INTRODUCTION TO MARKETING

WEEK 3: GO TO MARKET STRATEGIES:

FROM PRODUCT-CENTRIC TO CUSTOMER-CENTRIC MANAGEMENT

In this module we will talk about how one geos about designing a communications campaigns. In earlier
modules we talked about the four Ps, in this lecture, we will discuss promotions.

What does promotions include in terms of decision making?

- Communications strategy:
o Mass and targeted media (TV, Digital, Print..)
 Advertising:
 Outbound (TV and Radio)
 Inbound (Digital, Search)
 Product placement
 Public relations
o Personal and interpersonal means of communication:
 Sales force
 Word of mouth:
 Online
 Offline
o Point of purchase/In-store
- Non-communication strategies:
o Price discounts
o Coupons

In this module we are primarily going to focus on communication streategy and that is thourgh mass and
targeted media. But it is worthwhile for a moment to talk about a few of the things that are we are not going
to go into detail which are also useful.

For example what do we mean about product placement? Product placement is placing your product or
service in a television series or a movie. And why companies use it? Because there is a belief that anything that
looks like advertising is actually less effective than something that is somewhat indirect.

Public relation is not something that is really free. Wgar is really free in the public relations part is that you do
not pay for the media, which means you do not pay for time and space. But creating an activity that deserves
public relation and media mentions is reasonably expensive. So this is an area that can be managed quite well.
It is very effective, but is not an area where you actually pay for either time or space.

Personal and interpersonal communication is a very powerful means of promoting your products and services.
This can be done through sales force or word of mouth. Pharma companies have managed this for years even
before online came into existence, and even today with online, when you actually measure word of mouth,
80% of word of mouth is actually offline person-to-person and only 20% is online.

Let’s start with an example. Many of you may have seen the mulk campaign, which was very popular, dnoe by
the California milk board in 1992. They find that when they talked to consumers, they basically found most
peple like milk. But when you looked at the data you could see that milk consumption was going down rapidly.
At a time when people felt good about the product, the consumption was going down, and mil producers
were really concerned. So they started looking into what is the cause of the problem and what is the remedy.
As they looked deeper they found that people wanted milk, but often did not have milk at home. They felt that
baed on these interviews and focus groups that if you could convince people to have milk at home,
consumption will go up, which is true not just for milk. Milk producers had to found how do you say in a
creative and innovative way that if people had mik at home, they would drink it. Therefore lots of decisions
had to be made, talk to, whats should they tell them, what they wanted to achieve, which media were they
going to use… So for each of these questions, these were the answers they had in their mind and whis is on
which communiations campaign was based.

- Target audience:
o People who currently drink milk
- Message content:
o Make sure you have enough milk
- Mission:
o Increase milk consumption by one glass per week within a year
- Message design
o Got milk?
- Media strategy:
o TV and Print
- Money?
- Measurement:
o 60% aided recall in 3 months
o 2,67% increase in annual sales.

This campaign had a lot of continuity. It is the same message repeated in many different ways and contexts.
Sometimes they used celebrities regular people…

A very important thing to keep in mind is that in any communication campaign, you have to make seven
decisions, which we call the seven Ms of a communication campaign.

- Markets (Who should I talk to? Target segment?)

- Message content (What should I tell them? Key benefit/positioning)
- Mission (What do we intend to achieve? Awareness, knowledge, interest, trial)
- Message design (How should I say it? Creative strategy)
- Media strategy (How do I reach them?)
- Money (How much do I need to spend?)
- Measurement (Was it worth it?)
In some textbooks you will find just 5Ms. That is because the first to Ms (Which is your target segment and
what is your key message) is a decision that has to be made before you get to designing your communication
campaign.

KEY TRENDS

Most of us know that despite the changes in the industry in terms of various media available to us, TV viewing
is still covering a largest part of the audience, followed by radio, internet usage. But in terms of frequency,
there are lot of changes. Overall spend in terms of time people spend on various media is chaning, TV is going
down, some of the difital ,edia is increasing. But it is not like TV is falling apart, it is projected that at least one
third of total ad spending will be on television. Newsàèrs have gone down quite a bit and radio is still table,
eventhough is not as big as it used to be.

If you look at the overall trends what you will see is digital going up, and now is often very misleading, because
digital is looking more and more like TV, the only change is the method of distribution. So instead of you
watching your regular TV channel, you want to watch youtube. So it is important to understand that even
though digital is going up, the contnt which is video contnt, is actually increasing as a percentatge4 of total.
Only part of it gets delivered through the television, while the rest of it is getting delivered thourgh digital
means. It is important to emphasize that the ley principles of a compaign design are not affected by media
choice or media availability, it is the other way around. Media choice is determined by campaign design rather
than media affecting campaign design. So first we are to design the campaign properly and then select the
media.

MISSION:

What we know from buyer behavior and consumer psychology is that a consumer dos not go from being a non
buyer to a buyer in a 0-1 manner, that is certainly do not like something and they goa head and buy, they go
through certain stages: Becoming aware of the product, generatnig interest about it, hacing some desire to
buyo r consume it, and finally deciding to buy it.

What do we know from research on how we influence buyer behavior in our favor? What we know is that if
you look at through these stages caregully, things such as mass media are very good at creating awareness, but
not as effective at the latter stages of the persuasión process. Correspondingly, things like interperosnal word
of mouth or personal seeling are much less effective at the early staged of the decisión-making process, but
become much more effective at the later stages of it.

This means that you are not going to put your money into only mass media. You will spend a good part of it in
mass media to créate awareness but also spend a good portion in personal and interpersonal sources to créate
more word of mouth. This is often reffered to as the 1-2 punch theory of persuasion, which comes from boxing
and means that you use mass media to soften your customer, make them familiar with their products, and
then use either èrsonal selling or interpersonal word-of-mouth to actually convert them to your users

So one of the key lessons in determining nd designing a communications campaign is to make sure you have a
food mix of these sources.

MESSAGE DESIGN

This is a key component of a communication strategy. Psychologists and advertisers have learned over the
years that there are two types of appeals we focus on:
 - Rational appeals:
o Product demonstration: There are many products and services where we want to let the
consumer know that they deliver a particular point of difference or deliver a particular value
proposition. But that claim is not very easy to believe. People may not believe thy this
particular shaving system does give you a better shave tan another one. One way to
communicate that is to show the technology behind the product That is what product
demonstration is, demonstrating how this technology will deliver what it claims to deliver.
o Usage of a spokepersons: If spokepersons use a product that you ebelieve they do well with
the product, you may also feel that you will also be like them. Afain the use of the
spokesperson at times is very expensive, so you have to select your spokeperson very
caregylly, otherwise it can be not a food value proposition. Somtimes companies use another
type of spokeperson which is a cartoon ora n inanimate object.
o Testimonial: This comes from a regular user who then says “Look, I use the product, I feel
good about it, you should also do the same”. Testimonials many people beliee are more
effective, because they are coming from regular users and these regular users are not being
paid to say something about the product. They are doing it becaue they find the product
useful.
o Product comparison: They might compare their product against another producto na.
Number of characteristics or holistically say more people prefer our product to somebody
else. Whenever you use this product comparisons it is very important that you follo the legal
guidelines for product comparison. Most countries have very strong guidelines put in place,
in fact, some coutnries actually do not allow direct product comparisons, but those that do
have strong legal requirement that you must follow if you use product comparisons.
- Emotional appeals: There are different types of emotional appeals that we use proudly classified as:
o Positive emotions: There are many examples of positive emotions that advertisers use as
their developer campaign:
 Proctor & Gamble campaign for Olympics in which you see children growing up their
mothers taking care of, then and as the children frow up you see them in
participating in the Olympic games and then you see the child actually huggging the
mother. The Company managers were not very excited about this campaign
because it did not sell the product itself, just the company0s name.
There are good studies done on what type of Company should use corporate
advertising and what Company should not. The general theme where was
companies that use a common Brand name across many product should use
corporate advertising,
o Negative emotions
 Fear: That is intereting about fear is that we have found that too Little fear does not
have much effect and too fear algo noes not have much effect. So it is important
that if you use fear in amass media kind of setting, you have moderate levels of fear
in your campaign. One way to moderate the effect of fear is to combine it with
humor. An example coulñd be a Pharma ad in which you have gersm, but you never
show them a real germs. Instead, you show them as nice-lookin cartoons. So at least
there is fear, but it is mdoerated by using humor.

