Marketing Simulation:

Managing Segments and Customers V3

Debrief Slides

HBP No. 8882

This PowerPoint presentation was prepared by Harvard Business School Professor Das Narayandas for the sole purpose of aiding classroom instructors in the use of Marketing Simulation: Managing Segments and
Customers (HBP No. 8880). HBP educational materials are developed solely as the basis for class discussion. These materials are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.. 

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Note to Instructors

Please treat the information in this presentation as

you would a teaching note.

DO NOT COPY OR POST

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2
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Focus of the Simulation

Managing markets

Managing market segments

Managing customers

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Scope of the Simulation

Segment/customer
behavior
Channel conflict

Competitive
behavior
Pricing decisions Marker Motion’s
performance

Market
Investment conditions
decisions
Use of market
research

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Understanding the Market

Mature market:
• Approximately 5% growth per year (not explosive market growth)
• Competitive marketplace
– Over 100 general and specialized manufacturers
– MM facing market loss and margin pressures
• Technology-intensive products
– Periodic product performance enhancements to keep up with gradual (but continually
increasing) customer demands

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Insights About Your Competitors

• There are relentless 900-pound gorillas that can outlast, outrun, and
outspend you. But they cannot outsmart you.
• They will see anything that you do and follow blindly. They notice
price changes faster than they notice anything else.
• When you pull back on performance, they don’t. They stay at a
higher level.
• Add this to the customer’s response:
– There was equilibrium for several years before you took over
– Customers had problems but lived with it
– Competitors just plodded along

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Managing Segments

Segmentation based on size (purchase volumes):

• Large customers account for 70% of MM’s sales
– Served primarily by MM’s sales force
• Small customers account for 30% of MM’s sales
– Served primarily by the channel distributors
• Large customers are further broken down into four sub-segments
based on their needs and willingness to pay
– Three performance attributes

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Large Customer Sub-segments

Segment A places a premium on the sensors’ battery

life and generally requires a high level of sales support
due to the requirement for customization.

Segment B places a premium on small and light

sensors, and also values the market and technical
knowledge of a manufacturer’s sales representatives.

Segment C, the least price-sensitive of large-volume

customers, requires superior battery life as well as
small, easy-to-affix sensors. These customers conduct
sophisticated research for highly technical applications,
therefore their technical standards are stringent.

Segment D is price-sensitive. They buy sensors in bulk

for large scale studies.

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Three Distinct Positioning Strategies

Strategy 1: Maintain the status quo

• No focus on product performance
enhancements

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Three Distinct Positioning Strategies (continued)

Strategy 2: Become the high-end market leader

• Focus on product performance
enhancements on both dimensions
over time
• Increase price

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Three Distinct Positioning Strategies (continued)

Strategy 3: Become the dominant low-

end (commodity) player
• Increase thermal resistance levels
• Trade off on power-to-size
• Focus on lowering costs through
investments in manufacturing
efficiencies
• Lower costs

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Impact of Investment Decisions

There is a continual struggle between the short and long term

Profits = revenues – cost

Investments typically increase cots in the short-run but increase

revenues over time.
• As a result, if large scale investments are made
– The investments will have downward pressure on profits
– Lower profits means that management will cut the budget
– Lower budget can impact the ability to sustain higher effort
– Net result: such an investment strategy is not sustainable

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Impact of Investment Decisions (continued)

A long-term relationship-building strategy works when you

• Understand the interplay between immediate and lagged effects of
your investment decisions
• Understand that you cannot go after all segments
• Carefully pick the segments/customers you want to serve
• Craft and implement all elements of your marketing effort to go after
the segments selected

If done correctly, the simulation rewards any effort to build long-term

relationships (loyalty) with customers

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Pricing Strategy

Increase Prices
• You might be leaving money on the table
• If market research suggests that you are differentiated, make sure
you extract value that you create for your customers

Reduce Prices
• This can be a slippery slope (after they get a little, customers want
more)
• Improvements in performance don’t hedge against customers’ desire
for more reductions
• If you didn’t reduce prices before, why start now?

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Use of Market Research: Yes or no?

If you decide to use market research, a fixed $50,000 value is added to

your budget.

• Market research reports help you make better decisions

• The act of doing market research makes you more effective in
understanding customers, competitors, and other aspects of the
marketplace
• In business marketing, spending on marketing research is not easy to
define and manage

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Channel Conflict

• Small customers are supported by distributors

– Sales reps call on them because they are expected to grow in the future
• Large customers buy some portion of their product volume from
distributors
• Channel conflict
– The same customer is getting significantly different prices from two channels
– Price-reduction strategy (sales force might use it to attract small customers) upsets
the distributors
– High distributor margins, they go after large customers by offering lower prices

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Customer Management Process

Develop and manage

a portfolio of customer
relationships

Customer
Management

Link the customer-management

effort to economic rewards

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Customer Behavior

• Needs evolve very slowly

– Importance of different attributes does not change much over time
• Customers change expectations when vendors change performance
• Satisfaction = f(Performance, (Expectations – Performance))
– How well you performed
– How well you performed relative to my expectations
• Expectations = f(Past Performance)
– What I expect from you is based on how well you did last time

