Empirical Marketing - Week 3

What are the fundamental assumption of marketing strategy (competitive reaction)?

Competitors can displace firms in many different ways:

1. Technological innovations that provide competitors with a platform to launch a disruptive offering.

2. Exploiting changes in customer’s desires due to cultural, environmental and other factors

3. Individual entrepreneurship that constantly seeks a better way to solve a problem

4. Copycats that improve the efficiency or effectiveness of an existing execution.

What is the third marketing principles?

MP#3: all competitors react, and an effective marketing strategy must manage the firm’s sustainable advantage (SCA).

What is sustainable competitive advantage (SCA)?

A firm has SCA when it is able to generate more customer value than competitive firms in its industry for the same set of products and service categories and when these other firms are unable to duplicate its effective strategy.

• Being first to market with a new idea is not sufficient to create barriers to competitors, especially if deep-pocketed market leaders recognize the threat of an innovative new entrant.

• To make an SCA hard to copy, firms often turn to key marketing-based sources of SCAs.

What are 3 criteria that SCA should meet?

1. Customers care about what this SCA offers.

2. The firm does it better than competitors, which generates a relative advantage.

3. The SCA must be hard to duplicate or substitute, even with significant resources.

Marketing-based sources of SCA consists of: brands, offerings and relationships. What is brands, its barriers to duplication and where it is most effective?

Brands images reside in consumers’ minds which makes them difficult to duplicate; it facilitates habitual buying through awareness and provides identity benefits to customers.

Most effective in large consumer markets, consumer goods (soft drinks, beer, fashion,…) through advertising, PR, sponsors.

Marketing-based sources of SCA consists of: brands, offerings and relationships. What is offerings, its barriers to duplication and where it is most effective?

Innovative offerings can create a strong SCA by meeting customer needs better than existing alternatives.

Barriers to duplication: cost benefits, performance advantages, access to distribution channels but offerings require continuous innovation.

It is most effective in most markets, technology-based businesses (software, electronics)

Marketing-based sources of SCA consists of: brands, offerings and relationships. What is relationships, its barriers to duplication and where it is most effective?

Relational SCA can create some confusion for the firm as the relationship bonds might lie with the firm’s salespeople not the firm itself. So if the salespeople leave the company, they might take the customers as well.

Barriers to duplication: leads to trust, commitment and interpersonal reciprocal bonds that are hard to build or duplicate.

It is most effective in business-to-business markets, services, complex products (test equipment, haircut, financial services).

What is the property of 3 sources of SCA?

Brands, offerings and relationships (BOR) are additive and often work synergistically to give a firm a strong relative position in the marketplace.

Additive means that three sources of SCA can independently contribute the firm’s success and their combined effect strengthens a firm’s overall competitive position.

What is the evolution of SCA in marketing?

• Preindustrial age: interpersonal relationships are the greatest barrier to competitive attacks.

• Industrial revolution: brands are important to signal product quality.

• Technology revolution: offerings and innovations become key sources of differentiation.

• Services revolution: all 3 BOR strategies are critical to success, but relationships are becoming more important with the shift to a service economy in more developed countries.

What is customer equity perspective and BOR equity stack?

• Customer equity is analogous to the customer’s lifetime value (refers to combined CLV of all its customers)

• Three equities combine in an additive customer or BOR equity stack: brand equity, offering equity, relationship equity.

BOR equities are similar to what?

Tangible assets:

• They generate a return on assets (ROA)

• Which can be built through investments

• Depreciate over time if not maintained.

What is offering equity?

Offering equity represents the core benefits relative to costs of an offering stripped of any benefits from brands or relationships:

• Price and performance only

• Represents a large portion of total equity for commodity products

Less important for: services or high involvement products, products that provide meaning or status, maturing markets/industries.

What is brand equity (name/label/image)?

Brand equity is a set of brand assets and liabilities linked to a brand, its name, and symbol, that add to subtract from the value provided by a firm’s offering:

• Knowledge of the brand differentially affects behavior.

• Brand equity “lies in the minds of customer”

• Key for consumer goods, status-based offerings, and as consumption is more visible

• Since brand building can be hard to target, brand equity is better for offerings with large homogenous user group

• Hard to quickly adapt or change brand equity.

What is relationship equity (people serving beer and other customers)?

Relationship equity is a set of relational assets and liabilities linked to boundary-spanning employees and the social network associated with the offering or experience that add to or subtract from the value provided by a firm’s offering.

• Relationships affect behavior, relational based decision making is ingrained in our psyche.

• Key for B2B, services, and complex selling cycles.

How to calculate firm’s overall customer equity?

At the individual customer level, customer equity is analogous to the customer’s lifetime value (CLV): adding each customer’s equity generates the firm’s overall customer equity.

How to use experiments to determine customer equity?

Strong test of causality since:

• Random assignment of customers

• Control of conditions or treatments

• Comparison to control groups overtime

How to “test” findings from other method?