MEDIA PLANNING

There are three types of media when you look at it from a strategic perspective:

- Paid media: Television, searcha dvertising, banner advertising…

 - Earned media¡: What you earn base don what activities you do. So this could be actually you conduct
an event like a tennis tournament and then the media talks about it.
- Owned media: Own website, Company building… But also your products and services advertising
itself.

In any communication campaign has to decide how much emphasis is puto n paid, earned and owned. A good
important strategic choice in media i show much emphasis will be laido n paid media versus earned media
versus owned media. Once you have done that, there is the enxt step of the media planning process. Who are
you targeting? What media channels are you using. Then where are you going to spend your money, when are
you going to spend it. And finally how much are going to spend. All of these are technical decisional that if you
have a good advertising agency, they can help you make this decisions. This is not an área where a typucal
eprson who is taking their own product to the market should not specialize in. If your advertising agency does
not know how to do this, find another one. But this is an área where the skill sets are strong and you should
take advantatge of that.

MONEY

There are many formal metods of deciding budgets. Here we will just give you some key insights. Many
companyes when they are setting up their communications Budget, use heurstics. They are not very good
wats, because they are not very purposeful. What you should be doing is what we call as Objectices and Tasks
methods. THink of what the end goal of your communications campaign is. You can start with an end
objectivce in mind and then work backwards from there and ask yourself how muhc money do you need to
spend to get to that objective. That i show you set a Budget opposed to eprcentage of sales, or matching or
doing better than the competition.

Advertising agencies might encourage you to se4t a Budget that is percentage of sales so that when you grow
sales, the Budget grows and also their fees, so you need to be careful.

So always use objecties and Tasks method, which is started with the end goal in mind and then work
backwards as to how much you need to spend.

MEASUREMENT

Measuremnt is the last on the list, but it is important to nto decide it last. You should decide i ton early on, in
factm before you spend a dime on commubnications, decide what measuremetn method you are going to use.
There is no dearth of measurement methods. We have methods that cover mant different áreas:

- Pre-launch test of creative strategy

- Starch Scores for print advertising
- Day after recall for TV advertising
- Physiological response measures
o Galvanic skin responses
o Eye tracking
o fMRI
- Corss-Market tests
The problem often is the willingness to measure that prevents measuremt, because measurement per se is not
expensive. So please decide on what the misión of your campaign is, set the measurement emthod and then
goa head and develop your campaign and executre it.

FInally when it comes to communication strategy, it is a good idea to keep it simple. Your advertising agency
may be more interested in winning awards, but your job is to improve the sales of your products and services.

In sumary:

- Align your communciation strategy with your positioming and all the elements of your marketing mix.
- A great communication campaign is a key element of your marketing plan, ut it is nota ll of it.
- Define misión and metrics before spending even a penny on your advertising and communitations
strategy
- Eventhough measurements is the lst term, you should be designed in deciding it along with your
misión and not execute your advertising before you combine both misión and measurement.

PRICING

All companies and business have to make a pricing decisión. So first let’s talk about the importance of pricing
and why pricing is a key driver of profits

This study was done by McKinsey many years ago, and it looks at the improvement in your bottom line, if you
were to change or improve either your fized costs, sales volume, variable costo or price. The graph says that if
these companies were to lower their fixed costs by one percent, their oeprating profits will imprive by 2,3%.
And the same with the 1% of the other categories. So if you look at all the levels or drivers that are available to
a manager, impricing your pricing has the biggest impact on the bottom line. We have known this for a while,
but now you combine it with the next piece of data. When it comes to managers perceptions as to what they
are better informed about, what do they focus on? If you look at variable costs that is the higuest thing people
focus on. Followed by fixed costs, competitive prices, product value to customer, consumer price response and
consumer price acceptance. This means that even though people realized that pricing is one of the most
important drivers, the knowledge about how to use and execute that pricing is limited and can be much better.

Good pricing is a balancing act. In order to achieve the right balance, we need to be cognizant of a number of
different áreas. We need to unsertand economics, because pricing isa ll about economics. We also need to
understand psychology, because human beings make pricing decisiond and human beings repsond to pricing
decisión. In this age and also in any other age, the knowledge of statistics is very important. You need to be
able to manage and analyze data. You need to have a good understanding of operations research, which
means you need to learn how to optimize given some data. These days you need some basics about computer
science, and you also more importantly need a lot of courage because good pricing decisions are not made by
changing the price, they are made by changing the pricing strategy in a Company.

UNDERSTANDING PRICING SENSITIVITY

A key to maeking good pricing is understanding the concepts of price sensitivity and price elasticity.
Price sensitivity means under what conditions are consumers more or less price sensitive. From previous
research and observations, we know there are different drivers of price sensititivty:

AVAILABILITY AND AWARENESS OF SUBSTITUTES:

It is not very difficult to recognize that if your product has more substituted, people will be more price
sensitive. This is very straightforward, more substitutes that exists, greater will be the price sensitivity. What is
important is that it is not just the availability of substitutes, even the awareness of substitutes matters.

EASE AND DIRECT COMPARISON:

How easy it is for us to make direct comparisons make price sensitivity higher or lower. An study showed that
private generic labels share would fall by 10% if they were sold separately from national brands. Therefore, it is
not just the availability of private labels, it is the abaility to compare the price of one product against another
and even small changes there, make big difference in price sensitivity

EXPENDITURE:

What is the total expenditure on the product and also what is the total expenditure on this product as a
fraction of your total costs. Here’s an example. If you spend more ona. product or service, you are going to be
more price sensitive. Bigger families are more sensitive to price of groveries, because for a bigger family their
expenditure on groceries is a bigger part of their budget. So if you spend more on a product or serevice, you
are usually more price sensitive.

What is interesting is that if the product is a bigger part of your vost struvturem you will be more price
densitive, but if it is a very small part of your cost structurem you will be less price sensitive. For example, if I
am making steel furniture, I’ll be more sensitive to the price of steel than somebody who is doing wooden
furniture and uses steel nails, because for the wooden furniture, steel is a very little part of the cost structure.

SHARED EXPENSES:

Another example is that when you are a human pharmaceutical, or the produc you buy in a pharmacy when
they are covered by insurance, you are likely to be less price sensitive. How do companies encourage payers to
be more price sensitive, they make them pay part of the product.Whenever you have shared costs, and you
want the consumer to actually be more price senditive, you give them a discount rather than lowering the
price of the product directly.

SWITHING COSTS:

The costs that a consumer incurs as a resukt of changing brands.

PRICE QUALITY RELATIONSHIPS:

There are many product categories where consumers inferred the quality of the product from the price. An
example could be consulting services, legal services, choice of a doctor, financial advisors or retirement
planning. In all these cases, what we find is that people infer wuality of the product from the price. Why?
Because the common driver here is consumers lack of knowledge about the product or service. I do not know
who is the best legal professional because I do not use them very often. But If I have somebody who is really
cheap, I might infer from their lower price that they are not very good. This is consumers lack of knowledge
that drives the price quality relationships, because the cost of error is very high. Price quality relationships
happen in other ares too with a very similar idea.

