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---
title: "Introduction to marketing: Part 3"
author: "François Pelletier"
output: pdf_document
---
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Wharton School - Introduction to marketing
# Week 7 : Go to market strategies
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## 7.1 Introduction and execution
Great idea + Great brand + Target customers = time for execution
## 7.2 Go to market strategies: Introduction
1. Omni-channel strategy and online-offline interaction
2. How to find lead users and facilitate influence and contagion
3. Targeting and messaging, pricing to value, customer access and distribution
### Recap
- 5c's (Constraints)
+ customers (need)
+ Competitors (Relative strength)
+ Company (Resources)
+ Collaborators (Partnership)
+ Context (Change)
- 4P's (Parameters)
+ Product
+ Price
+ Promotion
+ Place
- STP
+ Segmentation
+ Targeting
+ Positioning
- The product should:
+ Deliver exceptional value
+ Address a large market
+ Be easy to explain and describe
+ Require not much capital to test and scale
**Execution - The key question:**
What is wrong with the status-quo ?
### Marketing math 101
Success = Product x Marketing
You have to be good at both, on a scale of 0 to 10:
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- Have a great product
- Have the right customer, brand fit, STP and 4P's
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## 7.3 Friction
2 most important frictions
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- Search frictions:
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+ Where do I buy a TV ?
+ Who will have the best price and assortment
+ Search cost to get a better deal
- Geographical frictions:
+ Cost vs benefits
+ Leave the tyranny of local options
## 7.4 Goods and information
Prior to the internet: all markets were local
Internet: Allow businesses to pool customers
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- In smaller markets: get unavailable goods
- Get information: How to spend our time (complement)
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## 7.5 Academic research
Content:
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- A lot is purely local (services, restaurants, people to date)
- Websites: Yelp, OKCupid
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1 million population yiends 50-60 websites
Product: Farther you live from physical retail location: go virtual else go to nearby store.
Online:
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- Lower prices or lower search costs
- Transact with others more efficiently
- Better information about local activities
- Improved customer convenience
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## 7.7 The long tail
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Historically: World of hits
Now: Infinite slots
Long tail exists:
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- Economics of storage and distribution (supply side)
- Endogenous: moreways to discover variety (demand side)
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Old-new economics:
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- Pareto: 80%/20% rule
- Zipf: 2nd: 1/2 of the first, 3rd = 1/3 of the first
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Key principles: tyranny of locality
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- Once upon a time in India
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Not enough demand for a movie theater but profitable from renting.
1. Q1: range Quality/Satisfaction ?
2. Q2: Implies for filtering ? (more variance in satisfaction)
The ratio Niche/Hits is changing
Distribution efficiency is amplifying
Recommendations and reviews drive sales
Collective sales of niche products > Hits
## 7.8 The long tail II
Research findings:
Disentangling supply side from demand side
Study: Data from retailer with two distribution channels: internet and catalog.
Differences between 2 channels:
- Gini coefficient: G = A/(A+B)
- Lorenz curve
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Internet: More evenly distributed sales. differences not attributed to price and availability. More niche products sold.
- Directed search
- Non directed search
- Recommendation systems
**Critiques**
- Natural monopoly (hits)
- Double jeopardy: Unfamiliar are less liked ([Million short](https://millionshort.com/))
[Chris Anderson: Technology's long tail ](http://www.ted.com/talks/chris_anderson_of_wired_on_tech_s_long_tail?language=en )
## 7.9 How internet retailing startups grows
Data required
- Gather sales info
- Customer ID / Date / Transaction / Value / Zip code
- Geo-demo "real world" data
Question:
- Why do some locations have more customers than others ?
What matters the most in internet retailing:
1. Alter cost-benefit tradeoff: Making things closer sometime at a better price
2. Sales evolution is structured and predictable: sales-time patterns
- Customers talking to each others
- Observation (packaging is a brand)
3. Good to great
- Expansion to niche locations
- Spacial structure
- Find your doppelganger (similar locations far from each other)
- Physical distance vs. social distance
- More chances of interactions if customers have similar tastes in different products and services.
