4H1ACM Analyzing & Understanding Markets Introduction PDF

4H1ACM Analyzing & Understanding Markets Analyzing and Understanding Markets: An introduction Agenda ▪ Markets: what they are and why it is important to understand them. ▪ Understanding markets: disciplinary perspectives ▪ Marketing: a brief introduction ▪ History of market research Wh...

4H1ACM Analyzing & Understanding Markets Analyzing and Understanding Markets: An introduction Agenda ▪ Markets: what they are and why it is important to understand them. ▪ Understanding markets: disciplinary perspectives ▪ Marketing: a brief introduction ▪ History of market research What is the market ▪ From the Latin mercātus (trade, market), from mercor (I trade, I deal in, I buy), itself derived from merx (wares, merchandise). ▪ Markets have existed since ancient – possibly prehistoric - times. ▪ The term originally referred to a gathering of people for the purchase and sales of merchandise, in a specific place and at specific times. ▪ Markets now exist at national or even global levels. The market can be thought as the sum of buyers and sellers for specific products in a given geographical area. We live in a market economy ▪ In many parts of the world, economic systems are market economies. ▪ A market economy is an economic system where decisions regarding investments, production and distribution to consumers are guided by the price signals created by the forces of supply and demand. ▪ Market economies can differ, from free market economic systems with very limited State intervention to interventionist systems where the State plays an important role in shaping economic activity and promoting social welfare. Economists identified different types of markets ▪ Industrial organization, a subfield of economics, looks at different forms of market structures. ▪ Perfect competition: large number of sellers of small size, which produce homogeneous products. ▪ Monopolistic competition: large number of sellers which sell similar but slightly differentiated products. ▪ Oligopoly: only a few firms in the market (say, 3-5). They might collaborate instead of competing, to keep prices high and increase profits. ▪ Monopoly: one firm controls the market, deciding quantities produced and prices. Consumers have no alternatives. ▪ The goal of economists was not to help firms maximize their profits. On the contrary, they want to help goverments regulate the market to avoid extra profits and increase consumers’ welfare. Important notions from economics (1): product differentiation ▪ Process through which firms distinguish their products from those of competitors, to make it particularly attractive to specific groups of customers. ▪ Can be: ▪ Vertical: differences can be measured objectively (i.e., CO2 emissions for cars) ▪ Horizontal: differences refer to individual subjective preferences (i.e., color of a T- shirt) Important notions from economics (2): Types of good based on the difficulty to evaluate quality Search goods Clients can easily compare alternative products and obtain all relevant information (quality, price) before purchase. Examples: salt, sugar, generic medicines such as aspirin, fuel. Small differences in price can make a huge difference in sales. Experience goods Product comparison is difficult. Clients can find some information, but they will have full information about quality only after purchase. Examples: having dinner in a new restaurant; buying a new wine. Credence goods: Not even after purchase clients are capable of evaluate quality. Examples: Even with the best surgeon, sometimes a patient dies during the operation. This doesn’t mean that the patient hasn’t received the best care. Going beyond economics ▪ Economics provides an undersocialized understanding of human life, which downplays social ties and the role of culture. ▪ Social scientists have studied markets in different cultures/parts of the world, showing how they differ. Their work is useful in international business – e.g., conducting business in Japan or entering foreign markets. ▪ Social science also illuminates how in some areas of life, exchanges of products and services are culturally expected not to be dominated by a market logic. Examples: ▪ Gift giving (we need to reciprocate with other gifts, not by paying a price) ▪ Family (sons are not expected to pay a market price for "services" received by parents) ▪ Health (we expect to receive basic health care even if we can’t pay the full price – although this is not universal) ▪ The body (we can donate, but not sell, organs) ▪ Religion (religious institutions accept offerings, but they don’t charge prices for religious services or exclude from access those with limited financial means). The expanding role of the market ▪ During the late 20th century, in many countries ideas about free-market capitalism that had fallen into decline after the second world war started influencing again the political debate. ▪ Neoliberalism is associated with the privatization of public services and a reduction in government spending. As a result, products and services that were once supported by public spending have started relying on market exchanges to cover costs. ▪ Marketization can also refer to the adoption of marketing logics and techniques (e.g., advertising, product differentiation, market research) in contexts that once were dominated by different logics. Examples include: ▪ Transports (increased competition, reduction of State support to national airlines/railways) ▪ Health care (private providers in competition with public ones) ▪ Arts and culture (reduction in public funding and mecetanism, institutions are ‘on the market) ▪ Education, higher learning (take the example of business schools: global competition, attraction of foreign students) Marketing ▪ Like economics, marketing has in the study of markets one of its central preoccupations. ▪ The American Marketing Association (2017) defines marketing as « the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large» ▪ Unlike economics, focused on the supply, marketing has developed many tools and instruments to study the demand (client, customers, consumers). ▪ And, unlike economics which developed to provide the State with instruments to reduce the market power of firms, marketing has evolved to provide insights to firms to increase their influence on clients and, as a result, their sales and profits. But what is marketing in practice? Marketing is the gerund of the verb ‘to market’. But marketing is not just selling. It is the process of getting potential clients or customers interested in a company’s products or services. Marketing thus involve - understanding what client wants - designing products/services accordingly - and then promote, sell, and distribute those products in the most effective/efficient manner possible. Marketing is thus a function inside a company. Most, if not all, companies have a marketing department to help improve their relationship with the market. Marketing is also the core business of many specialized service providers such as advertising, digital, and market research agencies. Marketing is also an academic discipline. All business schools in the world teach marketing. Key notions in marketing (1): market orientation Not all companies are market-oriented. Production-oriented companies focus on the production process and aim to manufacture goods as cheaply and quickly as possible. The focus is on reducing costs and serving a mass-market. Product-oriented companies focus on product or service quality and performance. This sounds similar to the production approach, but the main difference lies in keeping innovating to keep on improving product quality, so that the product can be sold at a premium price to a well-selected market segment. Sales-oriented companies focuses on adopting strategies and tactics that push people towards buying a product or sales. Often the focus is on achieving immediate sales, rather than long-term results. Market-oriented companies prioritize identifying consumers’ needs and delivering products and services that satisfy them. All companies can use market research, but for market-oriented companies, understanding the market is a priority. Key notions in marketing (2): Segmentation Customers all want different things. Segmentation is the business practice of dividing the market into approachable groups (or segments). There are different ways of segmenting the market, based on different criteria. Market research is fundamental to segment the market. Criteria for Demographic Firmographic Psychographic Behavioral segmentation  (B2C) (B2B) (B2B/B2C) (B2B/B2C) Definition Classification Classification Classification Classification based on based on based on based on individual company or attitudes, behaviors like attributes organisation aspirations, values product usage, attributes technology laggards, etc. Examples Geography, Industry Location. Lifestyle, Usage Rate, Gender, Education Number of Personality Traits, Occasion of the Level, Income Employees, Values, Opinions Purchase Decision Level Revenue Difficulty Simpler Simpler More advanced More advanced Key notions in Marketing (3): The 4 Ps Also known as the ‘marketing mix’, the 4Ps of marketing is a framework first introduced in the 1960s by Jerome McCarthy. The key idea is that marketing is about taking decisions about these 4 interconnected areas: ▪ Product refers to the decisions linked to design products or services in order to satisfy customer needs or design. ▪ Price refers to the decisions linked to setting a competitive price capable of covering costs, maximize sales, and generating profits. ▪ Place refers to distribution decisions (i.e., where to make the product available). ▪ Promotion refers to the decisions connected to marketing communications, including instruments (advertising, sales promotions, social media) and messages. These decisions should be coherent among each other: for example, a luxury product should be of high quality, sold at a premium price, not available everywhere (i.e., very selective distribution), and promoted through messages emphasizing its exclusivity. Market research can help in all these areas: what do consumers want? How much will they be willing to pay? How will they respond to specific messages? Where do they usually buy products? Market research ▪ Market research is a key area of marketing, which can help focus on the right market segment, increase the effectiveness of market mix decisions, and minimize risks of failure. ▪ Market research has a long history. New tools and techniques were added in different periods of time, all helping understanding markets better. ▪ But be aware that: outside marketing, market research has a bad reputation, as one way through which marketers can manipulate consumers and seduce them into buying goods they don’t really need. 1920s-1940s: The era of the quantitative questionnaire ▪ Market research emerged in the USA, as this was the first country with a consumer society. Before the 1920s, however, marketing was more an art than a science, and marketers were not basing their action on solid understanding of consumers. ▪ In the 1920s, psychologist David Starch first conducted tests to evaluate the effectiveness of advertising. Researchers would show consumers magazines and asked if they recognized/remembered any of the ads in them. ▪ During the 1930s, George Gallup championed the technique of aided recall, asking interviewees if they recalled an ad seen in a magazine without showing it to them. ▪ Gallup also pioneered scientific polling technique to assess public opinion – based on the fact that a small sample of the population could be used to predict general attitudes – a technique with both political and commercial applications. 