Sample chapter: Marketing Strategy by Robert W. Palmatier and Shrihari Sridhar

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LONG CONTENTS List of Figures

ix

List of Tables

x

List of Examples

xi

List of Data Analytics Techniques and Worked Examples

xiii

List of Analytics Driven Cases and Case Exercises

xiv

List of Abbreviations

xv

Author Biographies

xvi

Acknowledgments xviii Preface xx Overview of First Principles of Marketing Strategy Tour of the Book

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Tour of the Website

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1 Marketing Strategy: A First Principles Approach

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Learning Objectives 1 Introduction 2 MP#1: All Customers Differ  Managing Customer Heterogeneity 12 MP#2: All Customers Change  Managing Customer Dynamics 16 MP#3: All Competitors React  Managing Sustainable Competitive Advantage 21 MP#4: All Resources Are Limited  Managing Resource Trade-Offs 26 Implementing the Four Marketing Principles 30 Summary 33 Takeaways 34

PART 1 ALL CUSTOMERS DIFFER

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2 Marketing Principle #1: All Customers Differ  Managing Customer Heterogeneity

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Learning Objectives 38 Introduction 39 Approaches for Managing Customer Heterogeneity 47 Framework for Managing Customer Heterogeneity 65 Summary 76 Takeaways 77 Analytics Driven Case: Managing Customer Heterogeneity at DentMax 79 Analytics Driven Case Exercise: Segmenting the Smartwatch Market 90

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LONG CONTENTS

PART 2 ALL CUSTOMERS CHANGE

93

3 Marketing Principle #2: All Customers Change  Managing Customer Dynamics

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Learning Objectives 94 Introduction 95 Approaches to Managing Customer Dynamics 100 Framework for Managing Customer Dynamics 119 Managing Customer Dynamics Examples 126 Summary 129 Takeaways 131 Analytics Driven Case: Preempting and Preventing Customer Churn at TKL 133 Analytics Driven Case Exercise: Acquiring New Customers in the Hospitality Industry 143

PART 3 ALL COMPETITORS REACT

147

4 Marketing Principle #3: All Competitors React  Managing Sustainable Competitive Advantage

148

Learning Objectives 148 Introduction 149 Approaches for Managing Sustainable Competitive Advantage 161 Framework for Managing Sustainable Competitive Advantage 172 Summary 178 Takeaways 179 Analytics Driven Case: Fighting Competitive Attack at Exteriors Inc. 181 Analytics Driven Case Exercise: New Product Development with Conjoint Analysis at MobilMax Inc. 189

5 Marketing Principle #3: Managing Brand-Based Sustainable Competitive Advantage

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Learning Objectives 193 Introduction 194 Brand Strategies 200 Managing Brand-Based SCA 205 Summary 217 Takeaways 218 Analytics Driven Case Exercise: Back to Basics: Finding the Right Brand Identity for EnergAid 220

6 Marketing Principle #3: Managing Offering-Based Sustainable Competitive Advantage Learning Objectives Introduction Offering and Innovation Strategies Managing Offering-Based Sustainable Competitive Advantage

222 222 223 229 240

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NOT FOR DISTRIBUTION Summary 244 Takeaways 245 Analytics Driven Case Exercise: Making Free Drill Selector Apps Pay Off at MHG 247

7 Marketing Principle #3: Managing Relationship-Based Sustainable Competitive Advantage

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Learning Objectives 249 Introduction 250 Relationship Marketing Strategy 256 Managing Relationship-Based Sustainable Competitive Advantage 265 Summary 277 Takeaways 278 Analytics Driven Case Exercise: Managing Customer Relationships at AIRCO 280

PART 4 ALL RESOURCES ARE LIMITED

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8 Marketing Principle #4: All Resources Are Limited ďƒ’ Managing Resource Trade-Offs

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Learning Objectives 284 Introduction 285 Approaches for Managing Resource Trade-Offs 294 Framework for Managing Resource Trade-Offs 307 Summary 313 Takeaways 314 Analytics Driven Case: Allocating Dollars Wisely at BRT Tribune 316 Analytics Driven Case Exercise: A Resource Allocation Dilemma at Kreyers Froyo 321

9 Marketing Strategy: Implementing Marketing Principles and Data Analytics

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Learning Objectives 324 Introduction 325 Trends Increasing the Importance of the First Principles Approach to Marketing Strategy 328 Overview of the Four Marketing Principles: Problems and Solutions 331 Synergistic Integration of the Four Marketing Principles 337 Building Marketing Analytics Capabilities 339 Executing Marketing Strategies 344 Summary 348 Takeaways 350 References 351 Index 367

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Chapter 1 MARKETING STRATEGY: A FIRST PRINCIPLES APPROACH LEARNING OBJECTIVES •• Define marketing strategy.

•• Recognize similarities and differences between corporate and marketing strategy.

•• Explain why marketing strategy is important to a firm’s success.

•• Understand the complexity underlying each First Principle.

•• Explain the logic behind the First Principle approach to marketing strategy.

•• Review major approaches for managing each marketing principle.

•• Outline key inputs and outputs for each marketing principle.

•• Understand how to integrate the four Marketing Principles of marketing strategy.

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INTRODUCTION The marketing discipline keeps changing, and in this process, managers are overwhelmed by a huge range of analysis tools, processes, and research techniques that suggest ways to evaluate business topics and implement new marketing strategies (e.g., customer centricity, big data, net promoter scores). After the success of each new startup firm, a flood of articles follows, offering unique marketing insights into how to duplicate its results (e.g., Freemium pricing!

Crowdsourcing! Big data!). Although many of these new approaches offer some value, a marketing strategist is left with unanswered questions: 1 When should I use each specific approach?

2 How does each new marketing approach improve my firm’s performance?

3 Which approaches are worth my firm’s time and investment to implement?

But instead of answering these questions, a lot of marketing strategy books try to apply their preferred structures to new techniques. They often contain different chapters detailing each of the 4Ps of the marketing mix (product, price, place, promotion), then suggest ways to deal with competitors or execute specific marketing tasks (segmenting, branding) according to these 4Ps. It is a functional or task perspective on marketing strategy, and it describes various frameworks and processes that managers can use, across different marketing domains. But it offers little overall guidance on when to use the various frameworks, how they work, which ones are most valuable, or how they all fit together.

First Principles: The fundamental concepts or assumptions on which a theory, system, or method is based.1 This book takes a very different approach to marketing strategy. Rather than adding complexity, we seek simplicity. We argue that managers can make marketing decisions by trying to solve four underlying problems or complexities that all organizations face when designing and implementing their marketing strategies. These four problems represent the most critical hurdles to marketing success; they also define the organization for this book. We refer to them as the First Principles of marketing strategy, because they reflect the foundational assumptions on which marketing strategy is based.2 In short, marketing strategists’ most critical decisions must address the following First Principles of marketing strategy: 1 All customers differ.

2 All customers change.

3 All competitors react.

4 All resources are limited.

Simple, right? This First Principle approach to marketing strategy also is unique, because its main goal is to align existing analysis tools, processes, and research techniques with traditional frameworks and insights on the marketing mix (4Ps), competitors, and marketing tasks. We then use this alignment to suggest tactics for “solving,” or at least addressing, the problems represented by the First Principles. By organizing the varied discussions around four fundamental

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Marketing Strategy: A First Principles Approach

principles, we present every decision within its meaningful context, which includes its impact on other decisions. This view and context establish a guiding purpose for strategic marketing efforts.

For example, segmentation and customer centricity both attempt to deal with a First Principle: All customers differ. The First Principle approach gives marketing strategists a diverse toolbox, instead of requiring them to learn how to use unique tools (or techniques), that they can apply to deal with a broad range of marketing challenges. The guiding framework can address various marketing problems.

Conceptually, the application is similar to using Newton’s laws of motion (i.e., First Principles of physics) to solve various physics problems, rather than learning different steps to deal with each problem.

This chapter therefore begins with a short, historical overview and definition, to place marketing strategy in an appropriate temporal context and set the boundaries of the domain, relative to corporate strategy. We offer arguments for why marketing is so critically important to a firm’s success and provide evidence for why managers should invest the time and effort to develop effective marketing strategies. In turn, we present the logic behind the First Principle approach to marketing strategy. With an overview of each of the four First Principles, we prepare readers to dive deeper into the concepts, analyses, and decisions addressed in the rest of this book. Finally, this chapter integrates the four First Principles of marketing strategy and suggests how they fit together in a natural sequence, which organizations can use to develop effective marketing strategies.

Brief History and Definition of Marketing Strategy To appreciate the First Principle approach to marketing strategy, we first have to define marketing strategy: What are its key elements and its scope? We note five key elements that have been identified as its conceptualizations have evolved over time: 1 Decisions and actions 2 Differential advantages over competitors 3 Sustainability 4 Ability to enhance firm performance 5 Customer perspective.

Next, we trace how these five elements have emerged over time, resulting in our current definition of marketing strategy. The strategy concept arose from a military context, where a strategy represents the pursuit of situational superiority over an enemy. Carl von Clausewitz, in On War (1832, p. 196), describes strategy as follows: “Consequently, the forces available must be employed with such skill that even in the absence of absolute superiority, relative superiority is attained at the decisive point.”3 From these military roots, the notion of using resources skillfully, to create decisive positions of superiority over competitors, began to be applied in business in the 1950s and 1960s. Various forces (e.g., rapid, unpredictable changes in customer, competitor, technical, and economic environments) were beginning to challenge the “lumbering corporations” of the time, whose vast size limited their operational flexibility and dexterity. They needed a new way of thinking.

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The result was what often is described as “formal strategic planning”. A typical definition of business strategy from the 1960s described “the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.”4 Management scholars and practitioners from this era retained two elements of military strategy, focused on how decisions and actions could lead to differential advantages over opponents (or competitors).

Over the next few decades, a couple of necessary elements also entered the definition, to make it possible to apply the strategy concept more appropriately to a business: the need to make the advantage sustainable and the idea that the objective of any business strategy is to enhance firm performance.5 Even more recently, marketing strategists have suggested a refined view, the sustainable differential advantage and its objective should be evaluated from the perspective of the customer, or “strategy from the outside-in.”6

Source: Getty Images/Cultura RF

Each individual customer is an independent, decision-making entity, and the customer ultimately determines a marketing strategy’s success or failure.

According to this viewpoint, an effective long-term strategy must create value for the customer, because the customer ultimately determines the strategy’s success or failure. Working backward from a desired position, such that the firm enjoys some advantage among customers, it can craft its strategy purposefully. This effort continues to make the desirable position a reality. It also establishes a workable business model that provides attractive returns to the firm. In contrast with this customer-centric view, economists tend to take an industry-level perspective, and management scholars often adopt a firm-centric perspective.7 But a marketing strategy cannot be limited to pursuing the firm’s goals (e.g., the needs of shareholders, managers, and employees/stakeholders); it must include the goals of customers, as another key stakeholder. Any strategy that fails to generate customer value ultimately is unsustainable. Therefore, a customer-centric perspective represents a key difference between a corporate strategy and a marketing strategy.

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Marketing Strategy: A First Principles Approach

The shift in focus, to incorporate the customer’s perspective explicitly, also has occurred through a natural, long-term progression. Academics and managers continue to search for ways to explain firms’ performance by using smaller and smaller units of analysis. They have moved from a focus on industries, to firms, to individual customers. Each new level of analysis provides another set of variables that can explain firm performance. But ultimately, customers represent the fundamental unit of analysis for marketing strategy, because each individual customer is an independent, decision-making entity. Industries and firms instead are aggregations of customers, and aggregation always involves a loss in precision and insights.

Customers represent the fundamental unit of analysis for marketing strategy, because each individual customer is an independent, decision-making entity.

The customer-centric perspective is an important foundation for this book.

In later chapters, we describe marketing strategy frameworks and analysis techniques designed to capture, evaluate, and act on individual, customerlevel data (rather than treating all customers the same or grouping them into a few segments based on demographic characteristics). For example, customer lifetime value (CLV) analyses attempt to assign discounted cash flow values to each customer, according to his or her future sales and costs, so that the resulting marketing decisions are optimized for each customer.8 On the basis of this brief history of marketing strategy, we capture five key elements in a summary definition: Marketing strategy consists of decisions and actions focused on building a sustainable differential advantage, relative to competitors, in the minds of customers, to create value for stakeholders.

Thus, a marketing strategy can be equally meaningful for any entity that has “competitors” focused on some group of “customers.” It is just as applicable to countries competing for the right to host a future Olympic Games, to competing industry trade groups or sales regions, and to firms or individual product lines.

However, over time, organizations must come up with new marketing strategies to remain competitive and adapt to customers’ changing needs.

Example: Philips (the Netherlands) Philips, the Netherlands-based technology company, is a global leader in consumer technology. Over the past 125 years, Philips has innovated its marketing strategy many times to stay competitive. It is working to become more customer centric now. Philips establishes a strong physical presence in each market it enters, installing offices and staff in local settings, then relying on these teams to define the local market and consumers’ desires. But customers’ needs are not static, so it also innovates continually to sustain its competitive advantages. For example, Philips’ nine research centers, around the world, specialize in different domains (e.g., respiratory healthcare devices, automotive lighting), which reflect key interests in their local markets but also inform the company’s global product offerings. In addition, to stay ahead of competitors, Philips has created a “technology incubator” – a dedicated environment for innovative technologies that are new to both the firm and its customers. With its market and technical innovations and its consumer-centric focus, Philips has managed to hold on to its global and regional leadership in many product categories.9

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How Marketing Strategy Differs from Corporate Strategy In large organizations, corporate-level strategic plans usually are different from marketing strategies. Both strategies should have consistent goals (i.e., the marketing strategy needs to align with the corporate strategy), but the marketing strategy focuses specifically on how the firm interacts with its customers. Some key questions should define any entity’s marketing strategy: •• Who are your customers?

•• What value do you provide your customers (e.g., product, service, experience, status)?

•• How are you building a differential advantage, relative to competitors, for these customers?

•• What value do you earn from your customers due to this differential advantage (sales, profits, referrals)?