2 important patterns:
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1. Sales start in larger cities and spread through proximity
2. Sales in smaller areas with "similar" kinds of people (age, education, occupation, ...)
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Long tail over location
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## 7.10 Preference isolation
Shelf space allocation: Similar % of shelf space than % of population. In total same shelf space in the market for a same amount of customers but is distributed evenly across different stores, indementently of the size of the market.
Preference minority is correlated to internet sales.
# Week 8
## 8.1 Brands and digital marketing
Use of connected devices. It is still marketing.
1. Social commerce: reviews, blogs, network of curators
2. Digital ad, behavioral targeting / big data, micro-level targeting
3. Experimentation and testing
Intangible assets are 50% of the valuation of a business, against 20% in the 50's
A third of the value is attributed to brands.
[Stocks for the long run ](http://www.amazon.com/Stocks-Long-Run-Definitive-Investment/dp/0071800514 )
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Goals and tactics:
- Brand goals:
+ Heart
+ Mind
+ Thinking
+ Feeling
- Key tactic:
+ Real world events
- Outstanding value and positioning:
+ Authenticity and transparency (all stakeholders)
+ Brand personality and "hjumanization"
+ "Infinite" life and potential for serendipity (finding valuable or pleasant things that are not looked for)
Example: Jetblue
- All you can jet (599$ for 30 days)
- 10m blog refs
- 31m search queries
- 700% lift in traffic
[29 days until 29 ](http://www.29daysuntil29.com/ )
\#McDStories -> Negative stories
Organic celebrity: [Ree Drummond ](http://thepioneerwoman.com/ ), one of the larget blogs in the USA
## 8.2 Customers and digital marketing
Customer goals:
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- Attract
- Engage
- Retain
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Subject to:
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1. Never pay more to acquire than you will recoup (CLV > AV)
2. CLV need to incorporate RLV (referral lifetime value)
- 8% of customers are marketing agents
- Top 100 will generate 15000 other customers
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Attractive target customer:
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- Monologue to conversation with technology
- Amplification through virtual and real world synergy
- Long tail leverage
- Marketing "spend" as an asset
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Food for thought:
- Status-quo experience that is broken
- [Warby Parker ](http://warbyparker.com/ )
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## 8.3 Reputation and reviews
Apparently more than 60% of users read reviews before making a purchase and positive reviews increase conversion rates.
One friction of market: we don't want to try new stuff
- Many "up" to build a reputation. One "down" to lose reputation (Franklin)
- Reputation is got without merit, lost without deserve (Shakespeare)
Lots of sites for vacation, restaurants, cars, movies, contractors:
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- Chris Dixon from Trip Advisor:
Startup build from bringing information into market.
- More info: Almost always better
- Information by firms: might affect behavior as well (better or worse)
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Data:
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- Hygiene grades cards shown in window of restaurants (mandatory in LA/NYC)
- Impact of demand:
- A: increase of 5,7%
- B: Increase of 0.7%
- C: Decrease of 1%
- Objective quality went up: Hospital admission for gfood-borne illnesses down 13%
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Principles:
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- Review systems change behavior
- Should be objective and verifiable, not actually the case
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** Amazon and BN **
Reviews: 5* are frequent, 1* are rare. Average 4.14/4.45
Key findings:
- Customer WOM affect sales
- Better eviews boost sales
- Downside effect of 1* is larger than upside effect of 5*
- Text is actually read
Might motivate to review their own books. Review writing service/ fake reviews. Real reviewer, more than 25000 reviews. So many reviews does not mean fake reviews. Need algorithms.
According to Bing Lui, a data mining expert:
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- 1/3 reviews are fake
- A lot of money is involved in this market
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[This Man Made $28,000 A Month Writing Fake Book Reviews Online ](https://read.bi/OiuMh0 )
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Difficult for a data mining algorithm because of sarcasm, jokes, ...