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 Link Between Customer Expectations, MM’s
Performance, and Satisfaction
Past performance/
quality

Expectations

Needs, values, and

satisfaction with past Negative
performance disconfirmation

Satisfaction

Positive
disconfirmation

Perceived
performance/
quality

Disconfirmation = Performance — Expectations

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Link Between Satisfaction, Loyalty, and
Repurchase Intent

Other factors such as customer’s long-term orientation,

vendor’s past performance, value provided by vendor and as
perceived by the customer, and switching costs

Satisfaction with
MM

Repurchase
Loyalty
behavior

Satisfaction with
competitors

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How does satisfaction change over time?
Change in
satisfaction

Perf = Exp

x p
Perf > E
Performance —
Perf < Exp
Expectations
s
ain
tha om
ng
g er s l o
lar Losse

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What is the impact of customer loyalty
on loss aversion?
Change in
satisfaction

Perf = Exp

x p
Perf > E
Performance —
Perf < Exp
Expectations
s
ain
tha om
ng
g er s l o
lar Losse

Copyright © 2019 President and Fellows of Harvard College.

What is the impact of customer loyalty
on loss aversion? (continued)
Change in
satisfaction

Perf = Exp

x p
Perf > E
Performance —
Perf < Exp
Expectations
s
ain
tha om
ng
g er s l o

Loyalty should reduce the

lar Losse

asymmetry

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 The Cycle of Quality/Performance

Quality goes down as a result of cost cutting . . .

Willingness to pay

. . .as firm begins to

improve quality

Quality

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What’s wrong with a focus on satisfaction?

• Satisfaction: How well did I do in the past?

• Objective: I want you to come back and buy more
• Assumption: A satisfied customer will come back
• Management approach: Increase satisfaction and you increase
profits
• Reality: It does not happen all the time

The relationship between satisfaction and coming back is strong and

true only at the highest level of satisfaction

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Is it all about getting customers back?

• Firms try to buy satisfaction

– Let me give you a great deal. Are you happy now?
– I will do this for you if you tell me (and my boss) that you are happy
– I know the product is not good. How can I make you satisfied?
• Satisfaction goes up, customers don’t come back

• What firms need to do is build satisfaction

– Satisfaction goes up, customers come back and buy more
– In the face of competition
– You make more money

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 Fundamentals of Competitive Strategy

Superior
long-run performance

Attractive Competitive
industry structure advantage

Differentiation Cost focus

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 Fundamentals of Competitive Strategy (continued)
Superior
long-run performance

Attractive Competitive
industry structure advantage
High returns for the Outperform the average
average participant industry participant

Choice of industry to
operate in impacts ability
to produce return*
Differentiation Cost focus

Do things differently from rivals: Do the same things as rivals

Do better on existing performance attributes but more cost effectively
OR
*In this simulation, the industry is a given. Introduce new performance attribute
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Customer Loyalty

Loyalty is built by the firm, owned by the customer, and eroded by time,
the environment, and the competition

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Who is a loyal customer?

A loyal customer is one who is

• Willing to repurchase
• Willing to recommend you to others
• Willing to pay a premium price
• Resistant to competitor’s blandishments
• Willing to wait (to give you a chance to catch up or improve)
• Resistant to adverse expert opinion
• Going to complain to you and not to others

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Link Between Customer Satisfaction,
Customer Loyalty, and Profitability
Current
 Easier to convince
satisfied
customers
 Resistant to competitor’s
blandishments
Lower
costs

Profits
Profits

Source: Professor Sundar Bharadwaj, Emory University

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Link Between Customer Satisfaction,
Customer Loyalty, and Profitability (continued)
Current
satisfied
customers Word of mouth/
reputation

 Higher price

 Buy more

New Competitor’s
customers customers
Adoption
Switching

Higher share, revenues,

Profits
and higher prices
Source: Professor Sundar Bharadwaj, Emory University

Copyright © 2019 President and Fellows of Harvard College.

Link Between Customer Satisfaction,
Customer Loyalty, and Profitability (continued)
Current
 Easier to convince
satisfied
customers Word of mouth/
 Resistant to competitor’s reputation
blandishments
 Higher price
Lower
 Buy more
costs

New Competitor’s
customers customers
Adoption
Switching

Higher share, revenues,

Profits
and higher prices
Source: Professor Sundar Bharadwaj, Emory University

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How does satisfaction affect loyalty?

