Marketing Management Decisions

Chapter 1:
1. Establishing Value-Based Marketing Principles – Methods to Compete
Cash flow and the language of the boardroom; marketing’s value base.
Concept – The Shareholder Value Approach.

PRINCIPLES OF MARKETING PERFORMANCE

• What is the difference between the Marketing and Management Disciplines?

✓ The Marketing Discipline is concerned with managing markets (the stuff we see outside the
organization/ the window) (Decision around who are my competitors, how do I compete with
my competitors?, who are my suppliers?, How do I choose my suppliers?, who are my
customers?, what do they want?, why are they not coming?, how can I make them loyal?).
✓ The Management Discipline (a separate discipline) is concerned with managing organizations.

• Marketing—the status quo:

✓ Marketing is in-part replaced by market regulation (marketing regulations actually replaces

marketing). Ex: if the government puts a price limited to something or determines that fuel prices
are not allowed to go up. Then regulations are actually making a marketing decision because
markets make decisions around what should something cost, but the government says “No, I am
going to regulate in the cost of the product that it should not go up next year, that it is forbidden.”
In this case, the regulated is interfering in the marketing decision.
The more the governments make decisions for the market, the less marketers have room to make
their own decisions. The more the government withdraws from making decisions in the market,
the more room organizations have to make their own decisions around “what kinds of products
should they offer, what price they should choose, how many competing products they should be,

✓ Marketing (marketing language: customer loyalty, satisfaction) fails to speak the language of the
board room (it talks about cash flows, financial issues, return on investment, …). As long as
marketing can’t place its decisions in a financial content (ex: if marketers can’t say “if I launch this
advertisement campaign, it will lead to a 3% increase in cash flow”). The boarder always wants to
know if you do something, what does it mean for my cashflow, for the value of the firm. So unless
we can place our decisions in a financial implications context, the boarder is not really listening
because they only want to know what is bottom line here (if you going to do x what does that
been for the share price).

• Marketing—the trajectory (future):

✓ Continuing political appetite for market deregulation (different countries have different market
regulations, but the trend generally is moving towards deregulation – we are in a decade where
the government is sort of putting less regulation, a little bit more freedom for organizations. That
means that is more room for marketing decisions.
✓ An increasing recognition that marketing is a business-growth driver—and not a cost (money
spent in marketing is actually an investment which grows business, and not just a cost). There is a
shift in defining the expenditures around marketing.
 ✓ A growing belief that corporate/shareholder value is a trivial concept without marketing (in other
words, without marketing you can’t really create more value for the owners of the firm.

• Marketing Orientation (more organizational) v Market Orientation (more strategic):

✓ Marketing orientation is concerned with marketing’s functional role of coordinating the 4Ps
(Price, Product, Place and Promotion). The role of marketing is to manage the market by making a
product decision of goods and services, a price decision for the product (what kind of product
should we offer, how much variety should we offer), then make a decision around where you
want to sell it and finally, how to sell it (what am I going to say about the product: use social
media advertising, traditional television advertising and so on).
The decisions of which market to compete, or region is done by others. Then marketing is called
to deal with the four P’s

✓ In addition to coordinating the 4Ps (since the beginning), market orientation (in this oriented role,
marketing is involved much earlier, and a higher level of strategic decision making) is concerned
with the generation and dissemination of, and response to, information concerning service users,
competitors, and collaborators for the purpose of maximizing corporate value.
If a company is market oriented, it will ask marketers to even help us come to a decision about if
we should go to Chile or Canada. Marketing is involved from the beginning not like marketing
orientation that happens at the very end.
Market orientation is more than simply ‘getting close to the customer.’ An organization can be
market oriented only if it completely understands its market. Customer information must go
beyond research and promotional functions to permeate every organizational function.
Market orientation is a strategic focus on identifying consumer needs and desires in order to
define new products to be developed.
Amazon is an example of a market-oriented company. As it has grown and developed, it has
consistently added processes and features that clearly address concerns and desires expressed by
consumers.
For example, many consumers, especially city dwellers, worry about getting packages delivered
when they're not at home. The company responded with Amazon Locker, a network of self-
service pickup boxes.

Coca-Cola is another company that is famous for its market orientation. Considerable research
goes into identifying new flavors that consumers will actually like, such as wild strawberry and
lime. But those new flavors won't help Coca-Cola address the increasing health consciousness of
consumers. That's why the company acquired brands including Dasani, Honest Tea, Smartwater,
Simply Orange, Minute Maid, and Vitaminwater.
A model of being market oriented:

The company doesn’t need the marketing department to do a systematic evaluation of the customers,
competitors or suppliers. The boss is the one that makes those decisions. And then, it calls marketing in
when the decision to have a special edition of the generation part. This happens in a marketing orientation
company: marketing starts around the dissemination point. The generation point is done by some other
entity.

