SEGMENTATION, TARGETING AND POSITIONING

INTRODUCTION
Increasingly, organisations are recognizing differences in customer preferences and
needs when designing their product offerings. The marketing process of segmentation,
targeting, and positioning (or STP) identifies a firm’s potential customers, selects which
customers a firm should pursue, and formulates its value proposition for its target customers

The first step of the process, segmentation, groups customers with similar needs into
customer segments and then determines the characteristics of customers in those segments. For
example, a company that sells packaged tea leaves might uncover two customer segments: price-
insensitive customers and relatively price-sensitive customers. These price-sensitive customers may
have lower incomes but perhaps buy tea frequently and know a lot about the product category.

The next step is targeting, or selecting segments that the firm wants to focus on for its
products or services. This is done based on the attractiveness of segments (such as size and potential
profitability), intensity of competition, and a firm’s capability to serve customers in each segment.
The tea company might decide to focus only on the price-insensitive customers by offering a
premium product. For these customers, the company might offer an attractive tin containing loose
tea mixed with bits of fruits and flowers, or a tin filled with individual, pyramid-shaped linen sachets.

The final step is positioning, or formulating the firm’s value proposition for the target segments, and
developing an action plan for them. In our example, the tea company may
position its high-priced product as a premium/luxury product designed for the consumer with
good taste, while its low-priced tea could be positioned as a good value for the smart
consumer. This positioning is communicated to consumers through the ways in which the
product is designed, packaged, distributed, and advertised.

1. SEGMENTATION

Segmentation is the separation of a heterogeneous group of customers with different needs into
homogenous segments of customers with similar needs and preferences. This allows firms to tailor
their products and services to better meet the needs of each segment; additionally,they can identify
underserved customers and unfulfilled customer needs.

Without segmentation, companies will often overlook opportunities as they continue to provide a
single solution for everybody, instead, by using segmentation they can customise their offer.
Segmentation also informs a company about potential new opportunities. Segments with unmet
needs are opportunities that can drive
business strategy and new product development. Note that firms do not create segments; they only
uncover them. Indeed, different companies may segment the same market differently, depending
on how they view consumers and their needs.

- Segmentation Characteristics
There are often multiple ways to segment a market; however, for a segmentation to be useful, it
must be identifiable, substantial, accessible, stable, differentiable, and actionable.:

1. Identifiable. An organisation should be able to identify customers in each segment and to

measure their characteristics, such as demographics or usage behaviour.

2. Substantial. Although the increasing availability of data makes it possible to create micro
segments, it’s usually not cost-effective to target small segments. To be useful, a segment
therefore needs to be substantial—large enough for a firm to serve profitably.

3. Accessible. There is not much value in creating a segmentation scheme if an organisation

cannot reach the segments. To be accessible, a segment needs to be reachable through
communication and distribution channels independent of other segments.

4. Stable. A segment should be stable over a long enough period of time that any marketing
effort would be successful and profitable. For example, lifestyle is often used as a
segmentation variable but the stability of lifestyle segments in the international context
appears to be low. Many experts believe in the global convergence of consumer needs and
wants, which also suggests that international segments may be very dynamic and constantly
evolving.

5. Differentiable. Consumers in a segment should have similar needs, and these needs should
differ from the needs of consumers in other segments.

6. Actionable. An organisation should be able to create products and marketing programs for
attracting and serving customers in the segments identified.

- How to segment customers?

The key question to ask when doing the segmentation process are:
1. Who are the customers? → demographics, media habits, lifestyle
2. What have the customers done? → usage, loyalty, profitability
3. Why do customers make a decision? → need, preferences, decision making process.

1. WHO?
While the ultimate goal of segmentation is to group consumers with similar needs and preferences,
often it is easy to form these groups on the basis of readily available information about consumers,
such as their age, income, education, lifestyle, or family size. In business to business (B2B)
segmentation, the equivalent characteristics could be type of industry or size of business. In this
case, the manager hopes that consumers’ demographic and related characteristics are compatible
with their needs and preferences.
However, a combination of various demographic, geographic, and lifestyle factors is often used to
segment a market. Here are a few examples of how various companies have segmented their
markets, not always successfully:

- By demographics: the elements taken into account to define the demographics are:
- Population Density
- Population Growth
- Income
- Income Growth
These are usually reached through Census Data or Data Providers such as Wiland.
Example: In March 2013, the computation software manufacturer offered the standard edition of its
program However, it also offered a student version with limited features at less than half the price
of its standard version. Wolfram knows that students cannot afford the higher priced version and
perhaps would not need to use all the sophisticated features of the standard product
 - By behavioural: behavioural segmentation is the process of grouping customers according
to their behaviour when making purchasing decisions. Market researchers observe aspects
such as readiness to buy, i.e., the knowledge they have about the product, level of loyalty,
interactions with your brand or product usage experience, etc.

- By psychographics. By assessing intangible consumer characteristics such as lifestyle,

personality, interests, values, and attitudes, psychographics allows companies to segment
customers by traits that are not easily identified. For example, PRIZM, a system offered by
Nielsen (a U.S.-based market research company) to client companies, is a commonly used
lifestyle segmentation scheme that groups consumers into 11 lifestage groups and 14 social
groups.10 Another company, Kenya-based CfC Stanbic Bank, segments African customers for
loans based not only on repayment rate of previous entrepreneurial seed loans, but also on
results from “psychometric” testing of loan candidates. This includes anything from
motivation questionnaires to reasoning tests— which gathers useful information not usually
found on a loan application.

2. WHAT?

“What” variables emphasise customers’ purchase behaviour. In the age of big data, it is easy for
firms to collect and store transaction data, web traffic, multichannel buying patterns etc. This allows
firms to segment customers based on variables such as how recently and frequently they made
purchases, their brand loyalty, or their share of wallet (money a customer spends with a firm as a
share of all the money spent on that category) → connected to behavioural segmentation.
Consumers’ past purchase behaviour is generally a good predictor of future behaviour,
purchase-based segmentation provides firms with an actionable strategy to target the right
customers. Companies often segment them based on three factors, called RFM:
1. Recency,
2. Frequency,
3. Monetary value of purchases.

This approach is commonly used in database marketing and is easy to implement for companies who
track their customers’ transaction data. Research has shown that segments based on this RFM
model correlate well with customers’ future purchases. Customer loyalty—or the likelihood that a
customer will return to buy a company’s products over those of a competitor’s—is another
important variable for segmentation.

3. WHY?

While studying consumers’ past purchase behaviour and loyalty is a good way to assess their future
purchase behaviour, it is only through knowing why consumers make the decisions they do that we
can truly understand their needs and preferences—the fundamental bases of segmentation. Such
insight helps firms convert non loyal consumers into loyal consumers, design new products to appeal
to new groups of consumers, or change their marketing strategy to increase share and profitability.

Segmentation- Desirable Properties of Segments: LIDS

● Large: Each segment is large enough to be useful
● Identifiable: Can easily assign customers to their segments
● Distinctive: Segments don’t overlap
● Stable: Minimise changes over time

2. TARGETING
Targeting involves evaluating the attractiveness of each market segment, selecting one or more
segments to pursue, and then designing marketing programs to serve them. The goal is to select
segments that improve the organisation’s chances of maximising its long-term profitability in those
segments. A firm’s choice of target segments depends on the level of segmentation in a particular
situation or marketplace, which ranges from mass market to customization, or one-to-one
marketing.

Some markets may be undifferentiated, meaning that there are virtually no differences in
the needs of customers. In these markets, companies may decide to adopt a mass-marketing
approach by designing the same product for everyone. Large global firms tend to follow this
approach by appealing to the largest number of customers via broad distribution and mass
communication. This approach allows firms to reach the largest potential market at low cost because
of economies of scale in product design and marketing. The risk, however, is that competitors are
able to nibble at the edges of large firms by carving out a niche for themselves.

On the other extreme, companies can customise their products and services for individual
customers. Firms’ ability to collect data and reach customers through the Internet can enable one-
to-one marketing and mass customization→ companies are able to offer customers the ability to
design or personalise their own products on a mass scale, turning customers into a “segment of
one.” ex. Levi’s now offers customizable jeans, Google’s Gmail offers ads based on the content of an
individual’s emails etc.

But mass customization is not suited for all products. It is appropriate either for:
- technology products and services where the cost of a new product version is virtually zero
(e.g., a personalised ad)
 - industries where flexible manufacturing technologies exist to make customised products in
a cost-effective manner + customers are willing to pay a premium for products and services
tailored to their needs.
→ Paying more for customised jeans that look good and fit well is more appealing to many
customers than paying more for customised toilet paper or laundry detergent.

For most products, the reality falls somewhere in between these two, and that is why segmentation
remains a very important concept .
When choosing among segments, it is tempting for a company to target segments that are large,
have high growth potential, and where the share of the company’s brands is low, as the company
has a lot more room to grow in a large segment with low share.
→ But the segment share for a company might be small because its products do not appeal that
segment or because of intense competition. In general, three factors should influence the selection
of segment:
1. Consider the characteristics: how large they are, how fast they are growing, and how
profitable they are likely to be.
2. Consider its own competencies and resources: Even if a segment is large and growing, a
firm may not have the capability to address the needs of this segment. Managers should also
consider their long-term objective in pursuing a segment; for example, they may want to
target a small and emerging segment, since it may allow their organisation to build unique
skills that provide it with a strong competitive advantage in the future. In this case, the
choice of target segment may be driven by the desire to learn and develop long-term skills.
3. Consider current and potential competition: A large and growing segment is likely to draw
attention from many competitors→ could lead to a price war and low margins. Sometimes it
may be better to pursue a small niche segment that does not attract the attention of large
and powerful competitors.

These criteria may lead a firm to choose one or more segments.

- Small firms or firms with a unique product (e.g., Ferrari) may choose to focus on a single
segment and pursue a niche strategy → dominant share in its segment, and even if this
segment is small in size, it can have high profit margins.

- Some companies target multiple segments simultaneously, often by designing different

products to meet the needs of different segments. Automobile companies target multiple
segments with sports cars, minivans, hybrid cars, sports utility vehicles, and so on.

- Sometimes companies design a strategy with a sequential entry into multiple segments. In
such a case, a firm may start by building a strong position in one segment of the market and
slowly expand its reach in adjacent segments. For example, Porsche started with a focus on
the sports car segment and later expanded with the launch of Porsche Cayenne (station
wagon). This strategy is often used to preempt the competition from gaining a foothold in
any of the segments and later encroaching on a firm’s more profitable markets. Even so, the
approach not only requires significant investment, but also carries a risk of failure because of
its lack of focus.
 - STRATEGY FORMATION

Segmentation and targeting significantly influences an organisation’s resource allocation and

marketing strategy. Specifically, this process can influence the organisation’s product, pricing,
communication, sales force, and customer management strategies.

