Go To Market Strategies:

Week 9
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
2
o Motivation and Puzzles
o Inputs to the Pricing Decision
The floor and ceiling bound the Economic Value to the
Customer (EVC) metric
Note, however, that the 5Cs affect the final location of
the actual price between the floor and ceiling
o Getting Deeper into Customer Factors
Price sensitivity: Drivers and measurement
Psychological factors
o Takeaways
Overview
Motivation and Puzzles
4
The importance of this lever has driven a three-fold
increase in the number of pricing directors reporting
to C-level officers in the last 10 years
Potential Impact on Operating Profit
3.3%
7.8%
11.1%
2.3%
Fixed
Cost
Volume Variable
Costs
Price
Source: McKinsey study of over 2,400 companies
Motivation
5
o Trader Joes
Why does Trader Joes sell nationally-branded
water, e.g., Poland Spring, at very low prices?
o Catalog Company
Why are more shoes sold at $49 than at $44?
o Walmart
Why does Walmart sell Tide detergent for $4.73?
Pricing Puzzles
Four Inputs to Pricing
7
o Customers (most important, discussed last)
o Company
o Competitors
o Collaborators
o Context (not discussed)
5Cs and Pricing
8
o Financial Considerations
Target margin or internal rate of return (IRR)
o Consistency in the Product Line
Price of new Toyota Camry is influenced not only by
prices of Honda Accord or Ford Taurus, but also by
the prices of Toyota Corolla and Toyota Avalon
o Consistency in Image
Its difficult for Neiman Marcus to cut prices in
response to price competition
Company Issues
9
o Competitor Aggressiveness
The ability of the competitor to sustain a price-based
response, i.e., whether competitor has deep
pockets; propensity for irrational behavior
o Willingness to Respond on Price
Direct financial cost to the competitor
o Competitor Position
Market leaders are more likely to initiate; followers
are more likely to imitate
Competitor Issues
10
o Collaborator Incentives
How hard will the collaborator work to push your
product; what kind of pull support do they expect?
What other functions will perform, how much influence
do they have? (see Distribution session)
Also, its not just about marginsReturn on Assets
(ROA) also matters
ROA =
Assets
Profit
=
Sales
Profit
x
Assets
Sales
=
Margin x Rotation
Collaborator Issues
11
o Price Sensitivity
What drives it?
How can we measure it?
o Psychological Issues
Odd numbered endings (e.g., $3.99, $1,995, etc.)
Mental Accounting
Prospect Theory, including reference effects, loss
aversion, and diminishing sensitivity
Endowment Effect
Customer Issues
Go To Market Strategies:
Week 9 Module 2
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
2
o Ease of Comparison
Private label products, i.e., retailer brands used to be
placed in a separate section in the store; placing the
private label next to branded products increases the
ease of comparison and thereby increases price
sensitivity
o Expenditure
Large volume users tend to be more price sensitive
Buyers tend to be more price sensitive when the focal
component is a large part of total costs
Price Sensitivity Affected By
3
o Shared Expenses
A separation of between the user, e.g., an employee
and the payer, e.g., an employer can lessen price
sensitivity
o Price / Quality inferences
When quality differences exist between, but the user
cannot distinguish them e.g., in the case of complex
legal services, price sensitivity will be lessened
This is especially true when the seller uses branding
and other methods to signal quality
4
Conditions of Measurement
Variable
Measured
Natural Experimental
Actual Purchase
Preferences/
Intentions
Sales data
Field experiments
Laboratory experiments
Surveys Trade-off analysis
(conjoint)
Measuring Price Sensitivity
5
Everyday Price Level
70
80
90
100
110
120
-9% Control +9%
Change Index
(Post-Pre)
Unit Volume
Dollar Profit
Field Experiment
o 9 endings [e.g., $3.99, etc.] Some experiments
suggest that charging odd prices results in a
substantial effect
o Experiment: Effect of advertised price endings on
sales of margarine:
Regular price $0.83; Sales = 2817
Discount price $0.63;
Discount price $0.59;
6
(+406%)
(+194%)
Psychological Factors
Go To Market Strategies:
Week 9 Module 3
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
o Mr. A was given tickets to lotteries involving the
World Series. He won $50 in one lottery and $25 in
the other.
o Mr. B was given a ticket to a single, larger World
Series lottery. He won $75.
o A: 56 B: 16 No difference: 15
2
Mental Accounting: Whos Happier?
o Mr. A received a letter from the IRS saying that he
made a minor error on his tax return and owed $100.