•• How will you sustain this differential advantage into the future?

corporate strategy The direction and scope of an organization over the long term, to achieve some well-defined objectives.

A marketing strategy must answer these questions, then use the answers to decide on action steps to achieve the identified firm and stakeholder objectives.

However, implementing a marketing strategy also requires a lot of resources and a stable organizational platform. Thus, additional questions arise, regarding other aspects of the business, such as cash flow plans, tax considerations, and legal and personnel policies. These queries are the domain of the corporate strategy, defined as “the direction and scope of an organization over the long term: which achieves advantage for the organization through the configuration of resources within a changing environment, to meet the needs of markets and fulfill stakeholder expectations” (p. 10).10 Figure 1.1 summarizes key questions for both corporate and marketing strategies, so it illustrates the differences in emphasis. Although certain domains are primarily associated with corporate (taxes, legal) or marketing (promotions, pricing) strategic decisions, other domains may be influenced by both (human resources, operations, research and development (R&D)). But as Figure 1.1 indicates, every single one of these questions must be answered appropriately.

If the questions addressed by the marketing strategy are answered incorrectly or insufficiently, the enduring success of the firm will be in doubt.

Importance of Marketing Strategy Multiple perspectives highlight the importance of an effective marketing strategy for a firm’s success. Academic studies provide evidence of the strong links between marketing actions (brand and selling expenditures) and intermediate marketing metrics (customer satisfaction, loyalty, market share) with a firm’s financial performance.11 For example, improving customer satisfaction is not just a “feelgood” tactic but is associated with positive financial outcomes, including enhanced cash flows with reduced variability, sales growth, improved gross margins, and total shareholder returns. Strong evidence also describes when, how, and where brand advertising pays off; how price promotions affect short- and long-term outcomes (e.g., causing current customers to stock up versus attracting new customers); and how other elements of the marketing mix interact to drive performance.12

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Marketing Strategy: A First Principles Approach

Corporate Strategy The overall scope and direction of a firm and the way in which its various business operations work together to achieve particular goals.

What is your mission/vision?

What affects cash flow?

What legal considerations affect your business?

What personnel policies should you have in place?

Operations HR

Marketing Strategy

R&D

Decisions and actions focused on building a sustainable differential advantage, relative to competitors, in the minds of customers, to create value for stakeholders.

Both corporate and marketing strategy influence human resources, operations, and R&D.

Who are your customers?

What value do you provide customers?

What value do you earn from customers?

Figure 1.1 Differences Between Corporate Strategy and Marketing Strategy

However, research also notes some important nuances: not every strategy pays off every time. For example, the relationship between market share and profitability is not a direct function. Some strategies that might succeed in increasing market share actually can damage profitability. A variety of brand, customer relationship, and other factors together determine the ultimate outcome of a market share strategy.13 In addition, business trends influence marketing strategies. Some trends, especially in developed markets, suggest the need for market-based barriers (i.e., barriers erected through marketing strategic actions) to help a company withstand competitive assaults. For example, globalization and reduced trade barriers have added low-cost competitors to many industries; they offer similar, “me-too” products at low prices.14 In response, firms might need to increase their investments in brand building or relationship marketing strategies, or they might launch loyalty programs to differentiate their “total offering” through intangible factors that are harder for low-cost, copycat firms to duplicate. Today, firms spend as much on customer relationship management and brand building as they do on new product and service introductions.15 The business trend of building strong brands appears to have caught on in developing countries too.

Simply manufacturing world-class products at a low cost is not the only path to success, so new paths for brand building (e.g., citing indigenous cultures) are being forged.16

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In another trend, firms outsource product manufacturing, because the actual production of a product often offers little differential advantage over competitors.

As the examples of the personal computing, shoes, and clothing industries reveal, just a few firms have distinctive manufacturing capabilities that create meaningful incremental value for customers, beyond the value they get from products produced by high-capability, subcontracted manufacturers. Successful companies therefore shift their emphases from operations to marketing. Strong brands, channels, or customer relationships are more difficult to duplicate than nearly any tangible product. John Stuart, the long-serving CEO of Quaker Oats, explains: “If this business were to be split up, I would be glad to take the brands, trademarks and goodwill and you could have all the bricks and mortar – and I would fare better than you.”17 Marketing capabilities have greater impacts on improving firm performance than either R&D or operations capabilities.18 Finally, marketing strategy simultaneously affects many different factors, each of which has a role in determining the organization’s sales revenue and profit.

For example, the sales revenue ($) chain ratio equation in Figure 1.2(a) consists of market demand (units) × market share (%) × average selling price ($). Firms that launch innovative new products or advertise extensively increase their own market share and receive a price premium versus competitors; they also influence growth in the overall market by creating more awareness about the product category. In this way, a marketing strategy affects all three components of the sales revenue chain ratio equation.

(a) Firm’s Sales Revenues, According to the Chain Ratio Firm’s Sales Revenue $500,000

=

Market Demand 1,000,000

x

Firm’s Market Share 10%

Firm’s Average Selling Price $5

x

Example: iPhone Sales Revenues According to the Chain Ratio

2007

$1,841.40

=

Cell Phone Market Size in Units (millions) 109.21

2008

$6,749.22

=

126.51

x

9%

x

$591.00

2009

$14,934.00

=

163.14

x

15%

x

$600.00

2010

$28,426.00

=

285.23

x

16%

x

$610.00

2011

$55,341.20

=

486.34

x

18%

x

$620.00

iPhone Sales Revenue (millions)

Year

iPhone Market Share (%)

iPhone Unit Price ($)

x

3%

x

$558.00

(b) Firm’s Profit, According to the Chain Ratio Firm’s Profit $30,000

=x

Firm’s Sales Revenue $500,000

Firm’s Gross Margin 20%

–

Figure 1.2 Decomposing Sales Revenue and Profit with the Chain Ratio Equation

Firm’s Sales & Marketing Expenses $50,000

–

Firm’s General & Administrative Expenses $20,000

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Marketing Strategy: A First Principles Approach

Example: Apple (USA) Consider the launch of Apple’s innovative iPhone: without exaggeration, it basically created the smartphone market. This market grew from selling 109 million units to more than 486 million within five years of the iPhone’s launch, or by 345%. During that time, iPhone’s share of the market increased from 3.3% to 18.4%. Apple also has a remarkable ability to charge a premium price, compared with its competitors’ average prices. If we apply the chain ratio equation, we learn that Apple’s sales revenues from unit sales of iPhone (not counting accessories) grew from $1.8 billion in its first year (3% market share × 109 million unit market × $558 unit selling price) to $55.3 billion after five years (18% share × 486 million unit market × $620 unit selling price) – an increase in sales revenue of more than 2,900%.19

Building a powerful brand image or strong relational bonds with customers also can affect the average selling prices of a firm’s products. Price premiums are normal for strong consumer brands, such as Louis Vuitton, Nordstrom, or BMW. Such forces also affect business-to-business (B2B) firms. For example, B2B customers will pay, on average, a 4–5% premium to deal with their favorite salesperson rather than buy the same product from a different salesperson.20 The price a firm can charge further depends on its customers and how it targets them. If a firm builds its customer portfolio by attracting people with price discounts, it likely ends up with a price-sensitive, deal-prone customer base, so it has to keep offering constant discounts that are better than other firms.21 Because all components of the sales revenue chain ratio (demand, market share, and price) stem from a firm’s marketing strategy, it exerts a strong multiplier effect on net sales.

A similar analysis is possible for profit (see Figure 1.2(b)). This equation includes another factor that deserves special attention: sales and marketing expenses. These expenses are the costs of implementing marketing strategies.

They reduce profits, but they also represent investments that affect the three components of the sales revenue chain ratio. Effective marketing strategies that build a strong, loyal customer base thus can affect profitability by significantly reducing these sales and marketing expenses, in two main ways.

First, loyal customers are less expensive. They do not require expensive retention or recruitment efforts, like potential or less loyal customers do. There is a lot of variation across industries, but in general, the cost of acquiring a new customer is 5–10 times more than the cost of retaining an existing customer.22 Second, loyalty among current customers can reduce new customer acquisition costs. Loyal customers often engage in positive word of mouth, which persuades other customers to give the firm a try. Jonah Berger, in his book Contagious, attributes the effectiveness of word of mouth to its credibility (i.e., fellow customers are objective and candid) and its targeted nature (i.e., customers share news that they believe is relevant to the listener). Ben Fischman, founder of Rue La La (ruelala.com), which sells overstock and clearance high-end fashion products, notes that members’ word of mouth was far more effective than the firm’s early ad campaigns, because: “When a friend tells you you’ve gotta try Rue La La, you believe them. And you try it” (p. 53).23 In this way, loyal customers can be worth up to three times their individual value, because of their referrals of new customers.24

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Source: iStockphoto.com/Wavebreakmedia

Strong loyalty among current customers can reduce new customer acquisition costs, because customers engage in positive word of mouth, which effectively persuades other customers to try or switch.

The Logic for a First Principle Approach to Marketing Strategy A marketing strategy involves key decisions that result in certain actions that, we hope, lead to enhanced performance. So then the path to success may seem obvious: Review past marketing strategies, identify those that generated the highest performance, and implement them, again and again. Some firms follow this approach, with great success – in the short run. But as customers, competitors, and conditions change, strategies that led to success in the past become inappropriate. In some cases, success leaves the firm happy with a particular strategy, so it forgets to develop new capabilities and strategies to address new conditions.25 Similarly, some firms copy their more successful competitors, but that option also can lead to failure, because each firm has different capabilities.

We thus state this inconvenient truth plainly: No single marketing strategy is ever going to be consistently effective in all conditions or for all firms. As lots of research and practical examples demonstrate, the effectiveness of a marketing strategy depends on various customer, competitor, and contextual factors. These factors in turn are both interdependent and time varying.26 Therefore, good marketing decisions – which are essential to an effective marketing strategy – must first recognize the underlying factors that make them successful. Otherwise, a firm might try to copy the effective marketing actions of a competitor, only to find that they work only for certain customers, only at particular points in the customer’s lifecycle, only in response to specific competitive actions, or only in certain conditions. Identifying the underlying factors or complexities that cause a marketing decision to be appropriate or not also requires digging deeper than just reading about recent consulting fads. By definition, fads apply only for a short period of time or in certain situations.

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Consider Silicon Valley firms. They have been sorely tempted to launch new software products with a “freemium” (i.e., giving away a basic model in the hope that users will like the product and upgrade to a paid premium version) or “viral” strategy, rather than using a traditional sales force. With a few prominent exceptions, this temptation is likely to lead to ruin. As Bloomberg Businessweek noted: “For every Yammer, a social networking company that attracted corporate users initially by giving the product (bought by Microsoft for $1.2 billion), there are hundreds of companies that fail”27 – in part because consumers and potential adopters are inundated by thousands of new apps, all trying to catch their eye with a free version.

Thus, to be effective, a marketing strategy must include decisions that reflect an awareness of four underlying assumptions or complexities that are inherent, to some degree, to all businesses’ interactions: 1 All customers differ.

2 All customers change.

3 All competitors react.

4 All resources are limited.

Of course, you will recognize these four assumptions as the First Principles of marketing strategy, or the foundational assumptions on which any marketing strategy is based. As Figure 1.3 indicates, this approach to marketing strategy links key marketing decisions to these four assumptions, so that managers can understand and account for their interdependencies and temporal ordering before making decisions. Each First Principle, when matched with associated marketing decisions, produces a Marketing Principle (MP). For example, all customers First Principles of Marketing Strategy

Key Marketing Decisions

Marketing Principle #1

All customers differ

Managing customer heterogeneity

Marketing Principle #2

All customers change

Managing customer dynamics

Marketing Principle #3

All competitors react

Managing sustainable competitive advantage

Marketing Principle #4

All resources are limited

Managing resource trade-offs

This approach argues that marketing strategy effectiveness requires making decisions that are congruent with four underlying assumptions or complexities inherent to all businesses interactions that are the First Principles of marketing strategy, or the foundational assumptions on which marketing strategy is based.

Marketing Principle A First Principle or underlying assumption, when matched with its associated managerial decisions.

Each First Principle or underlying assumption, matched with its associated managerial decision, is a Marketing Principle (MP). For example, MP#1 is that all customers differ and thus firms must make strategic decisions to manage customer heterogeneity.

Figure 1.3 Four Marketing Principles: Aligning Key Marketing Decisions with the First Principles of Marketing Strategy

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differ, so firms must make strategic decisions to manage customer heterogeneity, and these combined statements constitute MP#1.

Each First Principle, when matched with associated marketing decisions, produces a Marketing Principle (MP).

With this approach, firms can effectively manage the four inherent business complexities when developing and implementing their marketing strategies. The approach does not remove or prevent the complexities. Rather, because the First Principles are given, firms need to understand and effectively manage each of them.

In support of this approach, we develop guiding frameworks for each of the four MPs, identifying specific tools and analysis techniques that are relevant to each principle and can support effective decision-making. Then we integrate the four frameworks to reveal the interdependencies and natural causal ordering among the four MPs. With these insights, any firm can generate its marketing strategy.

The chapters of this book focus on each Marketing Principle in detail. In the remainder of this chapter, we offer short overviews to help readers understand just what we mean by the four MPs, describe some available tactics for making decisions relevant to each MP, and depict a graphical input–output framework, all according to a First Principle approach.

MP#1: ALL CUSTOMERS DIFFER  MANAGING CUSTOMER HETEROGENEITY First Principle: All Customers Differ The first, foundational, most basic issue facing managers who make marketing mix decisions (pricing, product, promotion, place) is that all customers differ.

Customers vary widely in their needs and preferences, whether real or perceived.

Buyers are no longer satisfied by a one-size-fits-all approach.28 Their desires even vary for basic commodity products, such as salt and bottled water. Customers’ desire for variety is evident in the tens of thousands of products offered by most large grocery stores, in their effort to match each individual customer’s preference.

Various factors lead customers to differ in their preferences, including basic, personal differences; varying life experiences; their unique uses for the product; distinct aspirational self-identities (i.e., who they hope to be); and how persuasive efforts (e.g., advertising) have influenced them in the past. These different sources all work together to drive substantial variation in customers’ preferences.