Product strategy
Product strategy is the plan created by a company to define the vision for a product and identify how
that vision will be realized.

Pricing strategy.
Pricing strategies refer to the processes and methodologies businesses use to set prices for their
products and services. If pricing is how much you charge for your products, then product pricing
strategy is how you determine what that amount should be.

Communication strategy.
A communications strategy is a plan for communicating with your target audience. It includes who
you are talking to, why you are talking to them, how and when you will talk to them, what form of
communication the content should take and what channels you should use to share it.

Salesforce and channel strategy.

Business-to-business companies often segment their customers based on the volume of transactions
and their potential value to the firm, as we saw earlier in the case of Hill-Rom, the healthcare
equipment manufacturer. Many companies set up different channels with different sales teams to
target each segment. For example, national account teams call on service-oriented customers who
want and value consultation with the sales team, while low-value, infrequent customers are serviced
either by a different sales team that is more transaction-focused or by independent manufacturer
representatives that cost less.

Customer management strategy.

Companies use customers’ past purchase behaviour and RFM segmentation (how recently or
frequently purchases were made or the monetary value of the purchase) to decide which customers
should receive catalogues and how frequently. Airlines’ loyalty programs reward their best
customers by offering them free upgrades, lounge access, and priority boarding.

Targeting - Desirable Properties of Targets: PFD

● Potential: Sizable and growing
● Fit: Must fit with core competences
● Defensibility: Advantage over competitors
3. POSITIONING

THE HEART OF THE MARKETING STRATEGY

Analyzing the Marketing Strategy definition process is important to understand the heart: we’ve
already now it like “THE STP PROCESS”. It’s composed by 3 parts:

- SEGMENTATION group customers based on similar needs.

- TARGETING assess attractiveness of each segment and selecting which one to go after
- POSITIONING definition of the value proposition for the selected target

POSITIONING

The process of deciding what is the best message, in avertedly, should make you sure about several
aspect asking different question:

- What is interesting for the consumer?

- What are they looking for?
- Can the competitors offer the same thing?

Usually, the intuition is to make a general statement that try to capture all the aspect of the product
in order to differentiate it from the competition. The purpose is to create something specific, clear
and unique. The reason why is that all customers are bombarded by thousands of messages from all
brands which are competing for a share in our attention, understading and spotting in our mind.

However, through positioning plans in the mind of the prospect, the desired brand meaning, is what
managers wants that the consumer thinks about the brand.

According to the definition of Keller in 2008, he defined the positioning like “The act of designing
the company’s offer and image so that it occupies a distinct and valued place in the target
customer’s mind”.

A good brand positioning helps guide marketing strategy by clarifying what a brand is about, how
it’s unique and how it’s similar to competitive brands and why should consumers purchase/use the
brand.

Captured in the Positioning Statement: a strategic internal statement used to guide tactical
executions.

2.DEVELOPING POSITIONING FOR COMPETITIVE ADVANTAGE

THE POSITION STATEMENT

The positioning of a brand is expressing in a statement, most precisely in a positioning statement.

For example, Voss declared that the brand is “ For upscale consumers looking to make a design
statement with their choice of water, Voss is the only brand among all bottled waters that offers the
purest and most distinctive drinking experience, because it derives from an artesian source in
southern Norway and is pakaged in a stylish, iconic glass bottle.”

The positioning statement is composed by 4 different element:

1) TARGET Who Is the exact target, For whom?; For which occasion, When? Where?
2) COMPETITIVE SET Relative to whom is the brand position?
3) UNIQUE VALUE PROPOSITION What value? What unique benefit does it offer?
4) REASON TO BELIEVE reason to believe to this value proposition; Why? How?

Regarding the Voss positioning statement is possible to identify this elements:

- TARGET “For upscale consumers looking to make a design statement with their choice of
water”
- COMPETITIVE SET” Voss is the only brand among all bottled waters”
- UNIQUE VALUE PROPOSITION” Voss offers the purest and most distinctive drinking
experience”
- REASON TO BELIEVE “ Because it derives from an artesian source in southern Norway
and is packeged in a stylish, iconic glass bottle”

Entering more deeply into analysis of the UNIQUE VALUE PROPOSITION, which describes what is the
unique benefit that the brand offers to its target, we can declared that it’s represente the most
important and the hardest element to articulate.
The two elements you need to consider when building the unique value proposition, are:

- PoP Point of Parity

- PoD Point of Difference

both related to the competition.

PoP: POINTS OF PARITY

There are two types of PoP we can consider: Category PoPs and Competitive PoPs

- CATEGORY PoPS

Necessary associations to be a legitimate and credible player within a category . Necessary, but not
sufficient for choice. Establishing Point of Category is important when a brand is extended to a
different categories; you need to establish a competence and credibility in that category to show
that you actually belong them.
For example, for a bank this would be offering a variety of savings account in an app.

- COMPETITIVE PoPS

Associations designed to negate a specific competitor’s Point of Difference, trying to break-even on

important associations of the competition.

If you’re using Point of Parity one can built Vertical Differentiation. The idea of the Vertical
Differentiation is to stress your superiority on this Points of Parity

One concrete example of using Point of Parity in its Positioning, is the example of Westin Hotel:
providing a comfortable bed in a night sleep, is the basic offering that a hotel can have. However,
Westin Hotel, created the Heavenly Bed line promise to its guest a comfortable and the best night
they can live

PoD: POINTS OF DIFFERENCE

Point of Difference are Strong, Favorable and Unique associations:

- They may be based on any type of attribute, benefit or value association

- Customers must believe they cannot find the same attribute/benefit/value in a
competitor

The point of difference refers to something:

- Functional it means performance-related considerations

- Abstract it means emotional like image-related

Using a Point of Different approach you can achieve Horizontal Differentiation. While vertical
differentiation involves claiming superiority on a point of parity, the Horizontal means focusing on a
unique point of difference that nobody else talks about.
A good example of Horizontal Differentiation is Swatch. Until Swatch came around, watch
manufacture tried to promote the tradition and different part of the watch. Swatch promoted a
watch as something fun and individual.

UNIQUE VALUE PROPOSITION: SUCCESS CRITERIA

How do we know if the point of difference are successful? How we can measure the success of the
Value proposition?

There are 3 characteristics (the 3 c’s theory) that the preposition need to have:
 - RELEVANCE: need to be something that is relevant to consumer, something that
consumers care about and fulfil the need that they have. Without relevance, there are
no reasons for that product or service to exist Refers to CONSUMERS
- DIFFERENTIATION is not enough the fulfilment of the consumer need if the competition
already answered to this need. For this reason, the value proposition need to be
differentiated from the competition: has to be relevant but has to cover the customer
needs in a different way compared to competitors.--> Refers to COMPETITORS
- CREDIBILITYthe proposition need to be credible, meaning that is believable coming from
the company. This is related to the know-how, resources long-term plans and value.-->
Refers to the COMPANY ITSELF

UNIQUE VALUE PROPOSITION: CLAIMS LADDERING

The 3 different categories could be placed in a hierarchy going from the Functional ( at the bottom )
to the more Abstract ( at the top).

- FEATURES / ATTRIBUTES unique functional attribute of the product

- BENEFITS translate the product features into what it means for the customer or the
benefit they will get out with a certain features
- VALUESrepresent an abstract interpretation of the benefits
The idea of this ladder is moving from the functional and specific to the more abstract, creating and
making the communication better.

For example, considering the brand Pampers we can create the following claims laddering:

- FEATURE/ATTRIBUTE “0% chlorine bleaching, parabens and natural rubber latex”

- BENEFIT“Our softest diaper ever wraps your baby in comfort and protection”
- VALUE “Love. Sleep. Play”
 - PRODUCT PORTFOLIO MANAGEMENT

Most companies start by selling one product or one brand, but as they look for opportunities to
grow, they rarely keep the choice of one single brand/product. The tendency is to keep adding
different products or brands in order to cover different (therefore, more) segments in the market.
Ex.→ Sagres through the years added a dark and auburn variant to its portfolio, also a non alcoholic
one, a lemon one etc + they added different sizes and formats such as the mini size.

+ The parent company (central cervejas e bebidas) offers more than just beer: they market
ciders, flavoured water, and other beer brands such as Heineken and Guinness.

Product portfolio is the complete range of products produced by a business, including product lines
and individual products. Also called, a product mix.
→ the product line is a group of products that are closely related to each other, and are viewed as a
unit because of marketing, technical, or end-use considerations. They are also sold under the same
name, and all of this because the products under these categories either:
1. Function in a similar way
2. Sold to similar customer groups
3. Marketed through the same types of outlets

Ex→ “Vegalia”, a plant-based food line with different products that, however, respect the three
conditions mentioned above

→ As a company’s offering becomes more complex, the company starts to need a system to better
structure the overall offer.

Strategy: a product portfolio management strategy involves the design deployment and
management of multiple brands as one coordinated system. It tries to reconcile two almost
competing objectives:o
1. Reaching a comprehensive market coverage
2. Doing n.1 without cannibalising the sales of other products, so trying to do it in a
complementary way

The goal is to have a portfolio that covers a variety of needs, but without any overlap or duplication,
so that the products taken together can function as maximizers of the value of the overall portfolio.
Product breadth and depth

→ The breadth represents the different categories a company’s offering can touch. Companies will
subdivide the divisions or categories based on customer segments or product type (ex. Zara has:
women, men, kids; P&G has: body care, hair care etc)
→The depth represents the number of items in a given product line, or how a company can satisfy
customer sub segments with different taste and price sensitivity. Depth decisions are driven by how
many different segments within the target market the company chooses to serve.

The portfolio size is built over time→ ex. Inditex: it built the portfolio organically over the span of 30
years, expanding primarily in terms of depth (addressing different age and price groups) and to a
lesser extent in terms of breadth (zara home). The faster way to increase a portfolio is through
acquisition: simply buying another company and adding it and its offer to the company’s portfolio.

