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e-Marketing. Conceptual Overview Arvind Rangaswamy Web address: www.arvind.info email: [email protected]. January 13, 2005. Outline for Today’s Session. Emerging technology environment Emerging market environment Developing strategies aligned to current technology and market environments - PowerPoint PPT Presentation
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
January 13, 2005
e-Marketing
Conceptual OverviewArvind Rangaswamy
Web address: www.arvind.infoemail: [email protected]
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Outline for Today’s Session
Emerging technology environment Emerging market environment
Developing strategies aligned to current technology and market environments
Product strategies Personalization/Customerization Bundling
Pricing strategies Differential pricing Dynamic pricing Flexible pricing
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Facilitators• Government• InterNIC• ISO• The Internet
SocietyInternet Services
Infrastructure
Hardware Infrastructure
Content and Software Infrastructure
e-Marketing Applications
You/Your company cannow plug into a massiveexisting technologyinfrastructure
Database providersGoogle.comYour companyWeb services
News/Entertainment Providers NetscapeSAPMicrosoft…
Telephone Co.ISP’sCable Co.CISCO
UUNETSprintlinkBBN Planet
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Technology EnvironmentThe Plug-In Architecture
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
As enabling technologies
converge toward single
standards(e.g., MS Office,
Java, MP3)
The markets they serve expand and fragment
Time
Standardization of TechnologiesFragmentation of Markets
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
• Initiating contact
• Establishing terms of trade
• Exchanging value
• Establishing relationships
• Initiating contact
• Establishing terms of trade
• Exchanging value
• Establishing relationships
• Digital Networked Convergence
• Disappearing boundaries (temporal, geographic, across firms, across functions, etc.)
• High fixed costs/low marginal costs (especially for digital products)
• Economies of scale in both supply and demand
• Separation of content, context, infrastructure, and brand
• Customer-centric markets
• Digital Networked Convergence
• Disappearing boundaries (temporal, geographic, across firms, across functions, etc.)
• High fixed costs/low marginal costs (especially for digital products)
• Economies of scale in both supply and demand
• Separation of content, context, infrastructure, and brand
• Customer-centric markets
Supply
Demand
The New Market Environment
CUSTOMER
MARKET
SOCIETY
ECONOMY
INDUSTRY
COMPANY
YOU
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
The Increasing Need forStrategy/IT Alignment
Mar
ket
sC
orp
orat
e
IT
Architecture
Processes ResourcesProcesses/Capabilities
Resources
Governance
IT Scope
Systemic Competencies
ITGovernance
Distinctive Competencies
(Why?)
Business Scope
(What?)
Governance(How?)
Business Strategy IT Strategy
Business operations IT operations
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Lessons inStrategy/IT Alignment
Spending smart is more important than being first in the industry – focus IT spending on enhancing innovation, differentiation, customer responsiveness, and productivity.
IT must reinforce business strategy, and business strategy must help identify winning IT investments.
Leverage IT for scale and scope. Leverage IT with protected intellectual property. Embed IT in processes that are inimitable, and/or not
transparent to competitors.
Put the right people and processes in place before putting the right IT system.
Source: Based, in part, on a McKinsey article titled Getting IT spending right this time (2003).
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
What Wal-Mart did on 9/11
Within a few hours of the 9/11 attacks, sales of flags and other patriotic items started skyrocketing.
On Sept 11, the 2,700 Wal-Mart stores sold over 100,000 flags (compared to 6,400 the previous year on that day), and over 200,000 on Sept 12th.
Detecting these increases, Wal-Mart locked up all the supplies it could find before its competitors (like Kmart) could react.
Real-time tracking and analysis helped “adapt” to a demand surge.
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
How Texas Instruments Developed TI-92
Product design and specs put on web site, and teachers participating in the T3 (Teachers Teaching with Technology) group were invited to provide suggestions.
A flurry of email suggestions resulted in engaging this group in “adaptive” design of the product.
TI-92 became the best selling calculator introduced by TI.
Lesson: The market owned the product. Therefore, the product owned the market!
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
How P&G Test MarketedCrest WhiteStrips
In addition to conventional test marketing in selected cities, P&G also tested Crest Whitestrips in direct channels (web and QVC).
From Sept 2000 to May 2001, before national launch, P&G’s web site sold 140,000 units and logged 1.1 million visitors.
The web site helped P&G adapt its marketing programs for the product in several ways:
Helped define the target segment (female (70%) and over 35)
Created buzz for the product before national launch
….
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Emergence of Customer-Centric Markets
Transparency and interactivity are re-shaping the processes by which supply and demand are synchronized in today’s markets.
Increasing “atomization” of transactions (e.g., personalized products and services).
Anytime, anywhere commerce is becoming commonplace in the US.
