Markstrat PDF - Introduction to Marketing Simulation

LEZIONE 13/09 INTRODUCTION TO MARKSTRAT The starting point of the simulation is the analysis of the company, its products, the market and, most importantly, the customers (what they expect from products etc.) In real life, the...

LEZIONE 13/09 INTRODUCTION TO MARKSTRAT The starting point of the simulation is the analysis of the company, its products, the market and, most importantly, the customers (what they expect from products etc.) In real life, the demand for products, services or brands, by default, is 0 so we have to generate it and the same thing is true also for the simulation. In the simulation we won’t start from 0 but with 2 products that are already available in the market with their own marketshare, customers target, that already have prices and generate revenues. So there will be an ongoing company operating in one of the two markets of the simulation: the existing market, where you are already present, or the new one. Marketing is about identifying and satisfying customer needs. Marketing is not about sales. In the rst two decision rounds we have to identify and manage the demand, that is already there in the simulation existing market. The new market, also called organic market, will be available only after the third decision round and the demand for organic products is 0, it doesn’t exist: there are no customers, no competition; teams have to generate demand. We will have 2 industries and sometimes we will se that the organic market in one industry is bigger than the market in the other industry even if it seems impossible as we are talking about the same simulation with the same number of teams. Therefore, at the end, the share price in one industry will be lower than the one in the other industry as it is us generating demand based on marketing investments: the more we invest, create and the better we satisfy the needs of the new market, the bigger the market will become. We have to generate the demand. Marketing management represents the art and the science of selecting the right target market, as well as the acquisition, maintenance and growth of customers through the creation, distribution and communication of higher value for the customers.The marketing manager is responsible for managing (identify/generate) the demand: he needs to in uence its intensity, times and composition in order to achieve all company objectives. The main objective of the marketing manager is to make the sales process easy and smooth. We will be competing with other teams in a marketplace. According to economists, a market is where customers and buyers meets and engage in transactions on a product or a class of products; for us, in the markstrat game, the market will be a group of customers: marketing managers, in contrast, use this word to indicate groups of customers sharing some common characteristics (e.g., similar value expectations). The simulation is not a place where we o er something and get money back, it will be a place made up di erent groups of people, customers segments, some of them will react in a similar way others in a di erent way to our marketing mix. In the simulation original market we will have 5 customer segments while in the organic one 3: 8 groups of customers in total. The core marketing concepts we will be dealing with when playing the simulation are: 1. Needs, wants and demand, marketing doesn’t create needs. There’s a great di erence between the three: we cannot create and shape needs but we can create wants shaped by experience and cultural factors but mostly by marketing investments; demand, on the other hand, is the level of desire, how much customers want to buy a product. Demand and desire are measured with the willingness to buy, the purchasing intention, that is a ected by their purchase power. So the demand is made up of the desire and the purchase power that changes in the di erent segments (some segments have more money and are more price elastic than others). The price of a product is for all segments the most important decision element: - For segments that are very price elastic, price is everything, once that we change the price (increase or decrease it), even by a small margin, they will react to it 1  ff fi ff ff fl ff ff ff  - Customer segments that are less price elastic place greater emphasis on other factors (such as quality, brand reputation etc) so a moderate price change may not signi cantly impact demand (a moderate price increase won’t be considered that much as long as they they perceive a great quality or superior features than competitors) 2. Target markets, positioning and segmentations, customers are not the same, they have di erent needs, wants. Starting from the third decision round we will be able to target and position while in the rst two we will be able just to segment (and to some extent target) the market using the price, the only element that we can vary in these rst steps as we cannot change our products or introduce new ones 3. Market analysis: we have to be able to analyze all the information in the simulation and de ne which of them are needed and which are not and how to use them. Information is di erent from insights: information is essential, a collection of raw data, facts, and statistics collected during market analysis, the basic output of research activities; insights, on the other hand, are the actionable interpretations derived from analyzing and synthesizing this information, they dig deeper into what the data means 4. Marketing mix, the 4 Ps (place, price, product and promotion) and 7 Ps. In the rst decision round we can make decisions only about the price, the distribution (channels to use, how much to invest in each channel, the number of salespersons for each channel) and the communication, which in the rst two rounds can be considered just in terms of awareness 5. Brand and brand equity, our value proposition: we have to de ne who we are, what we want to achieve, what we want promise to our customers, the bene ts we want to provide 6. Value and satisfaction. Satisfaction is de ned by the di erence between the expectations and what is actually delivered, the experience. We have to make sure that what we promise is what we deliver in order to not disappoint customers expectations. Fooling customers is not a bad idea only if we are talking about a product that we want to remove from our portfolio (maybe because it in not pro table or there is too much competition for it) as it will not be something that we will bet in the long time, we take a short term advantage of this misleading communication 7. Marketing channels, distributions and communication channels. Every customer segment has its own preferences, some of them prefer to buy online, some o ine and we have to meet our segments preferences, needs and wants using these elements 8. Competition, globalization and integration. In the rst couple of rounds the focus will be on our company and customers so we won’t consider competition (as we won’t be allowed to change the characteristics of our products, to launch new ones, to reposition our brand or enter new markets). In the rst decision round we can just play on awareness, price and distribution channels: when we start the simulation, the way in which our money are distributed in the distribution channel is not optimal, same for production and communication, so we have to adjust that. Distribution and price are the most important things to consider in the rst two decision rounds. Starting from decision round 4 we will focus also on competition, as we will have already developed our own strategy but the outcome of the decision rounds will largely depend also on what our competitors do: if they do something we don’t expect we will loose. So, it is very important to look at the other company’s data and performance in order to predict their actions. Maybe the most important decision that we have to make in the simulation is if we wanna risk or play at safe. Playing at risk gives the 30% probability to win but 70% probability to be last, playing at safe provides a lower probability of winning (around 10/15%) but the probability that you are last is very low (around 10%). Most people decide to go safe, while just a few to play at risk but then just the 30% of this few wins. An example of playing at risk is lowering the money at a level that nobody expects, don’t making any money but with the other teams making even less money: I lose a bit to make other teams loose more 9. Integrated marketing communication 10. Price management, dynamic pricing and psychology of prices 2  ff fi fi fi fi fi fi fi ff fi fi ffl fi fi fi ff fi  The 4 holistic marketing