Why is portfolio management important? → Example of P&G

P&G has been through a major reconstruction that took place in 2016. In the early 2000s, the group
was operating with more than 250 companies, however 50% of sales and 66% of sales growth came
from only 10 of these.
This pattern of growth continued until 2016, when they decided to revolutionise their portfolio by
becoming more efficient. As a result, P&G reduced the number of brands to 65 (70% reduction) and
by reducing the breath to 10. They impacted the entire organisation:
- Manufacturing platform: -50%
- Number of roles and positions: -32%
- Advertising and PR activities: -50%
- Legal entities: -50%
They also reorganised the entire corporate structure: from 16 business units, to a streamline system
of structuring end-to-end around those new 10 categories. After this change, sales grew at a faster
rate and higher, they achieved 10 billion productivity products.
If managed correctly, the portfolio can bring efficiencies and benefits to the organisation.

Managing the portfolio

To manage the portfolio it is necessary to maintain two forces: making sure that there is sufficient
market coverage in synergies, but without overlaps that would eventually lead to cannibalization.
→ few brands means less market coverage, limiting growth potential and opening up the space to
competitors to address unserved segments
→ having too many products means inefficient complexity, reducing profits as the company pays to
maintain these products only to have customers to switch between them.

BUT, when a portfolio is managed optimally, it allows for efficient allocation of resources across
products+ identifies the underperforming products to cut them off or revitalise them +points to gaps
as potential opportunities.

How many brands is the optimal number for a portfolio? → depends on the company.
a. Service companies: smaller brand portfolios vs. Tangible products companies: bigger
portfolios.
b. Durable products co.: smaller portfolio vs. FMCG companies: bigger portfolio.
c. Companies with dispersed competition: smaller brand portfolios vs. Co. with concentrated
competition: larger brand portfolio.
Overall, co. with larger brand portfolios have higher consumer loyalty and company value, but also
higher advertising, selling and administrative costs.

To manage our portfolio and find that balance that we talked about, we first need to start with
getting a good sense of its current state→ The goal here is to understand what territory products
cover and what is their financial contribution
+ What is their strategic role within the portfolio? A clear understanding of the current state of
the portfolio will guide us in making decisions about what to change, meaning, what to
reduce, revitalise or where to expand.

Example: Inditex
They overlay different age groups of their target→ they cover the market in terms of age. Sometimes
there is overlap, like bershka, pull and bear and stradivarius that overlap over the 10-20 age group.
The idea is to use the axes that are important. In the company's segmentation strategy there may be
a reason to maintain three separate brands for the younger segment → We would have to move to
the second step in understanding the portfolio, which is just to look at the contribution of each
product or brand first financially, but also strategically.

- FINANCIAL CONTRIBUTION: understand for each of the brands or products in the portfolio,
how they contribute to the company's total revenue volume as well as profit and profit
margins→ where the company's money comes from and which of the brands or products
require disproportionate resource investment in order to deliver their volume . It is also
important to understand the product’s market share and future growth→ corporate
objectives and the growth the company intends to reach for the year ahead. Also,
 understanding which of the products in the portfolio have the potential to grow to help the
company reach its growth goals.

BCG MATRIX
It's a two by two matrix based on two factors:
1. On one axis, we have the market attractiveness→ how fast the market is growing, and
whether it has a good potential.
2. On the other axis we have the company's competitiveness→ within that market, how is the
market performing as reflected in its market share.

Within this framework, a product can be a

a. Cash cow: high market share but stagnant market
b. Star: high market share in a good market
c. Question mark: good market but the product doesn’t do well
d. Pet: product is not doing well in a market that is not growing
This is a dynamic process, changes constantly and that’s why the portfolio needs to be reviewed
periodically.
Why is this matrix important?
● Helps figure out the allocation of budget and movement of cash→ all companies need the
portfolio as a cash cow . These are the products that with minimal investment generate
excess cash. This money is to be invested in the question marks→ these products are in
categories that are growing a lot, so ideally, with enough support and the right plan, they
will improve their performance and market share and move to become stars. Stars also
require budget investments, so that eventually when the market slows down, they will
become a cash cow for the company and continue this cycle from question mark to start to
cash cow.
● Pets: kill them, get rid of the products, not devoting money to them BUT in a recent update
they recommended a different approach→ disciplined experimentation, so investing in
question marks and experimenting with them ina quicker, more economical way than
competitors, to grew them into stars. It is also important for the company to make sure that
they have some products at least in three categories: stars, question marks and cash cows.

Flaws of BCG: it concerns only two aspects, market share and market growth, and for instance a high
market share can be achieved by giving away the product for free, which is not healthy for the
company. At the same time, high growth means that there might be strong competition. As for pets,
the products may have a small market share in a stable market (okay in a small company and the
revenue that you get from this product in absolute terms is enough for the short run). So, in this
case, also consider the value of the product to the portfolio in strategic terms.
Line extension: uses the existing brand name on a new product within the same or closely related
product line (depth extension).This could be new flavours, ingredients, formats, packaging sizes and
dispensing options (ex. Coca cola cherry flavour).
a. Horizontal→ stretching horizontally at the same quality level to accommodate different
tastes
b. Vertical→ downmarket and upmarket
Category extension: transferring of a brand name to a new product or service outside the original
product category. (ex. Dorito’s salsa line). Category extensions are more risky, as the company
enters unfamiliar territory in terms of expertise and capabilities, but also consumer acceptance
( how well the perception of the brand fits those of the new category) → Colgate lasagna doesn’t
sound appealing
Customer extension: include a new customer segment (ex. Dove men’s line)
Channel extension: extending into different distribution channels (ex. Versace collab with H&M, a
mainstream channel).
 - PRICING
Firms should price to value, not to cost→ smaller firms tend to do the contrary.
There are 2 types of pricing:
1. Cost-based (easy): calculating the markup (the difference between the selling price of a good
or service and cost.). It is the prevalent pricing strategy
2. Value-based (hard):

When setting prices, managers should pay attention to:

a. Competition and elasticity: consumers price sensitivity. Example of paper clips: if i have the
monopoly over them, competition and elasticity will be connected as people will buy them
only from me.
A.1: Estimating demand elasticity, in order to inform managers on how to set the price. If a
market has an elasticity of -3, how should we price?
→ demand elasticity= % change of quantity / % change in price. Reasoning: if i increase the
price of 1%, how does it influence my sales change? This is a metric that can be used across
many markets, because everything is in percentage terms, and the result will be an absolute
number (usually negative as if the price increases the sales go down according to the law of
demand→ demand is negative), and also we can compare different markets because
everything is in ratios.

How to change elasticity into pricing? →

We start with profit ((Profit price- Variable costs)*quantity-fixed costs). We want to find the
optimal price, by taking the derivative of the profit function and making it equal to 0.
Basically, the formula that we need is

So, if i have an elasticity of -3, it means that my gross margin has an elasticity of -3, and we
should set a price so that our gross margins becomes ⅓ (0.33). As price elasticity increases,
you want to lower the price.
 You can also look at competition and adjust the formula, but it’s more complicated, but
actually most pricing models do not rely on elasticity, we just try to test different price levels
and try to understand them
b. Ease of comparison: how easy it is to compare prices→ one should pay attention to price
obfuscation, which reduces the customer's ability to fully understand the price, and
therefore to compare prices. For instance, when you're in the market to purchase a mattress
and you visit different stores, you'll likely encounter the same mattress listed under the
same name at various stores. However, what you'll often find is that even if the mattress has
the same brand, the models may differ. Why does this happen? → it’s a strategy to stop easy
price comparison. When you lie down on different mattresses in different stores, you'll find
it challenging to make direct comparisons.
Reducing these search frictions or engaging in price obfuscation activities is a common
practice. Depending on how easy it is for consumers to compare your product with others in
the market, you can command a higher price
c. Preferences/ WTP: willing to pay for the product → Conjoint analysis: show consumers
different combinations of features and prices. For example, it offers alternatives between
Apple, Sony, and LG, each with varying prices and distinct screen resolutions. Consumers
have a choice task, to click on one of the options, and the algotìrythm will show the
consumer new choices according to the one chosen first, to collect data about willingness to
pay (easier online)

Setting prices over time: It's highly unlikely that you'll maintain a single fixed price indefinitely.
Prices are likely to change over time. This is applicable not only to existing products but also when
introducing a new product. When introducing a new product, you should consider not only the initial
price but also the pricing trajectory. This leads us into the realm of price dynamics, where there are
two primary strategies:

Price penetration is the strategy of initially setting a low price and gradually increasing it over time.
This is a very aggressive approach, and there are several reasons for adopting it:

● Gain market share rapidly. It's crucial to establish a foothold in the market and secure a
competitive position quickly.
● Switching costs: costs that a consumer incurs as a result of changing brands, suppliers, or
products. Switching costs can be monetary, psychological, effort-based and time-based. (ex.
Qwerty). EX: operating systems such as Windows, iOS, and Linux. There are significant
switching costs associated with changing from one system to another. In essence, the
strategy involves starting with a basic product and then increasing the price or introducing a
tiered pricing model based on quality differentiation, often following a freemium model. It
also occurs when externality is a factor→ when the value of a product depends on how
many people use it, this is another reason to enter a market as quickly as possible using
penetration pricing.
● Entry deterrence: in a newly emerging market, there is a lot of competition at the outset to
prevent new entrants. For instance, IBM faced significant competition, particularly from
MAC iOS and various other platforms, in the early stages. This fierce competition led to price
pressure, especially in their dealings with companies. Eventually, as the market matured,
they were able to increase their margins when selling computers.
Price skimming is the opposite of price penetration, where you begin with a high price and then
gradually reduce it over time. It’s used in situations involving significant consumer heterogeneity
and the sale of durable products. Ex: iPhone, which was initially introduced at a much higher price
and then received price cuts in the following months, with older models transitioning as newer ones
are released.

Common in the technology industry, where prices tend to decrease over time. There are several
reasons for this:

1. Presence of customers willing to pay more than others. Therefore, consumer

heterogeneity is essential for implementing price discrimination using the temporal
dimension. When launching a product like the iPhone, some consumers have a high
willingness to pay for it, so the strategy is to have them purchase it at the initial high price,
while others are willing to wait for price reductions
2. Durable products: in many cases, most people will only buy one unit for an extended period.
This approach allows companies to obtain revenue from high-income customers first at the
initial high price, lower the price to attract a broader customer base, and then introduce new
and improved models to maintain higher profit margins.

- Consumer psychology

The first concept is that of Veblen Goods, which are products that become more appealing as fewer
people possess them. This is a well-known phenomenon, and it's sometimes described as the
"conspicuous consumption" phenomenon. Essentially, owning such goods enhances a person's
status in the eyes of others. Examples of Veblen Goods include luxury cars like Ferraris. People love
these products not just for their inherent qualities but also because of their exclusivity.