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
From Marketplace to MarketspaceOnline Exchange Processes
Global, 24/7 Richer content and context for exchange (The “reach”
vs. “richness” tradeoff minimized) Lowered costs of routinized transactions Two-way interactions Access to larger number of buyers and sellers Elements of the exchange process are atomized Tighter integration of market exchanges with firm
operations More flexible ways to determine the terms of exchange
Auctions, Reverse auctions Negotiations Fixed price
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
The Exchange Processes for Digital Products are Being Completely Redefined
Digital products (e.g, software, music, entertainment that can be delivered on the Net)
reproducible at low marginal costs by anyone in the marketing channel (including customers)
low distribution costs (on the Internet)
are non-destructible
are customizable
have positive and negative externalities
result in high heterogeneity in customer value (thus, they need to be priced according to value, not cost)
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
New strategies for managing digital products Licensing
Metering (Web services)
Bundling products (tied to search engines)
Delivering interactive “product experiences”
Frequent product updates
Lower prices
The Exchange Processes for Digital Products are Being Completely Redefined
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
You can add digital content to any product. This separates choice from purchase for many non-digital products.
High-ticket items (e.g., Car)
Experience goods (e.g., Dentist)
How about for other products?
Complex products (e.g., Home alarm systems)
Low-involvement products (e.g., Groceries)
A cup of cappuccino
Online Browsing for non-digital products facilitate informed decisions.
The Exchange Processes for Non-Digital Products are Being Transformed
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Sources of Information forConsumers
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Personalization andCustomerization
Personalization/1-to-1
Standardization
Customerization
MassCustomization
Lo Hi
Operational customization
Mar
ket
ing
cust
omiz
atio
n
L
o
Hi
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Customerization: Opportunity for Matching Offerings to Customer Wants
The Internet (combined with other IT components) can improve the match between customer needs and company offerings. It is impacting how all three levels of needs are satisfied, with a stronger impact on how wants are satisfied.
Customers are becoming more value-sensitive because of the richer, timely, and contextually relevant information available online.
Timely
Wants
Preferences
Core needs
Timeless
Hierarchy ofNeeds
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
IncreasingDifficulty
CustomizedContent
CustomizedPrice, Package, Lead times, etc.
CustomizedProduct
CustomizedCustomer Experiences
Customized Relationship
Layers of Customization
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Seems Like Everything Can Now beObtained On Demand!
– TV and Movies on demand
Source: Wired, October 2002 21
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Potential Benefits of Customerization
For customers:
Better meets their needs and wants. Customers can influence part of the design and production
process.
For companies:
Offers opportunity to differentiate brand from competing brands. Builds brands by building relationships with customers (through
higher customer involvement, satisfaction, and loyalty) Reduces/eliminates inventory. Provides up-sell and cross-sell opportunities. Provides, for the portion of the business that is manufactured for
inventory, more accurate market information on changing customer tastes.
Stimulates continuous innovation.
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Some Downsides to Customerization
Increases customer expectations.
Customers may not be willing to pay more.
Needs more integration across company functions, departments, and partners.
Increases complexity of choices for customers, and complexity of providing customer support for companies.
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Product BundlingNeed a Car? The Auto Market Online
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Need a Loan?The Loan Market Online
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Need a car and a loan?Opportunity for a Bundler
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Product Augmentationfor Non-Digital Products (1-800-Flowers)
Flower / Gift Decision Process
Need Recognition
Search For Ideas and Offerings
Purchase Decision
Message Selection
Post Sales Support and Perks
Education on Flowers and Decoration
Gift reminder service Holiday specials Everyday celebrations
suggestions Special occasion suggestions
Gift guru Favorite gifts Gift frequency Gift impossible Gift baskets Corporate gift services
Ideas and Information
Post-Sales Support
Product price Product picture Product description Delivery information Delivery availability
Gizmo fully-animated greeting cards
Physical cards in gifts
Order receipt email eQ&A online customer
service FAQ Customer service
inquiry formPerks
Miles earned with flower purchases
Free gifts Discounts at AOL &
BN with flower purchases
Member specials
“Care and handling” “Do it yourself” Special events and
educational workshops held at stores
Floral ideas Garden ideas Home ideas Gift ideas Gourmet ideas Store locator Recommendations by budget Best sellers
Evaluation of Alternatives
Gift Recommendations
Shopping basket E commerce transaction Special shopping features
– Delivery outside U.S.– 1-800-lasfloras.com
Product Offering
Source: Adapted fromRayport and Jaworski
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Schwab Learning Center Live Events Principles of Investing Understanding Market Cycles “Did You Know” Q&A
Schwab Signature Services
Schwab AdvisorSource Options Service Global Investing Service
Online chat with Customer Service Representatives
Customer Service via phone Customer Service via email Customer Service at Branch My Watch List
Margin Loans Money Transfers Automatic
Investing Options Service After Hours
Trading Account
Protection Bill Payment
Overall General Goal
Planner Investor Profile Sample
Investment PlansRetirement Retirement
Planner IRA Analyzer
Offering
On-Line Investment Process
Get educated
about investing Plan
investments
Decide on Investment
Perform Investment
Post Investment
Support
Perform Research
Estate Estate Tax and
Probate Calculator Alternatives ComparisonCollege College PlannerTax Tax Strategies IRS Withholding
Calculator
Overall Quotes and Charts Analyst CenterStocks and Options Stock AnalyzerBonds and Treasuries Schwab BondSource
ServicesCDs and Money Markets SchwabOne
Annuities Schwab Select
AnnuityLife Insurance Insurance Needs
Calculator
Source: Adapted from Rayport and Jaworski, e-Commerce
Product Augmentationfor Digital Products (Schwab)
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Internet’s Impact on Pricing
Differential pricing
Flexible pricing
Dynamic pricing/New price discovery processes
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Traditional Pricing Meets New Realities
Traditional Economic theory suggests that
Price = Marginal cost
is the likely outcome of competitive markets.