If firms ignore this First Principle of customer differences and offer a single product, they may gain sales in the short term, particularly if competition is weak or the product is scarce. The well-known example in this case is the Ford Model T. As long as Ford was virtually the only company able to provide vehicles, it could get away with making all its cars black. But as competition grew and automobiles became more widely available, Henry Ford’s maxim – customers can have any color they want, as long as it is black – flipped on its head. Today, customers can have any color they want in their car’s finish, and any company that tried to limit its offerings would find itself in trouble quickly. As customer

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Marketing Strategy: A First Principles Approach

Source: Getty Images/Blend Images

Customers’ desire for variety is evident in the tens of thousands of products offered by most large grocery stores, in their effort to match each individual customer’s preference.

demand for any new offering grows, competitors recognize the opportunity and begin supplying varied products. They aim to match the preferences expressed by specific subsegments of an overall market. If a firm fails to respond with refined offerings, customers move on to competitors that give them what they want. The firm loses sales revenue. But in addition, competitors probably have produced items that appeal to quickly growing or profitable subsegments, so even the customers still buying from the firm could be less profitable. Failing to manage customer heterogeneity – defined as variation among customers in terms of their needs, desires, and subsequent behaviors – has been the death knell for many firms.

Marketing Challenge: Managing Customer Heterogeneity The different sources of individual variation also work together. Although customer heterogeneity is a fundamental challenge that all firms must address when developing an effective marketing strategy (MP#1), the ways to do so are not particularly clear. How should each firm manage customer heterogeneity?

First, it could ignore customer heterogeneity and provide an offering that matches average customers’ needs. Many customers will be dissatisfied, but in a large enough market, there are enough average customers to keep the firm profitable – at least temporarily. If the market keeps growing though, a competitor likely will seek to appeal to some subsegment of customers who want a solution that better matches their preferences. The firm targeting the average customer would lose these sales and profits but still be stuck with an expensive infrastructure and costs, leading to pretty poor financial performance.

customer heterogeneity The variation among customers in terms of needs, desires, and subsequent behaviors.

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STP (segmentation, targeting, positioning) approach The general approach of grouping customers into segments, selecting target segments, and using marketing activities to improve a firm’s positioning in the target segment. customer-centric approach A companywide philosophy that places customers’ needs at the center of an organization’s strategic process and uses the resultant insights to make decisions.

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Second, a firm could offer a range of products and services to satisfy the needs of many different customer segments. This strategy can be highly effective; it also can be very costly and difficult. A single firm rarely can meet the needs of all different customers simultaneously. Imagine, for example, trying to appeal to high-end markets, as Four Seasons hotels and Neiman Marcus retailers do, while also marketing to low-end markets, as Motel 6 and Walmart do. From brand and infrastructure perspectives, such efforts seem virtually impossible.

Third, a firm might predict that its customers will take a good-enough product, if the price is sufficiently low. With a classic low-cost strategy, firms attempt to identify core, must-have attributes that will satisfy consumers’ functional needs, then focus all their efforts on reaching the lowest cost. This strategy can be viable, depending on the size of the low-cost customer segment and the firm’s ability to produce its offerings at a lower cost than competitors can.

Fourth, to deal with customer heterogeneity, a firm might select a specific segment of customers and target them by positioning its offering as the very best solution for them. This option is widely known as the segmentation, targeting, and positioning or STP approach. The result is often a strong brand that customers know and respect. Yet an STP approach also can limit a firm’s future growth.

Therefore, it often is combined with a customer-centric approach or strategy, in which the firm recognizes the long-term value of its core customer segment and puts it at the center of all its business processes and decisions.

Example: Godiva (Belgium) Godiva wants to sell you more chocolate, but it also wants to sell more chocolate to every one of your fellow consumers, everywhere in the world. Thus, the Belgian-based chocolate confectionary needed an effective global marketing strategy. To address MP#1, Godiva develops different products for different consumers, who purchase chocolates for different reasons. It identified three main reasons people buy premium chocolate: as gifts, to share with a group, and for themselves. Different offerings thus target consumers motivated by each of these reasons. Godiva continues to produce its famous boxed chocolate for gift-givers to exchange, but it also expanded its product line to include boxed brownies and chocolate fondue baskets. For group consumption, delicate truffles could not hold up on a buffet table, so Godiva developed individually wrapped candies. For chocolate lovers, facing “chocolate emergencies” and desperately needing a sweet indulgence, Godiva created both large candy bars and individually wrapped Godiva Gems for sale in supermarkets. The segmentation strategy has been sweet too: Godiva’s annual sales increases average around 10%.29

Input–Output Framework for Managing Customer Heterogeneity Figure 1.4 contains the input–output framework for managing customer heterogeneity. It captures approaches, processes, and analyses that aid managers’ decision-making. Three key inputs are required. The first input pertains to information about potential customers in the industry or product category.

The goal is to gather their needs, desires, and preferences (i.e., segmentation); perceptions of specific firms and brands in the marketplace on key attributes (i.e., targeting); and information to determine segment attractiveness, such as their growth rate or price sensitivity. Attractiveness information often comes from multiple sources, such as customer surveys, marketing industry reports, and other secondary sources.

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Marketing Strategy: A First Principles Approach

The second and third inputs are similar, but one focuses on the focal company, and the other involves competitors. Inventories of the company’s and its competitors’ strengths and weaknesses are needed to evaluate the firm’s relative, competitive strength in each segment, which supports targeting and positioning processes. These assessments should span all relevant domains (i.e., manufacturing, technical, financial, marketing, sales, research) that might produce a relative competitive advantage. Company and competitor strengths and weaknesses should be collected together with opportunities and threats in a classic SWOT (strengths, weaknesses, opportunities, and threats) analysis. All four factors might facilitate the firm’s targeting and positioning efforts.

Inputs (3Cs)

Managing Customer Heterogeneity

All Potential Customers • Needs • Demographics • Size, growth, perceptions

Your Company • Strengths and weaknesses • Opportunities and threats

Your Competitors • Strengths and weaknesses • Opportunities and threats

Outputs (STP) Industry Segmentation

Approaches & Processes Segmenting, targeting, and positioning (STP) Perceptual/positional maps Customer-centric view

Analyses Factor analysis Cluster analysis GE matrix Discriminant analysis Classification

• Customer segments • Needs, demographics, and opportunity of each segment

Target Segment

• Detailed needs, demographics, and value of target segment(s) • Discriminant function • Relative perceptions

Positioning Statement

• Who (target segments) • What needs/benefits • Why (relative advantage & support)

Figure 1.4 Marketing Principle #1: All Customers Differ  Managing Customer Heterogeneity

We can thus define the inputs for managing customer heterogeneity according to the 3Cs of situation analysis: customers, company, and competitors. Together, they provide the contextual background for the firm’s strategy. A firm’s marketing strategy is embedded in this background and must both fit with and leverage customers’ preferences and perceptions, market trends, and the firm’s own relative strengths.

In turn, the framework generates three outputs, which provide inputs for subsequent Marketing Principles. To start, this framework produces a map of key customer segments, according to customer preferences. This critical output defines the customer landscape, by addressing two key questions: Can the marketplace be subdivided into homogeneous groups? What does each group of potential customers want?

A second output then dives deeper, to describe specific segment(s) that interest the firm. These descriptions detail the value or attractiveness of each segment and the firm’s relative strength. Thus, the second output addresses two additional questions: What segments will the firm pursue? How can the firm identify each group of target customers?

Finally, the third output is a positioning statement, which captures the essence of the positioning strategy for a target segment. It combines three key questions to produce a single, concise statement that firms can use to direct their internal and external marketing mix activities. The three questions ask: •• Whom should the firm target?

•• What needs and benefits are being fulfilled?

•• What are the relative advantages of this offering versus competitive offerings?

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Position statements should apply to the firm overall but also to each key target segment that it addresses.

Summary of Marketing Principle #1 The process of converting customer, company, and competitor (3Cs) inputs into a representation of the firm’s environment, using industry segmentation, target segments, and positioning statement (STP) outputs, is a critical first step in developing a marketing strategy. It accounts for customer heterogeneity, customer attractiveness, and the company’s relative advantage. Thus, the firm can make sense of the customer landscape, identify appealing customer groups, evaluate its relative strengths, and make strategically critical decisions about how to win and keep those target customers. Virtually all other firm decisions build on this critical first step.

The process of converting customer, company, and competitor (3Cs) inputs into a representation of the firm’s environment, using industry segmentation, target segments, and positioning statement (STP) outputs, is a critical first step in developing a marketing strategy.

MP#2: ALL CUSTOMERS CHANGE  MANAGING CUSTOMER DYNAMICS First Principle: All Customers Change

customer dynamics The processes by which customers’ desires and needs change over time.

In addition to accounting for customers’ inherent differences (MP#1), managers developing their marketing strategies also must account for how customers’ needs change over time (MP#2). Even in well-defined segments, people’s needs shift at different rates and in various directions. These changes might reflect factors pertaining to the specific customer, the product market, or the context. At the very moment a product or service comes to match customers’ needs perfectly, those needs start to change. Customers who had been part of a relatively homogeneous segment ultimately exhibit unique needs and desires and no longer fit neatly into any market segment.

Consider the relatively homogeneous segment of new college graduates.

Companies like Toyota and GM design incentives to appeal to these well-educated consumers, who are about to launch their professional lives. Just two or three years later though, the members of this “new college graduate” segment likely have taken totally different paths. Some have invested totally in career success. Others have got married and are having children. Another group has returned to graduate school.

Some are buying their first homes, others rent, and still others have moved back into their parents’ houses. Their needs and buying preferences, fairly consistent just a short time ago, have splintered in various, distinct directions. The processes by which customers’ desires and needs change over time are called customer dynamics.

But changes also occur in markets, often as a result of technological innovations. In these cases, nearly all customers eventually change, but at different rates. Firms that lag too long suffer a risk of extinction, along with the old technology. Blockbuster, the US-based video rental company, was a strong market leader when people rented physical VCR tapes to watch movies at home; it shifted effectively to rentals of physical DVDs when that technology emerged.

But it struggled to adapt to the flexibility and convenience offered by rental kiosks

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(e.g., Redbox) and rentals-by-mail (e.g., Netflix). When video streaming entered the fray, it simply could not compete anymore.

Let’s look more systematically at changes in individual customer needs and preferences over time. Why do they occur? Different sources and drivers of customer dynamics combine to make change inevitable. Most drivers can be grouped into five categories: 1 Seminal events: The needs and preferences of individual customers change in response to life events, whether anticipated or not, such as a car accident, graduation, a major promotion, or a new job.

2 Life stages: Historically, people have moved relatively steadily through typical lifecycle stages as they mature (e.g., single –> married –> children –> parent of teens –> empty nesters –> retirement), which influences their product and service priorities.30 3 Knowledge/expertise: When people gain experience with a product, they consider different attributes more critical, due to the learning effect. For example, a first-time guitar buyer might focus on price, color, and whether it “looks like the one Slash plays.” As this musician gains skills and learns which attributes affect playability and sound quality, the preferences might shift to highlight the guitar’s neck width, fret board material, and tone woods.

4 Product category maturity: Another learning effect occurs at individual and market levels as a product category becomes more familiar over time. For example, even novice digital photographers likely consider a camera’s pixels and zoom rates, because these technical qualities, once known only to professional photographers, have become familiar to nearly everyone through the growth of this market.

learning effect The process by which customers become familiar with the product by using it, which changes their weighting of the relative importance of different attributes due to their enhanced knowledge and experience.

5 Regular exposure to relevant information: Finally, persuasive information is virtually everywhere, in communications received from marketers, firms, other organizations (e.g., government agencies, trade groups, nonprofit organizations), friends, and acquaintances – all of which can influence a person’s needs and preferences. Recall the messages you received this week about, say, healthy living: probably some admonitions to eat more vegetables and fewer desserts, advertisements for exercise equipment, or healthy recipes sent by friends. You may have ignored some of those messages, but others might spur some change. A public service announcement to get 30 minutes of exercise might encourage you to take a walk after dinner; a recipe from your mom for a vegetable casserole instead might prompt you to rebel by ordering a large portion of fries at the drive-through.

Because all customers change over time, a failure to understand and address customer dynamics ultimately will undermine virtually any marketing strategy.

Because all customers change over time, a failure to understand and address customer dynamics ultimately will undermine virtually any marketing strategy.

Marketing Challenge: Managing Customer Dynamics Marketing strategies often take a long time to implement and produce results.

Sitting around and waiting for evidence that customers have changed is not effective; the firm needs to respond proactively even before it learns from its

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MARKETING STRATEGY customer lifecycle The average change or migration among customers as they age, independent of any product or industry differences. product or industry lifecycle Typical user experiences and industry developmental effects that can be observed as the product category matures.

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financial reports that customer sales have fallen. But how can it do so? That is, how should a firm manage customer dynamics?

There are three main approaches. First, a firm can gain insights into customer dynamics by applying lifecycle perspectives. A customer lifecycle refers to average changes that customers undergo as they age, independent of the specific product or industry. These methods capture the first two or three sources of customer dynamics that we listed in the previous section. A product or industry lifecycle instead reflects changes as the product category matures, which leads to different typical user experiences and industry effects. It mainly captures the fourth and fifth sources of change. Both these lifecycle approaches are simple and easy to use, which probably explains why they are so popular in practice and in marketing textbooks.

Example: Netflix (USA) Netflix started by renting DVDs to customers, shipping the disks by mail in the late 1990s. Today, it is the world’s largest online subscription service, growing by millions of subscribers every quarter. Netflix successfully adapted to the industry lifecycle in the home entertainment market, as well as customer dynamics, by adjusting and expanding its services. For example, as the Internet became more accessible, consumers found it more convenient to stream offerings, so DVDs (and their players) become obsolete.

Netflix capitalized on these shifting preferences and new technologies. This home entertainment behemoth now counts more than 130 million customers worldwide and a net income of $1.2 billion in 2018 (up from $160 million in 2010).31, 32

acquisition, expansion, retention (AER) approach An approach that groups existing customers into three stages – those recently acquired, longer term customers, and those lost or at risk of being lost – can offer some insights into customer dynamics.

customer lifetime value (CLV) An approach that attempts to capture the financial contribution of each customer by determining the discounted value of the sales and costs.