The second concept involves price-quality inferences. Some products differentiate not only in terms
of quality but also in terms of price, and this distinction can have a significant impact on consumers'
perceptions. For instance, a higher price is often associated with higher quality, and consumers tend
to believe this.

Ex. study related to season tickets for an opera. Some consumers were randomly offered a discount
on their season tickets, and they were informed about the discount. While they were pleased with
the discount, they attended fewer opera performances. This indicates that consumer behaviour is
not purely rational, and psychological factors play a substantial role.

Furthermore, the psychology of costs paid in the past remains relevant. If a product was purchased
at a lower cost, consumers may be inclined to use it less, which is a fascinating aspect of consumer
psychology. This can lead to them evaluating the product as less valuable compared to other
activities they might engage in during the same time frame as the event they're attending

- Price discrimination
Price discrimination is a powerful method for generating value for a company. Consider two types of
consumers: the Cheapskates and the Money Burners. If we have 20 Cheapskates and 10 Money
Burners, with a willingness to pay $1.50 for the Cheapskates and $3.00 for the Money Burners.

Let's assume that we have economies of scale, meaning that the more we sell, the lower the cost per
unit becomes. We have only two segments of consumers: one segment is willing to pay $1.50, and
the other is willing to pay $3.00. There are only two possible price points that might be optimal:
$1.50 or $3.00. Anything in between would be a waste of money.

1. Charging $1.50 → both Cheapskates and Money Burners are willing to pay this price.
Therefore, we sell 20 units to Cheapskates and 10 units to Money Burners, we sell 30 units.
This allows us to achieve full economies of scale. Here, we'll be making a total of $45.
2. Charging $3.00→ Cheapskates are still willing to buy, but Money Burners are only willing to
pay $3.00. In this case, we don't fully benefit from economies of scale, and we make $20
from 10 units, which is worse than the previous scenario where we made $24. So, the
optimal price appears to be $1.50.
3. Set the price at $3.00 but introduce a coupon to get a discount and pay $1.50→ this could
involve a limited-time coupon that offers a discount when sent in through a mail-in rebate.
This way, customers have the option to get the product at a lower price if they go through
the process of using the coupon→ We sell the product at $3.00, but if the consumer is
willing to go through an inconvenience, they can get it for $1.50 using a coupon. What
happens in this case?

→ Well, firstly, not all the Cheapskates will be willing to go through the trouble of cutting out
the coupon, keeping it in their wallet, and going to the store before the due date to
purchase the product at a discounted price. So, let's say only 16 out of the potential 20
Cheapskates take advantage of this offer, and we make $1.50 from each of them.

→ Money Burners, (Leakage) maybe 4 of them also cut the coupon, but 6 of them are willing
to pay $3.00. So, in total, we have 16 Cheapskates and 10 Money Burners purchasing the
product. This means we get 26 customers in total. While we don't fully maximise the
economies of scale, we still get some benefit. Our costs are $0.74 per unit. When we
calculate the profit, it's not $20 or $24, but $28.

The intuition here is similar to most promotional or targeted pricing strategies in marketing. By
introducing a barrier that makes it more challenging for some consumers to get a discount compared
to others, you can incentivize those who are willing to go the extra mile for a better deal:

- Coupons require people to actively search for them, compare prices, and go through the
effort of redeeming them.
- Price matching works in a similar way. If a store claims to match any price you can find
elsewhere, you'll need to go to that other store, obtain their promotional materials, and
 bring them back to the original store to request a price match. This process can be quite a
hassle, and it's a promotion that requires consumers to opt into it.
- Temporary price cuts can also impact the timing of purchases. When an offer is only
available for a limited time, consumers may feel the pressure to make their purchases
sooner to take advantage of the discount.
- "Buy one, get one free" deals can be problematic for households with limited storage space,
as they may not have room for extra items. These promotions introduce a level of friction to
the discount, ensuring that only those who genuinely value the offer will take advantage of
it.
- Rebates are another promotional scheme where customers purchase a product, then need
to fill out a form and send it back (usually by mail) to receive a discount or a rebate check.
This process adds complexity to obtaining the discount, and customers must actively
participate in the rebate process to realise the value.

Especially in the digital world, there can be Leaky Paywalls: The New York Times has a paywall, as do
many newspapers. The idea behind these paywalls is that you may be able to read one or two
articles for free, but then you'll be required to pay for access. This approach is often described as
"leaky." Why do companies adopt this strategy? There are a couple of reasons:

a. Revenue from Subscriptions: It allows companies to generate revenue from subscribers.

Those who find value in the content are willing to pay for access, and this creates a steady
source of income.
b. Advertising Revenue: newspapers can maintain website traffic and continue to attract
advertising revenue. For instance, The New York Times might allow users to read a set
number of articles per month without restrictions.

Different companies use various hybrids of this approach.

→ Finding a balance between: retaining an online readership that attracts advertising income and
offering premium content for subscribers who are willing to pay for exclusive access. They can bring
in advertising revenue, but if consumers really like your product and want to access your website,
you may want to charge them.

Consumers will self-select as to whether they want to pay for your product or not, depending on the
type of paywall.

For instance, if I directly access a New York Times article, I might encounter a paywall, but if
someone shared the article on Twitter or Facebook and I click the link they shared, I might be able to
read the article without hitting the paywall. This is a strategy you can use to attract different types of
consumers and charge them different prices based on where they are coming from or how they
access your content.

- ADVERTISING AND DIGITAL

In general, advertising experienced significant growth in 2020, which was an exception to the norm.
Digital advertising spending has consistently increased year over year for the past decade. For a
while, people had been speculating that a year would come when digital advertising would surpass
and outperform traditional TV advertising, which had been the dominant advertising channel for
many years. This speculation was around 2016.

By 2019, digital advertising spending had already surpassed the combined spending on all other
advertising channels. In comparison, TV advertising spending in 2019 was around $70 billion,
whereas mobile advertising had already exceeded TV, reaching about $129 billion. This shift was
surprising because mobile advertising, in particular, became the primary component of digital
advertising.

Let's discuss a few examples. The first type of ad I'd like to talk about is the display ad. You might
have heard of these ads; they often come in the form of banner ads. Display ads were among the
very first types of online ads. For instance, you might see these ads on websites like The New York
Times, a publisher that provides valuable content for its readers. In the advertising industry, we
refer to The New York Times as a publisher because they offer content that consumers want to read,
and they have space available for ads.

Now, to make the most of their ad space, publishers like The New York Times often work with
advertising intermediaries, and in this case, Google served as the intermediary. This means that
when a company wants to display its ad on The New York Times, they don't usually reach out directly
to the publication. Instead, they go through an intermediary, such as Google, which facilitates the
transaction and ensures that the ad appears on The New York Times.

This allows them to bundle ads that might not have high demand on their own but can be combined
with content that people want to read. For example, the "TrackR.", that can help you locate items
like your wallet using your phone.

For instance, when a company wants to display an ad on The New York Times, they typically don't
contact the publication directly. Instead, they go through an intermediary. In this particular case,
Google served as the intermediary, facilitating the transaction that resulted in the ad being displayed
on The New York Times.
Search ads, which you've likely encountered when searching on platforms like Google or Amazon
using specific keywords. Display ads and search ads serve different roles → Marketing Funnel:
describes how consumers progress through various stages as they move towards purchasing a
product.

First and foremost, consumers need to become aware of a product. For example, from these
statistics, it's possible that around 75% of people become aware of a particular product.
Subsequently, they consider their options and create a comparison set, evaluating brands they've
heard about, seen advertisements for, or found through online searches. Out of this initial pool of
consumers, perhaps around 35% engage in an evaluation process. Of those, around 28% may
actually make a purchase. It's also essential to consider the impact of word of mouth, as
approximately 35% of those may recommend the product.

Many years ago, before online analytics and web page optimization tools became prevalent,
understanding the customer or marketing funnel was more challenging. Nowadays, these funnels
can provide insights into the behaviours of people who visit a website's front page and how they
convert.

For instance, if you're launching a product like a tracker, it's unlikely that people will be searching for
it initially since they may not even be aware of its existence. Display ads are typically used to capture
attention at the top of the marketing funnel. On the other hand, search ads, like those on Google or
Bing, are more focused on securing conversions and ensuring a purchase when people are actively
looking for a solution.

In summary, the key takeaway is that display ads and search ads have distinct roles and can be used
at different stages of the customer journey.
If you have various goals in mind for your company's online advertising, you're likely to use platforms
like Google or Facebook. To advertise on Facebook, there is Facebook Ads, and for Google you use
Google AdWords. These platforms are incredibly user-friendly and are typically simple to use. They
assist you in selecting different target criteria, such as age, location, demographics, and help you
align the characteristics of your product with your target audience.

This allows you to create multiple audience segments, target different groups, and assess the
performance of your ads with each.

You also have a panel for search ad optimization in Google AdWords. Google provides you with
expectations for metrics like weekly reach, impressions per week etc. It also allows you to target
specific demographics or user groups. When using keywords for search ads, Google can estimate
how effective these keywords are for reaching your audience and assess the level of competition.
For instance, if you intend to advertise health insurance, Google informs you that due to factors like
your reputation, it might be expensive. This is a characteristic of search ads almost exclusively.
Larger companies

This illustration depicts a potential market where you have an audience comprising consumers
seeking content, which they engage with through publishers. For instance, The New York Times
offers a substantial amount of content that people are interested in, such as election updates. These
consumers generate an ad inventory→ there's available ad space they'd like to fill to monetize those
views.

Larger companies, often referred to as advertisers, like Unilever and P&G, engage in a media
planning process. They usually collaborate with an advertising agency. The advertisers or advertising
agencies use a:

- Demand-Side Platform (DSP) →buy space.

- Supply-Side Platform (SSP)→ sell space.

Ad exchanges serve as the platforms where ad transactions occur between buyers and sellers.
→ Unilever wants to run a campaign for 3 million impressions related to their products: they
approach a media planning company or advertising agency and express their campaign goals. Often,
a collaborative campaign design is formulated, involving interactions with entities like The New York
Times and companies that facilitate the sale of advertising space on their behalf, operating within
the ad exchange ecosystem.

