Marketing Challenges - LBS Associate Professor Oded Koenigsberg

1. Marketing Challenges Oded Koenigsberg Associate Professor of Marketing Why do firms introduce new products and services? What determines their success or failure? At the very core of business operations, Marketing is the area charged with generating revenue through the provision of real value to customers. That same value must then be recaptured for the firm. This session will provide a short overview of marketing strategies and decisions by looking at some of the major challenges that marketing managers face. He will also examine the tools and frameworks managers can use to improve decision making. 1

2. Oded Koenigsberg Reunion Weekend: Marketing Session Agenda  Marketing Core: A reminder  Marketing Challenges 1

3. Class Assignment Think about a new product or a service The product can be anything that is new to the market within the last year or so New to the World… MODO Scooba Airless Tires Tesla Motors 2

4. Class Assignment Think about a new product or a service The product can be anything that is new to the market within the last year or so New to the World… MODO Scooba Airless Tires Tesla Motors 2

5. New to the World? About 5 - 10% of new products are truly new Total Total Fresh Stripe 2 in 1 toothpaste & mouthwash Sparkling White Sensation Whitening Sensitive Maximum Strength Tartar Control Tartar Control Plus Whitening Baking Soda & Peroxide Whitening Tartar Control with Baking Soda & Peroxide Cavity Protection Star Wars Barbie toothpaste Looney Tunes toothpaste My First Colgate Toothpaste with Barney Luminous Clean Mint paste Whitening Paste and Gel Advanced Fresh 2in1 WISP Sparkling White Fluoride Toothpaste, Mint Zing Herbal Types of New Products Marlboro Newness to Market L M H L Cost Reductions Repositioning Firm M Product line Extensions H New Product New to the World Lines 3

6. New to the World? About 5 - 10% of new products are truly new Total Total Fresh Stripe 2 in 1 toothpaste & mouthwash Sparkling White Sensation Whitening Sensitive Maximum Strength Tartar Control Tartar Control Plus Whitening Baking Soda & Peroxide Whitening Tartar Control with Baking Soda & Peroxide Cavity Protection Star Wars Barbie toothpaste Looney Tunes toothpaste My First Colgate Toothpaste with Barney Luminous Clean Mint paste Whitening Paste and Gel Advanced Fresh 2in1 WISP Sparkling White Fluoride Toothpaste, Mint Zing Herbal Types of New Products Marlboro Newness to Market L M H L Cost Reductions Repositioning Firm M Product line Extensions H New Product New to the World Lines 3

7. Discussion  Why do you think the company introduced it?  Whether you think it will be a success or a failure and why? Discussion  Why do you think the company introduced it? 4

8. Discussion  Why do you think the company introduced it?  Whether you think it will be a success or a failure and why? Discussion  Why do you think the company introduced it? 4

9. Better meet needs of slightly different sub-segments through differentiation Better meet needs of slightly different sub-segments through differentiation Buick Enclave GMC Acadia Saturn Outlook Chevrolet Traverse 5

10. Better meet needs of slightly different sub-segments through differentiation Better meet needs of slightly different sub-segments through differentiation Buick Enclave GMC Acadia Saturn Outlook Chevrolet Traverse 5

11. Better meet needs of slightly different sub-segments through differentiation Better meet needs of slightly different sub-segments through differentiation 6

15. Better meet needs of slightly different sub-segments through differentiation Dannon - c.1942 Variety seeking 8

16. Better meet needs of slightly different sub-segments through differentiation Dannon - c.1942 Variety seeking 8

17. Address potential emerging segments Address potential emerging segments Friday, January 2, 2004 Breweries rush to quench thirst for low-carb beer Market for new brew seen as biggest since debut of light By JUDY LIN THE ASSOCIATED PRESS 9

18. Address potential emerging segments Address potential emerging segments Friday, January 2, 2004 Breweries rush to quench thirst for low-carb beer Market for new brew seen as biggest since debut of light By JUDY LIN THE ASSOCIATED PRESS 9

19. Address potential emerging segments Friday, February 11, 2006 The new emphasis, says Elizabeth Sloan, …is likely to be the reformulation and marketing of products to incorporate the latest nutritional thinking about fats: that there are good and bad fats. By Melanie Warner New York Times Counter encroachment by new alternatives 10

20. Address potential emerging segments Friday, February 11, 2006 The new emphasis, says Elizabeth Sloan, …is likely to be the reformulation and marketing of products to incorporate the latest nutritional thinking about fats: that there are good and bad fats. By Melanie Warner New York Times Counter encroachment by new alternatives 10

