Marketing Analytics - KMBMK05 Unit 2

 

UNIT-2

Estimating Demand Curves: Estimating Linear and Power Demand Curves

Demand curve estimation refers to the exercise of estimating the demand curve, typically the market demand curve (as opposed to the individual demand curve) for a good. Demand curve estimation is typically done for the following purposes:

·         It may be done by sellers (and in some cases buyers) with significant market power, so that they can decide the appropriate price to set. Note that buyers or sellers who do not have market power simply set the price as the market price and know that whatever quantity they produce will get sold. In contrast, in the extreme case of a monopoly, the seller chooses both the price and quantity but is not guaranteed to sell everything. In order to be so guaranteed, the seller needs to have a plot of the market demand curve so that the (price, quantity) pair can be chosen as a point on the demand curve.

·         It may be done by buyers or sellers in order to better estimate prices and quantities to buy or sell for the future. Note that this is advantageous even in a perfectly competitive market: with knowledge of the future demand and supply curves, sellers can estimate future prices, and therefore optimize their long-run choices (i.e., make appropriate fixed cost investments).

 

·         Linear Demand Curve

·         Understanding linear demand curves is critical to learning the basics of how a market works and running a successful business. Being able to use a demand is almost like telling the future, because it predicts consumer behavior. However, in the real world, most curves are nonlinear, so you constantly need to analyze demand for your products.

·         Identification of Linear Demand Curve

·         A linear demand curve is the graphical representation of the relationship between the price of a good and the quantity of that good consumers are willing to pay at a certain price at a point in time. The slope, or rate that the line rises or falls, is equal to the difference between two quantities of a product — usually represented on the horizontal axis on the graph — divided by the difference price of two points of the graph — usually on the vertical axis.

·         Features of Linear Demand Curve

·         Linear curves rarely exist in the real world because demand depends in large part on elasticity of demand, or how consumers react to a change in price. Also, the relationship between demand and price is not always constant. Some products are in demand regardless of price. For instance, customers probably use about the same amount of electricity regardless of price because it is essential to living. On the other hand, televisions are a luxury, so consumers usually become exponentially more willing to buy a unit as the price drops.

·         Tip for Linear Demand Curve

·         Look at data from your past sales to graph a demand curve. You may want to hire a market research firm to help you set the price on your goods or calculate production level if you do not have sales data. You may also need to use your own estimation skills and to factor in the economic environment. For instance, Christmas decorations and new toys usually spike in price right before the holidays but fall during the beginning of the year because demand plummets. In the world of supply and demand, price increases as demand increases, and vice versa.

            

 

Optimize Pricing

Price optimization is using data from customers and the market to understand how you should most effectively be pricing your product. The optimal price point is the price where companies can best meet their objectives, whether that means increased profit margins, customer growth, or a blend.

Information used in price optimization includes things like:

·         Customer survey data

·         Demographic and psychographic data

·         Historic sales data

·         Operating costs

·         Inventories

·         Machine learning outputs

·         Subscription lifetime value and churn data (for subscription business models)

 

·         Pricing optimization is a similar process to dynamic pricing strategies used in hospitality, travel, ecommerce, and other industries, although dynamic pricing tends to change much more rapidly as companies tweak pricing to match real-time demand.

·         Finding the right price for your product—a price that maximizes value for customers and profit for you—starts with gaining a deep understanding of your customers. You need to understand who your best customers are, what features they like, and what features they need. Once you understand that, you can align your pricing with what they value, tracking the results of the price changes you make and improving over time.

(i)                 Get to know your customers

Optimizing your pricing is all about the data—both qualitative and quantitative. Hard data is the only way to find out how much customers are willing to pay for your product, and it’s the key to breaking free from the guessing cycle.

Quantitative data, like transactional data, customer reviews, supply and demand data, churn rate, MRR, and more show you how you’re doing and what needs to be changed. Software like Price Intelligently can help you make sense of those metrics and turn them into pricing insights by slicing and dicing your data based on demographic, psychographic, and customer preferences.

Just as helpful, qualitative data comes from talking to customers. Surveys are great, but they’re no match for picking up the phone and actually talking to customers, asking them about topics such as their price sensitivity and what features or benefits they value most in your product.

(ii) Quantify value

Once you’ve collected all your customer data, it’s time to work out what “value” actually means to your customers. That means working out your value metric. Your value metric is essentially what and how you’re charging for your product—identifying and pricing along your proper value metric is the difference between surviving and thriving.

(iii) Analyze the data

You’ve collected some customer data and worked out what your customers value—now it’s time to look for patterns in the features, benefits, price points, and value metrics that drive or detract from value. You’ll also find out how willing different segments and personas are to pay different prices for your products.

Use your findings to create tiers and proper packages for your product or services. Each tier should be priced along your value metric, and should align with your different buyer personas so that you’re offering the right amount of product or service to each customer segment.

(iv) Adjust pricing and monitor

Even once you’ve set your prices, you’re still not done—the value you provide versus your competitors’ is constantly changing, so you need to be constantly monitoring and adjusting your pricing.

Pricing is an ongoing process. You should use your pricing strategy to eliminate as much doubt as possible. Think back to our dartboard example from earlier—adjusting your pricing helps eliminate sections of the dartboard, focusing in on the right region for your dart to land as you learn more about what works.

