january 13, 2005

1

© 1998-2005, Arvind Rangaswamy (All Rights Reserved)

January 13, 2005

e-Marketing

Conceptual OverviewArvind Rangaswamy

Web address: www.arvind.infoemail: [email protected]

2


Outline for Today’s Session

Emerging technology environment Emerging market environment

Developing strategies aligned to current technology and market environments

Product strategies Personalization/Customerization Bundling

Pricing strategies Differential pricing Dynamic pricing Flexible pricing

3


Facilitators• Government• InterNIC• ISO• The Internet

SocietyInternet Services

Infrastructure

Hardware Infrastructure

Content and Software Infrastructure

e-Marketing Applications

You/Your company cannow plug into a massiveexisting technologyinfrastructure

Database providersGoogle.comYour companyWeb services

News/Entertainment Providers NetscapeSAPMicrosoft…

Telephone Co.ISP’sCable Co.CISCO

UUNETSprintlinkBBN Planet

3

Technology EnvironmentThe Plug-In Architecture

4


As enabling technologies

converge toward single

standards(e.g., MS Office,

Java, MP3)

The markets they serve expand and fragment

Time

Standardization of TechnologiesFragmentation of Markets

5


• Initiating contact

• Establishing terms of trade

• Exchanging value

• Establishing relationships

• Initiating contact

• Establishing terms of trade

• Exchanging value

• Establishing relationships

• Digital Networked Convergence

• Disappearing boundaries (temporal, geographic, across firms, across functions, etc.)

• High fixed costs/low marginal costs (especially for digital products)

• Economies of scale in both supply and demand

• Separation of content, context, infrastructure, and brand

• Customer-centric markets

• Digital Networked Convergence

• Disappearing boundaries (temporal, geographic, across firms, across functions, etc.)

• High fixed costs/low marginal costs (especially for digital products)

• Economies of scale in both supply and demand

• Separation of content, context, infrastructure, and brand

• Customer-centric markets

Supply

Demand

The New Market Environment

CUSTOMER

MARKET

SOCIETY

ECONOMY

INDUSTRY

COMPANY

YOU

5

6


The Increasing Need forStrategy/IT Alignment

Mar

ket

sC

orp

orat

e

IT

Architecture

Processes ResourcesProcesses/Capabilities

Resources

Governance

IT Scope

Systemic Competencies

ITGovernance

Distinctive Competencies

(Why?)

Business Scope

(What?)

Governance(How?)

Business Strategy IT Strategy

Business operations IT operations

7


Lessons inStrategy/IT Alignment

Spending smart is more important than being first in the industry – focus IT spending on enhancing innovation, differentiation, customer responsiveness, and productivity.

IT must reinforce business strategy, and business strategy must help identify winning IT investments.

Leverage IT for scale and scope. Leverage IT with protected intellectual property. Embed IT in processes that are inimitable, and/or not

transparent to competitors.

Put the right people and processes in place before putting the right IT system.

Source: Based, in part, on a McKinsey article titled Getting IT spending right this time (2003).

8


What Wal-Mart did on 9/11

Within a few hours of the 9/11 attacks, sales of flags and other patriotic items started skyrocketing.

On Sept 11, the 2,700 Wal-Mart stores sold over 100,000 flags (compared to 6,400 the previous year on that day), and over 200,000 on Sept 12th.

Detecting these increases, Wal-Mart locked up all the supplies it could find before its competitors (like Kmart) could react.

Real-time tracking and analysis helped “adapt” to a demand surge.

9


How Texas Instruments Developed TI-92

Product design and specs put on web site, and teachers participating in the T3 (Teachers Teaching with Technology) group were invited to provide suggestions.

A flurry of email suggestions resulted in engaging this group in “adaptive” design of the product.

TI-92 became the best selling calculator introduced by TI.

Lesson: The market owned the product. Therefore, the product owned the market!

10


How P&G Test MarketedCrest WhiteStrips

In addition to conventional test marketing in selected cities, P&G also tested Crest Whitestrips in direct channels (web and QVC).

From Sept 2000 to May 2001, before national launch, P&G’s web site sold 140,000 units and logged 1.1 million visitors.

The web site helped P&G adapt its marketing programs for the product in several ways:

Helped define the target segment (female (70%) and over 35)

Created buzz for the product before national launch

….

11


Emergence of Customer-Centric Markets

Transparency and interactivity are re-shaping the processes by which supply and demand are synchronized in today’s markets.

Increasing “atomization” of transactions (e.g., personalized products and services).

Anytime, anywhere commerce is becoming commonplace in the US.

