Subject: Marketing Analytics

Subject Code: MBA 961-18

Unit I
Class: MBA III (Marketing Group)
Session: Jan – Jul 2019
Instructor: Dr. Bushra S. P. Singh
 UNIT 1 SYLLABUS
• Understanding Data: Introduction to analytics,
Basics of Statistics and Data Interpretation on MS
EXCEL.
• Market Analysis: Sales Forecasting, Market
Share Analysis; Other Market performance
Indicators like Penetration, Usage, Brand
Performance, Satisfaction.
• Customer Analysis: Customer Choice Analysis,
Customer Profitability Analysis, Lifetime Value;
Acquisition and Retention Costs and Rates
• Product Analysis: Product Portfolio Analysis,
New Product Sales Forecasting; Cannibalization
Analysis
Understanding Data
 What is Analytics?

• Analytics is the scientific process of

discovering and communicating the
meaningful patterns which can be found in
data.
• It is concerned with turning raw data into
insight for making better decisions.
• Analytics relies on the application of
statistics, computer programming, and
operations research in order to quantify and
gain insight to the meanings of data.
• It is especially useful in areas which record a
lot of data or information.
 Basic Excel Skills

• Many commercial software packages can be used

for Business Analytics.
• Spreadsheet software, such as Microsoft Excel, is
widely used across all areas of business.
• Spreadsheets provide a flexible modeling
environment for manipulating data and
developing and solving models.
• This chapter provides a summary of the basic
features in Microsoft Excel for solving problems
in Business Analytics.
 Basic Excel Skills

• Opening, saving, and printing files

• Navigation
• Selecting ranges
• Inserting/deleting rows and columns
• Entering and editing text, data, and formulas
• Formatting data (number, currency, decimal)
• Working with text strings
• Performing basic arithmetic calculations
• Formatting text
• Modifying the appearance of a spreadsheet
 Basic Excel Skills
Ribbon in Excel 2010 for Windows
• Tabs - Home, Insert, Page Layout, Formulas, …
• Groups - Font, Alignment, Number, Styles, …
• Buttons and Menus
- Buttons appear as small icons.
- Menus of additional choices are indicated by
small triangles.

Figure 2.1
 Basic Excel Skills

Excel Formulas
• Common mathematical operators are used
c
a−d bP5 + would be entered into Excel as:
=a− b*P^5 + c/d
• Cell references can be relative or absolute.
• Using a dollar sign before a row or column
label creates an absolute reference.
• Relative references: A2, C5, D10
• Absolute references: $A$2, $C5, D$10
 Basic Excel Skills

Example 2.1
Implementing Price-Demand Models in Excel
Two models for predicting price using demand
Linear
D = a – bP
=B4 – B5*A8
(in cell B8)
Nonlinear
D = cP-d
=E4*D8^-E5 Figure 2.2

(in cell E8)

 Basic Excel Skills

Example 2.1 (continued) Implementing Price-

Demand Models in Excel

Figure 2.5

D = a – bP (linear)
D = cP-d (nonlinear)
 Basic Excel Skills

Copying Excel Formulas

Cells can be copied in many ways.
• Use the Copy button in the Home tab, then
Paste
• Use Ctrl-C, then Ctrl-V
• Drag the bottom right corner of a cell (the fill
handle) across a row or column
• Double click on the fill handle of a cell and its
value (or formula) is copied to the cells below
if there is data in an adjacent column
 Basic Excel Skills
Example 2.2 Copying Excel Formulas by Dragging

Figure 2.3
 Basic Excel Skills
Example 2.2 (continued)
Copying Excel Formulas by Dragging

Figure 2.4
 Basic Excel Skills
Example 2.2 (continued)
Copying Excel Formulas by Dragging

Figure 2.5
 Basic Excel Skills

Other Useful Excel Tips

• Split Screen
• Paste Special
• Column and Row Widths
• Displaying Grid Lines and Column Headers for
Printing
• Filling a Range with a Series of Numbers
 Excel Functions

Basic Excel Functions

• =MIN(range)
• =MAX(range)
• =SUM(range)
• =AVERAGE(range)
• =COUNT(range)
• =COUNTIF(range,criteria)
 Excel Functions

Example 2.3 Using Basic Excel Functions

=MIN(F4:F97)
=MAX(F4:F97)
=SUM(G4:G97)
=AVERAGE(H4:H97)
=COUNT(B4:B97)
=COUNTIF(D4:D97,”=O-Ring”)
=COUNTIF(H4:H97,”<30”)
Figure 2.6
 Excel Functions

Functions for Specific Applications:

• =NPV(rate,value1,value2,…)
• Net present value (or discounted cash flow)
measures the worth of a stream of cash flows,
taking into account the time value of money.
F is the cash flow ($)
i is the discount rate
t is the number of time
periods into the future,
where t = 0, 1, …, n
 Excel Functions
Example 2.4 Using the NPV Function
=NPV(rate,value1,value2,…)
Cell B8:
=NPV(B6, C4:H4) – B5

Figure 2.7
 Excel Functions

Insert Function:
• Click the fx button
or choose Insert
Function.
• You may type in a
description or
search.

Figure 2.8
 Excel Functions
Logical Functions:
• =AND(condition1, condition2, …)
• =OR(condition1, condition2, …)
• =IF(condition, value if true, value if false)
• You may nest up to 7 IF functions, replacing the
value if false with another IF function.
• Conditions may include the following:
= equal <> not equal to
> greater than >= greater than or equal to
< less than <= less than or equal to
 Excel Functions

Basic Excel Functions:

• =COUNTIF(range,criteria)

Figure 2.9
 Excel Functions
Example 2.5 Using the IF statement
=IF(condition, value if true, value if
false)
Cell K4: =IF(F4 >= 10000, “Large”, “Small”)

Figure 2.10
 Excel Functions

Lookup Functions:
 These functions are useful for finding specific
data in a spreadsheet.
=VLOOKUP(lookup_value, table_array,
col_index_num)
=HLOOKUP(lookup_value, table_array,
row_index_num)
=INDEX(array, row_num, col_num)
=MATCH(lookup_value, lookup_array, match_type)
 Excel Functions

Example 2.6 Using the VLOOKUP Function

Figure 2.11

=VLOOKUP(10007, $A$4:$H$475,3)
returns the payment type of Credit.
 Excel Functions
Example 2.7 Using the INDEX and MATCH Functions

Figure 2.12

=MATCH(1369,$C$4:$C$475,0)
returns 12 (the first instance of 1369 is the 12th item)
=MATCH(1369,$C$4:$C$475,1)
returns 14 (the last instance of 1369 is the 14th item)
 Excel Functions
Example 2.7 (continued) Using INDEX and MATCH

• =INDEX($A$4:$J$475, MATCH(1369,$C$4:$C$475,0),7)
returns 63,000 (the 12th value in the 7th column)
• =SUM(INDEX($A$4:$G$475,MATCH(1369,$C$4:$C$475,0),7):INDEX($A
$4:$G$475,MATCH(1369,$C$4:$C$475,1),7))
returns 163,800 (the sum of the 3 costs for item 1369)
 Spreadsheet Modeling and Engineering

• Spreadsheet Engineering is the process of

developing good, useful, and correct
spreadsheet models.
• Spreadsheet models characterize the
relationship between inputs and outputs.
• It is important not to use input data in model
formulas, but to instead reference the
spreadsheet cells that contain the data.
 Spreadsheet Modeling and Engineering

Example 2.8
Spreadsheet Model for the Outsourcing Decision

Figure 2.13

Total manufacturing cost = $50,000 + $125 x Q

Total outsourcing cost = $175 x Q
 Spreadsheet Modeling and Engineering

Example 2.9 Pricing Decision Spreadsheet Model

Figure 2.14

Sales = -2.9485 x price + 3,240.9

Total Revenue = price x sales
 Spreadsheet Modeling and Engineering
Spreadsheet Quality
 Verification is the process of ensuring that a
model is accurate and free from logical errors.
 Below are three approaches to spreadsheet
engineering that can improve spreadsheet
quality:
1. Improve the design and format of the
spreadsheet itself.
2. Improve the process used to develop a
spreadsheet.
3. Inspect your results carefully and use
appropriate tools available in Excel.
 Spreadsheet Modeling and Engineering

Example 2.10 Modeling Net Income on a Spreadsheet

Gross profit = sales – cost of goods sold
Operating expenses = administrative expenses
+ selling expenses
+ depreciation expenses
Net operating income = gross profit
 – operating expenses
Earnings before taxes = net operating income
– interest expense
Net income = earnings before taxes – taxes
Spreadsheet Modeling and Engineering

Simple Spreadsheet Model

for Computing Net Income

Figure 2.15
 Spreadsheet Modeling and Engineering

Data-Model Format for Computing Net Income

Figure 2.16
 Spreadsheet Modeling and Engineering

Pro Forma Income Statement Format for

Computing Net Income

Figure 2.17
NEW BUSINESS VENTURE…

36
ANSWER TO HIS WORRIES….
MARKET

38
 MARKET PLEASE READ

• A market is defined as the sum total of all the

buyers and sellers in the area or region under
consideration. The area may be the Earth, or
countries, regions, states, or cities.
• The value, cost and price of items traded are
as per forces of supply and demand in a
market. The market may be a physical entity,
or may be virtual. It may be local or global,
perfect and imperfect.

