LSM522 Transcripts - Amazon Simple Storage Service · think the ideas of segmentation, targeting, and positioning, of really thinking through who are the right customers to go after

LSM522: Applied Marketing Strategy and Decision-Making Tools Samuel Curtis Johnson Graduate School of Management, Cornell University

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LSM522 Transcripts

Transcript: Course Introduction Welcome to the course on applied marketing strategy and decision-making tools. This course covers some things that are very important in how to make sure you're making the right decisions to move your company, your brand, your product or service forward in the marketplace. The first thing that I think is important is making sure we don't miss things in making decisions. Quite often the easiest things is the things we know about. The things we think about. But not the things that we don't think about. And things that we might miss in doing our analyses that'll lead to not making the very best decisions. And that's the first part of this course. To think about frameworks. Frameworks are very powerful shorthand ways, to make sure we're bringing in the right elements to making our decisions and to make sure we're not missing something as we do that. And there are many different frameworks and what's very important I think is that when you're making decisions you use the right tool for the right decision. And that you have a broad toolbox so you can think about okay, what kind of decision is this? Is this a decision I'm making for the long term? Is this the decision that's very reactive and short term to a specific, market, happenstance such as a competitive, new strategy or new product, or change in, in some kind of way. So it's very powerful to think about having the right tools for the right kinds of decisions to make sure we bring in all the right factors. We then move on and thinking about marketing decisions more specifically. And there, I think the ideas of segmentation, targeting, and positioning, of really thinking through who are the right customers to go after. And there, I find many firms, many marketers, think too quickly about going, okay, this is what I want to go after, and they spend most of their time thinking about how to go after them. So here I want to give you some tools for thinking about who really are the right customers to go after. Not just choosing between segments towards the right target, but how to we come up with the segments in the first place? How do we think about dividing up the marketplace and the different segments of consumers? So that when we go about choosing which segment to go after, we've framed it in the right way. And quite often, I find that marketers go too quickly to the, okay, what's the target market? How do we go after them? As opposed to, how do we go about thinking about the market in the first place? How do we think about how to divide it up into different segments? And I'll go into some detail about that



that I hope will be helpful. And finally we go to the bottom line. Probably no marketing decision impacts the bottom line of companies more than the pricing decision. Almost every study that's done shows that more is left on the table in not being strategic and pro-active and really thinking through what is the right pricing strategy? To come up with the right price than any other area of marketing in terms of affecting the bottom line. So in terms of decision-making, we're really going to focus on a strategic view of pricing. Of thinking proactively about how our competitors, not just customers, but how our competitors react to our price. How can we set the price frame, such that we're moving forward, in a way that's longer term, that's gives sustainable competitive advantage that gives us sustainable profits? And moves us forward in a profit maximizing way. So again, I hope you get a lot out of this course. I hope it gives you a lot of different tools in your tool kit to make the best possible decisions for your company moving forward. Transcript: Why So Many Strategy Frameworks? Hi, welcome to the course on Marketing Strategy. We're going to start this course by looking at a number of different frameworks and looking at them at different levels. We'll start at the top level of this chart, at looking at consumers, company, competition, looking at more overall corporate marketing strategy. How are we attacking the marketplace and how do we think about that in terms of looking over time, at looking at different competitors, and other kinds of aspects of strategy. We'll then move on to the middle part, segmentation, targeting and positioning and things specifically about marketing strategy and how we're going to market. And then we'll move down to the lower level to specific executional elements of that broader strategy for example, pricing, and specifically we'll be talking about. So in this section, I'll be talking about frameworks, different ways of looking at the market, different ways of thinking about our competition, about our consumers and about our go-to-market strategy. There's many different frameworks that are out there. And for this course I've chosen five specific frameworks to discuss. Each one are widely used, are well developed in the literature, and I've chosen them to be representative of different ways of thinking about the marketplace, of thinking about strategy. Some look over time, some look at more specifically competition. Some look more specifically at consumers. But each of them try to say, how do we think about strategy, and what's the most effective way to think about strategy in specific situations? So I don't want you to think of these as any one thing as something that's used all the time. The old expression, don't be a hammer in search of a nail. Rather, what I hope you'll get out of this course is different tools to have in your tool kit, so when you see a problem, when you see a nail, or you see a screw, or you see whatever might be out there in the marketplace. You have different tools available to say, here's a way of thinking about that. Here's a strategic framework for me to go about solving this problem that I'm facing today for my organization.



Transcript: Ansoff’s Market Growth Strategies Framework First framework I'd like to talk about is Ansoff's product market matrix. It's really a good general framework for thinking about growth. Where are we going to get growth from? And it thinks about that on two dimensions. First we can think about are we going to get growth from our existing products or are we going to get growth from new products? Secondly, consumers, customers. Are we getting growth from our current customers? Or, can we get growth through developing new customers? And we look at that two by two matrix; existing versus new products and existing versus new markets, new customers. We look at the upper left usually first. That's the lower risk, what's usually termed the lowest hanging fruit, so to speak, matrix. And, as we go to the lower right, we get the more risky but maybe the more long-term profitable or strategic direction to go in. So, I would like to start where most companies start, is to say, can we get more profits, more sales out of our existing product with our existing market, what's called market penetration. Can we get our existing customers to buy more of our product, either through consuming more if they're buying from us as well as a competitor, getting more of their sales or some other way? We already have expertise with the product. We already have the product in the market place. We already have a relationship with these consumers. They are already buying from us. So, usually the lowest risk way to go about, is bringing small variations or doing promotions to get more volume. Or some other kinds of things to do what’s called market penetration, getting more sales from our existing product, with our existing consumers. If we move over to new product, the very first way to bring out a new product, and the easiest way is usually to try to bring out a new product for existing customers. These are customers we already know, we already have relationship. Customers who know us, customers who value us enough to already buy from us. But we try to develop a new product that would meet other needs of those customers and therefore get more sales from those customers. As we move to the lower left, we might develop sales. By not bringing out a new product, rather try to bring our existing product to new markets. For example, international expansion is one of the first ways many companies grow. And they take their existing product, they get economies of scale, they get more sales out of their existing product by bringing it to new markets. As we get to the lower right, diversification. Where we say, well we're bringing out a new product, but that new product is not aimed at our current customers. It's really being



