Marketing Strategy Based on First Principles and Data Analytics – Chapter 1



Oh [Applause] hi I'm Rob Hammacher one of the co-authors of the book marketing strategy based on first principles in data analytics before I get started in this first session I wanted to spend a minute and talk about first principles and the organizing framework we use in this book first principles and defined as the foundational concepts or assumptions on which a theory system or method is based just like Newton's laws of gravitational attraction first laws of thermodynamics it tries to break it down into the fundamental units our premise in this book is that marketing most of marketing strategy revolves around solving for problems and these four problems or issues our first principles go through each one of those the first one all customers differ represented by this pie diagram with customers broken into different segments the idea is that all customers that you deal with are different and all of our marketing strategy has to deal with addressing these different customers needs the second principle we deal with is that all customers change so not only are they different kind of inherently different but over time these customers are moving on what desires and needs they have so a marketing strategy has to deal with that the third principle even if you do the first two completely correct you solve them if you will and you're making lots of sales and profits competitors will come after you competitors are going to react every strategy do competitor is going to react so the third principle we have to deal with is recognizing that all competitors are at the forest principle principle that we have to deal with is after we address these three when we execute our marketing strategies we had fixed resources all resources are limited so we have to manage these resource trade-offs so our premise is that most of marketing strategy is around solving these four first principles or these four marketing problems and so we organized the book and all the frameworks processes and analysis tools around solving these four principles the idea would be you're sitting in a conference room a year or two from now and you have a marketing problem what you can do is you can write these four principles across the whiteboard and work at how are we addressing and we're going to spend each as we work through all these different sessions it's how best to solve each of these four principles so the agenda for today is first I'm going to do a little overview of marketing strategy where did it come from define it why is it important why is it important to spend your company's resources in your time on solving marketing problems then I'm going to give you a little review of each of the four principles this is just kind of a very short highlight we're going to have a session if there if you will there's a chapter on each one of these principles that we're going to go into much more deeply but it's helpful I believe to have an overall framework and how these fit together so when you hear the details you'll understand and envy that are able to remember them and then lastly for the last two points one is I'm going to integrate the four principles show how they come together and then we also this book works with mark strap mark strat is a separate company and you don't have to work with it but if you want to this is a simulation software that lets you practice the four principles in solving so a couple of times I'm going to speak to that if you don't use mark Strad or use a different simulation that's fine but I think there is some value in both talking about it and hearing and learning the concepts and also doing it and the market simulation actually lets you do them in a kind of a competitive environment so first we're going to go ahead and start with marketing strategy overview so a brief history where did market strategy start well actually didn't start with marketing strategy is started with military strategy and that's really the roots of all of marketing is from the military strategy it arose in a context and we read this quote the forces available must be employed with such skill that even in the absence of absolute superiority relative security is attained at the decisive point this is from the 1800s this was the idea that militaries had to fight and they always didn't have the biggest army or the best weapons so they had to pick where they were going to have their battle and then apply their force there after the military in the 1800s really starting in maybe even the 60s and 70s mainly by even a little bit in the 50s management scholars two more elements to this military strategy they added the idea that you don't have to just win this battle but we want to win on year in and year out so we needed to make that differential advantage or up here we talked about relative superiority we need to make that sustainable we wanted to make money superior sales and profits for many years to come so they added the idea of sustainability the second thing is the military is a little different than a business so they brought it in to business performance instead of having your country or your military win so there was two extra elements the management scholarship added then in the 80s and 90s marketing added to the definition in the big addition that marketing made they're made refinements around it but the big addition was the think of marketing strategy from the customers perspective so not just the firm or the industry but down to the unit of analysis being a customer because that's really where the battle occurs is winning customer by customer so if we put these five elements together the military elements the management elements in the marketing element we come up with five key elements that are critical for marketing strategy it leads to a differential advantage over competitors so when you design a marketing strategy you need some advantage over your competitors and you're going to use that to win it needs to be sustainable it does no good if you come out with a new product beat your competitors for six months and then they copy you and wipe you away you need some way to make that differential advantage sustainable the third the differential advantage the sustainable competitive advantage has to lead to performance we want to link our strategy to performance because that's the objective of most businesses fourth we're going to think about this and we're going to do a lot of analyses and processes where we think about these benefits from the customers perspective not from the CEOs not from other state goes from the customer that's where we believe marketing strategy has to begin in it and finally this is not just a set of slides or a binder it has to lead to decisions and actions decisions and action that you do so we'll put those five elements together to come up with a definition of marketing strategy but first I want