dimensions 1. Relationship management, which is made up of: Establish long-term relations Extended perspective to all stakeholders (clients, channels e partners): relationship management isn't limited to customers. It's crucial to maintain good relations with all stakeholders Marketing network, the interconnected relationships a business maintains with various stakeholder to create a collaborative ecosystem that enhances brand reach and reputation Customer relationship management (CRM): Customer Equity, Customer Engagement. CRM systems help businesses manage their interactions with current and potential customers. It is a tool and a strategy used for improving customer relationships and optimizing processes (like sales, marketing, and customer service) based on customer data. It focuses on two main concepts: customer equity, which re ects the long-term pro tability of each customer focusing on customer retention, satisfaction, and lifetime value; and customer engagement, the emotional connection customers feel towards a brand, product, or service beyond satisfaction that fosters loyalty To be successful in marketing we have to perceive as realistic all the marketing decision that we make: everything interacts and is integrated with everything, every decision has to serve the same goal. To do this we have to manage the relationships inside the team: getting along with the teams is one of the most di cult aspects of markstrat simulation, the relationship management. In the simulation all things are connected: if you invest 15% more in communication you may expect as a result a 5% market share but if the amount of budget that we allocated in distribution is the same as the previous round, none is going to sell our product. This is called “lost sales” or “lost demand” in the simulation: people that want our product but, because of one or more gaps, they are not buying it 2. Integrated marketing, ensuring that all your marketing e orts work together as one, delivering a consistent and uni ed message to your audience across di erent channels. The main elements are: Integrated Marketing Communication, when a business uses di erent types of marketing and advertising but makes sure that they all send the same message Multichannel & Omnichannel to create brand equity: when a company uses many di erent platforms to reach customers and all these channels are seamlessly connected 3. Internal marketing is about making sure that employees inside the company are aligned with the business goals. To do this: Integrate customer expectations into organizational processes: making sure the company’s internal processes are designed to meet what customers want and expect Hire, train and motivate capable employees Demand management (= aligning the supply of products or services with customer demand to avoid shortages or overproduction), resource management (=using company resources e ciently), business system management (=making sure all internal processes work together seamlessly to support customer satisfaction) 4. Performance marketing is about focusing on marketing strategies that are directly tied to measurable results, the goal is to ensure that every marketing e ort delivers a clear outcome and can be tracked. Main elements: Realization as an element of di erentiation (strategy is nothing without execution): having a good strategy is important, but it only matters if it’s executed well Measures as a prerequisite for implementation (marketing metrics): To know if your marketing e orts are working, you need metrics In markstrat we will have all the metrics that we need as long as we buy them. We have the chance to decide the kind of metric that we need and buy it. When playing the simulation we have to create value and deliver for customers but, to do this we have to: 3  ffi ff fi ffi fi ff ff ff ff ff fl ff  1. Understand the value proposition through the use of data: customer funnel, market forecast to see the size of segments 2. Determine the value proposition: budget, customer segments to target considering which one could be most pro table for me (the segment with less competition, higher pro t margins) 3. Develop the value proposition for our target changing our product characteristics or even create a new product from scratch according to the target selected, their needs and wants. We then have to deal with the price, set the price for the product created according to the idea and production costs, the research and development implied (in the simulation there is an option that provides the estimation of the costs for each product) 4. Deliver and communicate the value proposition: distribution and communication decisions. In order to be successful in today's hypercompetitive economic environment a company needs to carefully design a marketing strategy that creates and delivers value to its customers. So, the starting point it is the marketing strategy: our ultimate objective is to create value (=perceived bene ts - perceived costs). The value is subjective so value means di erent things in the di erent segments: for the more price elastic segments the value is the cheapest product in the market, for the less price elastic customers value is quality, the operation system and only then price. So, when playing the simulation: 1. Strategy is the rst step 2. Marketing planning in round by round execution 3. Operational planning, our daily activities Starting from the rst step of de ning the strategy (strategic planning) 1. De ne the mission statement: brief description of aims and values of the company, what you wanna be. Taking the example of the mission statement of Amazon “Our vision is to be earth's most customer centric company; to build a place where people can come to nd and discover anything they might want to buy online.” In the rst years of existence they just sold books but in this mission statements books are not mentioned, they consider everything as they knew they started with books to achieve all the other selling categories. In order to be a market leader we have to start being a leader in a lower market and then investing money in the other markets. To de ne the mission statement we have to answer 4 questions - What is your main business activity? - Who is your client? - How will your business look like in 10 years? - What does your client want? The mission statement has to include - Role and contribution (pro t, service opportunity): what the company does and how it contributes to its customers or society - Business de nition (provided bene ts, satis ed needs): what the business o ers and how it meets customer needs - Distinctive competency: highlight what makes the business unique and better than competitors - Indications for the future (what will you do, what could you do or what should you do) In designing the mission statements we have to focus on the most important elements, only on a limited numbers of objectives as in the markstrat simulation we cannot grow to in nity, unlike in the real world. Our starting budget in markstrat will be 7/8 millions and, no matter how bad we do in the simulation, we cannot bankrupt. No matter how bad we perform, in each decision period 4  fi fi fi fi fi fi fi fi fi fi fi fi fi ff fi ff fi ff  we will have 6/5 millions, we cannot go lower; on the other hand, no matter how good we perform we couldn’t exceed the maximum budget of around 24 million. So we start with 8, the minimum is 5 the maximum is 24: we cannot grow to in nity in the simulation. As we cannot grow to in nity we have to strictly de ne the corporate business principles, the customers: we cannot sell to everybody. In the simulation we have 8 customer segments: 5 in the initial market and 3 in the new market, we start with 2 products and by the end of the simulation, given the budget constraint, conception etc, the optimal number of products to have are 3/4 as it is di cult to successfully manage more than 4 products and target more than 4 customer segments, we don't have the budget to do so. At some point of the simulation, after decision round number 3, we can ask for a loan to the bank up to 15 million, we can ask for the 15 millions all at once or deferred in the future rounds. Then we have to return the money with the interest rate. We have to decide when to use it and how to use it and this is what makes the di erence: it is impossible to win the simulation without consuming the entire amount of the loan. So, the mission statement should: 1. Focus on limited number of objectives 2. De ne strictly the corporate business principles and values 3. De ne primary customers, markets and its geographical region of operations 4. Present a long-term plan for your business 5. Keep it