You need to continually collect data and analyze the value customers are getting from your product to make sure that what you’re offering still meets your customers’ needs and pricing desires. Make sure you keep a very close eye on your pricing, and see how customers respond. If need be, re-evaluate and change things up—but don’t be too quick to switch, since you might alienate potential or existing customers.

 

 

Need to optimize for

The goal of pricing optimization is to find that perfect balance of profit, value, and desire. Since you can’t control which products and features customers want, and adding valuable product features takes time and effort, most companies start finding that balance by setting two things: the starting price of their product or services, and any discounts or promotions they might offer.

(i) Starting prices

Your starting price, or base price, is important since it lets customers know whether your product or service is worth their time and investment. Starting prices should be optimized to match the baseline demand for your product before any discounts or promotions are applied. Optimizing the starting price works well for companies with products and services that remain fairly stable over time, like groceries, office supplies, or even SaaS products.

(ii) Discounted prices

If you’re in sales, you need to know what works best to pull in new customers. Offering your product at a discount—or, in some cases, even offering a freemium version—is a great way to bring in new customers (customers acquired through freemium offerings cost nearly half as much to acquire as those who sign up for paid offerings directly).

(iii) Promotional prices

What promotional offers would serve you and your customers best? Will markdowns create any additional profit, or are you better off charging the starting price? How big of a discount should you offer below your starting prices? How long will something take to sell at a specific price point? Optimizing your promotional prices can help boost sales for newly introduced products and promotional bundles—for example, a SaaS company launching a new product, or bundling multiple products.

Why many companies fail at pricing?

To make a long story short, most companies aren’t willing to put in the effort to optimize their pricing decisions. All the customer research needed to figure out the right valuations takes time and effort. Surprisingly, the average company only spends less than ten hours per year on their pricing strategy, which is not enough.

Instead, companies turn to strategies like guessing, relying on discounts, and not pricing based on value.

(i) Guessing

Many companies simply guess what an optimal price point would be instead of using analytics and metrics that their customers have given them. It’s an insidious cycle. With the right positioning and promotion, even guessing at your prices will work to some extent—it’s easy to take that as a sign that your pricing is “good enough.” Ultimately, though, you are leaving money on the table.

(ii) Misunderstanding tiers

Many companies don’t know how many different pricing tiers or levels they should incorporate into their pricing structure. It’s a common misconception that more tiers equals more conversions. Data shows that too many or too few options pushes away potential customers, with a clear decrease in conversion rates as the number of tiers gets higher.

(iii) Relying heavily on discounts

The problem with discounting is that many companies wield discounting like a sledgehammer instead of a scalpel. Yes, it juices your acquisition metrics in the short term, but over time discounting can reduce your SaaS lifetime value by over 30%. Discounted customers have just over double the churn rate of those who pay full price—they’ve either been trained to devalue the product, or they just weren’t the right customers in the first place.

 

(iv) Not pricing for value

Value-based pricing is the best price optimization model since it includes both you and your customer’s optimal prices. The goal with value-based pricing is to figure out how much each customer is willing to pay for your product, so you can maximize revenue by charging each customer exactly what they’re willing to pay. Figuring out what that price should be, though, isn’t easy.

(v) Target

That’s why so many companies lose out on revenue by setting their prices based on those of their competitors or on their costs—they don’t want to put in the effort.

 

 

Incorporating

Incorporation is the legal process used to form a corporate entity or company. A corporation is the resulting legal entity that separates the firm’s assets and income from its owners and investors.

Corporations can be created in nearly all countries in the world and are usually identified as such by the use of terms such as “Inc.” or “Limited (Ltd.)” in their names. It is the process of legally declaring a corporate entity as separate from its owners.

Incorporation has many advantages for a business and its owners, including:

·         Protects the owner’s assets against the company’s liabilities

·         Allows for easy transfer of ownership to another party

·         Achieves a lower tax rate than on personal income

·         Receives more lenient tax restrictions on loss carry forwards

·         Can raise capital through the sale of stock

Throughout the world, corporations are the most widely used legal vehicle for operating a business. While the legal details of a corporation’s formation and organization differ from jurisdiction to jurisdiction, most have certain elements in common.

 

The Creation and Organization of Corporations

Incorporation involves drafting “articles of incorporation,” which lists the primary purpose of the business and its location, along with the number of shares and class of stock being issued if any. A closed corporation, for instance, would not issue stock. Companies are owned by their shareholders. Small companies can have a single shareholder, while very large and often publicly traded companies can have several thousand shareholders.

As a rule, the shareholders are only responsible for the payment of their own shares. As owners, the shareholders are entitled to receive the profits of the company, usually in the form of dividends. The shareholders also elect the directors of the company.

The directors of the company are responsible for day-to-day activities. They owe a duty of care to the company and must act in its best interest. They are usually elected annually. Smaller companies can have a single director, while larger ones often have a board comprised of a dozen or more directors. Except in cases of fraud or specific tax statutes, the directors do not have personal liability for the company’s debts.

Other Advantages of Incorporation

Incorporation effectively creates a protective bubble of limited liability, often called a corporate veil, around a company’s shareholders and directors. As such, incorporated businesses can take the risks that make growth possible without exposing the shareholders, owners, and directors to personal financial liability outside of their original investments in the company.

·         Incorporation is the legal process by which a business entity is organized and brought into existence.

·         The process of incorporation involves writing up a document known as the articles of incorporation and enumerating the firm’s shareholders.

·         In a corporation, the assets and cash flows of the business entity are kept separate from those of the owners and investors, which is called limited liability.

