Market Based Management

1. Market Based Management BA 6324: Fundamentals of Marketing Professor Dillon Lecture Notes: Set #1

2. Market Based Management 1. How to Underwhelm Customers and Shareholders 2. Marketing Defined 3. Market Orientations 4. Market Definition & Product Markets 5. Management of Product Markets 6. Key Quantitative Tools 7. Practice Problems

3. Market Based Management 1. How to Underwhelm Customers and Shareholders Poor Understanding of Customers and Competition Pressure for Short-Run Results Unfocused Competitive Position Stagnant Shareholder Value Me-Too Customer Value Accounting Maneuvers Drive Financial Results Excessive Customer Turnover Sporadic Business Unit Profits Market Share Instability High Cost of Customer Retention and Acquisition 3

4. Market Based Management 2. Marketing Defined 2.1 Historical Focus on Exchange and 4P’s: > Product Key Questions? • > Price • Key Questions? • > Promotion • Key Questions? • > Place • Key Questions? • Marketing managers have, to vary degrees, control • over these elements—that is, the marketing mix.

5. Market Based Management 2.2 Modern Focus on Customer: • Marketing: Any and all activities that directly or indirectly influence the choices that individuals or organizations make. • Primary Objectives: • Creating Customer Value • Building Strong Brands

6. Power of Brands

7. Market Based Management 2.3Why is Marketing Difficult? ANSWERS TO MISSION CRITICAL QUESTIONS ARE NOT OBVIOUS! So You Want to Add Another Cruise Ship 7

8. Market Based Management • What are Some Key Management Issues? • How to determine ship/deck configuration and amenities • How to decide on trip itinerary • How to determine pricing schedule

9. 3 4 7 Florida/Caribbean NY/Mediterranean Market Based Management But Decisions With Respect To These Factors Will Depend On How Consumers Make Choices #Nights Origin/destination Room Type View Disney Princess Line Season Deck fall winter spring summer 1 2 5 6 7 8 stateroom deluxe stateroom suite royal suite inside ocean

10. Major competitors included for realism Rooms and seasons included to capture effect of differential pricing strategies Market Based Management Breaking task into two steps made it easier for respondents and provided analytic flexibility Price levels carefully selected to avoid “dominance” Respondents found“circling” preferred optioneasy to understandand perform New DCL 7-Day product to be tested

11. Market Based Management Two “no-buy” options

12. Market Based Management But How Do We Learn Or Come To Understand How Consumers Make Choices? THIS IS WHY MARKETING IS DIFFICULT!

13. Market Based Management The Choices of Consumers Will Ultimately Be Determined By - Your Value Proposition - Their Willingness to Pay

14. Market Based Management 2.4Contributing Factors: 1. Unlike successful corporate financial, accounting, or production personnel, a marketer cannot be successful without spending a considerable amount of time talking to customers. 2. At the same time, customers cannot always tell you precisely what they want. 3. Competition is dynamic and competitors actions are difficult to predict. 4. Changes in customer tastes and general societal trends occur frequently. 5. Following plans is often difficult. 14

15. Market Based Management 2.5 Changes Affecting Marketing: 1. Role of senior management 2. Globalization 3. Shifts in channel structure and power 4. Increased customer choice 5. Changing competitive boundaries 6. Technology and the Internet

16. Market Based Management 3. Market Orientations *Sales Driven: >WE SELL WHAT WE MAKE * Technology Driven: >LETS BUILD THE BETTER MOUSE TRAP * Marketing Driven: >LETS LISTEN TO CUSTOMERS * Customer Driven: >FOCUS NOT PROFITS BUT CUSTOMERS - Marketing Concept SATISFIED CUSTOMER PROFITABILITY Make & Sell Provide what we are good at and find people to buy it. Sense & Respond Listen to what people say and provide it. Anticipated Lead Find out what people want/would like even if they cannot image it & help them see the relevance and value and then provide it. 16

