Principles of Marketing

Sangwoo Shin

Sessions 01 ~ 04

Jan 7, 10, 14, 17

Who is ?

Educational backgrounds
• Ph.D., University of Rochester, 2008
Major: Marketing Minor: Applied Statistics
• B.A./M.S. in Business Administration, SNU, 1998/2000

Teaching experience
• Assistant Professor, Purdue University, 2008 ~ 2017

Research & Teaching interests

• Research: Dynamic consumer choice models, Consumer learning,
Applied Bayesian statistics,
Customer Relationship Management (CRM)
• Teaching: Marketing management, Marketing research, Pricing
Database marketing, Marketing analytics

Demographics
• Born in Seoul, 1973; Male; Married; father of two kids; big fan
Introduction to
Marketing
Various definitions
• Literally, Market + ing

A place where goods An action or a process

are bought or sold

• Performance of all business activities that

direct the flow of goods from producer to
consumer

• Marketing is what you do to sell stuff

Serzio Zyman, CMO, Coca-cola
Introduction to
Marketing
Various definitions (Cont’d)
• AMA’s official definition

Marketing is an organizational function and a set of processes for

creating, communicating, and delivering value to customers and for
managing customer relationship in ways that benefit the organization
and its stakeholders (2004)
Marketing is the activity, set of institutions, and processes for creating,
communicating, delivering, and exchanging offerings that have value for
customers, clients, partners, and society at large (2007)

• In this course, any 4P related decision making based

on understanding of 3Cs
 What to Know (3Cs)
& What to Do (4Ps)
Company Consumer
Profit maximization Utility maximization
Decisions on 4Ps Earning Profit Choice of the best
to make its product/service alternative that
the best alternative satisfies their needs
given competition

Creating Value

Through
Marketing Mix
Competition • Product
• Price
• Promotion
• Place
Marketing Definition Test

Dilbert by Scott Adams

Do you agree with ?

3Cs & 4Ps Extensions

Consumer heterogeneity

Product line consideration

Dynamic perspective
 Consumer Heterogeneity
(3Cs & 4Ps Extensions)
Segmentation/Targeting Sales promotion
Advertising
Sales force
Public relations
Packaging Product variety Product Promotion Direct marketing
Sizes Quality
Services Design Marketing
Warranties
Returns
Features
Mix Channels
Coverage
Price Place Assortments
List price Locations
Discounts Inventory
Allowances Transport
Payment period Targeting
Credit terms

Segmentation
Segmentation
What is a segment?
• A group of consumers who are similar at some level
• Homogeneous within a segment but heterogeneous between segments

Observable segmentation variables

• Geographic: Rural/Urban, Region, State
• Demographic/Scio-economic: Age, Sex, Income, Occupation,
Education, Religion
• Behavioral: Level of usage, Client/Prospect, Loyalty,
Responsiveness to marketing mix

• Psychographic: Attitudes, Interests, Opinions, Lifestyle, Personality

Targeting
Why?
• Consumer: Increased consumer heterogeneity
• Competition: Increased competition
• Company: Limited resources

How?
• Product: Customization
• Price: Differentiation
• Promotion: Ads content, Selective media choice
• Place: Selective distribution channel choice
 Targeting Example
(Microsoft Office 2007)

• Product: Essentially identical

• Price: Standard @$399.95 vs HS @$99.95

Standard Edition
• Promotion: Virtually no promotion for both

• Place: Online for both,

College book/computer stores for HS
Home and Student Edition

Does targeting make sense?

Product Line Consideration
(3Cs & 4Ps Extensions)

From a single product to the product line

Category profit maximization

• Cannibalization
• Bundling
 Brand Line Extension
Example (Audi Q7)
Cannibalization
Effect
Audi Family

Market Expansion
Effect

Potential
Car Buyers Business Stealing
Effect
Competitors
Dynamic Perspective
(3Cs & 4Ps Extensions)

World is dynamic!
• 3Cs are changing over time
• Market environments are changing over time
PEST: Political, Economic, Social, Technological

Company is not a mayfly ( )!