IF I AM MARKET ORIENTED, I AM SIMULTANEOUSLY:

➢ The implication of a Customer Orientation:

The product is experienced from the customer’s perspective (what would the customer really want
from us, from the product). You are experiencing the product form the customer’s perspective (Ex:
If I work in a pen’s company and I put myself in the customer shoes, I would want a pen that never
dries out every time I take the cap of. And, as an employee, I would know if that is possible or not
and I would ask the engineering department if they can make

➢ The implication of a Competitor Orientation:

The product is experienced from the competitor’s perspective (If I was my competitor what would I
been looking at?). (Ex: If I work in the fast-food market and I put myself in a competitor shoes.
What do I think a competitor of me would look at? – He would go to the competitors shops and
look at the items on the menu, how big is the menu, how are the prices set, they might even do a
mysterious shop of a very complex order and see how much time it takes to be served, how well it
was served when it means to the correct fulfillment of the order, and the quality of the product.
Look how big are the toilets, how clean are they.) Competitors look for those aspects, because
those are the factors that customers look at when deciding to which fast food to go (if going to my
restaurants or to my competitors’ ones.
If I look at the competitor’s perspective, I get an additional aspect for what the customers want.

➢ The implication of a Supplier Orientation:

The product is experienced from the supplier’s or distributor’s perspective. The better you are the
better for your supplier and he will provide you with benefits. So, if I put on the supplier’s shoes, I
can anticipate what those benefits will be.
What does Excellence in marketing management aim for?
The maximization of corporate value (Money). Or shareholder value which applies for both private and
publicly held shares.
In most profitable companies, the goal is to increase cash-flows.

If we are talking about a nonprofit organization, all of this still applies, marketing is also important. For
example, a charity organization will still be customer oriented, and will still need donors, so they still need
corporate value.

What must Marketing do to maximize corporate value?

Contemporary marketing thinking suggests two interrelated activities:

▪ Marketing must recognize/identify the true indicators of corporate value.

▪ Marketing must effectively link itself to those indicators. Effectively link those indicators to our
decisions.

Regarding the first activity: What are the indicators of corporate value?
The discounted future cash flow (finance matrix and not accounting ones) of a business unit (most
important indicator).
We need to start speaking the boarder’s language, finance language.

Why discounted future cash flows?

I need to know what the cash-flow in the future is worth today. Because cash can earn interest; cash
received today is worth more than the same amount received a year or more in the future. I need to know
what is that Money I am hoping to earn in the future without marketing management decision.

Where is discounted future cash flow reflected?

It is reflected in the corporation’s market value/ shares’ price. The share’s price reflects how valuable the
market is.

Why not focus on traditional accounting measures?

The assets of accounting are tangible assets. The focus of accounting is on past performance.

But …
Today, the most valuable assets are, for the most part, intangible assets (Ex: brand equity, customer loyalty,
reputation).
Corporate value is a reflection of expected future performance, not past performance.

Profit is not what it matters the most since, you can have a very profitable company that even so needs a
huge amount of investment to bring back the company to a good standard.
Even an highly profitable firm might actually lose value in the market because the market will look at the
firm and say: “But you haven’t invested lately, you haven’t fixed things up, you cutlet all the cost in order to
make profits go up. This is the situation which you have when you focus only on profit as the indicator of
how valuable the firm is.

At the end, the most powerful indicator to show how valuable a firm is, is its ability to generate cash in the
future.
Regarding the second activity: How can marketing link itself to the indicators of corporate value?
By shifting the business unit towards the most attractive markets.
By building a sustainable value proposition.

Why shift to the most attractive markets?

Because only there can a firm hope to ever maximize its corporate value. (Ex: if I am in the photography
marked and I want to maximize my company’s value and make the most money as possible, for sure that I
should be in the digital photographing market instead of the analogous one, because the digital market is
much, much bigger.

Why build a sustainable value proposition?

Because corporate value is created only when cash flow is positive (sales exceeds costs).
And this will only occur when there is a cost or differentiation advantage. And if the cost or differentiation
advantage is not unique/sustainable, competition will drive profits down to the cost of capital.
This gives a better position in those attractive markets and in a better position to increase the discounted
cash-flows.

RECOGNIZING THE TRUE INDICATORS OF CORPORATE VALUE

Shareholder value analysis determines the value of the firm.

The basic principle of shareholder value analysis is that a firm’s value is determined by the sum of all the
firm’s anticipated future cash flows, adjusted by an interest rate known as the cost of capital.