short, meaningful and easy to remember 2. SWOT analysis: analyze strengths and weaknesses which are part of our company environment, and opportunity and threats, part of the external environment 3. Set objectives: they have to be SMART: speci c, measurable, achievable, realistic and time- bound 4. De ne strategic business units, that in the simulation are the products (for example P&G have di erent categories of products as cleaning ones, ice cream products etc). SBUs (Strategic Business Units) are characterized by: - One single stream of activity or di erent streams that are connected (ex: a company could have an SBU for its clothing line or an SBU that handles both clothing and accessories) - Internally build competitive system and practices - Managed by responsible and experienced leaders: each SBU is led by its own experienced management team In the markstrat simulation we don't have brand management but just product management. So our strategic business units will be our products. Our budget will always be limited and we will always be short on budget, for this reason it is important to strategically divide this budget among our di erent products and, to do this, we use the Boston consulting group matrix. The two variables used in the matrix are the market share and the business growth rate, data that are available in the simulation. We will place our products in the 4 positions: - Stars: High growth, high market share. These are leading products with strong performance and potential for more growth - Dogs: Low growth, low market share. These products are struggling and typically don’t generate much pro t. We can eliminate them from our portfolio (but just starting from round 3) - Question marks: High growth, low market share. These products have potential but need investment to increase their market share. These are products that we don’t know whether they will grow or become dogs so we have to be selective - Cash cows: Low growth, high market share. These products are well-established and generate steady revenue with little need for investment. These are products where initially there is a lot of volume but very little margine because there is a lot of demand. 5  ff fi fi ffi fi ff fi ff ff fi fi fi fi  It is less likely to win the simulation if you bet on cash cows, we have to bet on stars. Cash cows in the beginning are our safe point but to then win the competition stars and question marks are better. If we need an alternative to the Boston consulting matrix, whether we need to account for more than just the market share we can use the McKinsey matrix, a strategy tool that o ers a systematic approach for the multi business corporation to prioritize its investments among its business units. It di ers from the Boston consulting matrix: it is more complex as we have more variations in data, 9 possibile outcomes and not just 4; furthermore marketshare, in the BCG matrix, is a unidimensional concern, meaning it has one dimension, while in the McKinsey one we use the industry attractiveness variable that is measured considering the potential marketshare, the pro t, its size, competitors and so more other factors. We can decide which factor of the industry attractiveness to include in the analysis, its subjective. In the table we see the factors of the industry attractiveness consided by the professor in his hypothetical analysis (we can also choose di erent ones if we want). BU1 BU2 etc are the products and we have to choose the amount of money to assign to each considering the factors of industry attractiveness. We consider the weight: how important is each factor for our sales. All these data related to the factors of the industry attractiveness can be found in the makstrat situation, just buying them. Then we use a 5 point Likert scale and assign a number to each product for each factor. Once de ned all the data, we multiply the weight for each number of the Likert scale and sum them up for each product (example for BU1: 0.35*2 + 0.25*3+ 0.2*4 + 0.15*2+0.05*1)and get the total score. Then we report these scores on the McKinsey table to de ne whether we have to invest or disinvest on each product. 5. Develop growth strategies. There are di erent ways to grow: - Vertically: company buys a company that performs another function within the supply chain in order to achieve improved e ciencies. Advantages provided are: more e ciency, more control and eliminate pro t centers. This is not something you can do in markstrat, only in real life - Horizontally: company buys another company in the same business in order to increase market share, the direct competitor. Advantages provided are: economy of scale can be reached, we can expand share and decrease the level of competition. Also this cannot be done in markstrat: we cannot buy other companies. - Intensive growth: this can be done in markstrat. There are two dimensions that we have to account for: - Market: existing market and new market (where we cannot access until decision round 3 and that should be created from scratch as there is are customers, competitors or anything in it) - Product: in the simulation we will start with 2 products and then, starting from round 3, we can start modifying the existing product or create new ones. So in the rst two rounds we can just grow with market penetration, as we can only consider the existing market and use the existing products (ex: a co ee shop o ering discounts to get 6  ff fi fi fi ff ffi ff ff fi ff ff fi ffi  more people to buy their co ee). How can we penetrate the market? Lowering the price, increasing the awareness through communication, investing in new distribution channels etc. Product development implies creating new products for existing markets (ex: a phone company launching a new model with advanced features.) Market development implies entering new markets with existing products (ex: a clothing brand expanding into a new country) Diversi cation: entering new markets and developing new products (ex: a car manufacturer starting a new line of electric bikes) Marketing plan is the round to round execution of the strategy. A marketing plan is a comprehensive document or blueprint that outlines a business advertising and marketing e orts for the coming year. It describes business activities involved in accomplishing speci c marketing objectives within a set time frame. Strategy and marketing plan are the two tools we will be working with. On a strategic level we do the SWOT, de ne the target market and shape the value proposition. Thats our strategy. On the other hand, on a tactical level we consider our marketing mix, that we have to adjust round by round (change price, the investments in the distribution channels etc according to what our competitors are doing). The marketing plan is the main tool for managing, coordinating, and controlling all marketing activities. Marketing planning is a 4 step process: 1. Perform a situation analysis and the marketing audit: a marketing audit is a systematic and periodic examination of a company marketing planning. It is designed to evaluate marketing assets and activities in the context of market conditions, and use the resulting analysis to aid the rm in planning. During the simulation lectures, the professor will close the decision round and give us the results of that round, we have then to analyze all these results making the situation analysis round by round. We have to analyze both internal audit (our company analysis) and external marketing audit (economic environment, market size, competitors, business growth). All these info are available in the simulation. How do we set the production plan, the number of units we decided to produce? The simulation allows for an automatic adjustment of the production. Lets assume that we plan to sell 500 000 units but there is a demand for 600 000 units, the situation allows the adjustments. The starting point in our analysis is the segment size (=the number of potential customers) as it changes round by round. If in the previous decision round the customer segment was 100 000 and we had 10% of these customers (10 000) and in the next decision round the customer segment increased to 150 000 and we still have 10% of market share then we have to produce 5 000 units more as the customer segment has grown. We then have to look at our price and the ones of competitors and do the map. Market potential is the maximum (ideal) level that the market demand can reach in a given period of time and in a given spatial context, under the hypothesis that all cumulated marketing investments (i.e., those of all companies operating in that industry) are at their highest possible level. In the simulation there is 1:1 relationship between a customer and a product unit (one customer means one unit per period). 