– Is there a bottleneck?– Are economic interests aligned?

• …while acknowledging that they are also competitors – Does channel policy give away ownership of customer?– How to maintain channel leadership?

Said Business School MBAMarketing

Hilary Term 2007

Week 5:Product Policy and Innovation

David Arnold

HOW TO FORMULATE PRODUCT POLICY

– Two first steps:• Map product usage by segment/channel• Map contributions by product line

– Look for interactions inter/intra line(s):• Negative, e.g., cannibalisation• Positive, e.g., halo effect, trading up

– Look for break points between products, using default rule of one line per segment

– Look for gaps in the market (not gaps in the product range)

– Look for evolution of product offer

– Reduce variety (cost to company, confusion to market) unless market justifies extra products

Product depth and breadth and marketing strategy

Vertical product policy:Top of product line in lead market(s), with rest of line according to market development, = segmentation by timing.Example: ?Challenge: ?

Horizontal product policy:Adapted product range for sustainably different markets, based on local customer research.Example: ?Challenge: ?

The evolution of value

V = B - C

Perceived Value = Benefits - Costs

Customers expectImproving valueproposition

Customerwearout,seek newbenefits

Costs riseas vendorseeks betterproduct margin

Value migration is inevitable..

• At best, it is consumer wearout:commoditization (technology markets)boredom (brand or image markets)

• More often, it leads to a shakeout, as an innovator produces:

a better value propositiona fresher idea for existing customersa new idea (which involves being different)

The disruptive technologies model

Time

PerformancePerformanceabsorbed bymainstreammarket

Performance deliveredby present technology

Disruptive technology

Source: Christensen

What is a disruptive innovation?

A new product or service that established playerscannot or will not offer to their major customers

It cannibalizescurrentproduct line

It offers alower level ofperformanceor service

OR

It carrieslower marginsthan currentproduct line

OR

Disruptive innovation

• Mostly undertaken by small players• Mostly starts at bottom end of market• Targets mass / middle market• Disrupts existing industry business model• Improves customer value proposition

reconfigures existing value chain, oftensidestepping major cost driver

Looking for potentially disruptive innovations

Examine thesupply chain:What doesn’twork very well?Who captures themost value

Examine the customer experience:How does this fit into their life?What is the experience of buying and using it?

The Product Life CycleSALES

TIME

Introduction Growth Maturity Decline

Customers Innovators2%

Early Adopters14%

Majority68%

Laggards16%

Product Policy

BasicOnly

AugmentedandImproved

Extended(Lines andBrands)

ConsolidatedRange

Integratedproductsolving customerneed

Range ofmodular productsserving wants (segments)

The adoption of innovative products

– Relative advantage

– Compatibility

– Complexity

– Divisibility

– Communicability

Source: Everett Rogers, The Diffusion of Innovations

Factors thataccelerate marketadoption ofinnovations

=

Said Business School MBAMarketing

Hilary Term 2007

Week 5:Sony Eye Toy debrief

David Arnold

Sony Eye Toy: building blocks of analysis…

TV

PS2 console

Eye Toy

Games

NEW USERS:Entry point isEye Toy +associated games

CORE GAMERS:Entry point isconsole + games

…lead to problem statement

This is a product extension (because you need a consoleto use the Eye Toy), but…Is it a market ‘extension’, or are Eye Toy users notinterested in consoles and established games?

If there is little synergy between these segments, as casesuggests, Eye Toy users will not drive further salesof traditional console-based games, and may even beput off by costs of console.

Notice (again) the value of digging for deep customer insight

• Gamers consume ‘solo’, Eye Toys in social groups. Gamers go online for company.

• Gamers are sedentary, Eye Toys are active.• Gamers go beyond reality in games, Eye Toys are constrained by reality.• Games interact via (complex) control unit, Eye Toys interact hands-free.• Gamers like ‘games’, with competition, but Eye Toys like activities as well as

‘games’• PLUS we see different demographics, price points, etc

ALL SUGGESTS THAT THESE ARE QUITE DIFFERENT SEGMENTS WITH LITTLE OF THE SYNERGY ON WHICH THE PRODUCT STRATEGY IS BASED

Sony Strategy Options

Current New

New

Current

PRODUCTS

PS2

MARKETS

1

1: PRODUCT DEVELOPMENT= target gamers to drive new gamesales and extend PS2 life cycle

2: MARKET DEVELOPMENT= extend PS2 installed base, opennew game revenuestreams

2

3

3: DIVERSIFICATION = new Eye Toy offer as TVenhancement without console

Bottom Line and Takeaways• Huge initial success, but Groove disappoints:

Only sells to 1/25 Eye Toy ownersProbably below break-even

• Could just be bad marketing: Play €60 for camera + 12 games, Groove €40 for 1 game

• Could be that initial success driven by promotion and give-aways, but fundamental problems lie below, i.e. Eye Toy users don’t like console and lose interest, console gamers don’t like it

QUESTION: It’s a product extension from a companythat thinks in systems and life cycles, but have theythought hard enough about market segments? Perhapsa bolder diversification strategy might be where theEye Toy brand ends up…

Said Business School MBAMarketing

Hilary Term 2007

Week 6:Pricing Policy

David Arnold

Price - core concepts• PRICE SENSITIVITY The importance of price as an

attribute in the purchase decision

• PRICE ELASTICITY Responsiveness of demand tochange in price

• PRICE DISCRIMINATION Different prices to different segmentsto maximize value capture

• PRICE BUNDLING Single price offered for multiple products

• PRICE STRUCTURE Division of total price into componentelements, e.g. lump sum, pay-as-yougo

MA

RK

ET C

HA

RA

CTE

RIS

TIC

SFI

RM

PO

LIC

IES

Examples of price policy in action

• Line item pricing – low ticket price in emerging markets

• Yield management – airline seats

• Reverse pricing – Priceline.com name-your-own price

• EDLP (everyday low pricing) vs Hi-Lo • Fixed vs. variable, razor/blade

– Mobile phone charges • Price as positioning statement

– Stella Artois “reassuringly expensive”