When people refer to ad exchanges, they often mean platforms like DoubleClick by Google, which
play a central role in ad space transactions. These platforms facilitate ad purchases through
Application Programming Interfaces (APIs). To engage with these platforms, you need some
knowledge of coding, or you can hire software professionals. Through these APIs, you can specify
your bid for, for ex., 3mln impressions targeted at a particular audience. The system will then inform
you if your request is doable. This is how you purchase ads through an ad exchange, a process that
Facebook and other companies also employ, even on a smaller scale. In essence, Google and
Facebook dominate this landscape, creating something of an oligopoly.

Larger companies, such as Unilever and P&G, often engage different firms to manage their
advertising efforts. These companies, such as Adobe, Dolby, or Oracle, take care of budget allocation
and manage the financial aspects of their campaigns. These companies then make bids for available
ad slots in milliseconds.

Here's how it works:

1. When you visit a webpage, like The New York Times, your browser communicates with the
site to retrieve content for proper rendering.
2. Before returning the content, the webpage contacts a third-party server that connects to
APIs, like DoubleClick. This server sends real-time data, often involving personal information,
location data, and behavioural data, to potential advertisers.
3. Different advertisers then determine how much they're willing to pay to display an ad to a
specific user through real-time bidding (RTB).
4. They respond to DoubleClick's request within 100 milliseconds (delays would result in poor
user experience).
5. The highest bidder wins, and DoubleClick attributes the ad impression to the respective
advertiser.
 6. The finalised webpage, along with the ad, is sent back to the user's browser for viewing. If
there's a significant delay, the default ad is shown to prevent an empty space on the
webpage.

Cookie matching: process by which companies collect data on individuals' online activities to get
targeted advertising. This process allows advertisers to track users across various websites and
platforms. Here's an explanation of how it works:

Cookies are small text files stored in a user's browser. They contain information about a user's online
behaviour and interactions. These cookies are created and managed by both advertising networks
and websites.

Let's consider an example with a user named Alice. If Alice clears her cookies in the morning and
then visits a website like The New York Times, the website will request ads from an advertising
network like DoubleClick. DoubleClick will initiate an auction to determine which ad to show to Alice.
Advertisers bid on the opportunity to display their ads to her. Once an ad impression is won by an
advertiser, Google assigns a unique identifier called a "Google User ID" to Alice. This ID is associated
with a cookie on Alice's browser. The winning advertiser also sets a cookie in Alice's browser. This
cookie enables them to track Alice's online behaviour, such as the websites she visits.

Advertisers who have won impressions and placed cookies on Alice's browser can use this
information to retarget her with relevant ads. They can then bid more aggressively and pay more to
show her the ad multiple times if she already interacted with the website, hoping to convince her to
make a purchase. This information allows advertisers to adjust their bids, giving them an advantage
in the auction process.

→ In essence, this process of cookie matching, and user tracking is the backbone of online
advertising and enables strategies like retargeting to reach potential customers more effectively. It's
important to note that privacy concerns and regulations are increasingly impacting these practices,
with many countries implementing laws to protect user data and privacy.
In this case, there are multiple touchpoints or interactions with our ads. For example, Alice might
have initially seen an ad managed through Google AdWords, then encountered a different campaign
through the DoubleClick Ad Exchange. Additionally, we were running advertisements on Facebook.
In the end, the user, whether it's Alice or another, conducted a search that ultimately led to a
purchase.

So, the question becomes, which of these touchpoints or ads played a crucial role in the sale? It's
possible that some of these ads merely raised awareness and didn't directly lead to a sale. Perhaps
the first interaction, the Google search ad, did most of the work, and Alice might have made the
purchase organically without the need for additional ads.

When you're running various ads for different consumers, you encounter the challenge of
determining which ads are performing well and which ones are underperforming. This is where
attribution modelling comes into play. Attribution modelling helps in deciding which advertising
channels are making a difference for the consumer.

There are various methods for attribution modelling. While some people rely on the "last touch"
approach, attributing the conversion to the last ad a user interacted with, this method has
limitations, especially when it comes to search ads, which tend to appear later in the customer
journey→ can lead to an overemphasis on the effectiveness of search ads and skew advertising
budget allocation.

Other techniques include statistical methods, operations research techniques like multi-armed
bandit strategies, and experimental techniques that allow dynamic adjustments over time to
optimise ad performance.

Running experiments→ you can conduct experiments by showing the Facebook campaign to some
users while not showing it to others, keeping all other factors constant, to gauge the effect of
specific ads being active or inactive.

Managing experiments across various advertising channels can be a complex task and require
considerable time and effort.
Search ads play a pivotal role in generating substantial revenue for Google and numerous
companies. They serve as a way for new businesses to gain visibility among consumers. For instance,
if a company like healthinsuranceplans.org wishes to appear prominently in search results, investing
in an ad slot becomes essential. While securing the top position might be expensive, even a
placement before established competitors like Humana can significantly boost visibility and
consideration.

The mechanism that determines the placement of ads, such as Google's generalised second price
auction, involves several key steps. Initially, a quality score is assigned to each advertiser based on a
prediction of their overall quality. Google keeps the specifics of this process confidential, but it likely
benefits from its analytics services, which track website traffic and provide insights into the
advertiser's performance. For newcomers in a specific product category, the quality score starts at a
lower level but can improve over time if the product proves to be successful and well-received by
consumers. This entire process ensures that relevant ads are displayed to users promptly,
eliminating the need for them to navigate through multiple pages of search results.

IN CLASS CONTENT:
 ● Establishing perceptions of need

● Increasing awareness

● Changing evaluations

● Creating Purchase Intentions

● Creating Reminders and boosting post purchase evaluations

● Persuasions

THE ELABORATION LIKELIHOOD MODEL

The Elaboration Likelihood Model (ELM) is a theory of persuasion that explains how cognitive
processing and elaboration influence attitude change through two distinct routes, central and
peripheral, which have different effects on persuasion. This understanding is important for
marketers attempting to influence consumer behaviour.

As previously discussed, the ELM proposes two significant routes to persuasion: the central and
peripheral. These routes can significantly impact how persuasive messages are processed and
attitudes are formed or changed. The central route is significant in marketing, relying on argument
quality and logical processing to positively change consumers’ attitudes.

The central route requires a deeper level of processing and is associated with attitude change that is
more enduring and resistant to counterarguments. It is the ideal route for marketers to take when
trying to promote new or innovative products or when they wish to establish a long-term
relationship with a customer. To successfully use the central route, marketers must ensure that their
messages are clear, logical, and well-supported by evidence. It can be done through careful research
and crafting persuasive messages focusing on the advantages of the product or service. Marketers
can also use emotional appeals if appropriate, as this type of message is particularly effective in
triggering consumer attitude change.

On the other hand, the peripheral route focuses more on presentation and impression management.
This route requires little critical or issue-relevant thinking, instead relying on heuristic cues such as
likability or aesthetics to promote attitude change. This can be used in cases where marketers wish
to quickly make an impact, such as product launches or limited-time offers. The peripheral route is
also helpful in encouraging people to act, such as signing up for a newsletter or purchasing.

This information is vital for marketers to consider when developing marketing strategies that
persuade consumers to change their attitudes toward a particular product or service. Understanding
the role of the central route in attitude change allows marketers to develop messaging that focuses
on quality and logic rather than peripheral factors such as emotional appeals or celebrity
endorsements. Ultimately, the ELM provides marketers with a framework to understand how
attitudes are formed or changed and how they can employ this knowledge to create effective
marketing campaigns.

HOW DO YOU BUILD A SUCCESSFUL SOCIAL MEDIA CAMPAIGN?

Features:

1) Surprises
2) Emotionally
3) Simplicity
4) Credibility
5) Story arcs
- MEASURING MARKETING PERFORMANCE
Historic data

We want to compare and evaluate the performance of marketing campaigns, Campaign A and
Campaign B, in the context of casino complementary products. These products include free
incentives and offerings provided to people with the aim of retaining them within the casino
premises, recognizing that they are significant contributors to the casino's overall engagement.

1. It might present an excellent opportunity to reward the most valuable customers.

2. However, such a strategy might be considered somewhat naive → a more nuanced approach
could be explored. For instance, one might question whether the focus should be on
rewarding those customers who may not be spending as much.
3. The goal could be to uplift this segment or even target a group of customers in the middle,
those who are indecisive and contemplating whether to extend their stay. Offering them
complimentary products, such as a free night in the hotel, could be a strategy to encourage
them to prolong their visit.

It's important to note that, despite marketing managers often having strong convictions and
preferences based on prior experiences, testing different alternatives is crucial. It's challenging to
determine which segment of customers will respond positively to complementary products.
Therefore, testing and analysing the outcomes empirically become essential to identify the most
effective strategy among alternatives.

Estimating success
Let's consider a scenario that almost acts as a brain teaser: estimating the effect of a price
promotion, a marketing action, using transaction data.

1. To set the stage, let's assume that the price has remained constant based on historical data.
Now, the straightforward answer would be that without any variation, we can't assess the
impact of lowering or increasing the price. It becomes clear that understanding which price
is more effective should have been tested beforehand.
2. Moving to the next point , the situation becomes more intricate. We have implemented
different prices for different consumers in the past, employing a price targeting strategy.
Depending on a customer's historical purchase behaviour, we adjust the prices over time in a
customised manner. BUT might not be enough, as what we truly need is for the same set of
customers to be exposed to different prices over time. In summary, the challenge lies not
only in having historical data with varied prices, but also in ensuring that the same
customers experience different prices across time intervals.
3. In this example, the issue is that the same individual consistently encounters the exact same
price. Therefore, point number three serves as our real starting point, which is a solid
foundation for measurement. In this scenario, measuring the performance of different prices
becomes more meaningful.

Suppose we have offered price promotions in our store over time, observing how people reacted to
them. One might assume that this would make it straightforward to understand the impact of setting
different prices. However, it turns out to be more challenging.
An example involves a consulting company trying to estimate the demand curve for the Portuguese
gasoline market. My friend said, 'Hey Pedro, we've just estimated a price coefficient.' The price
coefficient, of course, is that coefficient that is used in linear regression between price and sales in
this case.

He mentioned that it came out positive, indicating that if you increase the price, sales would also
increase. The general assumption would then be that one should charge customers infinitely and
sell an infinite number of items.

When testing marketing strategies, particularly in analysing historical data, it's essential to recognize
and address potential confounding factors. Using the example of ice cream sales, the challenge
arises when factors like weather influence both prices and demand→ if higher prices coincide with
higher demand during the summer, a naive analysis might incorrectly attribute increased sales solely
to higher prices.