ABILITY OF CUSTOMER TO CARRY INVENTORY:

If a consumer can buy an advanced for future consumption, they can take advantatge of lower prices, they
become more price sensitive. If a consumer is not able to carry inventory, like milk, fresh vegetables, that you
cannoy store them for a long time, people are less price sensitive because when the product is on sale, you
cannot buyt it for the next months of consumptions.

MEASURING PRICE ELASTICITY

Now we are going to use price elasticity, while before we used price sensitivity. Why are we using elasticity
and how is defined? So elasticity is defined as what is your percentage change in demand when you change
your price by one percent.

There are two advantatges of using a percentage intead of a ratio:

- If you just use change in demand and change in price you will get different answers depending on how
the demand is measured. Same way, if your price is measured in dollars versus euros, you get
different sanswers. We want the measure elasticity not to be dependent on the units in which we
measure demand, or the units in which we measure price. So if you use percentage, it is unit less.
- Helps make good comparisons across industries and firms because it is not specific to a particular unit
in terms of tons or dollars. So across industries becomes easier and more meaningful

Now that we have defined elasticity, let’s look at the concept elastic or inelastic, People often use the phrase “
the demand for my product is elastic”, other might say “demand for my product or service is inelastic. What
we mean when we use these terms is the effect of price changes on revenues. Let’s say I were to increase my
price by one percent, if I increase my price by one percent, the question we ask ourselves is what will happen
to the revenues?. If your demand is very elastic, when yiuo increase your price, your unit sales will go down a
bit. If your demnd is inelastic, when ou increase your price, your unit sales will not down as muh and your
revenue will increase.

Let’s look at specific terms. If I increase my price by one percent and my unit sales go down by two percent, my
revenues will go down. However, If I increase my price by one percent and my unit sales increase by 0,5%, my
revenue will go up. The breakpoint is going to be on, which means that if my demand goes down by exactly
one percent when my price goes up by one percent, then my revenues will not change.

How elasticity is formally measured? The way to put come structure on this is to ask ourselves what are we
going to measure and then how are we going to do it. On the other side, we look at conditions of
measurement. Are we measuring price elasticity in natural setting where consumers habitually biu? Are we
controlling the setting using some experimental methods? So if you combine the variables we measure along
with the conditions of measurement, we broadly get four different ways to measure price elasticity:

- Sales data (Natural/Actual purchase). We can get sales data from our products that are already on the
market. We can get ales and price data and then do something with it to figure out elasticity
o We launch this service in the marketplace, we observe it for a few weeks and we change
prices during that time and observe difference in sales. Now we have sales data. Once we
 have this data, we woukld play these data or we could estimate some statistical models to
estimate price sensitivity. For example:
 Run a regression on sales against proce and see what is the formal relationship.
From that, we could estimate price sensitivity.
- Survey (Natural/Preferences): Conduct a survey in a very natural setting and ask peple about their
intentionds to buy.
o Lets say I have new online new surveys and I want to estimate price elasticity. So one of the
things I could do is look at 600 representative potential users of this product, split them into
six sub-samples of 100 each, then describe in some detail what this new product is and ask if
they would buy it or not to each of the sub-samples. But the way I do it is to each of these
subgroups, I give them different price. So everything else about the product is described in
exactly same way, but each group has different prices. Then to reach of these groups, I count
the number of Yes and Nos and olot them ona. graph. If you look at this graph, you count the
number of Yes it is higher at $10 and lower at $15 and I can say I have a demand function
which related price to demand from which I can compute elasticity. This is one way,
however, there are many weaknesses in this method, eventhough it also have strengths:
 Strength
 Quick
 Not expensive
 Weaknesses
 People not often say what they would do. This in marketing is called as the
intentions behaviour link and there are ways to strengthen it.
 Not explicitly avvount for comparative prices
 Talk about using the product but not about how long will they use it?
Because your total revenues are not going to depend on whether people
are going to just try this surveys, but it is also going to depend on how long
they are going to use it, what is the customer lifetime value.
- Field/Laboratory Experiments
o We could conduct a field experiment or a lab experiment. For example, we could change
priced in one setting, compare it with another price in another setting, and look at the
difference. A very nice example of a field experiment with the retail store Dominick’s. It had
90 odd stores and they split them into three groups evenly. For one of the groups they
lowered the prices by 9%, for the second group they increased prices by 9%, and the third
group kept the same prices (Control group). The results showed that in the first group, the
sales came up by a 3%, However, the second group the unit sales went down by a 4%. In
both stores, the price elasticity is respectively -1/3 and 4/9. Due to the fact trelatively that
the price elasticity is <1, both examples show that demand is reatevely inelastic. The
conclusion would be that because of my inelastic demand, I can reise prices and my revenues
wil go up. But you have to be careful, if consumers are able to compare prices more easily,
maybe these effects will no longer remain valid. However we find that consumers are wuite
sticky when it comes the sotres they buy from.
- Trade off analysis (Experimental/Preferences)
o There are companies specialized in conducting this. Here’s an example:
 Let’s say we have 6 restaurant A,B,C,D,E,E. These restaurant s are defined on two
different characteristisc or attributes: Food (excellent, good or fair) and Atmosphere
(Intimate, candlelight, or bright lights). With these variables, we can create six
different types of restaurants and you can ask consumers or potential buyers, which
is your most preferred restaurant. If they say A, you ask that if A is not available,
which one would you pick. Essentially what you will be doing is get them to rank the
 restaurants. With this information, we can learn the preferences of our customers
about ambiance and food quality. We can then quantify it also more formally as
how much more do they care about food versud ambience? Furthermore, if we
change some variable for price, we would be able to measure price elasticity.
In conclusion, these four broad wats come about from what do we want to measure and how do we
measure it? Are we measuring people’s actual purchse behaviour or are we measuring intentions to
buy? In terms of how we ar measuring, are we measuring it in their natural setting, and then are we
measuring it in a controlled experimental setting?

PSYCHOLOGICAL ASPECTS OF PRICING:

Along with economics and statistics, psychology aare anther important aspect and we need to understand the
psychological aspects of pricing as we make pricing decisions. Psychologists have studied pricing in great depth
and there are many key findings.