Note the power of pricing to add value in the customer context

• Value pricing = ‘right’ price depends on customer-specific criteria

• DMP: when searching is for price info, price structure can add value

• Segmentation: price signal can prompt customers to self-select into segments

• Pricing can influence behaviour• Price and buying behaviour can be the difference between

segments

Pricing modelPricing must aim to optimise the company’s economic value

CUSTOMER VALUE

COMPANY COST

Competitioncan lowerperceived value

Marketingcan raiseperceived value

Price

CUSTOMERSURPLUS

PRODUCER’SVALUE CAPTURED

MAX PRICECustomerwillingness to pay

MIN PRICECompany totaleconomic cost

Three approachesto price-setting

Cost based“What margin should we

make?”

Customer-based“What will the market bear?”

Competitor-based“What do competitors

charge?”

Best practice in pricing

1. Price discrimination – different prices for different customers

2. Price sensitivity – best practices to reduce the price-sensitivity of customers

3. Prices of new products

Price discrimination

• First Degree– Unique price per customer, auction, haggling,

• Second Degree– Price/quantity, price/time relationship

• Third Degree– Segment or channel based

Best practices to reduce price-sensitivity

• Reference price effect – present higher price options first– help customers notice high competitor prices

• Difficult comparison effect– Make it hard to compare with competitors– Use different charging metrics (Leasing)

Source Thomas T NagleStrategy & Tactics of Pricing (1994)

Best practices to reduce price-sensitivity 2

• Switching cost effect– Ensure customers understand the financial

costs, risks, business disruption of changing suppliers

– Build psychological switching costs• Price/quality effect

– Ensure the customer understands the higher benefits of higher spec solutions

– Build quality image with fact-based evidence

Best practices to reduce price-sensitivity 3

• Fairness effect– Perceived unfairness creates price sensitivity– Link price increases to service enhancements or

investments• Framing effect

– Discounts are always preferable to surcharges

Pricing - some managerial rules of thumb• Cutting price is easy, raising price is difficult• Changing price is easier than changing price perception• In open markets, prices decline over time, absent innovation• In most markets, price customization is under-used• Price competitors cluster into tiers in most markets. Competition

more intense within tiers than between tiers.• Customers usually value transparency (i.e. they know the total

price at point of purchase) and choice and control• Customers face transaction costs (searching for information,

executing purchase) which can be both a barrier to initial purchase and barrier to later switching

• Competition on price alone usually leads to value-destroying price wars and eventual commoditization

Said Business School MBAMarketing

Hilary Term 2007

Week 7:Branding

David Arnold

Coca-Cola

Sony

McDonald's

Microsoft

Some of the world's strongest brands ...

Coca-Cola

Toyota

McDonald's

Microsoft

Accountants

Engineers

Marketing managers

Some of the world's strongest brands ...

...provoke the same reaction

Recognition

Judgments on characteristicsand qualities

Basis for decisions

Two basic truths about branding1. Brands belong to customers

- Brand meaning (= market position) is co-created- Only new brands can be created by

companies

2. Branding happens anyway

- Managing it is optional

The Firm Popular Culture

Influencers Customers

Brand CultureShared, taken-for-granted brand stories, images, and associations

Brandstories

Brandstories

BrandStories

BrandStories

Brands Have Many Authors

Brand Identity Template

E

ESSENCE – brand promise, always applicable

CHARACTER ELEMENTS –core brand values

BRAND BENEFITS andASSOCIATIONS –tangible and intangible,inc. support for brand benefits

For example

Environmental friendly

(german)Technology

PartlyauthoritarianMainsteam

orientation(broad mass of

society/bandwagon)

Characteristic Perfume (smellof cleanliness)

Gel

problem-solutionOrientation

Megaperls

Skin Care

Longterm ColorProtection

Innovation

Tradition /History

trust / security

social recognition (external care)

Superior Cleanliness and Care

Family values

externalrepresentation

Recommendation (from generation to

generation)

CleanlinessExperience

Scene

well being(internal care)

Omnipresence

An example of raw material: ‘pathway’ research

stainless(25)

Give a good impression

(20)

Wellbeing(52)

Feelingwell(42)

Materialliving quality

(78)

Leisure time orientation

(29)

Cleanlaundry

(25)

Save money(73)

Pleasant scent(41)

Laundry smellswell(40)

mileage(49)

Money forother things

(73)

Open forcontacts

(27)Time for

other things(29)

Savingtime (29)

I smell well(9)

Fibredeep-clean laundry

(26)

less shoppingefford(20)

Laundrycan be usedfor longer

(15)

cares/protectslaundry

(24)

Less washing

efford(15)

No pre-treatment necessary

(15)

Clear/shiningcolours

(13)

Absolutestainless

(33)

Brilliant whitelaundry

(7)

Social contacts(9)

Environmentalfriendly

(23)

Personal contribution to environment

protection(24)

Protects environment

(24)

Responsability for next generation

(17)

No residuesin laundry

(10)

Fresh scent(26)

Good washingpower(23)

Goodprice/performance

ratio(26)

Colour protecting

(13)

Best washingpower(29)

Easy todose(12)

Ingredients biodegradable

(7)Dissolves well

(10)

9

10

7

17 73

7

16

23

73 2924

29

12

12

29

13

10

19

25 267

11

12 13

12

23 23

3910

10

7

12

10

15

23 8

81927

Avoid sickness

(8)

8

Detergent ican trust

(27)

Traditional/proovenbrand(17)

9

Health/long life(12)

Well-gromed/Orderly appearance(50)

Feeling of cleanliness/freshness

(20)

Feel secure(31)

12

1115

11

Ladd

erin

g st

udy

Pers

il us

ers

Reduce search costs: brands as (simplification) aids in decision-making

Reduce risk (economic/socio-psychological):brands as assurance of quality and signals/badges of value