Summary: Reviews could be helpful but authenticity is a concern.
** Trip Advisor **
Approach and key findings:
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- Examine distributions of reviews
- Net gains should be highest for independent hotels with single-unit owners.
- Such hotels have more 5* and neighbors have more 1*
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## 8.4 Product life cycle
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1. Innovators (Research and Development)
2. Early adopters (Introduction)
3. Early majority (Growth)
4. Late majority (Maturity)
5. Laggards (Decline)
Pricing, customers and distribution are different in 5 stages
## 8.5 Influence and how information spreads
Obesity: Controversial / Spreads like a virus (video)
Network:
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- Pathways through which information, advice, resources, support flows between people.
- Physical or virtual
- Homophily:
+ Characteristics of participants that are similar (cultural, taste, income)
- Can be simple (dyad) or complex (hundred, thousand of nodes)
- Nodes and connections
- Ability to share information and resources
- Constraints / geography
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Participation in a network is a choice. You decide how many contacts you have, how you will be central and how transitive (embedded) you will be.
You are being affected ny a network:
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- Strangers and loose connectinos can affect us
- 1 person is 4% of influence
- 15 people are 40% of influence
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Six degrees of separation between you and anyone in the world
## 8.6 Elements of neighborhoods and examples
Unit of analysis: Zip code, city blocks
First order contiguity
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* [Social contagion and trial on the internet: Evidence from online grocery retailing ](http://d1c25a6gwz7q5e.cloudfront.net/papers/1283.pdf )
Influence parameter is positive and statistically significant after controlling for demographics.
## 8.7 More examples of influence
Observations:
Connections:
- Numerous friends
- Few carry a lot of influence
Scale:
- Inferring who is influencial to whom is difficult
First social networks:
- Classmates.com
- Myspace
- Facebook
Heterogeneity: Significant variance (to be expected), influence vs susceptibility to influence.
Average: 20% of friends have an influence. 1/3 are not influences by anyone.
Distriubtion of posteriori mean
Regression involving influence parameters: female influience male but not the opposite.
Simple metrics: Friend count, profile views are inadequate.
Retention: If top user defects then disproportionate negative effect
Advantage: Superior identification of best customers.
## 8.8 More examples of influence pt. 2
Helpful to understand network structure as unexpected leaders emerge
Contagion was at work and is very important in the diffusion process
Social capital:
- Ability of individual to secure benefits due to trust, cohesion, reciprocity.
- Frequency and quality of informatino in a community
High social capital = more efficient transfer of information
Example: Bonobos.com
- Apparel category has a non digital attribute. Fit and feel is difficult online.
- Focus on new trials: incomplete knowledge ex ante.
- Socially visible
- 50% of trials would not have happened if no additional information about non-digital attributes was transmitted through social learning
- Later trials: Driven by better information about non-digital attributes. Through communication with earlier triers
- Customer category in product life-cycle
- Proxy for offline social capital in target segment ?
(20-45 men fashion forward)
=> Number of bars and liquor stores in area.
How could other firms use this idea ?
# Week 9: Targeting and Messaging, Pricing to Value, Customer Access and Distribution
## 9.1 Pricing strategies 1: Introduction
Overview:
- Motivation and puzzles
- Inputs to the pricing decision
+ Floor, ceiling bound to the EVC (Economic value to the customer) metric
+ 5C's affect the final location of the actual price between floor and ceiling
- Getting deeper into customer factors
- Price sensitivity: Driver and measurement
- Psychological factors
**Motivation and puzzles**
Pricing have a huge impact on profit but is often neglected.
Can't find a private label everywhere else so evaluate the pricing is hard.
