Marketing Exchange Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives. --American Marketing Association, 1985 Three Concepts: 1. Marketing is exchange. 2. Marketing managers can facilitate exchange by orchestrating the controllable variables, that is, the marketing mix--product, price, promotion, place (distribution). 3. The Marketing Concept suggests that firms should seek to satisfy customer needs and wants at a profit.

Market Orientations: Three Unique Characteristics Customer Focus: An obsession with understanding customer needs and delivering customer satisfaction Competitor Orientation: Continuous recognition of competitors’ sources of advantage, competitive position, and marketing strategies Team Approach: Cross-functional teams dedicated to developing and delivering customers solutions

Marketing Orientation, Customer Satisfaction, and Profitability Business Profitability Customer Satisfaction And Retention Market Orientation

Customer Retention Tree Ex: banking industry – only 4% complain who are dissatisfied

Customer Life Expectancy and Customer Retention Banking industry = 5% increase in customer retention = 85% increase in NPV. Banking industry = cost of new customer = +/- $200 Must be able to perform these formulas (N) Average Life = 5 years than CR = 80% Customer life expectancy increases exponentially with customer retention.

Customer Lifetime Value *Discount Rate = 10% Discount Rate = 10%

Do we want to retain every customer? Is there a case for Outsourcing Customers? What about Spinners with AT&T What about “movers and shakers” with the baby bells? There are times when we should jettison unprofitable customers or customer segments. When?

AIRCOMM Customer Retention Tree (1000 customers surveyed) Satisfied Customers 67% 3,350,000 Retained 74,250 8,250 Lost 313,500 1,254,000 1,262,500 New customers Retained 90% Complain 5% Lost 10% Dissatisfied Customers 33% Customer Base 5,000,000 Retained 20% Did Not Complain 95% Lost 80% New Customers 25.5%

AIRCOMM Customer Retention 1 Customer Retention = Retained Customers/Customer Base = (3,350,000+74,250+313,500)/5,000,000 =3,737,500/5,000,000 = .75

AIRCOMM’s Average Customer Life Expectancy 2 A customer retention of 75% translates into an average customer life of four years. Customer Life 1 1 1 = = = = 4 years 1-Customer Retention 1-.75 .25

AIRCOMM: NPV of customer 2 It costs $250 to acquire a new customer. During the first year, a new customer produces $150 of revenue and $50 in margin. The cost of retention is $50. Thus in the first year, AirComm breaks even. In years 2 and 3, the average AirComm customer produces $400 in revenue and $250 in margin. The average cost of customer retention is still $50, so AirComm generates $200 in profit each year. In year 4, the average customer becomes dissatisfied. During this year, the average margin per customer drops to $100 as dissatisfied customers reduce their usage to an average of $200. AirComm spends $100 in customer retention efforts. The net result is a zero profit in year 4. Based on the net cash flow produced each year, an NPV of $51.80 is produced over a four-year customer life (DR = 12%). NPV = (-$250 x 1.000) + ($0 x .893) + ($200 x .797) + ($200 x .712) + ($0 x .636) = -$250.00 + $0 + $159.40 + 142.40 + $0 = $51.80

AIRCOMM: Improve customer satisfaction from 67% to 77% 3 With a customer base of 5 million, an improvement in customer satisfaction from 67% to 77% would result in 3,850,000 satisfied and retained customers. This level of customer satisfaction reduces the percent dissatisfied from 33% to 23%. This results in 51,750 dissatisfied customers who complained and were retained and 218,500 dissatisfied customers who did not complain but were retained. Overall, the number of retained customers increased to 4,120,250. For a customer base of 5 million, this is a customer retention rate of 82.4%. Satisfied and retained 5,000,000 x .77 = 3,850,000 Dissatisfied, complain, retained 5,000,000 x .23 x .05 x .90 = 51,750 Dissatisfied, don’t complain, retained 5,000,000 x .23 x .95 x .20 = 218,500 Total Customers Retained 4,120,250 Customer Retention = 4,120,250/5,000,000 = .824

Components of a Market Orientation Marketing Knowledge Business Profitability & Growth Marketing Leadership Market Orientation Customer Retention Customer Satisfaction Employee Retention Service Quality Employee Satisfaction Employee Productivity

Market-Based Performance Market Versus Financial Performance

Financial Performance Gross Profit Net Profit (before taxes)

Marketing Performance Metrics: External Measures of Market Performance Marketing Profitability: Profitability measure of a marketing strategy

Relative Index where 100 is equal to competition, > 100 ahead of competition and < 100 behind competition.