But the notion of predetermined lifecycles, whether for customers, products, or industries, is problematic. It would imply that organizations can identify an optimal marketing strategy at each stage, but we know that’s unlikely. Customers, products, and industries never evolve in the same way. Furthermore, different lifecycles capture effects at different levels but ignore other sources of customer dynamics that might be operating simultaneously. Every source of customer dynamics is critical for understanding and developing the marketing strategy though.

Second, some insights from MP#1 apply to customer dynamics. In particular, firms might segment existing customers according to their similar migration patterns, using an acquisition, expansion, retention (AER) approach, which we explain in Chapter 3. Briefly, grouping existing customers into three stages – those recently acquired, longer term customers, and those lost or at risk of being lost – can offer insights into customer dynamics, needs, and preferences. Then the firm can create a descriptive “persona” for each group. Even if they do not specifically adopt the AER framework, managers might want to name and describe important personas (i.e., prototypical customer groups in the firm’s target market), list their needs, predict their evolution, and develop visual representations of these insights.

Doing so can help managers understand and manage customer dynamics, as well as communicate about them throughout the organization.

Third, a customer lifetime value (CLV) approach attempts to capture the financial contribution of each customer by determining the discounted value of the sales and costs associated with them, according to their expected migration path over the entire relationship with the firm.33 Thus, CLV accounts for customer heterogeneity (MP#1). It is calculated at the individual customer level, so it does

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not include the assumption that all customers in the firm’s portfolio are the same.

It accounts for customer dynamics too (MP#2). Specifically, it discounts cash flows (sales and costs) during acquisition and expansion stages, then integrates expansion and retention expectations in predicting customers’ trajectories. With these determinations, CLV can suggest more preferable trade-offs and resource allocation decisions across stages and market mix investments.

Input–Output Framework for Managing Customer Dynamics The organizing framework for managing customer dynamics is shown in Figure 1.5. Whereas MP#1 focuses on the market as a whole, MP#2 narrows the scope to existing customers. It establishes that a firm must work to understand how its customers change over time.

Inputs (CRM data)

Managing Customer Dynamics

Outputs (AER) Segmentation of Customers

Your Customers

• Individual customers’ sales, margins, costs • Behaviors/needs over time/ events

Past Marketing Programs • Source of customers • Past programs targeted at specific customers

Lost Customers • Cause of defection • Characteristics of lost customers

Approaches & Processes Lifecycle approach Dynamic segmentation approach Acquisition, expansion, retention (AER) model Lost customer approach

Analyses Customer lifetime value (CLV) Hidden Markov model (HMM) Choice models Factor, cluster, discriminant analyses

• Customers' personas • Needs and CLV of personas • Why and how they migrate

AER Positioning Statements • How best to position the firm in each persona/AER stage

AER Strategies • What marketing strategies work best for each persona/AER stage?

Figure 1.5 Marketing Principle #2: All Customers Change  Managing Customer Dynamics

There are three categories of inputs in this framework. The first, data about the existing customer portfolio, is arguably the most important. A firm’s customer relationship management (CRM) system should provide detailed, customerlevel data, such as financial accounting (sales, margins), product purchase (timing, frequency, product migrations), and demographic (zip code, family size, age) information, over time. More sophisticated data also might capture what customers are thinking and feeling, at different points in their lifecycle. However, this information rarely is available in a CRM database and instead requires additional data collection efforts (e.g., surveys, focus groups, observations).

A second category of inputs describes how customers have responded to specific marketing programs in the past (e.g., advertising, new customer promotion, price discounts, reward program gifts), as well as their costs. If a firm lacks these data, it can run small A/B experiments. These experiments split customers randomly into equally sized groups, then offer a marketing program to one group but not the other. They track performance over time; similar experiments can compare a program’s effectiveness for different customer segments. The resulting evidence should indicate the effects of a program,

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which likely vary across customer groups and lifecycle stages (Chapter 4 describes these experimental methods in more detail).

The third category of inputs for this framework comes from lost customer analysis. When customers have stopped doing business with the firm or threaten to do so (e.g., customer complaints), figuring out why and what they choose instead (e.g., stopped using the category, switched to low-cost competitors, upgraded to a competitor with more features) is critical. It also can suggest some potential recovery strategies. Moreover, such an analysis can uncover ineffective strategies. Perhaps the firm tried to acquire customers who were not in its target market, aggressively worked to sell products to target customers even if they did not match their needs, or failed to help customers form relational bonds with its brands.

These inputs in turn produce three categories of outputs, including a thorough segmentation of the firm’s customer portfolio. By describing customer personas, their needs and preferences, and how and when customers migrate across personas, a marketing strategist can answer several crucial questions: 1 What critical triggers lead to migration across stages?

2 Which products and services do customers buy in different stages in their lifecycle, and why?

3 When and why do they stop buying?

4 What is the CLV of customers who represent each persona?

The second (AER positioning statements) and third (strategies) outputs are closely interrelated, in that they represent key strategic decisions that managers must make to manage customer dynamics. The process of identifying where specific personas/segments want to go, then designing strategies to help them reach these positions, parallels the process by which a firm defines its own positioning in the market. However, the MP#2 framework is unique. It focuses on a firm’s existing customers, captures differences across personas and stages, and incorporates insights from lost customers. The AER positioning statements also should be congruent with the firm’s overall positioning in the marketplace to be effective. However, when firms first start to manage customer dynamics, they lack the data they need to conduct specific analyses and define specific strategies.

Over time, firms can track and acquire richer data. With these data, managers can identify gaps and missed opportunities, as well as develop robust strategies.

Those strategies in turn inform specific marketing decisions (e.g., acquisition, branding activities, sales approaches).

Summary of Marketing Principle #2 Because customers’ needs and preferences are always changing, and for many reasons, a firm’s marketing strategy must account for customer dynamics to avoid becoming obsolete. Firms that fail to respond to emerging needs will be replaced by competitors that produce better solutions, more closely matched to customers’ evolving needs. This First Principle acknowledges that customers change and offers a framework for managing customer dynamics. The framework identifies how customers migrate (i.e., change), the triggers of these migrations, the different

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needs across stages, and desirable positions for appealing to customers over time.

Whereas MP#1 recognizes diverse customer needs across the market and seeks to select appropriate target segments, MP#2 looks at customers within each target segment to understand how to win and keep them, even as they change, by accounting for their evolving diversity.

MP#3: ALL COMPETITORS REACT  MANAGING SUSTAINABLE COMPETITIVE ADVANTAGE First Principle: All Competitors React The first two marketing principles are focused on potential and existing customers, because understanding and managing customer heterogeneity and dynamics allows a firm to develop a positioning strategy that matches its customers’ needs over time. But the best target markets and positioning strategies also reflect the firm’s relative strengths — that is, how it performs better than competitors. Therefore, a firm’s long-term success also depends on how competitors react, now and in the future. No matter how well a firm addresses MP#1 and MP#2, it has to know that competitors will try to copy its success or come up with options that better match customers’ needs and desires. All firms work to copy success and innovate, so all competitors react, and managers need to address this third principle by building and maintaining competitive barriers, as detailed in MP#3.

Example: General Electric (USA) It may seem obvious to say that competitors always react, and history shows that few firms can maintain a leadership position forever. But the exception is notable: Of the original top companies listed in the Dow 30 in 1928, only General Electric (GE) remains on the list. Of course, GE has repositioned itself with multiple, drastic, company-wide initiatives. In contrast, between 1929 to 2013, the Dow Jones top firm has changed 56 times, due to bankruptcy, poor performance, and other indicators of a failure to respond successfully to market changes and competitive threats.34

Competitors have many ways to challenge a firm’s market position. First, with technical innovations, they can launch new offerings that make existing products or services obsolete. Second, cultural, environmental, or seemingly random factors might make a firm’s brand seem irrelevant or even unappealing, such as when the US-based market share leader Wonder Bread found itself left on the shelf as consumers sought healthier, whole grain, or fresh breads.

Third, entrepreneurs and creative actors constantly seek different, better, novel solutions to problems (e.g., Uber replacing taxis). In some cases, these creative efforts replace the market leader; in others, they redefine the marketplace. Fourth, competitors might copy a focal firm’s offering but execute the strategy better.

Three brothers named Marc, Alexander, and Oliver Samwer have generated billions of dollars by copying the success formulas created by firms like Pinterest, Groupon, and Airbnb.35

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Thus, in response to changes in technology, customers, and business environments, all firms, including both the focal firm and its competitors, try to find new ways to satisfy customers’ needs and desires. In doing so, they all work to achieve more market share. The more successful a firm is, as reflected in its sales, profits, and stock prices, the more effort its competitors likely expend to attack its financially successful position.

The more successful a firm is, as reflected in its sales, profits, and stock prices, the more effort its competitors likely expend to attack its financially successful position.

Marketing Challenge: Managing Sustainable Competitive Advantage

sustainable competitive advantage (SCA) An advantage that a firm has when it is able to generate more customer value than the other firms in its industry and when these other firms are unable to duplicate its effective strategy.

Because competitors are always attacking the firm’s marketing position, managers developing marketing strategies cannot solely focus on customers’ unique needs now (MP#1) or manage changes in needs over time (MP#2). They also must anticipate future competitive reactions, then build barriers against them (MP#3). These barriers arise because a firm builds a sustainable competitive advantage (SCA). A firm’s SCA needs to be relevant to a specific target segment. If customer needs change, it must adapt its SCA too, whether to protect that segment or move to a different one. Many firms devote a lot of resources to marketing activities designed to shore up their SCA, through three key marketingbased sources: brands, offerings, and relationships:

Source: Getty Images

Successful products alone are not enough to maintain continuous success in sales, profits, or stock prices, because competitors attempt to create similar, if not better, products to lure customers away and gain market share.

•• Brands can create SCA in large consumer markets (e.g., soft drinks, beer, fashion, automobiles). Firms invest heavily in advertising, public relations, and celebrity sponsorships to build brand awareness and brand images in customers’ minds. The brands need to match the firms’ positioning strategy too, and then they can create SCA through multiple mechanisms. In a simple form, strong awareness can cause customers to buy because they recognize the brand or buy it regularly. These brand influences reduce their cognitive

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effort. If brands establish a strong, unique meaning, customers also might purchase them to achieve status, enhance their self-identity, or demonstrate their positive attachment to the brand. Customers feel attracted to a brand if its perceived image matches their needs and desires. If the firm’s brand aligns better with their desires than other, competitive brands, it likely establishes an SCA. •• Offerings can be effective sources of SCA; new and innovative products and services in particular have the potential to disrupt market segments. Firms perform R&D to achieve the newest or most innovative products, reduce their costs, add supplementary services, or fundamentally change customers’ experiences. Offerings create SCA if they meet customers’ needs better or provide more value than existing offerings. However, customers must care about and value the new feature, innovation, or value proposition established by the new offering for this source to work.

•• Relationships are especially effective in business-to-business (B2B), service, or complex business settings. Strong relationships between customers and the firm’s salespeople can keep customers from leaving, increase their loyalty, and lead to superior financial performance.36 Most B2B transactions are fairly complex, such that they require a lot of two-way communication and a long time, so strong interpersonal relationships between firm representatives can be critical. Good relationships establish trust, cooperation, and flexibility, which in turn create SCAs. Due to their commitment, the exchanges can adapt readily to changing circumstances, and buyers trust that future outcomes will be fair.

These three SCA sources are additive. They also can be evaluated from a customer equity perspective that treats customers just like any other asset. That is, they should be measured, managed, and maximized, just like land, buildings, or equipment is. Customer equity is “the total of the discounted lifetime values of all of [the firm’s] customers.”37 If a firm works to build strong brands, invests in R&D to develop innovative products, and trains salespeople to build enduring customer relationships, it should achieve brand, offering, and relational equities that together increase its SCA and its customer equity.38 Thus, we introduce the brand, offering, relationship (BOR) equity stack.

Across all the firm’s customers, this stack represents the firm’s overall customer equity. At an individual level, customer equity is analogous to customer lifetime value (CLV). In turn, we can take a customer equity perspective on applying a CLV analysis (as we do in Chapter 4), such that each equity in the BOR equity stack adds to the customer’s discounted cash flow over time. Similar to tangible assets, BOR equities generate returns on assets, increase with more investments, and depreciate over time if not maintained.

Effectively building SCA using specific BOR strategies is central to marketing strategy, so we address the strategic management of brands (Chapter 5), offerings (Chapter 6), and relationships (Chapter 7) in more detail in separate chapters. That is, Chapters 4–7 are all focused on MP#3, which reflects the importance and key role of marketing strategy for a firm’s SCA and financial performance.

brand, offering, relationship (BOR) equity stack A stack of brand, offering, and relationship equities that represents the firm’s overall customer equity.

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Example: Stance (USA) Socks are no longer commodities or lame holiday gifts. Instead, a luxury sock market has arisen, and one of the key players is Stance. The California-based company maintains a competitive advantage over its rivals that can be explained by its impressive BOR equity stack. Stance brands itself as hip and unconventional, using the mantra, “The Uncommon Thread,” and celebrity endorsements by “Punks and Poets.” Its offerings are innovative, visually captivating, and made of proprietary fabrics, like its Butter Blend, which it invented by weaving together sustainably sourced seaweed fibers. Furthermore, Stance has established relationships with the NBA to function as the league’s official on-court sock, and it connects with fans by offering team-specific socks to help them proclaim their favorite team.40

Input–Output Framework for Managing Sustainable Competitive Advantage We provide an organizing framework for managing SCA in Figure 1.6. Of the three key inputs for this framework, two are outputs from MP#1 and MP#2, and the third captures long-term environmental trends. Probably the most important input for this framework is the positioning statements derived from the first two marketing principles. Specifically, the positioning statement from the STP process identifies the product or service features that the firm will use to appeal to its target segment better than its competitors can. It provides guidance about where the firm needs to invest to build and maintain its SCA. The AER positioning statements, an output of MP#2, answer similar questions but focus on the firm’s existing customers. They describe who, what, why, and when details for each persona in the firm’s portfolio, as they develop over time.

