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Apontamentos Marketing Planning 2008 1. Market Opportunity I: Consumers 1.1. Purchase Process: Marketing Mix – product, Price, Promotion, Advertising, Place Mental Processes (consumer) – Psychological (motivation/personality) , Personal (demographics), Environmental (family, cultural) Consumer’s Response – What to Purchase? When? How Much? Where? Although the same process is followed by every consumer, the behavior can’t be always predicted and can unexpected. 1.2. Consumer Decision Making Process (DMP) This process changes depending on the product that is targeted. There are two main models, the High Involvement and the Low Involvement, being that the Low Involvement process doesn’t involve Information Search and Alternative Evaluation steps. Need Recognition: Low involvement: accelerate inter-purchase times; introduce new products with new benefits High Involvement: what drives the need? Social pressure, personal advancement? Information search: understand where information is obtained (advertising, internet) Alternative Evaluation: What are the evaluation rules? (multi-attribute weighting vs overall image) Purchase Decision: who is ultimately making it? Who influences it? Post purchase behavior: reduce post purchase dissonance; managing post-purchase behavior is critical difference between transactional selling and relations ship marketing. Conclusions: By exploring the process, we are able to determine that different consumers interpret the world (marketing mix) differently, due to their different perceptions. Different preferences lead to different behavior. The Marketing’s main objective is to manipulate this relationship to the benefit the firm. 1.3. Market Segmentation Is the process of dividing consumers into groups where the variation on purchasing behavior is low within groups but at the same time is high across groups. Each segment should be targeted with unique marketing mix, because: consumers will be more responsive to a message that speaks directly to them, and pay more for a tailored product that exactly meets their needs. Variables Appropriate for Segmentation: Consumer’s personal characteristics: geography, demographics (age, gender, income, education); life-cycle (stage of life. Single, married no kids, married with kids,…) and psychographics (personality traits, attitudes about self, family, society; general lifestyle; based on the notion that people buy things to reinforce their “self concept”) Product usage: frequency of brand/product use; brand loyalty (heavy users. 80-20 rule, loyal customers), attitudes towards the product. Product benefits sought: expectation of product performance; needs product must fill; perceptions of brands; satisfaction/dissatisfaction measures (e.g.: economy-low price, medicinal-decay prevention; cosmetic – bright teeth, taste – good tasting) Buying behavior and decision process. 1 Apontamentos Marketing Planning 2008 1.4. Market Targeting To target a specific segment we must study its attractiveness first, taking in account the Size and Growth, the Structural Characteristics and the Product-Market Fit. What makes an attractive segment to target? Expected (gross) segment profitability at a given point in time = prob. Of purchase of average consumer in segment x average likely volume if purchase is made by consumer in segment x profit margin per unit sold of product targeted at segment There are different approaches to targeting markets: Undifferentiated – Targeting the mass market, one strategy for everything Differentiated – targeting different consumers from the same market using different strategies for each product Concentrated – Like the Undifferentiated approach, it has one strategy for everything but instead it only targets a niche of the market. Customized – Targets consumers individually, a different strategy for every consumer 1.5. Positioning Is the perception about your product you create in the minds of the consumers in your target market. To develop a positioning strategy we should (a)begin by finding the important attributes that the target consumer’s value when they decide purchasing the product, then (b) study the current perceptions of consumers towards our company and the competitors on these attributes, (c) identify the gaps in the positions that your company/product can satisfy, and (d) plan and implement the positioning strategy. Positioning Formulation: “For the (target segment), (product/brand) is (single most important claim) among all (competitive frame) because (single most important claim).”Example: Avis – “To business people who rent cars, Avis is the company that will give you the best service among all rental car companies because the employees own the company” To understand the current positioning, usually marketer use Perceptual Maps, a spatial representation of the perceptions consumers in your target market have about you and your competitors on the relevant attributes for choice. 