Marketing Strategy II

Which Markets are the Most Attractive? Issues: 1. Segments offering a lot of surplus (Marketing Strategy 1) 2. Markets in which you have market power (Marketing Strategy 1) 3. Suppliers and distributors do not have market power (today)

1. Segments Offering A Lot of Surplus How much are customers willing to pay? What does it cost to satisfy customers’ needs? How big is the segment?

2. Markets in Which You Have Market Power Source of market power How many competitors? Is there differentiation? Evidence of market power How large is the market share? How large are the profit margins?

3. Suppliers and Distributors Do Not Have Market Power Why worry? – Share channel profits – Inefficiencies: fighting over share of profits reduces total channel profits (double marginalization)

Formally: Double Marginalization Firms only consider the impact of their decisions on their own profits not the profits of other firms – Overlook externalities – Do not maximize total profits in the channel

Summary Which markets? Surplus How much are customers willing to pay? What is the cost of satisfying their needs? How big is the segment? Horizontal Competition How many competitors are there? Are they differentiated? Is there an evidence of market power? Vertical Competition Do any upstream suppliers have market power? Do any downstream customers have market power?

Comment: Vertical vs. Horizontal Competition Market Power is derived from your level of the channel: – How many competitors? – How differentiated (what resources)? Market power from horizontal competition determines bargaining power with vertical competitors

Horizontal Competition ↓differentiation from other manufacturers ↑horizontal competition with other manufacturers ↓manufacturer market power ↓bargaining power with retailers

Vertical Competition ↑differentiation amongst retailers ↓horizontal competition amongst retailers ↑ retailer market power ↑vertical competition for the manufacturer

Compare Effect on Prices More horizontal competition: firms charge lower prices More vertical competition: firms charge higher prices

Example: Investment Brokers Relationships with clients are exclusive Need to build client trust Need to create incentives to develop relationships Credible risk will take clients with them Highly paid $150,000 to $250,000 Bank Managers $55,000

How Do Brokers View Cross-Selling? Harm relationship with clients – Potential breach of confidence – Loss of credibility when attempt to sell loans – May receive poor service Lose control of relationship Divert time from other activities

ABank Number of Client Accounts Referred Figure 1 Outcome of Referral Initiative Number of Active Client Accounts Brokers w ho Resigned Brokers w ho Stayed

What Do We Control? Surplus Focus on customer segments with more surplus Market power at your level of the channel Focus on markets tilted in your favor (Chicago football) Do not demonstrate the availability of rents (Snapple) Protect weak competitors (Bausch and Lomb, Victoria Secret)

What Do We Control? Market power at other levels of the channel Acquire the supplier (retailer) Reduce the supplier’s market power: Enter the supplier’s market Encourage other firms to compete with the supplier Contract (collude): Agree on efficient actions and divide up profits Make specific investments in relationship Increase your own bargaining power: Differentiate in the eyes of the final customers Add value to the channel

Relationship to Strategy Same Starting Point RESOURCES Marketing Which markets to enter? How to optimize in chosen market? Strategy Which resources to acquire? How to combine/use resources?

Relationship to Strategy Definition of Resources Marketing Own and control? Differentiate? Sustainable? Satisfy customer needs? Strategy Organization? Rareness? Inimitability? Value?