- The 9 price endings: In much of the U.S. and many parts of the Western world, you will se prices
ending in either 9 or 5. There are many experiments and studies that have shown the effect of 0 price
endings, and here is one:
o This is a very popular study that wa done many years ago, a price of margarine in a field
experiment. The regular price of margarine was 83 cents and the unit sales were 2817. When
the price was reduced to 63 cents, the sales increased by 194%. However, thereduction of
the next four cents from 63 to 59 cased an increase in sales by over 400%. So the first 20
cents, even though it is larger, it had lower impact on sales than the next four cents.
o Catolog sales: This is an study that had been reported in journals in which researchers send
out in a catalog setting the same dress to different consumers, but it was priced differently
depending on who received the product, or who received the catalog. In one case, the price
was set at $34, in other case at $39 and the third case at $44. The study found out that the
sales were higher at $39 even though the lowest price was $34. These studies illustrate why
9 endings often lead to higuer sales than non 9 endings. It is also a case that where are many
studies that have not found this effect, but the practice ocntinue to use 9 endings and 5
endings especially in the U.S.
- Weber Fechner law: Researchers dound out that consumers reaced to prices more in percentage
terms as opposed to absolutes. So in simple words, a typical consumer will be happy to drive fice
miles to save $5 on a product costing $10. But the same consumer will be not happy to drive the same
five males to save 5$ on a $1000 product. A rational consumer would be willing to drive five miles to
save $5 in both products, but they empirically found that consumers reacfted more to a percentage
price change as opposed to ab absolute price change.
- Endowment effects: It is a big word for something simple, which is a sense of ownership increases the
customer’s willingness to pay. Here’s an example:
o A professor told the first group a hypothetical setting in which he distribued mugs and he
asked them how much would they ask for to tell it to someone less fortunate that did not get
it. Also, he asked group B, who did not get the mug, how much would they be willing to pay
to acquire it. Consistenly was found that those who were put ina. Hypothetical situation that
they onwed the mug were asking for far more money than those who were willing to buy the
mug. Another important aspect is that neither of them actually had the mug, so the
endowment effect do not rely on actual ownership but a perception of ownership
The implication for this is to make the consumer feel they own the product before they buy it.
- Reference prices: Most of us do not loot at a price in isolation, we compare it with some reference
price we have in our mind and ask ourselves if this price is better or wrse than the reference price we
 have in our mind. Most of the time these reference prices are based on the past history of prices.
How do you manipilat the reference price?
o Comparing your today’s price against a list price, or oftentimes tou will see in an infomercial
people will start at a very high price to create that as a reference price and then go slowly
doen to make it sound like a good deal.
- Context effects: What this means is that what is the impact of the choice set that is offered to a
consumer on their buying decisions. Let’s look at two possible settings:
o We have in one setting consumers go to a store and they see two cameras on the shelf, one
priced at $169 and the pther priced at $239.
o The other set go to a store and see three cameras on the shelf, one at $169, another one at
$239 and the last one at $469.
What you observe in these studies in a very robust way is that when you add a higher priced option,
consumers are more likely to gravitat towards the intermediate option. This is the foundation of
companies offering good, better and best strategy, in whicvh they offer three versions of the product:
good, better and best, so more people are likely to buy the middle option

ANALYTIC FOUNDATIONS FOR PRICING:

In this lecture we will discuss some basic analytic foundations for pricing decisions.

MARGIN ANALYSIS

So let’s start with margin analysis and a case example. This case comes from a company called Vistakon, a
subsidiary of Jhonson&Jhonson, which were the first to launch disposable lenses. The first lens they launched
were called Acuvue, ehic was produced by a very unique proprietary technology and it costed about $0,5 per
lens. Patients were advised to war these enses for one week, then dispose them away, and use another
leneses for the following week. Soon after they launched Acuvue, some eye care professionals suggestd that
patients remove these lenses and clean them each night and replace them after two weeks, which was not
exactly what the Vistakon suggestd. In reponse to this particular usage pattern, Vistakon devided to launch a
new product called Surevue, which was specifically designed for thy stupe of usage which is two-week usage.
They priced it the same as Acuvue which was $2,5 to eye care professionals who charge $4,5 to end users. At
the time of this, Vistakon was thinking of launvhing a very different type of lens, disposable lens which they
called as one day Acuvue or daily disposables. This would be a product what would be dailuy wear, single-use,
truly disposable lens that offered both convenience and reduced health risk. These lenses costed Vistakon
about $0,25 to manudacture, they were priced at $0,65 to eye care profesionals who charged the customer
about $0,83. But what issues should Vistakon be concerned about as they launched this new product to
complement their existing product line of Acuvue and Surevue? A lots of answers come up:

- Will the new product cannibalize existing products?

- Will consumers really want it?
- Canw e produce so many units?
- Do we have the supply chain and the distribution netweok to support it?

All of these questions can be addressed by doing a margin analysis. If you look at the margin for each of these
products, so let’s start for Surevue. The price for the patient is $4.50, the price of the ECP is$ 2.50, unit cost is
$0.50. So Vistakon contribution is $2.00. If you look at Acuvue, it's exactly the same. But if you look at the one
day which is the daily disposable, it's $0.83 to the patients, $0.65 to the ECP, and the unit cost is $0.25
which means it has $0.40 margin to Vistakon.
Let's look at that a little bit more carefully now as we go deeper into this. So $2.00, whichis the margin per lens
for Surevue. We multiply that by 52. Where do we get 52? It's replaced by weekly which is 26 weeks. You have
two eyes so you are using 52 lenses. So 52 times 2 is a $104. Then for Acuvue again, the per lenses is $2.00
multiply that by a 104 because you are changing it every week, two eyes, 52 times 2 is a 104. You get $208. But
then you multiply the $0.40 margin on one day which is the daily disposable multiply that by 730, you get
$292. So clearly, once you look at it on a per consumer basis, you find that thedaily disposable is more
profitable. This is where now the real discussion begins. I ask, under what conditions would actually Surevue
be more profitable, even when you look at these data? This is not an easy question. But as we think about
it, the answer comes in the following way.
If you were told that you can make only a 100,000 lenses, which ones will you make? Then the answer would
be, you will make only Surevues. Why? Because from those a 100,000 capacity, you can make $2.00 per lens
and that will be 200,000. But with a 100,000 capacity to manufacture, you'll be able to satisfy very few
customers. On each customer, you will make only $292. So if your capacity were limited, then suddenly
Surevue looks more profitable. So the next question is, what capacity are we talking about when we're
thinking of $292, $208, $104 versus $2.40? The answer there is, you are assuming that the number of
customers you have is fixed and you are going to be able to change each customer from one lens to another
lens. So if your number of customers is fixed or limited, then clearly the daily disposable looks profitable. But if
your number of lenses you can make is fixed, then Surevue is more profitable.

CONCLUSIONS & LESSONS

So let's now put this in some perspective. When we compute margins, we all worry about what is the
numerator. By numerator I mean is a $2.00, $2.01, $2.02, is $0.40, $0.41 is it 292 or 293? What I urge you to
do is also think about the denominator. Should it be margin per lens? Should it be margin per customer? What
does that depend on? It depends on what is your key resource or your binding constraint. If your key resource
happens to be or your binding constraint happens to be production capacity, then you should be looking at
margin per lens. If you're binding constraint happens to be the number of customers you can access, then you
should be looking at margin per customer.

So think about it. A traditional retailer. When you ask them how do you compute your margins? They say,
"we'll compute margins per square foot of shelf space". Why do they do that? They do that because for a
traditional retailer, shelf space is their critical resource they can't change that in the short run. But now if you
ask a law firm or a consulting firm, they don't say, "we compute margins per square foot of office space". Why
do they not compute margins per square foot when a retailer does? Well because office space is not their key
constraint, their key constraint is the number of consultants they have. So they compute revenue per
consultant hour in deciding which opportunities are more interesting or more attractive. 

We all worry about the precision by which we compute margins, which is why we often refer as to numerator,
but what it is strategically more important is the denominator. IF you do not get the denominator right,
everything else foes wrong, because if you are compuring margin per lens when cutomer is your key
constraint, then you are most likely to make the wrong decision.

ANALYSIS OF EYE CARE SPECIALITS INCENTIVES

- So in this particular case, we'll assume going forward that there is no capacity constraint so for
Vistakon, the key constraint is actually the number of customers. So now lets start looking at another
question that comes up in the discussion which is, will the eye care professionals like this product? So
now let's start looking at the margins of the eye care professional. As you look carefully in the table,
what do you find? What you find is for the new product, the eye care professional is going to make
$131.40 per customer. Compare that with what they were making for Acuvue. For Acuvue, they're
making $208 per customer. For sure, of course they were making less which is a $104. So once you
look at the channel margins or the margin to your channel partner, I think you can conclude that
there is a good likelihood that your eye care professionals will not be as interested in this product. But
then I think a deeper discussion might lead us to say, "What if it is cheaper for them to sell daily
disposables?'' If it's cheaper for them to sell daily disposable, then may be a $131.40 is sufficient. But
the answer to that is, it's probably harder for them to sell daily disposables. They'll have to stock
 more, they'll involve more working capital and more space, but it is not likely to be easier to sell daily
disposables than it is to sell either one week or biweekly lenses.