1.6. How to Measure Satisfaction and Success? In order to measure customer satisfaction we use the Customer Satisfaction Index (CSI), which shows that very satisfied and loyal customers are the ones who shape the profitability of a business. We can use a quantitative method to calculate the loyalty, which is known as Customer Loyalty Index (CLI)= Customer Satisfaction Index x Customer Retention x Customer Recommendation Customer Life (N – purchase periods) = 1/(1-CR) or Customer Retention (CR)= 1 – (1/N) Customer Lifetime Value (CLV) – the revenues and intangible benefits (referrals, customer feedback) that a typical customer brings to the seller over their lifetime in the category, less the amount the company must spend to acquire, market to, and service the customer. It can be also referred as Customer Equity. The formula can be reduced to: with: M => margin the customer generates per year (volume of purchases per year x margin per purchase after tax) c => cost of marketing targeted to the customer per year r => retention rate i => interest rate AC => Acquisition cost for customer Customer Relationship Management (CRM) is the process of establishing and maintaining mutually beneficial exchange relations with your best customers. CRM can also be a strategic process for increasing the average lifetime value of the customer base. This model in based on the following premises: It is more profitable to keep best clients happy and loyal than to constantly be attracting new ones It is costly to replace defected customers by acquiring new ones. Customer Defector: a customer that at one time bought your product, but no longer does (and still in the category) It is much profitable to keep a loyal customer than to have a one-time customer. 2 Apontamentos Marketing Planning 2008 In order to use CRM efficiently, 4 steps should be followed: 1. Identify most valuable customers, meaning determine which customers are worth pursuing (80/20 rule: 80% of your sales should come from 20% of your clients) 2. Build a learning relationship with them. Create Opportunities for a dialogue/relationship with your best customers: two-way dialogue (e.g.: face-to-face channels, post-purchase calls, questionnaires, telemarketing, etc.) allows you to elicit your customers’ desires, needs, wants and complaints, learn what, where, when and how the consumer wants your product; keep a database of this information and use it to create value. 3. Provide them a sustainable advantage over competition, meaning use your database to create value for your customers. Customer value: added benefits that customers gain from buying from you vs your competitor: customized products (increase switching costs, charge higher prices); superior customer service, loyalty programs, exclusive privileges (e.g.: password for website); social incentives (recognize your customers by name) 4. Pay attention to consumers who have defected in order to determine how the product can be improved, meaning get feedback, especially from your defectors 1.7. Competitive Set In order to define our Competitive Set we need to some research: Customer Oriented – who are they (budget), when do they use and why Marketing Oriented – Media, theme, distribution, price Resource Oriented – Materials, employees, financial resources Geographic – Sales coverage, physical geographic areas Once that is done, we can define competition using 4-level Model: Product Form Competition – narrowest form, includes products of the same product type (Ex.: Sugar free chocolate bars) Product Class/Category Competition – products with similar features that provide the same basic function (Ex.: Other healthy snacks) Generic Competition – products that fulfill same basic need (Ex.: Snacks, yogurts, etc.) Budget Competition – products that compete for the same discretionary budget dollars (Ex.: Ice cream, Fast food, Video rentals) We must convince the customers that our product is the best in any of the 4-levels. Portfolio Planning is collection of businesses and products that make up the company. We should analyze the current portfolio or Strategic Business Units (SBUs) and decide which business we should invest in or divest. To do that we can use several methods, like: Growth Strategies: Market Penetration – gain more customers from existing target markets with the current product, using competitive pricing, increases in advertising/promotion or wider distribution, alternative uses. Product Development – keep current customers happy with new products. 3 Apontamentos Marketing Planning 2008 Market Development – look for new target markets with existing products, new geographics, new demographics or new business outlets. Diversification – compete in a portfolio of markets, not becoming dependent on one product line/industry. Pros and cons: risky, but profitable; strong brand names may help; need to think of competences 2. Products and Services A product has many attributes and what makes it or not distinguishable from the others are the attributes given in the expected product but more important in the augmented product (besides the basic product). New product/service can be: New-to-the-World products Brand extension – new category entries Line extension – additions to product lines Reinventing a brand (product improvements, repositions, new uses, new packaging) When we launch a new product/service the diffusion will depend upon each consumer group. We can distinguish these groups through Time of Adoption and Percentage of Adopters: Innovators (2,5%) – lead users (need driven in this category), willing to take risks, mainly youngsters with high income and well educated. Early Adopters(13.5%) + Early Majority (34%) – followers who adopt early but more cautious Late Adopters (34%)+ Laggards (16%) – risk adverse, tradition bound, need to be convinced of benefits, quality, value The Product Life Cycle (PLC) can be shown in the following chart: Introduction Phase – in the market there are undefined segments, few competitors, low sales; the consumers have low awareness and information; and the firm has high cost per customer and negative profits. The main objectives are to build