Marketing Challenges - LBS Associate Professor Oded Koenigsberg

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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.

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Oded Koenigsberg

Reunion Weekend: Marketing Session

Agenda

Marketing Core: A reminder

Marketing Challenges

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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…

MODOScooba

Tesla Motors Airless Tires

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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…

MODOScooba

Tesla Motors Airless Tires

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New to the World?About 5 - 10% of new products are truly new

Total Total Fresh Stripe2 in 1 toothpaste & mouthwashSparkling White Sensation Whitening Sensitive Maximum StrengthTartar ControlTartar Control Plus WhiteningBaking Soda & Peroxide WhiteningTartar Control with Baking Soda & Peroxide Cavity ProtectionStar WarsBarbie toothpaste Looney Tunes toothpasteMy First Colgate Toothpaste with Barney LuminousClean Mint pasteWhitening Paste and GelAdvanced Fresh2in1WISPSparkling White Fluoride Toothpaste, Mint ZingHerbal

Types of New Products

Newness to

L

Market

M H

L Cost

Reductions Repositioning

Firm M Product line Extensions

H New Product

Lines

New to the World

Marlboro

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New to the World?About 5 - 10% of new products are truly new

Total Total Fresh Stripe2 in 1 toothpaste & mouthwashSparkling White Sensation Whitening Sensitive Maximum StrengthTartar ControlTartar Control Plus WhiteningBaking Soda & Peroxide WhiteningTartar Control with Baking Soda & Peroxide Cavity ProtectionStar WarsBarbie toothpaste Looney Tunes toothpasteMy First Colgate Toothpaste with Barney LuminousClean Mint pasteWhitening Paste and GelAdvanced Fresh2in1WISPSparkling White Fluoride Toothpaste, Mint ZingHerbal

Types of New Products

Newness to

L

Market

M H

L Cost

Reductions Repositioning

Firm M Product line Extensions

H New Product

Lines

New to the World

Marlboro

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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?

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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?

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Better meet needs of slightly differentsub-segments through differentiation

Better meet needs of slightly different sub-segments through differentiation

Buick Enclave GMC Acadia

Saturn Outlook Chevrolet Traverse

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Better meet needs of slightly differentsub-segments through differentiation

Better meet needs of slightly different sub-segments through differentiation

Buick Enclave GMC Acadia

Saturn Outlook Chevrolet Traverse

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Better meet needs of slightly different sub-segments through differentiation

Better meet needs of slightly different sub-segments through differentiation

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Better meet needs of slightly different sub-segments through differentiation

Better meet needs of slightly different sub-segments through differentiation

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Better meet needs of slightly different sub-segments through differentiation

Better meet needs of slightly different sub-segments through differentiation

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Better meet needs of slightly different sub-segments through differentiation

Better meet needs of slightly different sub-segments through differentiation

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Better meet needs of slightly different sub-segments through differentiation

Dannon - c.1942

Variety seeking

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Better meet needs of slightly different sub-segments through differentiation

Dannon - c.1942

Variety seeking

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Address potential emerging segments

Friday, January 2, 2004Breweries rush to quench thirst for low-carb beer

Market for new brew seen as biggest since debut of lightBy JUDY LIN

THE ASSOCIATED PRESS

Address potential emerging segments

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Address potential emerging segments

Friday, January 2, 2004Breweries rush to quench thirst for low-carb beer

Market for new brew seen as biggest since debut of lightBy JUDY LIN

THE ASSOCIATED PRESS

Address potential emerging segments

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Friday, February 11, 2006The 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 WarnerNew York Times

Address potential emerging segments

Counter encroachment by new alternatives

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Friday, February 11, 2006The 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 WarnerNew York Times

Address potential emerging segments

Counter encroachment by new alternatives

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Facilitate attraction of new users

Alter a brand image

Mercedes C-Class VW Phaeton

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Facilitate attraction of new users

Alter a brand image

Mercedes C-Class VW Phaeton

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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

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

1986

1984

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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

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

1986

1984

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Problems with product quality or product attributes