He received a similar letter the same day from his state
income tax authority saying he owed $50. There were
no other repercussions from either mistake.
o Mr. B received a letter from the IRS saying that he
made a minor error on his tax return and owed $150.
There were no other repercussions from his mistake.
o A: 66 B: 14 No difference: 7
3
Mental Accounting: Whos Unhappier?
o Four Inputs to Pricing Process marginal cost,
willingness to pay, competitive pressures, distributor
margins
o Customer Price Sensitivity is a major input into pricing
decisions; it can be assessed through:
EVC to measure customer willingness to pay
Various statistical and marketing research methods, e.g.,
regression and conjoint analysis
Remember to Consider Human Psychology
4
Summary
Go To Market Strategies:
Distribution Strategies
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
2
o Channel structure (WHO is doing WHAT)
o Channel coordination (WHO gets compensation)
Overview
o Often the least appreciated element of the 4Ps
o Managers often underestimate its importance as a
Source of sustainable competitive advantage
Provider of increasing returns to scale
Source of customer value
Very costly element
Place: Final Frontier
Manufacturers Consumers Manufacturers Consumers
Distributor
9 transactions 6 transactions
850,000,000
transactions
108,500
transactions
American
Hospital
Supply
Direct vs. Indirect
o Erecting barriers to entry
o Quality of direct market feedback
o Bundling with high-margin products/services
Strategic Advantages of Direct
Channel Flows / Functions
Breaking bulk
Assorting
Assuring availability
(inventory holding or
BTO)
Customization
Delivery
Installation
Maintenance & repair
Identifying needs / solutions
Identifying customers / suppliers
Matching needs and solutions
Matching customers and
suppliers
Customization
Assessing / certifying quality
Negotiation / closing the deal
Ordering
Market feedback
Physical flows Information flows
* The set of activities that must be performed to deliver the value proposition to the customer
Channel Flows / Functions
o Posilac is a controversial genetically engineered bovine
growth hormone (BGH) introduced in the US in 1994.
Injected into dairy cattle, it can increase milk production by
10-20%.
o Marketing challenges included:
- Educating farmers and overcoming resistance
- Assuring quality control (temperature)
- Handling used syringes
- Monitoring farmers usage rate
Question: So, who should do what?
Hybrid Grid (Example)
Hybrid Grid (Example)
Go To Market Strategies:
Distribution Strategies
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
How many outlets to have in a given market?
Number of Retailers
Exclusive
Intensive
Selective
Channel Design: Channel Intensity
Selective vs. Intensive
(Number of Intermediaries)
Intensive distribution
Selling support not considered vital
Minimizes customers cost of obtaining offering
Selective distribution
Tradeoff between selling support and the costs customers face
to obtain the offering
Both are considered important
Exclusive distribution
Firm seeks strongest selling support
Customers cost of obtaining offering not considered vital
Distribution and the PLC
Introduction Growth Maturity Decline
Sales
Home Video Specialist
Circuit City
Walmart
Ebay
Logistics Needs
Information Needs
Intensity
o Functions or activities required to succeed depend on the
nature of your offering
o You can eliminate intermediaries, but you cannot eliminate
functions (necessary activities to succeed)!
o When intermediaries are eliminated, their functions are merely
shifted
o FORWARD E.g., IKEA spun off delivery and installation
o BACKWARDS Apple stores to assure consultative selling
o SIDEWAYS Amazon uses FedEx for delivery
o Channel margin = compensation for performing functions
o Functions can vary
o Across customer segments Different channels?
o Over time, customers need less handholding Channel migration
Implications of Functional View
6
Channel Coordination
Who wants the dogs?
We have told you many
times - we need exclusive
territories.
We do not keep any such
records! (Not a chance ..
they'll start selling direct)
Need more trade promotions
and discounts
Your prices are too high!
Manufacturers Distributors
Carry our full line.. no cherry
picking.
We need active involvement
in selling new products.
We need to know more about
(y)our customers so that we
can make better products.
You need to improve sales
effort!
Your channel margins are
too high!
