Managing Customer Value Lectures 3 & 4 PDF

Managing Customer Value Lectures 3 & 4 Session Outline Core concepts from sessions 3 & 4 ○ VOC & VTC Market attractiveness ○ Product Product & product lines Product differentiation New product development (firm...

Managing Customer Value Lectures 3 & 4 Session Outline Core concepts from sessions 3 & 4 ○ VOC & VTC Market attractiveness ○ Product Product & product lines Product differentiation New product development (firm view) Product adoption curve (customer view) Open Q&A As a note: Everyone is welcome to scholar sessions, but they are often of more use to those unfamiliar with marketing Marketing 101 Roadmap Two Types of Value Value of Customer (VOC) Value to Customer (VTC) ○ Perspective of the company ○ Perspective of the customer ○ We think about the reasons ○ We think about the reasons certain customers might be why certain product/service more valuable than other offerings are more valuable types of customers than alternative offerings Value of Customer (VOC) VOC: How to Determine Market Attractiveness Consider the market size ○ Demand-side approach TAM, SAM, SOM Chain ratio approach Basic value model (retail metaphor) Consider the market growth rate Consider customer’s willingness to pay ○ Estimating VTC ○ Economic vs. experiential value Also consider: ○ Cannibalization ○ Competitive intensity Demand-Side Approach: TAM, SAM, SOM A method for evaluating market attractiveness. Estimates the portion of your target market that you can capture. Example: Nike Shoes in the US TAM (Total Addressable Market) Size of the entire shoe market in the US $30 billion SAM (Serviceable Addressable Market) Size of the athletic shoe market in the US $17 billion SOM (Serviceable Obtainable Market) Nike’s % market share 48% of SAM or ~$8 billion Demand-Side Approach: Chain Ratio Approach A method for estimating market size by using a base number (e.g. total population of a country) and fine tuning it to arrive at a rough estimate for demand. The Formula: Example: Your potential share of the chewing gum market in Population Canada x % market penetration Population in Canada 35 million x consumption or purchase frequency x % of people who chew gum x 15% x average price per unit x number of packages of gum per year x 2 pack/month x x % of market you can capture 12 = your estimated market share x price per package per gum x $1/pack x % of market you can capture x 5% = your estimated market share for gum = $6.3 million Demand-Side Approach: Basic Value Model Also known as the “Retail Metaphor” Look for “deficient” behaviours and try to correct those! Traffic Conversion Basket Number of Rate Size Revenue visits Likelihood of Total amount purchasing spent Example: An Online Beauty Store 10% $50 2M visitors/yr average average $10M CVR basket Work on getting Industry average: Industry average: more visitors! 5% CVR $30 basket size VOC: Next Steps In these examples, we have used metrics such as total revenue as a surrogate for for value of customer But a more advanced or sophisticated approach would use net present value (NPV) techniques to compute customer lifetime value! Value to Customer (VTC) Calculating VTC Value to customer is the amount and type of value a firm provides to customers in $$$ Amount and type of value a firm provides to customers, in $$$ = Economic Value + Experiential Value = Reference Value + Positive Differentiation Value - Negative Differentiation Value Reference Value= cost to customer of the competing offering that the customer views as the best alternative to the firm’s offering, i.e. already incurring cost Differentiation value = value to the customer of any differences between the firm’s offerings and the reference offering Economic vs Experiential Value Economic Value Experiential Value Overall dollar savings/ Better quality of impact for customer consumption experience Value creation results in… that may or may not increase productivity A priori prediction of value A priori prediction of value Predictability possible not possible Measurability Easy to quantify Difficult to quantify Economic value easy to Hard - customers may need find… the “value model” can to experience the product or Ease of selling be explained to customer service to appreciate its value Rational, informational Emotional, transformational Marketing implication Calculating VTC Additional 20 Example: Comparing Commercial Espresso hours of training= Machines $200 in added costs in Year 1 Machine A: Costs $8000, requires 10 hours of training, requires 1 hour of daily cleaning Save 1 hour of cleaning daily= $3,650 Machine B: Need to determine appropriate price, annual