Source: http://www.techtv.com/print/story/0,23102,3013675,00.html

2004

NokiaN-Gage

Newton MessagePad - Popular Science, December 1993

Source: http://www.chuma.org/newton/ads/

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Problems with product quality or product attributes

Source: http://www.techtv.com/print/story/0,23102,3013675,00.html

2004

NokiaN-Gage

Newton MessagePad - Popular Science, December 1993

Source: http://www.chuma.org/newton/ads/

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http://thebase.weblogger.com/stories/storyReader$7510

Problems with product quality or product attributes

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http://thebase.weblogger.com/stories/storyReader$7510

Problems with product quality or product attributes

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Problems with pricing

Problems with distribution

Holly Farms -1988

Acquired by Tyson -1989

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Problems with pricing

Problems with distribution

Holly Farms -1988

Acquired by Tyson -1989

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Problems with communication

Marketing Management

Understanding the Customer

Understanding the Company

Understanding the Competition

Business Environment Decisions

Marketing Management Decisions

SegmentationTargetingPositioning

Strategy

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Problems with communication

Marketing Management

Understanding the Customer

Understanding the Company

Understanding the Competition

Business Environment Decisions

Marketing Management Decisions

SegmentationTargetingPositioning

Strategy

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Marketing Management

Understanding the Customer

Understanding the Company

Understanding the Competition

Success or Failure: Firm Performance

Product Decisions

Place Decisions

Pricing Decisions

Promotion Decisions

STP

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Marketing Strategy Framework

Customer Company CompetitionIdentifyMarket

Opportunities

Product Price Promotion Place

SetStrategy

Formulate Marketing

Program (Asim)

Segmentation Targeting Positioning

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Marketing Management

Understanding the Customer

Understanding the Company

Understanding the Competition

Success or Failure: Firm Performance

Product Decisions

Place Decisions

Pricing Decisions

Promotion Decisions

STP

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Marketing Strategy Framework

Customer Company CompetitionIdentifyMarket

Opportunities

Product Price Promotion Place

SetStrategy

Formulate Marketing

Program (Asim)

Segmentation Targeting Positioning

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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’

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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

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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’

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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

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Marketing and Firm Value

Market Value

Cash Flows

Customers

Company Competitors

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Customer and Firm Value

CUSTOMERACQUISITION

CUSTOMERRETENTION

CUSTOMEREXPANSION

VALUE OF ACUSTOMER Domain of

Marketing

PROFITS &CASH FLOW

Domain of Finance Linking Customer

and Firm Value

FIRM VALUE

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Marketing and Firm Value

Market Value

Cash Flows

Customers

Company Competitors

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Customer and Firm Value

CUSTOMERACQUISITION

CUSTOMERRETENTION

CUSTOMEREXPANSION

VALUE OF ACUSTOMER Domain of

Marketing

PROFITS &CASH FLOW

Domain of Finance Linking Customer

and Firm Value

FIRM VALUE

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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

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

The job of putting the marketing philosophy into practice normally falls to people in the firm who have marketing and/or product-management titles

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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

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

The job of putting the marketing philosophy into practice normally falls to people in the firm who have marketing and/or product-management titles

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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

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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

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43

Measuring CLVProfit Pattern

-40

42

66 70 7586 92 96 99105

-60-40-20

020406080

100120

0 1 2 3 4 5 6 7 8 9

Customer Tenure

Ann

ual P

rofi

t

100

8276

7066

6056

4740

34

0

20

40

60

80

100

120

0 1 2 3 4 5 6 7 8 9

Acc

oun

ts R

emai

nin

gCustomer Tenure

Defection Pattern

ACi

rm

i

rmCLV

....

)1(

))((

)1(

))((...

)1.01(

)76.0()66(£

)1.01(

)82.0()42(£40

2

2

2

1

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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

Discount 1/(1+i) 1/(1+i)2 1/(1+i)3 … 1/(1+i)t

22

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Measuring CLVProfit Pattern

-40

42

66 70 7586 92 96 99105

-60-40-20

020406080

100120

0 1 2 3 4 5 6 7 8 9

Customer Tenure

Ann

ual P

rofi

t

100

8276

7066

6056

4740

34

0

20

40

60

80

100

120

0 1 2 3 4 5 6 7 8 9

Acc

oun

ts R

emai

nin

g

Customer Tenure

Defection Pattern

ACi

rm

i

rmCLV

....