This violates the ceteris paribus assumption,which assumes that all other factors are held constant
in order to isolate the effect of a single variable on an economic outcome.

To address this, one solution is to include these confounding factors, such as weather, in the analysis
through regression techniques. By isolating the effects of these factors, you can obtain a more
accurate understanding of the true relationship between variables, like sales and price.

It's crucial to consider strategic decisions and non-random timing, such as the introduction of a
promotion or advertising campaign, as they can impact results.

→In summary, careful consideration of confounding variables and strategic decisions is necessary for
accurate and meaningful analysis in marketing studies
There are two methods for resolving this issue.

1. Instrumental Variables (IV) Approach: A Simple Explanation: Imagine you want to figure out
how the price of ice cream affects its sales. But there's a problem – the weather can also
affect sales. So, you decide to use instrumental variables to help you separate the impact of
price from the influence of weather and other factors→ You start by creating a special
column just for the price of ice cream, but you filter out the effects of things like weather.
This new column only shows how the price changes without being messed up by other
factors. It's like looking at the pure price variation that isn't influenced by outside conditions.
2. Price Experiments: Another way to use instrumental variables is through experiments.
Imagine you run a well-designed experiment, maybe changing the price of ice cream in
certain areas and keeping everything else the same. This gives you a solid foundation
because any changes in sales are likely due to the price change and not other factors. It's like
creating a controlled situation to understand exactly how price affects sales.

So, whether you're filtering out external influences or setting up controlled experiments, the goal is
to get a clean look at how changes in price specifically impact outcomes, like ice cream sales. It's a
way to figure out causation – how one thing (price) directly influences another (sales) by minimising
the interference from other factors.
Clean Variation refers to the careful design of an experiment where treatment prices fluctuate but
are not tied to external factors, ensuring random and independent variation. The crucial aspect is to
have a control group and a treatment group, avoiding systematic biases by employing
randomization. This approach allows capturing both unfavourable and favourable price variations,
with the goal of isolating the independent and uncontaminated effects of price changes from other
correlated factors, such as market conditions or advertising spend.

In the case of instrumental variables, which isn't truly part of the evaluation, I want you to be
mindful of the pitfalls associated with using historical data to understand marketing performance.
There are essentially two steps in this process.

1. Predict price based on input costs: Imagine you're trying to figure out how the price of
ketchup affects its sales. However,prices aren't just randomly set – they might be influenced
by things like the cost of tomatoes, which can change due to different situations. To tackle
this, you want to filter out the "good" price changes – the ones related to factors like tomato
costs that genuinely affect ketchup prices. To do this, you predict the prices based on the
cost of tomatoes.

Why tomatoes? Because they're a key ingredient, and their prices might lead to changes in
ketchup prices. However, the price of tomatoes may not perfectly match the demand for
ketchup. Here's where the instrumental variable idea comes in. You introduce a variable that
you assume influences ketchup prices. This variable helps you filter out the "bad" price
changes caused by things unrelated to your study, such as random market fluctuations.

2. Regress quantity on predicted price from step 1: In the first step, you perform a type of
analysis called regression. You predict the variations in ketchup prices based on the
variations in tomato costs. This helps break down the total price changes into two parts: one
related to tomatoes and another that includes irrelevant factors.By doing this, you're trying
to keep the "good" variations in ketchup prices that are genuinely connected to tomato
costs, while filtering out unwanted variations like seasonal effects or random market
changes. The predicted prices you get from this process represent a "clean" version – it's like
stripping away the noise and getting to the core relationship between ketchup prices and
something you know influences them.
 - MARKETING RESEARCH

CONJOINT ANALYSIS: is a form of statistical analysis that firms use in market research to understand
how customers value different components or features of their products or services. It’s based on
the principle that any product can be broken down into a set of attributes that ultimately impact
users’ perceived value of an item or service

Bike example: when we sell a bike we have to consider different characteristics (handlebars, frame)
and different prices. There’s a lot of different options and understand what the consumers prefer.

Compute the conjoint analysis through the linear regression that includes all the characteristics.
Normally a Dummy Variableis used, (d) which has a value between 0 and 1→ for each characteristic,
we have a dummy

Variable.

So what’s important to understand with the conjoint analysis is how each characteristics is related to
the rating, so which characteristics give a higher rating

- Attribute Importance: range of the betas you found (for ex: for the price the lowest beta is 0
and the highest one is 1.83, the range is 1.83-0 and so 1.83). Is a measure to understand how
much influence this attribute can have on the rating
1) Conceptually simple, but labourious
2) Can predict market share, if use individual partworth and competitor products
3) If have 6 characteristics probably you will have 228 combinations
 If you’re in a crunch rating, conjoint is really easy to implement and estimate.

LIMITATION

Sometimes it can be unreliable to extract price elasticity or demand elasticity:

1. People don’t buy the bike

2. If you have more price levels, the more price sensitive people will report to, so there’s more
prices around more price levels.

It’s not always reliable to extract willingness to pay.

PERCEPTUAL MAPS: try to understand consumer’s perceptions and preferences. How your target
market perceives your product or service.

Ex: In the market there are different types of beer with a lots of different perceptions, with the
perceptual maps let’s try to navigate the space of consumer perception

The first one is about perceptions, the second one is just preferences (how much do you like this
beer?)
For preferences we ask people how much they like each beer and then for perceptions we ask each
person how much they thought, which characteristic has.

CASES
- Altius

Altius Golf and the Fighter Brand Case Study Solution: Case Introduction

Despite long-term declines in golf participation and sales following the 2008 financial crisis, Altius
Golf maintains its position as the industry leader. The company has maintained its dominant market
share by constantly innovating and releasing new generations of ultra-premium and cutting-edge
golf balls that allow its customers to play like pros.

The company’s CEO wants to counteract the effects of price competition by introducing a program
called Elevate, which is designed to help young golfers improve their skills. The new ball, called
Elevate, will be 40% less expensive than the company’s flagship brand while still being easier to drive
for distance and forgiving. Unlike the company’s other products, which are sold exclusively in “on-
course” pro shops, Elevate will be available in “off-course” channels like golf specialty stores and big
box retailers. The board of directors is deeply divided over whether or not to support the decision.
Students are required to conduct a quantitative analysis of the CEO’s proposal before making a final
recommendation in order to better understand the risks and gains involved.

Reason for Declining Sales

2008’s Economic Downturn

The beginning of decline in Altius’ market share coincided with the beginning of the decline in the
golf equipment industry as a whole, which began with the beginning of the economic crisis that
began in 2008. The crisis didn’t start until 2008, but it began that year. The decline in the market for
golf balls mirrored the trend of consumers cutting back on their discretionary spending, which can
be seen in the previous sentence.

Decline in Popularity

The overall decline in interest Golf’s popularity has been on a downward trend ever since it hit an all-
time high in 2003, which is another significant factor. This decline in interest has been attributed to a
number of factors. In recent years, a significant number of female golfers and junior golfers have
given up the sport. In addition to this, the percentage of serious golfers, who represent Altius’ most
profitable customer segment, has also decreased.
Higher Incentives from Competition

Since the percentage of sales made by off-course retailers has increased, these retailers now have a
greater incentive to sell products made by competing companies because the higher margin of 20%,
which is significantly higher than the 15% offered by Altius, makes it more profitable for them to do
so. Additionally, the percentage of sales made by off-course retailers has increased.

High Price associated with the Sport

In addition, consumer research has shown that the high costs associated with playing golf are a
major deterrent for a great number of people who otherwise might start playing the sport if it were
not for the high costs.

Competition

Two of Altius’s competitors, Primiera and Meridian, had both implemented a strategy in which they
aimed their products at the beginning and recreational golfers. This was Altius’s strategy as well.
Both companies employed this tactic in their operations. They ran promotional campaigns aimed at
the recreational market, with the goal of assisting players in selecting balls that were tailored to their
specific requirements and producing non-conforming balls that were resistant to cuts and hooks.

Altius Golf and the Fighter Brand Case Study Solution: Source: Case Exhibit

There is a crossover between the percentage increase in total equipment sales and the percentage
increase in the sale of golf balls in the above graph, which was for 2010. More and more golfers are
opting for cheaper balls, reflecting growing consumer sentiment.

Altius stands to lose market share if it sticks to its current strategy and practices, as price-conscious
customers look elsewhere and the next generation of recreational golfers opts for more affordable
and less regulation-heavy options rather than Altius’s traditional and high prices. The current
product line limits participation in golf, an aspect the USGA is working hard to improve. More
difficult to defend your territory against competition as USGA campaigns and consumer preferences
shift toward golf balls that are more accessible and improve ease of play.

Altius Golf and the Fighter Brand Case Study Solution: Short-Term Strategy

In the short term, the primary objective for Altius should be to successfully implement the Elevate
strategy in order to protect its market share and continue to hold the leadership position in its
industry. This can be accomplished by repositioning your product line in such a way that it more
effectively targets different customer demographics, such as serious golfers and casual golfers. At
the same time, the company must make certain that the launch of a more cost-effective product line
does not result in a watering down of the premium image that is currently associated with the
brand. Because off-field channels are increasingly becoming the primary channel for the sale of golf
equipment, Altius needs to find a solution to the declining share of dollar sales that these channels
account for.

Altius Golf and the Fighter Brand Case Study Solution: Source: Case Exhibit: Long-Term Strategy

Long term, Altius needs to make sure that they not only promote recreational golf but that they can
also migrate some of these casual golfers who have started to use your value product to your most
premium and professional offerings, such as the Victor TX golf line. This is something that Altius
needs to make sure that they can do. balls. This migration would not only lead to an increase in the
company’s margins, but it would also lead to an increase in customer loyalty, as it would transform
the extremely slippery segment of casual golfers into the extremely traction-oriented segment of
serious golfers.

Altius Golf and the Fighter Brand Case Study Solution: Risk Analysis

Market Share Vs Margins

Altius must make a commitment to its profit margins if the company plans to protect its market
share against rivals who sell innovative and cost-effective products to customers. It would be
necessary to raise retailers’ margins to match those of their competitors in order to encourage large
retailers to sell the Altius product line. However, this would result in the retailers’ margins being
lowered, defeating the purpose of the incentive. When compared to the current business strategy,
which consists of selling only premium and mid-range products, selling a cheaper product would
result in a reduction in the profits made per unit.