A firm’s cash flow is affected by four operating factors/dimensions:

• Anticipated level of cash flow (ex: instead of selling a pen for 0,60$ I sell it for 0,65$ so I improved
the level of cash flow. I am getting more money per pen. Alternatively, I can try to sell more pens
per day. Try to persuade people to buy more often those pens. So, the more pens I sell it per day
the higher the level of cash flow).
• Anticipated timing of cash flow (ex: Alternatively, what if I make the decision to persuade those
people from before to go at 9am tomorrow and buy the pens within the first hour. The level is still
the same, but instead of selling it in a longer time period, example from 9am to 5pm, I receive the
money in one hour and can use that to invest that money in the same day).
• Anticipated sustainability of cash flow (Besides level and timing, I can also make sure that I will not
only sell 1000 pens tomorrow at 9am but also the follow and follow days).
• Anticipated riskiness of cash flow (Not only will I ensure that I sell 1000 pens per day at 9am for
the following days to come but I will also ensure that there is absolutely no risk to the scenario.
Like asking the people to sign a contract saying that they will buy a pen every day at that hour).

So, with marketing decisions you are actually improving corporate value by making decisions around these
four dimensions.

Why are these factors fundamental for marketing professionals to understand/ Why is it good to
understand those four dimensions?

• They equip marketing with a language that is understood by those around the boardroom table. To
be effective, marketers need to be speaking the same language.
 • They help marketing properly define its role and objectives in the strategy formulation process,
namely, to manage the firm’s markets to maximize the firm’s value (maximize cash flow).
• They can be used to demonstrate how marketing investments can contribute to value creation (will
be shown later).
• They help to protect marketing from arbitrary cuts to marketing budgets because marketing can
now demonstrate its financial value.

SOME EXAMPLES OF MARKETING’S CASH FLOW IMPACT

• Regarding the level of operating cash flow: Marketing decisions that affect the following factors
enhance cash flow: decisions that affect sales growth (e.g., offering sales incentives), price levels,
(e.g., enhancing the brand to support higher prices for the same product), cost levels (e.g., reducing
marketing costs).
• Regarding timing of operating cash flow: Marketing decisions that affect the following factors
accelerate cash flow: decisions that lead to faster new product development (e.g., faster customer
input), faster market penetration (e.g., deep-discount prices), network effects (e.g., offering
foundation equipment at cost, such as game consoles, and then selling add-ons at a profit).
• Regarding sustainability of operating cash flow: Marketing decisions that affect the following
factors sustain cash flow: decisions that sustain a competitive advantage (e.g., customer loyalty),
open up new product-markets (e.g., product innovation).
• Regarding riskiness of operating cash flow: Marketing decisions that affect the following factors
secure cash flow: decisions that reduce volatility of cash flow (e.g., increasing customer
satisfaction. Assures that customers are more loyal, they will not question their loyalty),
vulnerability of cash flow (e.g., offering superior products. Buying the best product for the same
price).

We now look at these factors in more detail. We will focus only on the level of cash flow for now.

Why this choice?

Because influencing the level of cash flow is the most important way of creating firm value.

What drives cash flow?

C Cash Flow (CF) = Sales Revenue (SR) – [Operating Costs + Tax + Investment]

Sales Revenue = Selling Price x Sales Volume

So, Sales Volume and Selling Price are the two factors that can drive the level of cash flow and are under
Marketing’s control (so, marketing managers should focus on these two).

a. Increase sales volume:

Sales of more products (goods and services) create firm value as long as the increase is not offset by
disproportionate increases in Operating Costs, Taxes or Investment.

Taking this rule of thumb into account, it can be shown that additional sales increase shareholder value, as
long as the operating profit margin exceeds a “threshold margin”.
Threshold Margin is a special/a form of Operating Profit Margin. It is the Operating Profit Margin level
above which your cash flow is valued enhancing for the firm. So, if you can achieve cash flow above the
Threshold Margin, you are adding value to the firm, and if below you are destroying value.

Threshold Margin = Incremental Investment x Cost of Capital

(1+ Cost of Capital) x (1- Tax Rate)
Operating Profit Margin = Operating Profit (pre-interest & pre-tax)
Sales Revenue

Note: Operating Profit =

Note: Incremental investment = the amount needed to be invested/spent to generate additional sales.

Worked example (part 1):

If your executive management demands a sales revenue increase, then how big must your operating profit
margin be for the sales revenue increase to add value to the firm?
Additional information needed:
Investment rate is 50% of incremental sales.
Cost of capital is 10%
Tax rate is 30%
Product unit cost is EUR20.