Implications
• Must look forward
• Must maximize not only today’s profit
but also tomorrow's profit
Examples of
Dynamic 4P Decisions
Product
• New product development
• Market entry (First mover vs Second mover)
• Repositioning

Price
• Skimming (High à Low) vs Penetration (Low à High)

Promotion
• Advertising is by nature an investment

Place
• Demand à Location decision or Location decision à Demand ?
• Preemptive Location decision
Dynamic Pricing Example

• Product: Hermes “Birkin” bag

• Price: More than $10,000

Increases over time

Skimming, Penetration or Neither?

What is Database Marketing?

Textbook definition
• Database Marketing (DBM) is the use of customer
databases to enhance marketing productivity through
more effective acquisition, retention, and development
of customers

At this moment,
DBM = Database + Marketing
What is Database?

Definition
• A database, often abbreviated as DB, is a collection of
information organized in such a way that a computer
program can quickly select desired pieces of data

Two facets of DB
• Technological
q Databases are structured to facilitate the storage, retrieval,
modification, and deletion of data in conjunction with various data-
processing operations

• Substantive The main focus of this Class!

q Marketing databases contain valuable information about customers
 Database Marketing
Example:
Boosting zoo membership
by geographical targeting
• Analyzed their membership data and learned
which ZIP Codes were home to the zoo’s most
frequent guests
• Then targeted discounted campaigns to other
people from those areas

u Result: A whopping 13% increase in membership during Q1

alone
u Takeaway: Even if products or services aren’t location-specific,
the companies can use this segmentation tactic to their
advantage
 Database Marketing
Example:
Identifying deal-prone customers
• Segmented their customer lists based
on how many bags of coffee customers
ordered
•Sent emails offering a 17% discount on a three-pack of
coffee to three unique segments: customers who had
previously purchased two bags, three bags, and four
bags
• Found that customers in the two-bag segment were
most likely to take advantage of the discount

u Takeaway: This gave the company insight into which

customers were more likely to respond to that specific offer,
and, in turn, the company was able to upsell those customers
Database Marketing
Example:
Identifying customer specific needs
• Segments its leads in a unique way: by the
size of their furry friends
 Database Marketing (DBM)

Textbook Definition
• Database Marketing (DBM) is the use of customer
databases to enhance marketing productivity through
more effective acquisition, retention, and development
of customers

§ For current, past, and § DBM attempts to quantify § Three major focuses of
potential customers the effectiveness of DBM
§ Customer information in marketing actions and § DBM is about long-run
the form of database is a improve it management of customers
major vehicle
 Customer Types & Key
Topics in DBM
Retention

Acquisition

Churn
Current Customers
Potential Customers
(Prospects)

① New vs. Old (to the Company) Development

② Occupied by Competitors or Not
 History of
Marketing/Consumer Data

Mid 1990s:
Customer Information File (CIF)
§ Real time scanner data
§ Roles of DM (direct mail) and internet industry
§ New ways of doing marketing: DBM, CRM
Early 1980s: § Financial institutions, communications,
internets
Scanner data
§ Upgraded “diary panel” data that is often used by micro economists
§ A. C. Neilsen and IRI provided some scanner data to academicians
§ Single source data: store panel + scanner panel + media behavioral data
§ Consumer packaged goods
1950s:
Consumer survey data
§ Expanding mass media industries such as radio and TV
§ Consumer packaged goods (e.g., P&G)
§ Examples: awareness, purchase intention, customer satisfaction etc.
Application of
Survey Data
conducts an annual
customer survey responded
by new vehicle purchasers

• Survey is useful to gather information about what is not

directly observable such as
q Awareness
q Purchase intention
q Satisfaction
q Brand image
Application of
Scanner Data
Diaper-Beer ( ) Syndrome

• Processing and mining of point-of-sales data reveals

q Men between 30- 40 years in age, shopping between 5pm and
7pm on Fridays, who purchased diapers were most likely to also
have beer in their carts