developed for new customers. That's real diversification. It tends to be the most risky, because we are developing a new product and going after new customers that we don't have a relationship with. It's expensive. It's developing product and market at the same time. It's risky, because it's a product we're not familiar with. At a market, we might not be that familiar with. But it might be the right thing to do because moving forward strategically for the company, the way to grow is to diversify more effectively. The last thing I'd like to talk about in terms of this matrix is to think of it as a portfolio. It's not a choice between one strategy or another strategy. Most multi product companies try to do all four at once. Try to have a new growth development pipeline in all four quadrants. Usually, most of the development effort is done in the upper left because it's the lower risk, but at least some development is being done more towards the lower right. So, we are thinking more towards the future and having at least some projects. Where we are really thinking strategically where the company might go if there isn't as much growth with our existing product in our existing markets. So, just one way to think about growth, and thinking about where growth is going to come from strategically for the company. Transcript: Ohmae’s 3 C’s Framework A second framework to look at in this course is Ohmae's three Cs. It's a very basic kind of analysis. It's not complicated but I think it's essential that we make always sure that we're thinking about all three Cs as we have a market orientation. Because of course the heart of a market orientation, the heart of really effective marketing, is having a superior value proposition, for certain customers, not all customers. So a certain target segment of customers, against specific competitors. Our competitive frame of reference. So this picture, which is a very basic picture, of company competitors and customers bring those three things together and talks about where is value going to come from. And Ohmae, who started the three Cs framework, thought about two really very different sources of superior value for the customers. One was cost. So, since value is benefits over cost, one way to win is to have lower cost than your competitors. You don't say I have more benefits or other kinds of things in value. But I have the same thing, but I do it at lower cost when I'm providing superior value. Walmart's an excellent example of this. They try to say, we're really giving value, we're not going to give you a tremendous amount of selection we're not going to have every product you might want. But we're going to have essentially the features that you want and we're going to deliver them at a lower cost, so therefore, we're going to provide you superior value. Walmart for a long time had a slogan, lower prices always. Not lower prices sometimes, not lower prices on some things. But we're going to give you value by having lower prices always.



A second way of providing superior value is not the work on the cost side but the work on the benefit side. So to say, that we have superior value so we have benefits that the other product can't provide. BMW doesn't say they're the low cost provider. They don't say they have the lowest prices. They say they give you a unique, the ultimate driving experience. So you're getting a set of features and benefits in terms of how you feel when you're in the car, how other people think of you when you drive that car. And other kinds of things that truly provide value to customers, and therefore you get a superior value proposition from the benefits you're getting as opposed to working on the cost side. So that's where three Cs started, but it's developed since then. So for example, Porter came along and said, yes, cost is one kind of strategy that Walmart strategy, but there's different ways of thinking about differentiation, and the different organizations, different brands, work on differentiation in different ways. And there's two primary ways of doing that. The leader strategy and the niche strategy. The leader strategy says, I'm going to have the superior benefits overall. I'm going to have better attributes. I'm going to have better quality. I'm really going to have the leading brand that's out there in the marketplace. For example, Corning and glass really tries to lead. They try to have at the very best technology, the very superior value proposition from the best benefits, generally point of view. That's one strategy, and it's the leader strategy, and it's very effective, particularly if you do have the best technology or in some other way really have the leading benefits in the category. A second strategy is what's termed the more niche strategy. To say, well I'm not going after the broad marketplace, and saying I have the superior value proposition for the broad marketplace. Instead, I'm going to pick some target market, some niche market. Where I'm going to come up with a set of features that are specific to the needs and desires of those specific customers, and therefore I'll have a superior product, proposition, and value proposition for those specific customers. It might not be the right set of features for some other customers but I'm not worried about those other customers. I'm worried about putting together a specific value proposition through specific features for specific kinds of customers. For a long time Pepsi was in that kind of camp in terms of targeting younger customers, and really trying to go out and have a positioning statement, having a brand. Having features, having an image, that was relevant for those kinds of customers specifically. So that they could be the dominant share Coke for those customers. So different kinds of strategies based on different views of how we're going out and differentiating in the marketplace. The last example of three C's I'd like to talk about were some consultants Treacy and Wiersema who said two things. First, it's not just about how you win. So it's not just about are you winning on cost, or are you winning on differentiation, but it's about winning on something and not losing on the other things. So you have to have a point of differentiation. You have to have something you win on, but also, make sure you don't