to speak a little bit more about customer centric what is customer centric mean it means that you're looking at the problem from the customers perspective and we feel that ultimately leads the success or failure and is interesting if you look at the shift if you went back 20 30 years management scholars but also many marketing scholars thought of marketing strategy just from the firm's perspective did the firm make more money and what we find is that there's a natural progressing to a smaller and smaller unit of analysis let me explain that we initially started with economists if you look at economists economists tried to understand why some firms perform better than others by looking at industry factors they say oh here's the monopolistic industry and that helps us determine how much money the firms are going to make in that industry they look at competitive barriers to entry and exit and such if you will michael Porter's framework but they were only able to explain let's say 30 or 40 percent of the variance in a firm's performance management scholars said no you can't just look at it from the industry you got to get down to a smaller unit of analysis and look at it from the firm's perspective and they added factors like human resources leadership culture and they's organizational structure and they think these factories these factors where one firm is different than another firm on their leadership or their structure also helps explain why they might outperform each other so while the economists looked at the industry to explain firm performance management scholars had no only got a look at firm level factors and they were may be able to explain another let's take 30 percent of the variance in a firm's performance now marketing scholars government said no you have to go you're lower yet you can't just look at the firm you have to look at the individual customers that work for a firm what kind of pricing strategy how does your salespeople or your customer service people deal with them what kind of loyalty programs you have how do you change your pricing across your different customers how do you build a brand in your customers minds and we see these extra factors help explain more variance so we think the marketing level helps explain at the customer level this marketing perspective or customer centric perspective helps explain more variance putting that all together we come up with a definition of marketing strategy and we're going to use this definition through the whole textbook marketing strategy consists of decisions and actions focus on building a sustainable differential advantage relative to competitors that's kind of who we're trying to be this is how we're going to beat them this is what we're going to do and we're going to do this in the minds of customers we're going to take this customer perspective and we're going to do this to create value for all stakeholders and when I say stakeholders what do I mean obviously the customers one stakeholder we want to have value to the customer if we don't have value for the customer long-term they won't stay with us we'll go to a competitor we want to have value for the firm selling the product or service because otherwise they can't stay in business and keep innovating but we also want to have value if you will for society and for the employees and in some cases there's even other stakeholders so we recognize that there's multiple stakeholders in this definition so that's what we have is the definition of marketing strategy a question that often comes up is how is marketing strategy different corporate strategy very often in management departments they have a corporate strategy what's the difference between the two if we look at it this big circle is corporate strategy and here's a definition kind of a standard definition that they often use for corporate strategy let's look at it the overall scope and direction of the firm and the way in which its various business operations work together to achieve particular goals you can see they're not getting down to the customer level so if this big grey circle represents corporate strategy things like legal tax and finance that only falls in to the corporate if we go to marketing strategy here's our definition we just decided that's getting right down to the customers mind being customer centric and obviously the sales and marketing organization is very much focused on marketing strategy but there are other groups HR operations and Rd for example that actually worked for both our HR is both a part of corporate strategy but also is important for marketing strategy let's think about that let's think of a company like starbucks starbucks sells coffee they have a policy where they hire if you will very good people they give them a health care they give them a retirement plan they give them resources to go to college or to get advanced education how does that help their marketing strategy well when they treat their people like this guess what they can hire stronger people into the job because they're giving more benefits they can also make them more loyal and more as committed and build a better culture in the firm do you think that matters when you go in and work at a Starbucks and you go in as a customer and deal with one of these these employees of course it does they treat you very different this is one of the reasons Starbucks doesn't use franchises they want to have all their stores owned by themselves so their own employees so they know that the culture that they build that their people matter so you can see HR while it is a part of corporate strategy also can impact marketing strategy if you think of Walmart's operations and their supply chain so they can deliver a low-cost product very quickly and efficiently that impact their differential advantage which is they can have every day low prices R&D if you think of companies like Apple bows stereos speakers those innovative products they come out that's part of their image that's part of their brand message so these areas where some people don't consider that part of marketing strategy absolutely share part of corporate and marketing and I draw I purposely draw the circle and marketing strategy fairly big why because I would argue for most firms this is what determines its long term success not how well they fill out their tax returns or how they finance their firm or even their legal now these things can cause serious problems that affirms that they're not operating correctly but I think this is the essence of successful strategy at the corporate level and obviously at the market level next I'd like to motivate a little bit why bother focusing on market marketing strategy how does it matter does it really impact firm performance and I want to just show a couple things first there's lots of research documenting the importance of customer strategy satisfaction the brand and we'll hear about this in many of the sessions