Trader Joe's: Mainly private brands
Price is more than a number: It sends signals to customer (premium/discount)
** Relate 5c's and pricing **
- Company issues
- Target margin or IRR (Internal rate of return)
- Consistency in the product line: Price of the new Toyota Camry is influenced by proces of the Honda Accord or Ford Taurus but also by the prices of Toyota Corolla and Toyota Avalon
- Consistency in image: It's difficult for Neiman Marcus to cut proces in response to competition
- Competitor issues
- Competitive aggressiveness: Ability of the competitor to sustain a price-based response. Deep pockets / irrational behavior
- willingness to respond on price: Direct financial cost to competition
- Competitor position: Market leaders will initiate, followers will imitate.
- Collaborator issues
Incentives:
- How hard will he work to push your product
- What kind of pull support do they expect
- What other fucntions will perform, how much influence do they have.
- Also, it's not jsut abour margins: ROA also matters
- ROA = Profit/Assets = Profit/Sales * Sales/Assets = Margin * Rotation
- Customer issues:
- Price sensitivity (elasticity)
- What drives it ?
- How can we measure it ?
- Psychological issues
- Odd numbered endings
- Mental accounting
- Prospect theory
- Endowment effect
## 9.2 Pricing strategies 2: customer factors
**Price sensitivity is affected by:**
- Ease of comparison:
- Private next to branded:
- \+ ease of comparison
- \+ Price sensivity
- You want price comparison to be somewhat difficult
- Expenditure
- Large volume users are more price sensitive
- Focal component is large part of total cost: more price sensitive
- Shared expenses
- Separation between customer and payer: lessen price sensitivity
- Feeling the "pain" of payment : more price sensitive
- Price quality inferences:
- Higher price = higher quality
- It lowers the price sensitivity
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| Var measured | Natural | Experimental |
|-----------------------|------------|-------------------|
| Actual purchase | Sales data | Field experiment |
| Reference / Intention | Surveys | Tradeoff analysis |
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Field experiment:
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In a grocery in the 1990's
Conjoint analysis:
- Warby Parker: Demand is highest at 79$ but gets flat before 95$. Sets price at 95$.
Survey:
- How likely to buy X at Y price.
- Calculate elasticity through statistical analysis
** Psychological factors **
9 endings: "Discount, in western culture"
Experiment:
Reg: 0,83$, 2817 Sales
Disc: 0,63$, + 194% sales
Disc: 0,59$, + 406% sales
## 9.3 Pricing strategies 3: Psychological factors
**Mental accounting: who's happier ?**
A: Won 50$ and 25$ on two tickets
B: Won 75$
A: 56, B: 16, No difference: 15
One big box for gifts or several smaller boxes
Bad news: Should be aggregated
Listing the details: Increase the unhappiness sentiment.
Charge more and give a rebate
** Prospect theory **
[Prospect theory ](https://en.wikipedia.org/wiki/Prospect_theory )
- Internal reference point
- Respond differently to deviation from reference point whether negative or positive. (loss aversion)
- Drive the reference point down with a rebate
- Unhappiness when increased
**Summary**
4 inputs to pricing process:
- Marginal cost
- willingness to pay
- Competitive pressure
- Distributor margins
Consumer price sensitivity:
- EVC
- Statistical and marketing research methods, regression and conjoint analysis
Consider human psychology
## 9.4 Distribution strategies 1: Introduction
Overview:
- Channel structure (who is doing what)
- Channel coordination (who gets compensated)
- Place: final frontier
- Often the less appreciated of the 4 P's
- Managers often underestimate
- Sustainable competitive advantage
- Increasing return to scale
- Source of customer value
- Hard good to soft good
- Channel structure: Who are the players
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### Direct vs. Indirect
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Indirect reduce the amount of transactions
Strategic advantage of direct:
- erecting barriers to entry
- quality of direct marketing feedback
- Bundling with high margin products and services
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### Channel flow / functions
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How it can be disrupted by technology
----
Physical flows:
- Breaking bulk
- Assorting
- Assuring availability (Inventory or BTO)