17. Market Based Management 3.1 What Does It Mean To Be Customer Oriented? >Customers buy benefits not products. • Implication: Understand which end-benefits are most important. >Investment in customers and their long-term satisfaction. • Implication: Track customer satisfaction and life time value of a customer. >Recognize that not all customers are alike. • Implication: Segment your markets and identify highly profitable customers. 17

18. 100 90 80 70 60 50 40 30 20 10 0 • Maximum Franchise Value Percent Cumulative Volume Total Profit • Optimal Market Share • • • • • • • • 0 10 20 30 40 50 60 70 80 90 100 Most Profitable Customers Least Profitable Purchasing Percentile Market Based Management > Customers are different The Optimal Market Share is generally less than 100 percent

19. Fast food Video rentals Baseball cards Ice cream Bottled Water Beer Juices Coffee Diet Cola Wine Regular cola Lemon limes Diet-Rite cola Diet lemon limes Fruit Flavored colas Diet Pepsi Primary form competition: Diet colas Budget competition: Food and entertainment Product form competition: Soft drinks Generic competition: Beverages Market Based Management 4. Market Definition & Product Markets Product Markets Set of products judged to be substitutes within those usage situations in which similar patterns of benefits are sought and the customers for whom such usages are relevant

20. Internal Performance Metrics External Performance Metrics Unit Cost Manufacturing Overhead Marketing Expenses R&D Expense Sales/Employee Inventory Turn Days Accounts Receivable Return on Sales Asset Turnover ROI and ROE Market Share Relative Share Customer Satisfaction Market Coverage Product Awareness relative Quality Relative Price Customer Preferences Relative New Product Sales Response Time to Problems Market Based Management 5. Management of Product Markets 5.1 Key Perspectives >Financials Are Necessary, Not Sufficient - CommTech > Internal vs. External Performance Metrics > In-Process vs. End-Result Market Metrics

21. Market Based Management 5.2 Market Metrics: Most commonly used metrics* Metric % of firms % that % giving top rating using measure reach the for assessing top board marketing performance Awareness 78.0 28.0 28.0 Market share (volume or value) 78.0 33.5 36.5 Relative price (market share value/volume) 70.0 34.5 37.5 Number of complaints (level of dissatisfaction) 69.0 30.0 45.0 Consumer satisfaction 68.0 36.0 46.5 Distribution/availability 66.0 11.5 18.0 Total number of customers 65.5 37.4 40.0 Perceived quality/esteem 64.0 32.0 35.5 Loyalty/retention 64.0 50.7 67.0 Relative perceived quality 62.5 52.8 61.6 *Tim Ambler, Marketing and the Bottom Line 21

22. Dollar Advertising Expenditures Year Total Sales Milk Beer Bread Diapers 1997 27,506,641 2,140 2,176 2,206 4,338 1998 41,112,062 2,148 4,303 2,214 6,456 1999 54,697,320 2,154 6,428 4,339 6,472 2000 41,197,141 4,276 2,191 2,220 2,234 2001 54,740,378 4,276 4,313 4,342 4,356 2002 68,279,725 4,279 6,434 6,464 6,478 2003 54,834,705 6,403 2,201 4,350 2,245 2004 68,385,508 6,406 4,324 6,472 2,248 2005 82,001,853 6,416 6,452 6,482 4,377 2006 AD Allocation % Market Based Management 6. Key Quantitative Tools 6.1 Marketing = Manager + Model 22

23. Dollar Advertising Expenditures Year Total Sales Milk Beer Bread Diapers 1997 27,506,641 2,140 2,176 2,206 4,338 1998 41,112,062 2,148 4,303 2,214 6,456 1999 54,697,320 2,154 6,428 4,339 6,472 2000 41,197,141 4,276 2,191 2,220 2,234 2001 54,740,378 4,276 4,313 4,342 4,356 2002 68,279,725 4,279 6,434 6,464 6,478 2003 54,834,705 6,403 2,201 4,350 2,245 2004 68,385,508 6,406 4,324 6,472 2,248 2005 82,001,853 6,416 6,452 6,482 4,377 2006 AD Correlations .71 .71 .94 .03 Market Based Management