21. Facilitate attraction of new users Alter a brand image Mercedes C-Class VW Phaeton 11

22. Facilitate attraction of new users Alter a brand image Mercedes C-Class VW Phaeton 11

23. Discussion  Whether you think it will be a success or a failure and why? Why Good Ideas Go Bad  Common reasons for product failure  Failure to understand 1986 consumers and competitors  Too small a target market  KODAK ULTRALIFE Lithium Power Cells, the world's first 9- volt lithium cells for consumer use  LA beer 1984 12

24. Discussion  Whether you think it will be a success or a failure and why? Why Good Ideas Go Bad  Common reasons for product failure  Failure to understand 1986 consumers and competitors  Too small a target market  KODAK ULTRALIFE Lithium Power Cells, the world's first 9- volt lithium cells for consumer use  LA beer 1984 12

25. Problems with product quality or product attributes 2004 Nokia N-Gage Source: http://www.techtv.com/print/story/0,23102,3013675,00.html Newton MessagePad - Popular Science, December 1993 Source: http://www.chuma.org/newton/ads/ 13

26. Problems with product quality or product attributes 2004 Nokia N-Gage Source: http://www.techtv.com/print/story/0,23102,3013675,00.html Newton MessagePad - Popular Science, December 1993 Source: http://www.chuma.org/newton/ads/ 13

27. http://thebase.weblogger.com/stories/storyReader$7510 Problems with product quality or product attributes 14

28. http://thebase.weblogger.com/stories/storyReader$7510 Problems with product quality or product attributes 14

29. Problems with pricing Problems with distribution Holly Farms -1988 Acquired by Tyson -1989 15

30. Problems with pricing Problems with distribution Holly Farms -1988 Acquired by Tyson -1989 15

31. Problems with communication Marketing Management Business Environment Strategy Decisions Understanding the Customer Segmentation Marketing Understanding Targeting Management the Company Positioning Decisions Understanding the Competition 16

32. Problems with communication Marketing Management Business Environment Strategy Decisions Understanding the Customer Segmentation Marketing Understanding Targeting Management the Company Positioning Decisions Understanding the Competition 16

33. Marketing Management Product Decisions Understanding the Customer Pricing Decisions Success or Understanding the Company STP Failure: Firm Performance Promotion Understanding Decisions the Competition Place Decisions Marketing Strategy Framework Identify Market Customer Company Competition Opportunities Set Strategy Segmentation Targeting Positioning Formulate Marketing Product Price Promotion Place Program (Asim) 34 17

34. Marketing Management Product Decisions Understanding the Customer Pricing Decisions Success or Understanding the Company STP Failure: Firm Performance Promotion Understanding Decisions the Competition Place Decisions Marketing Strategy Framework Identify Market Customer Company Competition Opportunities Set Strategy Segmentation Targeting Positioning Formulate Marketing Product Price Promotion Place Program (Asim) 34 17

35. What is Marketing? To achieve organizational goals by determining the needs and wants of customers and delivering the desired benefits more effectively and efficiently than competitors “Everything starts with the customer.”  Lou Gerstner, CEO of IBM (1993-2002) “My own biggest mistake in the last 20 years was that sometimes I designed solutions for problems that people didn't yet know they had. That's why some of the things that could've made a difference couldn't find a market.”  Bill Joy, the ‘Edison of the Internet’ 35 Why It Matters “The history of the industry was the better-mousetrap syndrome: You build a faster thing and the world will beat a path to your doorstep. But as the industry matured, that no longer became the best way to look at the problem.”  Paul Otellini, President and CEO, Intel 36 18

36. What is Marketing? To achieve organizational goals by determining the needs and wants of customers and delivering the desired benefits more effectively and efficiently than competitors “Everything starts with the customer.”  Lou Gerstner, CEO of IBM (1993-2002) “My own biggest mistake in the last 20 years was that sometimes I designed solutions for problems that people didn't yet know they had. That's why some of the things that could've made a difference couldn't find a market.”  Bill Joy, the ‘Edison of the Internet’ 35 Why It Matters “The history of the industry was the better-mousetrap syndrome: You build a faster thing and the world will beat a path to your doorstep. But as the industry matured, that no longer became the best way to look at the problem.”  Paul Otellini, President and CEO, Intel 36 18

37. Marketing and Firm Value Market Value Cash Flows Customers Company Competitors 37 Customer and Firm Value FIRM VALUE Domain of Finance Linking Customer PROFITS & and Firm Value CASH FLOW VALUE OF A CUSTOMER Domain of Marketing CUSTOMER CUSTOMER CUSTOMER EXPANSION ACQUISITION RETENTION 38 19