- Also look at profit-sharing. When we look at the table for the earlier two products, Surevue and
Acuvue, it's very interesting to see that the annual contribution for ECP and Vistakon was exactly the
same. Which means, whatever was the total size of the pie, they were splitting it equally. But now we
look at daily disposables, their plan is to actually split the pie unevenly. What does that mean? It
means most likely, it's not just about lower margins to the channel, it's also about fairness or lack of
fairness. Because now you're not going to split the pie evenly. Let's say if you were to split the pie
evenly which is change the price in such a way that the two products now, all three products are
shared 50-50 between you and the channel partner. How do you get to that? Well, you have to lower
the price to the ECP at 54 cents instead of 65 cents. Once you do that, you get 211.70, 211.70. Now,
all channel margins are equal between Vistakon and ECP. But then what you see is this product is
really not that great. Because it makes just a little bit more than what they were making on the
weekly product. 

A good thoughtfull margin analysis can peel the onion and help us identify:

- Is the new produt really better than our existing product?

- If you look at the margins more thoughtfully and include our channel partners also, then we can
understand their incentives or lack thereof.
- Lays open many interesting insights that one has to keep in mind as one launches new products or
prices them appropriately.

WHAT IS A MARGIN ANALYSIS:

It's simply a table of costs and prices for every member of the value chain. The person who's
taking the idea to market, channel partners, end-users, for every relevant product within the
product line, and often across competitors. 

WHAT A MARGIN ANALYSIS DOES:

It reveals everyone's incentives in a purchase transaction. A careful examination allows us the
discovery of potential problems such as cannibalization and channel conflict. It also provides
useful input for subsequent analysis. Now, let's move to the next concept which is break-even
analysis. Again, this is extremely useful in making pricing decisions. It's also extremely
useful in making other business decisions. 

TYPES OF BREAK-EVEN ANALYSIS

- Possible marketing options:

o Can we justify a $2 million advertising budget for daily disposables? How much many more
do we need to sell?
 To either justify or realize if it is worthwhile or not, we ask ourselves how much
money do we make per lens, which is 40 cents. So each lens we sell, we will make 40
cents. We are planning to spend two million dollars on advertising. So two million
divided by 40 cents is five million lenses. That means we'll have to sell five million
more lenses in order to be able to justify a two million dollar expense on
advertising. That's a nice analysis, but I don't think it's good enough. To make it even
better, I think you need to translate this into not lenses as the denominator, but
again consumers as the denominator. So if we translated into consumers as the
 denominator, each consumer, let's assume if we can get them, stays with us for
about a year, in which year they'll consume about 730 lenses. So, five million
divided by 730 is 6,849 new users. What does that mean? The two million dollar of
advertising will pay off, if we can get 6,849 new users. 

o If we were to lower the wholesale price of the daily disposables from 65 cents to 54 cents to
equate margins for ECP and Vistakon, how much more would we need to sell to break-even?
 So the question we ask ourselves is how much more will we have to sell if we reduce
the wholesale price from 65 cents to 54 cents and how would we analyze that? At
65 cents our profit margin would be of 40 cents, while at 54 cents, our marginw
ould be of 29 cents. So how much more would we have to sell at a margin of 29
cents relative to a margin of 40 cents to break-even? Imagine we are selling 100
lenses at 40 cents, to have the same benefits we would have to sell 137,9 lenses at
29 cents, which would mean an increase of 37,9 % in our sales. The next question is
if this is possible. What we could do a small test market ina. Small region, where we
lower price from 65 cents to 54 cents, and see whether we gert a boost in our sales
close to the desired 37,9%. If we do, we could considere it further.
What if the this anlysis turned out to be 200% increase of our unit sales? Then
maybe there is no need to probe further, because you know from pst experience
that this is unlikely to happened. So this break-even analysis gives you
someinteresting guidelines on what do do nect and also helps us rule out some
really dominated alternatives in certains cases
o How much cannibalization can we tolerate for Acuvue from the Surevue launch?
 Caannibalization is not really a problem in our cont3xt, because the new product
give us $292 per consumer, while the other products gives us less. So let’s look at
another event of this case study. This company at some point in time launch
Surevue when Acuvue was already in the rmarket, so let’s use it a example. How do
I know what level of cannibaiation can I tolerate from Surevue before it comes
unprofitable? Let’s say we have a sample of 100 customers who are currently buying
Surevue from which we are making 100x$104. If we did the exercice of asking them
what were they using before Surevue, what is the max number of people saying
they were using Acuvue that we can afford before we say Surevue is not profitable.
Or in other words what is the maximum draw Surevue can have from Acuvue before
it is unprofitable. This number will be called max, and how can we find it? In order
to Surevue to be profitable, 100x$104 has to be greater than the Max x $208.
Therefore the max must be less than (100x$104/208>Max), so we can tolerate 50%
cannibalization. If cannibalization is more than 50ç5, then Surevue is going to lead
to lower profits, because it will be drawing more customer from Acuvue than we
can candle.
 More generally, Break-even cannibalization is equal to the margin on the new
product divided by the margin on the existing product, which in this case is 50%.
 We could have another quedtion, what if we have more than one product?
 One possible answer is we can use the weighted margin on existing
products in the denominator. That would be an approximation but a good
enough approximation.

ECONOMIC VALUE TO THE CUSTOMER:

In this module we will focus on a concept called economic value to the customer (EVC), which can be very
useful on a number of things:

- It helps set us a price for a new product or service that you are planning to take to the matket
- To identify whether or not this new idea you have is economically worthwhile
- Effectively decide who or which type of customers you want to target
- Help make decisions about segmentation and targeting
- Identify who are your true competitions and what is their relative economic power.
- Useful for helping you rethink about how to price what you already have on the market.

CASE STUDY:

Imagine you use to have a swimming pool, which was 20.000 gallons, and every winter you worry about the
water getting irty and then having to clean it up on spring. So, to avoid the cleaning process, you drain the
entire water and refill it. However, the suburbs have very strict laws regarding water disposal and you cannot
just throw away the water like that. So I finally found a product on the market which was a tablet that you
drop in the pool and put the safety cover, and it is supposed to maintain the water crystal clean for the next
spring. In this case, we have innovation that will help you do the job faster and better, so how much woukd
you pay for it? This is where ECV comes in. Draining and refilling the swimming pool costs $220. Now let's start
thinking a little bit more about what this 220 means and what is its economic significance. If the tablet is priced
more than 220 and somebody comes to me and says, it's price is say 240, what am I likely to say? Say most
likely what I will say is that the current method is cheaper, I am not interested in this new idea. If the product
happens to be priced at less than 220, I'll probably show some interest, but if it's priced exactly a 220 I'm going
to say in my mind. I am indifferent between the existing technology which is throwing the water away and
refilling I'll call that as a method of working or a technology, and the new technology which is using the
tablet. So what is the meaning of economic value to the customer? What it means is, trying to identify a price
at which the customer is indifferent between their existing method of doing things, and the new idea that is
being proposed.

So what can this be used for? It can be used now for many things, it's a useful input our pricing decisions
for example, we already discussed this. This is the maximum price, I might be willing to pay, and so this is the
maximum price the innovator of the tablet or the inventor of the tablet will be able to charge. Now if the
maximum is not good enough to make your financials work now, we're thinking about the inventor of the
product. Then the new product you have is probably not worth taking to market. 