Answer:

Threshold Margin = 6.4 %

Managers must expect the operating profit margin to be above 6.4 % for the additional sales revenue to
add value to the firm.

Worked example (part 2):

If your executive management demands a sales revenue increase of EUR200,000 (10,000 per year at EUR20
per unit) over the previous year’s sales revenue, what operating profit does marketing need to achieve so
that “break even” is reached (i.e. to ensure that the firm’s value is not reduced)?

Answer:
Operating Profit Margin =

Therefore:
Operating Profit (OP) = Operating Profit Margin x Sales Revenue
= 6.4 x EUR200,000
= EUR12,800

So, an operating profit of EUR12,800 is needed to maintain the firm’s value if sales revenue is increased by
EUR200,000;
b. Higher prices:
Higher prices increase the value of the firm as long as these price increases are not offset by
disproportionate losses in volume.
In the short term, price increases usually raise profits because consumers do not usually switch to
competitor’s products immediately. But unless the price is justified by a superior offering, customers will
defect, and firm value will be eroded.
Superior brands and products create inelastic customers; that is, customers that remain loyal despite price
increases (reasonable increases).
In this case, a 5% price increase can be very effective.

Worked example (part 3):

If the price of the firm’s product is now raised by 5% and the above increase in sales volume
and all other costs remain unchanged, then how much has the operating profit margin
increased to?

Answer:
Price increase = 5% of EUR20
= EUR1
Increase in sales revenue = EUR1 x 10,000 units
= EUR10,000
= increase in operating profits
(since costs are unchanged)
Operating profit margin =

= EUR12,800 (calculated previously) + EUR10,000 (additional operating profit)

EUR210,000 (200,000 + 10,000)
= 10.8%

Worked example (part 4):

Now let us compare this to what happens if the price remains the same (EUR20), but the
sales volume increases by 5%. Assuming again that costs remain the same, which has a
more powerful effect on the operating profit: a 5% increase in price, or a 5% increase in
sales volume?

Answer:
Increase in sales volume = 5% of 10,000 units
= 500 units

Therefore, new sales volume = 10,000 + 500 units

= 10,500 units

Sales revenue = Price/unit x sales volume

= EUR20 x 10,500
= EUR210,000

Increase in sales revenue = EUR210,000 - EUR200,000 (10,000 units@EUR20)

= EUR10,000 = increase in operating profits (since costs are unchanged)
Operating profit margin =
= EUR12,800 + EUR10,000
210,000
= 10.8%

What do these calculations overlook?

To increase price does not cost anything, but to increase sales does. So, the 10.8% margin increase which
resulted from a sales volume increase of 5% is not realistic – whereas it is a realistic outcome of a price
increase. This also means that defending price is more important than to defend sales volume.
Interestingly, price is often sacrificed to preserve sales volume!

Let us look at Threshold Margins in more detail:

The threshold margin is the pre-tax operating profit margin necessary to finance value creating growth. It is
the minimum operating profit margin any additional sales, a price increase, or cost reduction must achieve
so that value is not destroyed.

What is the threshold spread?

The threshold spread is the difference between the actual operating profit margins and the threshold
margin.

The size of the threshold spread is a key determinant of value creation. It is the bridge between accounting
metrics and financial metrics.

How much value-to-the-firm does a threshold spread add?

To determine this, the finance discipline has developed the following formula, called shareholder value
added (SVA):
Shareholder value added to the firm =

Worked example:
The operating profit margin of a price increase is 10.8% and the threshold margin is 6.4%.
How big is the threshold spread? How much value has been added to the firm (i.e., how
much shareholder value has been added) in period 2 due to this price increase?
Additional information needed:
Cost of capital = 10%

Answer:
Threshold spread = operating profit margin - threshold margin
= 10.8% - 6.4%
= 4.4%
Shareholder value added to the firm
= EUR2,800

So, EUR2,800 was added to the shareholder value of the firm in period 2 after a 5% price increase.

SELECTING MARKETS
Identify and select the most attractive markets
How do we do it?

