Marketing and Business Models (cont.)

Lecture 7Tuesday Jan 27, 2009

Marketing 101

The 4 Ps

What is Marketing?4 Ps of Marketing

• Product • Promotion• Pricing• Place (or distribution system)

What follows is necessary for Business Plan but not for Tuesday Homework

Product• What is your product? Describe in

terms of benefit to the customer• Product packaging (is this

relevant?)– Discuss form-factor, pricing, look,

strategy– Summarize Cost of Goods and high-

level Bill of Materials– Shipping issues– Customs issues

Promotion• Direct marketing

– Overview of strategy, vehicles & timing– Overview of response targets, goals &

budget

• Third-party marketing– Co-marketing arrangements with other

companies

• Marketing programs– Other promotional programs

Promotion

• Branding– Concept of Brand Equity– What value do you get from

Branding?– How do you build a brand?– Is it worth it?

Pricing• Pricing

– Summarize specific pricing or pricing strategies

– Compare to similar products or compare to doing nothing

• Strategy– Summarize strategy relevant to

understanding key pricing issues

Placement (Distribution)• Distribution strategy • Channels of distribution

– Summarize channels of distribution

• Distribution by channel– Show plan of what percent share of

distribution will be contributed by each channel -- a pie chart might be helpful

• Discuss fulfillment issues

Vertical Markets/Segments

• Vertical market opportunities– Discuss specific market segment

opportunities– Address distribution strategies for

those markets or segments– Address use of third-party partner

role in distribution to vertical markets

Placement (International)

• International distribution– Address distribution strategies– Discuss issues specific to international

distribution

• International pricing strategy• Localization issues

– Highlight requirements for local product variations

Business Models continued

• How do you build a profitable company?– Make the right strategic Choices

• Solve customer problem• Differentiation• Pricing

– Create Value• Processes• Resources

– Value Network• Customer relationships • Suppliers• Information Flows

– Capture Value• Cost• Profit

• How do you build a profitable company?Consider Capturing Value- - It is not enough

to bring a terrific product to the market place, that your customer loves, if he won’t pay enough for it so that you can make a profit.

- Lesson of e-commerce- Lesson of third world charities

There are often many ways of making money on the same product or service. Limited by ingenuity

Some thoughts on how to increase profitsP=SP-C

1. Increase Selling Price

Increase Customer Value • Put extra features in product which require little marginal cost• Provide extra service• Target less competitive segment of the market• Get to market before competition• Price at the maximum the customer is willing to pay

Price models should reflect customer value- not cost (except in government contracts if you wish to avoid jail)

• Why?

Some thoughts on how to increase profitsP=SP-C

2. Decrease Selling Price

• Don’t commit to detailed design until you have customers specs firm

- then don’t change• Build a manufacturable product. Bring manufacturing in

early• Don’t overload with features that the customer doesn’t

want that are costly to develop• Manage tightly to schedule with appropriate risk and

risk reduction plans• Use rigid phase exit criteria

Some thoughts on how to increase profitsP=SP-C

3. Decrease Product Development (NRE) and Manufacturing (RE) costs

• Effect on product price in being first to market?

• Effect on total revenue of turning out products faster?

• Effect on Cost?

Some thoughts on how to increase profitsP=SP-C

4. Decrease Cycle Time for Product Development

Increase profits

Consider multiple business models. . .

Suggestions:

• The after-market Service ModelLarge complex equipment

• Aerospace• Medical

• Periodic updates (e.g. software “support”)• Equipment with consumables (the razor

blade model)• Printers (low margin) coupled with ink (high margin) • Video Games

• Brokerage• Intermediary• Market makers• Arbitrage • Ex: Trader Ben

Business Models

• Merchant•Virtual Merchant e.g., Amazon•Catalog Merchant -- mail-order business

with a web-based catalog. Combines mail, telephone and online ordering e.g., Land’s End

•Click and Mortar -- traditional brick-and-mortar retail establishment with web storefront. Barnes and Noble

•Bit Vendor –Apple I-tunes (plus I-pod)Which has the highest Gross Margin?

Business Models cont.

Business Models cont.

•DistributionExamples

•Services•Design house•Software development (not shrink-wrapped)

•Sales including VAR (Value Added Reseller)

•Outsourcing•Consultancy•R&D House (SRI, Battelle, Caltech research, etc.)

Business Models cont.

Businesss Models cont.• Manufacturer- - Make stuff and sell it to

another business• License - - IP, software or complete business

– Mixed model: Can license to markets you can’t address

• Community – Build and advertise/subscription• Pure Subscription• Advertising

• Clicks• Can be combined with others

• Infomediary• Audience Measurement Services • Incentive Marketing

Businesss Models cont.• Integrated Information Businesses-

Opportunity to “slice and dice”– Consider NY Times– Print– Web– Reprints

•Articles•Significant pages (e.g., date of your birth)

– Archival photographs– Classified– Delivery Inserts– News Service

– See Hal Varian “Information Rules”

Knowing your model, you have a decision to make. Where should you invest?

Investment efficiency

Each of these brings some value to the customer. Challenge is to decide which one(s) should get your investmentWhat should you be really good at? What should you outsource?

•Investment decision is based on Business Model

•Competencies required to support that model

•Cost of Competency vs cash generated by Business Model

It gets worse. . .

As Bill Collins discussed• How will you deliver

continuously increasing value over time?

• Competition doesn’t stand still. • The bar is raised Perceived Product Value/Cost

increases with time