40
 MARKET ANALYSIS PLEASE READ

• A market analysis is the best way to get a

third-party perspective of all of the best
options for your marketing campaign, and
to ensure that your money is spent in the
most effective way possible.
• The goal of market analysis is to determine
the attractiveness of a market and to
understand its evolving opportunities and
threats as they relate to the strength and
weakness of the firm.
 PLEASE READ
OBJECTIVES

• Determine attractiveness of a market.

• Find & identify new business
opportunities.
• Targeting and dividing the market into
niche.
• Positioning the products or brands in the
mind of customers
• Understand the dynamics of the market
 WHY MARKET ANALYSIS?

PLEASE READ
• Market information
• Insight into existing customers
• Identifying potential customers
• Customer need
• Customer behaviour pattern
• Identify business opportunity
 WHY MARKET ANALYSIS?

PLEASE READ
• Competitor Analysis
• Economic overview
• Shift share analysis
• Occupational changes
• Strategic advantage
• Resolving Business Problems
 WHEN MARKET ANALYSIS?

PLEASE READ

Determining the sales potential of your

products and services.
Attracting customers to your business
Selling to customers and earning repeat
business
 HOW MARKET ANALYSIS HELPS?

• A market analysis answers these questions

about your customers:
• Who are they? PLEASE READ

• Where are they?

• What do they need?
• How do they make their buying
decisions?
• Where do they buy?
• How do you reach them with your
marketing and sales messages?
 SALES FORECASTING PLEASE READ

• Sales forecasting is the process of estimating future

sales.
• Accurate sales forecasts enable companies to make
informed business decisions and predict short-term
and long-term performance.
• Companies can base their forecasts on past sales data,
industry-wide comparisons, and economic trends.
• It is easier for established companies to predict future
sales based on years of past business data.
• Newly founded companies have to base their
forecasts on less-verified information, such as market
research and competitive intelligence to forecast their
future business.
 SALES FORECASTING PLEASE READ

• Sales forecasting gives insight into how a

company should manage its workforce, cash
flow, and resources.
• Predictive sales data is important for
businesses when looking to acquire
investment capital.
• Sales forecasting allows companies to:
– Predict achievable sales revenue;
– Efficiently allocate resources;
– Plan for future growth.
 PLEASE READ
MARKET SHARE ANALYSIS

• Process of benchmarking your sales in a

market or product category against the
competition
• Process of benchmarking your sales
against the total size of a market
• Market share = (revenue/total market size) X
100
• Also possible to calculate using units sold
• Market share = (units sold/ market-units sold) X
100
 Market share using Earnings

PLEASE READ
• A Japanese beverage company
launches a line of non-alcoholic beers
with sales of $5 million. They estimate
the total market size of non-alcoholic
beers in Japan at $120 million by
looking at the earnings of their major
competitors.
• Market share = (5/120) X 100 = 4.2%
 Market share using Users
PLEASE READ

• In some cases, market share is measured

in terms of users. For example, a youtube
channel might benchmark its 10 million
subscribers against the 90 million people
in the country who subscribe to a similar
service.
• Market share = (10/90) x 100 = 11.1%
 PLEASE READ
Market share using Unit sales

• A third way to measure market share is using

unit sales. This is done when you have better
unit sales data than revenue sales for a market.
• Unit sales can also be used if your products are
at a completely different price level than the
competition such as a $100 mobile device with
a strategy to take the market of a $1000 mobile
device. For example if you sell 1 million devices
in a market where a total of 4.4 million devices
are sold:
• Market share = (1/4.4) X 100 = 22.7%
 PENETRATION PLEASE READ

Penetration is a measure of brand or

category popularity. It is defined as the
number of people who buy a specific brand
or a category of goods at least once in a
given period, divided by the size of the
relevant market population.
 PENETRATION PLEASE READ

• Managers must decide whether to seek sales

growth by
i. acquiring existing category users from their
competitors or
ii. by expanding the total population of category
users, attracting new customers to the market.
• Penetration metrics help indicate which of
these strategies would be most appropriate
and help managers to monitor their success.
• These equations might also be calculated for
usage instead of purchase.
 PENETRATION PLEASE READ

•  
 PENETRATION PLEASE READ

• Two key measures of a product's

"popularity" are penetration rate and
penetration share.
• The penetration rate is the percentage
of the relevant population that has
purchased a given brand or category at
least once in the time period under
study.
 PENETRATION PLEASE READ

• Over a period of a month, in a market of

10,000 households, 500 households
purchased Good knight mosquito
repellants.

• Brand Penetration = Good knight

Customers/Total Population = 500/10,000=
5%
 PENETRATION PLEASE READ

• During
  the month in which 500 households
purchased Good knight, 2,000 households
bought at least one product of any brand in
this category. Calculate Good knight’s
penetration share.
• Penetration Share
• Penetration Share = 25%
 BRAND PERFORMANCE METRICS

Brand metrics are units of measurement that

determine how strong or weak a brand is relative
to its impact on driving business goals
PLEASE READ
• Lead generation • Profit margin
• Purchases • Revenue uplift
• Re-purchases • Premium pricing
• Market share • Lifetime value
• Wallet share • Conversion rate
 PLEASE READ
LEAD GENERATION RATE

• It is the total number of leads captured, divided

by the total number of visitors through a
particular channel.
• Channels will be on social media, organic (SEO),
paid and referral.
• If 100 of 10,000 visitors through social media
into leads, lead generation rate is 1%.
• Social media visitors generally convert at a
lower rate than PPC or SEO traffic.
 PLEASE READ
LEAD GENERATION RATE
 PLEASE READ
PURCHASE AND RE-PURCHASES
• New customers are almost never as profitable as returning or
repeat shoppers.
• Adobe reported that in USA returning or repeat shoppers
account for about 41 percent of retail revenue online, but
represent just 8 percent of site traffic.
• Adobe found that shoppers who come back and make a
second purchase typically spend three times as much as new
customers.
• Repeat shoppers, those that come back more than twice, will
typically spend 5 times as much as new shoppers on each
purchase, according to Adobe.
• A retailer used a PPC campaign to sell a $10 item to a shopper
introducing that shopper to the store and its products. Now
that shopper spends no less than $500 per quarter with the
store.
 PLEASE READ
MARKET SHARE

• Market share refers to the percentage of

what a company earns of
the overall spending in an industry or
product market.
• If the total price of air conditioners sold
worldwide is $800 million, and a
particular vendor sells $200 million worth of
air conditioners, then that vendor's market
share for air conditioners would be 25%. 
 PLEASE READ
WALLET SHARE

• Share of wallet (SOW) is a marketing metric

used to calculate the percentage of a
customer's spending for a type of product or
service that goes to a particular company.
• For example, if a customer spends $60 a
month at fast food restaurants, and $30 of
that amount is spent at McDonald's,
McDonald's has a 50% SOW for that
customer.
 PREMIUM PRICING PLEASE READ

• Premium pricing is the practice of setting

a price higher than the market price, in
the expectation that customers will
purchase it due to the perception that it
must have unusually high quality.
• In some cases, the product quality is not
better, but the seller has invested heavily
in the marketing needed to give the
impression of high quality.
 PREMIUM PRICING PLEASE READ

Timex may have more bells and whistles than the

Rolex, but still consumers are willing to buy Rolex
because they perceive the product to be of
extremely high quality and an ultimate status
symbol.

$10,000 $28
 PLEASE READ
CONVERSION RATE

• It tells how many visitors are performing a

specific action (filling out a form, clicking a
button, etc.).
• To measure conversion rates,
– Identify a campaign goal (such as number of
leads from a PPC campaign)
– Measure the number of visitors who meet
said goal as a percentage of total visitors
• Out of 1000 views on an ad, only 15 turned
into actual, verified leads. Thus conversion rate
is 1.5%.
 CUSTOMER SATISFACTION
• Why measure customer satisfaction?
– Helps become customer-centric.  Just one
bad customer experience is enough for 58%
of customers to switch to another brand.
– Allows to predict future behaviors
– Improves marketing efforts
PLEASE READ
PLEASE READ
 CUSTOMER SATISFACTION SCORE (CSAT)

PLEASE READ

• CSAT is used to rate the overall satisfaction with the service(s)

received by a customer.
• Respondents are asked to weigh their satisfaction on a scale from
1 to a predetermined number (usually 3, 5, or 10). Each number
corresponds to a specific level of satisfaction, with low numbers
indicating low satisfaction and high numbers indicating high
satisfaction.
• CSAT score can also be expressed on a scale of 0 to 100 percent,
where the same principle is applied — the higher the number,
the higher your satisfaction.
• Sometimes instead of numbers, surveyors use emoticons. Over
92% of online users use emojis in their everyday conversations.
 NET PROMOTER
SCORE (NPS)
PLEASE READ

