Customer Analysis

1. Professor Andrés Musalem Marketing Management Fuqua School of Business Introduction What’s Marketing? Three C’s Customer Company Competition Four P’s Product Promotion Price Placement Summary Customer Analysis

2. Agenda • Value Proposition • Consumer Behavior • Measuring Consumer Perceptions • Measuring Consumer Preferences

3. The Value Proposition Benefits (including EVC) to Target Market Net Value to Target Market Cost to Target Market

4. Examples of Successful Value Propositions Volvo Station Wagon • Benefits: Durability and safety • Price: 20 percent premium • Target market: Safety-conscious “upscale” families

5. Volvo Safety Firsts 1927 Safety glass windshields with automatic windshield wipers 1944 Steel cage created to help protect passenger compartment 1944 Laminated windshields installed 15 years before mandatory 1958 Three-point shoulder/lap seat belt patented by Volvo 1959 Three-point shoulder/lap seat belts introduced in some models 1960 Padded instrument panel installed 1967 Three-point seat belts included in rear outboard seats 1970 Industry's first auto accident investigation team established 1973 Electric rear window defroster made standard on all models 1984 Antilock brakes (ABS) installed 1987 Three-point seat belts included in rear centre seat 1991 Integrated booster cushion added for children 1992 Side impact structure installed five years before mandatory 1995 World's first Side Impact Air Bags introduced 2000 Whiplash Protection System introduced 2003 World’s first SUV with Rollover Protection System and Roll Stability Control

6. Understanding My Customers • Who are our customers? • Why do they buy? • What important benefits do we provide them with?

7. Purchase Funnel: Barriers to Purchase No Is the customer aware of our product? Buy a competingproduct Yes No Arepriorbeliefs favorable? Yes No Is information available to customer? Yes No Isevaluation favorable? Yes No Is the productavailable? Yes PURCHASE Yes Yes No Is usage satisfactory?

8. Hypothetical Example: Marketing Research Results • 85% of customers are aware of our product • 60% of those are willing to consider our product • 68% of those can find information • 50% of those decide to buy it • 75% of those find it when they need it

9. Purchase Funnel

10. Understanding Our Customers

11. Investment Behavior:Boys Will be Boys • Men are dramatically more confident in their investment skills than women • They in turn trade 45% more than women with comparable portfolios • This leads men to earn an average return of 0.93% less than women Barber and Odean, QJE 2001

12. The Pepsi Challenge • One cup has M, the other Q? • M or Q?

13. The Pepsi Challenge >

14. M The Pepsi Challenge > Q

15. How many F’s? FINISHED FILES ARE THE RE-SULT OF YEARS OF SCIENTIF- IC STUDY COMBINED WITH THE EXPERIENCE OF MANY YEARS

16. How many F’s?

17. What’s More Important? • Objective reality • Perceived reality

18. Perceived vs. Objective Reality: An amateur bicycle racer in Los Angeles, has concluded that his iPod's Shuffle command favors the rapper 50 Cent -- and perhaps more important, that it knows exactly the right time to play 50 Cent's biggest hit, ''In Da Club.''… …The iPod knows somehow when I am reaching the end of my reserves, when my motivation is flagging,'' Mr. Greist insisted. ''It hits me up with 'In Da Club,' and then all of a sudden I am in da club.'' NYTimes 8/26/2004

19. How can we measure perceptions? attribute products

20. How can we measure perceptions? • Average Perceptions:

21. How can we measure perceptions?

22. What about applying this idea to men’s fragrances?

23. A possible solution:Multi-dimensional scaling (MDS) • The basic assumption: while people may not be able to reliably report what attributes drive their choices, they can report perceptions of the similarities of brand or companies

24. Perceived Similarity

25. Perceptual Mapping of Hotel Chains Average perceived similarities

26. Perceptual Mapping of Hotel Chains

27. But knowing perceptions is not enough • How are attributes traded off when choices are made--i.e., what is their relative importance?

28. Attribute Importance

29. Quadrant Map: Participants who subscribe to The Economist median x w median

30. Participants who subscribe to Businessweek median median

31. Do you prefer paintings that are related to religion or not related? What seasons would you like to depict? Do you prefer outdoor or indoor scenes? Do you prefer paintings predominantly of children, women, men, or it doesn’t matter? Do you like paintings of one person or a group of people? Thinking back on the paintings you have liked in the past, for the most part were the figures working, at leisure, or posed portraits? 20% related, 63% not related 15% Winter, 26% Spring, 16% Summer, 33% Fall 88% outdoor, 5% indoor 11% children, 6% women, 2% men, 77% doesn’t matter 24% one person, 48% group 23% working, 43% leisure, 27% posed The world’s favorite paintings: survey results in the U.S.A.