we go through but I'm going to use this chain ratio to describe it in a way a chain ratio work is this I'm going to look at a firm sale and I'm going to break down sales and there's an example of 500,000 by market demand that's how big the market is times how much share the firm has of that market so 10 percent in this case multiplied by the firm's average selling price if you multiply those three together you get the firm sales now we're going to do the same thing for gross profit we take firm sales down here just carry it down we multiplied by the percentage of the firm's gross margin and we subtract off the cost of sales and marketing expense and also other firm expenses this together would be the firm's sgna and what I want to look at is what kinds of things in marketing where does it affect this chain ratio so let's look at the first thing if you grow the market we'll use an example we'll stick to Apple when Apple launched the new iPhone a new smartphone did it impact the size of the overall market absolutely it increased it orders of magnitude so it grew the market which also helped Apple but also helped some of their competitors it made the market bigger when they launched a new product did it help their individual share yes they were able to steal share from the competitors so when they launched that new product it made the market bigger it gave them a larger share and in that product if you have better products it also made better prices in margin because their product allowed them to charge a premium and so what did that happen it impacted the firm selling price and it impacts the firm's margin so we can look and marketing initiative like a new rnv project where you launched a new iphone impact of the firm's sales revenue in three ways it made the market bigger it gave them a larger share and it gave them a higher price so you want to look at how marketing works sometimes it's hard to isolate it because it affects it in so many ways it also affects the firm's profit first it increased sales as we showed up here but it also increased the firm's gross margin so it had effect in multiple places lastly it also can reduce cost it can reduce sales and marketing expense how much free publicity free PR did Apple get when they launched that was there lots of newspaper articles news reports showing people's line lines of people standing outside the Apple Store that's all free PR how many people took their iPhone is showing it to their friend and say oh look this is a pretty cool feature that allowed the firm to grow their customers through word of mouth built their brand and that reduced their need to spend money on advertising so just one new product launch obviously a very good product launch impacted sales and profits in many many different ways and one of the reasons why it's very hard to isolate what's the impact of a dollar spent on building a better brand or improving a better product is it impacts the firm's performance at many many different levels so in addition to the academic research and managerial research showing it's important this kind of gives you a little flavor that it impacts across the firm okay that was kind of a quick overview of marketing strategy we gave the definition we talked a little bit about motivating why to even put effort into marketing strategy what I want to do next is I'm going to go through the four principles of market strategy and I'm going to give you just a quick overview so you have a framework in your mind as you hear the material over the next sessions and one thing I want to do on a little bit of terminology you notice up here I call it MP number one that's for market principle number one market principle number one combines two parts the first part is the first principle the first principle is the idea that all customers different so all customers different that's kind of the fundamental thing that is just a fact that leads to us needing to understand how to manage customer heterogeneity how to manage customer variation this is the strategy part when you put these two together the first principle that they're different plus the strategies you do to deal with those differences together those represent a marketing principle so very often I'll talk about market principle one when I talk about mark and principle that's the first principle plus the strategies to deal with it I'm going to go through all four of those so let's get started first I want to motivate why a first principle approach managers I would argue are being overwhelmed overwhelmed with the complexity of all the different tools and processes and research techniques how often have we heard about big data go study big data if you go to the book store you'll see new books come out every three months on a new marketing concept a new framework driven developed by a consultant how do we know when to use each of these when to apply it we think this framework we're outlining will help another thing I often bring up and this is ten years ago I used to be exclusively using cases to teach marketing strategy I would give an example of a firm and say look at this business situation look what this firm did and see how successful they are now I use very few cases I really use examples and I use some cases for data why did I shift away from cases well the problem with just using cases are multiple first it's hard to find a case for every marketing problem so you're sitting in the conference room two years from now and you have a marketing problem what if I never use the case to describe that individual marketing problem you'd say geez I I don't know what to do in that case I don't know in this situation because I didn't see that example that's a problem the second problem is let's say there was a case similar to your business situation and you follow it do you think doing the same thing that somebody did five years previously in a situation will work the same way I would argue it doesn't it doesn't because of really four different things that might be different you might have different customers than they did that's why your customers behave different you might be in a different stage of the industry or the product or market lifecycle so that might work early in the lifecycle but it doesn't work later you might be in a different competitive situation you might have different resources so these things might be different and when they're different just following what the Curt the firm did in the case might not work thus a key requirement for making good marketing decisions is to identify the underlying factors that the decision depends and we think these factors the most important ones are these four things and you'll recognize they're really tied each one to one of the first principles so our argument is this first principles approach argues that the market strategy is the pursuit of solutions to four fundamental marketing problems and organizes all the frameworks