• NPS measures customer loyalty and was invented by Fred Reichheld

(2003), a partner at management consulting company Bain & Co.
• “How likely are you to recommend the services?” The answer is
given on a scale from 1 to 10.
• The difference between NPS and CSAT is that it focuses on intention
(“I will (not) recommend the services”) rather than emotion (“I am
(not) satisfied with the services”).
• The question is whether your customers are willing to put their
reputation on the line by recommending your product/service.
Based on their scores, customers are sorted into three categories.
– Score 9 — 10: Promoters
– Score 7 — 8: Passives
– Score 0 — 6: Detractors
 NET PROMOTER SCORE (NPS)
PLEASE READ

• Detractors are unhappy customers who are likely to

spread negative word of mouth and thus damage
your company.
• Passives are generally satisfied customers whom
you failed to fully engage. For now, they are here to
stay, but then won’t get hangups about switching to
another company.
• Promoters are customers who you should focus on
— they keep purchasing from your company and
refer your services to others. They are the
cornerstone of your business.
 NET PROMOTER SCORE (NPS)

• Knowing the number of promoters and detractors of

your brand, you can calculate NPS using this simple
formula: PLEASE READ
• NPS = % Promoters — % Detractors
• NPS correlates strongly with repurchases, referrals and
other factors contributing to a company’s growth. The
thing is, it’s not a miracle solution by itself, and needs to
be used in conjunction with other tools.
• Once you get an answer to your NPS survey, you need to
follow up with an open-ended question, such as “What
changes to our products/services would prompt you to
give us a higher rating?”
 PLEASE READ

CUSTOMER EFFORT SCORE (CES)

• Customer Effort Score seeks to understand how
much effort a customer needs to exert to have their
issue solved.
• The idea for CES came from the CEB’s article Stop
Trying to Delight Your Customers, published in 2010
which showed that customers are likelier to punish
for bad experiences than to reward for good ones.
• For CES to be successful, the question needs to be
worded the right way. By asking 50,000 customers
from different regions and industries, CED found a
question that supposedly 25% more predictive of
customer loyalty than the next version:
 PLEASE READ
CUSTOMER EFFORT SCORE (CES)
• “To what extent do you agree with the following
statement: The company made it easy for me to
handle my issue.”
• CES goes from 1 (strongly disagree) to 7 (strongly
agree).
• 96% of customers with high-effort experiences lose
their loyalty, compared with 9% customers of low-
effort experiences.
• CEB claims CES predicts customer loyalty 1.8 times
better than customer satisfaction scores such as
CSAT and NPS.
 CUSTOMER EFFORT SCORE (CES)
• The idea behind CES is that a company
should relieve customer’s pains rather than spoil
them with excessive attention. PLEASE READ

• According to CEB, moving a customer from a

score of 1 to 5 boosts their loyalty by 22%.
• Like with other metrics, the best time to ask a
CES question is right after a customer has
concluded a CES-specific action.
• Eg. Websites that shoot quick surveys your way
after you close a chat window or confirm your
order.
 PLEASE READ
USAGE
• Measures of usage concern such market
dynamics as purchase frequency and units per
purchase.
• They highlight not only what was purchased, but
also when and where it was purchased.
• In studying usage, marketers also seek to
determine how many people have tried a brand.
• Of those, they further seek to determine how
many have "rejected" the brand, and how many
have "adopted" it into their regular portfolio of
brands.
 PLEASE READ
USAGE

• In measuring usage, marketers pose such

questions as the following:
– What brand of toothpaste did you last
purchase?
– How many times in the past year have you
purchased toothpaste?
– How many tubes of toothpaste do you
currently have in your home?
– Do you have any Colgate toothpaste in
your home at the current time?
 PLEASE READ
CONCLUSION
• Market analysis is
• Important to know your business inside and
out.
• Helps us to stick to the concept of describing
the market and the industry as they exist
today, a sort of situation analysis.
• If Market is analysed well then the stage will
be set to present your plan and product to the
world.
• Helps in proper implementation of
Marketing Plan and Strategy of the
product.
CUSTOMER ANALYSIS
 Consumer Choice

• You are constantly making economic

decisions
• At the highest level of generality, we are all
very much alike
– Come up against the same constraints
• Too little income or wealth
• Too little time to enjoy it all
• The theory of individual decision making is
called “consumer theory”

81
 The Budget Constraint

• Virtually all individuals must face two facts of economic life

– Have to pay prices for the goods and services they buy
– Have limited funds to spend
• A consumer’s budget constraint identifies which combinations of
goods and services the consumer can afford with a limited
budget
• Budget line is the graphical representation of a budget constraint
– The price of one good relative to the price of another
– The slope of the budget line indicates the spending trade-off
between one good and another
• Amount of one good, that must be sacrificed in order to
buy more of another good
• If PY is the price of the good on the vertical axis, then the
slope of the budget line is –PX / PY

82
 Figure 1: The Budget Constraint

Number of With $150 per month, Max

Movies per
Month can afford 15 movies and
no concerts, . . .
15 A
12 movies and 1 concert or any other
B combination on the budget line.
12
Points below the line are
9 C
H also affordable.

6 D
G But not points
E above the line.
3
F
1 2 3 4 5 Number of
Concerts
per Month
83
 Changes in the Budget Line
• Changes in income
– Increase in income will shift the budget line upward
(and rightward)
– A decrease in income will shift the budget line
downward (and leftward)
– Shifts are parallel
• Changes in income do not affect the budget line’s
slope
• Changes in price
– In each case, one of the budget line’s intercepts will
change, as well as its slope
• When the price of a good changes, the budget
line rotates
– Both its slope and one of its intercepts will
change 84
 Figure 2a: Changes in the Budget Line

(a)
Number of Movies
per Month
1. An increase in income shifts
30 the budget line rightward, with
no change in slope.

15

5 10 15 Number of
Concerts per
Month
85
 Figure 2b: Changes in the Budget Line

(b)
Number of Movies
per Month
2. A decrease in the price of
30 movies rotates the budget line
upward.

15

5 15 Number of
Concerts per
Month
86
 Figure 2c: Changes in the Budget Line

(c)
Number of Movies
per Month
3. while a decrease in the price of
30 concerts rotates it rightward.

15

5 15 Number of
Concerts per
Month
87
 Preferences

• How can we possibly speak systematically

about people’s preferences?
– People are different
• Despite differences in preferences, can find
some important common denominators
– In our theory of consumer choice, we will
focus on these common denominators

88
 Rationality

• One common denominator

– People have preferences
– We assume that you can look at two alternatives
and state either that you prefer one to the other
or
• That you are entirely indifferent between the two—you
value them equally
• Another common denominator
– Preferences are logically consistent, or transitive
• When a consumer can make choices, and is logically
consistent, we say that she has rational preferences
• Rationality is a matter of how you make your
choices, and not what choices you make
– What matters is that you make logically consistent
choices 89
 More Is Better

• We generally feel that more is better

• The model of consumer choice in this
chapter is designed for preferences that
satisfy the “more is better” condition
– It would have to be modified to take
account of exceptions
• The consumer will always choose a point on
the budget line
– Rather than a point below it

90
 Two Theories

• Theories of consumer decision making

– Marginal utility
– Indifference curve
• Both assume that preferences are rational
• Both assume that consumer would be better off with
more of any good
• Both theories come to same general conclusions about
consumer behavior
– However, to arrive at those conclusions each theory
takes a different road
• Our goal is to describe and predict how
consumers are likely to behave in markets
– Rather than describe what actually goes on in
their minds

91
Consumer Decisions: The Marginal Utility
Approach

• Economists assume that any decision maker

tries to make the best out of any situation
– Marginal utility theory treats consumers as
striving to maximize their utility
– Utility is a quantitative measure of pleasure or
satisfaction obtained from consuming goods and
services.
• Anything that makes the consumer better off
is assumed to raise his utility
– Anything that makes the consumer worse off will
decrease his utility
92
 Figure 3: Total And Marginal Utility

Utils 70
60 Total Utility
50
40 1. The change in total utility from
30 one more ice cream cone . . .
20
10

1 2 3 4 5 6
Ice Cream Cones per Week
2. is called the marginal utility 3. Marginal utility falls
Utils of an additional cone. as more cones are
30
20 consumed.
10
Marginal Utility
1 2 3 4 5 6
Ice Cream Cones per Week
 Utility and Marginal Utility

• Marginal utility of an additional unit

– Change in utility derived from consuming
an additional unit of a good
• The law of diminishing marginal utility, as
defined by Alfred Marshall (1842-1924)
states that
– Marginal utility of a thing to anyone
diminishes with every increase in the
amount of it he already has

94
 Combining the Budget Constraint and
Preferences (Marginal Utility Approach)

• If we combine information about

preferences (marginal utility values) with
information about what is affordable (the
budget constraint)
– Can develop a useful rule to guide us to
an individual’s utility-maximizing choice
• Highest possible utility will be point at which
marginal utility per dollar is the same for
both goods

95
 Figure 1: The Budget Constraint

Number of With $150 per month, Max

Movies per
Month can afford 15 movies and
no concerts, . . .
15 A
12 movies and 1 concert or any other
B combination on the budget line.
12