7  fi fi fi ff fi ff  Considering as a product the toothpaste, it has not a 1:1 relationship as you can use it even for one or two month, depending on the customers’ habits. Considering: - N= 220.000.000 - P= 90% (only over 5 years old) - F= twice per day x 365 days - D= grams per usage occasion/total grams in a pack = 3/150 What is the market potential in terms of toothpast packs that can be sold in a year? Potential gap analysis The simulation provides us data about the number composition of each customer segment in each speci c period of the simulation. We can also buy the market forecast that de nes the estimation for the next period number of customers. The composition of each segment also changes according to our investments as the ones that create the demand are our teams, we generate the demand. The forecast is made considering the demographics. The full market potential is the best scenario, the hypothetical scenario of the number of customers that we can expect in the next decision period but it is almost never reached because of some gaps: - Second-order causes: product, distribution, price and communication gaps. Imagine that we created the perfect product for our customers, considering all their needs and investing a lot in communication so the awareness is high and the price is optimal for customers. This means that, if there is no competition, the whole market should be our but it is important to invest enough also in distribution otherwise people won’t be able to buy those products. So the rst gap is the distribution. Another second order cause can be price: the product is good with all the characteristics needed, communication and distribution are ok but the price can be too high or even too low (if Apple sells the new iPhone 16 for 500$ I will think that is shitty as generally it costs a lot) - First order causes: non-usage gap (caused by people who have never used the product or those who stopped using it (dropouts) and light-users gap (comes from customers who use the product infrequently or in small amounts) 2. Set marketing objectives round by round. The objective must be SMART (speci c, measurable achievable, realistic, time-bounded) 3. Make hypothesis about the market and competitors moves considering all the data available in the simulation also about previous rounds moves of the other teams (ex: why our competitor team asked for the loan, what will they do with these money and we start to make hypothesis considering their products, their communication strategy etc). Certain key factors that a ect the success of company have to be formulated as an assumptions before initiating the next phase in the marketing planning process. The number of hypothesis needs to be limited to just a few; if the hypothesis have no relevance for the marketing plan, than they can be excluded. Example hypothesis: «In relation to the competitive market environment, it can be assumed that: the industrial production will increase from 105% to 115% as a result of the installation of new manufacturing plant; as a result of the erce competition the prices will go down with 10%; before the end of the second quarter our main competitor will introduce a new product in market X 4. Develop marketing strategies. Starting from our strategy we have to think about what we wanna be, whether we wanna be the cost leader keeping costs low, whether we want to have the best products in the market focusing on di erentiation or whether we want to be always di erent in each round. To do this we have to: 1. Identify target market(s) 2. Adjust marketing mix for each target market 1. Product strategies - branding, packaging 2. Pricing strategies - based on cost/demand/competition 8  ff fi fi ff fi ff fi fi  3. Promotional strategies - advertising, promotion, PR 4. Distribution strategies – when, how, where The porter strategies are four main strategies businesses use to achieve a competitive advantage based on cost and di erentiation. - Cost leadership: a company tries to become the lowest-cost producer in a broad market, o ering products at a lower price than competitors (low cost, broad market) - Di erentiation: a company o ers unique products that are di erent from competitors' in ways that customers value, allowing it to charge a premium (unique products, broad market) - Cost focus: the company focuses on a narrow market segment and aims to be the lowest-cost producer for that speci c group (low cost, narrow market) - Di erentiation focus: a company targets a niche market and o ers products that are highly di erentiated, catering to the speci c needs of that segment (unique products, narrow market) 5. Implement and control the marketing plan 1. We need a metric for everything, so, rst of all, we have to measure the actual performance using the return on marketing investment (ROMI): revenue generated by investment in a given marketing program divided by the cost of the program at a given level of risk (ex: Revenue from Marketing Investment = $150,000; Cost of marketing program = $30,000, then ROMI = 5 (150 000/30 000)) Since metrics are so important, we also have to forecast the expected results. In the simulation we can do feasibility studies (TELOS): - Technological feasibility: assesses if the technology or equipment required for the project is available and whether the team has the technical skills to execute it. - Economical feasibility: looks at the costs vs. bene ts, ensuring the project is nancially sustainable or pro table - Legal Feasibility: examines whether the project complies with laws and regulations, like licensing, patents, or contracts - Organizational Feasibility: evaluates if the business has the right team, structure, and resources in place to manage the project successfully - Scheduling feasibility: determines if the project can be completed within a realistic timeframe, considering deadlines and resources availability TELOS helps ensure that a project is technically, economically, legally, and organizationally feasible, and that it can be completed on time Another option is to do some focus groups and re ect within the team In real situation we can also use neuromareting but this cannot be done in the simulation. Then, with all the actual data and the estimation of the expected results we have to: 2. Compare performance and expectations to established objectives also considering previous rounds (let’s suppose that we had the objective to increase awareness for 20%, so we compare the awareness of the previous and current round to de ne whether we achieved the goal) 3. Whether results haven’t been reached, we have to make adjustments to objectives or strategies based on this analysis 6. Budget An overall budget must be set for the starting 3 years of the strategic marketing plan and one more detailed budged for the rst year, to include in the strategic plan for the rst year It is suggested to use the zero-based budgeting: we don't have to consider the budget used in the previous round, we set the budget round by round based on our short term market plan 9  ff ff ff fi ff fi ff ff fi fi fl fi ff fi ff fi fi fi  objectives. It is a budgeting method where every expense must be justi ed from scratch for each new period, instead of relying on past budgets. It starts with a "zero base", and all activities in the organization are reviewed to determine their needs and costs. Obstacles to the integration of the marketing plan: 1. U n s u c i e n t s u p p o r t b y t h e m a r k e t i n g department and the top management 2. Lack of plan for the marketing planning 3. Lack of support from the management due to absence of competence; scarceness of information and resources; inadequacy of the organizational structure and hostile behavior 4. Indications of goals and strategies in numbers 5. Too many details 6. Marketing planning is being perceived as a routine 7. Detachment between operative and strategic planning 8. Lack of integration between the marketing and corporate planning 9. Delegation of the marketing planning to external parts LEZIONE 19/09 RECAP We said that, even before starting playing the simulation, the rst thing that we have to do is de ne the business plan, that is composed of 3 sub-dimensions: - Strategic planning, the long-term planning - Marketing planning, the one that should be done round by round - Operational planning, the day to day activities On the strategic level, we have to: - De ne the mission statement - Analyze the internal and external environment - Set the objectives, that must to be SMART (speci c, measurable, achievable, realistic and time bounded). Once we