1950-60s: Focus groups and motivational research ▪ In this period, quantitative surveys remained the standard, but businesses started to also use qualitative methods. ▪ Focus group was one of those, based on bringing together a small group of consumers to answer questions about products or advertising to better understand their needs thanks to group interaction. ▪ Consumers, however, often say something and do something else, making market research unreliable. In the late 1940s, Enrich Dichter created motivational research, applying Freud’s psychoanalytical notions to investigate consumers unconscious desires, taboos, repressions, and secret needs. ▪ At a time when consumers where thought to be rational, Drichter highlighted that products were bought also for their image: for the values and symbolic meanings they embodied. ▪ His methods included deep interviews that looked like therapy sessions, and observations of consumers in real or simulated settings. ▪ One of his early success was for the Procter & Gamble Ivory soap, realizing that consumers used soap also to clean themselves from sin. The adoption of market research techniques trigger fears of consumer manipulation ▪ In 1957, Vance Packard publishes The Hidden Persuaders. ▪ The book examines advertisers’ use of motivational research and other psychological techniques to induce product desire for products (but also to manipulate the results of political elections). ▪ Translated in more than 15 languages, it influenced public opinion, legislation, and industry discourse, generating a fear of advertising role in manipulating consumers. ▪ The book was criticized by the advertising world for its sensationalism. 1970-80s: New statistical procedures to predict consumer behavior ▪ New technologies, such as phone systems and computers, made it possible to reach larger samples of consumers and statistically analyze larger volumes of numeric data. ▪ Thanks to these development, data about consumers, obtained through surveys, could be analyzed stastically. ▪ Examples of applications: ▪ Market segmentation: differences in groups of consumers based on their reactivity to the specific attributes (features, functions, benefits) that make up a product or services. ▪ Analysis of attitudes towards products/brands (i.e., positive, neutral, negative) and their impact on purchase behavior ▪ Analysis of brand awareness (do consumers know a brand?) and brand image (what do they know about the brand?). ▪ These technique are still used today. The constitute the backbone of market research. 1990s: The beginning of web analytics ▪ With the diffusion of the WWW, it become possible to track consumer behavior online. ▪ In 1995, Stephen Turner launched Analog, a freeware web log analysis software that showed website owners the usage patters on their web servers (ex., website visitors, page views, geographical origin of visitors). ▪ Marketers soon started using this data to improve the effectiveness of their online campaigns. ▪ Web analytics have become increasingly sophisticated, paving the way for criticism on the respect of user privacy, which have been exacerbated with the advent of social media. 1990-2000s: Ethnography enters the field ▪ Ethnography, a research methods developed by cultural anthropologists, is based on researchers’ participant observation in the field of study and long interviews with consumers. ▪ Being based on observation, ethnographic research can help go beyond the so-called ‘attitude-behavior gap’, that is, the difference between what consumers say they do and what they actually do. ▪ The results of ethnographic research, often using videos of consumer behavior, is an alternative way of generating managerial insight respect to pie charts and histograms. The 2000s: Neuromarketing ▪ Application of neurosciences to marketing and consumer research. ▪ Tools include devices that can measure vital physiological functions (e.g., heartbeat, respiration rate, blood pressure) and reflexes (e.g., gaze fixation, pupil dilatation, face expression). ▪ These tools reveal information about impressions, reactions (e.g., positive, negative) and emotional responses (e.g., positive, negative) when exposed to marketing stimuli The next frontier in market research: Artificial intelligence and machine learning Artificial intelligence (AI) makes it possible for machines to learn from experience, adjust to new inputs and perform human-like tasks. AIs can be used to: - Listen to consumers (obtain data about them) - Predict consumer behavior - Assist decision-making (e.g., Amazon recommendation system) - Interact with consumers (e.g., bots) To conclude ▪ Understanding markets is important for every company, and more so for market-oriented firms. ▪ Many methods to understand markets exist, and new will certainly be developed in the future. ▪ In this introductory course, with 12h only, we will focus on some widely employed research methods, that constitute the backbone of market research. ▪ From the next class, we will focus on how to carry out market research in practice. Readings ▪ On BrightSpace, you’ll find some readings that will allow you to understand better some of today’s notions, and to enrich them. ▪ It is a good practice to read them before the next class. ▪ You’ll need to study all readings for the final exam! Reading 1: The 4Ps of Marketing This reading (link on Brightspace), from the American Marketing Association itself, offers an introduction in a simple language to the 4Ps of marketing. Reading 2 This reading introduces you to key figures in the history of market research. To pass the individual exam, you should be able to remember what each technique covered is about, who are the protagonists behind each technique, and in which period each technique started to be diffused. Reading 3 This reading offers a different account of the history of market research which complements reading 2. To pass the individual exam, you should be able to remember what each technique covered is about, who are the protagonists behind each technique, and in which period each technique started to be diffused.