38. Marketing and Firm Value Market Value Cash Flows Customers Company Competitors 37 Customer and Firm Value FIRM VALUE Domain of Finance Linking Customer PROFITS & and Firm Value CASH FLOW VALUE OF A CUSTOMER Domain of Marketing CUSTOMER CUSTOMER CUSTOMER EXPANSION ACQUISITION RETENTION 38 19

39. Two Sides of Value  When firms deliver greater customer value than their competitors, they are more successful in attracting, retaining, and growing customers  When firms attract, retain, and grow customers, they earn profits and are more likely to survive and grow and enhance shareholder value “How does this “firm action" provide value to the customer and/or the firm?” Critical Activities The job of putting the marketing philosophy into practice normally falls to people in the firm who have marketing and/or product-management titles 1. Determine and recommend which markets to address 2. Identify and target market segments 3. Set strategic direction and positioning 4. Design the marketing offer 5. Secure support from other functions 6. Monitor and control execution and performance 20

40. Two Sides of Value  When firms deliver greater customer value than their competitors, they are more successful in attracting, retaining, and growing customers  When firms attract, retain, and grow customers, they earn profits and are more likely to survive and grow and enhance shareholder value “How does this “firm action" provide value to the customer and/or the firm?” Critical Activities The job of putting the marketing philosophy into practice normally falls to people in the firm who have marketing and/or product-management titles 1. Determine and recommend which markets to address 2. Identify and target market segments 3. Set strategic direction and positioning 4. Design the marketing offer 5. Secure support from other functions 6. Monitor and control execution and performance 20

41. What is Customer Lifetime Value (CLV) ? Customer lifetime value is the present value of the future cash flows generated from a customer over the life of her/his business with the firm What is Customer Lifetime Value (CLV?) Customer lifetime value is the present value of the future cash flows generated from a customer over the life of her/his business with the firm  A forward looking concept  Not to be confused with (historic) customer profitability 21

42. What is Customer Lifetime Value (CLV) ? Customer lifetime value is the present value of the future cash flows generated from a customer over the life of her/his business with the firm What is Customer Lifetime Value (CLV?) Customer lifetime value is the present value of the future cash flows generated from a customer over the life of her/his business with the firm  A forward looking concept  Not to be confused with (historic) customer profitability 21

43. Measuring CLV Profit Pattern Defection Pattern 120 120 105 96 99 100 86 92 100 100 75 80 66 70 Accounts Remaining 82 80 76 60 70 Annual Profit 42 66 60 40 60 56 47 20 40 34 40 0 -20 0 1 2 3 4 5 6 7 8 9 20 -40 0 -60 -40 0 1 2 3 4 5 6 7 8 9 Customer Tenure Customer Tenure (£42)(0.82) (£66)(0.76) (m)(r 1) (m)(r 2) CLV  40    ...     ....  AC (1  0.1) (1  0.1) 2 (1  i ) (1  i ) 2 43 Measuring Customer Value Margin m1 m2 m3 … mt Retention r1 r1r2 r1r2r3 … r1r2r3…rt Number of Customers n1 n2 n3 … nt Acquisition Cost AC1 AC2 AC3 … AC t 2 3 Discount 1/(1+i) 1/(1+i) 1/(1+i) … 1/(1+i)t 44 22

44. Measuring CLV Profit Pattern Defection Pattern 120 120 105 96 99 100 86 92 100 100 75 80 66 70 Accounts Remaining 82 80 76 60 70 Annual Profit 42 66 60 40 60 56 47 20 40 34 40 0 -20 0 1 2 3 4 5 6 7 8 9 20 -40 0 -60 -40 0 1 2 3 4 5 6 7 8 9 Customer Tenure Customer Tenure (£42)(0.82) (£66)(0.76) (m)(r 1) (m)(r 2) CLV  40    ...     ....  AC (1  0.1) (1  0.1) 2 (1  i ) (1  i ) 2 43 Measuring Customer Value Margin m1 m2 m3 … mt Retention r1 r1r2 r1r2r3 … r1r2r3…rt Number of Customers n1 n2 n3 … nt Acquisition Cost AC1 AC2 AC3 … AC t 2 3 Discount 1/(1+i) 1/(1+i) 1/(1+i) … 1/(1+i)t 44 22