24. 6.2Price Function - down ward sloping - slope = rate of change $1  in price leads to a b  in quantity demanded Q linear Q = a - bP (D) P Q P Q (B) Q  always negative (C) Q P nonlinear Q = aP-b (A) price M 6.3 Marketing Expenditure Function - constant - increasing - variable Market Based Management 24

25. Sales of Brand A Total Sales MS = Sales of all Brands that Brand A Competes Against Total Sales = Market Based Management 6.4 Market Share BUT

26. % Category $ (or Volume) in Geographic Market % US Population in that Geographic Market CDI = Bought in Last 12 Months ‘000 Total U.S. ‘000 %All Region Adults % Volume CDI Northeast 21.0 15.9 75.7 Midwest 24.2 25.2 104.1 South 34.5 32.3 93.6 West 20.3 26.6 131.0 Total Adults 184117 7712 Northeast 38649 1227 Midwest 44666 1944 South 63489 2489 West 37313 2051 County Size A 76568 3799 County Size B 55130 2012 County Size C 27932 1128 County Size D 24488 773 Market Based Management 6.5 Category/Product Development Index (CDI) Lets determine the CDI for personal computers for home use.

27. % Brand $ (or Volume) in Geographic Market % US Population in that Geographic Market BDI = County A County D Total Brand Units Units % BDI Units % BDI Market Based Management 6.6 Brand Development Index (BDI) IBM 2876 935 .3251 78.17 150 .0522 39.25 Compaq 613 150 .2447 58.84 60 .0979 73.61 Dell 159 50 .3145 75.62 20 .1258 94.59 MAC 3504 1400 .3995 96.06 95 .0271 20.38 Size 76568 .4159 24488 .1330

28. Market Based Management 6.7 Simple Financial Metrics 6.7.1 Variable Costs 1. Cost of Goods Sold (CGS)  materials  labor  factor overhead applied directly to production  cost of merchandise 2. Expenses that vary with volume (but not tied directly)  sales commissions  discounts  delivery expense 6.7.2 Relevant Costs 1. expected to occur in the future as a result of some marketing action and 2. differ among marketing alternatives being considered 28

29. CM = Unit price - unit variable costs unit price Market Based Management 6.8 Gross (Unit) Margin or Gross (Unit) Profit GM = (Net Sales) - (CGS) = (Market Demand x Market Share) - (CGS) 6.8.1 Contribution Measures 1. Unit Contribution (UC) UC = unit price - unit variable costs 2. Contribution Margin Percent (CM) 29

30. total fixed costs unit price - unit variable costs = total fixed costs unit contribution BEV = total fixed costs CM $BEV = Market Based Management 6.9 Break-Even (BE) Analysis 6.9.1 Unit Break-Even Volume (BEV) 6.9.2 Dollar Break-Even Volume ($BEV)

31. -(% price change) CM+(% price change) % BEV = Market Based Management 6.10 Price Changes and BEV 6.10.1 % Change in Volume to BE On Price Change

32. Market Based Management 7. Practice Problems 7.1Suppose a firm has fixed costs of $200,000 budgeted for a product or service, the unit selling price is $25.00, and the unit variable costs are $10.00. 1. How many units must be sold to achieve a profit goal of $20,000? 2. Suppose now that the firm wants to achieve a 20% profit goal: How many units must be sold? 3. This firm is considering dropping unit selling price to $20.00. Should it?

33. CSD BW CSD BW CSD BW CSD BW CSD BW Market Based Management 7.2 The table below shows CDI for Soft Drinks (CSD) and bottled water (BW) for several regions. Analyze. Total World Africa Europe Latin America North America

34. Market Based Management 7.3 The table below provides data on branded bottle water sales (in units) for five countries, along with population numbers. Analyze. (Hint: compute BDI)