12


From Marketplace to MarketspaceOnline Exchange Processes

Global, 24/7 Richer content and context for exchange (The “reach”

vs. “richness” tradeoff minimized) Lowered costs of routinized transactions Two-way interactions Access to larger number of buyers and sellers Elements of the exchange process are atomized Tighter integration of market exchanges with firm

operations More flexible ways to determine the terms of exchange

Auctions, Reverse auctions Negotiations Fixed price

13


The Exchange Processes for Digital Products are Being Completely Redefined

Digital products (e.g, software, music, entertainment that can be delivered on the Net)

reproducible at low marginal costs by anyone in the marketing channel (including customers)

low distribution costs (on the Internet)

are non-destructible

are customizable

have positive and negative externalities

result in high heterogeneity in customer value (thus, they need to be priced according to value, not cost)

14


New strategies for managing digital products Licensing

Metering (Web services)

Bundling products (tied to search engines)

Delivering interactive “product experiences”

Frequent product updates

Lower prices

The Exchange Processes for Digital Products are Being Completely Redefined

15


You can add digital content to any product. This separates choice from purchase for many non-digital products.

High-ticket items (e.g., Car)

Experience goods (e.g., Dentist)

How about for other products?

Complex products (e.g., Home alarm systems)

Low-involvement products (e.g., Groceries)

A cup of cappuccino

Online Browsing for non-digital products facilitate informed decisions.

The Exchange Processes for Non-Digital Products are Being Transformed

16


Sources of Information forConsumers

17


Personalization andCustomerization

Personalization/1-to-1

Standardization

Customerization

MassCustomization

Lo Hi

Operational customization

Mar

ket

ing

cust

omiz

atio

n

L

o

Hi

18


Customerization: Opportunity for Matching Offerings to Customer Wants

The Internet (combined with other IT components) can improve the match between customer needs and company offerings. It is impacting how all three levels of needs are satisfied, with a stronger impact on how wants are satisfied.

Customers are becoming more value-sensitive because of the richer, timely, and contextually relevant information available online.

Timely

Wants

Preferences

Core needs

Timeless

Hierarchy ofNeeds

19


IncreasingDifficulty

CustomizedContent

CustomizedPrice, Package, Lead times, etc.

CustomizedProduct

CustomizedCustomer Experiences

Customized Relationship

Layers of Customization

20


Seems Like Everything Can Now beObtained On Demand!

– TV and Movies on demand

Source: Wired, October 2002 21

22


Potential Benefits of Customerization

For customers:

Better meets their needs and wants. Customers can influence part of the design and production

process.

For companies:

Offers opportunity to differentiate brand from competing brands. Builds brands by building relationships with customers (through

higher customer involvement, satisfaction, and loyalty) Reduces/eliminates inventory. Provides up-sell and cross-sell opportunities. Provides, for the portion of the business that is manufactured for

inventory, more accurate market information on changing customer tastes.

Stimulates continuous innovation.

23


Some Downsides to Customerization

Increases customer expectations.

Customers may not be willing to pay more.

Needs more integration across company functions, departments, and partners.

Increases complexity of choices for customers, and complexity of providing customer support for companies.

24


Product BundlingNeed a Car? The Auto Market Online

25


Need a Loan?The Loan Market Online

26


Need a car and a loan?Opportunity for a Bundler

27


Product Augmentationfor Non-Digital Products (1-800-Flowers)

Flower / Gift Decision Process

Need Recognition

Search For Ideas and Offerings

Purchase Decision

Message Selection

Post Sales Support and Perks

Education on Flowers and Decoration

Gift reminder service Holiday specials Everyday celebrations

suggestions Special occasion suggestions

Gift guru Favorite gifts Gift frequency Gift impossible Gift baskets Corporate gift services

Ideas and Information

Post-Sales Support

Product price Product picture Product description Delivery information Delivery availability

Gizmo fully-animated greeting cards

Physical cards in gifts

Order receipt email eQ&A online customer

service FAQ Customer service

inquiry formPerks

Miles earned with flower purchases

Free gifts Discounts at AOL &

BN with flower purchases

Member specials

“Care and handling” “Do it yourself” Special events and

educational workshops held at stores

Floral ideas Garden ideas Home ideas Gift ideas Gourmet ideas Store locator Recommendations by budget Best sellers

Evaluation of Alternatives

Gift Recommendations

Shopping basket E commerce transaction Special shopping features

– Delivery outside U.S.– 1-800-lasfloras.com

Product Offering

Source: Adapted fromRayport and Jaworski

28


Schwab Learning Center Live Events Principles of Investing Understanding Market Cycles “Did You Know” Q&A

Schwab Signature Services

Schwab AdvisorSource Options Service Global Investing Service

Online chat with Customer Service Representatives

Customer Service via phone Customer Service via email Customer Service at Branch My Watch List

Margin Loans Money Transfers Automatic

Investing Options Service After Hours

Trading Account

Protection Bill Payment

Overall General Goal

Planner Investor Profile Sample

Investment PlansRetirement Retirement

Planner IRA Analyzer

Offering

On-Line Investment Process

Get educated

about investing Plan

investments

Decide on Investment

Perform Investment

Post Investment

Support

Perform Research

Estate Estate Tax and

Probate Calculator Alternatives ComparisonCollege College PlannerTax Tax Strategies IRS Withholding

Calculator

Overall Quotes and Charts Analyst CenterStocks and Options Stock AnalyzerBonds and Treasuries Schwab BondSource

ServicesCDs and Money Markets SchwabOne

Annuities Schwab Select

AnnuityLife Insurance Insurance Needs

Calculator

Source: Adapted from Rayport and Jaworski, e-Commerce

Product Augmentationfor Digital Products (Schwab)

29


Internet’s Impact on Pricing

Differential pricing

Flexible pricing

Dynamic pricing/New price discovery processes

30


Traditional Pricing Meets New Realities

Traditional Economic theory suggests that

Price = Marginal cost

is the likely outcome of competitive markets.