9 C

6 D

3 E

F
1 2 3 4 5 Number of
Concerts
per Month
 Max’s decision making

Income = $150 per month

Concerts at $30 each Movies at $10 each
Point No. of Marginal No. of Marginal
on the concert Utility MUconcerts movies per Utility from MU movies
budget s per from last month last movie
line month concert Pconcerts Pmovies
A 0 15 50 5
B 1 1,500 50 12 100 10
C 2 1,200 40 9 150 15
D 3 600 20 6 200 20
E 4 450 15 3 350 35
F 5 360 12 0

97
 Figure 4: Consumer Decision Making

Number of MUconcerts MUmovies

Movies per  40,  15
Month Pconcerts Pmovies
A
15 MUconcerts MUmovies
 20,  20
12
B Pconcerts Pmovies
MUconcerts MUmovies
9 C  15,  35
Pconcerts Pmovies
D
6
G
E
3
F

1 2 3 4 5 Number of
Concerts per
Month
 Combining the Budget Constraint and
Preferences (Marginal Utility Approach)
• For any two goods x and y, with prices Px and
PY, whenever MUx / Px > MUY / PY, a consumer is
made better off shifting away from y and
toward x
– When MUY / PY > MUX / PX, a consumer is made
better off by shifting spending away from x and
toward y
• Leads to an important conclusion
– A utility-maximizing consumer will choose the point
on the budget line where marginal utility per dollar
is the same for both goods (MUX / PX = MUY / PY)
– At that point, there is no further gain from
99
reallocating expenditures in either direction
 Combining the Budget Constraint and
Preferences (Marginal Utility Approach)

• No matter how many goods there are to

choose from, when the consumer is doing
as well as possible
– It must be true that MUX / PX = MUY / PY
for any pair of goods x and y
– If this condition is not satisfied,
consumer will be better off consuming
more of one and less of the other good
in the pair

100
 What Happens When Things Change:
Changes In Income

• A rise in income—with no change in price—

leads to a new quantity demanded for each
good
– Whether a particular good is normal
(quantity demanded increases) or inferior
(quantity demanded decreases) depends
on the individual’s preferences
• As represented by the marginal utilities
for each good, at each point along the
budget line
101
 Figure 5: Effects of an Increase in Income

Number of 30 2. If his preferences are as given

Movies per 27 H'' in the table, he'll choose point H
Month
1. When Max's
income rises
to $300, his
budget line A
shifts 15
B
outward. 12 H 3.But different marginal
C utility numbers could
9
D lead him to H' or H''
6
E
3 H'
F

1 2 3 4 5 6 7 8 9 10 Number of Concerts
per Month
 Changes In Price

• A drop in the price of concerts rotates the

budget line rightward, pivoting around its
vertical intercept
• The consumer will select the combination
of movies and concerts on his budget line
that makes him as well off as possible
– Will be combination at which marginal
utility per dollar spent on both goods is
the same
 Max’s decision making

Income = $150 per month

Concerts at $10 each Movies at $10 each
No. of concerts Marginal No. of Marginal
per month Utility MUconcerts movies per Utility from MU movies
from last Pconcerts month last movie
concert Pmovies
3 600 60 12 100 10
4 450 45 11 120 12
5 360 36 10 135 13.5
6 300 30 9 150 15
7 180 18 8 180 18
8 150 15 7 190 19
9 100 10 6 200 20
104
10 67.5 6.75 5 210 21
 Figure 6: Deriving the Demand Curve

1. When the price of concerts is 2. If the price falls to

Number of 15 $30, point D is best for Max. $10, Max's budget
Movies per line rotates
Month 10 K rightward, and he
8 choose point J.
6 D J

0 3 5 7 10 15 30
3. And if the price drops to
Price per $30 D $5, he chooses point K.
Concert
4. The demand curve shows
the quantity Max chooses
10 J at each price.
5 K

3 7 10 Number of Concerts
per Month
105
 The Individual’s Demand Curve

• Curve showing quantity of a good or service

demanded by a particular individual at each
different price
• In theory, an individual’s demand curve
could slope upward
– However, in practice this doesn’t seem to
happen

106
 Income and Substitution Effects
• Demand curve actually summarizes impact of two separate
effects of price change on quantity demanded
– Effects sometimes work together, and sometimes
opposes each other
• Substitution effects
– As the price of a good falls, the consumer substitutes
that good in place of other goods whose prices have not
changed
• Substitution effect of a price change arises from a change in
the relative price of a good
– And it always moves quantity demanded in the opposite
direction to the price change
• When price decreases (increases), substitution effect
works to increase (decrease) quantity demanded107
 The Income Effect
• A price cut gives consumer a gift, which is rather
like an increase in income
• Income effect
– As price of a good decreases, the consumer’s
purchasing power increases, causing a change
in quantity demanded for the good
• Income effect of a price change arises from a
change in purchasing power over both goods
– A drop (rise) in price increases (decreases)
purchasing power
• Income effect can work to either increase or
decrease the quantity of a good demanded,
depending on whether the good is normal or
108
inferior
Combining Substitution and Income Effect

• A change in the price of a good changes

– Relative price of the good (the
substitution effect) and
– Overall purchasing power of the
consumer (the income effect)

109
 Normal Goods

• Substitution and income effects work

together
– Causing quantity demanded to move in
opposite direction of price
• Normal goods must always obey law
of demand

110
 Inferior Goods

• Substitution and income effects of a price

change work against each other
– Substitution effect moves quantity
demanded in the opposite direction of
the price
– While income effect moves it in same
direction of price
– But since substitution effect virtually
always dominates
• Consumption of inferior goods will
virtually always obey law of demand
111
 Figure 7: Income and Substitution Effects

Price Decrease: Ultimate

Effect
P Substitution Effect (Almost Always)
QD

Þ QD
Purchasing QD if normal
Power QD if inferior

Price Increase:

P Substitution Effect
QD

Þ QD
Purchasing QD if normal
Power
QD if inferior

112
 Consumers in Markets

• Since market demand curve tells us

quantity of a good demanded by all
consumers in a market
– Can derive it by summing individual
demand curves of every consumer in
that market

113
 Figure 8(a): From Individual To Market
Demand

Jerry George Elaine

Price Price Price

$4 $4 $4

3 3 3

2
c + 2
C' + 2 C'' =
1 1 1

0 4 12 0 6 12 0 10 20
Number of Bottles per Week

114
 Figure 8(b): From Individual To Market
Demand

Price
A
$4

B Market Demand
3 Curve

C
2

D
1

3 10 27 44
Number of Bottles per Week

115
 Consumer Theory in Perspective: Extensions
of the Model
• Problems
– Our simple model ignores uncertainty
– Imperfect information
– People can spend more than their incomes in
any given year by borrowing funds or spending
out of savings
• You might think consumer theory always regards
people as relentlessly selfish
– In fact, when people trade in impersonal
markets, this is mostly true
• People try to allocate their spending among
different goods to achieve the greatest
possible satisfaction 116
 Challenges to the Model

• The model of consumer choice is quite

versatile
– Capable of adapting to more aspects of
economic behavior than one might think
– But certain types of behavior do not fit
model at all
• Violating our description of rational
preferences

117
 Improving Education

• Let’s apply our model of consumer choice

to a student’s time allocation problem
– We’ll assume there are only two
activities
• Studying economics
• Studying French
• Each of these activities costs time and there
is only so much time available
– Students “buy” points on their exams
with hours spent studying
118
 Figure 9: Time Allocation

(a) (b)

Economics Economics
Score Score
90 90
F
E
80 80 D
C C

70 75 80 70 75 80 90
French Score French Score

119
 Improving Education

• Let’s introduce a new computer-assisted

technique in the French class
– It enables students to learn more French
with the same study time or to study less
and learn the same amount
• It now takes fewer hours to earn a
point in French
• Opportunity cost of an additional point in
French is one point in economics rather
than two
120
 Improving Education

• How can a new technique in the French

course improve performance in economics
but not at all in French
– Substitution effect will tend to improve
French score
– If performance in French is a “normal
good”
• Increase in “purchasing power” will
work to increase the French score
– But if it is an “inferior good”
• Could work to decrease the French
score 121
 Improving Education

• Expect a student to choose a point

somewhere between, with performance
improving in both courses
• Leads to a general conclusion
– When we recognize that students make
choices, we expect only some of the
impact of a better technique to show up
in the course in which it is used
• Leads to the conclusion that we remain
justified in treating this research with some
skepticism 122
 CUSTOMER PROFITABILITY ANALYSIS
PLEASE READ

• Customer profitability analysis is best
conducted with a technique known as Activity
based costing or ABC analysis.
• Customer profitability analysis helps the
company understand the net profit coming
from each customer which can be calculated
by revenue less costs.
• These costs are not only manufacturing and
distribution costs but also sales costs,
marketing costs, services cost and any other
related costs which have to be undertaken to
service the customer.
LIFETIME VALUE
PLEASE READ
 CUSTOMER PROFITABILITY ANALYSIS