Transform the consumption experience: brands as sources of pleasure and utility derived from ownership and usage

How Branding Benefits the Consumer

Reduce search costs: brands as (simplification) aids in decision-making

Reduce risk (economic/socio-psychological): brands as assurance of quality and signals/badges of value

Transform the consumption experience: brands as sources of pleasure and utility derived from ownership and usage

Managerial implications of the theory

FOCUS and CONSISTENCY,the two “golden rules”

PRODUCT/SERVICE QUALITY – product performancein blind tests remains bestpredictor of brand performance

Be proactive in managing thefew key SALIENT ATTRIBUTESor consumer “TOUCHPOINTS”

When quality is unpredictableWhen customer is unfamiliar/inexperiencedWhen alternatives are difficult to compareWhen dealing with a credence good or serviceWhen product is socially visible and importantWhen category may be overlooked

When Branding Most Benefits the Consumer

Said Business School MBAMarketing

Hilary Term 2007

Week 7:Branding

David Arnold

Conceptual basis of CRM

• Relationships not transactions• Economies of scope not economies of scale• Multi-period not transaction by transaction• Value creation and value capture may not

be simultaneous

CRM Approach• Gather data

• Segment customers and prospects by..– category spending, lifetime value– loyalty/switching– cost-to-serve

• Design offering – Lock in most valuable customers, and those prone to loyalty– Cost structure so that all customers are profitable– Incentives to attract switchers at a profit

• Experiment, Redesign

CRM only works when…

• Organization has a proprietary, individualized, up-to-date database

• Organization has ability to customize offering

• Inter-customer contamination effect can be managed

Business Data Decision Matrix

TheoreticalRepurchaseFrequency

Low

High

Degree ofCustomizability

HighLow

Rewards Strategy

Personalization

Low Payoff Acquisition

Source: Reinartz, Kumar, HBR 2002

Customer Strategy

• Customers

- Customer not fully aware of what they want- Competition is to create value- Inter-order activity is designed to gain insight into unmet needs

• Orders

- Customer knows what they want- Competition is to satisfy that demand at best value point- Inter-order activity designed to keep us in the race

The Difference Between Customers and Orders

Return per scarceresource unit(A Control View)

Core competence(A Strategic View)

What is our long-term vision?

What do we need to do today?

CustomerSelection

OrderSelection

Designing Customer Management Strategies

• Understand the nature of customer benefits offered– Economic and tangible versus non-economic and

intangible

• Develop a plan on how to build each customer relationship over time– Foot-in-the-Door or All-at-Once

• Understand the link between value created and value extracted

Said Business School MBAMarketing

Hilary Term 2007

Week 8:Summary

David Arnold

Marketing - course summary

1. Marketing Frameworks

2 The Big Picture - Value Creation and Capture

3. Eight Big Ideas Encountered in Multiple Cases

4. Marketing Numbers - A Quick Recap

5. Exam Grading Guide

8 BIG IDEAS

BIG PICTURE

FRAMEWORKS

NUMBERS

EXAM

Marketing Frameworks

Company

MarketSegmentation

TargetMarketSelection

Product &ServicePositioning

Marketing Mix (The 4 P’s)

Product &Service

Place/Channels

Promotion

Pric ing

CustomerAcquisition

CustomerRetention

Profits

CreatingValue

CapturingValue

SustainingValue

Marketing Analysis (The 5 C’s)

Figure A: Schematic of Marketing ProcessNote on Marketing Strategy, HBS case 9-598-061, p. 2

Customers Competitors Collabor-ators

Context“... The goal of the marketing process is to assemble a detailed understanding of customers and prospects, and to use this knowledge to organize the firm’s market offering.”

Source: course description

FRAMEWORKS

How to Think Clearly about Messy Marketing Problems, Decide What to Do, and Present Your Analysis and Action Plan in a Way that Dazzles MBA ‘07.

Don’t rush to judgment. Resist the urge to find the solution prematurely. Find the problem first. Sort the evidence. Fit evidence on strategy into boxes labeled Customer, Competition, Collaborators, and Company. Fit evidence on tactics into boxes labeled Product, Place, Promotion, and Price. Use analogy. Remind yourself of other cases with feature in common with this one. In what ways might the analogies be useful? How might they be false? Analyze the evidence. Now dig a little deeper into the facts. Combine pieces of evidence. Examine ratios and comparisons. Who is buying what? Where? Who is spending and earning how much money? Identify the strategy. Take a step back. Look at the company. What is its strategy for creating and capturing value? What’s the core of the business: a proprietary asset, a well-defined target segment, a strong network of collaborators/channels, dozy competitors? How well is the company doing? What is changing? Now go back to the evidence and look for trends in the data. What is changing in this model? Define what it takes to grow the business. Identify obstacles and enabling factors. Ask what it takes to convert and to retain target customers. Consider the flow from prospect to convert to adopter to committed customer and ask where the conversion process is blocked and what it would take to unblock it.

Review the current positioning ofthe unit’s offerings. Does the served market correspond to the target market? Identify the offering’s competition and consider whether it is well differentiated. Review the current tactics. For each of the 4Ps, ask whether it is delivering value to the target market commensurate with its cost. Review also the organization’s structure, incentives, and control systems. Diagnose the problem. Look back over everything done to this point and state the problem. Do not confuse a statement of unmet goals with a problem: doctors are not rewarded for saying, “Your problem is that you are not well." A problem is a set of unmet goals linked to specific factors impeding their attainment. Now solve the problem. You may want to redefine the business. Or pick another target market definition. Or fix some of the 4Ps to deliver more utility to the target. Or review the organization’s structure, reporting relationships, incentives, control systems. Getnumbers support for your answer, perhaps an estimate of the return on investment or a break-even calculation or an income statement. Reality check. Is your solution practical? Implementable,? Efficient? Profitable? Are you pleased with it? Would you back it with your career? Present your recommendations. Never reach a conclusion without saying how you got there. Never make a recommendation without explaining what it will achieve. Make sure that every point (sentence, paragraph, exhibit) makes a distinct contribution. Check that nothing contradicts anything else.

