#11/25: Principles of Marketing Engineering

Marketing Engineering: A systematic approach to harness data and knowledge to drive effective marketing decision making and implementation through a technology-enabled and model-supported decision process.

Market response models

  • Inputs: actions that the marketer can control + environment
  • Response model
  • Objectives: monitor/measure, etc.

Value = Benefits – Price

  • Benefits
    • function (does the job)
    • psychological (status)
    • economic (saves money)
  • Price
    • Monetary
    • Perceived risk
    • Inconvenience

Customer Need

  • subject and importance of need
  • temporal aspects of need (urgency, frequency and duration)

Measuring Customer Value

  • Objective Customer Value
    • Internal engineering assessment (internal estimate)
    • Indirect survey questions (pay for better quality, etc.)
    • Field value-in-use assessment (economic benefit): Not only marginal costs but initial investment, etc.
  • Perceptual Customer Value
    • Focus groups
    • Direct survey
    • Importance ratings
    • Conjoint analysis
    • Benchmarking
  • Behavioral Customer Value
    • Choice Models
    • Statistical models / Data mining

Segmentation -> Targeting -> Positioning

  • Creating
    • how does the segmentation fit into the strategy
    • which variables can be used
    • exclusive segments?
    • how many segments?
  • Traditional segmentation
    • reduce data (PCA)
    • develop measure of association
    • identify and remove outliers
    • form segments (cluster analysis): are they clear and robust?
    • profile segments & interpret

Positioning

  • Attribute-based perceptual maps
    • identify other products & attributes
    • get data from questionnaires
    • reduce
    • plot
  • Preference Maps
    • weights for attributes
  • Joint-Space Maps

Translating Preference to Choice

  • first choice rule: infrequent, expensive
  • Share of preference rule: often, cheap, etc.

For [target segment], the [offering] is [positioning claim], because [single most important support].

Forecasting

  • Judgmental Methods
    • Sales force composite estimates: let the sales force forecast
    • Jury of executive opinion: different stakeholders
    • Delphi method: anonymous and iterative
    • Chain ratio method: split up in its factors

Conjoint study

  • select attributes of product
  • develop bundles
  • do survey
  • segment customers based o part-worth function
  • design market simulation
  • select choice rule
  • adj market shares

Top 10 Lessons

  • Marking Engineering is Marketing
  • ME is a means to an end
  • frames the opportunity costs for alt. actions
  • requires judgment
  • whole greater than the sum of its parts
  • data & info do not automatically result in value
  • rapid prototyping
  • every model has its downside
  • ME requires lifelong learning
  • be a coach rather than a teacher

Insights for better Implementation

  • Be opportunistic
  • Start Simple; Keep it Simple
  • Work backward
  • score inexpensive victories
  • develop a program, not just a project

I really liked Principles of Marketing Engineering. The book gives a great overview over the topic and different approaches. It’s written like a textbook, so it can be a bit lengthy in parts but otherwise, a nice book.

#1/25: Information Rules

I want to try out a new format which you could call “book commentary”. I’ll quote some text passages and write a short comment about each passage.

Technology changes. Economic laws do not. If you are struggling to comprehend what the Internet means for you and your business, you can learn a great deal from the advent of the telephone system a hundred years ago.

This is a great advice and I can anybody recommend to read old books about business and economics especially case studies. I already covered some old business books myself here on the blog and I’m always receptive to recommendations.

We think that content owners tend to be too conservative with respect to the management of their intellectual property. The history of the video industry is a good example. Hollywood was petrified by the advent of videotape recorders. The TV industry filed suits to prevent home copying of TV programs, and Disney attempted to distinguish video sales and rentals through licensing arrangements. All of these attempts failed. Ironically, Hollywood now makes more from video than from theater presentations for most productions. The video sales and rental market, once so feared, has become a giant revenue source for Hollywood.

Interesting enough, Hollywood is still trying to fight against piracy. The next step would probably be to offer cheap versions as a stream (ala netflix). However, people don’t want to pay too much for a video stream.
I think it may be comparable with the automotive industry in the beginning of the 20th century. There were lots of car manufactures that produced really high quality cars which were really expensive. Most people couldn’t afford a car at this time. Then came the Ford Model T, which wasn’t as fancy at these other cars but it was cheap and good enough and people bought it.
Maybe Hollywood should think about producing movies which don’t cost $200m but instead only $20m.

In competing to become the standard, or at least to achieve critical mass, consumer expectations are critical. In a very real sense, the product that is expected to become the standard will become the standard. Self-fulfilling expectations are one manifestation of positive-feedback economics and bandwagon effects.