Complementary Products

A complement refers to a complementary product or service used in conjunction with another product or service. Usually, the complementary product has little to no value when consumed alone, but when combined with another product or service, it adds to the overall value of the offering. A product can be considered a compliment when it shares a beneficial relationship with another product offering, for example, an iPhone complements an app.

 

Complementary Products

The joint demand nature of complementary products causes an interplay between the consumer need for the second product as the price of the first product fluctuates. In economics, this connection is called negative cross-elasticity of demand. So, as the cost of a product increase, the user’s demand for the complement product decreases. Further, as consumer demand weakens, the market price of the complementary product or service may fall. For example, when the price of a product rise, the demand for its complement falls because consumers are unlikely to use the complement product alone.

 

Examples

For example, should the price of hot dogs increase, it can cause a decrease in the demand for hot dog buns. Since the cost of hot dogs has an inverse relationship with the demand for hot dog buns, they are considered complementary products. Consumers may substitute hamburgers for their picnic, and weak complementary mustard and ketchup products will see little impact on the rising price of the hot dog.

Additionally, complementary pairs are not two-sided and often have one-sided effects. Using another example, if the price of car tires decreases, it will not necessarily increase the demand for cars. However, if the price of automobiles decreases, it will increase the demand for car tires as more are sold.

Real World Example

Complements are often used by merchants to increase sales. Supermarkets place related food products next to each other, such as tortillas next to refried beans, to increase sales of each. Merchants might also sell a product at a low price but charge more for add-on items that complement the first item.

Complementary products are often more lucrative for producers versus a substitute product. Netflix, Inc.(NFLX) could be considered an alternative product for traditional cable. However, with the potential unbundling of cable channels, financial analysts believe that Netflix may move from a substitute product to a complementary product.

The unbundling of channels refers to consumers’ ability to pick and choose which cable channels they pay for rather than being required to purchase an entire cable package. The belief that Netflix may become a complementary product to cable once it decides to unbundle has caused analysts like those at CNBC to estimate that the company will add 70 million subscribers by the end of 2020. Unbundling reduces the overall cost of cable, and more users are expected to subscribe to Netflix in addition to their chosen cable channels.

Complements and Elasticity

There are weak complementary products and strong complementary products. Weak complements have a low cross-elasticity of demand. For example, if the price of coffee increases it will only have a marginal impact on reducing the consumption of cream. In the case of Apple increasing the price for iPhones, this would reduce sales of iPhones and the demand for iOS apps.

Complementary products differ from substitute products, which are different products or services that satisfy the same consumer need. The Apple iPhone is a substitute for Samsung phones. These two products can, therefore, replace each. So, rather than complement each other they become substitute products. For this reason, if the price of the iPhone increases, the consumer demand for a substitute will also increase.

·         A complementary product is one used in conjunction with another product or service.

·         Such a product may have little value without its complement.

·         When the price of a particular product rises the demand for its complement drops because consumers are unlikely to use the complement alone.

 

 

Using Pricing Subjectively to Estimate Demand Curves

Suppose due to changes in income, population and other factors, the theoretical demand curve shifts from D₁ to D₂, D₂ to D₃ to D₄ in Figure 1. The corresponding supply curve at each of these points occupies positions S₁ to S₄. The price-quantity obser­vation which is recorded in period 1 (say, 1981) is given by the intersection of D₁ to S₁, namely, A. The next one is determined by the intersection of D₂ and S₂ at B (in 1982).

Thus we get a series of observa­tions A to D for four years, viz., 1981, 1982,1983 and 1984. These together trace out a demand curve DD. But this is not the same demand curve discussed in theory. More specifically, it is not reversible. It is improbable that we can move back from C to B and B to A.

It is unlikely that the precise combination of conditions which prevailed at these points will be repeated. In practice, the demand and supply curves may not move consistently in the same direc­tion, as is assumed in this diagram. They may move up or down rather erratically.

 

In Figure 11.1, points A, B and C are not three points on a single demand curve for, say, product X. Each point is on a different demand curve — one that is shifting over a period of time. So just by con­necting them we cannot trace out the product de­mand curve.

A firm may interpret the line dd (which is a Iocus of points A, B, C and D) as the demand curve by mistake. Thus it might assume that a reduction in price from P₁ to P₂ increases sales from Q₁ to Q₂. An expansion of demand may well justify the price re­duction.

But, in practice, such a price cut will result in a much smaller increase in demand. The true de­mand curve (D₁) is much less elastic than the line dd. Thus, a price cut is much less desirable than it appeared at the first sight.

Simultaneous Relationship

So there is interrelationship between demand and supply curves.

Now, data on prices and quanti­ties purchased can be used to estimate a demand curve only under two sets of conditions:

(1) The de­mand curve has not shifted, but the supply curve has shifted; or

(2) We have almost complete infor­mation to determine just how each curve has shift­ed during the observation period (which covers four years in this case).

Suppose there is a technological change in the production of X. So costs in the industry will fall sharply within a short period but demand condi­tions are likely to be stable. The situation is illus­trated in Figure 2. Here the demand curve, which initially was unknown, in now assumed to be stable. The supply curve shifts from S₁ to S₂, S₂ to S₃ and S₃ to S₄.

It is clear that each price/quantity point represents the intersection of the supply and demand curves. Since all the demand determinants except price are assumed to be stable, points A, B, C and D must be on the same demand curve. So the de­mand curve DD can be estimated by connecting the four points.