• This motivated the grocery store to move the beer aisle

closer to the diaper aisle, leading to an instant 35%
increase in sales of both

• This legendary story led to a gold rush in data mining in

1990s
Application of
Scanner Data
• Selling the system that would enable manufacturers and retailers to
identify customers based on actual purchase behavior and distribute
customized incentives at the point of sale
• Scanner-based technology to retrieve and respond to
consumer behavior
• Since the installation of the first stores in 1984, more than 22,000
stores in the US are now using the CM system

Checkout Coupon by
• Unlike uniform/random distribution
of coupons

q One-to-one price discrimination

q Distributed @ the point of sale
Application of
Scanner Data

• One of the major grocery retailer in UK competing with

ASDA Price Guarantee

• Launched an internet-based system
allowing customers to check their
grocery receipts against its
competitors and offering to repay any http://www.asd
difference in the form of a voucher apriceguarantee
.co.uk/
• ASDA chief executive said
“From today (Apr 27, 2010) ASDA cannot and will not be beaten on
price. Our grocery guarantee puts an end to the phony price wars that
most shoppers are sick of.”
Customer Information File
(CIF)
CIF
• Contains detailed information about the company’s
current customers
q Geo/Demographic information
q Transaction history from the beginning

• Thus, serves as a key driver of modern DBM

For a few examples, CIF helps
q Measure customer lifetime value
q Identify customers who have high attrition (churn) probability
q Determine whom, when, and how often to send promotion emails
q Identify customers who is more likely to buy B after purchasing A

• In particular, enhances substantially “Marketing

Accountability”
Marketing Accountability

Half the money I spend on

advertising is wasted; the trouble
is I don't know which half.

John Wanamaker
(1838-1922)

• In 1876, John Wanamaker, a Marketing pioneer, has

introduced the first US department store that sells various
specialty items under the same roof. He has also
introduced many innovative marketing strategies such as
newspaper feature ads, fixed price policy, money-back
guarantee, white sale, and so on.
Marketing Accountability &
Effectiveness

Who should receive special discounts?

Application of Customer
Information File (CIF)
Calling plans of
mobile telecommunication services
• Usually a form of three-part tariffs
q Monthly access fee
q Allowance minutes
q Per-minute rate after allowance
• Hence, overage or underage happens

• Offers “free plan analysis” service to customers

• Recommends the best calling plan to its loyal customers

Why encouraging customers to pay less?

• Short-term revenue loss vs. Long-term revenue gain
Beyond CIF
Key disadvantages of CIF
• CIF lacks information about
q Potential customers
q Competitor’s marketing actions

Solution
• Supplement CIF with other information sources
New Information Sources
Use a special device to measure what has
not been observed (or collected)

Some examples
• Physiological devices
q Electroencephalograph (EEG)
q Galvanic Skin Responses

• Eye trackers

• Clickstream Data

• Virtual Shopping
 Physiological Devices
Try to overcome the drawbacks
of survey data

Electroencephalograph (EEG) tracks Galvanic Skin Responses

and records brain wave patterns (GSR) is known as a lie
detecter
 Eye Tracker
Eye tracker yields valuable information
about which features are most eye-
catching, which can
complement scanner data

Two main uses

Web advertising Store display

Clickstream Data

A complete sequence of clicks on the web

helps understand web-surfing patterns

Two examples
tracks the web-surfing behavior of
a panel of over 2 million users

Web Crawler (or Spider)

Virtual Shopping

Simulates a consumer shopping activity in

a virtual world (mostly on the Internet but
not necessarily)
• Can duplicates the distracting clutter of an actual market
• Flexible, quick, low-cost design
• Used for field experiment

Example:
• To see more details, check
https://www.youtube.com/watch?v=ecHHH1PqsAs
Two Key Features of DBM

“Addressability” of customers
• The ability to interact with customers one-to-one

Direct Marketing (DM)

Long-run management of customers

• Acquisition à Retention à Development

Customer Relationship Management (CRM)

 Paradigm Shift
in Marketing
Lifetime Value of Customer DBM
Lifetime
Maximizes the lifetime value
What is the time horizon for
customer management?

of each customer with an aid of

CRM
Single Period

DM
One-to-One Marketing
Single Customer A lot of Customers

How many different customers are in the target market?