PLEASE READ
• Once the costs are finalized, the customer can
be classified into different profit tiers.
• This principle is best observed in
the banking industry with credit card as
a product. Customers are basically classified
into four types
– Platinum customers – Most profitable
– Gold customers – Profitable
– Iron Customers – Low profit but desirable
– Lead customers – unprofitable and undesirable
 CUSTOMER PROFITABILITY ANALYSIS
PLEASE READ

• A credit card company would always give

the best service as well financial and other
benefits to the top two customers.
• It will at the same time try to attract iron
customers and try to convert these iron
customers to platinum or gold customers.
• Finally, these companies will have systems
in place so as to avoid Lead customers
completely.
 CUSTOMER PROFITABILITY ANALYSIS
PLEASE READ

• The firm can correctly classify customers

and also find out which of the customers
it needs to hold on to and acquire more of
the same type, and which customers it
needs to let go of.
• Several times, companies find out that there
are customers which they should have left
altogether as the profitability from these
customers is minimum and expenses are
more.
 Problems in CPA PLEASE READ

• Calculating cost per customer becomes

difficult especially in a
service environment where manpower as
well as time also has a cost factor associated
with it. Time spent with each customer is
different and therefore the cost is different.
• There are several non customer related costs
too such as the cost of lost customers. If the
firm ignores these costs then the final cost
will be not be the right figure thereby
affecting the overall CPA. The customers will
be shown more profitable than they actually
are.
 CUSTOMER LIFETIME VALUE

• The total net profit a company makes from

any given customer. PLEASE READ

• CLV is calculated by subtracting the cost of

acquiring and serving a customer from the
revenue gained from the customer and takes
into account statistics such as customer
expenditures per visit, the total number of
visits and then can be broken down to figure
out the average customer value by week,
year, etc.
 CUSTOMER LIFETIME VALUE
• Average Revenue Per User: Determine the average
revenue per customer per month (total revenue ÷ number
of months since the customer joined) and multiply that
value by 12 or 24 to get a one- or two-year CLV. 
• Cohort Analysis: A cohort is a group of customers that
share a characteristic or set of characteristics. By
examining cohorts instead of individual users, companies
can get a picture of the variations that exist over the
course of an entire relationship with groups of customers. 
• Individualized CLV: Companies not interested in broadly
calculating CLV often focus on determining the total value
of customers by source, channel, campaign or other
mediums such as coupons or landing pages on a company
website. 
ACQUISITION & RETENTION COSTS AND
RATES

• Companies focus on acquisition more

than customer retention, even though it
can cost up to seven times more to
acquire new customers.
• Increasing customer retention by 5% can
increase profits from 25-95%.
• The success rate of selling to a customer
you already have is 60-70%, while the
success rate of selling to a new customer
is 5-20%.
PLEASE READ
 CUSTOMER ACQUISITION COST
PLEASE READ

• Customer acquisition is the cost of

converting a person into a paying
customer.
• Acquisition expenses include marketing,
promotions like discounts, labor and any
advertising targeted at non-existing
customers.
• High customer acquisition cost could
indicate demographic shifts, ineffective
marketing or problems with core products
and services.
 Calculating Customer Acquisition costs

PLEASE READ

• CAC =
•  
• The amount of money spent should include
things such as marketing staff salaries,
salespeople commissions and adverting costs.
• The derivative obtained from the calculation is
useful when determining how to best calibrate
your investment and make the necessary growth
decisions.
 CUSTOMER RETENTION COST
PLEASE READ

• Customer retention is the cost of keeping

an existing customer purchasing.
• Customer retention directly affects lifetime
values (LTV).
• High retention costs lower margins and
profits since each subsequent purchase is
actually worth less overall.
 Calculating Customer Retention costs
PLEASE READ

•• CRC
  =

• Calculating retention costs is not easy as a

general formula is not commonly accepted
by all.
• Customer retention directly affects customer
lifetime value.
• High retention costs lower margins and
profits since each subsequent purchase is
actually worth less overall.
 Acquisition or Retention?
PLEASE READ

• Acquisition is important to draw in new consumers and

expand the base.
• Retention is normally less costly and builds loyalty and the
brand.
• Retention also often relies on far less price sensitivity from
customers so that the long-term costs are recouped through
sales.
• It is essential to track the ROI for both customer acquisition
and customer retention and balance the two.
• Poor ratios in either area are strong indicators that more
research is necessary to see what is changing in the market
or what is happening within the business.
PRODUCT ANALYSIS
 Product PLEASE READ

• A product is a bundle of attributes

(features, functions, benefits, and uses) that
a person receives in an exchange. 
• Anything offered by a firm to provide
customer satisfaction—tangible or
intangible.
• Thus, a product may be an idea (recycling) ,
a physical good (a pair of jeans), a service
(banking), or any combination of the three.
 Product Line and SBU PLEASE READ

• A product line is a group of products marketed

by an organization to one general market. The
products have some characteristics, customers,
and/or uses in common, and may also share
technologies, distribution channels, prices,
services, etc. There are often product lines
within product lines.
• A strategic business unit or SBU is a self-
contained planning unit for which discrete
business strategies can be developed.
• An example of a strategic business unit is
consumer health care products.
 PRODUCT LIFE CYCLE

The process of strategizing ways to continuously

support and maintain a product is called product
life cycle management.
 PRODUCT LIFE CYCLE

• Introduction Stage
• Initial presentation of a product in the
market.
• During this stage, sales growth slowly
begins to increase as the public gains
awareness of newly introduced product
offerings through promotional efforts.
• Direct competitors in the market are few or
nonexistent at this point.
• There is focus on developing innovative
promotional strategies that will increase
product awareness.
 PRODUCT LIFE CYCLE

• Growth Stage
• Rapidly escalating sales due to increased
product awareness.
• This rapid sales growth generates significant,
positive attention but also attracts
competitors to the market.
• There is focus on building brand awareness.
 PRODUCT LIFE CYCLE

• Maturity Stage
• Sales growth levels off in what has now
become an established market.
• Plateauing sales growth causes weaker
competitors to exit the market, leaving their
stronger counterparts to compete for market
dominance.
• At this point, products are most lucrative for
their organizations.
• There is focus on increasing market share by
differentiating their products from
competitive offerings.
 PRODUCT LIFE CYCLE

• Decline Stage
• Sales growth rapidly decreases, as does the
number of competitors in the market.
• Falling consumer demand leads the
establishments to either eliminate these
products or seek to extend the life spans of
declining offerings through the discovery of
new product uses or through product
repositioning.
 PRODUCT LIFE CYCLE VARIANTS

• Figure A shows PLC of a

product that witnessed a
very lengthy ascent to
maturity because public
was not ready to accept
the product or firm
couldn’t create awareness
about the product.
 PRODUCT LIFE CYCLE VARIANTS

• Figure B shows PLC of a

product that gained
immediate acceptance
followed by a period of
enduring maturity

• Figure C shows PLC of a

product that entered
maturity, declined,
reentered maturity and
reentered decline.
 PRODUCT LIFE CYCLE VARIANTS

• Figure D shows PLC of a

product that reentered
the growth stage
multiple times after
reaching maturity.
• E.g. Zoo that exhibits
new offerings
• Figure E shows the PLC
of a product that
experienced a period of
rapid growth followed
by immediate decline.
 PRODUCT LIFE CYCLE VARIANTS

• Figure F shows PLC of

product that failed after
introduction into market.
• It shows initiatives that
failed to achieve
commercial success.
 PRODUCT PORTFOLIO ANALYSIS
PLEASE READ

• The strengths and weaknesses of a company

determine its internal capabilities to compete in a
market and fulfill customer expectations.
• The Product Portfolio Analysis was proposed in
1973 by Peter Drucker.
• Product portfolio is the compilation
of products and services offered by the company
to the target market.
• It comprises all the set of products offered right
from the ones that were launched and offered
during the inception of the brand to the ones that
are launched currently along with ones that are in
the pipeline.
 PRODUCT PORTFOLIO ANALYSIS
PLEASE READ

• Product Portfolio management is one of the

most crucial elements of the entire
business strategy as it helps the company to
attain its overall business objectives and plan
the future line of products accordingly.
• It works as a significant tool for the
corporate financial planning of the firm and
also for the investors conducting the equity
research analyzing the return on
investments.
 PRODUCT PORTFOLIO ANALYSIS
PLEASE READ

• Provides company with crucial information

such as stock type, growth prospects of the
brand, products that are high on profit
margins, income contribution by each and
every product offered to the market, market
share of every product, operational risks,
and market leadership.
• Decide which projects are well aligned with
the overall strategy and objectives of the
business and will be the cash cows and the
ones that don’t feel relevant is taken off
from the portfolio
 PLEASE READ
PRODUCT PORTFOLIO ANALYSIS

• The BCG Growth Share Matrix was evolved in the

early 1970s by Bruce Henderson, founder of the
Boston Consulting Group, to help corporations
make investment and disinvestment decisions
related to their business units or product
portfolios.
• It plots business units (or products) that form part
of a corporation’s portfolio on a grid of four equal
quadrants on the basis of their market growth
and market share (which is why the BCG Matrix is
also called the “Growth-Share” Matrix).
• The management team can then decide on the
right business strategy for each unit.
 Benefits of PPA PLEASE READ