32. Do you prefer paintings in which the person or people are nude, partially clothed, or fully clothed? Do you prefer paintings from a long time ago, like Lincoln or Jesus, or more recent figures like Kennedy or Elvis? Do you prefer painting of wild animals, like lions, giraffes, or deer, or of domestic animals like dogs, cats, or other pets? What type of outdoor scene appeals to you the most: forests, lakes, rivers, oceans, and seas; field and rural scenes, or cities? 3% nude, 13% partially clothed, 68% fully clothed 56% long ago, 14% recent 51% wild animals, 27% pets 19% forests, 49% water, 18% fields, 3% cities Survey results, continued...

33. If you had to name one color as your favorite, what would it be? Do you like to see expressive brush strokes or the surface of the canvas to be smooth? Do you prefer larger paintings or smaller paintings? If large, would it be the size of a dishwasher, full-sized refrigerator, or a full wall? 44% blue, 12% green 11% red, 4% black, 4% purple, 3% brown, 3% pink, 16% others 54% strokes, 35% smooth 41% larger, 34% smaller 67% dishwasher, 17% refrigerator, 11% wall Survey results, continued

34. America’s “Perfect” Painting

35. Canada France Finland Turkey

36. Italy Holland

37. Understanding Tradeoffs & Interactions (Conjoint Analysis)

38. Stated Preferences for Attribute Bundles (Conjoint Analysis)

39. Partworths for Netbook attributes (Conjoint Analysis: Average Partworths)

40. Partworths for Netbook attributes (Conjoint Analysis)

41. Price Sensitivity & Conjoint Analysis R2 is choosing between two products: Vaio, 60Gb, $900, 6 hours • Utility=16+19+0+6= 41 • Repeating this analysis for all respondents: 69% 31% Dell, 20Gb, $700, 2hours • Utility=26+0.1+32+3= 61.1

42. Price Sensitivity & Conjoint Analysis What if Sony matches Dell’s price ($900  $700)? Vaio, 60Gb, $700, 6 hours • Utility=16+19+32+6= 73 • Repeating this analysis for all respondents: 69%87% 31%13% Dell, 20Gb, $700, 2hours • Utility=26+0.1+32+3= 61.1

43. The value of brands and product attributes • Reducing price by $400 (from $900 to $500) increases utility by 64 points: $400 = 64 utility points => 1 utility point = $400/64= $6.25 • How much more is R2 willing to pay for getting a Vaio instead of an Apple Mini-notebook (when all other attributes are equal)? • Difference in Utility=16-6=10 points. • In Dollars: 10points x $6.25 per point = $62.5 => We can use Conjoint Analysis to estimate the $ value of a brand.

44. Key Takeaways • Value Proposition = Benefits – Costs • Consumer Decision Process: • Funnel: Multiple opportunities to fall through the cracks • Consumer choices are driven by perceptions and preferences. • Measuring perceptions: attribute ratings or similarly ratings (MDS). • Measuring preferences: self-reported weights or conjoint analysis.

45. Appendix

46. A Model of Consumer Behavior SOCIAL AND GROUP FORCES Culture Subculture Social class Reference groups Family and households PSYCHOLOGICAL FORCES Motivation Perception Learning Personality Attitude SITUATIONAL FACTORS When consumers buy Where consumers buy Why consumers buy Conditions under which consumers buy INFORMATION Commercial sources Social sources BUYING-DECISION PROCESS Need recognition Choice of involvement level Identification of alternatives Evaluation of alternatives Purchase and related decisions Postpurchase behavior

47. Conjoint Analysis: Implementation • Two attributes with two values each: • Cuisine: French or Mexican • Food Quality: Excellent or Fair. • Define two dummy variables: • Cuisine: • x1=1 if French Cuisine • x1=0 if Mexican Cuisine • Food Quality: • x2=1 if Excellent Quality • x2=0 if Fair Quality

48. Conjoint Analysis: Estimation • Ask a respondent to rate all possible combinations: • Estimate linear regression: Rating=w0+w1x1+w2x2+error • Interpretation of results: • w1: how much more a customer values a French restaurant over a Mexican restaurant =1.5. • w2: how much more a customer values excellent over fair quality=4.5.

49. Conjoint Analysis: Interactions • Estimate this alternative model: Rating=w0+w1x1+w2x2+w12x1x2+error • Interpretation: • w1: how much more a customer values a French restaurant over a Mexican restaurant =1 • w2: how much more a customer values excellent over fair quality=4. • w12: additional value that a customer assigns from going to a restaurant that is both “French” and has “Excellent” quality=1.

50. Conjoint Analysis: More than 2 levels • What if one variable has more than 2 levels? • Example: Excellent, Fair and No Information. • Need as many dummy variables as the number of levels-1. • Define 2 dummy variables for food quality: • If x2e=1: excellent quality • If x2f=1: fair quality • If x2e=0 and x2f=0: no information • Estimate linear regression: Rating=w0+w1x1+w2ex2e+w2fx2f+error