(With the) SWOT ANALYSIS

Let us start with the opportunities and threats (external analysis)

Which are the factors that should be reviewed in terms of opportunities and threats (OT) in order to
determine the attractiveness of a market?
The same thing is not attractive to all (firms). They have different perceptions while looking for the same
market.
So, first we need to apply the same criterions to each market and mark each criterion from 1-7 (low
numbers are bad, high number is good):
• Size of the market
• Growth of the market

Competitive structure of the market:

• Competitor hostility (if this is high it should be marked as a low number)
• Supplier power
• Threat of substitutes
• Buyer power
• Threat of new entry
• The cyclicality of the market
• Market risks
Example: Airline Europe Market

• Size of the market – 7 (huge size)

• Growth of the market – 3 (very saturated)

Competitive structure of the market:

• Competitor hostility – 2 (strong competition)
• Supplier power – 1 or 2 (since there are only two suppliers: Boeing and Airbus)
• Threat of substitutes (ex: other forms of transportation like bus or train) – 3 (from Germany to
Australia people will only go by a flight)
• Buyer power – 6 (the price is the one that it is on the site, buyers can’t decide about the price)
• Threat of new entry – 4 (reasonably easy to get in)
• The cyclicality of the market (ups and downs, low cyclicality is good as there is not many ups and
downs) – 6 or 7 (low cyclicality)
• Market risks – 6 or 7 (nothing unknown)

At the end I do the average and get a number which I will also find for the other markets.

Now we turn to the strengths and weaknesses (internal analysis). Which comes out at the end to the
strategy adopted. You are either a cost leader or a differentiator. Ex: you can’t have a tremendous number
of different cheeses in Lidle for the cheapest prices (you can’t have the best product at the best price.
There must be a tread off).

Which are the factors that should be reviewed in terms of a firm’s strengths and weaknesses (SW) to
determine the attractiveness of a market?
• Cost factors (fixed/variable costs) (In the case of Lidle, of course you need to have some different
cheeses but you focus on price, so you would have 4 or 5 different cheeses for cheap prices).
• Differentiation factors (what do I have better in comparation to others. Ex: better service, better
products, …)
Example: Airline Europe Market

• Cost factors (fixed/variable costs) - 7

• Differentiation factors – (good food, accommodation, experience) - 6

Considering this modern SWOT analysis, what has a greater impact on corporate value—
competitive advantage (strengths and weaknesses) or market attractiveness (opportunities and threats)?
Answer: Competitive advantage. Research shows that the variation of profitability within an industry
exceeds variation between industries (if I look at different industries and their different variations in
profitability, within a given industry the variations between the firms in each industry is higher than the
variation between industries. So, because the variation between firms in the same industry is higher than
across industries, these factors of variation in firms of the same industry must be more responsible for
corporate value).

And which competitive advantage is more vulnerable/open to attack—a cost advantage or a

differentiation advantage?
Answer: Some argue that a cost advantage is more vulnerable. But I am inclined to disagree: both are
sustainable over the long term (If you look for example at Aldi or Walmart or Rayner, which are cost
industries that built mechanisms against vulnerability).

Based on the SWOT what should the strategic market objective be?
Traditionally, strategic objectives have been conceptualized and organized in “capital rationalizing models”,
based on the premise that capital is a scarce resource. Traditional models include:
Boston Consulting Group Matrix.
Arthur D. Little Model.
 SELECTING MARKETS WITH THE STRATEGIC CHARACTERIZATION MATRIX (A tool to make to interpret the
number from before) Look more about this (https://www.slideshare.net/LawrencePhillips/strategic-characterisation-matrix-8365720)

I recommend a variation of the GE-McKenzie matrix. Every market can be assigned one of five objectives:
Grow; Enter; Harvest; Divest; or Maintain.
The assignment depends on whether investment in the market is likely to generate positive net present
value for the firm.
The strategic determinants of this assignment are (1) market attractiveness and (2) the differential
advantage.

1 2 3

OT 4
5 6

7 8 9

1 SW 7

1 – not very good competitive advantage, most likely competitive disadvantage. But in a very attractive
industry, which can be good or bad. Invest to get a better competitive advantage, or leave
2 - moderate competitive advantage in a very attractive. Invest/ grow to move to 3
3 - dominant firm in a very attractive business. Maintain position (keep investing in it)
4 – divest progressively (slowly start selling your assets, and your strategic position)
5 – moderate position. It can be good or bad. Harvest selectively (ambiguous position). Invest or not
6 – maintain position
7 – divest immediately
8 – divest (start getting out)
9 – very good competitive advantage in a bad market. It can be good or not. Harvest (make the most
money as possible)

Enter – An enter strategic objective should apply where there is a combination of both high market
attractiveness and an advantaged differential position. The business must have the ability to create a
sustainable differential advantage.
• New products
• New processes
• New markets
• New marketing strategies

Growth – grow your business, add new things (Ex: you have a hotel with 100 beds. Growth means adding
100 more beds). Stay in the market and grow
 • Grow strategic objectives are about the business investing to earn a return that exceeds its cost of
capital.
• Growth opportunities therefore depend on the business having a differential advantage
• The market should also have a high degree of attractiveness