The combination of the two positioning statements provides insights into which aspects of the BOR equity stack are key for winning customers and keeping them as they change over time.

The AER strategies, organized by stage and persona, are the second input. They indicate how a firm should invest to acquire and keep various customers. The

Inputs (MP#1 & MP#2) Positioning Statements • Target (external customers) • AER (internal personas)

AER Strategies • What strategies work best for each persona/AER stage?

Future Trends • Technology trends • Regulatory trends • Socioeconomic trends

Managing Sustainable Competitive Advantage

Outputs (SCA, BOR)

Approaches & Processes

• Existing SCAs, why you win now • Future SCAs, how you will win in future

Sustainable competitive advantage (SCA) Brand, offering, relationship (BOR) equity stack AER strategy and BOR equity grids Brand and relationship management Innovation processes

SCAs

Analyses

Field experiments Conjoint analysis Multivariate regression Choice models

BOR Strategies • Brand strategies • Offering/innovation strategies • Relationship marketing strategies

Figure 1.6 Marketing Principle #3: All Competitors React  Managing Sustainable Competitive Advantage

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AER strategies summarize how to win/acquire and keep/retain customers, but they also must be aggregated and reorganized by brand, offering, and relationship categories to match SCA efforts, as captured in a BOR equity grid (see Chapter 4).

The third input comes from the wider environment and its (technology, regulatory) trends, which may knock down SCA barriers. With this input, managers can avoid a limited focus on existing customers and competitors, because it forces them to acknowledge long-term trends and discontinuous changes in the environment.39 Two outputs result from the managing SCA framework. First, a description of the firm’s SCA, now and in the future, offers a high-level prediction of how the organization can win in the competitive marketplace. The aggregation of target segments and personas helps the firm recognize core foundations of its long-term success. Second, BOR strategies as an output aggregate the needs of each targeted customer and persona (accounting for customer heterogeneity) and the most effective strategies over time (accounting for customer dynamics), according to brand, offering, and relationship categories. Marketing programs often spill over to multiple personas and stages, so a high-level strategy is needed to provide consistent brand strategies that can be effective for multiple customer groups.

Both outputs (SCA and BOR strategies) thus combine insights gained from finegrained analyses, linking and reorganizing them to support higher level decisionmaking. Such a micro–macro duality increases the chances of a successful marketing strategy, because true customer understanding occurs at micro levels (which avoid aggregation bias), but strategic and resource-oriented decisions occur at macro levels (advertising, R&D, sales force strategies, and expenditures).

The micro–macro duality is critical to a successful marketing strategy, because true customer understanding occurs at micro levels (which avoid aggregation bias), but strategic and resourceoriented decisions occur at macro levels (advertising, R&D, sales force strategies, and expenditures).

Summary of Marketing Principle #3 MP#1 focuses on understanding what customers in the overall marketplace want and how the firm should position itself in this space. MP#2 addresses the firm’s own customers to understand which AER strategies are most effective when customers change over time. MP#3 is a natural next step. It describes building and maintaining strong barriers to withstand competitive attacks on high-value customer segments. These barriers, or sustainable competitive advantages, arise from marketing efforts to build them, in the form of brand, offering, and relationship (BOR) equities.

The three BOR equities combine into customer equity. In this way, customers are similar to any other firm asset, measured and managed to improve firm performance. The natural ordering of BOR strategic decisions produces the firm’s customer equity stack. First, the firm should make brand decisions, according to its overall positioning objectives (MP#1 and MP#2). Second, the firm should make choices about its offering, because product and service innovation and R&D efforts must align with both brand strategies and the firm’s positioning.

Third, relationship strategies get determined last. They involve the delivery and experience of offerings.

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MP#4: ALL RESOURCES ARE LIMITED  MANAGING RESOURCE TRADE-OFFS First Principle: All Resources Are Limited The final issue is perennial for managers: All resources are limited. Most marketing decisions require trade-offs across multiple objectives, because the resources available to address the firm’s needs often are interdependent.

Allocating thousands of square feet of retail shelf space to products that serve a wrongly targeted consumer segment could lead to substantial losses. A retailer that stocks pallets full of skinny jeans, just as wide-legged styles are coming back into fashion, will be in trouble. When marketing strategies dictate allocating more spending to brand advertising, or innovating new products, or expanding the sales organization to build relationships, they take from the same resource pool.

A firm only has so many resources, so trade-offs are unavoidable. In addition, marketing resources create the levers to implement what the firm has learned from MPs#1–3, so managing these resources carefully is critical. Of the many factors that determine complex resource trade-offs, five are especially notable: •• Resource slack refers to usable resources a firm has. With more slack, it can undertake changes to its marketing strategy more easily. For most firms, the amount of resource slack depends on the economy and the firm’s financial performance.

•• Changes in customers’ needs alter the size and attractiveness of segments, as well as the number of segments the firm wants to target. Therefore, they might require the firm to reallocate its resources to match its shifting commitment to various segments.

•• Lifecycle stages of a firm’s product portfolio emerge and require the firm to rebalance its product portfolio to include products that address advanced lifecycle stages and varied target segments.

•• Changes in the product market landscape result from the entry or exit of competitors. An advantageous market position attracts competitors, trying to steal market share from one another. To combat these efforts and retain its SCA, the firm might need to reallocate its resources.

•• The effectiveness of marketing activities depends on changing customer segments, values, and tastes, the competitive landscape, and economic conditions. The same resources might be rendered more or less effective due to external changes. Trading off resources in such environments can be very challenging, and firms must constantly vary their allocations. In some cases, they even might need to reverse allocation rules they have used for years.

These different sources work together to create the powerful need for complex trade-offs when firms execute their marketing strategy, representing another First Principle.

Firms that ignore the complexity of resource allocation adjustments may continue to enjoy sales, especially if they operate in a monopoly (e.g., daily newspapers from the 1960s to the 1990s). But it rarely works in the longer run.

Trading off multiple marketing options is inevitable in a dynamic business

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environment. Multiple factors simultaneously influence firm performance, so if firms do not develop effective methods to manage complex trade-offs, they risk losing whole customer segments or significant market share to competitors that have grown more effective at allocating their resources.

Example: Zara (Spain) Even though Zara rarely advertises, you likely know the name of this massive clothing retailer. That’s because the company prefers to devote its limited resources to establishing store locations and improving customer experiences. The Spanish fast-fashion chain operates thousands of stores in hundreds of cities, as well as a growing online market. In addition to establishing them in convenient locations, many Zara stores feature augmented reality displays, because Zara invested its resources in installing innovative technology to allow customers to use their smartphones to view models wearing particular outfits.

By managing these resource trade-offs, Zara opts for a superior in-store experience over conventional advertising efforts.41

Marketing Challenge: Managing Resource Trade-Offs The assumption that all resources are limited and that an effective marketing strategy must manage resource trade-offs is the fourth and final marketing principle. Resource trade-off strategies define how much the firm allocates to each target market segment, AER strategy, and SCA strategy. They should be relevant to the firm’s current target segments (MP#1), maintain the firm’s current AER strategy (MP#2), and support its stated SCA (MP#3). If any factors (e.g., changes in customer segments, product portfolios, or effectiveness of marketing activities) prompt new resource trade-offs, the firm must adapt its strategy too.

The resource allocation decision framework then can be informed by two broad approaches.

First, firms use heuristic-based processes if they lack hard data about the attractiveness of each resource option. Managers use simple rules of thumb, driven by intuition and judgment, such as allocating some percentage of sales to marketing. Such approaches can be adapted quickly, so they seem appealing in complex situations. However, most heuristics are incorrect. They lack any scientific basis and rely instead on managers’ gut sense of the right resource allocations. But continuing to allocate the same average percentages as used in the past to set advertising budgets, across all segments, would violate MP#1. It assumes that advertising pays off equally across all customer groups, even though all customers differ. If the firm sets advertising expenditures as a percentage of sales, it violates MP#2. All customers change, but this heuristic would assume that advertising works just as well today as it did in the past.

To improve on these methods, firms can adjust their heuristics, in a process known as “anchoring and adjusting.” For example, managers might use an initial heuristic to determine resource allocations (i.e., anchors), then adjust their decisions every period, after observing the outcomes. Imagine the heuristic requires spending 1% of sales on advertising. In each period, the firm reviews its performance and then maintains “business as usual” (keep advertising at 1% of sales) or else adjusts the heuristic, upward or downward. In relatively stable markets, these methods might work, at least temporarily. In unstable markets,

heuristic-based processes A decisionmaking process where an individual uses lay theories or common beliefs (heuristics) to make decisions with uncertain outcomes.

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attribution-based processes A method for gauging marketing effectiveness that attributes causal economic effect to a marketing investment, in environments where multiple marketing and confounding events may shape an economic outcome.

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marked by heterogeneity and sales volatility, simple decision rules often lead to poor trade-off decisions.

Second, attribution-based processes capitalize on improved computing power and advances in statistics and data management. That is, firms can review their historical data and measure the impacts of various marketing resource allocations on outcomes. These historical data contain insightful information about whether and by how much marketing resources truly increase economic outcomes. For example, marketing managers can answer critical resource allocation questions, like: How much would our financial outcomes change if we increased marketing efforts by 1% (i.e., marketing elasticity)? If marketing managers use more than one marketing resource (as is almost always the case), they can separate out the relative impact of each resource to determine their optimal allocation.

Source: iStockphoto.com/wutwhanfoto

Because all resources are limited, the success or failure of a firm’s marketing strategy depends on the allocation of these limited resources.

All resources are limited, so a firm’s marketing strategy must effectively allocate its resources to maximize its business performance over time. Chapter 8 expands on this discussion of heuristic- and attribution-based approaches to resource trade-offs.

All resources are limited, so a firm’s marketing strategy must effectively allocate resources to maximize its business performance over time.

Input–Output Framework for Managing Resource Trade-Offs In the organizing framework for managing resource trade-offs in Figure 1.7, the three key inputs reflect the outputs of the three preceding First Principles. That is, MP#1 yields a positioning statement, and that statement provides information

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Marketing Strategy: A First Principles Approach

Inputs (MP#1, 2, and 3)

Managing Resource Trade-offs

Outputs

Positioning Statements • Who, what, and why support, overall and for each persona • AER (acquisition, expansion, retention) statements by stage

AER Strategies • What strategies work best for each persona?

• What strategies work best for each stage?

BOR Strategies • Brand, offering, and relationship strategies

Plans and Budgets

Approaches & Processes

• Budget per marketing activity • Allocation across categories • Time horizon

Heuristic approach Attribution approach

Analyses Response model attributions Experimental-based attributions

Marketing Metrics • Marketing metrics • Financial metrics

Figure 1.7 Marketing Principle #4: All Resources Are Limited  Managing Resource Trade-Offs

about key customer segments to target, products to invest in or discontinue, regions to target, and relative advantages to build and maintain. Thus, this output serves as a starting point and input for resource trade-offs, because it establishes working boundaries for when and with whom to execute the firm’s positioning statements.

Then MP#2 yields AER positioning statements that indicate the who, what, why, and when information for each customer persona in the firm’s portfolio, as well as effective AER strategies across customer personas and stage. The combined outputs from MP#1 and MP#2 narrow the potential trade-offs (across segments, products, regions, and relative differences) in the resource allocation decision. They restrict the decision to only those trade-offs that are key to winning customers in the marketplace and keeping customers as they change over time.

Finally, MP#3 focuses on how to build and maintain strong barriers around customers to withstand competitive attacks. Its output is the firm’s BOR strategy, which describes the key objectives of branding, offering, and relationship investments. The suggested trade-offs among these elements reveal how to build and maintain the firm’s SCA. The managing resource trade-off framework produces two outputs: plans/ budgets and marketing metrics. When a manager makes a specific resource allocation decision, the choice gets captured in the firm’s annual marketing plans and budgets, with three subdecisions: •• Budget per marketing activity, or the commitment the firm makes to the marketing activity.

•• Allocation across categories, which reflects the percentage split of the marketing budget for a specific activity across categories.

•• Time horizon, indicating the timespan for which the firm commits to this marketing budget.

The marketing metrics a firm needs to manage its resource allocation activities also can determine whether it is successful in achieving its goals. For example, financial metrics based on financial ratios can be converted easily into monetary outcomes such as net profit or returns on investments. Marketing metrics reflect

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customers’ attitudes, behaviors, and mindsets about a firm’s products, measured with variables such as awareness, satisfaction, loyalty, and brand equity. Mindset metrics can signal why particular marketing efforts have been successful. Chapter 8 provides an exhaustive list of marketing and financial metrics, pertaining to various marketing functions.

As market segments change, due to changes in customers or the competitive landscape, the metrics and resource allocation decisions need to be adapted continually too. Chapter 8 therefore outlines a five-step process for using the framework to transform inputs into outputs.

Summary of Marketing Principle #4 MP#4 takes on the perennial challenge of resource limitations. Managing resources well is critical, because marketing resources provide the tools to implement what the firm has learned from the first three marketing principles. First, to manage customer heterogeneity (MP#1) effectively, managers must develop a segmenting and targeting approach, which demands good systems and processes to allocate resources to the identified segments. Second, to manage customer dynamics (MP#2), managers design acquisition, expansion, and retention strategies for serving customers through their lifecycles. They need adequate marketing budgets to refine their resource allocation policies and cater to any changes. Third, to build sustainable competitive advantages (MP#3), managers devote various resources to building brands, introducing new products, and pursuing strong customer relationships, so they allocate these resources according to BOR strategies.

Chapter 8 also describes two approaches to managing resource trade-offs in more detail. As we introduced them here, a heuristics-based approach uses an anchor as a base decision rule, then adjusts the choice every period. An attributionbased approach is more scientific, relying on mathematical assessments of the effectiveness of prior marketing activities.