lose on the other things. So they said there were three essential elements of value that consumers get. One is cost, one is the actual product that consumers might buy. But another is the service that goes around that product. And that as a company, you want to focus on clearly winning on one, and being clear in your position in the marketplace that you win against the competition on one of the three. But also making sure that you don't lose too much on the other ones, such that you don't win overall. So, for example, Walmart has superior prices. They're saying, we're giving you the best prices, but we're giving you the same products that other people can get. You're not getting inferior products. What Target was able to do, in competing very effectively with Walmart, was to reposition Walmart and say, target, we have better products, and by inference that Walmart had inferior products. So they were very effective in competing with Walmart, not on price, but by trying to take away Walmart's point of parity on products. In terms of differentiation, you might think of some very higher end clothing retailers. Bloomingdales and Nordstroms. They have very different positioning. Neither one says they're low priced. They're both very higher end, high quality, merchants of fashionable clothes, but they take a different strategy. Bloomingdale's is much more on the product end, saying they have the very latest, greatest clothes, and if you want to go and get the very latest fashions and best fashions, come to Bloomingdale's. Nordstrom's, on the other hand, says we also have great clothes, but where we win, is we give you absolutely the finest service. You can return anything at any time. They even position themselves, as you can call the president of the company if you have an issue, because we're extremely service oriented and if you want the very best service come to Nordstrom's. So each of these marketers, Walmart, Bloomingdale's and Nordstrom's attacks their competition, attacks their consumers, in trying to have a superior value proposition in different ways. So again, the three Cs is fairly simplistic in terms of those other three basic parts of the marketplace. But it's hard to believe you could ever come up with a marketing strategy without making sure you've taken each of the three into consideration. Transcript: Porter’s Five Forces Framework The next framework I'd like to talk about is one that's very well known, and I think a very powerful one. It has a lot of complexity to it, and I encourage you to read about if you want to. But I want to go through the basics of it, because it makes two very powerful arguments. One is - who are competing with you for your customers. So there's a very famous marketing article by Ted Levitt, called Marketing Myopia. And what he talks about is thinking about your competition differently, and that's the vertical part of Porter's Five Forces. That your competition is not just, who makes what you make, or who sells exactly what you sell. Rather it's who's competing for your customers? Who's competing for your consumers? It might be people who aren't even in the industry now, but potentially might enter that industry. It might also be people who don't make what you



make or sell what you sell, but rather people who sell substitutes for what you sell. You might sell a certain luxury good, but people are in the market for luxury. So they might trade off, for example, jewelry versus high-end fashions. And might not be able to do both, but might say, I want some luxury part of my ensemble, and I can either do that through the jewelry, or through accessories, or through the fashions themselves. So, your competition is not just who sells what you sell, but who provides the benefits you provide. So railroads aren't in the railroad business, they're in the transportation business. Levi's is not in the jeans business. It's in the comfortable wearing apparel business. So thinking about that is one aspect of Porter's Five Forces, and a very important aspect of thinking about competition. But Porter added to that framework, and made a very important contribution in saying really what we want to do as an organization is maximize profits. So if we think about profits, as opposed to customers, we start thinking about competition differently. That competitors are anybody who might be in competition with us for profits. Not just who's in competition with us for customers. Now obviously all the people on the vertical axis, those people in our industry. Those people who provide substitutes for our product or service, potential new entrants to our industry or substitute industries, are important in terms of competing for profits. But this horizontal axis, suppliers. We might have suppliers who have a lot of power. For example in the computer industry, in the 1990s, Intel built a very strong brand around Intel chips and the Pentium chips and the heart of the computer being the chip. That created a lot of power for Intel in that channel and allowed Intel to take a lot of the profitability out of the channel from the computer manufacturers and retailers back to Intel. Or for example, Walmart on the buyer's side. Walmart created a very powerful market position. Therefore, Walmart can go to marketers and demand better prices and get more of the profit out of the value chain than marketers had traditionally gotten. So, if we think about competition not as who makes what we make, or who sells what we sell, but rather, who might provide value to consumers and who might take away our margins and our profitability, we get a much richer view of competition to go into our strategic thinking. So I think this kind of framework is very powerful, and really gets you thinking about the entire value chain and how you're providing value. And also how your organization is attracting the most profits out of that value overall in the marketplace. Transcript: Growth Share Matrix Framework



And now I would like to switch to a framework that thinks very explicitly about time. Different frameworks are useful in different context. What this framework is good about is thinking about, well, over time, where do the different products we have in our portfolio sit. And how should we think about, what we should invest in, what we should take more profits out of, how we should think strategically about the different products in our portfolio. There are different growth share matrices, but the one I want to talk about today is the Boston Consulting Group matrix. It's perhaps the best known and I think the easiest to think about. And it sets up two dimensions of this matrix that you can look at. One is Market growth rate. How fast is the market growing? That competitor pressures are very different depending on market growth. If markets are growing fast, and everybody can grow, and they're not quite as competitively intense. If markets are growing much more slowly, for example, in a mature market, competition becomes much more intense. And it becomes much more about share rather than growth, and therefore profitability changes significantly. On the other axis, we have market share, what's our market power? In BCG framework, the high share is when you are the market leader. Your share compared to your next biggest competitor is greater than one. You're the highest market share in the market. Whereas low share is when you're a market follower. Your share compared to the highest competitor is less than one. Why is that important? Well, market share quite often, most often, means market power. So can we extract profits from the market as efficiently as possible or not? If we have high market share, we can extract more profits generally. Low market share, we don't have as much power and can't extract quite as much profits. So this matrix is pretty basic way of looking at the four possible combinations of market growth and market share. And if we have high share in a high growth market, we really have a star. We have a product that not only should we be getting profits from now, but we should be getting even more profits in the future. Because it's a growing market, where we're really able to get higher sales and higher profits moving forward as long as we appropriately and intelligently leverage the market power we have from our high market share. That's something we really ought to invest in and ought to pay a lot of attention to, because a lot of our future products should come from our stars. In the lower left, where we have low growth but high share. Here we have market power. But the future doesn't look as good. It's a lower growth market. It's a more mature market. It's a market where market shares can be harder and harder to come by, so market growth is going to be harder and harder to come by. So we have market power, so let's use our power less for the future and more for the present. So the general prescription in the lower left is to take money out of those products. Take the profits you can get from your market power now, rather than investing to get those profits in the future. So that's why it's quite often called a cash cow. Let's milk that cow now, let's get those profits now because the future isn't quite as bright.