processes analyses to solve these problems that's really the essence of taking a first principles approach is we say these four are important so rather than just give you examples and say oh look at how this firm made a lot of money which I have this forum adding a lot example we're going to try to make it so it's very clear on how to understand these four situations and develop a marketing strategy so here's a little review very similar to what I just spoke up market principle one is all customers different we want to manage customer heterogeneity that's the techniques we're going to show you and how to deal with that problem the second one is all customers change we're going to deal you how do you manage customer dynamics how do you manage customer dynamic that's customers change over time what do you do firms do a lot to solve that problem third all competitors react and the way we're going to deal with that is we're going to manage our competitive or sustainable competitive advantage I'll often use an abbreviation for that I'll call that FC ASEA is a sustainable competitive advantage the idea is think of a sustainable competitive advantage as building walls around your business or maybe a moat end walls you're trying to protect your business because if you're successful you know competitors are going to come after you and you want to have some way to repel them we're going to talk more so you know competitors going to react this is how you build your barriers fourth after you do all these you're going to have to make some decisions and these decisions take money but you only have a fixed number of resources so we want to understand how do you best manage these resource trade-offs each one of these is going to be a chapter in the book and we're going to have a session on it okay now that we did a little overview of that I'm going to go through each principle just a couple slides on each one to give you that little executive overview the first one all customers different my premise is to you that for every product and service customers vary on their desires and needs for that product and service so let's think of something in the financial services there's over 9,000 mutual funds do we really need nine thousand ways to group stocks to meet your investment well I guess customers desire different things so they're able to get away with you go to a typical grocery store in the United States you get sixty thousand SKU zsk user shopkeeper units sixty thousand different things as you push your car up and down the aisle you look at something as simple as bottled water bottled water how many different types of bottled water is there at a typical US grocery store and this is fundamentally it's h2o it's the same ingredient in everyone most people would consider that a commodity but marketing has to jeez maybe it comes from Canada maybe it comes from a mountain in Hawaii it comes from Colorado is it from spring water or is it distilled water these differences is to put in a different kind of bottles the bottle tall does it have a a resealable lid is it a screw top all these differences allow people to position their water at different groups of customers and these customers have different desires and needs for bottled water even though at the fundamental level it is exactly the same chemical compound h2o and obviously it's been done for coffee cars you can name pretty much any product so I would argue all customers are different so how do firms deal with that generically what they do is they try to partition the customers if there's if this whole room all of you let's say we're going to look at automobiles let's say this part of the room all have three or four kids and you want minivans this part of the room once are all single and are fairly have a pretty good job and you want sports cars if I was a firm selling automobiles and I average and I gave you all survey on what your desires for a car were I averaged them together and I designed one car for the whole market that car would have minivan features and I would have sports car features how well do you think that car would solve the minivan people no I don't think it would work very well they say jeez why do you have all this energy and all this performance stuff on it I just want a car to have my four kids in the sports guys have cheese I don't want to have sliding doors on the side and this big ol lunker doesn't look very sporty so neither group would be thought if I sold that product and I had to compete against one firm that only made Vinny van and another firm that just focused on the sports car who would win guess why the guy focusing just on minivans would have a better product for that group then I would had a product for everybody and the same for the sports car so the way people are dealing with this is they're targeting smaller and smaller groups why because one of the things we learn if you target a big group and you average them all together your product doesn't fit everybody very well if I cut that group in half and I design a product that's perfectly suited for one part of that with a very homogeneous group my product will fit their needs better and that's why there's so many retails that's why there's so many car brands that's why there's so many different forms of water so the way firms are dealing with this idea that all cuts froz different they're targeting smaller and smaller segments and we've even seen this in the evolution of marketing where we move from mass marketing we kind of sold one product let's say a beer to the whole at a Super Bowl ad to everyone to now then we went to niche marketing and even today many firms are moving to one-to-one marketing and in many ways wonder what marketing is most effective when Amazon makes a recommendation for you for a they base that on all the other books you bought and they looked at what other people like that bought those similar book and makes an individual recommendation to you in some ways that a one go in marketing but there's a competitive race there's a competitive race if firms try to target smaller and smaller segments here's a good example we can think of it Sears Sears is a retailer from the US they used to its discontinued now but they used to sell a catalog hundreds of thousands of catalogs they would mail all across the US and families would really be excited when this catalog showed up this was before the Internet the catalog was about three inches thick and they sold one version of the catalog where they mailed one version of catalog to the farmer in Iowa and to the single person living in Manhattan the farmer might turn to page 200 maybe two pages of equipment that they'd be interested in for farming or maybe even some sports equipment and then the Manhattan person would turn to a different page but guess what's happened to them they ended up going out of business you know why multitude of firms came and design smaller catalogs one just