 

Price Bundling and Nonlinear Pricing: Pure Bundling and Mixed Bundling

Price bundling is combining several products or services into a single comprehensive package for an all-inclusive reduced price. Despite the fact that the items are sold for discounted prices, it can increase profits because it promotes the purchase of more than one item.

Pricing Bundling Examples:

·         Detergent and dryer sheets

·         New phone with a data plan

·         Bake at home pizza and a large soda

Deeper Insights

For example, mobile phone retailers frequently bundle the prices of several products and services together for their new customers. They offer the phone itself with a package that also includes the 2-year phone plan, internet access, and phone charger. This bundle benefits the customer because it provides them with all the tools they need for their phone all at once and it benefits the mobile phone retailer because they are selling the customer supplementary products and services other than just a phone.

The main appeal to sell things in a bundle is that you can introduce new or complementary products packaged with a consistent high seller. Many businesses do this to try to promote new products and get customers intesrested enough to buy more.

Advantages and Disadvantages

Bundle pricing has many advantages. The most important one is it that it allows companies to sell their lesser known or unpopular products with the popular ones. It will also help attract different kinds of buyers: buyers looking for deals, buyers looking for convenience or buyers looking for advice on items that complement each other. Some consumers will be spending more than they initially wanted when they see an offer they like (if you offer the product that they already wanted to buy with something they wanted to try but never got to it). Product bundles have lower marketing cost because you are promoting two or more products with an effort and resources for one.

No matter how great a strategy is there is always a downside to it. The biggest disadvantage for this one is that it can lead to cannibalization of your products that can be bought outside of the bundle. For example, you are selling a laptop and a printer together, but also separately. Because of this more printers could be sold through the bundle than on its own. This does cause lower profit for that particular product. There is also a chance that some consumers won’t buy something if it can’t be bought separately because they feel forced to buy more. So it’s crucial to choose the right products for the bundle.

Product bundles are very popular among customers. They make their lives easier because they save them time looking all around the store for each product, they help them decided on products they weren’t sure about trying them, etc. When done right, bundle pricing strategy drives more sales and profit for the companies, which is why it’s one of the most used ones.

There are two basic bundle pricing strategies, which are pure bundling and mixed. Let’s see what each of them means and how you can apply them.

1.    Pure Bundling

Pure bundling is when products are only sold together. In some cases, products don’t exist outside the bundle. The best example for that are TV channels offered by cable providers. They offer a number of packages and each one has a different combination of channels. If you want a specific one, that is offered in only one package, you have to get all of the others from that one. For example, if you want HBO, you will have to pay for HBO2 and HBO3 too, and other channels that go with it (depending on the provider). When you think about it, it makes sense for such products.

Pure bundling has three subcategories: joint bundling, leader bundling, and mixed-leader bundling.

·         Joint bundling is when the two products are offered together for one bundled price.

·         Leader bundling is when a leader product is offered for a discount if purchased with a non-leader product, accessory, etc.

·         Mixed-leader bundling is a type of leader bundling with the added possibility of buying the leader product on its own.

 

2.    Mixed Bundling

Mixed bundling, also called custom bundling, is when customers are offered to purchase a bundle or separate products on their own. Consumers are offered complete cable, internet, and telephone packages. The price will depend on the level of service that the package provides. If you choose high-speed internet and maximum channels, it’s going to be much more expensive than getting a package with low-speed internet and minimum channels. Each of these services can be bought separately, but it’s just like the restaurant example – it will be more expensive.

 

NONLINEAR PRICING

Nonlinear pricing is a broad term that covers any kind of price structure in which there is a nonlinear relationship between price and the quantity of goods. An example is affine pricing. A nonlinear price schedule is a menu of different-sized bundles at different prices, from which the consumer makes his selection. In such schedules, the larger bundle generally sells for a higher total price but a lower per-unit price than a smaller bundle.

 

 

 

Determine Optimal Bundling Pricing

In a bundle pricing, companies sell a package or set of goods or services for a lower price than they would charge if the customer bought all of them separately. Common examples include option packages on new cars, value meals at restaurants and cable TV channel plans. Pursuing a bundle pricing strategy allows you to increase your profit by giving customers a discount.

 

Based on Consumer Surplus

 

Bundle pricing is built on the idea of consumer surplus. Every customer has a price that he is willing to pay for a particular good or service. If the price you set is equal to or lower than what the customer is willing to pay, the customer will buy, as he considers the price a bargain. The difference between what the customer pays and what the customer was willing to pay is known in economics as the consumer surplus. Bundle pricing is an attempt to capture more of your customers’ consumer surplus.

 

Personalized Pricing

An example: Your car wash offers two services, exterior cleaning and interior cleaning. Using market research and your own experience, you’ve concluded that there are two primary groups of customers. Those in group A are concerned about appearances and are willing to pay up to $15 for the exterior package but only $8 for the interior. Members of group B are less appearance-oriented, but they value comfort; they’re willing to pay $10 for the exterior package and $9 for the interior.

If you were able to charge everyone exactly what they’re willing to pay, you could get $23 from each customer in group A and $19 from each in group B, for a total of $42 from a pair of A and B customers. With personalized pricing, there would be no consumer surplus.