set the objective, we need to nd a metric to assess whether we are able to achieve that objective within the given timeframe or not. If we are talking about short term goals, they must be achieved within the following decision round; if it is a long term objective, then based on the long term planning, it is something that we will have to achieve within the decision round 5/7. In the simulation we will not manage brands but products, the one we have in the portfolio. So we have to arrange our budget among the di erent products and, to do this, we can use two di erent methods: - Boston Consulting Group matrix, a very simple intuitive tool that considers the market share and the business growth rate - McKinsey matrix, a more complex and sophisticate method that allows to include more than one factor in each dimension (we saw the example of industry attractiveness) We also discussed about the growing strategies and stated that the only one we can use in the simulation is the intensive growth, vertical and horizontal integration cannot be performed in the simulation. Considering the intensive growth, in the rst two decision rounds we could go only for the market penetration growth as we cannot modify products or enter new markets while, starting from the third decision round, when we can start modifying our products, we would be able to manage market development, product development or di erentiation. We stated that the main di erence between the marketing plan and te strategic plan is the time frame: marketing plan is a round by round planning and in it we consider and manage the marketing mix, all decisions related to promotion, placement, pricing strategies and products management. So these are decisions we have to make on a marketing plan level. Furthermore, we 10  fi fi ffi fi ff ff fi fi fi ff fi ff  stated that marketing planning is a 4 step process. The rst step consists in performing the situation analysis, something that should be done on a round by round basis as at the end of each decision round we have to see and analyze the results from the previous round to de ne what wasn’t done well, things that need to be improved. The situation analysis must be conducted rst internally (decisions that we made, company’s performance) and then externally (considering what the other teams did, changes in price, chances in their products or if they asked for a lone) Production planning is really di cult to get, for this reason the simulation allows for automatic adjustments of around 20% up or down the production plan. So if you need more units of product, the simulation can increase the production by 20%; if you anticipate a given demand but then you realize that the demand for your product is lower, then the simulation will adjust the situation up to 20%. We also talked about the potential gap: performing market forecasts we will be able to de ne the maximum number of potential customers in the segment during the following decision period. However it might happen that the number is not reached because our team or some of our competitors were not e cient with the marketing investments. So, the size of each customer segment and the size of the market, depends on the quality of the marketing investments of both our team and of the teams that compete with us. The better we are and the more we invest in marketing, the higher will be the demand. As we said, in the marketing plan level, we have to set goals that are speci c and measurable. We start by setting long term objectives then, to achieve them, we have to de ne smaller goals on a round by round basis. When analyzing our performance and taking decisions, we have to take into account also the decisions of our competitors. In the simulation we will have access to all the information that we need (some of them will be directly given, others need to be calculated) except those about our competitors future moves and decisions; for this reason it is really important to make hypothesis based on the data that we have, imagining our self in their position and thinking about what we would do if we had their performance, marketshare, price levels etc. So we have to develop marketing strategies on a round by round basis, being sure that we use the right metrics that will allow us to compare our expectations to the actual outcome of the decision. Example: I expected to increase x by y% and I ended up increasing x (market share for example) by z. What’s the reason for it? So we have to analyze and make adjustments. In terms of budgeting, we understood that it is suggested to state the budget on a round by round basis using the so called zero-based budget: we don’t have to look at the budget of the previous round, we just have to consider the objectives that we want to achieve during the following period and allocate the budget according to it. Analyzing data This is one of the most important thing that we will be doing during the simulation. As we said, every decision we will make (from the development of the objective to the de nition of the customer segment, to the targeting or the positioning of our products) must be based just on data. Actually the rst thing that we have to do when opening the simulation is looking at the available data and try to make sense of them, transforming data into actionable insights on which we will base our decisions. In real world, marketers use the so called marketing information system that consists of people, equipment, and procedures to gather, sort, analyze, evaluate, and distribute needed, timely, and accurate information to marketing decisions makers. It receives information from 4 main sources: 1. Acquired base: a collection of data that the company obtains from external source 2. Company records or internal data: this is the type of info that in the simulation we will get for free in every decision round. These are the info that we collect on a round by round basis thanks to the marketing department of our company. In real life these type of information are collected through the order-to-payment cycle: for example, when customers make an order or a payment using loyalty cards, VIP cards, discount cards or whenever they do something in 11  fi ffi ffi fi fi fi fi fi fi fi  the physical store and they are asked to provide their personal information to create their own card and get some discounts. Another way of collecting these type of information is online with the Sales Information System through the use of cookies for example: companies collect information about all the clicks you make or the informations that you require, when you get a free trial. All these information are collected and then analyzed by companies 3. Marketing intelligence: most of these information will be available for us in exchange for a payment. The main di erence between the marketing intelligence and the company records is that the latter gives us information also about the past (results data): what our target audience did in the previous round, how much they bough, their preferences, values and expectations. Marketing intelligence, on the other hand, gives us insights about the future (happenings data), how big the customer segment will be in the next decision rounds, customers preferences in the future decision rounds, where our competitors will be. So marketing intelligence will make a forecast about customers, competitors and the development of the market using di erent type of sources: Books, newspapers, and trade publications Talking to customers, suppliers, distributors Monitoring social media and internet Marketing intelligence actions (=key actions businesses take to collect marketing intelligence): - Train and motivate the sales force to spot and report new developments: our salesforce will be a very valuable source of information so we have to de ne the size of the salesforce for each distribution channel and how much money to give them, money that can be used to push products inside the retail space or to improve their sales skills in order to sell better and more. Salespeople are in direct contact with customers and the market, so training them to observe and report changes (like new competitor products or customer preferences) can provide valuable insights - Motivate intermediaries (like distributors or retailers) to pass along intelligence, meaning to share feedback or trends they observe helps the company stay informed - We can invest money also in order to hire external experts to collect intelligence, data and insights on speci c markets or competitors that the company doesn’t have the resources to collect in-house - Set up customer advisory panel, it is a panel of loyal customers in which they provide us information