Loyalty

1 2 3 4 5
Satisfaction Rating

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 Framework for Explaining Customer
Profitability in Industrial Markets
Process Outputs

Attribute-level Customer’s
Performance
Attribute-level Satisfaction response
Performance with the supplier
Attribute-level Sales Volume
performance
Inputs Share of Purchases Revenue

Customer-
Customer
management
profitability
effort

Costs
Source: Bowman and Narayandas (2004)

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 Framework for Explaining Customer
Profitability in Industrial Markets (continued)
Process Outputs

Attribute-level Customer’s
Performance
Attribute-level Satisfaction Loyalty
response
Performance with the supplier A proxy for actual
Attribute-level Sales Volume
performance customer behavior
Inputs Share of Purchases Revenue

Customer-
Customer
management
profitability
effort

Costs
Source: Bowman and Narayandas (2004)

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How well do satisfaction measures predict
defection?

It depends on
• How central the issue is
– Defection is abrupt if the issue is central
• How well the vendor’s solution fits customers’ needs
– Defection is gradual if solution fit is poor
• Customers’ attitudes towards alternatives
– Defection is gradual if alternatives are poor

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How well do satisfaction measures predict
defection? (continued)

Brittle
Relationship
Satisfaction

Soft
Relationship

Time

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The Loyalty Ladder
Enthusiastic
Advocate

Very likely
to re-buy

Will not be affected by adverse

comments from experts

Will pay
more

Will wait if product is

in short supply

Likely to
re-buy

Will say positive

things about you
Won’t switch immediately to superior
products from competition
Source: Narayandas (2005)

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 The Loyalty Ladder (continued)
Enthusiastic
Advocate

Very likely
to re-buy
 What is the cost of moving
the customer from one rung
to another?
 What is the revenue impact? Will pay
more

Likely to
re-buy

Will say positive

things about you
Won’t switch immediately to superior
products from competition
Source: Narayandas (2005)

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 Simulation Structure
Decide
Prepare Analyze (13 quarters)
What background material What information do you What levers What feedback
do you have? begin with? do you pull? do you receive?

Industry and Company

Historical Financials Price Financial Data
Summary

Industry Data Discount Structure Market Research Data

Marketing of the
Marketing Expenditures Customer Satisfaction Data
Customer Base

Instantaneous
Your Objectives Size of Sales Force
Feedback Coaching

Budget Available for

Account Management
Next Period

Product Customization

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 Causal Loop Diagram
Fraction of
R&D Spending on
Spending on Large Large Customer
Feature
s Selected Feature Customers Retention Rate
Performance
s Fraction of Time
Social Media
Spent on Large
Spending
o Direct s Customer
o Customer Retention
Other Feature Communication o o
Large Customer
Performance s Large Customer
o s Satisfaction
Acquisition Rate
Small Customer
o Brand Satisfaction
Manufacturing s Reputation
Costs
s
s s s s
s
R&D Spending on s
Process s s
Improvement Large Customer
Sales o s
Total Costs Total Sales s Market Share
s s s s
Fully Loaded s
Small Customer
Salary Per s s Sales
Salesperson
s
s s o o s
s Total Revenue
Sales Force Profit s s
Spending

s Market Research
Effectiveness
Sales Force
Sales Force s Effectiveness s
Channel and
o Segment Discounts
Net Price
s
s
s
Sales Force Integrated Marketing Market Research
Emphasis Communications and Training Spending List Price

s = change in same direction

o = change in opposite direction

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Class Data: User Results by
Metric

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User Results by Metric: Score

12

10

8
Users

0
0 to 13 14 to 26 27 to 39 40 to 52 53 to 65
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User Results by Metric: Cumulative Revenue

10
9
8
7
6
5
Users

4
3
2
1
0
$34.85M to $50.02M to $65.19M to $80.36M to $95.53M to
$50.02M $65.19M $80.36M $95.53M $110.70M

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User Results by Metric: Cumulative Profit

25

20

15
Users

10

0
-$38,886.91K to -$30,100.01K to -$21,313.11K to -$12,526.22K to -$3,739.32K to
-$30,100.01K -$21,313.11K -$12,526.22K -$3,739.32K $5,047.58K

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User Results by Metric: Market Share

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User Results by Metric: Customer Satisfaction

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 Thank You

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I am not from a finance background?

- “You need to understand Profits to be a good manager or a CEO”

Revenue or Sales

Costs

• Variable

• Fixed

Net Income or Profit

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“There are so many financial numbers, is this Marketing?”
- Marketing requires money, it is important understand monetary impact of
marketing decisions and strategy”

Can you earn more by selling less?

- Generally people find it difficult to ask for premium
- And relate to selling less for more

Why variable costs are not going down?

- Are you selling more ? By definition, variable costs vary with units sold
- Are you manufacturing better products?
- You can try to control increase in unit variable cost

Fire resources to decrease costs

- Are you building a sustainable business?

Why all my customers are not satisfied?

- Are you in the business of satisfying everyone?

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I do not understand what distributors are doing here?
- Can a company like HUL service remote Indian villages directly?

How QA issues, product issues, failures etc. can be resolved?

- Sales rep quality links to everything in a B2B segment
- Your customer service is mostly your sales support in tech product market
- Investing in sales may even be better than products at times

I did everything but still results are not in my favour?

- That’s exactly what the CEO role entails. Market can do wonders for you
both during good and bad times
- One wrong decision can over do all right decisions

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