TARGETING & EVC

Using the analysis we just did, can we identify who will be willing to pay more for the new tablet based on our
analysis? So when asked this question from my students and also senior executives, the first answer I get
always is those who have bigger pools. Well, that is true if the same tablet works for 30,000 gallons also, then
the homeowner who has a 30,000 gallon pool will be willing to pay more. Assuming they are of the same type
then instead of 220 it will become 330. But then there is a next question when it comes to segmentation and
targeting, which is how will you find out who has a bigger pool? And when I ask this question most of my
students remain silent, because pools are in the backyard and if I am this inventor of this tablet, how would I
know who has a bigger pool or a smaller pool?  It's not easy to identify who has a bigger pool and who has a
smaller pool specially when you are new in the market. So I think it's very important to recognize that while
size of the pool is a good segmentation variable, identifying who has a bigger pool and who has a smaller pool
is very hard. So conceptually it's a good segmentation variable but in practice it will not work as well.

Those who live in areas where the cost of water disposal or fresh water is high. Now that will be easier to
identify because going back to our session on segmentation, this will be segmentation based on
geography. Certain zip codes will have a higher cost of disposal, certain zip codes may have zero cost of
disposal, so this is very easy to identify. So now we can now segment customers based on geography, based on
the cost of water disposal or the cost of fresh water. So it gives us an idea as to how to segment the market,
and then also decide who to target.

Another posible segmentation would be the enviromentally conscious. Although is very difficult to tell who is
les sor more enviromentally conscious.So in summary the computation of EVC also gives us some insights into
how to segment the market and who to target, and these are all key decisions in developing a good go-to-
market plan.

Another área that we can focus on this domain is trying to combnine customer lifetime value and EVC. So now
we have this 2 by 2 gives us four possible scenarios, so 

Let's identify these scenarios and see their managerial usefulness. 

- I think the obvious one is the ones in the low low box, the lower box is these people are not
interested in us. Because they don't value our product, and they're also not interesting to us.Because
they have a low customer lifetime value, these maybe people who use the tablet once every five
years, they also don't value the tablet. So these are obviously customers we will not target.
- Now look at the bottom right box. These are the people who are interested in us and also interesting
to us, why are they interested in us? Because they have a high economic value to the customer, they
value our product and services, higher and why are they interesting to us? Because their customer
lifetime value is higher, these will be obviously the segment's to go after this will be the best segment
to target. .
- Low customer lifetime value, but high customer economic value, these people are interested in
us. But costly to deal with, why are they costly to deal with? Because they have a very low customer
lifetime value, they probably don't buy as frequently, they ask a lot of questions, they need a lot of
help, but they do value our products. So their economic value to the customer is high, but the CLV is
low, and then look at the lower left side. 
- The lower left side is interesting but not interested in us, why are they interesting? Because they have
a high customer lifetime value, and why are they not interested in us? Because they don't value our
product maybe they have smaller pools, or they'd rather do their work themselves.

So combining customer lifetime value with EVC it gives oyu a very Deep insight into your customer base of the
types that we typically we do not think about. And we use this extensively in deciding which customer groups
to target an which ones not to target.

EVC & COMPETITION

We can also use it to identify who our true competition is and what their response might be when we launch a
new idea. So, let's say we are thinking of the person who invented this tablet and you ask the question, who
will this person compete with? And the typical answer you will get is, other people who make such tablets
or those who might make such tablets in the future. That's a good answer, but I don't think it's a great
answer, I think we can do better. And a better answer begins by redefining what is competition, a broader in
my view if not a better view of defining competition is, who all will suffer if we succeed? So let's think about
that, if our new tablet becomes successful and people like professor Raju start to use it, who will lose
business? Well the first person who lose business is companies that take the water away companies that haul
the water away, why? Because now people will not have companies haul the water away because they all they
do is put the little tablet. Water companies that supplies water will also have low business because now their
billings will go down. So whenever we take a new idea to market or a new product to market, value shifts from
one industry to another. It's not about one tablet competing against another tablet, it's the launch our tablet
takes money out of certain other industries. And once we identify where the value is going to migrate from, we
know they are going to respond in some way to prevent that from happening. So we can expect some
response for those who lose if we win, and this I believe gives us a broader understanding of who our
competitors are. These are people who lose when we win, again economic value to the customer gives us
some insights into their value gets migrated from.

INSIGHTS ON HOW BIG IS THIS IDEA

We can define the value of an idea by estimating the value it creates for the company. Let's assume for the
moment that all customers are exactly like me, then each will be willing to pay a maximum of $220 for the
tablet. If we were told that the cost of the making this tablet is $240 per tablet, and you put 220 next to
240. It's not rocket science to conclude that this is not a very useful idea, because it costs two and forty dollars
to make but the maximum that a customer is going to be willing to pay is $220. But what if we were informed
that the cost of making this tablet is only $20? Then the company has created or the innovator has created a
value which is $200, which is 220 minus 20. Now, this is the value we can now put to work, and more on this as
we go forward in terms of improving pricing decisions. 

So, let's say the economic value as we computed is 220, the cost is 20 in this chart, I have drawn to 20 at the
top and 20 at the bottom. And let's say we are hypothesizing a price of $100, if you are hypothesizing a price of
$100 and we put a hundred on this chart, what inside does it give us? Well, it tells us that we are giving the
customer $120 incentive to switch from whatever they are doing today to this new method of working, and
the inventor of the tablet is going to get a margin of $80. Where am I getting $80 from? It's 100 minus 20, and
where am I getting 120 from? It's 220 minus 100 remember professor Raju it costed him $220 to keep the pool
fresh by spraying. Now if the price of the tablet is 100 he's going to save $120, now if we shift the price higher
or lower, let's say we increase the price 140, what are we really doing? What we are doing is balancing the
incentive given to the customer against the margin for the inventor of the product. 

So in this particular framework, price comes a sharing rule, a rule by which we decide how much of the created
value is shared between the inventor and the customer. And it's a very useful way of thinking about making
good pricing decisions. 

We could now bring our channel partner in the analysis, the inventor of the tablet is not going to go to
but maybe go through a store a swimming pool store. Then we have to keep their interest in mind, let's say we
charge a price of $70 to our channel partner. And the general partner then charges a price of $100 to the end
user. The channel partner is going to make $30, is the $30 margin per tablet good enough for the channel
partner? Well, how will we answer that question, what are his or her other alternatives? What can he sell that
will give him $30 maybe more than that? If there are many things that he can sell that will give more than $30
then $30 is not enough. But it helps us identify each person's incentives, and then the next question we ask
ourselves is, have we created enough value. Or has the innovation created enough value to keep all three
parties happy? Our channel partner our end user would they be interested in switching to us? And also
ourselves, is it enough of a margin to us? If the difference between the cost and the EVC is not very high, then
it's unlikely that all three parties are likely to be happy, and the innovation is not likely to succeed.

SUMMARY

- Helps set a price for a new producto service you ar ep’lanning to take to the market
- Who should you target?
- Who is your competitions and their economic power?
- Whether or not the new idea you have is economically worthwhile
- Do we have enough channel partners?

CREATIING CUSTOMER ACESS:

In this lecture, we will talk about creating customer access for our products and services that we've
developed. When we develop or go to market plan, there are four areas where we need to make key
decisions, the 4Ps:
 - Product
- Price
- Promotion
- Place

What we mean. By place is making sure your producto r service is accesible to the customer at the right place,
the right time, and the right type and quantity. In old school marketing this is reffered as distribution channels.
This is very important because by this time, you know how to understand your customer, develop a great
product or service based on that customer input, created a great brand as Professor Con spoke about, and
communicated the value through your advertising campaign, and even priced it appropriately. But what if your
customers are not able to find it? All that you've done may not matter. Many times a customer's decision on
what product to buy is also based on their experience in the store at the point of purchase, whether it's a
bricks-and-mortar store or an online store.It's also important to recognize that most businesses often spend 
significantly more money on creatingappropriate customer access for their product or service, than they spend
on advertising or promotions. In many cases, it's been studied extensively that you are spending three to four
times as much on creating customer access. So it's expensive. Some companies are spending 40 to 50 percent
oftheir revenues on creating customer access. 