Bundling Benefit

If you have no reliable way of telling whether customers are in group A or group B when they come in, personalized pricing is impossible. In a bid to get each customer to buy both services, you’d charge $10 for exterior and $8 for exterior, as each group is willing to pay that amount for each service. Each customer would produce $18 worth of revenue, for a total of $36 from a pair of A and B customers. The consumer surplus in this case is $6. Look again at what each customer is willing to pay for the two services: $23 in group A and $19 in group B. If you set an interior-exterior bundle price of $19, you’d make $38 per A-B pair, capturing $2 of consumer surplus.

Other Advantages of Bundles

Offering products in bundles provides benefits beyond simply getting more revenue from each customer. It simplifies production and reduces errors. Think about a fast-food restaurant where customers can quickly order the No. 3 or No. 7 rather than separately order a sandwich, fries and maybe a drink. It also heads off pricing disputes with customers. A customer might be perfectly happy to pay an all-in bundled price, yet be turned off by a laundry list of charges that add up to the exact same dollar amount.

 

Nonlinear Pricing

Nonlinear pricing is used in a situation in which the cost of purchasing q units is not equal to the unit cost c per unit times q. Bundling (discussed in Chapter 5, “Price Bundling”) is a special type of nonlinear pricing because the price of three items is not equal to the sum of the individual prices.

Other common examples of nonlinear pricing strategies include:

· Quantity discounts: If customers buy ≤CUT units, they pay high price (HP) per unit, and if they buy >CUT units, they pay low price (LP) per unit. CUT is simply the “cutoff point at which the charged price changes.” For example, if customers buy ≤1000 units, you charge $10 a unit, but if they buy more than 1000 units, you charge $8 per unit for all units bought. This form of nonlinear pricing is called the nonstandard quantity discount. Another type of quantity discount strategy is as follows: Charge HP for the first CUT units bought, and charge LP for remaining units bought. For example, you charge $10 per unit for first 1000 units and $8 per unit for remaining units bought. This form of nonlinear pricing is called the standard quantity discount. In both examples the value of CUT = 1000.

Two-part tariff: The cost of buying q units is a fixed charge K plus $c per unit purchased. For example, it may cost $500 to join a golf club and $30 per round of golf.

Many companies use quantity discounts and two-part tariffs. Microsoft does not charge twice as much for 200 units, for example, as for 100 units. Supermarkets charge less per ounce for a 2-pound jar of peanut butter as for a 1-pound jar of peanut butter. Golf courses often use a two-part tariff by charging an annual membership fee and a charge for each round of golf.

Just as in Chapter 5 you used the Evolutionary Solver to find optimal price bundling strategies, you can use the Evolutionary Solver to find the profit maximizing parameters of a nonlinear pricing strategy. As in Chapter 5, you can assume the consumer will choose an option giving her the maximum (non-negative) consumer surplus. You can see that nonlinear pricing can often significantly increase your profits, seemingly creating profits out of nothing at all.

In this chapter you will first learn how a consumer's demand curve yields the consumer's willingness to pay for each unit of a product. Using this information you will learn how to use the Evolutionary Solver to determine profit or revenue maximizing nonlinear pricing strategies.

Profit Maximizing with Nonlinear Pricing Strategies

Throughout this chapter assume a power company (Atlantis Power and Light, APL for short) wants to determine how to maximize the profit earned from a customer whose demand in kilowatt hours (kwh) for power is given by q = 20 – 2p. It costs $2 to produce a unit of power. Your analysis begins by assuming APL will use linear pricing; that is, charging the same price for each unit sold. You will find that with linear pricing the maximum profit that can be obtained is $32. Then you will find the surprising result that proper use of quantity discounts or a two-part tariff doubles APL's profit! The work for this chapter is in the file Powerblockprice.xls. To determine the profit maximizing linear pricing rule, you simply want to maximize (20 – 2p) × (p – 2). In the oneprice worksheet from the Powerblockprice.xls file, a price of $6 yields a maximum profit of $32 (see Figure 6.1). The Solver model simply chooses a non-negative price (changing the cell that maximizes profit [Cell D12]). Charging $6 per kwh yields a maximum profit of $32.00.

Figure 6-1: Finding the profit maximizing single price strategy

     

 

Price Skimming

Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and then lowers it over time. As the demand of the first customers is satisfied and competition enters the market, the firm lowers the price to attract another, more price-sensitive segment of the population. The skimming strategy gets its name from "skimming" successive layers of cream, or customer segments, as prices are lowered over time.

How Price Skimming Works

Price skimming is often used when a new type of product enters the market. The goal is to gather as much revenue as possible while consumer demand is high and competition has not entered the market.

Once those goals are met, the original product creator can lower prices to attract more cost-conscious buyers while remaining competitive toward any lower-cost copycat items entering the market. This stage generally occurs when sales volume begins to decrease at the highest price the seller is able to charge, forcing them to lower the price to meet market demand.

Skimming is a useful strategy in the following contexts:

• There are enough prospective customers willing to buy the product at a high price.
• The high price does not attract competitors.
• Lowering the price would have only a minor effect on increasing sales volume and reducing unit costs.
• The high price is interpreted as a sign of high quality.

Marketing Analytics - KMBMK05 Unit 1

 

Unit -1

Marketing Analytics: Meaning and Characteristics

Marketing analytics is the practice of measuring, managing and analyzing marketing performance to maximize its effectiveness and optimize return on investment (ROI). Understanding marketing analytics allows marketers to be more efficient at their jobs and minimize wasted web marketing dollars.