• Innovation - It helps in defining the types and

nature of products that are liked and preferred
by the customers and with the experience and
knowledge, launch the new line of products
that are not only innovative and novel in
ideation but matches the taste and preferences
of the target market.
• Tax benefits - Managing and analyzing the
Product Portfolio on the regular basis helps to
structure the investments and all the other
financial elements of the company resulting in
the various tax benefits.
 Benefits of PPA PLEASE READ

• Aligns projects with the business strategy -

Having the proper management of the
Product Portfolio helps the management to
align the existing and projects in the pipeline
with the overall business strategy and vision
of the company.
• Visualize the entire portfolio - all the key
members of the management are able to
visualize the entire portfolio of the all the
old, existing, and future products having a
broader spectrum.
 Benefits of PPA PLEASE READ

• Effective allocation of resources - Having

and managing the Product Portfolio helps in
allocating the various resources of the firm
such as finances, human resources, and
manufacturing plants amongst others in an
effective manner.
• It helps in figuring out the products that are
working as the cash cows for the companies
and the products that are redundant in
nature and needs to be taken off from the
market.
 Benefits of PPA PLEASE READ

• Data for the key members of the

management - It helps providing the crucial
and important data to the key members of
the management that enlightens them
about the performance of the products in
the market, revenue generation by the each
product, market share, customer
preferences, and requirement of any sort of
tweaking or innovation in any products
amongst others that helps with the planning
and execution of the next plans and
strategies of the business.
 Benefits of PPA PLEASE READ

• Cash flow management - The company

requires the regular flow of cash for the day
to day business operations. And with the
proper planning and administration of the
Product Portfolio, the cash flow issues of the
company are sorted out as it helps to
determine the products that bring the
maximum revenues and the company will
allocate the maximum resources on the
same.
 Benefits of PPA PLEASE READ

• Synergy within the internal team - With

the proper Product Portfolio in place, there
are various team meetings and discussions
resulting in all the members on the same
page and well aware about the overall
business strategy and operations of the firm
having a required synergy to attain the
long-term business aims and objectives.
 Benefits of PPA PLEASE READ

• Proper selection of the target market -

Product Portfolio helps the management to
figure out on why the certain lines of
products are performing extremely well
working as the cash cows for the firm whilst
some of them not matching the required
and envisioned plans and objectives.
 PLEASE READ
Types of Products - PPA

• Today`s Breadwinners - Most profitable to

the company. The company should support
these products and maintain current
investment levels.
• Tomorrow`s Breadwinners - Have the
potential to contribute to the company`s
profit in the future and thus the company
should support these products and perhaps
increase investments in them.
 PLEASE READ
Types of Products - PPA

• Yesterday`s Breadwinners - Most profitable

products of the past but do not currently
contribute significantly to profits.
• The company needs to maintain a minimum
level of support and investment for these
products until the time they resume
generating substantial profits.
• After that, the company may decide to
discontinue such products.
 PLEASE READ
Types of Products - PPA

• Developments - Under development and

need greater investment to achieve a level
on which they start generating profits. A
decision on whether to invest more
resources needs to be made after a thorough
analysis of the market potential and Return
on Investment (ROI) for these products.
• Sleepers - Have been around for some time
but have failed to establish themselves.
 Types of Products - PPA PLEASE READ

• Investments in Managerial Ego - Backed by

influential managers, have little proven
demand in the market and typically waste
many functional resources.
• Failures - Have failed in the past and have
no future in their current form. They
should ideally be discontinued unless there
is a way to successfully reposition them.
 PLEASE READ
Types of Products - PPA

• Products in the first three categories,

"Today`s Breadwinners," "Tomorrow`s
Breadwinners," and "Yesterday`s
Breadwinners," are strengths of the
company
• "Investments in Managerial Ego" and
"Failures," are weaknesses.
• The "Developments" and "Sleepers" need to
be analyzed in greater detail to classify
them as either strengths or weaknesses.
 Example: PPA of Phone Manufacturers

• Today`s Breadwinners: Touch screen cell

phones
 Example: PPA of Phone Manufacturers

• Tomorrow`s Breadwinners: Hybrid tablet-cell

phones
 Example: PPA of Phone Manufacturers

• Yesterday`s Breadwinners: Home phone

handsets
 Example: PPA of Phone Manufacturers

• Developments: Wearable technology

 Example: PPA of Phone Manufacturers

• Sleepers: Imbedded, bio-technology

 Example: PPA of Phone Manufacturers

• Investments in Managerial Ego: Extendable

keyboards
 Example: PPA of Phone Manufacturers

• Failures: In-ear receivers

PRODUCT PORTFOLIO ANALYSIS TOOLS

BCG Matrix

GE-McKinsey matrix

Directional Policy matrix

ADL matrix

Hofer matrix
BCG Matrix: Tool for PPA
PLEASE READ
PLEASE READ
 BCG Matrix: Tool for PPA
• Stars PLEASE READ
• “Stars” are business units that have a high market share
but consume a high amount of cash as they are
situated in a high-growth market.
• Stars generate cash because of their high market share,
but because a high-growth market also demands cash,
most of the cash that stars earn is absorbed by their
capacity-building activities.
• Stars may become “cash cows” if they can maintain
their market share until the market itself stars to
decline.
• BCG Matrix Stars Strategy:
• Invest in stars in the hope that they become cash cows
and generate funds for the corporation’s future plans.
 BCG Matrix: Tool for PPA

• Cash Cows PLEASE READ

• “Cash cows” are business units with a high market

share but find themselves in a mature, low-growth
market.
• Therefore, such units do not require cash but rather
provide cash.
• Cash cows can be “milked” to generate funds for
other business units under the corporation, to turn
“question marks” into “stars,” to repay corporate
debt, to issue dividend to share holders, or to fund
research.
• BCG Matrix Cash Cows Strategy:
• Invest in cash cows, but only to maintain their level of
productivity, and until they become “dogs.”
 BCG Matrix: Tool for PPA

PLEASE READ
• Dogs
• Dogs, also known as “pets,” have a low
market share in a low-growth market.
• They neither generate cash nor require
investments.
• They are often seen as “cash traps,” in which
the investments already made do not
generate profits.
• BCG Matrix Dogs Strategy
• Sell them off.
 BCG Matrix: Tool for PPA

• Question marks PLEASE READ

• Question marks, also known as “problem children,”

have small growth rates in a high-growth market.
They demand high investments to capture some
market share, but whether this cash infusion will
provide returns will be known only in the future.
However, they have the potential for growth.
• BCG Matrix Question Marks Strategy:
• Invest in them depending on the prospects, but sell
them off if they do not start yielding profits.
• Applying the matrix principles, all business units start
off as question marks, then become stars and cows,
and finally end their life cycles as dogs.
 BCG Matrix: Tool for PPA PLEASE READ

• Knowing about the product life cycle is also important

to understanding market growth.
• During the introduction phase, the market growth rate
is low, and the longer-term potential is unknown. 
• As the market moves into the growth phase, it moves
up the market growth axis and creates opportunities
for products that are gaining market share and
becoming stars.
• Those that don’t perform well in gaining market share
will become question marks.
• As the market moves into maturity and decline, the
market growth moves back down the axis and products
will become either cash cows or dogs.
 BCG Matrix: Tool for PPA
PLEASE READ

• Henderson’s matrix makes two major

assumptions:
• The higher the relative market share, the higher
the cash generated by the unit. (This assumption
is often true—when a firm captures a higher
relative market share, it goes forward on the
experience curve compared with its rivals, and
secures a competitive advantage and a cost
advantage.)
• The higher the market growth, the higher is the
requirement of cash for capacity-building.
 BCG Matrix: Tool for PPA
• Criticism of BCG Matrix PLEASE READ
• Its basic assumption that a business unit with a higher market
share will generate more cash. It has been pointed out that a unit
that has a high market share needs to keep investing in itself to
sustain this share and, therefore, may absorb cash instead of
generating it.
• Also, the matrix seems to ignore interdependencies among a
corporation’s business units. A dog, for example, may be helping
a question mark or a star with cash.
• Uses broad definitions of market share and market growth
overlooking nuances—a unit that makes moped tyres, for
instance, may have a big market share in this niche segment, but
only a minuscule share of the overall tyre market.
• Wrong assumption that all corporations will identify units or
products in the four quadrants, and that units or products will
travel through all the four quadrants in their life cycles.
PLEASE READ
PLEASE READ
PLEASE READ
BCG Matrix: iPod transition
PLEASE READ
PLEASE READ

BCG
BCG matrix of TATA PLEASE READ
BCG Matrix of Nestle PLEASE READ
 BCG Matrix of Hindustan Unilever

PLEASE READ
 GE McKinsey Matrix PLEASE READ

• In the 1970s, General Electric

(GE) commissioned McKinsey & Company to
develop a portfolio analysis matrix for
screening its business units.
• GE Matrix is a variant of the Boston
Consulting Group (BCG) portfolio analysis.
• The GE McKinsey Matrix also compares
product groups with respect to market
attractiveness and competitive power.
 GE McKinsey Matrix PLEASE READ

• The GE McKinsey Matrix comprises two axes.