1. Randomly divide customer into groups (2 to 3)

2. Do nothing to one group (control group)

3. Do your test (conditions/treatments) to other groups, but nothing else (ideally customers and employees involved don’t know the difference; “double blind”)

4. After a period of time test the difference in outcomes across groups and see if it varied significantly

One increasingly popular method is to rely on marketing experiments (A/B tests) or quasi-experimental design (natural experiments, differences-in-differences)

In relationship marketing, what is building and maintaining relationship?

Relationship marketing (RM) is the process of identifying, developing, maintaining, and terminating relational exchanges to improve performance - can produce relationship equity.

Relational exchanges happen in B2B and B2C markets, and for channel partners rather than direct customers.

Customer relationship management (CRM) is the managerially relevant, organization-wide, customer focused application of RM, using IT to achieve performance objectives.

In relationship marketing, what is social exchange theory?

Commitment and trust are central to strong business relationships

Commitment: an enduring desire to maintain a valued relationship.

Trust: confidence in a relationship partner’s reliability and integrity.

What is the benefit of relationship equity?

RM do not affect financial performance directly, instead they help build relationship equity, which influences customer behaviors, improve seller’s financial outcomes.

The chain of effect operates through 4 mechanisms: relational loyalty, referrals or word of mouth (WOM), empathetic behaviors, cooperative behaviors.

What is relational loyalty?

• Likelihood that the customer provides the seller benefits in the exchange process due to their relational attitudes and ties.

• Relationships positively influence this loyalty, because customers perceive less risk dealing with trusted partners, act on relationally generated belonging, and minimize costs by buying from valued sellers.

•   Loyalty is very determinant of firm success in competitive marketplaces.

What is referrals/word of mouth (WOM)?

-       Reflects the likelihood that a customer comments positively about a seller to others.

-       Relational bonds, feelings of gratitude, and positive attitudes drive the motivation and willingness to provide referrals.

-       Loyalty is different from referrals. Loyalty affects financial outcomes by altering the exchange process with the loyal customer, referrals affect them by generating business with new customers.

Only customers with strong, trusting relationships are likely to risk their reputations by advocating a seller to another potential customer

What is empathetic behaviors?

-       Having a greater likelihood to be influenced by perceptions of the seller’s position.

-       Customers in a strong relationship may attribute service failures to external causes that the seller cannot control.

-       Their sensitivity to and empathy for the seller’s difficulties also may prevent them from imposing the price-reduction pressures common to service failures.

What is cooperative behavior?

-       Coordinated, complementary actions between partners to achieve a mutual goal.

-       Creates value beyond what each individual firm could do on its own, increases customers’ flexibility and adaptiveness to sellers’ requests for changes, information, or reciprocation.

-       Commitment encourages the parties to remain in their valued relationships, even if the reciprocity is delayed or non-equivalent.

What are the 2 main steps of building a relationship equity?

1. Develop a strong foundation that supports relationship building and maintenance.

2. Implement relationship marketing and loyalty programs targeted at specific customer groups, designed to generate specific relational outcomes across the firm’s customer portfolio.

What are the 3 different RM programs?

• Social RM programs: use social engagements to convey the customer’s special status, e.g., free tickets to concerts or sporting events.

• Structural RM programs: provide investments that customers might not make themselves, e.g., customized packaging

• Financial RM programs: provide economic benefits, in the form of special discounts, giveaways, free shipping, or extended payment terms that ultimately tend to offer little relative advantage, because competitors can easily match them

What is maintaining relationships in marketing?

-       A negative event can overwhelm an accumulation of positive activities.

-       Long-term RM success often depends more on preventing the bad than on promoting the good.

-       Negative activities generally have approximately twice as strong an effect as positive activities, but not all negative events are the same.

-       Companies sometimes engage in actions that generate and even encourage perceptions of unfairness (loyalty, reward or relationship programs).

-       When managers recognize unfairness, they should find the antidote by revising their RM and loyalty programs to make the benefits for targeted customers invisible to bystanders. Preemptive approaches might be the best antidote

To measure relationship equity, we use the regression analysis. What does this analysis caputres?

It captures the statistical association between a focal marketing outcome of interests (sales, loyalty, CLV, profitability) and several marketing interventions that simultaneously may affect the focal outcome (relationship marketing efforts, marketing mix)

What are the steps of the multiple regression analysis?

1. We can discern whether a particular marketing intervention truly influences a marketing outcome (significant or not).

2. We learn the sign of the relationship between a marketing invention and a marketing outcome.

3. A multivariate regression helps researchers compare the relative strength of multiple marketing interventions.

4. With a multivariate regression, we can control for confounds

When do we use discrete choice model?

When linear regression is a very bad fit

What is internal validity?

It is about the intrinsic experiment design

Fails when there are differences between treated and controls (other than the treatment itself) that affect the outcome and that we cannot control for.

What are the threats to internal validity?

Failures of randomization

Non-compliance with experimental protocol

Attrition

What is external validity?

It is about the applicability of the outcome to a broader context. In simpler terms: the extent to which our findings apply to the real world

Fails when the treatment effect is different outside the evaluation environment.

What are the threats to external validity?

Non representative sample

Non representative program

Hawthorne effects