A very interesting observation with great effects. This makes PR much more important than I thought it would be. Especially, if you apply to to startups. Signals like founding and investors become stronger. And it isn’t so much about the product and more about connects, strategic networks, PR and marketing.

The dominant component of the fixed costs of producing information are sunk costs, costs that are not recoverable if production is halted. If you invest in a new office building and you decide you don’t need it, you can recover part of your costs by selling the building. But if your film flops, there isn’t much of a resale market for its script. […] Sunk costs generally have to be paid up front, before commencing production.

We’ve seen some movies which ran horribly in the cinema but great in DVD markets. So, there’s some recoverability. However, the movie can still suck. One method to cover the costs are upfront investments. Kickstarter is basically allowing this for a mass-market and some game studies took this approach to produce games which wouldn’t be backed by a publisher (see Doublefine Adventures).

The key to reducing average cost in information markets is to increase sales volume. Think of how a TV show is marketed. It’s sold once for prime time play in the United States. Then it’s sold again for reruns during the summer. If it is a hot product, it’s sold abroad and syndicated to local stations. The same good can be sold dozens of times.The most watched TV show in the world is Baywatch, which is available in 110 countries and has more than 1 billion viewers. […] The shows are cheap to produce, have universal appeal, and are highly reusable.

Basically the Hollywood argument I made above. Lower the production costs but produce more variety and stimulate more innovation.

With information you usually produce the high-quality version first, and then subtract value from it to get the low-quality version.

This is really important for the customer. You don’t want to feel that you paid the normal price for the inferior product. One example are some games which come with lesser content in the normal version but still costs $50-60. Don’t do that.

The coupons are worthwhile only if they segment the market. A coupon says “I’m a price-sensitive consumer. You know that’s true since I went to all this trouble to collect the coupons.” Economist say that a coupon is a credible signal of willingness to pay. […] What does this have to do with information pricing? Well, suppose that information technology lowers search costs so that everyone can “costlessly” find the lowest price. This means that sales are no longer a very good way to segment the market. Or suppose that software agents can costlessly search the net for cents-off coupons. In this case, the coupons serve no useful function.

I found this passage quite interesting. Basically sites like Groupon are too easy to use, so that people don’t segment themselves that good. Furthermore, there are lots of sites which offer coupon codes, so that today a sale for most online shops is probably more appropriate.

The rights management strategy is a twist on the versioning strategy described in Chapter 3. There we argued that you should offer a whole product line of information goods. The cheap versions (which can even be free) serve as advertisements for the high-priced versions.

Freemium described over 12 years ago. Interesting enough, McAfee used a freemium model since 1993 and before that they used a “pay what you think“-model, which was also quite revolutionary for that time.

Of course, a new brand can emerge that is easy to learn, thus reducing switching costs. Indeed, one strategy for breaking into a market with significant brand-specific customer training is to imitate existing brands or otherwise develop a product that is easy to learn. Borland tried this with Quattro Pro, aimed at Lotus 1-2-3 users, and Microsoft World has built-in, specially designed help for (former!) WordPerfect users.

We’ve seen this in the online market quite recently, e.g. with WordPress and tumblr. I wonder if you see a better word processor in the future.

What happens when perfect competition meets lock-in? […] Think about the extreme case in which you face fierce competition from equally capable rivals to attract customers in the first place. Both you and your rivals know that each customer will be locked into whatever vendor he or she selects. The result is that competition indeed wrings excess profits out of the market, but only on a life-cycle basis. The inescapable conclusion: firms will lose money (invest) in attracting customers, and (just) recoup these investments from profitable sales to locked-in customers.

Normally, you would assume that lock-in leads to excessive profit in a market but it doesn’t. You can talk about quasi-profits, i.e. the lock-in needs negative investment at the start and if you locked-in a customer, he will return the investment costs over his life-time. That is, if you want to make excessive profit, you have to still rely on product differentiation and/or cost leadership.

If you give your product away, anticipating juicy follow-on sales based on consumer loyalty/switching costs, you are in for a rude surprise if those switching costs turn out to be modest.

That’s when freemium goes wrong. If you are in a market with low or non-existing lock-in costs, i.e. trash mail provider or image uploading sites, freemium probably won’t work.

An other approach is to rely on versioning by offering long-standing customers enhanced services or functionality. Extra information makes a great gift: it is cheap to offer, and long-standing customers are likely to place a relatively high value on enhancements.

I really like this idea. Often you see introductory offers, like 20% off of the subscription but after this period, you either don’t care about the price, feel ripped-off, because you have to pay more or cancel your current account and get another introductory offer.
However, if you reward long-term customers with some useful addons, they have no incentive to do the latter and probably will appreciate the extra addon. Varian and Shapiro talk about this in the book in greater length.