The attractiveness of the market is represented
on the y-axis and the competitiveness and
competence of the business unit are plotted on
the x-axis.
• Both axes are divided into three categories
(high, medium, low) thus creating nine cells.
• The business unit is placed within the matrix
using circles. The size of the circle represents the
volume of the turnover.
• The percentage of the market share is entered in
the circle. An arrow represents the future course
for the business unit.
PLEASE READ
PLEASE READ
PLEASE READ
 GE McKinsey Matrix factors

• Market size PLEASE READ

• Historical and expected market growth rate
• Price development
• Threats and opportunities (component of SWOT
Analysis)
• Technological developments
• Degree of competitive advantage
• Value of core competences
• Available assets
• Brand recognition and brand strength
• Quality and distribution
• Access to internal and external finance resources
 GE McKinsey Matrix Application
PLEASE READ

1. Invest/grow : Growth is facilitated by

expanding the market or making investments.
2. Hold: By making careful investments, the
current market is consolidated.
3. Harvest/sell: No extra investments but mainly
focusing on maximizing returns. By assigning a
weight to each factor, the GE McKinsey Matrix
can be used more effectively. Based on these
weights, the scores for competitiveness and
market attractiveness can be calculated more
accurately for each business unit.
 How to set up GE McKinsey Matrix?
• Define the Product Market Combinations (PMC’s). Who are the customers of
an organization and what are its products and/or services?
• Define the aspects that determine the attractiveness of the market. Certain
weight factors can be assigned to certain aspects. Market attractiveness is a
critical factor that has to be considered carefully.
• Define the aspects that determine the competitive power of the organizations.
• Assign scores to the different PMC’s. Have this done by several people within
and outside of the organization. This will ensure a fair representation.
• Calculate the final scores. By comparing the final scores for market
attractiveness and competitive power with the maximum score, it is possible to
determine their position on the matrix.
• Draw the matrix and plot market attractiveness on the x-axis and competitive
power on the y-axis. The higher the volume in turnover of a PMC, the larger
the circle.
• Evaluate and discuss. The matrix can serve as the basis for a discussion about
strategic decisions.
 Shell Directional Policy Matrix
• The Shell Directional Policy Matrix (DPM) is
another refinement upon the Boston Consulting
Group (BCG) Matrix.
• Along the horizontal axis are prospects for business
sector profitability, and along the vertical axis is a
company’s competitive capability.
• Business sector profitability includes the size of the
market, expected growth, lack of competition, profit
margins within the market and other favorable
political and socio-economic conditions.
• Company’s competitive capability is determined by
the sales volume, the products reputation,
reliability of service and competitive pricing.
 DPM Decisions
• Divest: SBU’s running in losses with uncertain cash flows. They
should be divested as the situation is not likely to improve in
the near future. These liquidate or move thee assets.
• Phased withdrawal: SBU’s with weak competitive position in a
low growth market with very little chance of generating cash
flows. They should be phased out gradually. The cash realized
should be invested in more profitable ventures.
• Double or quit: Gamble on potential major SBU’s for the
future. Either invests more to use the prospects presented by
the market or else better to quit the business.
• Custodial: SBU’s are just like a cash cow, milk it and do not
commit any more resources. The corporate has to bear with
the situation by getting help from other SBU’s or get out of the
scene so as to focus more on other attractive business.
 DPM Decisions

• Try harder: SBU’s could be vulnerable over a longer

period of time, but fine for now. They need additional
resources to strength their capabilities. The corporate
try harder to exploit the business prospects thoroughly.
• Cash Generator: Even more like a cash cow, milk here
for expansion elsewhere. SBU’s may continue their
operations, at least for generating strong cash flows
and satisfactory profits. No further investments are
made.
• Growth: Grow the market by focusing just enough
resources here. These SBU’s need funds to support
product innovations, R&D activities etc.
• Market Leadership: Major resources are focused upon
the SBU. It must receive top priority.
 Hofer Matrix

• 15 squares matrix was created by Ch. W.

Hofer.
• It is a development of
the ADL and McKinsey matrices and is
especially useful when analysing
strategically diversified entity.
• Matrix is created on the basis of two
criteria: the maturity of the sector, divided
into 5 phases and the competitive
position of companies in the sector.
 Types of Products – Hofer Matrix
• Products A - Dilemmas that have chance of
success with appropriate marketing strategies
and financial aid
• Products B - Winners, require appropriate
marketing strategies and financial aid, if
company has limited resources for advertising
managers must make a choice between
products A and B
• Products C - Potential losers, the weak
position, the sector in the growth phase -
managers should make additional analyses to
rule out the possibility of going through the
shock phase
 Types of Products – Hofer Matrix

• Products D - despite the current difficulties

can become market leaders or profitable
producers
• Products E and F are profitable, so it is
possible to introduce other products in the
phase of shock and generate considerable
profits
• Products G and H are the losers are in the
exit phase of the market, ahead of the full
withdrawal managers should use strategies
for "gathering the harvest"
 ADL Matrix

• It was created in the seventies

at consulting firm Arthur D. Little, Inc.
• The design of ADL matrix is based on two
variables:
– Degree of maturity of
the industry (market)
– Degree of competitiveness of a product
or company's competitive position
 ADL Matrix

• Maturity size sector is composed of four

phases:
– Start-up
– Growth
– Maturity
– Decline
 ADL Matrix
• There are five dimension of competitive position:
– Leading - provides the ability to control the behavior of
competitors,
– Strong-enables policy-making in the field of your choice
without compromising its position in the long term,
– Favorable - gives a good chance of implementation of
the strategy and maintain its position in the long term,
– Unfavorable - justifies the continuation of the activity, if
the results are good enough, allows the use of general
tolerance of strongest competitors,
– Marginal-gives a chance to improve the situation
despite the unsatisfactory results, but improvement
must be significant.
 NEW PRODUCT PLEASE READ

A New product is ……
• a cost improvement (reduced cost or price versions of the
product for the existing market)
• a product improvement (new, improved versions of existing
products/services, targeted to the current market)
• a line extension (incremental innovations added to existing
product lines and targeted to the current market)
• a market extension (taking existing products/services to new
markets)
• a new category entry (new-to-the-company product and new-to-
the-company market, but not new to the general market)
• new-to-the-world (radically-different products/services vs. current
offerings and markets served)
 NEW PRODUCT PROLIFERATION
PLEASE READ
An 18-Year Comparison of Consumer Packaged
Goods Product Launches

Number of Product Launches 1980 1998

Cereals 34 192
Ice cream, Frozen yogurt 57 556
Spices, Extracts, Seasonings 61 403
Deodorizers, Air refresheners 53 372
Paper towels, Napkins 11 126
Milk, Yogurt drinks 26 255
Coffee 11 384
Beer, Ale 25 187
 WHY NEW PRODUCTS ARE INTRODUCED?
PLEASE READ

 According to researchers, on average, almost 20% of a

company sales result from New Product introductions.
 Within the New Product sales, almost half come from line
extensions.
 On average, 26% of revenue at engineering companies is
earned from products less than three years old.
 Executives expect new product revenue as a share of total sales to
hit 34% in 2007, up from just 21% in 1998.
 Companies with strong enabling R&D strategies are 73%
more profitable.
 Research indicates that 70% of today's manufactured goods will
be obsolete in six years.
 For companies in the fastest-moving industries such as high tech
and fashion goods, obsolescence may take only a year or two.
 NEW PRODUCT INTRODUCTIONS ARE
CRITICAL PLEASE READ

What Has the Biggest Impact on Overall Business?

100%
90%
NPDI
80%
New Product Development Initiatives
70%
CRM Customer Management Initiatives
60%
Supply Chain Management Initiatives
50%
SCM Internal E-Business Processes
40%
30% 11% Enterprise Resource Planning Initiatives
20% 9% Internet-Based Procurement and Sourcing Initiatives
9%
10% Private Trading Exchange Initiatives
0%
 NEW PRODUCTS DRIVE VALUE
PLEASE READ

Stock Market Valuations Exceed Existing Asset Values

% of Valuation Based on:
Company Share Price New Investments Existing Assets

Dell Computer 28.05 78% 22%

Johnson & Johnson 56.20 66% 34%
Procter & Gamble 90.76 62% 38%
General Electric 60% 40%
32.80
Growth
Lockheed Martin 62.16 59% 41%
Companies
36.94 8% 92%
Past
49.40 Cash
5% 95%
Cows
35.00 3% 97%
 WHAT CEOs HAVE TO SAY…