Maintain – keep your hotel with 100 beds and make sure all the conditions are assured. Stay in the market
and keep business as usual
• In a maintain strategy it is not expected that the market share of the business will erode or increase
over time
• Key objectives of a maintenance strategy is to avoid price competition as this will negatively impact
on the value of the business, maintain the barriers to entry and keep a focus on innovation
• The conditions in which a maintain strategy should exist are:
➢ Significant barriers to entry
➢ Market is dominated by a small number of players
➢ No decline in the market is expected
➢ Business has a well-established competitive position and is earning healthy economic profits
with marginal investments able to earn a return that exceeds the current cost of capital

Harvest – not reinvest anything (not change anything), extract the value of the hotel and sell it (three years
after). Move it to the ground. Stay a little bit longer in the market but eventually get out.
• A harvesting strategy maximizes the cash flow of the business from its existing assets and is
typically an appropriate strategy when the net divestment value of the business is below its optimal
restructured value
• It is typically applied when the competitive advantage of the business is in decline with reducing
sales volumes or where market conditions are deteriorating
• Harvesting strategies that increase operating margin include: raising margins, focus on premium
niche markets and cutting variable and fixed costs
• Harvesting strategies that reduce investment include: reduction in inventory, tight control on
debtors, extending creditors and reducing fixed assets

Divest – selling the hotel tomorrow.

• Divestment is a strategy that is considered when a business is not making suitable profits or when
another organization values the business higher than the current organization’s owner
• It involves exiting the markets or market segments that do not offer potential for profit growth,
cutting costs and shifting resources to more economic activities
• A business may be able to significantly increase their value by divesting from products and
customers that do not produce profits for the business

This tool helps to understand the SWOT Analysis.

Which areas in the Strategic Characterization Matrix (SCM) are value creating, and which are value-
destroying?
(How do you grow/enter, how do you maintain, how do you harvest?)
Once you have your strategic objectives (those five things in the matrix above), research shows that
pursuing one of the following two strategic focuses increases the likelihood of achieving your objectives.

What are the two principal strategic market focuses? (we want to marry five objectives to two focuses)
➢ Increase sales volume (Sales volume measures how many units of a product your company sells
during a specific reporting period. Understanding your sales volume can tell you what products are
and aren’t selling, which is valuable information for business growth.)
➢ Increase productivity (greater output for the same inputs/costs)

How do I know which focus belongs to which objective?

The focus depends on the strategic objective.
➢ If the objective is to enter or grow, then best practice research supports a focus on increasing sales
volume.
➢ If the objective is to maintain, harvest, or divest, then best practice research supports a focus on
increasing productivity.

Which marketing tasks are involved with a volume focus?

Ex: 20 years ago, with the first telephones. You created a different one and want to grow.
▪ Convert non-users (Ex: nobody had a phone at that time. People managing constructed sites, travel
sales industry could be willing to buy phones).
▪ Enter new market segments (phones become smaller a better and you sell to others like, offices,
parents, schools, etc.). Get more clients
▪ Increase the usage rate (creation of iPhone becomes a trend and everyone starts buying those
phones).
▪ Win competitors’ customers (now we are at the end of innovation, we reached the end, but the
boss still wants more sales. So, I will make people that don’t have iPhones to switch to it. So, we
steal clients from competitors. The deadly situation).

Which marketing tasks are involved with a productivity focus?

▪ Reduce costs (e.g., fixed and variable cost of marketing).
▪ Increase prices (e.g., lease rates across the organization) (there is a limit to it).
▪ Enhance product mix (e.g., greater lease rate variation depending on location) (Ex: economic class,
business class, 1st class. Or in the hotel you have suite room, single room, with view to the garden,
etc.) Change a product a little bit and increase the prices (Ex: same type of whisky but some is older
than the others, so it is more expensive)
MANAGING MARKET SEGMENTS

The development of compelling benefits is difficult and is best approached systematically.

Here we explore how to do that.
The tool to be used is the Strategy Canvas.
Three qualities characterize an effective strategic profile (that needs to have to be meaningful):
▪ Focus – you concentrate in something particular in order to be persuasive to the customer. (Focus
is all about execution of key factors that the organization has raised in its strategic canvas.
Customers will have to feel the difference.)
▪ Divergence – it means that that focus is particularly strong, that is, there is a strong divergence on
the lowest and highest point of the curve. (Your basic strategy canvas needs to be different from
the industry leaders.)
▪ Compelling tagline (“just do it” - Nike. A strong and truthful tagline on the strategy canvas will give
clear message on cost-value offering and create interest to the customers. If you can’t put your
value proposition in a short tagline then it means it is a too complicated value proposition.
Customers will not understand it.)