Traditional Economic analysis also suggests that a necessary condition for Pareto- efficiency is:
Marginal cost = Marginal willingness to pay.
Question: What happens under high fixed cost and near zero marginal cost? (This is the case with many digital products).
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Solution: Differential Pricing
Making every customer pay marginal costs will not be efficient in this case.
An alternative approach for seller is Differential pricing/ Nonlinear Pricing:
-- yield/revenue management
-- two-part tariffs, as used by ISPs such as AOL
-- two-tier pricing through loyalty cards.
Internet and other IT are making it easier for sellers to implement differential pricing in many categories, such as perishable products, and products with high fixed costs.
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Price Differentials
First Degree — Charge consumers exactly what they are willing to pay for product
(e.g., college tuition)
First Degree — Charge consumers exactly what they are willing to pay for product
(e.g., college tuition)
Second Degree — Offer consumers a menu of options at different prices
that correspond to consumers’ willingness to
pay for the different options (e.g., volume pricing)
Second Degree — Offer consumers a menu of options at different prices
that correspond to consumers’ willingness to
pay for the different options (e.g., volume pricing)
Third Degree — Divide consumers into distinct
segments, charging different prices to different segments (e.g., movie-theater pricing)
Third Degree — Divide consumers into distinct
segments, charging different prices to different segments (e.g., movie-theater pricing)
PriceDiscrimination
Source: Textbook
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Consumer’s Demand for Electronic Music
Consumer’s Demand for Electronic Music
Value of . . . First Single: $6.00 Second Single: $5.00 Third Single: $4.00 Fourth Single: $3.00 Fifth Single: $2.00 Sixth Single: $1.00 Seventh Single: $0.50
Production cost of a single: $1.50
Buy first three singles at $4 per single After three singles have been purchased, buy two
additional singles for $2 each $4 is “left on the table” (consumer was willing to pay $20
for five songs)– Revenue: $16– Profit: $8.50
A flat subscription fee of $12.50 can be charged. In addition to the flat subscription fee, a fee of $1.50 per
single can be charged. Given its demand schedule, the consumer is willing to
pay the subscription fee and purchase five singles at $1.50 per single; recall that the consumer values the five singles at $20
– Total Revenue: $20– Total Profit: $12.50
Economically speaking, it is optimal to use a flat fee subscription model only when the marginal cost of producing the good is equal to zero.
Volume Discounts and Two-Part Pricing
Simple Volume Discount Pricing PlanSimple Volume Discount Pricing Plan
Two-Part PricingTwo-Part Pricing
Source: Textbook
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Low-ValueCustomers
AppropriateLow-cost
Service Level
High ValueCustomers
AppropriateHigher Cost
Service Level
Balance the value provided to a customer with the price received from the customer.
Value from….Value to Value from….Value to
Service
Service Service
Service
The Need for Balancing Differential Pricing with Differential Service
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Flexible Pricing
Bundled prices
“Pay per service”
Lease versus buy
...
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Financial
News Legal News
Current News
Value Bundle
E-Information’s Price
$3,000 $1,500 $1,250 $5,000
Company A’s Valuation
$3,000 $1,500 $500
Company B’s Valuation
$3,000 $750 $1,250
Company C’s Valuation
$3,250 $750 $750
Strategy Result
Company A: Purchases value bundle. Implicitly pays $1,500 for legal news, $500 for current news.
Company B: Purchases value bundle. Implicitly pays $750 for legal news, $1,250 for current news.
Company C: Purchases financial news. Pays more ($3,250 vs. $3,000) for financial news relative to Companies A and B.
Bundling Strategy
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Price Discovery(Involves both Buyers and Sellers in Price Determination)
Buyers
Exchange/Marketplace
Chemconnect.comNewView Technologies
(newview.com)VerticalNet.com
Auction
Amazon.com AuctionseBay.com
Yahoo!Auctions
Bidding
FreeMarketsPriceline
Haggling/Negotiation
Intagio.comBarter Business (bbu.com)
www.framesoft.com
SellersOne Many
Many
One
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Online Price Dispersion(From www.nash-equilibrium.com)
Relative Dispersion is the coefficient of variation in prices charged by different sellers for the same products. It is zero when all sellers charge the same price for a product.
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Internet Competitiveness(From www.nash-equilibrium.com)
The Internet Competitiveness Index is a comprehensive measure of the level of competition. Increases indicate more competitive pricing, while decreases indicate a lessening of competition.
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© 1998-2005, Arvind Rangaswamy (All Rights Reserved)
Why is Price Dispersion So Large?
Random variations?
Use of mixed strategies (regular price + promotion price)?
Price premium extracted by brands providing better value (Value sensitivity?)
Price discrimination based on consumers’ opportunity costs of time?