 “In this regard the only source of profit, the only

reason to invest in companies in the future is
their ability to innovate and their ability to
differentiate. Today, organic growth is the key.
It's going to determine who gets rewarded and
it is absolutely the biggest task of every
company." - Jeffrey Immelt, Chairman and CEO,
General Electric Presentation at MIT,
September 2003
 “You only get a position in the future by
investing, creating something new, and staying
ahead of the competition. So it’s simple: invest
or die.” - Craig Barrett, CEO, Intel Business 2.0,
January/ February 2004
 ADVANTAGES OF NEW PRODUCT
INTRODUCTION PLEASE READ
• Partly as a consequence of the increasing rate of New Product
introductions but also because of the drive of technology advances,
product life cycles are shortening.
• Companies are increasingly dependent on revenues from New
Products to drive their top lines each year.
• Newer products typically command higher margins in the market
while older products are impacted by competitive challenges and
waning customer interest.
• New Products allows companies to grow revenues and retain high
margins by creating new customers in new markets.
• Even when a company’s top line isn’t increasing, it needs New
Products to replace existing products that are reaching end-of-life.
• New Products drives growth which drives value, and high valuations
allow companies to raise money in the markets at the best rates,
acquire competitors, and attract the best people.
 KEY REASONS FOR NEW PRODUCT SALES
FORECAST PLEASE READ

 Product launch decisions,

 eliminating an unprofitable product is an equally useful reason to
forecast as introducing a successful product.
 Capacity planning
 Manufacturing decisions on raw materials procurement,
manufacturing schedules, and finished goods inventory
levels
 Logistics decisions on network design and physical
distribution planning
 Marketing decisions on marketing budgets and promotion
schedules
 Sales decisions on support materials and salespeople training
 Finance decisions on corporate budgets and financial
expectations for the new product
 Commonly Deployed Techniques/Methods

PLEASE READ

 Customer/market research– 57%  Exponential smoothing –

 Jury of executive opinion – 44% 10%
 Sales force composite  Experience curves - 10%
– 39%
 Looks-like analysis  Delphi method –
– 30%
8%
 Trend line analysis – 19%
 Linear Regression –
 Moving average – 15% 7%
 Scenario analysis – 14%  Decision trees –
5%
 Simulation –
4%
 Others: Quant Methods –
9%
 NEW PRODUCT SALES FORECASTING

PLEASE READ

• The development and introduction of a

new product is an inherently risky venture.
• The risk of great error is particularly high
for new products that are fundamentally
new and different.
• Also, the forecasting of new durable goods
and services is more difficult than the
forecasting of new consumer packaged
goods.
 NEW PRODUCT SALES FORECASTING

• Jury of Executive Opinion PLEASE READ

• It is a top-down forecasting technique that arrives at a

sales expectation by largely ad-hoc, “gut-feel”
methodologies.
• Experts in Sales and Marketing functions from the
business line will often meet face-to-face or virtually
and hammer out a sales forecast for the new product
by sharing combined expert opinions, predictions, and
other information.
• The forecast is then broken down into increasingly
smaller units by geography, region, and/or individual
salesperson for reporting and accountability.
 NEW PRODUCT SALES FORECASTING

PLEASE READ

• Scenario Planning or “What-If” Analysis

• It is held by the sales experts.
• With scenario planning, the project team
can develop indicators so that the company
can plan and respond to emerging
situations before the competition
 NEW PRODUCT SALES FORECASTING

PLEASE READ
• Historical Trend Analysis
• Simple extrapolations of trends give the best fit
across new products in the consumer durable goods
markets (e.g. dishwashers and televisions).
• ECV = [(PV X PCS – C) X PTS] - D
• where ECV is the Expected Commercial Value, PV is
the Net Present Value of the project’s future
earnings, PCS is the probability of commercial
success, C is the cost of launch, PTS is the
probability of technical success, and D is the
remaining development cost for the project.
 NEW PRODUCT SALES FORECASTING

• Historical Review PLEASE READ

• If a company has introduced similar new

products into similar markets in the past,
these histories can often be good
predictors of future outcomes.
• If a company has no such history, then
histories of similar new products
introduced by competitors or other
companies can serve as historical
guidelines to help derive a new product
sales forecast.
 NEW PRODUCT SALES FORECASTING

• ATAR model PLEASE READ

– Awareness
– Trial
– Availability
– Repeat purchase
• Knowing the overall market size (3 million
potential units), we estimate the awareness
of our new product (40%) and the number
of consumers willing to try it (20%), and
calculate the potential market as 240,000
units.
PLEASE READ
 NEW PRODUCT SALES FORECASTING
PLEASE READ

• If our new product is only available to 40% of those

potential customers due to distribution limitations, for
instance, and each customer will buy three units every
two years, our annual unit sales estimate by the ATAR
method is thus 72,000 units per year.
• Finally, knowing our profit per unit is $13.50, we
estimate a profitable return of $972,000 for this new
product.
• ATAR is most commonly used for consumer packaged
goods.
• The model is generally not as useful for consumer
durable goods, since the trial and repeat purchases are
not normally part of the average buying experience.
 NEW PRODUCT SALES FORECASTING

• Test Market PLEASE READ

• The new product is developed and introduced into
one or more test markets.
• Actual store sales and market shares are tracked
via Nielsen or IRI, or data from retailers in some
instances.
• Often this sales tracking is supplemented by
survey based tracking of consumer awareness,
trial, usage, and repeat purchase patterns.
• In some instances, consumer diary panels or
purchase panels are used to track consumer trial,
repeat purchases, and share.
 NEW PRODUCT SALES FORECASTING

• Seek other sources of intelligence PLEASE READ

• Talk to trusted customers, suppliers and
sales partners such as dealers or distributors
to get their take on how the product will do
in the first year.
• Consider primary research
• Primary market research involves such
techniques as conducting surveys, organizing
focus groups and observing customers.
 NEW PRODUCT SALES FORECASTING
• Before-after retail simulation PLEASE READ
• A sample of target-audience consumers is presented with simulations
showing the in-store retail environment and a realistic display of all the
major brands in the category.
• The consumer is asked to choose or “purchase” brands as they normally
would, or as they might on their next 10 purchases.
• The new product is missing from the simulation during this “before”
measurement.
• Then the consumer is exposed to the new product concept and/or
advertising that conveys the new product concept.
• Later, the consumer sees the exact same simulated display (except now it
contains the new product) and is asked to make the same choices or
purchase decisions as before.
• So, we have market shares for all brands in the category before the new
product is introduced, and the same data after the new brand is
introduced.
 NEW PRODUCT SALES FORECASTING
PLEASE READ

• Traditional awareness-trial- repeat purchase model

• Awareness is forecast based on year-one advertising
and media plans.
• All media advertising (including print, radio, Internet,
etc.) is converted into television GRP (gross rating
point) equivalents.
• These GRP equivalents are fed into a mathematical
model to forecast awareness week by week during the
brand’s first year of life.
• The model converts this awareness into a cumulative
trial rate, week by week, based on predicted
distribution levels, promotional plans, and inputs from
concept research and advertising testing.
 CANNIBALIZATION ANALYSIS
PLEASE READ

• In marketing, "cannibalization" refers to a new product

eating into the profits of a current product from the same
company.
• It is the reduction in sales (units or rupees) of a company’s
existing products due to the introduction of a new product.
• Cannibalizing your own product can actually be a
successful business practice.
• One consideration when the company decided to launch
new product is ‘timing’. If a company launches its new
product too early, it may lose too much income on its
existing line; if it launches too late, it may miss the new
opportunity altogether. 
 CANNIBALIZATION ANALYSIS

• In 2010 for example, when Apple introduced

the iPad, it took sales away from the original
Mac computer.
• However, the iPad ultimately led to an
expanded market for consumer computing
hardware and was quite a successful venture
for Apple. PLEASE READ
 CANNIBALIZATION ANALYSIS
PLEASE READ

• Similarly, iPod cannibalized by iPhone in

2007.
 CANNIBALIZATION ANALYSIS
PLEASE READ

•  
Cannibalization Rate =

Example: Suppose, sales of new product is 70

units and cannibalization rate is 60%, so it means
that 60% new product’s sales is taken from
existing product.

 
= 42 units
 CANNIBALIZATION ANALYSIS

PLEASE READ
• This means the sales of existing product will
be decreased by 42 units from its current
sales.
• If the existing product sale before launching
new product was 80 units, thus its sales after
the new product launched will be:
• Sales loss of existing product = 80 – 42 units =
38 units
 CANNIBALIZATION ANALYSIS

• Sales of existing product after cannibalization =

38 units
PLEASE READ
• Sales of new product = 70 units
• With the unit margin of ₹12 of existing product
and ₹10 of new product, the overall profit with
the introduction of new product will be:
• (38 units x ₹12) + (70 units x ₹10) = ₹456 + ₹700 =
₹1,156
• Profit without new product launch = 80 units x
₹12 = ₹960
• ₹1,156 > ₹960 so, new product should be
launched
 CANNIBALIZATION ANALYSIS

• Break-even Cannibalization Rate PLEASE READ

• If a company is considering the introduction

of a new product, the potential for
cannibalization is a key factor to consider.
• The amount of cannibalization should be
estimated beforehand. Companies need to
know the maximum they can allow for its
new product to cannibalize its old product.
• That maximum cannibalization rate is called
the Break Even Cannibalization Rate or BECR.
 CANNIBALIZATION ANALYSIS

PLEASE READ
• BECR refers to the cannibalization rate at
which the losses incurred by the company
due to a decrease in sales of the old product
is equal to the gains made by the company
from the new product sales.
• Losses will occur if the rate goes beyond the
BECR, and profits are made if the
cannibalization rate is less than BECR.