for farmers one for just people in Manhattan maybe another one for a sports enthusiast if you would think of it if you compare it to a company called Eurosport Eurosport spells has a catalog selling sporting equipment mainly for soccer for there it has a jerseys for all the teams the EPL and and many different teams sierra's might have had four pages for soccer or for sports equipment if you're a spotter and soccer enthusiasts do you think you'd like to look at the four pages in Sears or the 30 or 40 pages by Euro Sports targeted just that what you're interested in guess what you'd rather go to the Euro sport so Sears lost that business and has happened one after another people came out and targeted niche after niche till finally Sears had a big catalogue and they weren't really competitive and hardly any of the any of the markets so why is this happening why are firms targeting smaller it's our niches why is it very hard to be a mass marketer today it's hard because customers have inherent desires and those desires vary dramatically some of those are real desires people are thirst day to have a desire for water that's a functional need no problem but there's also perceived needs marketers spend a lot of time increasing these perceived needs that you need a spring water or you need to have a little lemon spray too it's going to be fresher that way so customers do their needs do very both real needs and in some cases we convince them they have specific needs the other thing is if you focus on a narrow segment you're very much faster to respond to customers needs and trends when it changes let's think about this if I'm a firm and I sell products to all market segments and there's some small change going on in the healthcare market how quick am I going to be able to detect that change that change is lost in the noise of financial services government high-tech let's say there's another firm over here that only focuses on health care every one of their salespeople all they call out is day in and day out at health care people so in other words when this little change goes on in the healthcare guess what they see that change very very quickly every one of their customers are talking about that change so they pick that up and they're able to adapt to that very quick so when you're focused on a narrow niche you're faster able to detect change and respond you better match customers needs faster to respond this is happening more and more today because of technology technologies enabled this you can look either by getting data or and also searching people out on the internet you can find very small groups of customers and you can offer economically a product to them why because they can find you very cheaply when people only use to shop in a retail store if you're a small little person you only with the business the only way you could reach all those customers is to get your product put in all those retails today you can put it online and have people come in and target you very small so technology is enabled the only reason everybody isn't doing one-to-one marketing which really is the best way is because in some markets it's just not cost prohibitive to do that for example can you design a manufacturer car exactly how individual person wants no that's probably too expensive today but can you do it for clothing well it used to be firms made blue jeans and three sizes small medium and large and then as you know they've expanded out to you go into a Levi's store it's amazing how many different kinds of jeans they have but one of the things you're seeing happening and there's companies doing it today and it's going to be I think five years from now it'll be coming you'll be able to order your jeans custom-made to you you'll be measured with a machine that data will be set into a piece of equipment that'll be able to make jeans one-off that exactly fit you now you say wow that's going to be very expensive well it used to be printing different catalogs would be very expensive but if you look at your digital printing it costs no more to have the second paper come out of your printer than if it's different than the first one or if they're the same it used to be in the old printing technology if you had to change what came out it would cost different that's not the case today and it won't be the case in the future for clothing well so we can see this technology is allowing one-to-one marketing to be successful so what do we said we said first principle one is all customers different how do firms deal with it they're dealing with it by segmenting smaller and smaller ultimately to get the one-to-one marketing and these are some of the reasons this is trending in that direction so that's kind of a very quick overview of the first principle and if you will the first marketing principle all customers different and we're going to manage customer heterogeneity for every one of the market principles we're going to have a framework it's a visual representation of what we do it works by coming from inputs this is where you manage customer heterogeneity and this is what your output is and I think this is a fairly intuitive or simple way to think of it let's walk through this and we're going to go through this again when I do the whole chapter just on market principle one the inputs are what sometimes are called the three C's it's information about all your potential customers their needs and their demographics things about your company or your SWOT analysis strengths weaknesses opportunities threats you need to have that information about your competitors too you take these three pieces of information about your customers all potential customers not existing your company your competitor and you feed it through these approaches and processes and analysis segments targeting and positioning will go in in a lot more detail that's the basic process for dealing with the idea of all customers different we're going to talk about perceptual and position Maps and this idea of customer centric view really putting the customer at the center of your decision-making there's a set of analyses that help to deal with this factor analysis cluster G matrix discriminate and classification analyses so what is the output you get well the first output you get is very helpful so back before when I was talking about the car let's say this was the whole market for automobiles after I go through this one of the things I'm going to get out is I'm gonna get a map of the industry it's going to show me the different segments is going to say here's a group of consumers that want minivan here's a group of consumers that one sports car sedans trucks it's going to give you a map of the market is that helpful yes because how can I decide my decisive point of attack if you remember back to the beginning of market strategy or actually military strategy how can I decide that if I don't know the landscape that first thing it gives