 DBM, DM & CRM in DBM

DBM
DM CRM
One-to-One Marketing Lifetime Customer Management

Database
Direct Marketing (DM)

Textbook definition
• The marketing practice of selling products or services
directly to the end consumers rather than through
middlemen of any kind

Examples
• Selling through the company’s own store
• Selling through the company’s own salespeople
• Selling through mail-order, telephone, or Internet
 Direct Marketing (DM)
Traditional DM focuses more on
communication/distribution channel through which
individual customers are directly reached

The key byproduct of

DM is the
presence/availability of
rich customer level
information,
which serves as a basis
for one-to-one
marketing
Direct vs. Indirect Channels

Direct vs. Indirect channels

• Direct channels
q Selling through personal contacts from the company to prospective
customers by mail, phone, electronic means, in-person visits and so forth

• Indirect channels
q Selling through third-party intermediaries such as agents or broker
representatives, wholesalers or distributors, and retailers or dealers

When is one preferred to the other?

Direct channels Indirect channels
Product information needs are high A broad assortment is essential
Product customization is high Availability is critical
Product quality assurance is important After-service is important
Logistics are important
Traditional Example of DM:
Vertical Integration

• A vertically integrated apparel retailer

q Unlike similar apparel retailers, Zara controls most of the steps on the
supply-chain: It designs, produces, and distributes itself

• Design strategy
q According to an article in Businessworld magazine, "Zara was a fashion
imitator. It focused its attention on understanding the fashion items that its
customers wanted and then delivering them, rather than on promoting predicted
season's trends via fashion shows and similar channels of influence, which the
fashion industry traditionally used.”

• Considerably more products, quick lead time, & short

product life cycle
q 11,000 distinct items annually compared with 2,000~4,000 items for key
competitors
q 4 or 5 weeks for a new product and only 2 weeks for a modification of existing
products
q Items sold not well in the first week of introduction are withdrawn
Traditional Example of DM:
Salesforce
In the 1950s, pioneered
• The plastic food storage container business

• The means by which the containers

were sold

In 2002, Tupperware placed its products

in all 1,148 Target stores
• After experiencing 15-year-long decline in sales due to
q heightened competition from brands such as Rubbermaid
q increased proportion of working mom
Other Examples of DM

Customer level information (e.g., contact

and transaction) is at company’s hand

à A basis for One-to-One Marketing

One-to-One Marketing
Definition

Personalized 4P decisions
① Product
② Price
③ Promotion
④ Place

• A practice of tailoring Marketing outreach to each

customer differently by leveraging knowledge about
individual customer preferences

Key information requirement

Value of One-to-One Marketing:
Case of Price Discrimination
Why price discrimination?
• Never satisfied with a single price
§ Pricing too low to some segments leaves money on the table
§ Pricing too high to some segments leads to missed revenue
opportunity

Money left on the table Demand: # of consumers

P D who are willing to pay
at least P for the product
Missed revenue opportunity
Psingle

Revenue

Qsingle Q
Value of One-to-One Marketing:
Case of Price Discrimination
Why price discrimination?
• Two prices (High, Low) vs. single price
P D
PHigh More consumer surplus extracted
à Higher revenue
Psingle

PLow
Revenue
QHigh Qsingle QLow
P D
Q P1
P2
• Why NOT more than two
prices? P3
Revenue
P4
P5

Q1 Q2 Q3 Q4 Q5 Q
Implementation of
One-to-One Marketing
General conditions
• Diversity of customer needs or preferences in target
market
• Ease of collecting individual demand information
• Low personalization costs

More specific conditions

• Existence of high-quality customer database
• (High) Price level of products/services
• (Short) Length of purchase cycle
Product Customization in
Manufacturing Industry
Mass customization
• The concept behind product customization, namely,
making products to fit the customer’s exact specifications,
is an old one
• However, the advent of digital-age technology enables
companies to offer products faster, in a larger scale, and
more cost-efficiently

No customization

Company Consumer &

Mass customization
Competition

One-to-one customization
Mass Customization

Examples
Dell’s built-to-order computers, sold directly by the
company on the Internet or over the phone, helped
make it the most successful computer manufacture of
the 1990s

Supply-side benefits or demand-side costs?

