Fall+2008+Section+07-SS+Week+5

= Class Discussion For Week 5 = Marketing Mix: Product, Price, and Place

1. Business to Consumer 2. Hewlett Packard Computer Systems 3. Moving from Strategic Marketing to Operational Marketing 4. Virgin Mobile 5. Natureview Farm 6. Wildfire Communications, Inc 7. The Value Proposition

//**Take -Aways**//

· Consumers are not rational · They tend to see what they want · To understand their positions, and be effective, you need to segment the market base on benefit profiles · Building a relationship with a customer, should lead to positive attitudes about what you offer while helping to build better brand recognition. Positive brand association builds positive messages into potential buyers/customers long-term memory. By planting positive reasons for recognition into the memory of the customer, the results will yield greater customer satisfaction, and affinity with what you are selling. Additionally, in a world where high quantities of information pass through the minds of customers, satisfied customers will be more likely to attend to your message when they are considering decisions.
 * //Business to consumer://**

//You cannot be high “value added to everyone.” If you are not the low cost producer…it is about being a differentiated provider of value to hopefully maximize customer lifetime value. Your value proposition has to match your segment benefit profile. Your choice of segment has to be both large enough, and profitable enough and matched to the benefits that you can provide with the greatest competitive advantage.. Remember to consider customer lifetime value as more than just a number.//

//**Organization to consumer:**// Business to business: · There are fewer buyers in each segment · These buyers often make bigger purchases · Some are professional buyers. Therefore there is a need to bring more to the table because there is a higher level of knowledge. Decisions are often made through purchasing professionals and buying centers. This can make transactions more complicated and complex. Filtering processes in organizations are often more complex and stronger than the filtering processes used by an individual because of the added layer of strong culture in the organization. However,in organizations, each decision is made eventually by individuals who use their own filters to judge, receive, and process information.

· There is more power for the buyer · The initial purchase becomes more important, causing repeat purchases · There is a longer decision making process - no impulse buying · There is a more complex decision making process due to multiple layers of the organizations needing to make the decision before action. Sellers must understand who in the org makes the decisions. All organizations are different
 * //When there are fewer buyers and bigger purchases://**

Participants in the buying process need to get past the purchasing agent (gatekeeper). To do this effectively we must learn and understand the structure of the organization.
 * //The Buying Process//**

The buying process is complex · Expect that there will be several buying influences · Expect a complicated series of communication involving multiple sales calls · Remember the concept of reciprocity- meaning buying and selling to another part or layer of the company, or I give you this... if you give me that. It needs to benefit the buyer, but it can be an incentive for buying and a tool in selling. Build relationships. The main objective is building the relationship: Build in barriers to exit – switching cost. The selling company is trying to structure the sale so that there will be ongoing sales, switching cost, etc. //**Buying Centers**// · You'll encounter significant expertise from the customer · It is difficult to determine how decisions for purchases are made · You need to create barriers to exit, increased switching costs, while making your product valuable A **buying center** (also known as a **decision making unit** or **DMU**), in [|marketing], [|procurement], and [|organizational studies], is a group of employees responsible for purchasing an item for the organization. In a business setting, major purchases typically require input from various parts of the organization, including finance, accounting, purchasing, information technology management, and senior management. Highly technical purchases, such as information systems or production equipment, also require the expertise of technical specialists. In some cases the buying center is an informal ad hoc group, but in other cases, it is a formally sanctioned group with specific mandates, criteria, and procedures. The employees that constitute the buying center will vary depending on the item being purchased. In a generic sense, there are typically six roles within any buying center. They are: Because of the specialized nature of computer and software purchases, many [|corporations] use buying centers that are specialized for [|information technology] acquisition. These specialized buying centers typically receive information about the technology from commercial sources, peers, publications, and experience. In this process, top management, the IT director, IT professionals, and other users participate together to find a solution. (From Wikopedia)
 * 1) Initiator who suggests purchasing a product or service.
 * 2) Influencers who try to affect the outcome decision with their opinions.
 * 3) Deciders who have the final decision.
 * 4) Buyers who are responsible for the contract.
 * 5) End users of the item being purchased.
 * 6) Gatekeepers who control the flow of information.