Marketing analytics involves the technologies and processes CMOs and marketers use to evaluate the success and value of their efforts. As such, marketing analytics uses various metrics to measure the performance of marketing initiatives. Effective marketing analytics gathers data from all sources and channels and combines it into a single view. Teams then use the analytics to determine how their marketing initiatives are performing and to identify opportunities for improvement. It is difficult to determine the effectiveness and return on investment (ROI) of your marketing campaigns without marketing analytics.

Beyond the obvious sales and lead generation applications, marketing analytics can offer profound insights into customer preferences and trends. Despite these compelling benefits, a majority of organizations fail to ever realize the promises of marketing analytics. According to a survey of senior marketing executives published in the Harvard Business Review, “more than 80% of respondents were dissatisfied with their ability to measure marketing ROI.”

Characteristics of Marketing Analytics

1.      Ensure high-quality data

Your analytics rest on your data. That means you need a tool that mines both structured and unstructured customer data from all possible sources, including various interactions and touch points.

2.      Get real-time insights

Your marketing analytics solution also needs to deliver real-time insights to you. You can’t be effective if your information is out-of-date; tracking the right metrics at the right time is key.

3.      Perfect your dashboard

While it may be tempting to track as many metrics as possible, your analytics will not be as useful if you do. Rather, define your goals and measure results for the use cases most important to you.

4.      Choose the right analytics visualization

Marketing teams and stakeholders must be able to make something of the data if you are to gain meaningful insights from it. The key is to choose the most appropriate data visualizations so you can find patterns and interpret the data. Thus, you must choose a marketing analytics solution that allows you to choose or customize your visualizations instead of using default charts for displaying data.

5.      Use a tool featuring machine learning and AI to predict and prescribe

Marketing must be real-time and predictive to be effective today. You must be able to make accurate predictions, analyze the data, and make data-driven decisions to enhance each step of the customer journey.

 

Advantages and Disadvantages of Marketing Analytics

Advantages of Marketing Analytics

1.      Granular Segmentation

Marketing departments depend on the right segmenting to deliver impactful messaging and relevant communications to leads and customers. After all, one email that targets males aged 20–55 probably won’t incite as much engagement compared to a message targeting a smaller age bracket, an audience with a shared interest or audience with similar spending activity.

But there’s a reason many marketing analytics teams don’t go as granular as they’d like in their communications. It’s because they don’t have access to marketing analytics dashboards that instantly group customers based on different metrics.

For example, a marketing assistant could search ThoughtSpot for customers that have purchased six or more times this year in the Southwest region to gather contacts for an upcoming joint promotion with a business chain in the area.

2.      Tailored Messaging

Effective marketing has always been about persuasion. But instead of trying to persuade the masses, marketing today is about delivering personalized messaging and offers to both customers and potential customers alike.

Send something irrelevant to a lead and they’ll disregard the message and probably your business along with it. Do the same thing to an active guest and they’ll think you’re not paying close enough attention, damaging your rapport.

Marketing analytics tools can also play an integral role in the timing of communications and the mode through which they’re sent. This gives businesses the best chance of reaching customers in a good state of mind.

3.      Multi-Channel Customer View

The more a marketing department interacts with leads and customers, the better understanding they have of their audience base. This is especially helpful in our digital age because, just like the preference of communication medium, consumers tend to spend time in different places.

Tracking customer behavior, including engagement and buying activity across channels, gives marketing a comprehensive understanding of how to interact with a customer. This includes what kinds of communications they respond best and worst toward, as well as strategies that can increase their lifetime value.

4.      Marketing Analytics with ThoughtSpot

Leveraging a marketing data analytics tool offers knowledge at scale for an entire marketing department and beyond. Platforms like ThoughtSpot allow marketing teams to better segment audiences, deliver tailored messaging and gain a complete view of customers across channels.

Disadvantages of Marketing Analytics

1.      Misidentifying Market Needs

One of the elements of your marketing analysis is identifying the needs of each market segment. It also identifies other businesses and products that are attempting to satisfy the needs of this segment. The disadvantage of doing this is twofold. You may overestimate how well your competition is meeting the customers’ needs and quit before you even try to market. You also may misidentify the need that is being met. Don’t overlook the uniqueness of your own offering. Just because competition wants the same customer you do, that doesn’t mean you are satisfying the same need.

2.      Evaluating Market Growth without Market Share

Your marketing analysis will include a look at how the overall market is growing, which can give you some idea of your range of opportunities. If your analysis discourages you, however, it can be a disadvantage. You can successfully compete in a limited market if you capture market share. An analysis of the market size alone is not enough to indicate your opportunities. Improved market share can compensate for a slow-growth market.

3.      Market Segmentation Versus Target Markets

You must identify the segments of the market that have potential customers for your products or services. This will help you understand the varied approaches you may need to take to reach different types of customers. The downside is that you may spread yourself too thin. Few businesses can afford to market to every single potential customer. Identify a target market that you choose from among the available segments, and go after that target market in a focused manner.

4.      Improper Interpretation of Data

A marketing analysis is only as good as the analyzer. You can collect a lot of data in market surveys, but interpreting that data correctly is vital. You will be at an extreme disadvantage if you misinterpret facts and make decisions based on that misinterpretation. Run your analysis past a trusted adviser or two. Make sure your analysis is not wishful thinking.