IMPLEMENTING THE FOUR MARKETING PRINCIPLES We close this chapter with a brief discussion of how to implement the four Marketing Principles (MPs) in practice. Each principle is a standalone entity, with its own input–output structure. But to make effective marketing decisions, firms must consistently take actions that reflect their strategy for building relative advantages over competitors, making this relative advantage salient to customers, and sustaining this advantage over time, even as customers change and competitors react. Thus, to successfully implement the four MPs, managers need to integrate them into their day-to-day practices, build strong marketing capabilities to effectively conduct the individual steps, processes, and analyses, and continuously iterate to improve the execution of each principle.

Integrating the Four Marketing Principles The solution to the four principles is hierarchical. Solving some principles requires knowledge of solutions to other principles. Figure 1.8 illustrates how the four MPs are connected in operation. The orange boxes represent the overarching

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Marketing Strategy: A First Principles Approach

marketing principle; the blue ovals represent its solution (or output). Imagine a firm that wants to develop an SCA by devising brand and offering strategies for its customer base. The brand and offering strategies must meet three conditions: 1 Customers care about what the SCA offers.

2 The firm must do “it” (whatever “it” is) better than competitors, leading to a relative advantage.

3 The SCA must be hard to duplicate or substitute.

However, it would be impossible to build effective brand and offering strategies without knowing which customer segments to pursue or how the firm can uniquely meet their needs and provide benefits relative to other offerings. That is, it needs output from MP#1 to even begin building an SCA (“Positioning statement” in Figure 1.8). To ensure the SCA can thwart competitive attacks, it also needs to account for how customers change over time and note when they might start or stop buying from it or competitors. The output of MP#2, which captures triggers of migration across stages, thus represents critical input to the problem of building SCA too (“AER positioning and strategies” in Figure 1.8).

Making resource trade-offs in MP#4 similarly requires a clear understanding the first three MPs. All Customers Differ

All Competitors React

Managing Customer Heterogeneity

Managing Sustainable Competitive Advantage

• STP • Perceptual maps • Customer centricity • Cluster analysis

Positioning statement

MP#1

• SCAs • BOR equity stack • Brand/relationship management • Innovation processes • Conjoint/choice models

SCAs now and in the future

MP#3

BOR marketing strategies

Managing Customer Dynamics

• Lifecycles • AER bathtubs • Lost customer • CLV analysis

MP#2 All Customers Change

Managing Resource Trade-offs AER positioning and strategies

• Heuristic approach • Attribution approach • Response models • Experimental models

MP#4

Plans, budgets, and metrics

All Resources Are Limited

The four Marketing Principles (orange boxes) can be integrated according to the key output (blue oval) of each principle that serves as an input for each subsequent principle.

Figure 1.8 Integrating the Four Marketing Principles

Building Marketing Analytics Capabilities To implement the four Marketing Principles framework successfully, a firm needs to develop customer analytics capabilities. This technology-enabled, model-supported approach harnesses customer and market data to understand and serve customers. Firms using customer analytics rely on data and methods

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to test and improve their marketing decision frameworks. It thus requires both data capabilities and methodological capabilities. A firm can increase its data capabilities by building databases that contain three forms of intelligence: (1) economic data that reflect the trading environment and changes in business conditions, (2) customer data that capture customers’ needs and behaviors, and (3) competitive data that reveal the competitive landscape, threats, and opportunities. To gain methodological capabilities, the firm should master the analytical tools that we describe in the process boxes of each of the Marketing Principles’ frameworks.

Continuously Iterating and Improving Finally, a firm cannot solve all the First Principles simultaneously; they are too complex and interrelated. Instead, firms need an iterative approach. In an ideal solution, all the key First Principles get optimized simultaneously, but firms likely lack the required time, resources, and skills to implement such an ideal solution.

Yet they can gradually improve their overall marketing functions by improving one principle at a time, while temporarily maintaining an existing (even if suboptimal) approach to the others.

MP#1: Target products to meet the needs of different

customer segments and manage customer heterogeneity.

High performance High Earners

Low price

customer needs.

High performance Shoppers Light gray box represents Team A’s product position

High price

Savers

MP#2: Adjust strategies over time to adapt to changing Segments expand

Low price

Dark gray boxes represent Team B’s product position

High price

Savers

Changing customer needs

Low performance

Low performance

MP#3: Introduce new products to create a sustainable

competitive advantage (SCA) as a barrier to other teams attacking your position.

Small display

Product Designs Product A

Blue represents Brand B resource allocations

Marketing Mix Ad

ve

D R&

Low price

Low-cost segment preferences

Manage limited resources by making resource trade-offs among marketing mix categories and brands.

Sales

Possible Design Characteristics

MP#4:

rti

sin g

les

ng

tisi

ver

Ad

Sa

Product B

Modern design High-performance segment preferences

Figure 1.9 How Markstrat Works

R&D

Fast processor

Purple represents Brand A resource allocations

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Marketing Strategy: A First Principles Approach

The first and most basic issue facing managers as they make marketing mix decisions for their firm is that all customers differ. Many factors cause customers to differ in their preferences for a product or service, including basic differences across people, varying life experiences, unique functional needs, differing aspirational self-identities, and the effects of persuasive efforts to change customer preferences. Thus, customer heterogeneity is a fundamental problem that all firms must address to develop an effective marketing strategy (MP#1).

The second underlying complexity for managers as they make short- and longterm marketing decisions is that all customers change. The multitude of drivers of customer dynamics include life-changing events, emerging life stages, growing knowledge, product category maturity, and new exposures. The key question is how the firm should manage those customer dynamics. Whereas MP#1 focuses on the market as a whole, to determine which customers to target, MP#2 narrows the scope to the firm’s own customers and challenges firms to understand how their existing customers change over time.

Persistent efforts by other firms to copy and innovate, or the premise that all competitors react, is the third principle that marketing managers must address, by building and maintaining competitive barriers (MP#3). Barriers that can withstand competitors’ actions are sustainable competitive advantages (SCAs).

A firm’s SCA should resonate with a specific customer target segment. If those customer needs change, then the firm has to adapt its SCA to protect the segment, or else shift to a different customer segment.

Finally, a perennial issue for managers is their realization that all resources are limited. Many factors create complex resource trade-offs for firms, such as changes in resource slack, a firm’s customer segments, the product portfolio, the product landscape, or the effectiveness of a firm’s marketing activities. A firm’s resource trade-off strategy, defining how much it allocates to each target market segment, AER strategy, and SCA strategy, must be relevant to current target segments. It also should maintain the firm’s current AER strategy and reinforce its stated SCA. Thus, to make effective marketing decisions, firms must consistently address and optimize their plans for building relative advantages over competitors, making these relative advantages salient to customers, and sustaining this advantage over time, even as customers change and competitors react. Managers need to integrate the four MPs fully into their day-to-day practice, build marketing analytics capabilities, and constantly iterate to improve.

SUMMARY Marketing strategy texts often try to introduce the growing numbers of marketing analysis tools, processes, and research techniques available for evaluating business phenomena around the 4Ps (product, price, place, promotion), for dealing with competitors, and for executing specific marketing tasks (segmenting, branding).

This functional perspective produces a wealth of frameworks and processes. It offers little overall guidance on when to use those tools, how they work, which ones are most valuable, or how they all fit together.

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This book proposes a simplifying approach to marketing strategy. Marketing decisions primarily should involve solving basic underlying problems or complexities that firms face when they design and implement a marketing strategy. Central to our First Principles approach is the assumption that to build sustainable differential advantages, firms need to evaluate how customers see them. A marketing strategy is a set of decisions and actions, focused on building a sustainable differential advantage, relative to competitors, in the minds of customers, to create value for stakeholders. With this view, we outline and detail four fundamental problems and critical hurdles to marketing success, termed the First Principles of marketing strategy, which constitute the foundational assumptions on which any marketing strategy is based.

TAKEAWAYS •• Marketing strategy is the set of decisions and actions focused on building a sustainable differential advantage, relative to competitors, in the minds of customers, to create value for stakeholders.

•• This book takes a simplifying approach to marketing strategy, arguing that marketing decisions should focus on solving the four underlying problems or complexities that all entities face when designing and implementing a marketing strategy.

•• The first and most basic issue facing managers in their marketing mix decisions (pricing, product, promotion, place) for the firm is that all customers differ. Customer heterogeneity is a fundamental problem that all firms must address when developing an effective marketing strategy (MP#1).

•• The input–output framework for managing customer heterogeneity captures the approaches, processes, and analyses that can aid managerial decision-making. The inputs include customers, the company, and competitors, which together constitute the contextual background in which a firm’s strategy must operate. The output identifies key industry segments, the firm’s target segment(s), and positioning statements, which reveal the relative advantage of the firm’s offering for the target segment.

•• A second underlying complexity for both short- and long-term marketing decisions is that all customers change. Therefore, with a focus on the firm’s own customers, MP#2 challenges firms to understand how their existing customers change over time.

•• The input–output framework for managing this customer dynamism emphasizes the firm’s existing customer portfolio and data that link past customer responses to specific marketing programs as inputs. The outputs are acquisition, expansion, retention (AER) positioning statements and strategies, which help the firm effectively manage dynamics.

•• The idea that all competitors react is the third principle that marketing managers must address, by building and maintaining barriers to competitive attacks and thereby ensuring a sustainable competitive advantage (MP#3).

•• The input–output framework for managing competitive reactions cites three inputs: the outputs from MP#1, the outputs from MP#2, and long-term environmental trends. Its outputs are a firm’s brand, offering, and relationship (BOR) strategies, which aggregate and reorganize the needs of each targeted customer and persona, as well as the most effective strategies over time, in terms of brands, offerings, and relationships.

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•• The fourth marketing principle holds that all resources are limited, so firms must develop resource trade-off strategies that are relevant for their current target segments (MP#1) and maintain their current AER strategy (MP#2) and stated SCA (MP#3), which together constitute MP#4.

•• In the input–output framework for managing resource trade-offs, the inputs include the outputs from the first, second, and third marketing principles; the outputs are the metrics that firms need to manage their resource allocation activities, as well as the specific resource allocation decision that managers make for that period.

COMPANION WEBSITE Please visit the companion websites, www.macmillanihe.com/palmatier-ms-2e and SAMSinstitute.com, to access summary videos from the authors, along with full-length cases with datasets and step-by-step solution guides.

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INDEX Page numbers in italics denote a figure or photograph, bold indicates a table.

A A/B experiments 19, 342 AB InBev 199, 200 Abercrombie & Fitch 61, 61 accounting processes 167 Acer 198 acquisition, expansion, retention (AER), approach advantages 107 CLV combination 115 customer dynamics 18, 20 customer dynamics, process managemesnt 105–7, 105, 121–4, 130–1, 332–3 definition 18 disadvantages 106–7, 108 hidden Markov model (HMM) 108–11, 110, 130, 333 integration 31, 31 lost customer analysis 112–13, 333, 348 resource trade-offs 27, 29, 285, 292, 308, 311 strategy grid 175, 176, 178–9, 200 sustainable competitive advantage (SCA) 24–5, 172, 173 acquisition stage AER approach 106, 113, 122, 125–6 AER approach example 126–7 CLV approach 116, 117 Acura 45, 99, 113, 202 adidas 226 adoption lifecycle 237–8, 241, 244 advertising awareness index 305 brand equity 207, 210–11 customer equity 168 offering equity 228 one-to-one marketing 49–50 online search expenditure 300 optimization 296, 299, 311, 339 relationship equity 253 television/cable channels 47, 48, 305, 325 Aetna 90–1 aging effect, customer 96 Airbnb 143–6, 241 Airco, case study 280–1 Alibaba 226, 299 Amazon brand value ranking 194 buyouts 266 customer-centric approach 75, 76

interactive marketing 209 market expansion 285, 347 one-to-one marketing 49, 50 partnership potential 91 anchoring and adjusting heuristics 27–8, 30, 297–8, 305, 313 Anomaly 340 Antinori, Thierry 268 Apple brand equity 195, 198 brand value ranking 163, 194 iPhone and market growth 8, 9 marketing strategy 46, 160, 347 offering equity 228, 235, 239 positioning strategy 60 service sector 163 smartwatch market 90 supplier relationships 253 Art of War (Sun Tzu) 69, 149 ASOS 106 associative network memory model 195–7, 196, 217 AT&T 44, 299 attribution approach, resource allocation experimental attribution 299–302, 300, 302 overview 28, 30, 295, 298–9, 336 response models 302–7, 304, 307 Away 207

B B2B (business-to-business) customer analytics 340 hidden Markov model analysis 109, 110 lost customer analysis 112 personal selling 209, 210 price premiums 9 relationship lifecycle 264, 264–5 relationship marketing analysis 276–7, 276 relationships 23, 156–7, 251, 254, 262 segmenting 72 B2C (business-to-consumer) 112, 251, 266, 340 Barnum & Bailey 159, 233 Bass model 244, 245 “bathtub model” see acquisition, expansion, retention (AER), approach Baumgartner, Felix 208–9 beer, brand equity 165, 165, 198

Berger, Jonah 9 Best Buy 71, 233, 286, 346–8 betrayal 259–60, 264 Bezos, Jeff 75, 76 “Big 5” traits 40, 41 “big data plus” era 325–6, 326–7 bimodal rating distributions 42 Blockbuster 16–17, 151 blue ocean strategies 159, 232, 232 BlueScope 226 BMW 43, 107, 196–7, 197, 228 Bose 60, 228 boundary spanners conflict resolution 260 customer service culture 266–7 relationship equity 177, 177, 178, 251–2, 277 seller expertise 257–8 Bow-mar Instruments 155 brand definition 194 historical developments 162–3 relative advantage 200, 205–6, 218 as SCA source 8, 22–3, 152, 153–4, 153–4, 194–5, 197–200 strategies 200–2, 201, 217 targeted marketing 47 brand architecture 202–3, 203, 217, 334 brand associations 203 brand audit 212, 214–16, 216, 218, 334 brand awareness associative network memory model 195–7, 196, 217 definition 195 positioning 200, 205–6, 217 price promotions 6 relationship programs 96–7 resource trade-offs metrics 311 sustainable competitive advantage (SCA) 22–3, 153–4, 153–4, 195 brand breadth 205 brand category extensions 204, 217 brand depth 205 brand elements 194 brand equity assets and liabilities 154, 195 associative network memory model 195–7, 196, 217 benefits 197–8 brand value ranking 163, 194, 194 building process 205–6, 206, 250, 334, 349 customer lifetime value (CLV) 165–6, 195