)1(

))((

)1(

))((...

)1.01(

)76.0()66(£

)1.01(

)82.0()42(£40

2

2

2

1

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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

Discount 1/(1+i) 1/(1+i)2 1/(1+i)3 … 1/(1+i)t

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45

Measuring Customer Value

Lifetime value of a customer

m = margin (i.e., profit)

i = discount rate

r = retention rate

AC = acquisition cost

ACri

rmCLV

1

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Margin MultipleConstant Margins

Customer Lifetime Value = Profit Margin * Margin Multiple

RetentionRate 10% 12% 14% 16%

60% 1.20 1.15 1.11 1.0770% 1.75 1.67 1.59 1.5280% 2.67 2.50 2.35 2.2290% 4.50 4.09 3.75 3.46

Discount Rate

Margin Multiple

ri

r

1

23

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Measuring Customer Value

Lifetime value of a customer

m = margin (i.e., profit)

i = discount rate

r = retention rate

AC = acquisition cost

ACri

rmCLV

1

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Margin MultipleConstant Margins

Customer Lifetime Value = Profit Margin * Margin Multiple

RetentionRate 10% 12% 14% 16%

60% 1.20 1.15 1.11 1.0770% 1.75 1.67 1.59 1.5280% 2.67 2.50 2.35 2.2290% 4.50 4.09 3.75 3.46

Discount Rate

Margin Multiple

ri

r

1

24

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Margin MultipleGrowth in Margins

RetentionRate 0% 2% 4% 6% 8%

60% 1.15 1.18 1.21 1.24 1.2770% 1.67 1.72 1.79 1.85 1.9280% 2.50 2.63 2.78 2.94 3.1390% 4.09 4.46 4.89 5.42 6.08

Growth Rate

)1(1 gri

r

48

Increasing value of customers

Customer acquisition (gain new customers)

Customer expansion

Customer retention

ACri

rmLV

1

24

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Margin MultipleGrowth in Margins

RetentionRate 0% 2% 4% 6% 8%

60% 1.15 1.18 1.21 1.24 1.2770% 1.67 1.72 1.79 1.85 1.9280% 2.50 2.63 2.78 2.94 3.1390% 4.09 4.46 4.89 5.42 6.08

Growth Rate

)1(1 gri

r

48

Increasing value of customers

Customer acquisition (gain new customers)

Customer expansion

Customer retention

ACri

rmLV

1

25

49

Customer expansion: Increasing margin

Your Customer You Your Competition

Your Problem

How to Increase 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…)

E[CLV] =∑

25

49

Customer expansion: Increasing margin

Your Customer You Your Competition

Your Problem

How to Increase 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…)

E[CLV] =∑

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Impact of Retention on Firm Value

0.1

0.9

1.1

4.9

0 2 4 6

… creates % improvement infirm value of1% improvement in …

RetentionRate

Margin

DiscountRate

AcquisitionCost

Source: Gupta, Lehmann, and Stuart (2004), “Valuing Customers,” Journal of Marketing Research, 61 (February), 7–18.

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Customer Retention

34%

60%

72%

Guess who’s gone…?

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Impact of Retention on Firm Value

0.1

0.9

1.1

4.9

0 2 4 6

… creates % improvement infirm value of1% improvement in …

RetentionRate

Margin

DiscountRate

AcquisitionCost

Source: Gupta, Lehmann, and Stuart (2004), “Valuing Customers,” Journal of Marketing Research, 61 (February), 7–18.

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Customer Retention

34%

60%

72%

Guess who’s gone…?

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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

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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

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Marketing Management Decisions

Decisions

Tools and Methods

Models, Theories,

and Frameworks

Information

Business Analytics

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Marketing Management Decisions

Decisions

Tools and Methods

Models, Theories,

and Frameworks

Information

Business Analytics