Doing Marketing:Four Iterative Steps

Distill Key IssuesSpecify the coreproblem the solutionto which will leadto meeting goals

AnalysisAssembleclues fromwhich youinfer issuesand strategy

Devise StrategySpecify key changesin marketing strategy to resolve issues.

Devise Action PlanCompose marketing actionsthat creatively “execute” strategy

Customers Company

MarketSegmentation

TargetMarketSelection

Product &ServicePositioning

Marketing Mix (The 4 Ps)

Product &Service

Place/Channels Promotion

Pricing

CustomerAcquisition

CustomerRetention

Profits

CreatingValue

CapturingValue

SustainingValue

Marketing Analysis (The 4 Cs)

Channel tomarket

CompetitorsCompany

Source: adapted from Note on Marketing Strategy, HBS 9-598-061

FRAMEWORKS

On Being Good at Marketing

• Insistence on good market dataRefusal to accept generalizations from personal preferences

• Dogged persistence in returning to the basic questions (e.g. what are we selling? to whom? how much do they value it?). Always seek to start with data on customer buying patterns and behavior.

• Understanding of role and objectives of all actors in the marketing system

• Sensitivity to changeCommitment to continuous improvement of value proposition delivered to the market

• Appreciation of the wider business constraints on marketing, and the implications of marketing investments

• Ability to frame tactical decisions in a strategy for business growth

FRAMEWORKS

Value Capture and Creation

Value created and captured through marketing

Understand customers

Offer customizedvalue proposition

Integrated marketingmix to deliver andcapture value

Build defensibleadvantage, e.g.brand, servicenetwork

BIG PICTURE

Strategy= target market+ value proposition+ defensible asset

Tactics / Programs= design 4Ps to make offereasy to understandeasy to purchaseconsistent with behaviorconsistent with expectation

8 BIG IDEAS

Segmentation

Which segments are:growing?declining?emerging?

Are there better ways ofsegmenting the market,i.e. getting closer to whatthe customer actually wants?

Moreaccurateinformation,i.e. bettercustomerinsight

Easierinformation,i.e. morefeasible togather

DEMOGRAPHICS

PSYCHOGRAPHICS

Product andBuyingPreferences

Buying Behavior

Decision making unit (DMU)Decision making process (DMP)

Are we giving each player theright assistance at each stageof the process?

Can we improve the process(e.g. reduce search costs, providesamples)? Should we changewhom we target?

BuyerUserInfluencerLodgekeeperDecider

Need stimulationSearchPurchaseRepeat purchaseReinforcement/service

8 BIG IDEAS

Value Pricing

How much value is createdby the product/servicefor the user?

Price discrimination (orcustomization): if different segments value the productdifferently, can it be priceddifferently to each segment?

How much of the created valuecan be captured by the provider,intermediary, and user?

Formulating pricing policy

Variable cost

Price to intermediary

Price to user/consumer

Producer’s valuecaptured

Incentive for user(to buy) and intermediary(to distribute)

COST

VALUE

Marketingcan raiseperceivedvalue

Competitioncan lowerperceivedvalue

Penetrate

Skim

8 BIG IDEAS

Extending the Product Offer

Can the product be augmented,e.g. bundling, service?

Early in the product life cycle:is the product easy to adopt?

Later in the product life cycle:does the product line need extendingto cater to increasing segmentation?

Watch out for disruptive innovationsthat bypass cost structures of incumbentsand offer new value proposition

expensiveand undifferentiated product

8 BIG IDEAS

customized and wide

reaching service

Push and Pull Promotion

Push vs. pull: is the balanceeffective?

Are the different tools in the communications mixbeing used to facilitatebuying behavior?

Do we understand which element of communications mixis shaping perception andbehavior (e.g. shelf presence, brand image)?

Impact of Various Promotional Tools

TraditionalAdvertising

ConsumerPromotion

Awareness

Liking

Trial

Adoption

TradePromotion

Shelf Space,Features,Displays

DirectResponse

Advertising

Sponsorship

8 BIG IDEAS

Channels to Market

Channel functions:who is most effective?Who is most efficient?

Are incentives aligned?

Can players bere-aligned intonew “demandchain’?

Are multiple/hybridchannels necessaryto cover market?

Distribution channel functionsDEMAND GENERATION: Promotion, sales calls, pricing

PHYSICAL DISTRIBUTION: Hold inventory, break bulk, offer assortment, convenient availability, delivery

FINANCING: Assume inventory carrying risk,extend credit

PRODUCT SUPPORT: Technical support, product customization,after-sales service and support

INFORMATION Gather customer data

A FIRM CAN CUT OUT THE DISTRIBUTOR, BUTCANNOT ELIMINATE THE DISTRIBUTION FUNCTIONS

8 BIG IDEAS

Direct Customer Relationships

Requirements for direct:customer-specific recordrecord of customer responseability to adapt to that response

Key measures of direct marketing:acquisition/retention costcustomer (lifetime) value

Relationship often driven by customerpreference regarding how businessis done (telephone, email, catalog)

leverage relationship throughwider product/service range

BUT don’t violate customer trust,overdo selling efforts, or bundleproducts which are not complementary

Relationship/1:1 Marketing

Few Many

CustomersServed

ManyShare of Customer -> Economies of Scope

Broad Product Line

Needs Satisfied

8 BIG IDEAS

Colleagues or Competitors?