savings requires 30 hours of training, self-cleaning Labour cost= $10/hour Cost of Training costs = Labour costs Machine A Assume customer operates 365 days/year = $8000 VTC= $8000 + $3650 – $200 = $11,450 Growth Strategies: The Ansoff Matrix Ansoff Matrix Example Example: Apple, 2024 Existing Products New Products Existing iPhone Apple Vision Pro Markets Apple Car in North New Markets Apple TV+ in Nigeria Korea Product What is a Product? A product is a bundle of attributes. There are three levels of a product: ○ Core product: Benefit offered that is intangible, not physical (e.g. a car's benefit is transportation) ○ Actual product: Tangible, physical product ○ Augmented product: Non-physical part of the product (e.g. after-sale service, warranties) You want to achieve parity on the core but differentiate on the augmented. To differentiate themselves, companies sell the core product with warranties, customer service, and other add-ons to make their products stand out. What is a Product? Example: Honda Civic Core benefit: Transportation Actual product: Honda brand with specs specific to Civic model Augmented product: Honda warranty, 0% financing, post-sales support Product Development The Alternative Practical The Orthodox Way The Incorrect Way Way Identify opportunity and Develop product and then Identify unmet value then develop suitable sell to market drivers in market, develop product based on your product concepts based on competencies and competencies and constraints constraints, identify best High chance of success concept based on STP, since you investigated and then make the actual variety of segments product Saves you time and $$ since you don’t need rigorous segmentation Select approach based on market conditions (ease of development, life cycle, competitive intensity etc.) New Product Adoption Factors that influence the likelihood, rate, and scope of adoption/diffusion of an innovation (from the customer’s point of view) Questions to Ask: Advantage 1. Advantage: What does it replace? Is it better than what they are currently using/buying? Complexity 2. Complexity: How can we communicate the benefits? Is it easily understood? Compatibility 3. Compatibility: How does it match current behaviors/habits/lifestyles? Observability 4. Observability: Can customers easily see and understand the benefits? Risk 5. Risk: What kinds of risks exist? Can the product fail? Can it affect other things? Divisibility 6. Divisibility: Can there be a trial period? Is it possible to try before fully committing? Product Adoption Curve Product Line Extension Product depth, breadth, and consistency Product line: group of related products satisfying a particular set of needs or being used together (e.g. vehicles) Product breadth: the variety of product lines offered by the firm (e.g. cars, minivans, motorcycles) Product depth: the variations offered within a product lines (e.g. HR-V, CR-V, Pilot) Product mix: all the products offered by the firm; can be diverse (like GE) or narrowly focused (like Swatch) Product Differentiation Horizontal Differentiation Vertical Differentiation Based on consumer Based on consumer differences in tastes differences in (e.g. design, colour, size) willingness to pay for Use perceptual maps to quality identify possible Quality can be a underserved needs combination of many complementary attributes (e.g. speed, comfort, reliability) Examples of Horizontal Differentiation ○ Think of product lines with Product different flavours, colours, designs, sizes etc. Differentiation? Vertical Differentiation ○ Think of products with different price points ○ Think of companies that have products with differing levels of quality or comfort or reliability or speed or luxury Consider whether branded under the same or different name… why? Horizontal or Vertical Differentiation? Horizontal or Vertical Differentiation? Horizontal or Vertical Differentiation? Horizontal or Vertical Differentiation? Reminder: Spike’s Key Takeaways An attractive market is “matched,” “matched+”, substantial, growing, and affluent (high WTP) Value to Customers (VTC) can be economic or experiential Computing the economic value is a useful input into the pricing decision (and hence into the VOC) Orthodox, incorrect, and alternative practical ways of new product development At least 6 factors (“ACCORD”) influence the likelihood, rate, and scope of adoption/diffusion of an innovation Many products fail to cross the chasm Products can be differentiated horizontally or vertically Product line extensions may use the same or a different brand name Expect and manage risks of further and further extensions Q&A