 

Market Data Sources (Primary and Secondary)

Primary Market Research

Primary research is research that is conducted by you, or someone you pay to do original research on your behalf.  In the case of primary research, you are generating your own data from scratch as opposed to finding other people’s data.  You might choose to gather this data by running a survey, interviewing people, observing behavior, or by using some other market research method.

Secondary Market Research

Sometimes called “desk research” (because it can be done from behind a desk), this technique involves research and analysis of existing research and data; hence the name, “secondary research.”  Conducting secondary research may not be so glamorous, but it often makes a lot of sense of start here.  Why?  Well, for one thing, secondary research is often free.  Second, data is increasingly available thanks to the Internet; the US Census and the CDC (health data), for example, are two great sources of data that has already been collected by someone else.  Your job as a secondary researcher is to seek out these sources, organize and apply the data to your specific project, and then summarize/visualize it in a way that makes sense to you and your audience.  So, that’s what secondary market research is all about.  The downside, of course, is that you may not be able to find secondary market research information specific enough (or recent enough) for your objectives.  If that’s the case, you’ll need to conduct your own primary research.

Sources of Secondary Data

Secondary data comes in all sorts of shapes and sizes.  There are plenty of raw data sources like the US Census, Data.gov, the stock market, and countless others.  Internal company data like customer details, sales figures, employee timecards, etc. can also be considered secondary data.  Published articles, including peer-reviewed journals, newspapers, magazines, and even blog postings like this count as secondary data sources.  Don’t forget legal documents like patents and company annual filings.  Social media data is a new source of secondary data.  For example, the New York Times collected Twitter traffic during the 2009 Super Bowl and produced this stunning visualization of comments throughout the game.  Secondary data is all around us and is more accessible than even.  It is increasingly possible to obtain behavioral data from secondary sources, which can be more powerful and reliable than self-reported data (via surveys and focus groups).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The New Realities of Marketing Decision Making Market Sizing: Data Sources

 

Every business has a market. From businesses like Amazon, whose audience could be anyone, to niche businesses selling specialized, custom products, knowing your market is essential to establishing a successful business. Many organizations believe their product is so novel or useful that their market is everyone, but more often than not, the customer base will actually exclude certain demographics. If your product is extremely expensive, that means the product is probably only going to be bought by people in a certain income bracket. If your product can only be used in certain areas (like boats as opposed to cars), you’ll likely only sell that product regionally. This is why it’s important to understand your target audience and estimate your market size and type when setting up your business and marketing plans.

Market Size

Market size can be simply defined as “the number of people likely to buy a product or service.” Many businesses have a rough idea of who their market is or how many individuals it might involve, but it’s important to accurately estimate market size in order to plan for things like budgets, sales goals, marketing efforts, and staffing. Knowing how large your market can be directly proportional to your business efforts. Using smart market size estimation techniques is an important planning step.

How to Evaluate Market Size?

There are several kinds of market sizing techniques that businesses should consider and use in their market size analysis. The most important step, before considering anything that will help you estimate your market, is having good data that accurately paints the picture of the marketplace or industry. Having good data and research is necessary to understanding how to estimate your market size. Before working with any market size estimation techniques, make sure you have solid information to draw from and analyze. With good data, you can:

·         Look at the competition: Are you the only provider of your business or service locally? Regionally? Nationally? This will tell you a lot about the potential size of your market. If you have a lot of competition, you know you are competing with other businesses for customers, effectively reducing or limiting your potential market.

·         Understand your product: Be realistic about things that will affect who will buy your product. Things like cost, usefulness, reliability, or availability will influence how many people are truly in your market.

·         Understand your customer: Similar to understanding your product, you must know something about your customer when doing market size calculation. Are your customers likely to be male? That tells you something about your market. Are they likely to be college-educated? Found in cities? Make a certain salary a year? Knowing your target customer always leads to helping you estimate your market size.

Estimating your market size is an important step in establishing and growing your business, including planning budgets, forecasting goals, and creating marketing plans. In addition to being something businesses should do as they launch, it should also be reevaluated regularly as your business gains customers and recognition. Customer market size is never a static thing and can grow, change, and shrink based on anything from the economy to available technology, so always be mindful of market size for your business.

Data Sources

Your selected approach will dictate the necessary sources to estimate market size. Secondary research or desk research searches for existing data and is the most commonly used form of research in this type of exercise because it is quicker to obtain and therefore usually more cost effective. Through general web searching, a wealth of information can be found at little or no cost. Subscription-based or syndicated research is a great place to start, but there are also free sources that contain valuable information. Articles about companies or products in the target market will often quote data from these sources. You might also check whitepapers and product announcements for similar information. Publicly held companies are required to share information in analyst and investor reports. Quarterly and annual reports are typically available on these company websites as well as through the SEC filings. Also, trade associations will often conduct market research and aggregate industry data.

Primary research, also called field research, is often used in addition to secondary research. The primary research can take on many forms and can strengthen your understanding of the market, allowing you to make better informed assumptions. The most versatile form of primary research is in-depth telephone interviews that can be used to capture more sensitive information. If possible, on-site visits can be used to confirm or contradict market sizing estimations or determine key information on market trends, such as technology, market performance, relative competitive position or other information dealing with understanding scope and defining the target market.

Stakeholders

A stakeholder is a party that has an interest in a company and can either affect or be affected by the business. The primary stakeholders in a typical corporation are its investors, employees, customers and suppliers. However, the modern theory of the idea goes beyond this original notion to include additional stakeholders such as a community, government or trade association.