45. Measuring Customer Value Lifetime value of a customer  r  CLV  m   AC 1 i  r  m = margin (i.e., profit) i = discount rate r = retention rate AC = acquisition cost 45 Margin Multiple Constant Margins Customer Lifetime Value = Profit Margin * Margin Multiple r 1 i  r Margin Multiple Retention Discount Rate Rate 10% 12% 14% 16% 60% 1.20 1.15 1.11 1.07 70% 1.75 1.67 1.59 1.52 80% 2.67 2.50 2.35 2.22 90% 4.50 4.09 3.75 3.46 46 23

46. Measuring Customer Value Lifetime value of a customer  r  CLV  m   AC 1 i  r  m = margin (i.e., profit) i = discount rate r = retention rate AC = acquisition cost 45 Margin Multiple Constant Margins Customer Lifetime Value = Profit Margin * Margin Multiple r 1 i  r Margin Multiple Retention Discount Rate Rate 10% 12% 14% 16% 60% 1.20 1.15 1.11 1.07 70% 1.75 1.67 1.59 1.52 80% 2.67 2.50 2.35 2.22 90% 4.50 4.09 3.75 3.46 46 23

47. Margin Multiple Growth in Margins r 1  i  r (1  g ) Retention Growth Rate Rate 0% 2% 4% 6% 8% 60% 1.15 1.18 1.21 1.24 1.27 70% 1.67 1.72 1.79 1.85 1.92 80% 2.50 2.63 2.78 2.94 3.13 90% 4.09 4.46 4.89 5.42 6.08 47 Increasing value of customers Customer acquisition (gain new customers)  r  LV  m   AC 1 i  r  Customer expansion Customer retention 48 24

48. Margin Multiple Growth in Margins r 1  i  r (1  g ) Retention Growth Rate Rate 0% 2% 4% 6% 8% 60% 1.15 1.18 1.21 1.24 1.27 70% 1.67 1.72 1.79 1.85 1.92 80% 2.50 2.63 2.78 2.94 3.13 90% 4.09 4.46 4.89 5.42 6.08 47 Increasing value of customers Customer acquisition (gain new customers)  r  LV  m   AC 1 i  r  Customer expansion Customer retention 48 24

49. Customer expansion: Increasing margin Your Customer You Your Competition Your Problem 49 How to Increase CLV E[CLV] = ∑  Reduce acquisition cost (AC)  Reduce customer attrition – Increase retention  Increase net cash-flow per period  Cost of serving customers  “Customer expansion” (pricing strategies, product line, cross-selling, up-selling, and more…) 25

50. Customer expansion: Increasing margin Your Customer You Your Competition Your Problem 49 How to Increase CLV E[CLV] = ∑  Reduce acquisition cost (AC)  Reduce customer attrition – Increase retention  Increase net cash-flow per period  Cost of serving customers  “Customer expansion” (pricing strategies, product line, cross-selling, up-selling, and more…) 25

51. Impact of Retention on Firm Value … creates % improvement in 1% improvement in … firm value of Retention 4.9 Rate Margin 1.1 Discount 0.9 Rate Acquisition 0.1 Cost 0 2 4 6 Source: Gupta, Lehmann, and Stuart (2004), “Valuing Customers,” Journal of Marketing Research, 61 (February), 7–18. Customer Retention 34% Guess who’s 60% gone…? 72% 52 26

52. Impact of Retention on Firm Value … creates % improvement in 1% improvement in … firm value of Retention 4.9 Rate Margin 1.1 Discount 0.9 Rate Acquisition 0.1 Cost 0 2 4 6 Source: Gupta, Lehmann, and Stuart (2004), “Valuing Customers,” Journal of Marketing Research, 61 (February), 7–18. Customer Retention 34% Guess who’s 60% gone…? 72% 52 26

53. Issues in Computing CLV Contractual vs. non-contractual settings. (retention rate ≠ repeat buying rate) In contractual settings:  Don’t blindly use a formula; write out the “time line”  Monthly vs. quarterly vs. annual retention rates  Can we assume a constant retention rate? Business Analytics 27

54. Issues in Computing CLV Contractual vs. non-contractual settings. (retention rate ≠ repeat buying rate) In contractual settings:  Don’t blindly use a formula; write out the “time line”  Monthly vs. quarterly vs. annual retention rates  Can we assume a constant retention rate? Business Analytics 27

55. Marketing Management Decisions Models, Tools and Theories, Information Methods and Frameworks Decisions Business Analytics 28

56. Marketing Management Decisions Models, Tools and Theories, Information Methods and Frameworks Decisions Business Analytics 28

Marketing Challenges - LBS Associate Professor Oded Koenigsberg

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Marketing Challenges - LBS Associate Professor Oded Koenigsberg