In the upper right, we have question marks. We're not the market leader. We don't have the most power in the market, but it's a growing market. The competitor pressures are not quite as great. So it's a question of what we should do. Should we invest in the product, try to grow share in a growing market? Not as difficult to grow share in a growing market as a low growth market. And try to really get some power in that market where we're going to be able to extract profits in the future. Or on the other hand, might we not get a return from such an investment, would we not really be able to grow share enough to get power to justify the investment in that product. In the lower right, it's a little more clear. We don't have that much share. We don't have that much market power. And it's a low growth market. So the future doesn't look as good. We don't want to invest because we don't have the power. And we're unlikely to get power in the future because the market is not growing. And we can't take as much profits out of such a product as we could a cash cow, because we don't have as much market power to be able to extract those profits. So the general recommendation in this is to think about, well, could we get value from this because somebody else could use this product more? We could invest this product. Or some other way to extract maximum value from what value there is in that product. So, again a pretty basic two by two framework, but I think the powerful one to think about, how we think about, how attractive the market is in terms of growth as well as our power within the market. And how do we look at the different products in our portfolio, or think about what's the right strategy for each. Transcript: Product Life Cycle Framework The last general framework I'd like to talk about in this course is product life cycles. In the growth strategy framework, we look at different products and think about them moving forward. The product life cycle also looks at time, but looks at it somewhat different. It says, let's look at one product, at one product category. And think about how strategy should change over time. And it's very powerful, because the product life cycle has been shown to be true for many different products in many different categories over a long period of time. But I will at the end talk about some issues that some people have, with too closely following product life cycle. But before doing that, let's talk about what the product life cycle is. And it suggests and for new products there's four basic stages. First we have to introduce a new product. And when we introduce a new product, generally there's no competition, because by definition it's a new product. So the challenge when we introduce a new product, is getting consumers to be aware of it, to understand the benefits, to understand what we're selling to them. And, to make the commitment to buy it and maybe drop the old product and adopt this new product.



The second phase is when we've already gotten enough consumers buying that people are starting to know about it and understand the benefits and now it's really starting to be adopted in the marketplace. So we get a lot of growth. But what happens when there's growth, when it gets accepted in the marketplace, is a lot of competition comes into the marketplace. So, there tends to be a period of intense competition where there's a lot of growth so everybody can increase their sales, but new entrants are entering the market so each player in the market has to better define their position in that marketplace to make sure they're being competitive within a certain group of consumers. Eventually though, more and more consumers have adopted the product and the product is sort of reached its potential and now we get to maturity. Where growth is slow down, there is a lot of competitors in the marketplace that are well defined. And, now the battle becomes less for defining yourself in a growing market, and more for making sure you are maintaining share in a slow growth market. Very different competitive environment, very different mindset on the part of consumers because they know all the players, and they know where the players fit in the market. Eventually, for most products, there's decline. Some new product comes in that has new features or new technology. Or in some other way, changes the marketplace and the existing product starts losing sales. That's obviously a way to manage your situation because now you are losing consumers. It's not about maintaining share and about managing decline and eventually exiting that market. So, a very powerful framework for thinking about the market in terms of both consumers and competition for how we should manage our strategy at different phases of the product life cycle. Now, finally, I would like to talk about some criticisms of the product life cycle. While it's proven to be very powerful in many product categories, the largest criticism is around self-fulfilling nature of the product life cycle. If you believe in your maturity and you believe you're about to be in decline, what do you do? You start taking away profits and stop investing in that product. Well of course if you take away, investment in a product, take away attention of a product, what's going to tend to happen? It's going to tend to decline. So, there's a certain element of making sure that you don't preemptively just assume a product life cycle. One example I use to show you just how long these things can be is, five of the top ten products in American supermarkets, were in the top ten, 100 years ago. So not every product goes through maturity and decline quickly at all. Some last a long, long time. While time is the element of the product life cycle, we haven't defined time. So many companies look at the product life cycle and say, yes I understand the insights from it. But I think I have a product, I have a brand that I can keep in the marketplace for a long time. So rather than allow a product to decline, we do things like restage it. We rebrand it. We reposition it. We bring in new technology, new