Stakeholders can be internal or external. Internal stakeholders are people whose interest in a company comes through a direct relationship, such as employment, ownership or investment. External stakeholders are those people who do not directly work with a company but are affected in some way by the actions and outcomes of said business. Suppliers, creditors and public groups are all considered external stakeholders.

Internal Stakeholder

Investors are a common type of internal stakeholder and are greatly impacted by the outcome of a business. If, for example, a venture capital firm decides to invest $5 million into a technology startup in return for 10% equity and significant influence, the firm becomes an internal stakeholder of the startup. The return of the company’s investment hinges on the success, or failure, of the startup, meaning it has a vested interest.

External Stakeholder

External stakeholders are a little harder to identify, seeing as they do not have a direct relationship with the company. Instead, an external stakeholder is normally a person or organization affected by the operations of the business. When a company goes over the allowable limit of carbon emissions, for example, the town in which the company is located is considered an external stakeholder because it is affected by the increased pollution

 

Conversely, external stakeholders may also sometimes have a direct effect on a company but are not directly tied to it. The government, for example, is an external stakeholder. When it makes policy changes on carbon emissions, continuing from above, the decision affects the operations of any business with increased levels of carbon.

Problems with Stakeholders

A common problem that arises with having numerous stakeholders in an enterprise is their various self interests may not all be aligned. In fact, they may be in direct conflict. The primary goal of a corporation, for example, from the viewpoint of its shareholders, is to maximize profits and enhance shareholder value. Since labor costs are a critical input cost for most companies, a company may seek to keep these costs under tight control. This might have the effect of making another important group of stakeholders, its employees, unhappy. The most efficient companies successfully manage the self-interests and expectations of their stakeholders.

Stakeholders vs. Shareholders

Stakeholders are bound to a company with some type of vested interest, usually for a longer term and for reasons of greater need. A shareholder, meanwhile, has a financial interest, but a shareholder can sell a stock and buy different stock or keep the proceeds in cash; they do not have a long-term need for the company and can get out at any time.

For example, if a company is performing poorly financially, the vendors in that company’s supply chain might suffer if the company no longer uses their services. Similarly, employees of the company, who are stakeholders and rely on it for income, might lose their jobs. However, shareholders of the company can sell their stock and limit their losses.

 

 

 

Application and Approaches (Top-Down and Bottom-Up)

Top-Down

Top-down analysis generally refers to using comprehensive factors as a basis for decision making. The top-down approach will seek to identify the big picture and all of its components. These components will usually be the driving force for the end goal.

Overall, top-down is commonly associated with the word macro or macroeconomics. Macroeconomics itself is an area of economics that looks at the biggest factors affecting the economy as a whole. These factors often include things like the federal funds rate, unemployment rates, global and country-specific gross domestic product, and inflation rates.

An analyst seeking a top-down perspective will want to look at how systematic factors are affecting an outcome. In corporate finance, this can mean understanding how big picture trends are affecting the entire industry. In budgeting, goal setting, and forecasting the same concept can also apply to understand and manage the macro factors.

Top-Down Investing

In the investing world, top-down investors or investment strategies focus on the macroeconomic environment and cycle. These types of investors usually want to balance consumer discretionary investing against staples depending on the current economy. Historically, discretionary stocks are known to follow economic cycles with consumers buying more discretionary goods and services in expansions and less in contractions.

Consumer staples tend to offer viable investment opportunities through all types of economic cycles since they include goods and services that remain in demand regardless of the economy’s movement. Comprehensively, when an economy is expanding, discretionary overweight can be relied on to produce returns. Alternatively, when an economy is contracting or in a recession, top-down investors will usually overweight to havens and staples.

Investment management firms and investment managers can focus an entire investment strategy on top-down management that identifies investment trading opportunities purely based on top-down macroeconomic variables. These funds can have a global or domestic focus which also increases the complexity of the scope. Typically, these funds will be called macro funds. Generally, they make portfolio decisions by looking at global then country-level economics. They further refine the view to a particular sector, and then to the individual companies within that sector.

Top-down investing strategies typically focus on profiting from opportunities that follow market cycles while bottom-up approaches are more fundamental in nature.

Bottom-Up

The bottom-up analysis takes a completely different approach. Generally, the bottom-up approach will focus its analysis on specific characteristics and micro attributes of an individual stock. In bottom-up investing concentration is on business-by-business or sector-by-sector fundamentals. This analysis seeks to identify profitable opportunities through the idiosyncrasies of a company’s attributes and its valuations in comparison to the market.

Bottom-up investing begins its research at the company level but does not stop there. These analyses weigh company fundamentals heavily but also look at the sector, and microeconomic factors as well. As such, bottom-up investing can be somewhat broad across an entire industry or laser-focused on identifying key attributes.

Bottom-Up Investors

Most often, bottom-up investors are buy-and-hold investors who have a deep understanding of a company’s fundamentals. Fund managers may also use a bottom-up methodology. For example, a portfolio team may be tasked with a bottom-up investing approach within a specified sector like technology. They are required to find the best investments using a fundamental approach that identifies the companies with the best fundamental ratios or industry leading attributes. They would then investigate those stocks in regards to macro and global influences.

Metric focused smart-beta index funds are another example of bottom-up investing. Funds like the AAM S&P 500 High Dividend Value ETF (SPDV) and the Schwab Fundamental U.S. Large Company Index ETF (FNDX) focus on specific fundamental bottom-up attributes that are expected to be key performance drivers.