primary demand and create product awareness and trial. In this phase the price is high (to recover costs) and the product line is narrow. There is also a selective distribution and a very high budget for advertising. Growth Phase – the market has increased competition, the segments emerge and the sales rise; consumers are more informed; and the firm has higher profits and lower cost per customer, with more efficient channels of distribution and production. The objectives in this phase are to build secondary demand and compete on features while watching copycat products. The product can now be adjusted and innovated taking in account the feedback, and the price is lowered as competition increases. More distribution channels are added and advertising is made in mass media to build brand awareness. Maturity Phase – the market has very distinct segments with high competition and peak sales; the consumers expect quality and performance; while the firm looks for cost reductions. The objective now is to defend the brand share and grow by stealing from competition. The brands are diversified and price is the optimal to maintain share. The distribution is more intensive and advertising focus on stressing brand differences and benefits. Decline Phase – The market is declining in sales and the segments are shrinking and disappearing; the consumers’ preferences changed; and the firm profits decline. The main objective now is to cut costs and reduce expenditures. For that the company phases out weak items, cuts prices to sell inventory, phases out unprofitable channels and reduces the advertising to a level needed to retain hard-core loyals. It is tempting to apply PLC concept to brands, but it makes more sense to apply to product categories (“automobiles”) or even better, specific product forms (“internal combustion engine cars”). Chief criticism: theoretical and not useful – you can’t predict well how long the cycle will stretch; you can’t tell where you are until you’ve been there. Knowing where you are in the PLC gives you a “conventional wisdom” for marketing strategy (it reduces the vast number of alternative strategies). 4 Apontamentos Marketing Planning 2008 What would tell us the stage we are in? Introduction? We have a defensible patent, we don’t see any other providers in the market, our chief problem is meeting demand Growth? We see “new entrants” into our turf, we observe a lot of advertising based on features Maturity? The industry players are well known, we observe a lot of competition on price and sales promotion deals Decline? Competing technologies have been announced; pricing is brutal, with “irrational players” Forecasting New Products: Bass Diffusion Model Is a model to describe first purchase behavior of consumer durables and trial for some non-durables. M=market potential Yt = cumulative number of adoptions till t M – Y(t-1)= fraction of the remaining market potential that will buy in each period t In each period, as the cumulative number of adopters increases, the remaining market potential decreases. p= initial probability of purchase (“coefficient of innovation”) q= parameter that represents the rate of diffusion of the product due to the influence of others (“coefficient of imitation”) Pt = probability of purchase, given no previous purchase = p + (q/M)Y(t-1) St = sales in period t = (M – Y(t-1)) x Pt developing… St = a + bY(t-1)+ c(Y(t-1))2 a=pM b= q-p c=-q/M 3. Marketing Research and Forecasting 3.1. Marketing Research Marketing Research is used to analyze marketing environment, competitors, current customers and products, and to keep continuous tracking. The process can be described in 5 steps: 1. Define the Problem and Objectives P: developing new product; O: determine product features, price P: losing market share; O: why consumers aren’t buying? P: ad campaign hasn’t boosted sales; O: what went wrong? – Improper message for target and product attributes? – incorrect placement of advertisement? P: leader loosing market share; O: why has it been a leader and exploit the competitive advantage) 2. Design Research plan – what data will be needed and how to get it 2.1. Secondary Data – data already collected, which provide insight (popular press, trade reports, internet, government reports, statistical abstracts, census) 2.2. Primary Data – data collected for purpose of study (surveys, test markets, focus groups, observational). This data must be reliable, valid and representative. Primary data sources: 2.2.1.Employees (internal sources): sales force, accounting department, R&D, Brand Managers 2.2.2.Consumers: 2.2.2.1. Exploratory/Observational (used to explore the environment): Observational Studies: watch them shopping; mystery shoppers; Problems: if consumers sense they are being watched they will change behaviour; doesn’t answer why! Focus Groups - requires trained moderator who preferably specializes in the industry; (in)formal; Challenges: herding bias; may say what they think you want them to; Solution: alternative methods to eliciting consumers attitudes, beliefs. 2.2.2.2. Descriptive/Survey Research (used to measure the environment) - Survey Design (what info is needed? What type of questions?) Sampling Issues (survey who? - how many? – random vs. convenience sample) Practical Questions(is it too long? – incentives?) Pitfalls of Survey Research (does not consider: consumers’ lack of knowledge – misunderstanding the questions – how questions are worded or framed) Interpretation (understand how they answer and what are the company norms). 