1. Copyright © 2003 by Marketspace LLC Mohammed, Fisher, Jaworski, Paddison Internet Marketing, 2 nd Ed Chapter 2 Lecture Slides Framing the Market Opportunity Exhibits and Tables

2. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Framing the Market Opportunity — Today’s Objectives  Objectives will be to: Introduce the market opportunity analytic framework Examine three basic value-types Discuss the identification of unmet and under-served needs Explore how customers are segmented and targeted Examine the role of resources in evaluating market opportunities Discuss how to assess the attractiveness of a market opportunity Examine eBay’s market opportunity

3. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Chapter 2: Framing the Market Opportunity The Market Opportunity Analytic Framework Three Basic Value Types — Trapped Value, New-to-the-World Value and Hybrid Value The Use of the Customer Decision Process to Identify Unmet and Underserved Needs Segmentation and Targeting The Role of Resources in Evaluating Market Opportunity Assessing the Attractiveness of a Market Opportunity EBay’s Market Opportunity Conclusion

4. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Chapter 2: Framing the Market Opportunity The Market Opportunity Analytic Framework Three Basic Value Types — Trapped Value, New-to-the-World Value and Hybrid Value The Use of the Customer Decision Process to Identify Unmet and Underserved Needs Segmentation and Targeting The Role of Resources in Evaluating Market Opportunity Assessing the Attractiveness of a Market Opportunity EBay’s Market Opportunity Conclusion

5. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–1: Framework for Market Opportunity Determining where and how a business will compete

6. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Chapter 2: Framing the Market Opportunity The Market Opportunity Analytic Framework Three Basic Value Types — Trapped Value, New-to-the-World Value and Hybrid Value The Use of the Customer Decision Process to Identify Unmet and Underserved Needs Segmentation and Targeting The Role of Resources in Evaluating Market Opportunity Assessing the Attractiveness of a Market Opportunity EBay’s Market Opportunity Conclusion

7. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–2: Three Types of Basic Value More efficient markets More efficient value systems Customize offerings Build community Introduce new functionality or experience Disrupt pricing Ease access Radically extend reach Trapped Value New-to-the-World Value Hybrid Value

8. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–A: Exploring Basic Value Trapped Value More efficient markets lower search and transaction costs Bizbuyer.com Lending Tree Inc. CircleLending More efficient value systems compress or eliminate steps in an existing value system General Electric New-to-the-World Value Customizing offerings allows customers to add and remove features Yahoo Quicken.com Build communities to leverage customers’ participation Zeal.com Introduce new functionality to transform all or part of an industry value chain Internet telephony Digital photography Hybrid Value Disrupt pricing and change pricing-power relationships MySimon.com Enable ease of access and help customers find products Abebooks.com Extend reach and welcome distant customers Distance education

9. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–B: Pinpointing Value Consider horizontal and vertical dimensions Horizontal value plays improve functional operations that are common to multiple industries and types of value systems –“We’re really good at managing retail operations” –GE (planning and control), eBay (on-line auctions) Vertical value plays create value within activities that are central to a particular business –“We know everything there is to know about oil, from drilling to pumping gas” –Covisint (an online consortium, which facilitates transactions of materials for the automotive supply chain) Look for clues to trapped value Asymmetric information Poor access to information and advice Significant time and resources Low collaboration between key participants

10. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Chapter 2: Framing the Market Opportunity The Market Opportunity Analytic Framework Three Basic Value Types — Trapped Value, New-to-the-World Value and Hybrid Value The Use of the Customer Decision Process to Identify Unmet and Underserved Needs Segmentation and Targeting The Role of Resources in Evaluating Market Opportunity Assessing the Attractiveness of a Market Opportunity EBay’s Market Opportunity Conclusion

11. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–C: Customer Decision Process Origination Information Gathering Evaluation Purchase Decision Postpurchase Evaluation and Behavior Pre- purchase Purchase Post- purchase What prompts the customer to action? What factors influence the customer’s decision? What attributes of the product does the customer consider? What options does the customer identify? What decision(s) does he make? What does the customer do about his decision? A framework to help managers look systematically for unmet or underserved needs Because value creation is based on understanding and meeting customer needs.

12. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Origination Information gathering Evaluation Purchase decision Postpurchase evaluation and behavior Personal use Gift Features Brand/ manufacturer Brand/ manufacturer Type (digital/film) Cost Likelihood of repeat purchase or recommendation Pre- purchase Purchase Post- purchase Film Digital APS Basic Fully loaded Complexity Usage occasions Past experiences Budget constraints Print quality Reliability Learning curve/ ease of use Learning curve/ ease of use Range of accessories 35mm Body type Lens Throw- away Standard SLR Point & shoot Zoom Fixed Instant Reviews Exhibit 2–3: Decision for Purchasing a Camera

13. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–D: Decision for Vacation Travel Destination Origination Information Gathering Evaluation Purchase Decision Postpurchase Evaluation and Behavior Pre- purchase Purchase Post- purchase Likelihood of Repeat or Referral Comfort Style Photos Degree of Memorability Event Break Honey- moon Reunion Holiday Number and Relationship of Travelers Weather Duration and Distance Activities Budget Travel Agent Travel Guides Past Experiences Brochures Chat rooms Books Vacation Package Independently Planned World Tour Cruise Small-Town Discovery Beach Escape Outdoor Adventure

14. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–E: Using the Customer Decision Map What is the nature of the customer’s ideal experience? How does it vary through the stages of decision-making? How closely does the actual experience compare to the customer’s view of the ideal? What are the key frustration points? Does the customer’s experience yield the result that best meets his needs? What might help the customer achieve better results? Does the desired customer experience vary? What are customer beliefs about the decision-making process and the options available for purchase? What barriers block participation by potential customers? What technological, communication or online opportunities might enhance the customer experience? How do customers define value for critical steps in the process? Would they be willing to pay for certain elements of that value? Some questions to consider

15. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Chapter 2: Framing the Market Opportunity The Market Opportunity Analytic Framework Three Basic Value Types — Trapped Value, New-to-the-World Value and Hybrid Value The Use of the Customer Decision Process to Identify Unmet and Underserved Needs Segmentation and Targeting The Role of Resources in Evaluating Market Opportunity Assessing the Attractiveness of a Market Opportunity EBay’s Market Opportunity Conclusion

16. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–F: Designing a Value Cluster Value Choice of target Reason to believe Selection of benefits

17. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–4: Segmentation Approaches Grouping customers into useful categories

18. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–G: Geographic Segmentation Source: Philip Kotler, Marketing Management (1997), p. 257 Geographic segmentation divides the market into distinct geographical units, such as nations, states or regions In the Internet space, geographic barriers are to a large extent lifted However, there still are many industries where local relationships and distribution channels play a key role, maintaining the need for a local focus –Grocery-delivery service Peapod is currently operating in several metropolitan markets; entry into new geographical markets will require the building of the necessary home- delivery infrastructure –Many construction sites have a local or regional focus, since relationships with local or regional contractors and suppliers are of critical importance Country Region Urban vs. Rural Density Climate Description Segmentation Examples

19. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–H: Geographic Segmentation Example — Citysearch.com Citysearch.com “Where to go, what to do, how to get things done... in your city” Citysearch.com is a leading local portal and transactions company, providing content and services in select popular cities in the US and slowly expanding to international cities Citysearch provides complete city guides for 128 cities worldwide Citysearch’s offering includes: –Movie listings –Shopping –Restaurant reviews –Ticket purchases –Yellow pages –City exploration Citysearch.com “Where to go, what to do, how to get things done... in your city” Citysearch.com is a leading local portal and transactions company, providing content and services in select popular cities in the US and slowly expanding to international cities Citysearch provides complete city guides for 128 cities worldwide Citysearch’s offering includes: –Movie listings –Shopping –Restaurant reviews –Ticket purchases –Yellow pages –City exploration

20. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–I: Demographic Segmentation Source: Philip Kotler, Marketing Management (1997), p. 258 Market division into groups based on customer demographic variables Most popular method for distinguishing customer groups, highly actionable Age Income Occupation Nationality Market division into groups based on business demographic variables Highly actionable, since business demographic data is readily available Industry Company size Location B2C: Demographic B2B: Firmographic Description Segmentation Examples

21. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–J: Needs-Based Segmentation Consumers and businesses purchase goods and services because they satisfy their needs –The same product may satisfy many different needs; a person may purchase chewing gum in order to freshen her breath, to promote dental health, to help her quit smoking or because she enjoys the taste Needs-based segmentation seeks to understand why a purchase is made (i.e., what needs are being satisfied) and to divide the market into groups of buyers whose needs are homogenous Needs-based segmentations are particularly compelling for technology companies; they can prevent companies from developing new technology features because they are “cool” or just because they are possible

22. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–K: Requirements of an Effective Segmentation Source: Philip Kotler, Marketing Management (1997), p. 269 In order for a customer segmentation to be effective, it must be meaningful, actionable, substantial and measurable Meaningful Actionable Substantial Measurable Customers must demonstrate needs, aspirations or behavioral patterns that are similar within a segment and different across segments –A distinction between a price-sensitive and a quality-seeking segment is meaningful, since the two segments demonstrate distinguishable sets of needs A company must be able to reach customers within each segment through effective and targeted marketing programs –A customer segment consisting of customers with blue eyes is not actionable, since it is very hard to identify and reach only customers with blue eyes Segments must be large and profitable enough to make the investment in serving them worthwhile –MyCFO.com is targeted toward high-net-worth individuals, helping them manage their portfolios; even though the number of those individuals is small, the dollar amount managed is sizeable, thus constituting a substantial segment Key characteristics of the segments (e.g., size and spending patterns) must be easy to measure

23. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–L: Segmentation Examples Children’s Toys –Relationship to purchaser (e.g. self, peer, parent) –Age of purchaser –Reason for purchase (e.g. entertain, reward, educate) Online Trading –Value of stock portfolio –Frequency of trades Internet Service Providers –Age of purchaser –History of Internet use –Primary online activities Select actionable, meaningful bases for segmentation For each segment defined, how might you locate the customer?

24. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–M: Choice of Focal Customer Benefits Customer Criteria Do target customers understand the value proposition? Is the value relevant to the target customers’ needs? Do target customers believe the value proposition? Will the value proposition provoke customer action? Do target customers understand the value proposition? Is the value relevant to the target customers’ needs? Do target customers believe the value proposition? Will the value proposition provoke customer action? Selecting a relevant, important and parsimonious benefit Company Criteria Will the company support the proposition? Does the company have the resources and capabilities to “own” the proposition? Does selection of the proposition limit future growth into other markets? Will the company support the proposition? Does the company have the resources and capabilities to “own” the proposition? Does selection of the proposition limit future growth into other markets? Competitor Criteria Are competitors trying to provide a similar value proposition? Do current competitors have the resources and capabilities to copy the proposition? How easy is it for the required resources and capabilities to be developed? Are competitors trying to provide a similar value proposition? Do current competitors have the resources and capabilities to copy the proposition? How easy is it for the required resources and capabilities to be developed? Three classes of considerations for assessing the value proposition Caution: Compromising two benefits is less valuable than fully delivering one.

25. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–5: Segmentation Variables

26. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Purchase occasion Computer experience and age Basic digital camera Intermediate digital camera Fully loaded digital camera No significant market Exhibit 2–6: Consumer Digital Camera Purchasing Segmentation

27. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–N: Point-Counterpoint: Does Segmentation Matter in the Online World? Point-Counterpoint

28. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–7: Amazon.com Homepage for Two Different Customers Recommendations are based on the individual’s past purchases. The display is personalized for each customer.

29. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Chapter 2: Framing the Market Opportunity The Market Opportunity Analytic Framework Three Basic Value Types — Trapped Value, New-to-the-World Value and Hybrid Value The Use of the Customer Decision Process to Identify Unmet and Underserved Needs Segmentation and Targeting The Role of Resources in Evaluating Market Opportunity Assessing the Attractiveness of a Market Opportunity EBay’s Market Opportunity Conclusion

30. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–O: Specifying a Resource System The resource system shows how a company must align its internal systems and partners to deliver the benefits of the value proposition or cluster. The construction of a resource system occurs in five steps: Identify core benefits in the value proposition or cluster Identify capabilities that relate to each benefit Link resources to each capability Identify to what extent the firm can deliver each capability Identify partners who can complete capabilities

31. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–P: Evaluating a Resource System Uniqueness Good resource systems provide benefits, capabilities and activities that are different from those of competitors Links Good resource systems have links between capabilities and benefits, among capabilities, among resources, and between virtual-world and physical-world business systems Sustainability Good resource systems are difficult for competitors to replicate Source: Philip Kotler, Marketing Management (1997), p. 269 Making sure the company’s systems and partners are aligned with the value proposition

32. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Chapter 2: Framing the Market Opportunity The Market Opportunity Analytic Framework Three Basic Value Types — Trapped Value, New-to-the-World Value and Hybrid Value The Use of the Customer Decision Process to Identify Unmet and Underserved Needs Segmentation and Targeting The Role of Resources in Evaluating Market Opportunity Assessing the Attractiveness of a Market Opportunity EBay’s Market Opportunity Conclusion

33. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Supporting Slide 2–R: Factors of Opportunity Attractiveness Competitive Intensity Customer Dynamics Technology Vulnerability Microeconomics Competitive vulnerability measures the number and identity of competitors and their respective strengths and weaknesses at delivering benefits Technical vulnerability considers the ease of competitive duplication Magnitude of unmet need measures the amount of ‘white space’ apparent in the marketplace Interaction between segments measures the level of reinforcing activity that generates more purchase and usage. Likely rate of growth estimates annual growth of underlying customer-unit market –E.g. Fast-growing small-business market Technology adoption measures customers’ adoption of the technologies required to recognize the value of the offering Impact of new technologies considers the likelihood of a new technology radically altering the economics or attractiveness of the offering Market size is the dollar value of all sales generated in a particular market Profitability is the profit margin that can be realized in the market Source: Philip Kotler, Marketing Management (1997), p. 269 Criteria for making a go / no-go assessment

34. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–8: Competitor Profiling—Eastman Kodak Eastman Kodak Purchase camera Purchase film Take pictures Digitally manipulate pictures Download and choose pictures to print Print and receive pictures Share pictures Store pictures on CD Purchase accessories Olympus Fuji Adobe Systems Shutterfly OfotoSnapfish Photoworks Moto Photo Snapfish Direct Competition Indirect Competition Intel Geocities HP Yahoo Photos Identifying competitors for each activity of the business

35. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–9: Calculation of Per-Household Consumer Film Revenue Traditional Film Film + Digital Fully Digital # Photos Taken100160300 # Film Photos Developed100670 # Digital Photos Developed01854 Revenue/Film Print$0.37 Film Print Revenue$37.46$25.10$0.00 Film Revenue$17.00$11.39$0.00 Revenue/Digital Print$0.50 Digital Print Revenue$0.00$9.00$27.00 Total Revenue per Household$54.46$45.49$27.00 % Profit Loss v. Film only0%16%50% Key Assumptions  For easy comparison, assume 100-photo base for average family.  Revenue/Film Print assumes $8.99 per 24 exposures.  Revenue/Digital Print assumes 50 cents per exposure.  Film revenue assumes $3.99 for 24 exposures.  Families with digital cameras take 60% more pictures, but take 33% fewer film photographs.  Only 20% of digital photos taken are developed. Kodak stands to lose as much as 50% of its film revenue in a fully digital photography world

36. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–10: Photography Value ChainCapture Store and Retrieve EnhanceRepurposeShare Film Value Chain: Products and services Virtual Value Chain: Products and services Still cameras Film Batteries Commercial processing Negatives Commercial Processing PictureMaker Kiosks Commercial processing PictureMaker kiosks Reprints Albums Digital cameras Webcams PDA cameras Memory sticks Flash cards CDs PC hard drive Home inkjet printer Inkjet paper Inkjet ink Commercial processing Online upload and development PDA Commercial processing PC software Online software PictureMaker kiosks Commercial processing PC software Online software PictureMaker kiosks Reprints (online services, printers) Online albums E-mail Diskettes Flash cards Memory sticks PDA

37. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–11: Notable Kodak Investments and Partnerships, 2000-2001 Cameras and Scanners Online Partnerships Storage Solutions Printing Solutions Commercial Printing Development of EasyShare digital camera technology License of EasyShare technology to Olympus Investment in PictureVision scanners and servers Ofoto.com acquisition Snapfish.com investment AOL “You’ve Got Pictures” partnership PhotoAlley.com investment iFilm.com investment MyFamily.com investment Partnership with CVS.com and Kmart photofinishing Partnership with Circuit City for creating and sharing prints Partnership with Freeserve, largest ISP in the UK DataPlay partnership for low- cost storage devices LSI Logic photo CDs via DVD players Lexmark partnership for home printers Encad acquisition for inkjet printers HP JV for commercial digital inkjet minilabs (Phogenix)

38. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–12: Kodak’s Digital Photography Overall Opportunity Assessment Competitive vulnerability Technical vulnerability Magnitude of unmet need Interaction between segments Likely rate of growth Technological vulnerability Market size Level of profitability Positive factor Neutral factor Negative factor

39. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Chapter 2: Framing the Market Opportunity The Market Opportunity Analytic Framework Three Basic Value Types — Trapped Value, New-to-the-World Value and Hybrid Value The Use of the Customer Decision Process to Identify Unmet and Underserved Needs Segmentation and Targeting The Role of Resources in Evaluating Market Opportunity Assessing the Attractiveness of a Market Opportunity EBay’s Market Opportunity Conclusion

40. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–13: EBay’s Financial Growth Millions of dollars Source: EBay Annual Report

41. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–14: Market Share — EBay Controls Majority Share of Total Online Auction Revenue Source: Nielsen/Net Ratings

42. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–15: EBay — Defining the Value System

43. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–16: EBay — Unmet and Underserved Needs Conduct preliminary research on items Bid Win? Seller Auction House / Dealer Buyer Realize he or she would like to sell something Like to browse or have a specific interest or need Research the value of the item and a possible channel for exchange Research venues / channels for procurement Choose exchange agent and negotiate terms Choose procurement channel Establish and agree to selling / buying process Deliver merchandise Determine appropriate schedules and locations Set auction schedule and choose venue Attend auction Hold auction Receive payment Pass a percentage of proceeds to seller Pay Receive payment Receive merchandise Take commission and fee Notification of when specific items are being sold Easy channel / venue access Objective listing agent Passive search and decision process Easy listing process and objectives Ability to list modestly priced items Improved availability and access Simplified shipping; elimination of two-stage process Time to conduct due-diligence research on items Time to think about purchase Ease of payment Reasonable agent fees Minimized time lag between merchandise surrender and compensation Prepurchase Purchase Postpurchase Traditional Auction Process Customer’s Unmet and Underserved Needs

44. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–17: EBay Buyer Potential High Income Moderate Income Limited Income Active deal makers with means Active frugal collectors Active frugal collectors Price-sensitive Active frugal collectors Active frugal collectors Passive collectors Ease Convenience Limited accessibility or options History of Responding to Promotions Top Priority Secondary Priority Tertiary Priority Identifying key customer segments

45. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Exhibit 2–18: EBay Overall Opportunity Assessment Competitive vulnerability Magnitude of unmet need Interaction between segments Likely rate of growth Technological vulnerability Market size Level of profitability Positive factor Neutral factor Negative factor

46. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Chapter 2: Framing the Market Opportunity The Market Opportunity Analytic Framework Three Basic Value Types — Trapped Value, New-to-the-World Value and Hybrid Value The Use of the Customer Decision Process to Identify Unmet and Underserved Needs Segmentation and Targeting The Role of Resources in Evaluating Market Opportunity Assessing the Attractiveness of a Market Opportunity EBay’s Market Opportunity Conclusion

47. Last Updated: 04/10/03 Copyright  2003 by Marketspace LLC Framing the Market Opportunity — Conclusion A firm needs to follow a rigorous approach to correctly isolate market opportunities — the market opportunity analysis framework is a six-stage process that addresses this need The six stages of the framework are: 1) investigate opportunity in an existing or new value system, 2) identify and choose priority customer segments, 3) determine target customer segments, 4) assess resource requirements to deliver the offering, 5) assess competitive, technological and financial attractiveness of opportunity and 6) conduct a go / no-go assessment In assessing the attractiveness of an opportunity, four dimensions should also be considered: 1) competitive intensity, 2) customer dynamics (e.g., unmet needs, likely rate of growth, etc.), 3) technological vulnerability and 4) microeconomics (industry size and profitability)