Customers havesimplified perceptions for ease of informationprocessing

Different players inthe market systemhave different goals

GET IT WRONGDifferent elementsof the systemundermine each other

GET IT RIGHTDifferent elementsof the systemare synergistic

8 BIG IDEAS

Useful marketing numbers:a quick recap

• Market potential and dynamicsSales = Customers x Purchase AmountIdentify market size, structure, growth

• Channel economicsProfit = Margin x TurnoverIdentify value added at each levelIdentify number of players at each level

• Profit and loss projections- by year, product, market, segment, customer- for new products/markets, break-even

NUMBERS

Useful marketing numbers:a quick recap

• Elasticities (input-output)when input data available, identify results of changes in marketing activity e.g. price, salesforce, promotional spend

• Metrics of marketing performancelook for ratios, e.g:

advertising per market share pointsales per salespersoncontribution per outlet

NUMBERS

Final Exam EXAM

CRITERION DESCRIPTION

1: SITUATION ANALYSIS Analysis of case evidence to give snapshot of marketOUTPUT should be: - identification of key drivers of value in market

- assessment of market size and potentialLOOK FOR - analysis/interpretation of case data, not just repetition

2: STATEMENT OF KEY ISSUES Statement of the key market issues relevant to corporate goals: - obstacles which need addressing, including competitors - opportunities which are emerging

LOOK FOR - sense of scale of problem/opportunity - follows from Situation Analysis

3: MARKETING STRATEGY Statement of plan for achieving goals, including at least: - target market selection - value created in those markets - point of differentiation fom competition

LOOK FOR - clarity and precision in statement - identification of key sustainable leverage points - sense of why this was selected rather than alternatives

4: MARKETING PROGRAM DECISION Assignment question on marketing mix decisionAnalysis of and recommendations regarding policyLOOK FOR - specific analysis using case data

- projections of results of these actions - consistent with strategy

5: QUALTIY OF ARGUMENT AND IDEAS Coherence and consistency of argumentBalance of ideas guiding argument and evidence supporting argumentLOOK FOR - insight (not just repetition of questions or case data)

- convincing (evidence or illustration used in support) and coherent

The best exam papers…• are easy to read, with every line/sentence/chart making a distinct point which is

immediately apparent• demonstrate rigorous reasoning in a way which makes the argument more convincing,

e.g. the analysis behind a conclusion is cited, as is the support for a recommendation

•Never reach a conclusion without indicating how you got there.•Never make a recommendation without explaining why it’s the right decision.•Make sure that every element (sentence, paragraph, chart) contributes something different.•Check the completed paper to make sure that nothing contradicts anything else

EXAM

Some questions to ask of a marketing plan

• Are customer perceptions and behaviors well understood?• Is there a clearly targeted customer segment?• Is the positioning clear? Are all 4Ps aligned behind it?• Are the marketing processes (buying behavior,

communications, distribution) aligned?• Are the customer acquisition and retention processes being

managed?• Are push and pull programs correctly supported?• Are intermediaries/distributors motivated?• Is the price right? Who captures how much value?• Is there a vision of how the plan will evolve as the market

changes and the business needs to keep growing?

EXAM

To: MBA 2006-2007 From: David Arnold Date: 11th February 2007 Re: Marketing Practical Work – Aqualisa Quartz Administration You will be receiving from Exam Administration a percentage grade for this submission. This will later be weighted in calculating your final grade because, as you know, this Practical Work will count for 40% of your final grade, with the final exam accounting for the other 60%. This note is intended to supplement that grade by giving you an indication of what we were looking for in the papers; this supplements the case analysis we conducted in class in Week 4. I have not issued letter grades, but I have followed the grading conventions of the MBA, i.e. 70%+ is ‘Excellent’ and potentially Distinction quality, 50% is ‘Bare Pass’, and less than 50% is ‘Weak’ and potentially a fail. Grades of 55, 60, and 65 are steps in the Satisfactory-Good range. Overall, I was satisfied with the work, especially in view of the constraint on the length of the paper, and the fact that it came so early in the course. Quite a few were graded as ‘Excellent’, and only a handful were weak. Overview The objective of the assignment was to give you the opportunity to develop your skills in producing a marketing recommendation based upon analysis of a marketing situation. This is in line with the ‘learning-by-doing’ pedagogy of this course, and the fact that you are working in teams is in line with the situation in most firms. Remember that, like any recommendation, this should be an argument, which outlines a course of action justified by situation analysis and evaluation of options. We are looking for:

• Interpretation of data to identify key drivers of market development • Identification of key issues facing firm • Clearly articulated strategy for addressing these issues • One or more specific actions that should be taken to implement this strategy • Consistency of argument, and insight into key issues

Above all, we value interpretation rather than description, focus on a few key issues, and insight supported by logic. The heart of any marketing piece of work is insight

Marketing Practical Work 1 – debrief note 2

into the process of value creation by the firm, value perception by its customers, and the market dynamics through which the value is allocated among the parties involved.

Aqualisa Quartz – Key Issues As was covered in class, there are several key issues in this case. To be graded at 70% or more (distinction level), a paper would need to show an appreciation of all (or nearly all) of these, with some supporting analysis or argument, woven into a coherent recommendation for marketing action.

• Value – the core concept of marketing, and the first building block of any analysis. This case offers the opportunity to quantify the value created by Quartz for both the plumber and the consumer. For the plumber, we can start from the hours saved by the faster installation time. The same faster installation is also the basis for the consumer savings. Beyond savings, the plumber gains opportunities to expand the number of jobs taken, and the consumer gets extra benefits such as ease-of-use, no excavation of the wall, etc.

• Decision-Making Process – the other vital building block is an understanding of the decision-making process followed by the customer. This should reveal the plumber as the vital gatekeeper of the market, involved in 73% of purchase decisions. A secondary point, included in the best papers, is an appreciation of the different segments, such as planned renovation vs emergency repair – this is relevant because we can expect this to influence the decision-making process and probably therefore the shower choice.

NOTE: the main failing of weaker papers was that they were not grounded in a demonstrated understanding of these two fundamental building blocks.

