Intro-to-marketing-course-notes/Week2.md

title	author	output
Introduction to marketing: Part 2	François Pelletier	pdf_document

Wharton School - Introduction to marketing

Week 4: Customer centricity

4.1 From product-centric to customer-centric management

Three axis of marketing

• Performance superiority: Having the best products
• Operational excellence: Low cost and efficiency
• Customer intimacy: Who is the customer. How intimate we want to get to add value.

What stores are customer inmtimate ?

Product-centric approach

All about making money by maximising the value of the company Total value of the company = time value of money -> Maximising shareholders value Volume and cost reduction:

• Will it scale : Can we deliver our products and services at scale ?
• Different metrics:
  • Volume
  • Costs
  • Market share (how well you will do right in the future)

1. Fine tuning the metrics
2. Growth
   • PS and OE are now standard
   • Search new sources of growth:
     • New customer segments and geographies
     • Innovation (extending products)
   • Companies work in product/service expertise (silos).
     • Competitive advantage
3. Mental process: Divergent thinking, different uses for the same product

4.2 Cracks in the product centric approach

Changes in the last 15-20 years:

• Emerging trends are here to stay

Leading factors:

• Commoditization (technology enables product development)
  • Lifecycle is shorter
  • Always must have a new product coming
  • No more natural monopoly power
• Smart customers
  • Technology enabled informatino flow
  • Aware of options availabl for them
  • Put mode demand of companies
  • Have to extract value from product
• Retail saturation
  • Tech enabled delivery
  • Instant availability
• Globalisation
• Deregularization : Must be more competitive

More demanding customers:

• How will the product solve my problem
• end-to-end solutions with products form multiple vendors
• Example: IBM
  • Customer centric solutions provider
  • Harder to commoditize
  • Left building and slling products

Information systems allow customer tracking

• Before: Know the sales Don't know who buys and how many they buy
• Now: Know who buys what and when

4.3 Data driven business models

Harrahs:

• Casino chain in the US
• Loyalty programs
• Games / meals / rooms at a really granular data
• Detect thresholds (when to offer a meal, ...)

Tesco:

• Grocery chain in UK
• Loyalty program
• What products are boucht in Tesco vs. products bought elsewhere.
• Know which customer can switch to competition easilyDefending against Wal-Mart

4.4 Three cheers from direct marketing

Individual customers = unit of analysis:

• Who they are, what they buy
• Determine marketing communication
• Segmentation / Customer lifetime value comes from direct marketing

What kind of product for the most valuable customers and how to attract them. Capacity to learn and leverage customer information: Should inspire from direct marketing books

Being Direct Making Advertising Pay

4.5 Which firms are customer centric ?

None of the big firms are really customer centric:

• Walmart: Best at product-centric
• Apple: Best at product superiority, begins to collect data abour customers with iStore
• Starbucks: Customer-centric only at local level.
• Nordstorm: Great personalized service, but not based on CLV, so does not target the best customers but all of them.

Week 5: The Opportunities and Challenges of Customer Centricity

5.1 What is customer centricity

How do you define customer centricity ?

• Development and delivery of product and services
• Fulfill the current and future needs of a select set of customers
• Maximise their long-term value to the firm

You have to be willing to change:

• Risky
• Require data and models

Do something even if someone is not an actual customer because he/she will be one later

5.2 Living in a customer-centric world

• The main goal is still maximising the shareholder's value

• Distinguish the profitable customers from the less profitables ones

• Past is of some guidance for the future

• Focus of future profitability instead of short-term profitability

• Three tactics:

  1. Acquisition
  2. Retention
  3. Development

• Customer-centric organisational structure

• Customer data can't be commoditized easily

• Divergent (different uses for the same product) to convergent thinking (different products for the same customer)

5.3 More reflections on customer-centricity

There is a balance between really valuable customers and not so valuable ones. The latter ones add stability to the business like cash or bonds in an investment portfolio.

Paradox of customer-centricity The more you focus on the most valuable customers, the most you need the other customers too.

5.4 Questions on customer-centricity

Who is your customer ?

Example: Healthcare:

• Patient
• Doctor
• Hospital
• Insurance company

Procter & Gamble: Customer = Retailers

• It could be the customers in a few years: get ready for a direct marketing approach

Barriers to customer-centricity:

• Data
• Regulatory issues
• Control: Impossible to move
• Specific challenges for each company
• Resources available
• Build IT, hire employees

What competitors are doing in this area:

• Financial services
• Hotels and hospitality
• Be the first ones !

Does it make sense to be customer-centric ?

• Technology initiatives
• Experiments

You have to prepare before taking the big step.

Week 6: How Can Customer Centricity Be Profitable?

6.1 How Can Customer Centricity Be Profitable?

Focus on the right customers for strategic advantage

Product-centric approach have some cracks:

• Commoditization
• Well-informed customers
• Globalization

Customer-centric:

• Promising alternative
• Not clearly understood
• Many firms are tauted to be customer-centric but are not really

Clear definition:

• Celebration of customer heterogeneity
• Customer lifetime value

How to manage tactics:

• "Show me the money"
• Can't be world-calss on 3 tactics
• Doing one well can be really lucrative
• A lot trickier than we think of

Where tu put the extra dollar ?

• Most managers would put it either in retention or development

Acquisition

Metric: Cost per acquisition (CPA): Big mistake to guide customer acquisition performance

For employees, lawyers, technology: we focus on the best, not the cheapest Why for customers we would like the cheapest to acquire ?

VPA: Value per acquisition = Customer lifetime value

• Upper bound for spending to acquire a new customer
• A lot of value in customers that we don't appreciate
• Match info with what customer prove to be over time

Customer acquisition summary

• Avoid CPA mentality
• Ceiling instead of floors
• Heterogeneity with CLV (search words, geographical, social)
• Be more patient and forward-looking when judging acquisition efforts
• Firms tends to underspend on acquisition

6.2 Customer retention

Metric: Churn / Attrition / Retention rate

• Good measure, but need to examine it at the right levevl
• How the retentino rate variaes across customers

Average retention rate = bad calculation

The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value

Right calculation: Average expected lifetime: Accounts for customer heterogeneity.

Customer retention summary

• There is no average customer
• Difference can be huge between average measures and accounting for heterogeneity
• Attrition elasticity is much lower than in the homogeneous case
• Investment in reducing attrition give more modest returns than expected

6.3 Customer development I

Make existing customers as valuable as possible Loyalty programs themselves are not a tool for customer development

• Cross selling
• Up-selling
• Increase frequency and volume
• Premium pricing

6.4 Customer development II

Metric:

• Share of wallet: How many needs are met by this firm
• Amount of product and services

Share of wallet is not correlated with size of wallet

Good and bad news about cross-selling

Good: Customer's share are correlated Bad: Some customer will not become better customers

• Upside of developmenet opportunities is more limited than managers think
• Icing on the cake: Not to change the customer but unlock value that is already there

But: Acquisition is not valuable in saturated markets

Overall summary

• Celebrating heterogeneity
• Smart acquisition
• Don't overspend retention: flighty customers will fly away no matter what you do or will become unprofitable

6.5 Wrap-up

Making customer centricity profitable:

• Need to have the technology to track data and do projections
• Update regularly the CLV
• Break customers into segments that we cam measure:
  • When they reach us
  • What products they buy first
  • What campaign bring them to us
• Allocate retention and development ressources appropriately: target marketing communications based on a segment characteristics
• Constantly experiment with these tactics
  • Send different messages to different people
• Bottom up perspectives to drive product line decisions
• Think about competition identifying the same high-value customers too