2.2.2.3. Causal/Experimental Research (used to test environment) – Simulated lab shopping environment; Field experiments; “Quasi-Market” Tests. Pros & Cons: expensive; allows to test relationships between variables by controlling for certain variables. 3. Collect and analyze data – Focus groups, questionnaires, etc. (means, variances, statistical models) 4. Report and recommend (important to summarize and condense data into understandable and meaningful information – pie charts, graphs, tables, etc) 5. Post-implementation tracking 5 Apontamentos Marketing Planning 2008 3.2. Forecasting Potential – the maximum sales reasonably attainable under a given set of conditions within a specified period of time. (Potential Buyers*Estimate purchase rate = Market Potential Market Potential *Market Share = Sales Potential) Quota – a related concept. Quotas are typically set by senior managers and are what an individual in the company is expected to achieve. Sales Potential = Market Potential X Firm’s Market Share Forecast – the amount of sales expected to be achieved under a set of condition within a specified period of time. The forecast is used to help set budgets, provide basis for a monitoring system, aid in production planning and used by financial analysis to value a company. Methods of forecast: Judgment-based methods o Naïve extrapolation – last period sales level + x% o Sales force composite o Jury expert opinion o Delphi method – variation of the panel consensus. (average of all individual forecast and then revise own forecast based on the average) Customer-based methods- Discrimination “ Can they tell the difference?”; Preference “ Which version do they prefer and how?”; Reaction to change in general “ Pro-change or against?” Sales extrapolation methods – takes in I account all past data: base value, trend, economic cycles, seasonality and randomness. Some methods are Moving Averages (St = (St-1 + St + St+1)/3), Exponential Smoothing (^St+1 = aSt + (1-a)St^) and Regression Analysis (Sales = a + b(time)). Model-based methods – association methods that use one or more variables other than time, using a multivariate regression analysis(= f(price own, price compet, adv own, adv compet…)) and considering uncertainty. Mainly used to track awareness, trial and repeat rate. Share Forecasts (Share Brand i = e^(Bxi) / e^(BXj) all brands Bxi = Bo + B1(Adv) + B2 (Price)) Forecasting New Products: Awareness: [ usually modeled as a function of advertising]; At– Cumulative awareness in period t; Gt – Gross rating points in period t Ln( 1-At/ 1-At-1) = a-bGt ; Trial:[Tracked across time to forecast its eventual level] Tt – Cumulative trial in period t; At –Awareness at period tCumulative trial t = a + be^(-t) Tracker(includes awareness) Tt – Tt-1 = a(At – At-1) + b(At-1 – Tt-1) Repeat Rate t’- is time since first purchase; a – ultimate repeat rate Repurchase Rate t’ = a + b/(e^(t’)) There is a probability of Forecast Bias, since not always it’s possible to be accurate. Calculating the magnitude (Et=FtAt; variance between the forecast F and the actual result A) of the variance between current forecast and results won’t help much in the adjustment of future forecast, yet, calculating a systematic past forecast error can be easily used for that purpose. 4. Pricing Factor that affect Price Setting: Company: costs, overall goal, distribution Competition: relative market prices, competitive reaction Consumers: willingness to pay (WTP), demand (price elasticity=%change in quant.demanded/%change in price; PE<1-demand elastic, PE<1-demand inelastic), psychological implications 6 Apontamentos Marketing Planning 2008 The pricing decision is made based on price range from Price Floor (Marginal Costs) to Price Ceiling (Value Price). There are two philosophies of pricing: Cost Based Pricing – start with the product cost and add a margin to create price. By calculating the Break Even we know how many units must be sold to cover costs, and through that we can adjust price to reach an optimal quantity. Value Based Pricing – start by understanding what creates value for the costumers, set the price and only then adjust costs and product accordingly. Marginal (Variable) Costs – Cost directly tied to producing and selling one unit (labor, materials, commissions…) / Fixed Cost – Costs that remain the same over a wide range of quantities produced (administrative salaries, rent, depreciation…) Unit Contribution (UC) = Selling Price (P) – Marginal (variable) costs Operating Margin = #units sold (Q) *UC – Fixed Costs (FC) BEP = Q* = FC/UC “How much sales volume needed to cover fixed costs?” or “How much would sales have to increase to company profit from 5% cut in price?” %Breakeven Sales Change = - Price change / (Base UC + Price change) Price Elasticity (PE) = % change in quantd demanded / % change price PE > 1 demand elastic, PE < 1 demand inelastic. Dynamics in Consumer Response to price changes: Zero order model of Consumer Response – Qt = B0 + B1Pt + et Stockpiling – Qt = B0 + B1Pt + B2max (Pt –Pt-1, 0) +et Discount Anticipation – Difficult to model Pricing strategies: Captive Pricing – introduce basic product at low price with expensive follow-on supplies Bait and Switch – Lure with lower-priced goods, push higher priced goods Skimming pricing vs. Penetration pricing – pricing over time We must exploit differences among consumers’ WTP, and engage in Price Discrimination, which consists in extracting the maximum WTP from each segment by charging different prices in such a way that consumers from one segment have no desire or ability to buy the product offered to