//**Buying TIPS**// Attracting and retaining customers by adding structural ties · Entering into long-term contracts creates continued service encounters. You want the customer having this train of logic: “If I get rid of product, then I get rid of the services. I don’t want to get rid of the service; therefore I am not getting rid of product.” · Charge lower price to high volume customer · Turn the product into a long-term service. Have something to offer beyond initial sale. This is why your initial position is so important. It is harder to change position once your first one is established.


 * __Hewlett Packard Computer Systems__**

Business strategy starts with introducing the sale of the hardware, but those products are only a foot in the door. HP wants to use that wedge to establish a relationship and build the confidence, so the decision makers, and those with higher corporate responsibilities, see the value in HP’s value proposition and leverage them to be a solutions provider. HP ultimate goal is to be the nervous system for the company. Products (hardware), to solutions (advanced software), to concepts (critical life force of company), is a positive progression.



It is important to understand and decipher the filters company employs, how those filters are used, and what it takes to pass through them. You may need to be an expert in how this process works for your target company. To address this effectively one might need well educated sales force that know how the products work in and out, or coordinate sales with company product line managers so both are present at the sales meeting. It may require that you segment very narrowly to pass through their screening filters. Once you have passed through the filters you may be able to widen out what you can offer and become a value added supplier.

The HP case used this analogy. HP did not know its market segment, so it needed to narrowly segment to figure out what to take the market.

It is always about being more than just the low cost producer. We need to understand “customer lifetime value” and our value proposition, which has to address the customer’s needs.

//**Take “Aways”:**// 1. Customers are not rational 2. It is very important to plant the business in the long-term memory in the customer. Brand. Become a positive attitude. 3. The drivers of organizational markets are the same as those in consumer markets. It’s just a matter of degree 4. Doing all this is not costless, identify the customers you want to focus on in the long-term - relationship building takes time.

· Moving from Strategic Marketing to Operational Marketing · At this time, we have completed the left part of this diagram. Now we should be moving to the right side with more details to come.
 * __Class overview:__**



__ **Virgin Mobile** __

Positions Statement: Break into the cellular phone market with new hip phone that can be personalized, has features and functions that are new and desireable.

Target Market: Virgin has a long running brand that is hip, up to date, with it, Richard Branson driven. With broad association, Target hip, young people giving a fun, edgy and upfront benefit. Virgin has wide product offerings from music to airlines. Keep in the same market of 15 to 29 year olds had little cellular market penetration (15%) targeting 100 to 300 minutes per month. The market has credit issues impacting phone service contracts because of the age group.

The customer: · Customer often isn’t using the right plan for their usage · First time cell phone owners · Geographically challenged · Inconsistent usage · Not afraid of new offers · Fashion statement · Disdain hidden fees Using the acquisition cost for each customer determines the lifetime value of each customer

CLV = (Product Margin/(1 - r + i))-acquisition cost CLV = Customer Lifetime Value r = Retention rate i = Interest rate (discount rate) Churn is the number of people who leave the account

Virgin's Numbers: for traditional pricing CLV = ((22x12) / (1-.76+.05))-350 CLV = $560

Options: Traditional pricing and plans (with out without hidden fees) Non Traditional pricing, prepaid phones

Elliot also emphasized the need for sensitivity analysis on any numbers, thus any variable that was soft (difficult to know if true) has to be varied over its anticipated range to see the effect on the CLV.

When calculating TCV: 1. Make sure everything is in the same time increments 2. On any assumed numbers(no way of verification), you need to sensitivity analysis (best case, worst case, middle) 3. Make sure you are always using a discount rate

__ **Natureview Farm** __

Need to increase revenue from $13-million to 20-million in about a year

Position/Value Proposition: Produce natural yogurt for educated, health conscience, skewed female, not price sensitive. They use natural ingredients, a special process, distributed through natural food stores, which give it a halo effect.

1. Go into the supermarket channel w/ 8 oz products, with six SKU’s in the west and northeast area 2. Go into the supermarket channel w/ 32 oz products, with four SKU’s nationwide. 3. Produce the 4-packs and stay in the natural food chains. This is NOT adding new value propositions, as you are not changing the market segment.
 * Alternatives:**

Based on volume estimates, it is possible to make the mark if the company takes option 1, and then some. Based on volume estimates, it appears possible, on first look at revenues and profits, to make the mark if the company takes options 2; however, when looking at the volume estimate and comparing this with the size of the particular segment (they would need 50% market share), we see this is impossible. Based on volume estimates, it is impossible to make the mark if the company takes option 3

