Marketing and Business Models (cont.) Lecture 7 Tuesday Jan 27, 2009

Marketing 101 The 4 Ps

What is Marketing? 4 Ps of Marketing Product Promotion Pricing Place (or distribution system) What follows is necessary for Business Plan but not for Tuesday Homework

Product What is your product? Describe in terms of benefit to the customer Product packaging (is this relevant?) – Discuss form-factor, pricing, look, strategy – Summarize Cost of Goods and high-level Bill of Materials – Shipping issues – Customs issues

Promotion Direct marketing – Overview of strategy, vehicles & timing – Overview of response targets, goals & budget Third-party marketing – Co-marketing arrangements with other companies Marketing programs – Other promotional programs

Promotion Branding – Concept of Brand Equity – What value do you get from Branding? – How do you build a brand? – Is it worth it?

Pricing – Summarize specific pricing or pricing strategies – Compare to similar products or compare to doing nothing Strategy – Summarize strategy relevant to understanding key pricing issues

Placement (Distribution) Distribution strategy Channels of distribution – Summarize channels of distribution Distribution by channel – Show plan of what percent share of distribution will be contributed by each channel -- a pie chart might be helpful Discuss fulfillment issues

Vertical Markets/Segments Vertical market opportunities – Discuss specific market segment opportunities – Address distribution strategies for those markets or segments – Address use of third-party partner role in distribution to vertical markets

Placement (International) International distribution – Address distribution strategies – Discuss issues specific to international distribution International pricing strategy Localization issues – Highlight requirements for local product variations

Business Models continued

How do you build a profitable company? –Make the right strategic Choices Solve customer problem Differentiation Pricing –Create Value Processes Resources –Value Network Customer relationships Suppliers Information Flows –Capture Value Cost Profit

How do you build a profitable company? Consider Capturing Value- - It is not enough to bring a terrific product to the market place, that your customer loves, if he won’t pay enough for it so that you can make a profit. - Lesson of e-commerce - Lesson of third world charities There are often many ways of making money on the same product or service. Limited by ingenuity

Some thoughts on how to increase profits P=SP-C 1. Increase Selling Price Increase Customer Value Put extra features in product which require little marginal cost Provide extra service Target less competitive segment of the market Get to market before competition Price at the maximum the customer is willing to pay Price models should reflect customer value- not cost (except in government contracts if you wish to avoid jail)

Why? Some thoughts on how to increase profits P=SP-C 2. Decrease Selling Price

Don’t commit to detailed design until you have customers specs firm - then don’t change Build a manufacturable product. Bring manufacturing in early Don’t overload with features that the customer doesn’t want that are costly to develop Manage tightly to schedule with appropriate risk and risk reduction plans Use rigid phase exit criteria Some thoughts on how to increase profits P=SP-C 3. Decrease Product Development (NRE) and Manufacturing (RE) costs

Effect on product price in being first to market? Effect on total revenue of turning out products faster? Effect on Cost? Some thoughts on how to increase profits P=SP-C 4. Decrease Cycle Time for Product Development

Increase profits Consider multiple business models... Suggestions:

The after-market Service Model Large complex equipment Aerospace Medical Periodic updates (e.g. software “support”) Equipment with consumables (the razor blade model) Printers (low margin) coupled with ink (high margin) Video Games Brokerage Intermediary Market makers Arbitrage Ex: Trader Ben Business Models

Merchant Virtual Merchant e.g., Amazon Catalog Merchant -- mail-order business with a web-based catalog. Combines mail, telephone and online ordering e.g., Land’s End Click and Mortar -- traditional brick-and-mortar retail establishment with web storefront. Barnes and Noble Bit Vendor –Apple I-tunes (plus I-pod) Which has the highest Gross Margin? Business Models cont.

Distribution Examples

Services Design house Software development (not shrink- wrapped) Sales including VAR (Value Added Reseller) Outsourcing Consultancy R&D House (SRI, Battelle, Caltech research, etc.) Business Models cont.

Businesss Models cont. Manufacturer- - Make stuff and sell it to another business License - - IP, software or complete business –Mixed model: Can license to markets you can’t address Community – Build and advertise/subscription Pure Subscription Advertising Clicks Can be combined with others Infomediary Audience Measurement Services Incentive Marketing

Businesss Models cont. Integrated Information Businesses- Opportunity to “slice and dice” – Consider NY Times – Print – Web – Reprints Articles Significant pages (e.g., date of your birth) – Archival photographs – Classified – Delivery Inserts – News Service – See Hal Varian “Information Rules”

Knowing your model, you have a decision to make. Where should you invest? Investment efficiency Each of these brings some value to the customer. Challenge is to decide which one(s) should get your investment What should you be really good at? What should you outsource?

Investment decision is based on Business Model Competencies required to support that model Cost of Competency vs cash generated by Business Model

It gets worse... As Bill Collins discussed How will you deliver continuously increasing value over time? Competition doesn’t stand still. The bar is raised Perceived Product Value/Cost increases with time