another segment. Discrimination types: 1st Degree – price specific for each consumer 2nd Degree – price depends on volume/bundle 3rd Degree – price specific to a segment In order to engage in price discrimination there must exist consumers with different WTP, the different prices must be charged legally and must not annoy consumers, or allow them to take advantage of other segments pricing. Consumer Psychology in Pricing: Anchoring Effects – consumers perceive and process information relative to an anchor (more likely to buy €1,99 vs. €2,00). Weber Fechner Law – only relative price (%) difference matters, not absolute. Framing Effects – having the same product, the consumer reacts differently to each depending on the framing (positive or negative). Prospect Theory – people feel the pain of losses much more than they feel the happiness of gains. Series of separate gains are seen as “bonuses”, but a series of separate losses are perceived as even greater “punishments”. Key messages on Pricing: a) Developing Profitability pricing strategies is critical but creative; b)Must recognize: all influential variables; creative methods for developing effective price discrimination techniques; and consumers don’t always behave the way we might expect, so use theory and proven practices to guide pricing strategies. 7 Apontamentos Marketing Planning 2008 5. Planning Communication Strategy Advertising Planning process: 1. Advertising Objectives – we must first decide who we want to target and what is the main objective: Information (builds primary demand, useful for new products), Persuasive (builds secondary demand, useful for competitive industries) or Reminder (maintains awareness, useful for industry leaders, builds brand loyalty). 2. Budget Decisions – Advertising should be viewed as an investment, rather than an expense. There are several methods to determine the budget: a. Objective-and-Task – determine the objectives than allocate budget to reach these objectives. b. Percentage-of-Sales c. Competitive Parity – considers share of advertising relative to sales (share of voice). d. Affordable method – sets the budget that result in acceptable statement and profit level. e. Experimentation method – managers try different levels of spending in controlled settings and then extrapolate them to the total market level. f. Decision Calculus – computerized decision support systems with subjective inputs. 3. Media Planning – we need to answer the questions: Who? What? To Whom? Which Channel? Achieve What?. The main aspects of media planning are selecting the appropriate media categories and specific vehicles within each medium (TV, radio, Magazines, Web, etc.), advertising scheduling and selecting a message strategy between informal/rational and emotional appeals. Note: reach - # of % of target customers who receive at least one exposure during a specified period of time; frequency – average # of exposures a potential customer receives during a specified period of time; gross rating points (GRPs) - -total # of exposures received = reach * frequency 3. Creative Execution (straight-sell or factual message, scientific/technical evidence, comparisons, testimonials, animation, product demonstration, personality symbols, “slice of life”, fantasy, dramatization, humor) 4. Campaign Evaluation – there should be tracking studies over time in order to analyze top-of-mind awareness or aided recall and other behavioral measures. Some mistakes in developing advertising are due to wrong assumptions about consumer knowledge, failure to distinguishing ad positioning (what to say) from ad creative (how to say), failure to break through clutter or changing campaigns too frequently. Communication Mix – Integrated Marketing Communications: Advertising - Pros: Very large reach, Message content control, Flexibility. Cons: expensive, difficult to evaluate, clutter (overall level of all). Direct Marketing - Forms: telemarketing, Internet, direct-mail marketing, direct sales. Pros: easy evaluation, customized messages, little waste. Cons: consumer dislike, low response rates, global restrictions, clutter. Sales Promotion – Provide extra incentives to consumers or trade in order to achieve a short-term objective (increase sales level). Consumer-Oriented (pull): coupons, samples, sweepstakes, rebates – Objective is short-term sales. Trade – Oriented (push): Sales contests, training and quantity discount – Objective is distribution. Pros: induce new product trial, gain shelf space, Generate repeat purchase, reinforce brand image, generate measurable short-term responses. Cons: effects are short-lived, price-focused, consumers may become conditioned to expect deals. Public Relations – Publicity (usually free) typically takes the form of an article, magazine. Pros: more credible than advert. Cons: sponsoring company has little control. Personal Selling – Use of face-to-face communications between seller and buyer. Largest part of marketing budget for business-to-business marketers. Pros: immediate feedback, customized presentations. Cons: expensive, manager’s control over final message delivered by sales representative is difficult to achieve. Miscellaneous – Packaging, Trade shows, Events and sponsorships, Product placement in TV/movies, Product demonstrations. Conclusion:1.Define your target market and chose media that reaches them effectively. 2. Determine their needs from your product. 3. Develop an advertisement that creates an image (positioning) for your product that is desirable to your target market and achieves the stated objectives. 8