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INDEX definition 195 metrics 164–5, 166, 168, 212–16, 213, 216, 218 relationship equity comparison 277 summary 217–18 brand extensions 198, 203–5, 217, 334 brand identity brand positioning 196–7, 200 EnergAid, case study 220–1, 220 loyalty effects 198, 199 product differentiation 43, 202 brand image associative network memory model 196–7, 197 customer heterogeneity 45 definition 196 exclusivity 60 identity linkage 42–3, 76, 107, 197, 206 positioning 60–1 price premiums 9 sustainable competitive advantage (SCA) 22–3, 173, 194, 202 targeting 43, 73, 74 brand line extensions 203–4, 217 brand metrics 216 brand, offering, relationship (BOR) equity stack benefits 165 customer equity 164–8, 165–6, 178 definition 23, 165 equity grid 175, 176–7, 179, 200–1 micro-macro duality 339 resource trade-offs 29, 292, 308, 311 strategies 173, 174, 176–7, 178, 334, 335, 349 sustainable competitive advantage (SCA) 23–5, 157–8, 178 tangible assets comparison 164 see also brand equity; offering equity; relationship equity brand positioning 200–1, 292, 334 branded house architecture 202, 203, 217 Bristol-Myers 290 Brooks Running 52 BRT Tribune, case study 316–20, 317, 319–20 Brussels Airlines 174 Buckman, Mark 267 Buick 99 bystanders 259–60

C Cadbury 253 case exercises, unsolved app adoption, MHG 247–8 brand identity, EnergAid 220–1, 220 new customers, Airbnb 143–6, 144 product development, MobilMax Inc. 189–92, 191–2

NOT FOR DISTRIBUTION relationship equity, Airco 280–1 resource allocation, Kreyers Froyo 321–3, 323 segmentation, smartwatch market 90–2 case studies customer dynamics, TKL 133–42 customer heterogeneity, DentMax 79–89 overview xxiv–xxv, xxvi–xxvii resource trade-offs, BRT Tribune 316–20 sustainable competitive advantage (SCA), Exteriors Inc. (EINC) 181–8 causality 166–7, 169–70 chain ratio 8–9, 8 Channel Nine 264 channel partners 251 Chevron 309 China 43, 155–6, 295 China Unicom 121 Chipotle 97 choice models 113–15, 115, 333, 342 Christensen, Clayton 233–4, 234 Cirque du Soleil 159, 233 Clairol 60 classification analysis 69–71 Clausewitz, Carl von 3 cluster analysis customer dynamics 122 customer heterogeneity 72, 76, 331 data analytics technique 57, 58, 342 definition 53 process 52–4 worked example 59–60, 59, 59–60 Coca-Cola 47, 154, 155, 163, 206 coefficient of imitation (q) 244 coefficient of innovation (p) 244 Comcast 50, 299 commitment 252–3, 254, 255, 258, 263–4, 277 “commodity products” 39 communication 258, 264, 267 compatibility 239 competitive marketing efforts 305 competitive parity method 298, 313 competitive strength 55, 56, 73–4 complexity 239 conflict 257, 264, 266 conjoint analysis case study, Exteriors Inc. (EINC) 184–6, 185–7, 188 case study, MobilMax Inc. (MOIC) 191–2 methodological capabilities 342 offering, design and launch 241–4, 243, 334 cooperative behaviors 255 Corning 253 corporate strategy 6, 7 Coupang 164 covariation check 301

Covid-19 pandemic 288 Crest 203–4 Cricket Australia 264 crossing the chasm 237–8, 241 customer analytics 31–2, 339–41, 340, 349 customer-centric approach benefits 63–4, 75, 77, 345 combined with STP 14, 76, 77 definition 14 disadvantages 64, 77 historical developments 4–5 market size 45 organization structure 50–1, 63, 63–4, 75–6 overview 77, 344–5 see also customer lifetime value (CLV) approach customer dynamics approaches, historical developments 100–1, 130–1, 329 brand, offering, relationship (BOR) equity stack 25 case exercise 143–6 customer lifetime value (CLV) 115–18, 119 definition 16 First Principles xxxiv, 16–21 historical developments 101 input–output framework 18–19, 19, 119–21, 120, 131 integration 337–9, 338, 349 lifecycle approach 102–5, 103–4, 130, 329 management process 122–6 Marketing Principles xxix–xxx, 31, 31, 33 marketing strategy re-evaluation 98–9 migration paths and triggers 122–4, 123 overview 95, 129–31 problems and solutions overview 332–3, 333, 348 resource trade-offs 26, 30, 285 segmentation approach 105–13, 105, 110, 122–4, 130–1, 329 segmentation approach, example 126–8, 127–8 simulation software 129, 129 sources 17, 95–8, 96, 98 customer dynamics case study, TKL case overview 133 dataset description 141, 142 problem background 133–4, 134 problem statement 135 segmentation, data collection 136–7, 137 segmentation, exercise analysis 137–8, 138–9 solution findings 141 targeting and positioning 139–40, 140

NOT FOR DISTRIBUTION customer equity accounting process 167 advertising expenditure 168 brand, offering, relationship (BOR) equity stack 164–8, 165–6, 178, 250–1, 273 customer lifetime value (CLV) 23, 165–6 definition 23, 164 metrics 166, 168 sustainable competitive advantage (SCA) 23, 25, 164–8, 166, 178, 330 customer heterogeneity approaches, historical developments 47–51, 48, 329 brand, offering, relationship (BOR) equity stack 24 case exercise 90–2 definition 13 First Principles xxxiv, 12–16, 13 input–output framework 14–16, 15, 65–6, 65–6, 68–9 integration 337–9, 338, 349 latent 44–5 Marketing Principles xxix–xxx, 31, 31, 33 marketing strategy examples 44–6 overview 39–40 problems and solutions overview 331, 332, 348 relationship marketing (RM) 261–2 resource trade-offs 30, 285 segmenting 14 sources 40–3, 41, 42, 76 customer heterogeneity case study, DentMax case overview 79 dataset description 88–9 industry segmentation, cluster analysis 84–6, 84, 85 problem background 79–80, 80, 80 problem statement 81 segment targeting and positioning 86–8 segmentation, data collection 81–2, 83 solution findings 88 customer learning effect 96–7, 103 customer lifecycle aging effect 96 customer dynamics 18, 95–6, 102–5, 103, 121, 130 definition 18 life experiences 41, 41, 76 customer lifetime value (CLV) analysis goal 5 brand equity 165–6, 195 customer dynamics 18–20 customer dynamics, process management 115–19, 119, 124, 126, 131 customer-focused metrics 64 definition 18 relationship equity 272–3

customer loyalty brand image 206 CRM system 326 customer service culture 266 negative “lock in” 107 positive referral benefits 9, 10 relationship investment 258 strong brand protection 198–9, 199–200 customer onboarding 97, 106 customer relationship management (CRM) customer dynamics 19, 120–1, 122–4 definition 251 historical developments 325 investment 7, 326 relationship marketing comparison 251 see also relationship marketing (RM) customers as unit of analysis 4–5

D data analytics benefits 341 brand audit 214–16, 216 choice models 113–15, 115 classification analysis 69–71 cluster analysis 53–4, 57–9, 58–9, 59–60, 76 conjoint analysis 184–5, 242–4, 243 customer analytics 31–2, 339–41, 340, 349 customer lifetime value (CLV) analysis 118–19, 119 discriminant analysis 69–71, 76 factor analysis 53–4, 54–5 hidden Markov model (HMM) 108–9, 109 marketing evolution 325–6, 326 marketing experiments 169–70 Marketing Principles 31–2, 336 Markstrat 32, 129, 129 multivariate regression analysis 273–5, 274 overview xxii–xxiii, xxvi response models 306–7, 306 software 342–3 survey design 214–16, 216 SWOT analysis 66, 67, 67–8 3C analysis 66, 67–8 usage growth 340 data capabilities 32, 325–6, 326, 341, 349 data era 295, 296–7, 325, 326, 330 Datril 290 decline/recovery stage, relationships 264, 270 Dell 210, 223 demographics 51–2, 53, 65, 69, 72 DentMax, case study 79–89 dependence 258, 259, 261

INDEX

designers’ curse 230, 230 diffusion factors 237–9, 240, 241, 245 Digital Equipment Corp. (DEC) 233 direct marketing 209, 325 DirecTV 244 discrete life events 17, 95–6 discriminant analysis 69–71, 76 DISH Network 107 disintermediation 163 disruptive technologies 234–5, 234, 245

E early adopters 227 eBay 228 E-commerce, China 255, 346 eFinance 251 emerging markets 262 Emirates Airline 268 empathic behaviors 256 endorsed brand strategy 203 endowment effect 230 EnergAid, case study 220–1, 220 Enginius 343 Enterprise Holdings 64, 225 entry barriers 101 environmental trends customer dynamics 97–8, 130 customer heterogeneity 44–5 resource trade-offs 287–8, 292–3, 296 sustainable competitive advantage (SCA) 21, 25, 173–4, 176, 178–9 Ergen, Charlie 107 Ericsson 206 Eurosport Soccer 48 events and experiential marketing 208–9 Excel (Microsoft) xxvi exchange uncertainty 261 exclusivity 60 expansion stage AER approach 106, 113, 122, 126 AER approach example 126–7 CLV approach 116 expenses 9 experimental attribution 299–302, 300, 302, 311, 313 experiments data analytics technique 169–70, 342 definition 166 external validity 302 innovative offering, case study 247–8 internal validity 301–2 natural 167 resource trade-offs 300–1, 311, 313 sustainable competitive advantage (SCA) 166–7, 169–70, 241 worked example 171–2, 171–2 exploratory/early stage, relationships 263 Exteriors Inc. (EINC), case study 181–7, 184–7

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INDEX

F Facebook 152 factor analysis 53–4, 54–5, 72, 342 financial RM programs 268–70, 334 first movers and early followers 155–6, 225–6 First Principles definition 2, 44 logic 10–12 overview xxi–xxii, xxxiv–xxxv, 2–3 summaries 16, 20–1, 25, 30, 34–5 Fischman, Ben 9 Flipkart 264 Foodpanda 157 Ford Motor Company Ford Edsel 155 marketing strategy 39 Model T 12, 39 4Ps of marketing mix 2, 57 Foyr.com 155 free will 263, 269 “freemium” products 11 Friendster 152 Funai 104 functional needs, customer 41–2, 41, 46 Furdo.com 155

G Galeries Lafayette 48 Gallo Winery 56 Garmin 158, 235 Gatehouse 292 Gateway 198 GE matrix 56, 56, 73, 76, 292, 295 General Electric (GE) 21, 149, 202, 203, 223 General Motors 47, 99, 205 geographic marketing 43 globalization 7 Godiva 14 Goldman Sachs 46 “goodwill” 167 Google brand value ranking 163, 194 offering equity 158, 235, 239 partnership potential 90 search advertising 299–300 GPS 158, 228, 235 graphic processing units (GPUs) 90 gratitude 253, 254, 260, 263, 264, 269–70 growth/developing stage, relationships 263

H Harley-Davidson 107 Heineken 296 heuristic-based processes 27, 30, 294–5, 295

heuristics era 294–5, 330 Hewlett-Packard 210 hidden Markov model (HMM) customer dynamics solutions 333, 348 data analytics technique 108–9, 109 relationship states and migration paths 108–11, 130 historical method (budgeting) 297–8, 313 Home Depot 224 Honda 45, 63, 99, 113, 202 house of brand architecture 202, 217 Howard Johnson 159 HSBC 291

I IBM 209, 267 IKEA 194, 301 India 155 individual differences 40–1, 41, 43, 76 Industrial Revolution 162 industry lifecycle 18, 102, 130 industry segmentation 68 influencer marketing 207 innovation budget factors 288 competitive offerings 158–60, 160, 163 definition 223 latent customer heterogeneity 44–5 offerings, SCA source 23, 224–8, 244, 334 strategies 222–3, 229–35, 234, 236, 244–5, 334 sustainable competitive advantage (SCA) 155 innovation radar 224–5, 225 innovators 227, 237 input–output framework customer dynamics 18–19, 19, 119–21, 120, 131 customer heterogeneity 14–16, 15, 65–6, 65–6, 68–9 resource trade-offs 28–30, 29, 307–10, 308, 310 sustainable competitive advantage (SCA) 24–5, 24, 172–5, 172, 178 integrated marketing communications (IMC) 207–11, 208, 218, 305 Intel 63–4, 63, 90–2, 210, 223 interaction frequency 258, 260, 268 interactive marketing 209 Interbrand 216 interfirm relationships 254, 271, 277 Internet of things (IoT) 90, 325 interpersonal relationships 254, 266 Intuit 345 iPhone 8, 9, 160 iterative approach 345–6, 349

J J. Walter Thompson 43 Jobs, Steve 160 John Lewis 258 Johnson & Johnson 290 jugaad practice 231, 240, 245

K Kahneman, Daniel 230 Kellogg’s 62, 198, 237 Keurig 101 Keytrade Bank 326 KIND 292 Kleenex 205 Kodak 150, 235, 236 Kreyers Froyo, case study 321–3, 323

L Lamkin, Simon 174 latent customer heterogeneity 44–5 latent loyalty 199 Laura Ashley 95 learning effect 17, 96–7, 103 Lego 330 Lexus 45 location marketing 43 lost customer analysis 20, 112–13, 120–1, 126, 130–1, 333, 348 loyalty 9, 10, 255–6 loyalty programs 123–4, 258–60, 267–8, 270, 278, 326 Lubetzky, David 292 Lululemon Athletica 211 luxury goods 60, 173, 198, 267

M Macy’s 299–302 Maguire, Bevin 267 Maktoob 226 MapQuest 235 market attractiveness 55, 56, 65–6, 73–4 market orientation 64, 345 market research 72–3 market sensing 340 marketing activities 41, 42–3, 291 marketing elasticity 303–4 Marketing Engineering (MEXL) xxvi, 342–3, 344 marketing metrics 29–30 Marketing Principles analytics capabilities 339–43, 340 definition 11 implementation 30–3, 31–2, 327–8, 343, 344 integration 30–1, 31, 337–9, 338, 349 iterative approach 32–3, 345–6, 349 overview, xxii, xxix–xxx, 11–12, 11