Conflict
Manufacturer
Retailer A Retailer B
Retailer C
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Horizontal Conflicts
Types of Conflict
Vertical Channel Conflict
Vertical conflict: Conflict between different levels of the
channel
o Integrate, i.e., consider make versus buy
o Increase legitimate power of the downstream player,
perhaps through franchising
o Build explicit relationships, e.g., P&G and Walmart
o Monitor downstream partners, e.g., mystery shoppers,
surprise visits, etc.
o Alter incentives via trade promotion policies, e.g., rationing of
hot selling products, etc.
Managing Vertical Conflict
Problems between retailers
Low-service, low-price retailers hurt high-service,
high price retailers
If possible, consumers can go to high-service
store, get educated, get product information and
then go to low-service store to buy the product
Horizontal Conflict: Free Riding
Go To Market Strategies:
Distribution Strategies
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
Free Riding: Show-Rooming
Free Riding: Show-Rooming
More Strategies for
Managing Horizontal Conflict
Establish boundaries between channels
Demarcation by customer or territory
Delineation by product classification
Segmentation by size-of-order
Set appropriate level of distribution intensity
As distribution becomes more selective, reseller support and
merchandising efforts increase
Introduce multiple brands
Different brands for different channels
Private brands
o Length of the Channel: how many intermediaries between us and the
customer
Short, medium, long
o Autonomy
Owned, franchised, independent
o Density
Single, Dual, Multiple
6
More Strategies for
Managing Horizontal Conflict
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Length
Autonomy
Density
Determinants of Conflict
Food For Thought
Identify a firm that has really innovated in the
area of distribution. What did they do, exactly?
How did they minimize conflict?
Go To Market Strategies:
Targeting and Messaging
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
Overview
Trends and Data
Classic Campaign (Milk)
7M Framework
Mission and Message
Rational Appeals
Emotional Appeals
Classic Campaign
24.2
24.4
24.6
24.8
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25.2
25.4
25.6
25.8
26
1987 1988 1989 1990 1991 1992
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Milk in California
o Milk advertising in 1992:
o Adults: Milk is healthy
o Teens: Milk makes you strong and beautiful
o Kids: Milk is cool and fun
o Beliefs about milk in 1992:
o I like the taste of milk: 80% agree
o Milk is a healthy drink: 89% agree
o Solution
o Increase mindshare: create memorable advertising
campaign
o Manage rationing: encourage buyers to bring
more milk home
Milk in California
Heaven
o Market (target audience)
o People who currently drink
milk
o Message content
o Make sure you have enough
milk (it complements many
other meals)
o Mission
o Increase milk consumption by
one glass per week within a
year
o Message design (creative
solution)
o Got Milk? deprivation
campaign
o Media strategy
o TV, print
o Money
o ??
o Measurement
o 60% aided recall in 3
months
o 2.67% ($30M)
increase in annual
sales
Got Milk
7Ms
o Markets (Who should I talk to? Target
Segment)
o Message Content (What should I tell
them? Key Benefit/Positioning)
o Mission (What do we intend to achieve?
Awareness, Knowledge, Interest, Trial)
o Message Design (How should I say it?
Creative Strategy)
o Media Strategy (How do I reach them?)
o Money (How much do I need to spend?)
o Measurement (Was it worth it?)
Targeting &
Positioning
Advertising
decisions
The 7M Framework
Go To Market Strategies:
Targeting and Messaging
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
Demonstration
Spokesperson
Testimonial
Comparison
Burger King survey
o How do you prefer your hamburgers?
Fried 25%
Flame-broiled 75%
Another survey
o How do you prefer your hamburgers?
Cooked on a hot stainless steel grill 53%
Cooked by passing raw meet through an open flame 47%
Comparison (and Framing)
Go To Market Strategies:
Targeting and Messaging
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
Emotional Appeals
o Used by financial services, public
interest, high-tech organizations, among
others.
o Inverted-U relationship for effectiveness
Fear
Fear (and Humor)
Fear (and Humor)
Positive Emotions
Appendix: Money and
Measurement
o Methods of setting advertising budgets
Percentage of sales
Match (or better) competition
Objectives and tasks methods
Harder, because it forces you to justify
Still, some easy tools available
Money
o Simplified Parfitt-Collins model
Say that a break-even market share required is 6%. Based
on market research I conclude that 30% of those who are
aware try the product. Furthermore, only 40% of those who
try become repeat buyers. How much awareness do I
need?
[%aware]*[%try]*[%repeat] = market share
[%A]*[.30=%try]*[.40=%repeat] = .06
[%A]*.12 = .06
Implies that 50% must become aware!
Money