What's interesting is that most companies don't even know the cost of it because it does not show up on your
income statement. Think of a company like Unilever, your revenues are recognized based on how much you
sell to your distributors, and the distributors then sell the product to the end user. What you recognize is the
price at which you sell to your channel partner or your distributor. The difference is what they charge the end-
user. So if you think of as standard department store, they make 50 percent margin. It means you are getting
half of what the customer is paying for your product. Just think about that, how expensive that is, and it is not
even showing up on your income statement because it's really you not recognizing that channel
margin because that's from the income statement of the channel partner.

How we créate customer Access or distribution channel can be a great source of competitive advantatge and a
disruptor in the Marketplace.

DISRUPTION IN RETAIL:
Many businesses have been disrupted, many industries have been disrupted merely because somebody else
came up with a better distribution channel to access the customer. If we look at this concept of disruption, and
especially if you look at retail, and you look around us, there are so many changes that are happening. In 2017,
for which we have some data, nearly 9000 bricks-and-mortar stores closed in the US. Toys-R-Us is out of
business, Circuit City is gone. Well-known department stores that many of us love, such as Filene's
Hecht's, Mervyn's Marshall Fields are all gone. Rite Aid closed 600 stores, Sports Authority: 460 stores. Even
companies like Walmart are closing stores. Macy's is closing a 100 stores. But when you also compare it with
other things, Warby Parker, an eyeglass retailer has opened approximately 100 retail locations. Caspar, that
we'll talk about in more detail later, is opening 200 stores. Amazon, the big killer of bricks and mortar retail
just bought Whole Foods for 13.4 billion, and bought their bricks-and-mortar stores and will plan to continue
them, and use them to the best of their capability. So I think all this makes us wonder that if online is the place
to be, why are companies opening physical stores?  Let's also not forget that some of those being disrupted
today were actually the disruptors. You can go back to the 1980s and late 1980s, when Toys-R-Us, Circuit
City, and Sports Authority, who are once deemed as category killers, they were the innovators of the
day.Department stores were an innovation that went on to change the very face of detail and how customers
bought products and services.Harding and Howell to the best of my knowledge in 1796 in London, was the
very first department store. Macy's opened in 1878 in New York, and Selfridges opened in 1909 in
London. These were the innovators of the day and disruptors of their times, and some are still around. 

CREATING CUSTOMER ACCESS

In order to understand all this, I think we need to get to basics and start with foundations of how we
understand distribution channels and creating customer access. So let me start by giving what often people call
as an old-school tutorial on channels that is still just as relevant. In order for any of us to buy a product or a
service, it is important that the customer has acess to?
- Relevant information needed to make the purchase:
- His/Her purchase can be executed via the right logistics

BASIC INFORMATION NEEDS:

So let's think about information. 

- Primary informtiion.First piece of information I need to know is, why should I buy this product or
service? Why should I pay so much for a new idea? How will it work? How will I use it? We call this
primary information. 
- Comparative information: Then, there is what we call as comparative information. Why should I buy
from you and not someone else? That is comparative information. Every customer needs this in order
to decide whether or not to buy a new product or a service.

LOGISTICS
There are many components of logistics:
 Convenience and accessibility, how far will I have to travel to buy it? I'm hungry now. Or I need diapers for my
young child. How much will I have to travel to get those? 
Will I have to buy 24 bottles of wine a day vitamins with each having a 120 capsules? Can I buy just
one, instead of having to buy so many? 
How long will it take for me to get it? Time between order and receipt of goods is important. 
Who will I go to if the snow blower I just bought doesn't work? Who will ask if I have a problem in assembly? A
part is missing or broken, where will I get it from? All this falls under logistics.

 So we can see a consumer when they are making a decision to buy a product or a service,they need to have
information about its value, its price, how it works, but also needs to make sure that the product is accessible
at the right time, at the right place, in the right quantity, and of the right type.Now how do we put together all
of thisin a reasonable easy to understand framework? It requires making a few sort of starting assumptions as
we call it.

CHANNEL DESIGN DECISION

CLASSIC ASSUMPTIONS
Traditionally, one can start by assuming that a manufacturer, somebody let's say who makes shoes, say Nike, is
in a better position to provide information about their shoe, but intermediaries say as a retailer of a shoe
is probably better at providing logistics.  These are starting assumptions and over time these assumptions
change, and with that frameworks will also change.

Now different products and services may have different levels of information requirements and logistic
requirements. Some are high, low on both sides. 
- So for example, if a hospital is purchasing a radically new equipment for say proton therapy, they
require a lot of information on whether to buy, which one to buy, but the lead for logistics is
low because they're going to buy it once and never again. It's not like they're going to buy this every
day, every month. So the product has to be available to them at the right time. It's a one-time
purchase. 
- On the other hand, if the same hospital is going to adopt a new drug that will be used extensively in
the hospital,say it's an antibiotic that'll be used extensively for many patients at many different
times, then the need for information is high, but they also have to purchase that extensively and
repeatedly, so the need for logistics is also high
- Think of another situation, where either us as the warden school or a hospital is going to replace table
lamps that are sitting on our desk. Well, table lamps are not that complex of product so we are going
 to buy it maybe once every few years. So the need for information is also low and the need
for logistics is also low because it's infrequently purchased. 

- On the other hand, think of buying surgical supply for a hospital which is used extensively, but I
bought it many times before. So I really need to know too much about it, because I have already
purchased it before, but I need to make sure it comes to me at the right place at the right time. So I'm
not out of stock. So in this case, the need for information is low,but need for logistics is high.

Now depending on various combination, we can set up different types of customer access structures. So for
example:
- If the need for information is high and the need for logistics is low, it's a one-time purchase,we can go
direct to the customer. That's what happens most of the time is these companies have their own sales
people, they go have interactions with the hospitals, and then they directly install the equipment. 
- On the other hand, if it's a new drug that is going to be adopted by a hospital or a set of
physicians, then of course the pharmaceutical companies sales-reps will go, convince the doctor in the
hospital why this drug makes sense, why it should be adopted, but then the hospital does not buy the
drug directly from the pharmaceutical company. There are many intermediaries who will do that for
us. So we'll call that system a pull system.  Because the job of the company is to actually create the
demand for the product, and then the product is then purchased from ancillaries and wholesalers. 

This is a framework that we often use to design what we call structured customer acesss or channel design
decisions, but it is the traditional view of thinking. What has happened overtime is something different.

This framework argues for is that a particular product, the nature of the product determines whether tou need
high or low logistics and information. Once you have that, a disruption occus by reallocation of function. Let’s
see an example:
- Furniture is a complex product. We buy it once in a while and it requires high level of information and
also high level of logistics. What IKEA said was, "You can come to IKEA and pick up the furniture, but
you will install it yourself, you will assemble it yourself." So they outsource the assembly and
installation to the end user. That does not mean that installation and assembly was no longer needed
the delivery and installation and assembly was still needed in a furniture, is just that who did it
changed. Earlier a furniture company did everything themselves, now IKEA outsourced it to us. In the
process, we paid less for the furniture. Because we are doing part of the activity ourselves. So in sum
is, logistics was spun off to us partly. Not everything, but partly to us, and so IKEA was able to sell the
furniture at a lower price to us.

- Apple stores now have consultative selling in-house or online, instead of relying on value-added

resellers. So what Apple did was actually bring in some of the activities that the value-added
resellers did in their own house, and in the process change that business model. 