about their ideal values and how their expectations will evolve in future. - Take advantage of government-related data resources: economic, demographic, and industry data to analyze trends and understand market conditions - Purchase information from outside research rms - Collecting Marketing Intelligence on the web through the use of Customer Review Forums, which are websites where customers leave reviews that represent a source of customer feedback Examples of these type of information that we can buy from markstrat: brand awareness for each brand, purchase intention of each products, shopping habits, semantic skills, media reporting, marking forecast, multidimensional scaling, BCG matrix. The market intelligence that we can get for free is made up of market and competitive news 4. Market research: the systematic design, collection, analysis, and reporting of data and ndings relevant to a speci c marketing situation facing the company. How it works? Generally we have 3 dimensions: qualitative, quantitative and the cause-e ect dimension. - We start developing the research design with the use of qualitative interviews (exploratory) that helps us understand better the research phenomenon and the business problem we are dealing with. Some of the most common used qualitative research methods are in-depth interviews, focus groups, lettering techniques, meta analysis. Considering focus groups, they have the advantage to stimulate social interaction, provide major exibility induced by the social in uence, they are fast and low cost but, on the other hand, focus groups are less e ective for some target groups, reduce control and are characterized by logistic complexity. 12 fi  fl fi ff fi ff fl fi fi ff ff  The nal output that we get from every qualitative research method that we decide to use is a network of associations: for example, if the professor asks us what we expect form luxury cars, we might answer comfort, exclusivity, performance and these answers are all associations that customers make with luxury cars that de ne the network of associations. The consensus map is a visual tool used in group decision- making and analysis to represent the collective agreement (or disagreement) of participants on various topics or issues. It helps illustrate areas where there is consensus (agreement) and where there might be divergence or uncertainty within a group. - The next step is to understand how well or bad we are positioned based on these words and, to do so, we need a quantitative research, the systematic empirical investigation of observable phenomena visa statistical, mathematical, or computational techniques. We need to quantify the results that we obtained in the network of associations, meaning that we have to transform that results in numerical form (percentages, statistics). To do so, we have to use a survey. In the survey we will ask, for example: “on a scale from 1 to 7, how exclusive is my car?” “on a scale from 1 to 7, how reliable is my car?”. So we will de ne the questions based on the qualitative research analysis: for each word of the network of associations we ask the same question, not only considering our brand but also our competitors (=“on a scale from 1 to 7, how reliable is my Ford’s car?”). We will then submit the survey to the highest possible number of customers that will answer providing numbers for each association and each brand: in this way we will de ne our positioning also in relation to our competitors. This is the method we will use in every round of the situation to make decisions about our products, investments in communication etc. - Then we have also the positioning of our target audience, of the di erent customer segments. Suppose that in the simulation we initially have 5 customers segments and then later on other 3 customer segments, in total we will have 8 customer segments and to nd the positioning of each one of these segments we ask “On a scale from 1 to 7, SegmentX, how important is for you the reliability/exclusivity?”. We ask the same question to each segment and for each element of the network of associations; customers of the segment will then answer providing a number, called ideal value, that will allow us to position each segment. So, how will we be using the positioning map during the simulation? In two ways 1. The rst way in order to measure the gap, namely the distance between our current position and the ideal values of our target audience in order to understand the gap I have to close to perfectly match the target segment. In this way we can understand which changes to make in order to be as close as possible to the target, considering that the position of each segment will change during each decision round according to the actions and investments of our team and of the competitors 2. The other way of using the map is to spot opportunities: an opportunity is a customer segment that currently is not well targeted by the other companies on the market, that is available as nobody wants it so, why not create a product to target this customer segment? (Remember to check rst whether it will be pro table) In the markstrat simulation we look at this map from 2 di erent perspectives. - Form the company perspective: it focuses on products characteristics that customers perceive, perceptions that are subjective and depend on how customers see products. Exclusivity an reliability are perceptions, not product characteristics as it is a subjective concept (for someone exclusivity might mean high quality, for others scarcity). - From the product perspective: focuses on physical features of the product, size, materials of products. A brand map provides on the axis the brand characteristics 13  fi fi fi fi fi fi ff fi fi ff  The perceptual map is how consumers perceive characteristics In the simulation there is no one-to-one relationship between the quality, the characteristics of the product and the way customers perceive it: let’s suppose that we create a product that has 5 in terms of design, but customers might perceive this either as a four, so lower than it is in reality, or 6, so higher. So reality might be different from perception and we must manage perceptions with the elements of the marketing mix: distribution, communication or pricing strategies. Sometimes the perfect match can occur: a certain characteristic is 5 out of 7 and customers perceive it exactly as 5 out of 7. These differences can be seen when comparing the maps: - Brand map: shows the way you are positioned based on your tangible and real characteristics - Perceptual map: shows how you are positioned based on the way customers perceive your characteristics There is a great difference between the actual characteristics and the perception. Perception is the key thing we will be working with: even if we create the best product in the market, customers might perceive that our competitors supply a better product and this because they did a better job in managing perceptions using communication, distribution or pricing data. Sometimes offering a product at a lower price than how much customers expect to pay for that product can damage their perceptions: imagine that we create a high quality laptop and we price it 1200$ instead of 15000$, that is the expected price of customers for a high-quality laptop, customers perceptions may be shaped by this price thinking that there is something wrong with it. We have to play with perceptions. For example, if at some point you decide to withdraw a product from the market because you decide that this product is not worthing investments anymore, you can play with perceptions and lie to customers in order to allure them to try your product. Once that they then understand that you lied, for example, on the quality of your product stating that is 5 while in reality is 4, they might decide to not buy it anymore in future, but at that point you won’t care about it anymore as you are going to withdraw that product from the market. In other scenarios we have to be consistent with our promises: if you promise 6, make sure that you deliver 6. If you want to cheat, you need just one round, but if you want to build a loyalty with your customers, then you need more time. Once that you start building loyalty, your marketshare will grow slowly but, on the other hand, loyal customers have higher switching costs (meaning that they won’t easily shift to another brand). Furthermore we have to consider that the positive/negative performance of one product won’t a ect, directly or indirectly, the performance of the other products. Products are not connected to each other in terms of performance of the brand, so we can lie about one product without