Contribution Analysis Unit Contribution: The difference between unit price and unit variable cost. Total Contribution: The amount available to the firm to cover (or contribute to) fixed costs after variable costs have been deducted from total revenue.

Break-Even Analysis Total Revenue or Total revenue Total Cost Profit Break-even point Variable Cost Fixed costs Loss BEV Unit Volume Total Revenue = Total Cost Price x BEV = Fixed cost + Unit variable cost (BEV) BEV = Fixed cost Price – Unit variable cost BEV = Fixed cost Unit contribution Sensitivity analysis Market size

Break-Even Analysis Example: $30,000 BEV = = 10,000 units $5-$2 A manufacturer plans to sell a product for $5.00. The unit variable costs are $2.00. The fixed costs assigned to the product are $30,000. How many units must be sold to break even? $30,000 $5-$2 BEV = = 10,000 units Total Revenue = Total Cost Price x BEV = Fixed cost + Variable cost (BEV) BEV = Fixed cost Price – Unit variable cost BEV = Fixed cost Unit contribution

Net Marketing Contribution (NMC) How do marketing strategies contribute to overall profits of a business? Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Profit (before taxes) = Traditional View

Net Marketing Contribution: Santa Fe Sportsware Product Line P1 Marketing and Sales Expenses are traditionally a part of Sales, General & Administration (SG&A) in most annual reports.

Santa Fe Sportsware: Product Line Marketing Profitability

Fundamental Market-Based Strategies and Profitable Growth 10 million 10 percent $50 $5,000,000 $40

Marketing Productivity Market Productivity = Net Marketing Contribution Marketing Budget

Market Definition, Potential, and Demand

AVOIDING MARKETING MYOPIA Marketing Myopia is management’s failure to recognize the scope of its business. To avoid marketing myopia, companies must broadly define organizational goals toward consumer needs. © PhotoDisc

Avoiding Marketing Myopia Company Myopic Description Marketing-Oriented Description MCI Worldcom “We are a telephone company.” “We are a communications company.” Northwest Airlines “We are in the airline business.” “We are in the transportation business.” Prudential Securities “We are in the stock brokerage business.” “We are in the financial services business.” Sony “We are in the video game business.” “We are in the entertainment business.”

Vertical and Horizontal Markets and Growth Opportunities

Personal Computer Market Development

Maximum Market Potential and Current Market Demand

The Diffusion Process Describes how potential customers learn about new products, try them, and adopt or reject them. Rogers (1962) categorized adopters on the basis of relative time of adoption of the innovation based on individual differences. People differ markedly in their readiness to try new products.

Adopter Categorization of the Basis of Relative Time of Adoption of Innovations Deliberate, adopt before the average person, but are not leaders. 13 1/2% Early adopters 34% Early majority 34% Late majority 16% Laggards Skeptical, adopt after the majority of people have tried it. Opinion leaders, adopt new ideas early but carefully. Tradition bound, suspicious of change. Venturesome, willing to try new ideas at some risk. 2 1/2% Innovators Time of adoption

The Chasm Time of adoption innovations 13 1/2% Early adopters 34% majority 34% Late majority 16% Laggards 2 1/2% Innovators Time of adoption innovations

Product Adoption Categories Innovators Early Adopters Early Majority Late Majority Laggards 2.5% 13.5% 34% 34% 16% Tech. Enthusiasts Visionaries Pragmatists Conservatives Skeptics Tech. Junkie Aggressively pursue technology products Appreciate technology for its own sake May purchase for the pleasure of exploring the new product’s properties Realize potential Gatekeepers Winning them over is key because their endorsement reassures the market that the product works Appreciate the benefits of new technology Match technology to opportunity Motivated by future opportunities Intuitive Support revolution Contrarian Break from pack Risk taker Seek what is possible Key to opening market segment Wait and see Motivated by present problems Driven by practicality Analytic Want to see well- established references Conformist Stay with the herd Risk manager Pursue what is probable Winning their business is key to profits and growth Wait, wait, wait until new technology becomes established standard Less willing to become technologically competent Motivated by tradition Support status quo Stay in center of herd Risk adverse Winning their business is highly profitable Do not want anything to do with the new technology Only buy is when the technology is buried so deep inside another product that they don’t know it is there. Not worth pursuing

Product Life Cycle Sales & profits ($) Time Introduction Growth Maturity Decline

Intel’s Product Life Cycles

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