• Problem diagnosis – putting together these two areas, it should emerge that the key obstacle to Aqualisa achieving its goals is the resistance of plumbers to this innovation. This should be explained in the terms of the case description (e.g. previous electronic showers have been unreliable, etc) and perhaps also in terms of an empathetic understanding of the plumbers’ perspective, i.e. they are in demand and feel no need for anything to change

• Channels – good papers should relate the different channels to the different segments and the different types of shower, offer a quantitative description of market structure, and (most importantly), reach a conclusion about market size, the scale of Aqualisa’s ambitions, and the implications for whom it should target.

• Target market: Plumber or Consumer? As we discussed in class, a good argument can be made either way here. It depends upon the assumption we make about how we should deal with the plumber – should we go round them by appealing to the end consumer (pull marketing) or attempt to win them over via push marketing? If the former, we should expect to see the plan based upon the pull power of showroom. If the latter, we should expect to see the

Marketing Practical Work 1 – debrief note 3

plan based upon the superior economic returns we can offer the plumber. A subtlety here (which would push this analysis from satisfactory to excellent) is to ask the value to Aqualisa of either the plumber or the consumer – obviously, the plumber is worth a lot more, and the consumer may buy only one or two showers in a lifetime.

• Implementation – the better papers had concrete plans for implementation. The most interesting areas, on which they tended to focus, were (i) the price of the Quartz, related to value; (ii) the margins offered to the distribution channels; (iii) the number and/or structure of Aqualisa salespeople given the job of building the market for the Quartz. There are some indications in the case that this is a rather sleepy industry, and that even Aqualisa’s salesforce is somewhat averse to innovation – this can be the basis for a sales plan.

Please note that some of the issues raised by Harry Rawlinson in the class (e.g. the management of the life cycles of Aqualisa’s product portfolios, or the evolution of the digital shower into a corporate strategy of electronic water control throughout the house) are not really evident in the case and therefore were not expected in the assignments.

The best papers covered all or most of these areas – I appreciate that this is a lot to cram in, given the space constraint, and graded accordingly, but quite a few papers did cover all these topics. More importantly, they put together these elements into an argument and plan, rather than offering disparate pieces of analysis.

Marketing C209

Professor David Arnold

Mid-term assignment:

Aqualisa Quartz

Aqualisa Quartz 1

Aqualisa Quartz: bathroom nirvana or simply fool’s gold? Introduction Quartz offers a technological step-change which seems in principle to offer enhanced value to consumers. In developing and bringing it to market, Aqualisa has been commendably customer-focused, making considerable effort to understand what consumers want and to refine its product accordingly. Notwithstanding its clearly enhanced value to consumers, however, Quartz has failed to live up to expectations since its launch. In the analysis that follows, we focus on:

how the UK shower market is structured and segmented, and how value is appropriated;

how Aqualisa’s current approach to marketing its new product fails to take sufficient account of this context;

how its approach might be improved to make Quartz the commercial success that its value to customers merits.

Understanding the UK shower market: segmentation on price and product type also extends to the channels

VEL: value equivalence line

Electric showers

Mixer and power showers

Value customers tend to opt for electric showers, which they install themselves. Mid-range and premium customers generally opt for mixer and power showers, which afford them higher utility and require professional installation

Value

Mid

Premium

Cost

Value to custom

ers

The UK market for showers segments into three: value, mid-range and premium. Customers in the former segment tend to be highly price sensitive and to want a basic shower; they attach little importance either to aesthetics or to shower experience quality (since electric showers do nothing to improve – the mostly poor – water pressure). This segment is served mostly via DIY stores, reflecting electric shower purchasers’ general enthusiasm for taking advantage of such products’ relative ease of installation. For them, therefore, the cost of the shower unit itself represents the bulk of the cost of installing a shower. Aqualisa captures about 16%

Aqualisa Quartz 2

of the annual market in this segment through its Gainsborough range; but although volumes are high (180,000 out of a total market of 1.1M in 2000), manufacturer margins on retail prices ranging from €95-230 are likely to be correspondingly low. Customers in the mid- and premium segments tend to place value in both overall shower quality and aesthetics (the “wow” factor). They tend to eschew electric showers in favour of mixer and power showers and are prepared to pay much higher prices (up to around €750). The fact that mixer and power showers usually need to be installed by a professional plumber – typically taking two days – also adds substantially to the overall cost to the customer of acquiring a shower: with plumbers charging between €40-80 an hour, sixteen hours of labour can add between €640-1280 to the bill. Even if we assume that, for a two day job, most plumbers charge towards the lower end of this range, they still end up appropriating on average at least half of the overall value of the customers’ purchase.

0

20

40

60

80

100

120

Electric Mixer/power

Shower type/segment

% o

f ove

rall

cost

to c

usto

mer

LabourCost of unit

For electric showers, mostly aimed at the value end of the market, shower unit cost represents the vast bulk of the cost to the customer. For mixer/power showers in the higher value segments, shower unit costs can be exceeded by the costs of installation.

Aqualisa’s slice of the overall mixer and power shower pie in 2000 of 555,000 equates broadly to that of the electric shower market, with the majority of its 139,500 units sold under its Aquavalve brand (with its value brand, Gainsborough picking up 23,500). Manufacturer margins in this segment are much healthier (and can be significantly more than 100% of a shower unit’s production cost). Finally, and critically, distribution channels in this segment are rather different. For mixer showers, independent plumbers install 54% of all showers purchased (with a further 20% installed by showrooms). In 73% of cases, the plumber exerts significant influence over the choice of shower purchased (either by purchasing it direct or by significantly influencing the customer’s decision). Plumbers source their showers from trade shops, who are Aqualisa’s customers. Marketing issues: why Quartz isn’t making a splash? Our analysis points to two main issues which are impeding Aqualisa’s ability to realise the expected sales volume from this innovative product.