having fear to attach the others; there might be a negative e ect on the company performance but not on the other products. Choosing the right customers is another important thing we will have to deal with in the simulation at some point. If we work smart enough, we will see on data that the 20% of our customers will generate the 80% of our revenues. It’s called the Pareto Principle: 20% of our e orts will generate 80% of our results and this segment must be identi ed for any given period (cause we know that customer segments characteristics change over time). At some point we have to identify the 20% of our customers that generate the bulk of our pro ts and we have to make sure to keep them loyal as attracting and getting new customers costs 5 times more than keeping our customers loyal. This because usually the conversion rate is very low: once that we generate awareness, that requires a lot of investments, just a small fraction of people who know the brand will then convert and take actions. Customer Perceived Value is the di erence between the prospective customer’s evaluation of all the bene ts and all the costs of an o ering and the perceived alternatives. Targeting, acquiring and retaining “right” customers is at core of many successful service rms. Objective is to build 14  ff fi ff ff ff fi fi ff fi  relationships and to develop loyal customers who will contribute to the growing volume of rm’s business in future. Customer loyalty extends beyond purchasing behavior, and includes preferences, liking and future intentions. As we can see from the graph, the highest revenue driver is customer retention, meaning keeping happy your loyal customers. The probability of selling to an existing customer is 70% while the probability of selling to a new prospect, is between 5% and 20%: for this reason it is important to keep our customers, because they can generate us extra money that come from lower expenditure in advertisement as we don’t have to build awareness. If the purchase intention is 50%, then keep your awareness around 60% so you don’t have invest that much in advertising and use this money for other marketing initiatives. To loyal customers we can also ask a higher price, we can increase our margins with them: we have to be sure that we squeeze our loyal customers as much as possible during the last rounds of the simulation: we can increase the price of 1/2$ after having them loyal for 6 rounds in order to increase net pro ts. An increase of the price of a product by 1% will translate in an increase of the net pro ts by 12%. So, how to build long term relationship with customers to get all these advantages? First of all we have to be able to capture all the informations available about them to identify the 20% of customers that will generate the 80% of our pro ts, the segment we can satisfy the best with out current characteristics. In the rst 2 decision rounds we won’t be able to modify the characteristics of the two products that we have at the beginning of the simulation, meaning that we won’t be perfectly positioned in a single segment, we will be positioned between more segments. For this reason, it is important to identify from the beginning the segment that we think is the most promising for us and start adjusting the things that we can adjust (price, distribution and awareness) according to them waiting for the third round in which we will be able to change also the product characteristics. We have to di erentiate among the customers and choose as we won’t be able to target all of them because of time and budget constraints. Customer relationship management (CRM) - Allows rms to perform one-to-one marketing, meaning personalizing their marketing e orts for each customer - It is a process by which rms enact their customer orientation, making the company more customer-centered - CRM collects information at each customer touchpoint - Customer prioritization: it helps companies identify and prioritize their most pro table or important customers - Customers are nancial assets: in CRM, customers are seen as nancial assets because their loyalty and spending power can signi cantly impact the company's nancial success To perform a one-to-one marketing, we have to follow several steps: 1. Identify customers and get to know them in as much detail as possible 2. Di erentiate among these customers in terms of both their needs and their value to the company 3. Interact with customers and nd ways to improve cost e ciency and the e ectiveness of the interaction 4. Customize some aspect of goods or services o ered to each customer. Example of Starbucks: Starbucks is the most customer centric company in the world as everything that we see in store comes from customers, starting from the name on the co ee cup, the barista that repeats the order and the music inside the store. We have to give the right tools to customers so that they can express and share their ideas, they can interact with you. This is how Starbucks does: in their website you can submit an idea and when one of the ideas provided form customers reaches a certain level of approval, the brand implements it. 15  ff fi fi ff fi fi fi fi fi fi fi ff ffi fi fi fi ff fi ff ff  In order to choose a customer segment, or more, to focus on we have to perform a customer value analysis, done to reveal the company’s strenghts and and weaknesses relative to those of various competitors. If I choose a segment at the beginning I can’t stick with the same segment until the end of the simulation as each segment changes with time, maybe in the rst ve decision rounds it make sense to invest in that target segment but then, starting from round 6, it makes sense to withdraw that market and start targeting another customer segment because of better performance forecasts. The customer value analysis might help to do this. Customer value analysis is so important as pro ts do not necessarily increase with time for all customer segments, especially when we are dealing with price sensitive customers where the margin and pro tability will decrease with time as companies generally enter in that type markets with price wars. In those cases, at some point, you will reach the minimum production cost for your product, a level that you cannot produce it any cheaper, and margins will be very low. We cannot assume that loyal customers are always the most pro table ones as for some customers building loyalty costs too much money: maybe when this time comes it is smarter to move to another customer segment. So, calculating customer lifetime value is an inexact science that is subject to a variety of assumptions: Pro t impact of a customer may vary dramatically depending on the stage of service product lifecycle Cannot assume loyal customers are always more pro table than those who make one-time transactions Pro ts do not necessarily increase with time for all types of customers. Marketing is the art of attracting and keeping pro table customers. Yet every company loses money on some of its customers. The image presents a matrix comparing di erent products (P1 to P4) and di erent customers (C1 to C3). Each product-customer combination is assessed for pro tability, marked by symbols (pluses and minuses), and linked to overall product and customer classi cations. - P are various products o ered by the company: P1: Highly pro table, P2: Pro table, P3: Unpro table, P4: Highly unpro table - C represent di erent types of customers: C1: High-pro t customer (brings the most value, C2: Mixed-bag customer (some pro table and some unpro table transactions), C3: Losing customer (overall unpro table for the company) - Each intersection of a product and customer has a "+" or "-" to show if that product-customer relationship is pro table (+) or not (-) The customer pro tability analysis can be used to see, among all the customers that we target, at every moment, which are the most pro table ones currently and which one will be more pro table in each of the next rounds. There is very simple formula that we can use to compare customer lifetime (we don’t have necessarily to use it as a too complex analysis might get us distant from competitors) Big Data describes the exponential growth of structured and unstructured data: - Internet data can be hard to analyze using traditional approaches - Internet of Things (IoT) – describes how everyday objects (e.g., cars and refrigerators) are connected to the Internet, these are objects able to communicate information throughout an interconnected system Big Data provide competitive advantage: - Identify new opportunities through analytics for a better ROI on marketing e orts - Turning insights gained into products and services that are