- Customization
- Delivery
- Installation
- Maintenance and repair
Information flows:
- Identify needs and solutions
- Identify customers and suppliers
- Matching needs and solutions
- Matching customers ans suppliers
- Assessing and certifying quality
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- Negotiation / closing the deal
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- Ordering
- Market feedback
Tools and framework: Hybrid grid
X axis: Activities
Y axis: Individuals and entities
System optimized / operates efficiently and smoothly
Example: Posilac, controversial genetically engineered bovine growth hormone
## 9.5 Distribution strategies II: Channel design
Intensive:
- Selling support not vital
- Minimize cost over customer
Selective:
- Tradeoff
- Both are important
Exclusive:
- Strongest selling support
- Customer cost of obtaining offering not considered vital
Implications of functional view:
- Function or activities required to succeed depends on the nature of your offering
- You can eliminate intermediaries but not functions. Functions are shifted forwards:
- Forwards: IKEA (Delivery and installation)
- Backwards: Apple store to assure consultative selling
- Sideways: Amazon use FedEx/UPS for delivery
### Conflict betwen manufacturers and distributors:
Manufacturers:
- Carry out full line (no cherry picking)
- Need active involvment in selling new products
- Know more about "your" customers to make better products
- Need to improve sales efforts
- Channel margins are too high
Distributors:
- Who wants the dogs ?
- We need exclusive territories
- We do not keep any such records
- Need more trade promotions and discounts
- Your prices are too high
Solutions:
- Conflict might have some good side
- Vertical conflicts vs. horizontal conflicts
### Vertical conflict:
Nike < - > Foot locker
Managing:
- Integrate (flagship stores)
- Have franchises (downstream)
- Monitor downstream partners (mystery shoppers, surprise visits)
- Alter incentives via trade promotion policies
### Horizontal conflicts
Problem between retailers
**Free riding**
- Low price and low service vs. High price and high service (customer gets educated)
- Establish boundaries between channels (territories)
- Set appropriate level of distribution intensity
- As distribution becomes more selective. reseller support and merchandising efforts increase
## 9.6 Horizontal conflict
Smartphone to find a better price
Buy online, pickup in store (BOPS)
Some physical inspection: increase store sales and lowers online sales
Research online, purchase offline (ROPO)
Mores strategies to manage horizontal conflict:
- Boundaries between channels (how many intermediaries)
- Length (how many intermediaries)
(conflict proportional to length)
- Autonomy
(conflict proportional to autonomy)
- Density
(high conflict at average density)
- Set appropriate level of distribution intensity
- Multiple brands for each retailers
## 9.7 The 7 M's
Overview:
- Trends and data
- "Classic" campaign (Milk)
- 7M Framework
- Mission and message: rational and emotional appeals
### Classic campaign
- California milk processor board
- Decrease in consumption
- Milk advertising in 1992 (+ indicators)
### The 7M's
- Market (target audience)
- People who currently drinks milk
- Message content (key benefit/positioning)
- Make sure you have enough milk (it compliments many other meals)
- Mission (Awareness, knowledge, interest, trial)
- Increase milk consumption by one glass per week within a year
- Message design (creative solution)
- Got milk? deprivation campaign
- Media strategy (How do I reach them)
- TV, print
- Money (how much do I need to spend ?)
- Measurement (Was it worth it ?)
- 60% aided recall in 3 months
- 2,67% (30M) increase in annual sales
## 9.8 The mission and message (rational appeals)
What are we tying to influence ?
Rational appeals
- Demonstration (appropriate: key features)
- Spokesperson (positive characteristic get transfered to the product)
- Testimonial (May end up using a long period of time)
- Comparative (Framing, surveys can easily be biased)
## 9.9 The mission and message (emotional appeals)
Negative (fear: financial services, public interest)
Too much fear is not effective
### Money
Methods of setting advertising budget:
- Percentage of sales
- Match of better competition
- Objective and tasks methods
Simplified Parfitt-Colling model:
- Break even market share: 6%
- 30% of awary try the product
- 40% of those who try will buy again
- aware × try × repeat = market share
- 50% must be aware