Aqualisa Quartz 3

Blockage in the channels When consumers understand the Quartz offering, they are invariably bowled over by its “wow” factor. It got rave reviews on its launch, and customer reactions when they encounter the product in high-end showrooms is also impressive. This is testament to the considerable effort that Aqualisa put into refining Quartz to reflect consumer preferences over the three years of its development. This is all well and good. But relatively few showers are actually bought through this channel (only 13% of total sales of mixer showers in 2000). And Aqualisa’s products are only sold through 25% of UK showrooms.

In any case, customer views of mixer showers have traditionally not played that significant a role in the mixer shower purchase decision-making process. This reflects the very influential role of independent plumbers in the distribution process; and their traditionally extreme stickiness over the brand choice. The fact that plumbers tend to stick with the brand they know – for convenience as well as cultural reasons – means that once hooked they tend to be loyal customers. The corollary is that it is hard to convince plumbers to shift allegiance to an unfamiliar product (particularly one whose innovative electronic controls evokes connotations of historic failure and unreliability). Aqualisa’s failure to date to confront plumbers with a compelling reason to switch explains Quartz’s failure to gain traction. The company’s predicament is made worse by the fact that, notwithstanding plumbers’ critical role in distributing its products, they are available in only 40% of the trade shop outlets from which plumbers source products.

A lack of sales and marketing focus The evidence suggests some ambivalence towards the Quartz products amongst the sales and marketing team responsible for making it the commercial success that Harry Rawlinson clearly believes it ought to be. Messrs Pestell and Denny express some confusion about the place that Quartz should occupy amongst Aqualisa’s product range, regarding it as a niche product that will not replace Aquavalve, the company’s “bread and butter”. They do not seem conscious of the fact that, even if overall volumes are static, the company has the opportunity to leverage the enhanced customer utility offered by Quartz to move consumers along the value equivalence line (thereby moving more of them into the higher margin premium segment). Nor do they seem alive to the possibility that Aqualisa may be able to exploit Quartz’s innovative “wow” factor to generate brand and reputational value (thereby increasing its share of a mixer and power shower market of which it enjoys currently a modest 16.5%). The fact that the sales staff spend 90% of their time on maintaining relationships with existing clients – including their loyal plumber base – is also a problem. Unless they are incentivised to develop new customers, they will not do so. This may reflect a lack of focus at the top. Rawlinson seems clear himself of the potential of Quartz’s disruptive technology to secure success in the market place. But there is a question mark over the extent to which he has communicated this through the company; and his preoccupation with the wider applications of

Aqualisa Quartz 4

electronics in the bathroom is unfortunate and potentially diverting given the rather more pressing – and in any case logically prior – need to make Quartz a commercial success. Finally, the company’s existing sales and advertising literature fails either effectively to articulate Quartz’s real selling point to customers or to capture the “wow” that customers feel for the product when they see it in the showrooms. The message is that Quartz will revolutionise showering: but the advert that we have examined focuses on the product’s technical specifications rather than either its aesthetic or functional benefits to consumers or its advantages to plumbers. Marketing strategy: articulating the Quartz value proposition so that plumbers cannot resist and generating pull from consumers Quartz has to overcome plumbers’ predisposition to stick with what they know. That means giving them a convincing – and hence soundly economic – rationale for change. Aqualisa’s marketing effort has to date focused on the fact of Quartz’s ease of installation, which can save up to 75% of standard installation time. Yet the company does not seem to have developed the unanswerable logic that this will enable plumbers to make more money. Indeed, currently Quartz runs the risk of turning plumbers off: what interest could they have in pushing a shower from the installation of which – on a per-unit basis – they stand to appropriate less value (in absolute and relative terms) than is currently the case? Aqualisa needs to show plumbers why it is in their interests to recommend and install Quartz. This comes down to demonstrating to them that, although they will do less work on each installation, they will be able to charge higher hourly rates (that is towards the upper end of the range); that they will be able to service at least three if not four times as many customers (with demand pent up given current six month waiting times); and that the work is so simple that they can use relatively inexpensive apprentices and juniors to do the work. The table below illustrates how plumbers can effectively double their revenues by installing four times as many showers and charging premium rates for reduced time that they spend on each job. Quartz Traditional mixer/power Hours per installation 4 16 Plumber charge per hour 80 40 Total cost of plumber 320 640 Number of jobs in 48 hours 4 1 Total plumber revenue 1280 640

Even if plumbers charge rather less, say €60 per hour, to install Quartz they will still make more than they do at present. The beauty of this is that it will allow Aqualisa to appropriate more of the value from each shower unit sold than it does at present, both proportionately and – given the increased selling price and margin that Quartz commands – without substantially increasing the overall cost to customers. Indeed, compared to Aqualisa’s current flagship Aquavalve 609, Quartz ought to cost customers as much as €175 less (once

Aqualisa Quartz 5

installation costs are taken into account) while delivering €50 more in margin to Aqualisa. Quartz Aquavalve 609 Cost of shower 850 715 Cost of plumber 320 640 Total cost to customer 1170 1355

What Aqualisa, therefore, has the potential to do is move customers along Aqualisa’s virtual value equivalence line – giving them increased value at an increased price – without affecting overall the cost of what they are acquiring (a working shower) and hence overall demand. All this shows that there is very little need to reduce the product’s price in the market; indeed, if Aqualisa were to go down this route, it would simply be increasing the amount of value that plumbers and showrooms could appropriate to its detriment.