Premium Image Vs Value Image

If the company makes the decision to sell the Elevate line of golf balls, it will be venturing into the
territory of valor. As a result of players using Altius golf balls on professional courses such as those
used in the PGA and LPGA, as well as the company’s Victor TX line of balls, which focused on
maximizing distance while maintaining a consistent feel, players have come to associate the name
Altius with quality. It would be to the company’s advantage to remove this premium brand image
from the value offering; however, the company will need to take measures to ensure that the
premium image is not diluted in any way. as well as the possibility that the company will be able to
keep its existing professional customers.

Professional Branding Vs Casual Branding

The current strategy for promotion, as well as the current positioning of the Victor TX and Victor line
of golf balls, both draw attention to the fact that Altius golf balls are used by professional golfers. A
novice golfer may find this intimidating, which may cause them to have an inaccurate impression of
how challenging the game is. It is more likely that this will catch your attention if a new line of value-
oriented golf balls that emphasizes the product’s ease of use is introduced. However, because
professional and casual offerings are simultaneously marketed, Altius needs to make sure that the
appropriate consumer segment is targeted without altering the way that the other consumer
segment views the brand of the company.
 Altius Golf and the Fighter Brand Case Study Solution: Source: Estimations
The case data shows that Altius and its competitors have comparable manufacturing costs. This
indicates that, from a purely operational perspective, there is no longer any room for improvement.

Altius Golf and the Fighter Brand Case Study Solution: Source: Probable reasons for High Cost

Since Altius is aiming to project the image of a high-end brand, the company has raised prices in
order to maintain this perception. The recent success of the Altius brand has allowed the company
to increase its profit margin and bargain power with retailers.

As we can see from the above, Altius can increase its attractiveness to retailers by lowering the gross
margin of the premium category of balls it sells. This will help the company achieve its goal of
premiumization by encouraging retailers to sell more premium balls.

Altius Golf and the Fighter Brand Case Study Solution: Source: Elevate Introduction

Altius Golf and the Fighter Brand Case Study Solution: Source: Value Range of Exhibit
As can be seen from the information presented above, it is quite clear that Altius will not be able to
keep the same level of gross margins with the Elevate product line as it does with the Premium
product line. Due to the fact that customers in this market are much more aware of the prices, Altius
would need to lower its gross margins in order to be competitive in this space from the perspective
of pricing.

Altius Golf and the Fighter Brand Case Study Solution: Introduction of “Exhibit”

In light of the responses to the three questions presented earlier, we believe that Altius should
implement the Elevate strategy, with the primary motivation being the rising number of golfers who
play the game for either recreation or competition. those prices that, in the future, can be converted
into high-margin premium offers to be sold.

Our recommendation is to undercut the prices of the rivals in the value market by a significant
amount and provide retailers with a convincing gross margin of twenty percent. The only way to
accomplish this is for Altius to lower its gross margin on this line of business.

Altius Golf and the Fighter Brand Case Study Solution: Source: Potential Risks

Dilution of the Brand

Altius runs the risk of diluting the premium brand image that it has worked hard to cultivate and
hurting the feelings of its existing base of devoted customers. This can be dealt with by maintaining
and further enhancing Altius’s reputation as a premium brand. increasing the amount of promotion
that is put into the Victor TX line. In addition, Altius could form partnerships with prominent golfers
in order to strengthen its reputation as the brand of choice among professional golfers. In addition,
in order to keep the allure of its premium line alive and well, Altius needs to continue to innovate.

Cross Cannibalization

Due to the fact that they are targeted at completely different ends of the market, the Elevate
product line and the high-end Victor TX product line would not pose a significant threat to one
another in terms of cross-cannibalization. However, it could be a problem for the product line that
falls in the middle of the price spectrum, which is the Victor line. This is because the most loyal and
agnostic Altius customers (which account for 31% of the total market) would choose to purchase the
value range rather than the option that falls in the middle of the price spectrum. Because of this, it is
not necessarily a bad thing for Altius, as with a lower entry price, Altius can work to create more
loyal consumers and sell them to the Premium offer in the future. This is not necessarily a bad thing
for Altius.

If the aforementioned strategy of lowering prices is implemented by Altius, the company has the
potential to not only become the leader of the market in the quality category but also the leader of
the market in the value category. The company already has a great brand image.

- Calyx

1. Introduction
Calyx Flowers is one of the four business units of Vermont Teddy Bear Company and provides its
clients with a premium experience by delivering flower arrangements. Currently the company is
encountering issues in attaining its maximum financial potentials, despite gross margins of 50%. The
analysis of the company’s situation identified three core strategic obstacles that constrains Calyx
Flowers’ sales volume: customer segmentation and targeting; communication of the value
proposition; current marketing channels.

2. Analysis
2.2 Segmentation and targeting
Calyx Flowers faces significant segmentation and targeting challenges. Despite currently relying on
behavioural and demographic segmentation, they miss out on the potential of attracting new
promising market segments, not considering prominent demographic segments that already showed
interest in other products of the parent brand, like males with disposable income and offices.
Moreover, their targeting efforts are suboptimal, as they overspend on segments with low
conversion rates (1%), neglecting more profitable opportunities.
2.3 Value proposition
In a fragmented market that is characterised by numerous players offering similar products, as the
floral industry is, executing an efficient marketing strategy is challenging. Yet, considering its quality
of both product and delivery service, Calyx Flowers has the potential to stand out from its
competitors. However, the company fails to communicate their unique selling proposition to
consumers which can be seen in their conversion rates.
2.4 Marketing channels
Calyx Flowers are solely focusing their marketing through sending out catalogues to current
customers, recipients and their rented mailing lists. Catalogues sent out to flower recipients and
rented mailing lists are inefficient for the company as they generate a negative ROI of -45%
(appendix 1), and should be terminated as they are a direct loss of approximately $2 million
(appendix 1). Catalogues as a communication medium is an outdated and costly marketing strategy,
restraining the company in reaching new potential customers.
3. Tactical and strategic recommendations
3.1 Segmentation and targeting
Calyx Flowers should conduct a comprehensive market research on internal and external factors to
reach its full potential. This can be done through the 5C’s framework that involves an analysis of the
context, customers, competition, collaborations and the company itself. Calyx flowers can thereby
accurately segment customer groups based on demographic, behavioural, and psychographic criteria
and identify which groups to target and thereby broaden its currently narrow target market. An
advice for the company to have in mind is to follow the LIDS criteria of segments; large, identifiable,
distinctive, and stable, and the PFD criteria of targets; potential, fit, defensibility.
3.2 Value proposition
The company needs to understand its target audience's needs and what will resonate with them in
order to receive a positive impact on convention rates. Calyx Flowers should refine a proper value
proposition, highlighting their core benefits which they can communicate to consumers and thereby
position themselves relative to competitors. These benefits include; longevity, freshness, fast
delivery, big variety of flowers, floral subscriptions, complementary products and floral accessories.
By emphasising the benefits they offer and their premium value, Calyx Flowers can accordingly
justify their higher prices with more ease.
3.3 Marketing channel
Today, the company generates 40% of its sales through their website which should be capitalised on
by increasing their internet presence. In contrast to mailing out millions of catalogues with low
conversion rates, online advertising is a more cost-efficient strategy with the potential of higher
conversion rates. This advertising strategy allows Calyx Flowers to design their ads to successfully
reach their selected target audience based on demographics, behaviours or interests, as well as
customization based on user data. Additionally, the company can increase visibility and attract new
customers by using SEO tools as they increase the likelihood that the company appears in the search
results when consumers actively search for flower arrangements. Moreover, internet advertising
could potentially enhance the customer-journey if marketing channels equals sales channels
resulting in frictionless customer experience and overall enhanced consumer satisfaction.

4. Conclusion
In order for the company to improve their financial performance, Calyx Flowers should put emphasis
in conducting a comprehensive market research to identify relevant segments and broaden its
current target audience, develop a persuasive value proposition designed to effectively
communicate their unique selling propositions, and terminate or reduce the catalogue mailings and
reallocating resources towards a focus on internet advertising.

Appendix 1: Profitability Analysis of catalogue mailing

Current customers Recipients Rented mailing list

Catalogues sent 4,000,000 1,000,000 5,000,000
Catalogues cost/unit in 0.74 0.74 0.74
Dollars
Total Costs 2,960,000 740,000 3,700,000

Response rate 0.045 0.01 0.01

 Orders placed 180,000 10,000 50,000
Average order value in 80 80 80
dollar

REVENUE 14,400,000 800,000 4,000,000

Gross Margin in % (as 50% 50% 50%
per case)
Gross Margin in $ 7,200,000 400,000 2,000,000
Profit 4,240,000 -340,000 -1,700,000
ROI 143.24% -45.94% -45.94%

- Cialis

1. Introduction. Lilly ICOS LLC, a collaboration between Eli Lilly and ICOS, is set to launch Cialis, an
innovative treatment for Erectile Dysfunction (ED), targeting the 150 million affected men
worldwide. Differentiating from competitors like Pfizer's Viagra, Cialis offers quicker onset, longer
duration, and fewer side effects. To compete with Viagra and emerging rivals like Bayer's Levitra,
managers must identify target groups, select a positioning strategy, and choose effective
communication methods. Three strategies to consider are to serve a niche, follow head-to-head with
Viagras' positioning, or adopt a more differentiated approach.

2. Positioning. “Positioning is the act of designing the company's offer and image so that it occupies
a distinct and valued place in the target customer’s mind” (Keller, 2008). This process is outlined in
the following.

2.1. Competition. While Bayer introduced its ED medication, Levitra, with a niche strategy targeting
diabetic men with ED, Viagra stands out as the dominant player, with unparalleled global brand
recognition. To compete effectively, Cialis should employ a differentiated strategy highlighting its
unique value proposition. Points of Parity encompass a moderate efficacy rate of 81%, which aids in
helping ED patients respond to stimulation and, consequently, regain intimacy in their relationships.
Conversely, Cialis unique Points of Difference include a 36-hour duration, compared to Viagra's 4
hours, and a short 30-minute onset time. It is also unaffected by dietary factors and has shown no
visual abnormalities during testing, making it a safer choice than Viagra. A preliminary study with
350 doctors found that duration contributes only 10% to a characteristic's importance, while efficacy
and safety combined make up about 70%. This underscores the opportunity to emphasize Cialis's
superiority in safety but also in duration.