NOT FOR DISTRIBUTION problems and solutions overview 331–6, 332–3, 335, 337 solutions and supporting DATS 336 trends 329–30 marketing strategy corporate strategy comparison 6, 7 customer-centric perspective 4–5, 4 definition 3, 5 execution 344–7 historical developments 3–5, 325–6 importance 6–9 micro-macro duality 25, 174–5, 175, 177, 178, 339, 349 resource trade-offs 291–3, 293 summary 348–9 temporal interconnections 337–8, 338 trends and First Principles relevance 328–30 Markstrat xxvii–xxix, 32, 129, 129 Marriott 56, 203, 288 Mars 341 mass marketing 47–8, 291 maturing/maintaining stage, relationships 264 McDonald’s 47, 51, 159, 205, 223 Mercedes-Benz 194 methodological capabilities 32, 341–3, 342, 349 metrics see data analytics MHG, case study 247–8 micro-macro duality 25, 174–5, 175, 177, 178, 339, 349 micro-marketing see niche marketing Microsoft 90, 152, 286 Microsoft Excel xxvi, 342, 343 migration paths and triggers AER approach 106, 122–4, 128 Hidden Markov model (HMM) 109–12, 110 military strategy 3 millennials 97, 105 mobile marketing 43, 106, 258, 296 MobilMax Inc. (MOIC), case study 189–92, 191–2 monopoly power 44, 99, 292 Moore, Geoffrey 237 motives 263, 269–70 movie placement 196–7 multiple discriminant analysis (MDA) 54 multivariate regression analysis 272–5, 274, 334, 342

N narrowcasting 48 natural experiments 167 needs, customer relationship marketing (RM) 263 resource trade-offs 288 segmenting 52, 53, 65 net promoter score 64

Netflix 18, 50, 151, 239 Netscape 152 network theory 254, 277 newspaper industry 292–3, 293 niche marketing 45, 48–9, 49 Nike 195 Nokia 206 non-spuriousness check 301 Nordstrom 48, 156, 259

O observability 239, 242 offering equity benefits 226–8, 244 building process 240–1 customer equity 165, 166 R&D investment 223, 334, 349 offerings competitive displacement 158–60, 160 definition 223 design and launch research 242–4 historical developments 162–3 launches and diffusion factors 236–9, 240 new product/service benefits 227–8 overview 223–4 as SCA source 155–6 strategies 229–35, 229–30, 232, 244–5 summary 244–5 sustainable competitive advantage (SCA) 23, 25, 224–8 Olsen, Ken 233 one-to-one marketing 49–51, 329 online sales and services customer relationships 157, 208 innovative offerings 155, 176, 224, 226, 239 mobile marketing 106 product lifecycle 18, 103 repositioning strategies 233, 291 resource trade-offs 291, 299–300 targeted marketing 43, 49 O’Reilly, David 309 Oreo 204 Osborne 155

P Panera Bread 176 patents 156, 163, 226, 227, 290 Peppers, Don 49 Pepsi 154 percentage of profits method 297, 313 percentage of sales method 297, 298, 313 perception brand equity 197–8 empathic behaviors 256 motives 263, 269–70 resource trade-offs metrics 309

INDEX

perceptual maps 61, 61, 65–6, 74–5, 76–7 performance trajectory 235 personal selling 209, 210, 291, 304 pharmaceutical sector 156, 226–7, 227, 240, 290 Philips 5 points of difference 201, 205–6, 218 points of parity 201, 205–6, 218 Polaroid 150 Porsche 204 positioning statements customer dynamics 20, 121, 124–5 customer heterogeneity 15–16 definition 62 process 62–3, 69, 72, 74–5 resource trade-offs 28–9, 308, 311 sustainable competitive advantage (SCA) 24, 173 premium products 60, 173, 198, 204 price discounting 9, 207 price-sensitive customer 46 pricing methods 326 Procter & Gamble (P&G) 45, 47, 202, 242, 285 product design conjoint analysis 241–4, 243, 334 functional needs 41–2, 41 positioning 60 stage-gate development process 229–31, 229 product failures 155, 236–7 product lifecycle adoption lifecycle 237–8 customer dynamics 18, 97, 102, 103, 104, 105, 130 definition 18, 97 launch, diffusion factors 238–9, 241, 245 resource trade-offs 26, 288, 290 product uncertainty 261 profit, chain ratio 8, 9 Progressive Insurance 224–5 Proximus 124 public relations (PR) 208

Q Quaker Oats 8, 154 qualitative analysis 212, 213, 213–14, 218 quantitative analysis 213–14, 218

R Radio Shack 103, 346 R&D (research & development) budget factors 288 offering equity 223, 334, 349 pharmaceutical sector 226–7 resource trade-offs 292 US national spend 223

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372

INDEX Razer 208 reciprocity 253, 254, 255, 258, 263, 269–70 Red Bull 208–9 red ocean strategies 231–2, 232 referrals 255–6 see also word of mouth (WOM) regression analysis 272–5, 334 regulatory trends 25 relational loyalty benefits 156, 157, 255, 261–2 definition 255 individual salespersons 156–7, 268 online facilitation 157 retention stage (AER approach) 106–7, 113 relationship breadth 254, 270, 277 relationship composition 254, 270, 277 relationship duration 258–60, 272 relationship equity Airco, case study 280–1 benefits 255–6 brand equity comparison 277 building process 250–1, 265–70, 265, 269, 334, 349 customer behavior 251 customer equity 165, 166, 209, 272–3 customer lifetime value (CLV) 272–3 definition 251, 272 metrics 270, 271–2, 272–3 summary 277–8 relationship investment 111, 258, 260 relationship marketing (RM) best practices 265 customer relationship management comparison 251 customer service culture 266–7 definition 250 delivery effectiveness 263 financial programs 268–70, 334 metrics 270, 271–2, 272–3 overview 250–1, 250 relationship lifecycle stages 264–5 social programs 267–8, 334 strategies 253, 256–63, 257, 260, 278 structural programs 268, 334 sustainable competitive advantage (SCA) 23, 25, 251–2 targeting and adapting 261–3 theoretical approaches 252–4, 277 relationship orientation 261–3, 271 relationship proneness 261 relationship quality 254, 271, 272, 277 relationship states and migrations (HHM) 109–12, 110–11 relationship theory 252–4 relationships historical changes 161–2 lifecycle stages 263–5, 264, 270, 272 as SCA source 156–7, 251–6, 252–3, 256 relative advantage 238–9, 240

NOT FOR DISTRIBUTION repositioning 61, 61, 75, 231–3, 334 resource slack 26, 287–8, 313 resource trade-offs anchoring and adjusting heuristics 297–8, 313 attribution approach 298–305, 300, 302, 304, 311, 313–14, 336, 337 case exercise 321–3 customer-centric approach 64 definition 285 First Principles xxxv, 26–30, 28 historical developments 294–7, 295, 330 input–output framework 28–30, 29, 307–10, 308, 310 integration 313, 337–9, 338, 349 management process 310–13, 312 market disintegration 292–3 Marketing Principles xxix–xxx, 31, 31, 33 metrics 309–10, 310, 311, 335–6, 349 overview 285–6, 287 problems and solutions overview 335–6, 337, 349 product design 241 profit function 311–12, 312 sources 287–8, 289, 290–1, 290 stage-gate development process 231 summary 313–14 targeted marketing 50–1 resource trade-offs case study, BRT Tribune allocation decisions 319–20, 319 data and response model results 318–19, 319 data set description 320, 320 problem background 316–18, 317 problem statement 318 solution findings 320 response models analytical technique 306–7, 306, 342 attribution approach 302–5, 304, 311, 313–14 BRT Tribune, case study 318–20, 319 retention stage AER approach 106–7, 113, 122, 126 AER approach example 126–7 CLV approach 116, 117 Reynolds International Pen 155 RFM (recency, frequency, and monetary) variables 118 Ringling Bros. 159, 233 risk 263, 269 Ritz-Carlton Hotels 264, 266 Rocket Internet 156 Rogers, Everett 238–9 Rogers, Martha 49 Royal Bank of Canada (RBC) 62, 63, 117 Royal Crown Cola 155 Rue La La 9 Ryanair 232

S Sainsburys 64 sales promotion 207, 208 sales revenue, chain ratio 8–9, 8 Samsung 60, 90, 194, 228, 305 Samwer Brothers 21 Schick 339 Sears, Roebuck & Company 39–40, 43 SeaWorld 208 segmenting analysis methods 53–4 customer dynamics 20, 105–13, 105, 110, 121, 329 customer dynamics, process 122–4, 126–8, 127–8 customer heterogeneity 12–13, 13, 14 definition 51 industry 65 offering launches 237–8, 241 process 51–4, 65–6, 66, 71–3, 72, 331 resource trade-offs 292 sustainable competitive advantage (SCA) 25 Segway 151, 236 self-identity 41, 42, 42, 76, 107, 199, 206 seller expertise 257–8, 261 Sephora 270 service sector 163, 178, 252, 262 7-Eleven 43 Shopperception 296 Siemens 194, 198, 209 similarity 258 simulation software xxvii–xxix, 32, 129, 129 situation analysis 15, 66, 67–8 “skunk works” 231 Skype 158, 235 smartwatch market, case study 90–2 Smith’s Snackfood Company 290 social exchange theory 252–3, 277 social media 209 social RM programs 267–8, 334 socioeconomic trends 25 software 129, 129, 342–3 Sony 90, 203, 210 South African Breweries (SAB) 199, 200 spillover awareness 9, 203 Spotify Technology 50 spurious loyalty 199 stage-gate development process 229–31, 229, 240, 245 Stance 24 Standard Bank 251 Starbucks 43, 45, 158, 222–3 Starwood Hotels & Resorts Worldwide, Inc. 268 Statistical Analysis Software (SAS) xxii–xxiii status quo bias 235 Steinhafel, Gregg 95 Stengel, James R. 47

NOT FOR DISTRIBUTION STP (segmentation, targeting, positioning) analysis company strategy examples 44–6 customer-centric approach comparison 64 customer-centric combinations 14, 76, 77 customer heterogeneity 14–16, 15, 62, 348 historical developments 47, 51 offerings 232, 241 overview 76–7, 331, 332 positioning process 56–7, 60–3, 61, 69, 74–5, 331 resource trade-offs 26, 29, 288 segmenting process 51–4, 71–3, 72, 331 simplicity 71 sustainable competitive advantage (SCA) 24, 25, 173 targeting process 55–6, 56, 73–4, 74, 331 structural RM programs 268, 334 Stuart, John 8, 154 sub-branding strategy 203 Sun Tzu 69, 149 sustainable competitive advantage case study, Exteriors Inc. (EINC) BOR strategy modifications 187 case overview 181 dataset description 188, 188 problem background 181–2 problem statement 183–4 solution findings 187–8 survey data, analysis and results 184–7, 184–7 sustainable competitive advantage (SCA) case exercises 189–92, 220–1, 247–8, 280–1 competitor displacement factors 158–60 definition 22 environmental changes 159–60 First Principles xxxv, 21–5, 22 historical developments 161–4, 162, 178, 330 input–output framework 24, 24–5, 172–5, 172, 178 integration 337–9, 338, 349 management process 175–7, 178–9 Marketing Principles xxix–xxx, 31, 31, 33 marketing strategy 174 overview 149–50, 178–9 problems and solutions overview 333–4, 335, 349 resource trade-offs 26, 27, 30, 285–6, 290, 311

sources 22–3, 152–7, 152, 194 strategy developments 4 success criteria 150–1 technological innovation 158 sustaining technologies 233–4, 234, 245 SWOT analysis 15, 66, 67, 67–8 synergies 305

T takeaway summaries benefits xxxii–xxxiii customer dynamics 131–2 customer heterogeneity 77–8 First Principles 34–5 Marketing Principles 350 resource trade-offs 314 sustainable competitive advantage (SCA) 179, 218, 245–6, 278 Target 95 targeting see STP (segmentation, targeting, positioning) analysis taste perceptions 198 Taylor, Andy 64 technology trends customer dynamics 16–18, 97, 100–1, 103 customer targeting 43, 49–51, 106 data capabilities 341 global economic effects 288 innovation strategies 233–5, 236, 245 internet based marketing 50 online sales and services 155, 157, 176 relationship marketing (RM) 252, 252 resource trade-offs 296–7 sustainable competitive advantage (SCA) 21, 25, 158, 160, 163, 173–4 television advertising 47, 48, 49, 305, 325 Telstra 44, 267 temporal precedence check 301 Tencent 160 Tesco 150 test marketing 241, 242 “think-feel-act” model 210–11 3Cs 15, 16, 55, 66, 69 Tiffany & Co. 166 TiVo 152 TomTom 158, 228, 235 Toshiba 90 Toyota 45, 194 trade barriers 7 trialability 239 Tripadvisor.com 264–5 true loyalty 199, 200, 206 trust 252–3, 254, 255, 263–4, 277 Turkish Airlines 210 Tylenol 290

INDEX

U Uber 44, 101, 151 uncertainty 261 undifferentiated marketing see mass marketing unfairness 257, 259–60, 264, 266 Unilever 47, 168, 194 United Airlines 260 US economy trends 149

V validity, experiments 301–2 Vanguard 266 vertical extensions 205, 217 “viral” strategy 11 VoIP technology 234–5 Volvo 43

W Walmart 46, 346 Wang, Xiaochu 121 Wardah 154 water, bottled 39, 43 Weibo 155–6 Western Electric 44 word of mouth (WOM) acquisition strategy 176, 198 marketing strategy 209 negative reaction 107 online benefits 209, 228 positive referrals 9, 10, 198, 206, 255–6, 272–3 product lifecycle 97, 102

X Xero 238 Xiaohongshu app 291 Xiaomi 156

Y Yahoo! 235 Youku Tudou 155 Young & Rubicam 216 Your World Rewards 268

Z Zappos 266 Zara 27

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