So I think what this framework says is disruptions can happen through re-allocation of activities or
functions,, but activities or functions do not go away. Then the channel margin should be a function of what
activities is being done. If a channel partner does more, then you have to pay them more. If you are doing
more, then you can pay them less.

NEW WORLD DISRUPTIONS: TECHNOLOGY

Now in today's world, when we step back a little bit, there are other disruptions that are possible. One of the
key disrupters here is technology. So let me think about technology a little bit more broadly than we typically
think about. When typically we think about technology in retail and distribution channels, we think of online
buying. But technology is much bigger than that,  the impact on customer access is far deeper.

 Let's think of three industries; books, music, and let's say money. I asked my students which of these three
industries has been most disrupted by technology? The typical answer I get is books. Amazon started as a
bookseller, but now it's much bigger and books have been disrupted. But oftentimes that's not the right
answer.

First of all, why have these three industries been disrupted the most? It's not because we can buy books
online, tt's really because today all these three products mature earlier hard goods. By hard goods I
mean, book is a hard good, it's a physical product, has been converted to a soft good. What do we mean by a
soft good? Book is now a soft product, you can download it on your computer, or on your on your iPad or on
your Kindle. Think about what music was many years ago. If you were rich enough, you were a king or a
queen, the musician came and played music for you and, all the poor people may be sat on the side and if the
wind blew in their direction they could hear the music. But then, music gets codified into a tape then it gets
codified into a record or some of you may still remember seeing a record. They are coming back because they
apparently have still better quality. Then it went from a record to a a CD, and now what is music? Music is
basically bits and bytes. Now it's become a soft good.  So what technology has done in all these three
industries, is convert a hard good to a soft good. When a product changes from being a hard good to a soft
good, that's when disruption happens.

So this is an example of disruption of technology where hard good got converted into a soft good. So the
answer is really not the method of purchase, it's not online versus bricks and mortar, it's the product
itself. What else we can ask ourselves can change from a hard good to a soft good?  People are arguing that
within the next 20 years, many products that are, what we consider as hard goods today will become soft
goods that people will be able to just print at home with the additive manufacturing. I can only visualize what
customer access will look like when that happens. So I think it's really important to understand the role of
technology in this area more broadly than just online versus bricks and mortar.

DISRUPTION IN INFORMATION DELIVERY:

In the previous lecture, we talked about how technology disrupted money, books, and music mainly by
changing a hard good into a soft good,and in that in that way changing the logistics. Now, let's talk a little bit
about how disruption happens in information delivery. 

TYPES OF ATTRIBUTES
If we think about our day-to-day purchases, every product or service that we buy is a bundle of attributes or
benefits. Some of these benefits researchers have called as digital attributes or digital benefits and others have
been classified as non digital attributes.
Digital attributes: Easy to convey using online channel ore ven catalogs
Iphone: Size of screen, price of product, warranty…
Non digital attributes: Customer prefers to touch and geel the product
Iphone: Feel & touch of scree, brightness of colors, speed with which one can open or close apps

Now some products are predominantly consisting of digital attributes say a printer cartridge from a well-
known company, an accessory for my iPhone. A book whose abstract I can read online or a pair of socks that I
purchased before. And I'm sure you can come up with many more examples like that. And there are other
products that are mostly non-digital, a new jacket that you are planning to buy, a pair of running shoes that
you're going to spend a lot of time running and you're worried about how they're going to affect your
knees.Your choice of a channel can depend on whether the product has mostly digital ornon-digital attributes.

For non digital product experience is important, so there is a need for bricks-and-mortar. Depending on your
product and service whether it has more difital or non-digital attributes, you can think of whether you should
use online channel or bricks-and-mortar channel.

CREATIVE SOLUTIONS TO MANAGE NON-DIGITAL ATTRIBUTES

There are creative solutions that companies have used to manage non-digital 
attributes in an online world. 

WARBY PARKER
So let's look at an example of Warby Parker, a company started by Wharton students a few years ago. This
industry is very large, over $60 billion and the margins in this industry were extremely high. There are different
types of providers, people who provide only glasses, people who provide fashion guards, people who have
insurance, or have retail stores, all these fell under one group called Luxottica. They owned everything,
therefore they were able to command high premiums, high price cost margins. So Warby Parker comes out
and says we we'll offer eyewear online. Now what's the problem with eyewear online? Most of us who wear a
pair of glasses want to try it out. Now these people can't afford to open retail stores at the time they started,
so how did they beat the non-digital attribute tissue? They said why don't you try these at home? So what did
they do? They said you can try five pairs at home, depending on whether you like or not, you can keep one,
send the others back. So what they are trying to do is using their online world, but yet offer the customer an
ability to try the product through in-home experience.

MATRESS INDUSTRY

Mattress industry is another example, it's a very large market dominated by two major companies. The very
little growth in the industry, people don't replace their mattresses that often, it's driven primarily by new home
formation. The adoption online was very limited, because it's an unpleasant shopping experience. But more
importantly, you don't want to buy a mattress online, because you can't experience whether it's going to be
hard or soft or medium. 

Now, that's that's an example of a product with very high non-digital attributes. 
So what did Casper.com do? Well, it's a online retail store, but they let you try at home for close to 100
days. What that does is it removes the anxiety, it creates a product which has non-digital attributes. You don't
deny it, you don't fight it, you say to the customer, okay, you try it if you don't like it we'll actually go pick it up,
you don't have to send it back. 

EFFECT OF REPEAT PURCHASE

It's important to understand the effect of repeat purchase on digital and non-digital attributes. Repeat
purchase reduces the weight a customer puts on non-digital attributes. 
Once you purchase the product, next time in many cases the touch and feel becomes less critical, because you
already know. So there are opportunities online in products that are primarily purchased again, and again.

MANAGE CHANNEL CONFLICT:

Anytime you have a partner who helps take your products or service to the market to the consumer, there are
opportunities for conflict. It's good to understand when this conflict occurs and how you can mitigate it. There
are two types of conflict that are possible:
- Vertical conflict: Conflict between us & our channel partners.
o Some years ago, Costco decided not to carry Coca-Cola in its stores. That's a conflict between
Coca-Cola, the company, and Costco; its retailer. 
- Horizontal conflict: Conflict amogst our channel parterns, which disrupts perturbs the channel as a
whole.

HORIZONTAL CONFLICT: FREE RIDING

Horizontal conflict comes in different shapes and sizes but broadly speaking a dominant form of horizontal
conflict that we need to think about is what we call as free riding. This is problems amongst your channel
partners. Typically, free riding occurs when a low service, low-price retailer hurts a high service, high price
retailer. So a consumer can go to a high service, high price retailer. They are higher price because they provide
the higher service, get educated about the product, get all the information about the product, and then go to a
low service store to buy the product. 

So Best Buy for example, argued that they were the showroom for Amazon. So people came to Best Buy. They
studied all these high-end televisions, see how the picture was or amplifiers and had other audio
equipment. They experienced it there, understood what they were going to buy but then click the
button, went to Amazon and purchase it from there. 

Amazon responded back by coming up with the concept of what we call as webrooming, which is I have so
much information on the web about various products and services. People come to the website, look at these
products, try to understand them, compare them with other products. We have comparison engines but then
because they need it tomorrow, they go to the other store and then buy it right away and take it home
because they want to watch the Superbowl the very next day and we can't deliver the next day, at least at that
time they couldn't.

CONFLICT MANAGEMENT
So I think these are both examples of what we call as horizontal conflict, either showrooming or
webrooming. How do we manage such conflict? 
- Understand what are the underlying drivers of conflict. 
- The best way to manage conflict in my view is through good design of the channel.
o Who will do what
o What is the appropiate compensation
o What actions will be taken when infringement occurs
- Eliminating the conflict is no the goal
o Managing it so that it is healthy and not disruptive is a more reasonable objective