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Go To Market Strategies:Week 9
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
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o Motivation and Puzzleso Inputs to the Pricing Decision
– The floor and ceiling bound the Economic Value to theCustomer (EVC) metric
– Note, however, that the 5Cs affect the final location ofthe actual price between the floor and ceiling
o Getting Deeper into Customer Factors
– Price sensitivity: Drivers and measurement – Psychological factors
o Takeaways
Overview
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Motivation and Puzzles
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The importance of this lever has driven a three-foldincrease in the number of pricing directors reportingto 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
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o Trader Joe’s – Why does Trader Joe’s 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
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Four Inputs to Pricing
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o Customers (most important, discussed last)
o Company
o Competitors
o Collaborators
o Context (not discussed)
5Cs and Pricing
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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; followersare more likely to imitate
Competitor Issues
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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, it’s not just about margins—Return on Assets
(ROA) also matters
ROA = Assets
Profit
=Sales
Profitx
Assets
Sales
= Margin x Rotation
Collaborator Issues
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Go To Market Strategies:
Week 9 – Module 2
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
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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 pricesensitivity
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
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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
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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
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Everyday Price Level
70
80
90
100
110
120
-9% Control +9%
Change Index
(Post-Pre)
Unit Volume
Dollar Profit
Field Experiment
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o 9 endings [e.g., $3.99, etc.] Some experimentssuggest that charging odd prices results in asubstantial effect
o Experiment: Effect of advertised price endings onsales of margarine:
• Regular price $0.83; Sales = 2817
• Discount price $0.63;• Discount price $0.59;
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(+406%)(+194%)
Psychological Factors
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Go To Market Strategies:
Week 9 – Module 3
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
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o Mr. A was given tickets to lotteries involving theWorld 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: Who’s Happier?
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o Mr. A received a letter from the IRS saying that hemade 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: Who’s Unhappier?
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o
Four Inputs to Pricing Process marginal cost,willingness to pay, competitive pressures, distributormargins
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
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Go To Market Strategies:
Distribution Strategies
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
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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”
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o Erecting barriers to entry
o Quality of direct market feedback
o Bundling with high-margin products/services
“Strategic” Advantages of Direct
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Channel Flows / Functions
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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
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o Posilac is a controversial genetically engineered bovinegrowth 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)
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Hybrid Grid (Example)
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Go To Market Strategies:
Distribution Strategies
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
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How many outlets to have in a given market?
Number of Retailers
Exclusive Intensive
Selective
Channel Design: Channel Intensity
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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
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Distribution and the PLC
Introduction Growth Maturity Decline
Sales
Home Video Specialist
Circuit City Walmart
Ebay
Logistics NeedsInformation Needs
Intensity
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o Functions or activities required to succeed depend on thenature of your offering
o You can eliminate intermediaries, but you cannot eliminatefunctions (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
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Channel Coordination
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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 promotionsand 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 saleseffort!
Your channel margins are
too high!
Conflict
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Manufacturer
Retailer A Retailer B Retailer C V e r t i c a l
C o n f l i c t s
Horizontal Conflicts
Types of Conflict
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Vertical Channel Conflict
Vertical conflict: Conflict between different levels of the
channel
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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
l fl d
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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
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Go To Market Strategies:
Distribution Strategies
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
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Free Riding: Show-Rooming
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Free Riding: Show-Rooming
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More Strategies for
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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
More Strategies for
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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
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More Strategies for
Managing Horizontal Conflict
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C o n f l i c t
C o n
f l i c t
C o n f l i c t
Length
Autonomy
Density
Determinants of Conflict
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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?
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Go To Market Strategies:Targeting and Messaging
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
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Overview
Trends and Data
“Classic” Campaign (Milk)
7M Framework
Mission and MessageRational Appeals
Emotional Appeals
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Classic Campaign
C f
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24.2
24.4
24.6
24.8
25
25.2
25.4
25.6
25.8
26
1987 1988 1989 1990 1991 1992
G a l l o n s c o n s u m p t
i o n p e r c a p i t a
Milk in California
Milk i C lif i
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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
Solutiono Increase mindshare: create memorable advertising
campaign
o Manage “rationing”: encourage buyers to bring
more milk home
Milk in California
H
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Heaven …
G t Milk
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o
Market (target audience)o People who currently drink
milk
o Message content
o Make sure you have enough
milk (it complements manyother meals)
o Mission
o Increase milk consumption byone glass per week within a
yearo Message design (creative
solution)
o Got Milk? “deprivation”campaign
o
Media strategyo TV, print
o Money
o ??
o Measurement
o 60% aided recall in 3months
o 2.67% ($30M)increase in annualsales
Got Milk
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7Ms
Th 7M F k
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o Markets (Who should I talk to? TargetSegment)
o Message Content (What should I tellthem? 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
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Go To Market Strategies:
Targeting and Messaging
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
D t ti
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Demonstration
S k
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Spokesperson
Testimonial
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Testimonial
Comparison
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Comparison
Comparison (and Framing)
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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)
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Go To Market Strategies:
Targeting and Messaging
David Bell (@davidbnz)
Xinmei Zhang and Yongge Dai Professor
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Emotional Appeals
Fear
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o Used by … financial services, public
interest, high-tech organizations, amongothers.
o “Inverted-U” relationship for effectiveness
Fear
Fear (and Humor)
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Fear (and Humor)
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Positive Emotions
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Positive Emotions
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Appendix: Money andMeasurement
Money
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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
Money
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o
Simplified Parfitt-Collins model
– Say that a break-even market share required is 6%. Basedon market research I conclude that 30% of those who areaware try the product. Furthermore, only 40% of those who
try become repeat buyers. How much awareness do Ineed?
– [%aware]*[%try]*[%repeat] = market share
– [%A]*[.30=%try]*[.40=%repeat] = .06 – [%A]*.12 = .06
– Implies that 50% must become aware!
Money