features, to freshen the product. To try to maintain that product in the market as long as possible. So I think the product life cycle, a very powerful way of thinking about who your competition will be, who your customers will be, and how that competitive landscape will change over time. But also one we have to use with a pinch of caution to make sure we're not taking actions that lead to decline. As oppose to managing the decline appropriately, if and when it happens. Transcript: Marketing Oriented Strategy (Why Segment) Up until this point of the course we have been talking about different frameworks for thinking about markets. Be they over time, be they thinking about competition. Different kinds of frameworks of thinking about where are we in the marketplace, where are we moving, and what does that mean for our marketing strategies? Now I would like to turn a little bit farther down in strategic thinking, more specifically to marketing-oriented strategy. And for that I'll use the framework called STP: Segmentation, Targeting, Positioning. That we start with segmentation, breaking the market up into different sub-markets. Then we target, we choose some of those sub-markets as we discussed in the 3Cs discussion, where our value proposition is superior to that of the competition. And once we've done that, we then position our product for those target consumers to show what our value proposition is and why it's superior to that competition. So let's start with segmentation. I like to spend a little bit of time on this because I think in my experience many people go quickly through. Well, these are the segments that are out there. Women 25 to 44. Young, educated people. By region, those in the West versus those in the East or whatever the criteria might be that people use to break up the market. To get you to think about how we break up the market, the variables we use, the size of the segments, is very important in making sure we've optimized the target market we go after. And the strategic position we have in the marketplace. So I'd like to start with two dimensions of segmentation, and the first and most important is the horizontal dimension. How big are the segments? So, if we think about that we can think about two ends of a spectrum. Micro marketing, marketing to a segment of one. Really focusing our marketing at one to one level. Or mass marketing, a market of everyone. Where we're not really segmenting the market at all, we're going after the large mass market and going after everyone. And what are we trying to do? We're trying to maximize our value proposition. Well, at each end of the spectrum, the value proposition is maximized in a very different way. So if you think about value proposition, it's benefits over costs. But what happens if we micro segment? What happens if we really go after a segment of one? The benefits go up a lot because we're bringing out a product or service or our pricing or our after sale service, or whatever it might be, is



focused on delivering exactly what that consumer wants, so benefits are very high. But what's the problem with that? Of course, delivering that is usually at extremely high cost. How do we customize the product? How do we deliver it exactly the way that particular consumer wants? So in terms of value proposition, if we micro-segment the benefits are high but the costs also tend to be very high. What about the other side of this dimension? Mass marketing. Well here costs tend to go down because we get economies of scale. We sell exactly the same thing to everybody. We communicate it in the same way to everybody. We do everything in the same way so we get economies of scale so costs go down. But what's the downside of that? Well, benefits tend to go down. We're giving everybody exactly the same product or service so we're not able to tailor the benefits or our communications, or the way we service it, or the way we sell it, or other kinds of things to what that particular person needs. So, we tend to have lower costs, but also lower benefits. So the question before us is how do we maximize the value proposition? We tend not to mass market because at that end the cost savings don't tend to outweigh the benefit reduction. We tend not to micro segment because the benefit enhancement tends to be outweighed by the growth in costs. So what we're trying to do in segmentation is figure out, where's the sweet spot? Where can we get segments where we can deliver the benefits that they want, but those segments are big enough that we can get economies of scale? Such that we keep costs down but keep benefits up and maximize our value proposition. And that's really the trick in segmentation, is figuring out how do we go about defining the group, the group size, the group composition. It really maximizes our value proposition, and that will rarely be at either end of the spectrum. Sometimes it is. The promise of advanced technologies is that we can do more and more micro segmenting with less and less cost, so we can move more to that end of the spectrum. But in general we do have economies of scale. But in general we also have very big differences between consumers in the benefits they want and the ways we go about marketing to them. So in general we can't either mass market or micro segment, we have to look somewhere in the middle. So, if we're going to do that, we have to think about the vertical dimension. We have to think about what variables do we use to go about segmenting the market. It's not just how big are these segments, but how do we go about defining them? Do we use behavior, past purchase behavior to define those people who are heavy users versus light users? Or those people who are loyal to our product, for those people who are not loyal to our product. If we have good data about those people, and that's indicative of what they are going to do as we move forward, which behavior often is. That might be a good segmentation variable, or it might be more people's attitudes. So, as I started out this section I talked about women 25 to 44 or young, educated people. Variables that tend to suggest groups of people who have similar likes, similar benefits they're seeking, and are big enough and we're able to target them, we're able to identify them in the marketplace. So segmentation is really a difficult task to figure out, how big should the segments be? What variables should we use to define the segment? And those marketers who really come up with the right definition of segments so they can



get the right kinds of benefits to consumers. But get economies of scale so they can do that profitably tend to have an edge in the marketplace. So, spending a little extra time thinking about that can quite often be worth the time and cost it takes to go about defining segments in the best possible way for your product or your service. Transcript: Choose Your Target Markets In the segmentation, targeting, positioning framework, after we segment, the next step is to target. To choose who is the right target segment. What's the right group of consumers for us to target where we'll win with the competition? For that I'd suggest we use the three C's framework that we talked about earlier. The same factors come into play. We have to think about the customers. What are the different needs of the different segments? How can we go about marking to them? Where do they go about buying things? What are their place preferences and demand and those kinds of things. Secondly, our company, what are the benefits? What are the strengths? What are the weaknesses of our product or service? And of course, the competition. Because what are we trying to do in terms of picking a target segment? We're picking that segment, or those segments where our value proposition is superior to our competition. And trying to avoid segments where we'll have a more difficult time beating the competition. So thinking about target market, thinking about the right target market is absolutely critical to being successful. Let me tell you a story about how that could be more difficult than you might think. Tylenol, an absolutely fantastic brand, very successful, brought out extra-strength Tylenol right when store brands, brands by the retailers. Which generally mimic the benefits of branded goods but at a lower price point. Started becoming very popular in that product category. And Tylenol thought about well, who do we target? And the variables they used were income and education. They did some surveys, and those surveys suggested that higher ranked income, more education people, indicated they'd be more likely to buy the more expensive branded product. So Tylenol went about targeting that group. But it turned out that was a group that said they wanted it, but their behavior was not that. If we look at purchase data, which Tylenol did, people who were more educated and higher income tend to be more likely to purchase the lower priced store brand than were lower educated, less income people. There’s lots of reasons behind that. Reasons why they said one thing and did another. And reasons why people with more money bought the less expensive good, people with less money bought the more expensive good, which is not what usually happens. But the reason to tell this is to really think about who's really the person who's going to buy your product.