better aligned with the desires of customers 16  fi fi fi fi fi fi fi ff fi fi fi fi ff ff fi fi ff fi fi fi fi fi fi fi ff fi fi fi  - Delivering communication on products and services to the marketplace more e ciently and e ectively Structured data are highly organized and stored in a de ned format, they are easy to process since they are well structured. Examples are date, time, census data, Facebook likes Unstructured data don’t follow a pre-de ned model or structure, they are often messy and come in formats that are harder to categorize. For this reason, special tools, like AI or machine learning, are often needed to analyze them as they don’t t neatly into a database. Examples are body of emails, tweets, Facebook status, video transcripts. In the world of Big Data, massive amounts of information are collected and stored, often measured in terabytes. Data mining is the process where analysts dig through this enormous amount of data to nd meaningful patterns that can help companies understand customer behaviors, trends, or predict future actions. Data mining uses sophisticated statistical and mathematical techniques such as cluster analysis, predictive modeling, neural networking to extract from mass of data useful information about individuals, trends, and segments These data need to be used to: - Acquire new customers and understand how to do it - Customer retention and loyalty: identify big-spending customers and target them with special o ers (e.g. customize their customer journey or loyalty programs) Example of a two-star Michelin restaurant Oriole based in New York: when you call for a reservation, you have to call at least a couple of weeks or even moths in advance. In order to book a table you are generally asked to provide your name and phone number, email but also the credit card as, in the case you won’t show up, they subtract money from the card. These type of restaurants generally use the customers personal information to create them a pro le on the UpServe system that identi es whether you are a st-time customer or not. They use information form social media, cookies online, but they also have data of your card so they know on what you spend your money on. Thanks to all these informations that are in the UpServe system, the restaurant owner will be informed about everything regarding the customers (how they look like, if they eat gluten free, if they like sports) in order to provide them the best customer experience. This restaurant also o ers di erent types of menus based on the customer pro le: if you are a regular customer you will get a di erent menu from the rst-time customer, if you are vegan you will get a menu with only vegan option, if you don’t like chicken you will receive a menu with no chicken o ers on it. - Market basket analysis: a technique used by companies to analyze what products customers often buy together analyzing the buying patterns to provide targeted promotions - Customer abandonment: when a company decides to " re" a customer because they are costing more than they're worth because they make unreasonable demands, they are slow to pay, they don’t listen to you, they want everything for nothing they don’t respond to you So it is important to collect as many information as possibile about our target audience, study them and then make sure that we deliver to customers exactly what they expect. Marketing analytics is a group of technologies and processes that enable marketers to collect, measure, analyze and assess the e ectiveness of marketing e orts. An example is the A/B testing, an experiment where two versions (A and B) of something, like an ad, are shown to di erent groups of users to see which performs better. The goal is to identify which version leads to more favorable outcomes, like higher sales or clicks. The major marketing channels are: - Social media - Search engines - Short message service (SMS) - Digital ad networks - Email Comparing value of the digital marketing investments: 17  ff ff ff ff fi ff fi ff ff ff fi fi fi fi fi fi ff ffi fi fi  1. Google’s paid search ads: Cost-per-click (CPC), you pay only when someone clicks on your ad (it’s more expensive and requires interaction); Cost-per-impression (CPI), you pay based on how many people see your ad (impressions), even if they don’t click (it’s generally cheaper but less direct engagement) 2. Search Engine Optimization (SEO) focuses on improving your website’s ranking in organic (unpaid) search results. Digital marketing metrics: - Click-through rate: (N of click-throughs / N of impressions)*100 - Cost per order: advertising costs ($) / N of orders - Margin of sales: selling price per unit ($) – cost per unit ($) - Churn Rate: (N customers lost prior period / Total N customers prior period)*100 LEZIONE 20/09 Segmentation, targeting and positioning Target marketing strategy consists of three separated steps: 1. Segmentation: marketers rst divide the market into segments based on customer characteristics 2. Targeting: evaluate the segments and decide which to go after 3. Positioning: develop a market mix that will create a competitive advantage in the minds of the selected target market Segmentation is about dividing the market in di erent segments that should be homogeneous and based on one or more shared characteristics. Customers from the same segment should react in a similar way too your marketing mix. Furthermore, the di erence between the segments should be signi cant enough so it makes sense for the company to create a speci c marketing mix for each segment: each customer segment has di erent needs/preferences and can be targeted with tailor-made marketing mix strategies Which are the main bene ts of segmentation? - It allows to optimize the results to resources ratio, so it increases e ciency as, by targeting speci c customer groups, companies can focus their resources on the most relevant customers, leading to better results - It enhances the company’s ability to quickly adapt to changes in customer preference: the way customer perceive characteristics of the brand and product will change from one round to the other as it is a very dynamic environment - Allows for direct comparison with competitors - Stimulates proactive behaviors: it forces you as a marketer to be more accurate and precise in de ning and predicting customer needs, encouraging companies to anticipate what customers will want in the future So, generally speaking, we have two main approaches in segmenting the market: We will focus on the one in which we start from the individual characteristics of the target audience (demographic, geographic, psychographic or behavioral characteristics) in the creation of the customer segment. We describe these segments in terms of their needs, preferences, values and expectations. We create the segment based on one or more of the criteria of the map. Once we do that, either the already created segment, we start describing them. Let’s start with the rst segmentation criteria: Demographic - The most commonly used demographic segmentation criteria is the age: customers desires and preferences might change with time. Pampers, for example, targets the audience based on age: divides the market into prenatal, infants (up to 5 months), early childhood (6-12 months), rst steps (13-23 months) and preschool age (from 24 months upwards). 18  fi fi fi fi fi fi fi ff ff ff ffi fi  - Another demographical segmentation is based on the gender of customers (men and women). Even if it is becoming more and more blurred in recent years, it is still a common way of segmenting the market as, genetically and physiologically speaking, men and women are di erent (hormones, the mental procedures, the way in which they interact with the others and the environment, mental signs, genetic makeup). For example, women tend to be more community oriented, consider surroundings globally are more predisposed to touch a product without solicitation and relate to a product on more personal level Men, on the other hand, are more assertive and focused on certain goals, they focus on the part of the environment that can be useful in achieving their goals, they often need to be solicited to touch a product, and they tend to relate more on a product on an information-based level. Example: EasyScience was a retail company selling domestic appliances that was interested in increasing the number of sales. The insights that the company shared is that the 40% of their clients are men, that usually the probability that a customer, will be buying their products increases by 30% if he touches the product. The company also stated that women are more likely to touch products and, therefore, 30% more likely to buy the