you is a map a map of your market the second thing it's going to give you detailed information so you can just detect you can determine which of these segments you want to go after do you want to go after the mini man or you want to go after the sports car it allows you to aim your market resource to one of these segments to that decisive point where you think you can have victory where your firm can beat out the competitors and have a relative advantage the third thing is after you decide you have the map you pick which one you're going to go after now I have to really didn't start develop my strategy it's how am I going to win what do I want customers to think about me in my target segment it's really the who want and why of going after your customers so that would be the framework we're going to use to manage customer headed heterogeneity in order to deal with the fact that all customers differ ok now I'm going to do the same thing for market principle – just a quick overview on – on a couple slides first customers designs and needs for most products and services vary over time we feel that the fact let's stick to our automobile example do you think the car you have while you're sitting as a senior in high school or maybe a freshman at college do you think the needs of your car there are going to vary versus the car that you need when you take your first job or maybe after you get married and have children or maybe after you retire as your life goes on for all the different products you buy your needs and desires change some of those are functional needs some of them are other so consumer needs change sometimes there's trigger events that make these changes occur just think of all the things that happen when you have a child do you think your financial services needs change your automobile needs change even your entertainment an interesting fact is people buy more beer after they have children why they can no longer go out to the bar so they buy it and bring it home industries and market changes if you look at the personal computer industry that has changed dramatically over the last 20 or 30 years so customer's needs if we summarize very not only due to the inherent differences in people that's market principle one the idea that all customers different we have to manage heterogeneity but they also change because people and markets change over time so this is a tough problem if you're trying to deliver a product or service that exactly meets your customers needs first all customers differ and guess what they're all moving and so you have to track them as they move in order to satisfy them over time thus our segment and targeting that we talked about under market principle one has to vary for the idea that customers life cycles change and there's customers dynamics so let's go through the framework for this we have three inputs for this also for market principle – first you have to have information on your individual customers how does your individual customers sales margin the cost this gives you financial and also how do their behaviors and their needs in lots change over time so now we focus more into our own customer base and we want to understand how those customers are changing over time you have to look at your past marketing programs where you found your new customers your acquisition how you retained your new customer how did those different programs work we're also going to study our lost customers lost customers have a lot of good information in it when a customer's been buying from you and they all of a sudden leave and start buying from somebody else they made a conscious decision they had to take some effort to do that I think an interesting example of this and I'll bring this up later is Honda Honda was surprised at one point where they found they had customers that gave them a 10 out of 10 on a satisfaction scale these people bought two or three hundreds in a row and they thought they were very loyal customers they were surely satisfied customers and all of a sudden they found these customers no longer buying a Honda and they said why they went and investigated these lost customers and they found the problem was these people had advanced in life they've got promotions or earning more money and they want to have a higher status car than Honda it was actually the reason Honda came out with a cure so that these customers that were migrating out of owning owning a Honda could move into their next brand and their next higher-end brand was inaccurate a lot of good information that's not always the good news on lost customers sometimes it's because you have product or service failure and in those cases you might need to fix the problem also what are the approaches and analyses we use for this we use a life cycle we do dynamic segmentation and we use this thing we call acquisition expansion and retention model you're going to see us talk about that a bit it's going to be the air model air AER come to find out when you first acquire a customer they're a little different then after they've been in your portfolio for five years and we're going to understand that we need to treat those customers different lost customer I already spoke up some of the analyses we do here lifetime values CLV hidden Markov model choice models and we also look at fact or cluster discriminate and classification analysis just like we do at market principle one these a lot of these techniques can be used in more than one market principles some of them are best suited for one of them and we'll go through that next time goes on so what do we get out of this framework if we know how to manage customer dynamics we get three outcomes segmentation and customers and this is the outcomes of if you will air first market principle one segments the whole market let's say we decided to go after the sports car market principle two now focuses on the sports car and we understand their dynamics as they go through the life when they first buy let's we'll pick on a BMW they first buy a BMW what do they want maybe it's a 3-series and then over a number years they get a little bigger maybe to go to a five series at some point geez maybe the kids leave the family and they want to go to a two series or whatever maybe a convertible so we segment the first outcome is segmenting our own customer base and understanding how they migrate through our lifecycle once we understand that why they migrate maybe they migrate with kids maybe they migrate with try Ehrman then we go through air positioning air positioning statements are very similar to the overall positioning statements we have for the firm for the overall market but they actually look at what we want customers to think about us when they first start buying from us let's think of financial services as a college if when you're in the junior senior year of college you're going to get bombarded with applications for credit cards fifteen to twenty a year