One problem with taking option 1 is that by introducing their yogurt in the supermarket channel, they may damage relationships already established within the health food store channel (the core business), possibly cannibalizing on that business. It may also remove the halo effect of producing natural food for health food stores. This may be the best proposal from the seller’s point of view, but a buyer of the firm, during their due-diligence process, will likely see this as a "red flag", as income may not be sustainable for ensuing years, unless expanding the market through the supermarket channel also grows (though the market in general is growing only slightly and market share would have to come primarily directly from the "big boys" who have enormous resources). This option does produce sufficient revenue (and profits), so that if the revenue estimates ($30 million) are not met, because of cannibalization or loss of brand equity in the natural food channel, Natureview will likely still be able to reach the $20 million target. This would also potentially create a change in the culture of the company and its small company feel.

One option would be to license the yogurt to a chain store, which might produce the needed 7-million, however there wasn't enough information in the case to analyze this option.

Elliot’s three issues in writing a case: 1. Beyond the first year of any analysis, you need to look at the long term effect on cash flows and assets 2. Discounting cash flows also think about profitability in addition to revenue 3. Always look deeper into the case than the alternatives given. Look at more than just the numbers, or the most apparent problems, as there may be more complicated issues that arise from what you consider the “fix.”
 * Financial Analysis**


 * __ Wildfire Communication, Inc. __**



Three products focused on three different segments. They are the innovator of the personal telephone assistant. Since they are early in the product life cycle, they need to focus. This is apparent because they have three segments meaning three different value propositions. Right now they have a product focus. They need to clarify their customer focus (choose a segment) in order to jump the chasm. To do this they need to convince the pragmatist to purchase the product. The way to convince pragmatist of something they have little experience with is to associate benefit to a quantifiable numbers. This should focus on either cost savings or revenue enhancer. Once you have an understanding of the value to pragmatist. It is important to put this in a different language so that a pragmatist will understand the message. Translate the value of a benefit to a quantifiable, numerical number. Two choices: Cost saver or revenue enhancer Focus. Translate / Develop benefits into $$. Understand going after three things is ridiculous, going after one can work if you develop a compelling value proposition Wildfire's competence is innovation, not sales, distribution, marketing... Wildfire does not have the resources to develop three new markets to three different segements. Paucity of resources will also impinge on strategies to encourage adoption of this new category. The firm will have to try to develop the market very strategically if it is to encourage adoption in reasonable numbers before attracting entrants. Entrants may develop the category and take it away from them. If they can't now raise large amounts of VC money for marketing, they may have to take what they can get from cell phone companies or someone.
 * Moving from innovator to a larger segment:**

Wal-mart sells more than just distribution. One of their biggest assets is their supply chain management system and their information data base. This information from this system alone is worth its weight in gold, not to mention the large distribution system. To evaluate Distribution Partners (channel partners): 1. What value is the distributor providing to the customer and/or me? 2. What is that value worth to me? a. If cost gets too high, are you willing to go away? 3. What is the cost if I do it in-house?
 * Distribution**

Side Note: At the end of each chapter in the //Market-Based Management// book, there are references to templates found at [|www.rogerjbest.com] web site.

What is a value proposition? How do the 5-P’s contribute to the communication of the value proposition? It is similar to a position statement. It is the same as a position statement if you are servicing only one segment. You distinguish a value proposition by using the 5-P’s. Communicate benefits through 5Ps; All the p’s together convey the value proposition. 1. Product 2. Price 3. Place 4. Promotion 5. Participation
 * __ The Value Proposition __**





When you start thinking of value proposition, you usually do not start with core benefits. Core benefit is the core need being fulfilled. Basic product is what all products have. Expected product is what you expect of the product. Augment product starts confirming different benefits for different customers. This is where the capabilities for product differentiation //start//, therefore the ability to create value proposition. When you get significantly different benefit profiles, you get into value proposition. Potential product: things the segment cannot imagine by themselves. The potential product is a good way to leverage your current value proposition.

For the Natureview case, the core need is yogurt. The basic product is creamy product in a container. The expected product is healthy and flavorful. The augment products are things like fruit versus plain or 32 ounces versus 8 ounces and in natureviews case, long shelf life. The easiest case to identify potential product would be the Wildfire Case. In this case, the potential product would be the ability to replace staff with a machine.

If I can educate the consumer, that’s a big win. Do this to the degree that it allows you to segment the market.