VEL

Aqualisa’s existing products

Quartz

By improving the customer offering, Quartz has the potential to move customers along the VEL for shower units, improving margins for Aqualisa, without increasing overall costs of installing a shower for consumers

Cost V

alue to customers

Aqualisa also needs to build on anecdotal experience which suggests that consumers can be effective in influencing change-resistant plumbers. That means capitalising on Quartz’s “wow” factor, generating pull from customers via the glossy magazines and the showrooms where many mid - and premium end customers go to get ideas, even if their subsequent intention is to source a shower via their plumber. So what should Aqualisa do? Aqualisa needs to deploy a combination of push strategies, designed to educate plumbers and the trade shops that supply them of the compelling value proposition that Quartz represents. And at the same time, it needs to generate a little pull from customers “wowed” by its innovative and aesthetically pleasing features. In practical terms this means:

Aqualisa Quartz 6

educating the sales force on the importance of Quartz to the firm’s future and

encouraging it to market the product aggressively to existing trade customers, including the pack of “pet” plumbers. Rawlinson needs to be clear with his top team that the company cannot simply grow fat on the profits derived from its current range; the fact that Quartz will deliver demonstrably higher margins should make it easier to persuade them that – even if all it does is cannibalise existing sales without growing market share – it will improve returns. He also needs to stop tinkering with the R&D guys on the apparently endless opportunities for digitising the bathroom; this sends the wrong signal to his people and fails to convey the single-mindedness with which the company should be seeking to market Quartz;

actively incentivising the sales team to seek out new customers. Quartz’s

prospects are harmed by the fact that it is not sold in 60% of trade shops (impeding a plumber’s ability to switch even if he should want to) and is absent from 75% of up-market showrooms (which makes it harder than it ought to be to generate favourable pull from impressed customers). The 90/10 balance of sales team effort needs to be adjusted in favour of acquiring new customers, particularly in the showrooms (on the basis that, if plumbers can be convinced, they will exert their own pull on trade shops);

taking the plunge and investing in the proposed advertising campaign. Aimed

directly at customers, this needs to be aspirational, majoring on the “wow” factor whilst making clear that such a desirable shower can be acquired – once installation costs are included – at little, if any, premium. We recommend that the chosen media should be glossy lifestyle magazines (of the Homes and Gardens variety), along with a below the line campaign through the showrooms. Rawlinson needs to see the cost of such a campaign (up to €4M), and the dent it would make in projected company profits (€17M) in context. With Quartz’s margin of €275 (€345 for the power shower version), the company needs to sell only around 14,000 over two years to recover its costs. Although significantly in excess of the paltry number that it has sold to date, this amounts to only 2.3% of total mixer/power shower sales via the showroom and trade shop channels. Given Aqualisa’s existing share of this market, and the value of its Quartz offering, this ought to be a target well within the company’s grasp. Investing in advertising might also have the side-benefit of demonstrating to the sales team the importance that Rawlinson places on them selling Quartz (if necessary at the expense of its hitherto core products). This should also facilitate the development of the Quartz/Aqualisa brand, which may have value when – as is surely likely – imitator “me-too” products emerge on the market in the future.

investing in the buy-in of the plumbers. They are very sticky and could provide

strong loyalty but must be converted first. Strong effort should be made to explain the value proposition as outlined earlier of how they also can extract more value by this installation. The company should consider advertising the product more directly in the trade press, majoring on the favourable economics of its ease of installation (rather than, as in its current literature, simply the time saved). This might be bolstered by the initiation of a training programme designed to demonstrate how simple Quartz is to install. In addition, the company might also

Aqualisa Quartz 7

offer an extended warranty on the product. By putting its money where its mouth is, the company might successfully overcome plumbers’ concerns about the reliability of electronically controlled showers.

What should Aqualisa avoid doing? We do not recommend that Aqualisa targets the low-end DIY market. At one level, this is as Rawlinson himself acknowledges, attractive: it accounts for very high volumes of sales of basic showers; Aqualisa already has high penetration, with its products already stocked in 70% of outlets; and the ease of Quartz’s installation may make it attractive to DIY-ers hoping to avoid the need for professional installation. But there are also real pitfalls. First, the volume of mixer and power showers sold through this channel is relatively small (at 100,000 units less than one sixth of that sold elsewhere). In any case, it is hard to see that customers primarily driven by cost would be motivated to pay a price premium for Quartz’s much higher value offering. This would leave Aqualisa having to reduce the price, which – given the low retail prices prevalent in this channel – would significantly impact on its margins (potentially rendering them nugatory). This would make it much harder to sustain price levels in the other channels. On top of this, it is hard to see how a strategy of targeting the product at that segment of the market that has traditionally eschewed the use of plumbers would be compatible with a strategy that places wooing plumbers at its heart. Nor would we encourage Rawlinson to pursue the idea of targeting developers, for the reasons that he himself articulates. Although volumes might be high, margin erosion would likely be significant; and in any case, it is not obvious that such an approach would generate much consumer pull, given the time-lag. That said, it might be worth seeking to get Quartz installed in up-market boutique hotels, spas and gyms. Volumes would be much lower – with a correspondingly less heinous impact on revenues – and, with installation and exposure times much quicker, customers demand might be more rapidly stimulated through exposure through such channels. Finally, as already indicated, we do not believe that Aqualisa should reduce Quartz’s price. To do so, given the economics outlined above, would unnecessarily cede value to plumbers and merchants. With the company enjoying a two year window before competitors catch up, it should seek to charge a premium price for a high value product (accepting that it may have to reduce prices in due course). Conclusion Aqualisa is, as Rawlinson acknowledges, doing very well. Its profits in 2000 amounted to nearly 26% of turnover. But Quartz offers it the opportunity both to grow turnover and brand and to position itself for the future. It should grab the opportunity with both hands, investing serious effort in communicating in unambiguous terms the product’s virtues to those who have such an influence in shaping customer demand (plumbers); and those who are the ultimate customers (consumers). In doing so, the company needs to recognise that Quartz’s features appeal to these different groups in different ways; and its strategy needs to reflect this. For a company whose sales and marketing budget amounted in 2000 to around 10% of turnover, there is scope for upping its efforts in order to land what is an impressive prize. But increases in

Aqualisa Quartz 8

expenditure will not be sufficient; what is also necessary is a strategy which communicates Quartz’s added value to plumbers (in economic terms) and to consumers (in aesthetic and functional terms).

Aqualisa Quartz 9

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