The beautiful if frightening implication: success and failure are driven as much by consumer expectations and luck as by the underlying value of the product. A nudge in the right direction, at the right time, can make all the difference. Marketing strategy designed to influence consumer expectations is critical in network markets.

See the quote above. Early adopters are really important and early press coverage can greatly introduce the probability of success.

The revolution strategy involves brute force: offer a product so much better than what people are using that enough users will bear the pain of switching to it. […] The revolution strategy is inherently risky. It cannot work on a small scale and usually requires powerful allies.

The authors quote Grove’s 10X as a revolutionary metric. I got two nice examples which fit to this quote.
Firstly, Google+ which hasn’t offered a 10X and wasn’t a evolution of Facebook either. Furthermore, the group in the beta phase was too small.
An other example, are open source clones of proprietary products. More often than not, free source code or enhanced privacy aren’t 10X.

In addition to launching your product early, you need to be aggressive early on to build an installed base of customers. Find the “pioneers” who ware most keen to try new technology and sign them up swiftly.

Really important, see Crossing the Chasm.

All in all, I really liked this book. I think it’s probably a must-read for internet entrepreneurs. What I personally found really interesting to see which people endorsed this book and one of them is Eric Schmidt (Google’s ex CEO). And he said in an interview about Google+ and its chance to beat Facebook: “It’s very hard to beat a fast-moving incumbent in exactly same game in technology because it changes so quickly.

If you are interested in more detail about the content of the book, its website offers free presentation material for college courses. Great book, great writing.

Provide services, not just products

In the last two weeks there were some discussions about (enterprise) software sales [1, 2] on hacker news. The main complaint is that software sales are often nontransparent, complicated and highly time consuming.

I think this comment sums the problem up:

As you imply, there are segments in every market. Of course there is a segment of companies with hundreds or even thousands of employees with gigantic budgets. These guys are going to do RFP’s and spend months evaluating the different payroll providers.

Then there is the segment of small guys lik me who have under 10 employees who frankly don’t need anything too complicated. You can say “I am only going to serve large enterprise customers through a complex sales process” and that’s completely fine with me. But don’t pretend to cater to my segment if you are not to adapt your model. —labaraka

The last sentences is probably the most important. Don’t pretend to serve a segment just to be “present” in this segment. If your sales process sucks for this segment then it’s better not to serve this segment at all.
Some big software companies tried to enter the SMB market but most failed. Why? I think that it is really hard to sell for 10-20 years products to big cooperations who want customized modules, pay for consultants and don’t care if a basic module costs $100k and then to try to reduce one’s product, make it easy and create a new sales process for said businesses.
The great thing about this is that there’s always a market for software for SMB even if there are big names out there. Salesforce is such an example. At the time there were big names like Microsoft, SAP or Oracle who fought over market shares for CRM systems but Salesforce decided to gather a different market – a market where people don’t have a multiple millions IT budget or even a IT staff.
But even Salesforce can’t serve the whole tail. Still, there are companies that are overwhelmed by Salesforce’s offer or don’t feel adequately served by them.

In conclusion, as a customer I want to know that somebody cares about my company or my segment. If you are just trying to be present in a segment without really caring, people will go to other companies that care. This will allow entrepreneurs to create companies for different niches that other companies don’t really care about. Care about your customers.

#83/111: Strategic Database Marketing

What is it about?

You collected data from your customer and then? Arthur M. Hughes explains how to analyze customer data and use it in the decision making process.

What can I learn?

Recency, Frequency, Monetary: The easiest metric is RFM. You divide each customer in one of many groups and test your offering/ad/etc. on a small subset. Let’s say you got 10000 customers. Now you are going to sort them by recency, e.g. latest sales, and split them up in 10 groups. Do the same thing for frequency and monetary. Now every customer got a recency group, a frequency group and a monetary group. Now comes the beauty. You just test your offering to a subset (e.g. 10% of each group) and notice how much each group spend. Finally, you can see which groups were the most profitable and just send them the final offering.

Know what you want to do: It’s essential. Hughes wrote that companies often just collect tons of data without a purpose. Data alone won’t help you. Spare your time and resources and define at first what you want to achieve and then start collecting data.

Customer Lifetime Value: I explained the concept early, however the RFM approach makes this more interesting because you can now easily test the impact on small groups.

Conclusion

Strategic Database Marketing is a pretty good book. It got lots of examples and the author explains each approach in detail. I especially like the RFM approach because it is so easy but works well. If you want to learn more about analyzing customer data this book is for you.