LUFTHANSA VS. RYAN AIR

Factors customers consider when choosing among options (different competitors). From the least
important to the most important feature in their value proposition.
The green line has evidence of focus (particularly
from inflight to reserve seats) while the red basically zero. Divergence is the difference between the low and the high
point. Green has higher divergence.
(the bigger the focus the bigger the divergence)

It makes sense why Ryan air has more money than Lufthansa.
Lufthansa doesn’t want to be like Ryan air, but they still need focus and divergence.
Ryan Air is a cost leader (its tagline is about that and it gets closer to what is shown as divergence and
focus). If I cannot tell the difference between those two airlines, why should I choose Lufthansa if it is
cheapest to choose Ryan air.

Singapore airlines clearly have a compelling value proposition. They are a very successful international
airline. They are good in all those factors. But they still have focus and divergence because, instead of
pulling things down, they will say: “we are going to have a high level across all factors, but some of them we
are going to be off the chart (be more than excellent – offer the ultimate luxury experience).

Factors of competition (40 at maximum): what should we think about

➢ Which seating options will we offer?
➢ Pilots training, what kind of pilots will we hire.
➢ Entertainment
➢ Decide if we will get meals or not, if they will be free or not.
➢ Frequency of departure (ex: how many times a day we go to Barcelona)
➢ What kind of network we will want to apply (Ex: a few larger cities, European Union, …) – density of
network

Then order the factors from the most important to the last one. Then we stay with the 8 most important
factors.
 The Brand as an Orchestrator of Marketing Decisions

What is a Brand?
A brand is a strategic market position it represents a numerous of things to the customer. After I have my
value proposition, I need to brad my products (I need to give it a story, a collection of associations). I need
the brand first before promoting it.
It represents the face of the company, the recognizable logo, slogan, or mark that the public associates with
the company.

Brands are an important instrument for managing firms’ markets and segments. A brand:
• Identifies the associations (pictures that comes to the customer mind when he thinks of a brand)
consumers should make in relation to a product. A brand identifies for consumers who the product
is meant for by engendering associations that are appealing to certain consumers.
• Differentiates the product from competitor products. A brand positions a product visa-vie its
competitors. Thus, the brand articulates the differential advantage (that strategy curve) of the
product.

What does a brand consist of? (Keller book)

• Brand awareness
• Brand image
• Brand (it is a knowledge construct) knowledge can be modelled as follows ((when you think of a
brand and we respond to it based on what you know about the brand):

When you think of jeans you think immediately

of Levi (very strong awareness)

Image is

Is it good to have that brand?

What drives brand knowledge and its components?

Answer: Brand capability drives brand knowledge and its components.

There are two central capabilities:

• The ability to develop a brand identity (different from image. The identity is what is projected in the
market, what the managers expect of the brand. While, on the receiving ending of the consumers
they at the end see the image of the brand. So, this translates in two sides of the same coin: the
managers seek a sort of identity for the brand, while consumers adopt an image of the brand. The
more the identity matches the image, the more you have a spitting image: if the mirror is not
distorted, you see the identical picture of yourself in the mirror) that meets the needs of the
market. A good thing is to have an image that is equal to the identity.
 • The ability to communicate to the market (ability to say/tell a great story about the brand. Have a
great market value. Ex: Tesla’s market value is greater than BMW even though the last sells more
cars. This is because the Tesla’s story is more genuine when talking about electric cars).

So how does the brand organize marketing behavior?

The four Ps establish the link between brand capability and brand knowledge to create brand equity.

4Ps (How the brand is communicated, which translates what people know about the brand):

• Promotion (how you communicate)

• Price (conveys part of the brand’s identity)
• Place (where are the shops located, how big or small they are)
• Product (how they look like, how many different ones are)

Some important caveats world-class organizations take into consideration when using a
brand framework to organize their marketing behavior:

• World-class organizations do not manage products that happen to have a name; they manage
brands that deliver market-required products (4P’s).
• But they never forget that if the product is not ‘right’ (or does not work properly) then the brand
(magnet) will lose its equity (magnetizer). If the product fails no one will want the brand
• At the same time, products come and go, while brands have long-enduring features. So, if a brand's
equity is damaged, it will take a long time to rectify, while a product can be replaced or put right
relatively quickly.

How can a brand’s life cycle be described?

The results from measuring brand knowledge define where a brand is in its life cycle. This
life cycle can be depicted in the Strength-Stature grid. The grid is used by the international
advertising agency Young & Rubicam.
The knowledge components used for the Strength-Stature grid include:
Brand awareness (“have you heard of the brand before?”)
Brand favorability (“how much do the brand’s associations appeal to you?”)
Brand strength (“how much can you remember about the brand?”)
Brand uniqueness (“is there any other brand like this one?”)