Traditional Economic analysis also suggests that a necessary condition for Pareto- efficiency is:

Marginal cost = Marginal willingness to pay.

Question: What happens under high fixed cost and near zero marginal cost? (This is the case with many digital products).

31


Solution: Differential Pricing

Making every customer pay marginal costs will not be efficient in this case.

An alternative approach for seller is Differential pricing/ Nonlinear Pricing:

-- yield/revenue management

-- two-part tariffs, as used by ISPs such as AOL

-- two-tier pricing through loyalty cards.

Internet and other IT are making it easier for sellers to implement differential pricing in many categories, such as perishable products, and products with high fixed costs.

32


Price Differentials

First Degree — Charge consumers exactly what they are willing to pay for product

(e.g., college tuition)

First Degree — Charge consumers exactly what they are willing to pay for product

(e.g., college tuition)

Second Degree — Offer consumers a menu of options at different prices

that correspond to consumers’ willingness to

pay for the different options (e.g., volume pricing)

Second Degree — Offer consumers a menu of options at different prices

that correspond to consumers’ willingness to

pay for the different options (e.g., volume pricing)

Third Degree — Divide consumers into distinct

segments, charging different prices to different segments (e.g., movie-theater pricing)

Third Degree — Divide consumers into distinct

segments, charging different prices to different segments (e.g., movie-theater pricing)

PriceDiscrimination

Source: Textbook

33


Consumer’s Demand for Electronic Music

Consumer’s Demand for Electronic Music

Value of . . . First Single: $6.00 Second Single: $5.00 Third Single: $4.00 Fourth Single: $3.00 Fifth Single: $2.00 Sixth Single: $1.00 Seventh Single: $0.50

Production cost of a single: $1.50

Buy first three singles at $4 per single After three singles have been purchased, buy two

additional singles for $2 each $4 is “left on the table” (consumer was willing to pay $20

for five songs)– Revenue: $16– Profit: $8.50

A flat subscription fee of $12.50 can be charged. In addition to the flat subscription fee, a fee of $1.50 per

single can be charged. Given its demand schedule, the consumer is willing to

pay the subscription fee and purchase five singles at $1.50 per single; recall that the consumer values the five singles at $20

– Total Revenue: $20– Total Profit: $12.50

Economically speaking, it is optimal to use a flat fee subscription model only when the marginal cost of producing the good is equal to zero.

Volume Discounts and Two-Part Pricing

Simple Volume Discount Pricing PlanSimple Volume Discount Pricing Plan

Two-Part PricingTwo-Part Pricing

Source: Textbook

34


Low-ValueCustomers

AppropriateLow-cost

Service Level

High ValueCustomers

AppropriateHigher Cost

Service Level

Balance the value provided to a customer with the price received from the customer.

Value from….Value to Value from….Value to

Service

Service Service

Service

The Need for Balancing Differential Pricing with Differential Service

35


Flexible Pricing

Bundled prices

“Pay per service”

Lease versus buy

...

36


Financial

News Legal News

Current News

Value Bundle

E-Information’s Price

$3,000 $1,500 $1,250 $5,000

Company A’s Valuation

$3,000 $1,500 $500

Company B’s Valuation

$3,000 $750 $1,250

Company C’s Valuation

$3,250 $750 $750

Strategy Result

Company A: Purchases value bundle. Implicitly pays $1,500 for legal news, $500 for current news.

Company B: Purchases value bundle. Implicitly pays $750 for legal news, $1,250 for current news.

Company C: Purchases financial news. Pays more ($3,250 vs. $3,000) for financial news relative to Companies A and B.

Bundling Strategy

37


Price Discovery(Involves both Buyers and Sellers in Price Determination)

Buyers

Exchange/Marketplace

Chemconnect.comNewView Technologies

(newview.com)VerticalNet.com

Auction

Amazon.com AuctionseBay.com

Yahoo!Auctions

Bidding

FreeMarketsPriceline

Haggling/Negotiation

Intagio.comBarter Business (bbu.com)

www.framesoft.com

SellersOne Many

Many

One

38


Online Price Dispersion(From www.nash-equilibrium.com)

Relative Dispersion is the coefficient of variation in prices charged by different sellers for the same products. It is zero when all sellers charge the same price for a product.

39


Internet Competitiveness(From www.nash-equilibrium.com)

The Internet Competitiveness Index is a comprehensive measure of the level of competition. Increases indicate more competitive pricing, while decreases indicate a lessening of competition.

40


Why is Price Dispersion So Large?

Random variations?

Use of mixed strategies (regular price + promotion price)?

Price premium extracted by brands providing better value (Value sensitivity?)

Price discrimination based on consumers’ opportunity costs of time?

january 13, 2005

Documents