• Reduce inventory • Longer lead time
• Save warehouse space
• Save the expense of discounting
leftover merchandise
Another Mass Customization
Example: Jones Soda
Branding by customization
• Launched with six flavors
in 1996; Seattle-based

• Uses its Web site to solicit comments and collect

suggestions
q Adds flavors such as chocolate fudge and green apple
q Off-beat names like Bohemian Raspberry and D’Peach Mode
q Encourages fans to submit their own photos for the bottle labels

• Personalized photo label

One-to-One Marketing
Example:
Recommender system
One-to-One Marketing
Example:
Dynamic pricing
• Amazon started to average more than 2.5 million
dynamic price adjustments per day in 2013

2013
Dynamic Pricing is Popular
in E-commerce!
Dynamic vs. Static Pricing
Dynamic Pricing
Example:
Dynamic (Surge)
Pricing:
Cautions for One-to-One
Marketing
Checklist
• Addressability of individual customers
• Different tastes, preferences or demand intensities
• Revenues > Costs of one-to-one marketing
• No reselling possibilities
• No resentment
• Legal conditions
 DB, DM & CRM in DBM
Recap
DBM
DM CRM
One-to-One Marketing Lifetime Customer Management

Database
Customer Relationship
Management (CRM)
Simplest definition
• CRM is information-enabled relationship marketing

• With this definition, CRM almost is a synonym to DBM

• But, “Relationship” is at the center stage!

• Although modern CRM relies on the heavy use of

customer information, CRM can be conducted without it
 Relationship is the Key!

Relationship
• Mutually beneficial (Win-Win)

• Long lasting or sustainable

Better
Relationship with
Retention

Development
Current Customers
Relationship Marketing

The main idea behind CRM is not new

• Historic shift in marketing from managing products to
managing customer relationships
• Often without an aid of customer database

• From brand management perspective, relationship

marketing is viewed as means to reach the highest level
of brand equity
Brand Equity
How to conceptualize it?
Value of a branded product

Value of a unbranded Brand Equity

counterpart

• Brand Equity = Value added by branding

= Value of a brand – Value of a unbranded counterpart

Brand Equity as a Bridge

• Brand Equity provides marketers with vital strategic bridge
from their past to their future
q Brand Equity as a reflection of the past marketing investments
q Brand Equity as a direction for the future marketing actions
Brand Building Blocks
Consumer-Based Brand Equity Pyramid
Stages of
Brand Development
4. RELATIONSHIPS =
What about you and me?
RESONANCE

3. RESPONSE =
What about you?
JUDGMENTS FEELINGS

2. MEANING =

PERFORMANCE IMAGERY What are you?

1. IDENTITY =
SALIENCE
Who are you?
 CBBE Pyramid Implications

Consumer owns Brand resonance provides

brands important focus

RESONANCE

Don’t take shortcuts Brand should have

JUDGMENTS FEELINGS
with brands a duality

PERFORMANCE IMAGERY

SALIENCE
Brand Resonance
Definition
• The extent to which consumers feel that they are
“in-sync” with the brand

Resonance is characterized by
• The depth of the psychological bond that customers
have with the brand
• The level of activity engendered by this loyal relationship

Four sub-dimensions
• Behavioral loyalty • Emotional attachment
• Sense of community • Active engagement
Behavioral Loyalty
Example:

• The first airline loyalty program (introduced in 1981)

• This frequent flier program rewarded the airline’s top
customers with free trips and upgrades based on mileages flown
• 1,500 participating companies
• More than 100 frequent-traveler programs exist, but American
Airlines still has the largest, with membership of over 50 million
by 2005

Rationales
• Artificial switching costs increase retention
• Shift from price competition to service competition
 Emotional Attachment
Example:

• The leading greeting card company in the US

q More than 50% domestic market share (worth $4.4 billion)

To elicit feelings for the Hallmark brand

• The slogan since 1944 • A sponsorship of TV programs

q Introduced in 1951
q Has won 80 Emmy Awards

• Launch of cable channel in 2001

Sense of Community
Example:

• HD Sponsors the Harley Owners Group (HOG)

• By 2005, 900,000 members in chapter group all over the
world
• To share a very simple mission, “To Ride and Have Fun”
• Benefits
q A magazine called Hog Tales q Emergency road service
q A touring handbook q A special insurance program
q Discount hotel rates q a Fly & Ride program

• 1-year free membership for the first-time buyer

Active Engagement
Example:
“Bonds Almost Anything!”
• Ran the “You Glue What?” contest for one year to
demonstrate the product’s superiority and inspire
creativity in use

World’s biggest bowl Used by NASA as a thread 19,500 toothpicks

(8’6’’, 1,452 pound) sealant for space suits
Relationship Marketing
Example:
Experiential Marketing
• Promotes a product by connecting it with unique and
interesting experiences
• “The idea is not to sell something, but to demonstrate
how a brand can enrich a customer’s life”

’s sponsorship of

q Access to free personal TVs at major court venues

q Presales of tickets; Use of bonus points to buy tickets
q Tennis Lovers’ Night with Match.com
q Live viewing on giant screens with mock stadium seating in Rockefeller
Center
q Family weekend in Madison Square Park with interactive activities for all ages
Relationship Marketing
Example:
Aftermarketing
• Focuses on actual product experience—what P&G calls
the “second moment of truth” (the first occurs at purchase)
• Most marketing activity is devoted to finding ways to
encourage purchase, not consumption
q User manuals: comprehensive, clear, user-friendly, multi-lingual
Sends researchers home with first-time buyers to
check that its software is easy to easy to install and to
identify any source of problems that might arise

q After-use customer satisfaction survey

q Well-designed customer service center, easily accessible by a toll-

free number of via the web
Customer Relationship
Management (CRM)
The use of customer database
is essential, not optional, to
implementing CRM today!
• More popular in service industry
Customer Relationship
Management (CRM)
Two key issues of CRM
• Which one is
more important,
Acquisition or
Retention?

• Are all customers equally important?

Acquisition vs. Retention
Retention à Consumer
Surplus (CS)
Improved CS for current customers
• Even when 1) Benefit & 2) CSbest alternative are assumed to be same
between Trial and Repeat
Trial Perceived Repeat Perceived
Expected Risk Expected
Risk Benefit Benefit
Search Costs
Search Costs
Purchasing Costs
Purchasing Costs Use Costs

Use Costs CSbest alternative

Pmax
CSbest alternative
Pmax

Pmin
Acquisition
Pmin
Cost Retention Cost
Retention à Market Share

Evolution of market share depends on retention

Switching matrix
To To
A B A B
A 0.8 0.2 A 0.9 0.1
From

From
B 0.2 0.8 B 0.2 0.8

A’s market share next period

when its current share is 50% ?
• Note that MSt = MSt-1 × r + (1-MSt-1) × a
where r = retention rate a = acquisition rate
A’s long-run market share(LRMS)?
• Note that LRMS = a/(1-r+a)
Retention à Profit
Pareto’s 80/20 Principle

Original form

In the CRM context,

Pareto’s 80/20 Principle

Empirical evidence

Financial Assets Segment Size % Net Profits

Less than $10,000 90.8% -15.2%

$10,000~$30,000 5.0% 17.6%

$30,000~$50,000 1.8% 15.9%

$50,000~$100,000 1.6% 25.3%

More than $100,000 0.8% 56.4%

Source: Chosun Daily, June 29th in 2004
Implications for CRM

Identify “good” prospects and acquire

them
Acquisition

Build good relationship with “good”

current customers
Better
Relationship with
Retention

Development
Current Customers
Key Remaining Issues

How to identify “good” prospects?

How to identify “good” current

customers?

There is a metric used commonly in

practice for these purposes