Where should you put your resources? What's the right target market? And not just going by what people say they'll do, not just going by what you're preconceived notion or that in general higher income people buy the higher priced product. But really understanding where your value proposition will be superior to your competition for a certain group of consumers. Doing that effectively will get you the biggest return on your marketing investment. Transcript: Ask the Expert: Clarence Lee Discusses Digital Targeting How has targeting changed in the digital context? So one thing we always talk about in marketing is money follows attention. And I would go even a step further to say that the type of attention matters as well. And digital technology allows the firm to better understand and segment the type of attention that it can garner from consumers. And one example of this is compare Facebook with Google. It's well known that consumers spend much more time, on average, on Facebook than on Google. Yet, if you looked at the advertising revenue that Google's able to bring in, it's a multiple orders of magnitude, multiple orders of times, than Facebook. And why is that? The reason is because when consumers go on to Google to search for your product, that is actually signaling to you that they have your product or your brand specifically in mind, and they're probably closer to the purchase stage in the consumer funnel, than supposedly if they encountered your ads while browsing through the pages of Facebook. So this is an example of how because of that type of potential from Google is closer to the further down the purchase funnel, it's more valuable, and therefore that information is also. How does social network data help a business make decisions? So having social networking data allows the firm to better target and also segment its customers. We all know that birds of a feather flock together. And this is something that's well known in sociology, the idea of what's called homophily. That people tend to, on average, have higher trust and value the opinion of people that they're more similar to more. And so supposedly if you know whom are connected together in a social network, then what you can also do is understand who are the influencers, who are the key opinion leaders in that network, and that allows you, as the firm, to better target these opinion leaders, understand their challenges, their needs, what they like about your product, what they don't like about your product. And all that information within these pockets and clusters of a social network can be valuable to you in that it saves time on sampling everybody. But also it allows you to better, once we have that



information, act on that information. It can better reach across to these communities of customers in a more efficient way. Transcript: What is Positioning? The last part of the segmentation targeting position framework is positioning. Once we've broken the market into different segments, we've chosen our target market. We then have to go about showing that target market that our value proposition is superior to our competition. And that's what positioning means. It's getting consumers to think about our product in relation to the competition in a way that we win, that our value proposition is superior. Well, what does that mean? That means having a clear framework where we have a target market just like the three C's framework. We know who the competitors are, who we've defined as the competitors to provide the benefits that we provide to that target market. And what our company's strengths and weaknesses are in terms of where are we providing superior value? Once we've defined that, we then have to go about going to the marketplace and getting consumers to believe that. And that means a couple of things. We have to know where our value comes from. What's our point of differentiation? Where are we superior to the competition? But just as important sometimes is a point of parity. Making sure that we shore up our weaknesses. For example, in the diet soda category, the point of difference is usually lower calories. That diet soda is lower calorie than regular soda. But the point of parity quite often has to be taste, that you get lower calories but not at the expense of very poor taste. Because if you get low calories but it tastes bad, people don't see that as a superior value proposition. So we have to think about where we win but also shoring up our weaknesses. We have to do that in terms of some competitive spirit. We have to define who is the competition? Who are we better than? So some decaffeinated coffees come out and say, well, we taste just as good as caffeinated coffees, but we have less caffeine. That's the advantage, the point of parity and point of difference. Other decaffeinated coffees say, well we taste better than other decaffeinated coffees. They don't taste so good, but we taste good as a decaffeinated coffee, so the competitive frame is other decaffeinated coffees. So we have to think of our points of parity and difference. And think about what's the competitive frame that's most effective at showing that we have superior value proposition for our particular target market. And lastly, there's a reason why. Why should people believe that you have that point of differentiation? You have that superior value proposition. If we have all of those things well laid out and we're able to communicate them effectively, we then have good positioning in the consumers' minds. And I want to emphasize that. We get to choose the target market but we don't get to choose what our positioning is. We get to choose what we want our positioning to be, but positioning is something that's in the consumer's



mind. What do they believe about our value proposition compared to what competition? And if we do that effectively, and we build good positioning within the consumer's mind, what we end up with is a strong brand. Something that consumers believe about our product or service, compared to the competition, that they tie to our brand. A very strong place to be in the marketplace if we can build that effectively. Transcript: The Role of Pricing in Strategy And now, we can move on to the third part of this course. We started at the very top, sort of the strategic level, talking about different frameworks like the 3 c's or five forces. We then moved down to more specific marketing strategy. S.T.P. Segmentation, targeting, positioning. Once we have good positioning in the marketplace, we then have to set up a specific marketing plan. And that's where what's called the four P's come in. How does our positioning play out in terms of our specific code of market strategy in terms of product, in terms of price, in terms of promotion and in terms of place or distribution? What I'd like to do is just talk about one of those four Ps and how this kind of strategy plays out, and that's pricing. And perhaps nothing is more important to our bottom line then getting price right. If we charge too much, sales go down, if we charge too little, we'll leave a lot of money on the table. So a lot of studies suggest that getting the right price means a lot to our profitability. But some people think that price is just a tactical. Should we charge a $1.83, or we charge a $1.88? That's not strategic, because no matter what price we charge, our competitors might be able to charge the same price. That's something that we can't really own. Well I'd suggest that price is strategic. That price is something that comes out of our positioning. That there's a right price for where we sit in the marketplace. And that price is not something that's so comparable, if we're proactive. If we choose the right place in the marketplace and are proactive in building a brand around that price. And, that's what I really want to emphasize in this section. That we choose the right competitors, we choose the frame of reference, and we choose the price at which we are going to win in a particular part of the market place. And, if do that correctly. Then our competitors have to react to us; we are not reacting to them. And we can do it in such a way that it's difficult for them to react to us because we have a firm place in the marketplace. In consumers’ minds around where we fit in terms of price that makes price a strategic move on the part or marketers. Transcript: Three Common Pricing Strategy Mistakes To give some examples of strategic pricing. And what we mean by some of the advantages of strategic pricing versus the cost of more just tactical pricing. I'd like to talk