2.2. Segmentation & Targeting. Cialis should target three customer groups, referred to as the "3 Ps":
patients, physicians, and partners. Cialis is a prescription drug providing physicians with influence
over patient purchasing decisions. In addition, about 80% of people with ED have sexual partners,
who turned out to be the main motivator for starting treatment. Therefore, it is essential to include
physicians and partners in the targeting efforts to encourage patients to choose Cialis. Within these
3 Ps, further segmentation based on factors such as relationship status, geography, age, and
previous Viagra usage for patients is recommended (Appendix: Figure 1). Given the limited budget
compared to competitors in terms of net sales, the initial strategic focus should be on the US and UK
markets. The US, being the largest Viagra market and home to approximately 20% of all ED patients,
presents a significant opportunity for Cialis. Dissatisfaction with Viagra and a high willingness to try
Cialis in both countries support this focus as well as the approach to highlight the superior attributes
of Cialis. Furthermore, targeting individuals in relationships, allows to position the drug as a
relationship enhancer, as explained in the "Promotion" section. The segmentation based on age and
previous Viagra usage provides opportunities to emphasise different benefits of the new drug and
tailor the marketing channels according to segment needs.

2.3. Promotion. The 3 Ps necessitate distinct promotional approaches. Doctors should be presented
with attribute- and benefit-based USPs, emphasising reduced side effects, hence increased safety.
Customers respond better to a value-oriented approach. Studies indicate that Viagra often carries a
"playboy" image, yet men with ED frequently cite their partners as their primary motivation for
seeking treatment. Therefore, to distinguish Cialis, it should be positioned as a "relationship
enhancer". Moreover, addressing the barrier of embarrassment connected to EDs, particularly in
segments 2 and 4, is crucial. Communication should convey empathy and normalise the condition.
This can be achieved by using everyday people in advertising instead of celebrities destigmatizing
couples' problems in bed. Moreover, tailoring marketing channels is equally important. While
doctors should be targeted through sales representatives and conferences, female partners can be
reached via TV ads and women's magazines. Similarly, TV and online advertising may work better for
younger ED patients, while older generations may respond better to newspaper ads. Additionally,
distributing infographic pamphlets in clinics of urologists, family doctors, and heart specialists can
encourage patients to openly discuss health concerns that may contribute to ED during their
upcoming appointments.

3. Recommendation. Our suggestion to Cialis' leadership is to pursue a "beat" strategy, leveraging

its distinct advantages (duration, effectiveness with high-fat meals, and fewer side effects) and the
prevalent dissatisfaction with Viagra and vast number dropouts in the selected countries. Moreover,
differentiated targeting efforts for the 3 Ps, is crucial to reach all potential consumers on the market.
Lastly, positioning Cialis as a relationship saver is vital for the differentiation strategy. In terms of
pricing, it is advisable to maintain prices at a competitive level with Viagra to avoid the risks
associated with a detrimental price war.

- Cheese.io

The entrepreneur in question embarked on a venture to produce vegan cheese without initially
conducting consumer research. Initially targeting the business-to-business (B2B) market, specifically
cheese producers, the main advantage of the vegan cheese was its cost reduction due to the
absence of yeast or milk in its production.
To assess the viability of the venture, a profit and loss (P&L) analysis was conducted, incorporating
sensitivity analysis to determine an optimal pricing strategy. However, a dilemma arose regarding
pricing - setting it too low might undermine credibility, while a high price could pose a significant and
risky investment.
The P&L calculations were extended to both the potential clients, i.e., cheese producers, and the
entrepreneur's own company. Issues such as the allocation of fixed costs and the consideration of
whether to have a dedicated key account manager were also addressed.
Despite the financial focus, it was emphasised that the entrepreneur needed to consider the market
launch carefully. Surprisingly, there was a lack of market research before launching the product. It
was suggested that a more prudent approach would have been to conduct consumer tests, starting
on a smaller scale with one producer, gauging consumer satisfaction, and only scaling up the project
if successful. This oversight pointed to a missed opportunity to validate consumer interest and
satisfaction before fully committing to the venture.
- DryClean Express
Company Overview:
DryClean Express, a privately held dry cleaning business with over 400 retail locations, is currently
addressing a critical customer complaint challenging its "same-day service" and "satisfaction
guaranteed" commitments. President John Turner, in collaboration with store management, is
exploring strategic resolutions to ensure effective problem-solving while maintaining customer
satisfaction and brand reputation.
Problem Description & Discussion of Potential Solutions:
The president faces a critical customer complaint from a client who entrusted a suit for dry cleaning
with the expectation of a next-day turnaround, as per the company's commitment to "same-day
service" and "satisfaction guaranteed." Unfortunately, the suit went missing, resulting in a one-week
delay before it could be returned to the customer. In response to this service failure, the customer is
demanding an apology and a $300 refund as he had to buy a substitute suit. The store manager,
however, contends that while improvements are necessary in communicating guarantees and
policies, the company should not comply with the customer's request as he eventually received the
suit. This poses a dilemma for Mr. Turner: either he invests $300 to appease the customer (in the
form of a credit from Dry Clean or a cash refund), potentially avoiding indirect costs such as negative
word of mouth, or he risks losing the customer by doing nothing, with the prospect of avoiding
direct costs. Choosing the latter option, as preferred by the store management, would mean
foregoing an upfront payment but could lead to customer dissatisfaction, potential loss, and
negative word-of-mouth impact. The direct weekly profit loss of $5 (see Appendix 1) from this
customer, assuming a constant margin of 20% and average spending of $25, is at stake. In
contemplating potential solutions, Mr. Turner is inclined towards offering a $300 credit for dry
cleaning services as an indirect refund, providing the customer with the option to utilize the credit
over time. This approach, while incurring a similar cost to the direct refund, holds the advantage of
potentially retaining the dissatisfied customer by encouraging continued engagement with DryClean
Express. Evaluating the financial implications, it is evident that either method requires 60 weeks for
the company to recover the incurred costs (see Appendix 2a & 2c), considering a constant profit. The
credit alternative, however, may foster customer retention as the individual returns to utilize the
credit, providing an opportunity to reestablish satisfaction with the company's services. The incident
highlights a broader problem in the company – the absence of clear guidelines for handling urgent
and conceivable scenarios like the one at hand. This emphasizes the need for well-defined protocols
in handling customer complaints. In summary, Mr. Turner grapples with reconciling a dissatisfied
customer's refund request, the store manager's hesitancy, and the long-term implications for
customer retention, all amid the absence of established procedures for such situations within the
company.
Strategic Recommendations:
1. Embrace a More Customer-Centric Approach: DryClean Express, as a service-oriented chain,
should prioritise customer satisfaction by promptly addressing incidents like the one described. This
involves widespread communication across its 400 stores, ensuring a unified approach to handling
grievances and policy restrictions. Offering consistent customer support & service through various
channels, such as phone, email, or mobile apps, will keep customers updated on their orders.
Employee training is also crucial for service improvement and mistake avoidance. In addition,
adjusting policy communication, including "satisfaction guaranteed" and "same-day service," and
establishing continuous after-sale relationships, will contribute to transparency and effective
expectation management. Finally, immediate resolution of incidents and a focus on positive
customer interactions, including timely services, is essential. These changes aim to build enduring
customer relationships, fostering loyalty and satisfaction over time.
2. Implementation of Clear Customer Complaint Handling Policy: DryClean Express should establish
a clear and standardised policy for handling customer complaints, preemptively regulating the
possibility of such incidents and outline limitations for all retail locations. This proactive approach
aims to prevent the need to escalate each case to the president, thereby avoiding potential waves of
dissatisfaction among both customers and employees. Implementing transparent guidelines will
streamline customer complaint resolutions, with a focus on enhancing communication through
prominent emphasis on policy details, including prerequisites and restrictions, such as printing
concise remarks on the front of the receipts to improve clarity and prevent future
misunderstandings.
3. Offer a $300 Credit as a Customer Loyalty Initiative: As mentioned earlier, both the credit and
cash alternatives have the same time to return to profitability. Additionally, they incur equal direct
losses; however, the cash alternative involves direct costs of $300, while the credit alternative incurs
direct service costs of $240, in addition to $60 of forgone profits (Appendices 2a & 2c). Moreover, in
the long run, the credit/coupon option presents a more dependable choice for fostering customer
loyalty to the store and reduces the likelihood of customers sharing negative experiences. Also the
costs can be spread out over time. This approach could be implemented across all DryClean Express
stores, guaranteeing the return of customers to utilize the company's services following a
dissatisfactory experience.
Appendix
Appendix 1
INPUT
Customer Expenditure/ Week (=Revenues) $25
Gross Margin 20%
Cost of Service/ Week (1- 0.2) * $25 = $20
Customer Value (=Profit) / Week $25- $20= $5
Requested Payment $300

Appendix 2: Options
Appendix 2a
Pay $300 in Cash
Risk of losing the costumer Moderate - High
Immediate/ Direct Cost $300
If customer stays: Weeks to recover $300 / $5 = 60 weeks
If customer cannot be retained: Yearly indirect 52*$25*0.2 = $260
costs of losing the loyal customer

Conclusion: A substantial upfront cost, absence of customer loyalty incentives, and no

recourse in case of customer departure, all contribute to a risky situation.
If the customer nevertheless stayed, it would take Dry Clean Services 60 weeks to recover
from the direct costs. However, if the customer could not be retained, the company also
faced yearly profit losses of $260 in addition to the direct costs.

Appendix 2b

Offer Nothing and Risk to Lose the Customer

Risk of losing the customer High
Direct cost $0
+ Indirect cost of losing customer
Weekly cost (profit loss) $5
Yearly costs (profit loss) 52 * $5 = $260
60-weeks cost (profit loss) 60 * $5 = $300

Conclusion: Offering the customer nothing, would equal $260 profit loss per year (if we
assume the customer stayed otherwise). Moreover, the customer is likely to leave and
negative reviews are a potential risk, damaging the brand image. Worst option.

Appendix 2c

$300 worth of dry-cleaning credits

Risk of losing the customer Low
Weekly Cost (direct service costs) $20
Weeks of free service using vouchers $300 / $25 = 12 weeks
Total Direct Cost $20*12 =$240
Profit loss due to vouchers $5*12 = $60
Extra weeks to recover $240/$5= 48 weeks
Total weeks to recover 48 weeks +12 weeks = 60 weeks

Conclusion: Opting for a reimbursement in the form of a voucher is a safer choice, as it

makes the customer less likely to leave or share negative experiences and fosters brand
loyalty. Offering $300 in dry cleaning credits is equivalent to 12 services free of charge and
additional 48 weeks to recover from those costs for the company until retaining the
customer will lead to additional profits again. The company incurs $240 of direct service
costs but also faces $60 foregone profit over the timespan of 12 weeks. Best Option.