why banks coming after you because they're know you're going to graduate and start making money and they know if you can first get a credit card then after a couple years maybe they can give you a home loan maybe a checking account savings account maybe retirement planning life insurance whatever the case may be these positioning states they have positioning statements is what that financial services company wants to have you think about them when you first graduate that positioning statement that might be their acquisition positioning statement their expansion might be four years later and what they want you to think about when you're adding more mortgages when you're straining to expand services and then for each of these segments within the your own customer portfolio you want to look at the strategies that will best work for them so we have air positioning acquisition expansion retention positioning we have air strategies actresses and expansion retention strategy so that ends the second principle first one's all customers differ we manage customer heterogeneity second one all customers change we manage customer dynamics now the third one let's say we do both of those things very well first we segment the whole market we go out to sports car then we understand our sports car customers and how they migrate through their life cycle and we're making lots of money dealing with the sports car we know competitors are going to come after us so next we're going to talk about what can we do competitors are always copying successful strategies and trying to innovate new strategies that strategy could actually be a new business process or actually a new market actual new product and you'd say well once a firm gets big it stays successful well it's very interesting to understand only one firm in the original Dow is still there General Electric all the other firms were the leaders in their industry think of Kodak Eastman Kodak Polaroid film industries do you think how do those firms did they both went bankrupt dropped from the Dow so things change and no matter how strong your position competitors are going to come after you typically given enough time and money your strategy can be copied the so we need to build this barrier I just spoke of earlier this barrier are the walls around our business the walls and barriers around our business we turn that wall sustainable competitive advantage and it needs three things to have a sustainable competitive advantage for something in your firm to be called a sustainable competitive Vantage it has to meet three conditions first customers have to care customers have to care that's a customer centric view right they have to care we know their needs and desires and they have to want it second if you're going to compete on this fact you have to do it better be it brand be it performance be it low cost you need to do with veteran competitors and the third it has to be hard to duplicate because if customers care you do it better but everybody can copy you you're not going to be able to be sustainable so it has to meet those three conditions sources of competitive advantage it's really three categories of sources we're going to look at first building brands and relationships if you look at coca-cola the soft drink what do you think the biggest barrier of that firm being taken to being knocked out of business do you think it's a recipe of making their soft drink taste better well no in a blind taste test actually Pepsi beats coke if you look at the new coke that was a brand failure they actually designed that because it was a more successful taste in a blind taste test but the real barrier to the business isn't their recipe it would only take a couple million dollars for somebody to make a soft drink that would have a better blind taste test their barrier to the business as their brands that brand people have seen from their whole life from their young children its resides in their mind another way you can build barriers is relationships in some cases you might have such a good relationship with somebody who provides you services you would never think maybe your person who cuts your hair your hairdresser very often people of monona they move to fly back to their old town to use their old hairdresser do they really believe there's no one in their own town that in their new town that can't make cut their hair well enough no it's that relationship bond people have been known to walk by one Starbuck to go to another Starbuck to get the exact same drink only because they can get a head nod from the barista why because the person recognizes them they have a relationship relationships are very powerful we'll talk about how relationships can be a big barrier you can also offer innovative offerings new products and services sometimes you can patent those like in pharmaceuticals in other cases you might have trade secrets low cost location you can be the first there's lots of ways you can build barriers in innovative so you look at there's really three main ways we build barriers brand offerings and relationships those three together we call Boris strategies Bo our brands offering relationship we use the term offering rather than products to capture both products and services because most offerings are both products and services and we're going to show how these are how we build barriers around our business you might say of these three which ones are building growing importance we'll talk more about this but brands and relationships and especially relationships are coming back to the forefront as a way to build barriers the reason is innovation while important in many industries is one of the easiest things to copy there's only a few industries can you patent it and really have the patent stand up to prevent people from working around your patent pharmaceutical is a good example of that so what's the framework for market principle 3 if you look at the inputs in this case are the outputs of the first two principles market principle 1 and 2 positioning statements for market principle 1 err strategies from excuse me for market principle 2 we also need to look at future trends this goes through the same framework of approaches processes and analyses for managing sustainable competitive advantage we're going to look at things like the equity stack air strategy and bore equity grids brand and relationship management innovation process we're also going to look at a number of analyses these field experiments conjoint multivariate choice models what do we get as outputs we get how we're going to win today and in the future we're going to understand what is our sustainable competitive advantage now and in the future because firms have to change ge would have not stayed as being the only firm to remain in the Dow if they still only made light bulbs and switch equipment they shifted they ship to the services they shifted a lot to financial services funding