about Peter Drucker and an article that he wrote. Peter Drucker unfortunately not still with us, was a great thinker. He was a man who grew up in Europe in the middle of the 20th century, came to United States, and studied business in the United States during the 50s and 60s as it boomed. Then moved over and studied Japan in the 70s and 80s when it boomed. And really thought a lot about what makes business affective. And what are some of the things that make business not affective? Late in the 1990s, towards the end of his life, he wrote an article called the Five Deadly Business Sins. And here's Peter Drucker, a great thinker, a management theorist, perhaps the greatest business thinker of the 20th century, thinking about, what are the big mistakes that business make? The big, strategic, broad mistakes that business makes. And the reason why I bring it up. And the reason why I think that article is so relevant to discussion of strategic pricing is that three of those five mistakes were bad pricing strategy. Not bad marketing strategy but one specific part of marketing, bad pricing strategy. And it talks about why pricing is so important to be strategic. To think about how you're competing in the market place and just how important price is to how you're competing in the market place. So let me talk for just a minute about each of those three sins to give an idea of why Drucker thought thinking strategically about price was so important. The first of his deadly business sins was what he called premium pricing. Charging whatever the market will bear. Charging as much as you can get away with in the marketplace. And he said the problem with that is you're really just going after the very best consumers or being very short-term oriented. As opposed to thinking strategically about where are you positioned in the marketplace for the long term and how does your price reflect that. Probably the best and most common example of that, of doing it strategically, is Walmart, and the concept of everyday low pricing. Walmart doesn't say I'm in going to charge whatever I can get away with today. They say, I'm going to charge every day a low price. I'm going to give you a good, fair price every day. And that's an extremely big part of their brand. It's an extremely big part of how they're positioned in the marketplace. They're not tactically saying, well, on this product, should I charge more or less, or something like that. Of course, they do those kinds of analysis. But they're really thinking about price as a fundamental part of how they are positioned in the market place. Where should their price point be? Where should consumers believe their price point be? How do they deliver on that belief so that consumers really continue to believe it? So that they position themselves in the best possible place in the market place. So a very strategic way of thinking about pricing. The second deadly sin from Drucker is price skimming. The idea that when you enter a market place, and this is about new product introductions, you really have two choices. You can come in and say I'm in the first in the market place. There's people early on, the innovators, the early adopters, the people who really want the product who are willing to pay a high price. So when I enter the market, why don't I charge a high price? And then, as I develop the market, I'll move my price point down, to meet the needs of the ever-increasing number of consumers who aren't willing to pay that initial high price.



That's called price skimming. Start with a high price. A separate strategy would be what's called penetration pricing. Start with a low price and get a lot of sales early. And Drucker says price skimming is a deadly sin because too many people go after those short-term profits, of getting those consumers willing to pay a high price, early on. What's the problem with that? We do have customers out there willing to pay a high price, why don't we charge them a high price, get the margins from that, and then move on? And the problem is, as Drucker lays out, competition. What happens if you enter the market at high price? You're at some sense, just setting up competition to come and succeed and charge a lower price and position themselves, as lower priced than you are, and you having extremely premium price. And market after market, Drucker in particular is critical of American firms that tend to be perhaps on the cutting edge technologically or in other ways, and might be the first to market with a product, but do so at too high a price and allow international firms, in his analyses, many of the Asian firms that grew to prominence in the late 20th century, did so by mimicking in electronics and other categories. The benefits of products that were brought out by Americans and European companies. But doing so at a lower price and effectively being able to position themselves as the better value brand in the market place. The last and actually my favorite of Drucker's three sins is called price-based costing versus cost-based pricing. The sin to Drucker is cost-based pricing, what most companies in fact do. They say, what are my costs? And I have to add up those costs. And in figuring out a price, I start with my costs, and then I try to say, well what kind of margin can I get based on those costs? Well, that makes a lot of sense. It costs you a certain amount to deliver the benefits that you're providing and therefore you have to think about those costs in terms of your price. But Drucker says that's the wrong way to think about it. That if you're really market oriented what you want to start with is what consumers demand. What do your customers want? What price do they want to pay for what benefits? So let's start with the price and then think about can we come up with a cost based on that price. Not the way we usually think about it. Because we usually think well we don't get to make up our cost, the costs are what they are. But we get to determine the price. And Drucker says well quite often that's true, but there's lots of examples of some of the great marketers in history, who really thought about pricing, and thought about price based costing. And we're able to transform their market place and make a lot of money by that kind of thinking. And a lot of the best examples I think come from the automobile industries. So let me give you three examples from the last 100 years in automobile history about this thinking of price based costing. The first, and the most famous, is the Model T car. Many people know the famous quote from Henry Ford that you can get a Model T in any color you wanted as long as it was black. And they think about that quite often if they know the history of, Ford, they think about that as an assembly line. Production, kind of an argument. That Henry Ford was one of the first developers of the true modern production line. And that you could get the Model T in any color as long as it was black,



