Session 2 - Customer Networks, Network Effects & AECCC

Marketing strategy process

Appraise the situation → propose a strategy → propose tactics to implement the strategy

What should firms examine when appraising the situation?

Customer unmet needs, company competencies/costs, and competitor vulnerabilities

STP

Segmentation, Targeting, Positioning — strategic decisions used to determine how the firm will compete

Tactical 4Ps

Product, Price, Promotion, Place — tactics used to implement the strategy and deliver value to the target market

Strategy vs. tactics

Strategy identifies the key to success and target positioning; tactics are the specific 4Ps used to implement that strategy

How does affluence affect customer needs and marketing opportunities?

Affluence moves opportunity toward higher-order needs; digital technology makes satisfying those needs scalable

What higher-order opportunities does digital technology help firms satisfy?

Information, connection, recognition, identity, creativity, and self-actualization

How have social networks changed in the digital age?

From local/bounded networks with slower diffusion and limited reach to global/visible networks with fast diffusion, searchable history, creator amplification, and collective action

What does digital technology change about customer networks?

Their scale, speed, visibility, and power

CAE

Connected, Active, Empowered

Connected in CAE

Customers communicate with firms, creators, and one another across platforms

Active in CAE

Customers search, compare, review, create, share, organize, and participate

Empowered in CAE

Customers influence reputations, product design, visibility, and market outcomes

Major implication of CAE

The customer is no longer a passive endpoint; customer behavior shapes communication, discovery, product value, and the data that guide future decisions

Network effect

The effect one user of a good or service has on its value to other people; when present, value depends on the number of others using it

Direct network effect

More users on the same side of a network affect the value received by other users on that same side

Metcalfe's Law

The value of a network is proportional to the square of the number of users: network value ∝ n²

Two-sided market/platform/network

An economic platform with two distinct user groups

How do two groups in a two-sided market create value?

Each side attracts more of the other, so the two user groups provide one another with network benefits

Examples of two-sided user groups

Sellers/buyers, drivers/riders, developers/gamers, merchants/cardholders, rooms/renters, job listings/job seekers

Indirect or cross-sided network effect

The value of a platform for users on one side depends on the number of users on the other side

Direct vs. cross-sided network effect

Direct = users affect value for users on the same side; cross-sided = users on one side affect value for users on the other side

Negative direct network effect

More same-side users can create congestion, overload, noise, or lower relevance

Negative cross-sided network effect

Growth on one side — such as advertisers, sellers, drivers, or developers — can reduce the experience of the other side

What determines the sign and strength of a network effect?

Quality and governance

Ohmae's 3 Cs

Customer, Company, Competition

Primary focus of Ohmae's 3 Cs

The interest of the customer; segmentation helps the firm understand the customer

Economies of scale in the industrial-age cost sense

Producing more units lowers per-unit cost because fixed costs can be spread across more units

How can learning reduce marginal cost?

Learning from experience can reduce mistakes, waste, and the cost of producing additional units

Why can identical offerings from different companies have different value in the digital age?

Network effects can make one firm's offering more valuable because of the network surrounding it

How can network effects create competitive advantage?

They can create customer lock-in/exit barriers and barriers to entry for competitors

Network effects vs. traditional economies of scale

Network effects are demand-side economies of scale that increase customer value; traditional economies of scale reduce per-unit cost as output increases

AECCC

Access, Engage, Customize, Connect, Collaborate

Access — goal

Give customers fast, easy, accurate, and flexible access to information, offerings, and interactions

Four major elements of Access

Findable, On Demand, Frictionless, Embedded

Access — Findable

Customers can discover the firm through SEO, structured content, platform search, and AI discovery

Access — On Demand, Frictionless, and Embedded

On Demand = available through customer-selected channels when needed; Frictionless = simple interfaces/checkouts/handoffs; Embedded = connected products/services remain available during use

Engage — goal

Earn customer attention by creating valuable digital content that is sensory, interactive, shareable, mashable, and relevant to customer needs

Five approaches to Engage

Entertain, Inform, Provide Utility, Invite Participation, Build Personality

Engage — diagnostic question

Why would a customer choose to give this brand attention?

Customize — goal

Adapt offerings to customers' needs and allow customers to choose or modify their experiences

Approaches to Customize

Offer a vast menu with filters, make choices personal, let customers modify products/services, and use algorithm/data-driven personalization

Why are filtering and recommendations important to Customize?

A large assortment can create decision fatigue, so filtering and recommendations help customers navigate choice

Connect — goal

Become part of customers' conversations and help customers create value through interaction with one another

How can firms support Connect?

Listen, learn, join conversations, provide forums, and let customer conversations add a layer of value

Collaborate — goal

Turn customer participation into joint action by having customers contribute toward shared goals or help build the enterprise

Four forms of collaboration

Passive contribution, active contribution, open competition, open platform

Connect vs. Collaborate

Connect = customers share, discuss, review, and influence; Collaborate = customers contribute effort, data, ideas, or innovation toward a shared goal

Key rule for applying AECCC

Prioritize — do not force symmetry; the dimensions should guide judgment, not replace it

What did Nike+ combine?

Nike partnered with Apple to connect sensors in running shoes with digital tracking, stored running data, and the Nike+ platform

How did Nike+ address both physical and higher-order customer needs?

Shoes satisfied the physical running need while tracking, goals, performance feedback, sharing, and social interaction addressed higher-order needs

Nike+ mapped to AECCC

Access = track activities; Engage = coaching/performance insights; Customize = personal goals; Connect = describe/share/challenge friends; Collaborate = contribute toward shared network value such as better routes

Why might Nike+'s digital strategy create sustainable advantage?

First-mover benefits and network effects can strengthen retention and brand loyalty, although direct and indirect competitors may imitate or substitute for the experience

QUIZ 1 PRACTICE: Which of the following about customer network is correct? A. The customer is a passive endpoint in the customer network. B. The customer in the customer network is communicating with firms, creators, and one another across platforms. C. The customer in the customer network cannot enjoy positive network effect. D. The customer network only makes firms more powerful

B. The customer in the customer network is communicating with firms, creators, and one another across platforms

QUIZ 1 PRACTICE: Which of the following about network effect is correct? A. When network effect is present, the value of a product or service is independent on the number of others using it. B. Network effect is a supply side economies of scale. C. Network effect is always positive. D. A network effect is the effect that one user of a good or service has on the value of that product to other people. E. Network effect won't cause customers lock-in.

D. A network effect is the effect that one user of a good or service has on the value of that product to other people

QUIZ 1 PRACTICE: Which of the following is correct? A. "A" in AECCC refers to providing consumers easy, flexible, and fast access to digital data, content, and interactions. B. Dynamic pricing is a strategy where companies automatically adjust the price of a product or service in real-time based on factors like demand, competitor pricing, supply, and time. C. In Freemium pricing model, the business serves free tier users because of it being a marketing tool (sampling and referral), a way to collect valuable user data, and the network effect among users. D. All of the above.

D. All of the above