thing now they're moving more to knowledge in the digital economy they followed what happened based on future trends very infrequently can you have the same sustainable competitive advantage forever the other thing we're going to get out is we're going to get our board strategies and this is where we're really going to spend a lot of money in time if you're a firm building brands innovating new offerings and building relationships with your sales organization you're inside sales and customer service team that's where you spend a lot of money and it's where we spend a lot of effort in marketing we're going to actually spend one whole chapter on each of these because these are from marketing this is actually a big part of how we are successful in building sustainable competitive manner now we're going to look at the fourth and last market principle which is the idea that all resources are limited so if you look at most marketing decisions required trade-offs across multiple objectives let's think of some of these objectives it could be you have a certain budget you could spend it on advertising salespeople discounts to customers Rd Channel coops many many examples so how do you decide where to spend your money in some cases it's not just a month money trade-off it's a message trade-off do you think as one firm you can be seen as a high-status brand and the low cost provider let's think of Tiffany jewelry very expensive they also and they have a high-status brand today all of a sudden want some products that are at the low end don't you think that would hurt their high-end brand so very high very often it's hard to do two messages you have to decide your target market and have one message for them and there's short term versus long term trade-offs very often if the quarter isn't going well financially firms will cut back on their advertising spend so that money can be shown as profit cut back on the cost thus you need to balance market resources across these you need to cross different customer segments across acquisition expansion retention how much budget do you want to spend on bringing in new customers versus retaining old ones across brands offering relationships are you going to spend more money on advertising or more money on your sales force and across all the different marketing mix elements so what if the grid look like here the framework these are the inputs from all three from market principle one two and three positioning air strategies and Bawra strategies it comes in we're going to go through both the heuristic in the attributional approach for making resource decision trade-offs and we're going to have some analyses be it response model experiments and anchor and adjustment we'll go through those in detail what do you get out you get out both the metrics you're going to use to measure success across all your market principles as well as what you need this is where you get into the action items your budget and your plan how BIG's the budget how do you allocate it across what time horizon so we do all that work to ultimately come up with a marketing plan and a marketing budget so that's a summary of the first principles of marketing strategy we break it down into four so really all the rest of the material is going to go through these in detail and especially we're going to spend a lot of time as I mentioned on how to build sustainable competitive advantage through brands offering and relationships now the question might be well how do these four fit together do you do them all separately or is there some natural sequence well there is a natural sequence here's the picture and I'm going to walk through this a little bit you do market principle one that drives the positioning statement that positioning statements used for understanding how you're going to build walls around your business because your position statement tells you who your customers are and how you're competing so that tells you how to build your wall it also gives you input into your resource trade-offs market principle – on customer dynamics give you positioning strategy statements around acquisition expansion retention this one's for the whole market this one's for your existing customers only they also feed into how you're going to build sustainable competitive advantage and how you make resource trade-offs out of your sustainable competitive and ajar all competitors react bucks you come out with your board strategies how are you going to use brands offering relationships to build barriers around your business all three principles feed into managing resource trade-offs what comes out of this your plan and that's your se a so you can see there is a natural sequence to these it's also interesting to note if I was teaching this or I was going through this textbook let's say ten years ago I would only focus on these two you do your STP dealing with all customers different and you drive right down into your market mix trade-offs and do your plan we're marketing is really advanced in the last decade or so is we've added in this idea of managing dynamics we've added in this idea let's really understand how to build barriers around our business or SCA the last thing I'd speak to and this is really only interesting to you if you're also using this book in conjunction with mark strat again that's very much optional but if you are mark strett does allow you to experiment and actually in your classroom and among each other you can practice the first principle so let's go through how mark strat does the first principle the first thing it does it allows you to target to meet needs of different customer segments and manage heather magenta heterogeneity so they have multiple different markets let's look at if you're familiar with this with the so night market they have high earners and savers and it allows you to target those with different products second it allows you to deal with customers need because each week as you're competing customers are changing they might be moving in different directions some segments get bigger some might become more price sensitive the third it allows you to build SCA you can launch new products you can advertise certain characteristics about your product to build a brand around your product and then lastly it allows you and it makes you make resource trade-offs between advertising R&D sales and you have to do that across multiple products so it's kind of interesting and I like this simulation because it allows you to practice and actually do the first principles well this really concludes the first session where we looked at kind of an overview of marketing strategy based on the first principles in data analytics and we did it across all customers different customers change all competitors react all resources are limited and that's going to be the organizing framework for all this material thank you Oh [Applause]

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