because that fit the production and the efficiency of the assembly line. But that's not what Ford started with. Ford famously would always say, I start with the price of the article, I start with the man. And, then go back and try to figure out how I can develop cost to deliver on that price. So, the story of the Model T is very much one of price based costing. Before Henry Ford and the Model T came along, automobiles were very luxury good. Only the rich could afford them. Why? Because they were custom made. And they were done mostly by hand. And so they were very expensive to produce, and since they were expensive to produce, automobile manufacturers charged a higher price. Ford's insight was, he said, can I sell a car to my workers? And he said, well, how much could my workers afford to pay? And he came up with a price of $350, which at the time was a lot of money for the average worker. He said okay, well if I'm going to sell a car for $350, I have to produce it at a price at cost at which I can make a profit. So he went backwards, and he engineered the assembly line, engineered the Model T. And engineered the way he went about selling it to be able to sell it for $350 and make a profit at that price point. That meant he had to take out costs. That meant you couldn't have color choice. That was one of the ways cost came out of the production process for that particular car. So the reason why he'd get a Model T in any color as long as it was black, because Ford was trying to meet a price point. A price point at which he could sell a whole lot of cars, and really transform his industry. Two other examples. Many people know about the Ford Mustang. And a man called Lee Iacocca that went on to lead Ford and then Chrysler. Very famous in automobile manufacturing and marketing. Well, the Ford Mustang came from Iacocca as a Ford marketer's insight into the market place, that there was huge demand out there. When he did surveys of consumers, the people wanted a sports car. But sports cars were too expensive and too hard to fix and not reliable enough. It wanted an inexpensive reliable sports car. So, Iacocca went to his engineers and R and D people and said, well let's come up with a less expensive, more reliable sports car. And the R and D and production people said, but you can't do that. A sports car is expensive to make. The cost is too high. The price has to be too high. Iacocca did his research and he went to them and said, no let me tell you what a consumer means by a sports car. You R and D people, engineer people think that a sports car has to have certain kind of steering, acceleration and all those kinds of things. Consumers don't mean that by a sports car. They mean that it has two seats and a pretty loud engine, and very importantly a stripe along the side of the car, and a certain profile, and other kinds of things. And a lot of quote, unquote, car people scoffed at Iacocca and said well that's not a real sports car. And Iacocca said, well I'm trying to meet market demand. I'm trying to meet what the consumer thinks is a sporty car. Not what the engineer, the production people think is a sporty car. And he came up with a price point of $2500 for the original Ford Mustang. And they developed it. And they developed it on what was at that time called the Ford Falcon, basic chassis and engine and drive train and those kind of things. But he changed the muffler, and changed the engine a little bit, and changed the body a lot to meet the needs. In the first year of Ford Mustang sales, Ford Mustang profits were greater than the entire history of sports car profits up until that point, in one year. And,



that's what this price based costing, as a strategic move in a true market orientation means. Now think about what does a market want? Where is a market need not being met? Where is a price point that if I can meet that price point, I can really get an edge on the competition and really meet consumer needs and can I backwards figure out a cost that meets that need? And I think the Model T and the Ford Mustang are great examples of that. And just one last example that I think is another twist on it. The how you can be creative and really understand what the issues are in the market place to have a success. And that's the Mazda Miata. The Mazda Miata came out when sports cars were having difficulty being sold and part of that was because insurance costs were very high. There had been a number of problems, very public, with a number of different sports cars and because of that insurers were charging very high prices for sports cars. So Mazda's insight was, we're going to build a sports car, but we're going to work with the insurance industry. We're going to come up with the parts that aren't that expensive to replace. We're going to come up with bumpers that are more effective than most sports cars and other kinds of things. Where they weren't just meeting a price point for selling the car, they were meeting a price point for owning the car. An important price for owning the car was insurance. So they had an insurance price point that they wanted to get to before they were willing to introduce the car. They met that insurance price point, brought out the Mazda Miata, and had a huge advantage in the market place. Not in the price of the car so much as the price of ownership, which led Mazda Miata to get a dominant market share in its part of the sports car market. So again, it's not any one of these examples that's important. What I tried to get across and from Drucker's thinking and Drucker's three deadly sins is to think about price pro-actively. To think about price strategically. It's not just a tactic of should we charge a $1.85 or $1.95, but where's the opportunity in the market place? Where do we want to be positioned in the market place? And how does our price strategy reflect that. Transcript: Thank You and Farewell I hope you found this course useful. I tried to go through three different ways of thinking about marketing strategy. To show you different ways and different paradigms and frameworks that might be useful to you as you develop your code of market strategies. First, thinking at a higher level. What are the different frameworks we can use? How we're thinking about our competition. How we're thinking about our customers. How we're thinking about our company. And how we put those three things together to come up with our strategic thinking about where our value proposition is superior to our competition. We can think about it over time. We can think about it in terms of how do



we think about different competitors in the market place? Different ways of thinking about it. Then moved on to more specific marketing strategy and argued for really thinking through STP. Segment, targeting and positioning. So, we pick in a place, in the marketplace, where we can communicate effectively a superior value proposition in terms of positioning. It'll live in the consumer's mind, it'll be believable to them. And then one aspect of making that real in the marketplace, pricing. To think strategically about things like pricing. So that as we choose our value proposition, as we build our positioning, we're doing that strategically, not tactically. So we come up with the winning strategy for us in our go to market plans.

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LSM522 Transcripts - Amazon Simple Storage Service · think the ideas of segmentation, targeting, and positioning, of really thinking through who are the right customers to go after