Four brand life cycles

The Brand Strength – Stature Matrix Brand Stature

 2
3

1
4

1 – New/Unfocused: Here Tesla was just launched (a lot will say that they never heard about Tesla, those
who have they will ask what it comes to their mind, what is their average favorability, strength and
uniqueness. Also, very low). And it is the same standard profile to other brands.
The process of growth of a brand starts in the lower left quadrant where they first establish their
differentiating qualities while it is not yet widely known.

2 – Curiosity: It has been now three or four years since Tesla is in the market, so there are same changes
now. The level of awareness is now higher. (They reached teenager ages). Uniqueness is the most
pronounced, developed component. Favorability develops more slowly than understand the uniqueness.
As the brand develops enough strength, it moves to the upper left quadrant where it needs to translate its
strength into stature.

3 – Leadership/Mass Market: Today, both Samsung and Apple are leaders. Apple defines the design more.
Apple is usually the pioneer and Samsung follows. You need to keep reminding yourself about what makes
you unique.
Brand leaders are present in the upper right quadrant and they need to identify their emerging competitors
in the adjoining quadrant.

4 – Fatigue (Commodity or Eroded): The problem of Nokia is uniqueness. Brands don’t die because of
awareness but because of uniqueness. Brands can come back and revive (that happened with Apple).
The bottom right quadrant is the trouble area which suggests that brands have failed to maintain their core
strength
 • Differentiation(/uniqueness) – It defines how a brand distinguishes itself from others and is
perceived as different and unique.
• Relevance(/favorability) – It defines if a brand is personally appropriate to consumers. If it is not,
then it is difficult to attract consumers to the brand in large numbers.
• Esteem(/strength) – It is the regard for the brand that consumers hold.
• Knowledge(/awareness) – It means being aware of the brand and understanding what it stands
for.

There are two kinds of advertising:

• Based on and around emotions/ skin and human adds (what we see is what we like). But there is
not much information about the product there. They focus on part 2 trying to increase awareness,
favorability and strength to become a leader.
• Take/information adds. Used when I want to increase uniqueness and strength (point 4 to 3)

We don’t need to follow from 1 to 4. We can go from 1 to 4 directly (the other way around, but that is a
dangerous path, and you need to rush it). First, we need to have the facts and then have money to promote
the brand, that is the traditional a safer path.

‘P’ for ‘Product’

We have already developed a value proposition.

Developing and launching a product that encapsulates the value proposition involves a complex set of
decisions.
There are two fundamental decisions all firms face:
➢ How much to invest in modifying or developing the product?
➢ How many products should the firm offer the targeted market segment?

Before we can turn to the determinants of the two product decisions noted on the previous slide, the
concept of a ‘product mix’ has to be understood. Basically, both product decisions are centered around this
concept:

Product mix is defined in terms of breadth, length, and depth.

➢ Breadth (like SBU) refers to how many different product lines a firm has. (Ex: hair product, skin care
and baby food. Three different product lines). (Another example: if a company produces only soft
drinks and juices, this means its mix is two products wide. Coca-Cola deals in juices, soft drinks, and
mineral water, and hence the product mix of Coca-Cola is three products lines.)

➢ Length refers to the number of products within a product line. (Ex: shampoo, conditioner, color die.
For the hair product line)

➢ Depth refers to the number of variants of each product in the product line. (Ex: shampoo for dry
hair, for curly hair, …)
Now we turn to the determinants of product mix decisions:
• The first determinant of a product mix decision is the firm’s core strategy:
➢ Cost-leader,
➢ or Differentiator. (usually has more debt. Offers a broader choice of products)

Cost-leaders usually have less length and depth in their product mixes than differentiators, and usually
more breadth than differentiators.

• The second determinant of a product mix decision is the firm’s strategic objective:
➢ Divest,
➢ Harvest,
➢ Maintain,
➢ or Grow.

Following the descending order of the above objectives, the length, depth, and breadth of a product mix
usually increases.

If the objective is to enter, then the depth of the initial product usually increases first, followed by increases
in product mix length, and then breadth. (when you enter a market you usually start with only one product
and then you offer variances of that product before you start adding lots of different product lines. Start
with a product, add variety and you build a name, and then the product line may get a little longer and
overtime you may add two or more product lines)

• The third determinant of a product mix decision is the firm’s strategic focus:
➢ A focus on increasing volume.
With a volume focus, the length, depth, and breadth of a product mix is likely to be high.

➢ A focus on improving productivity.

With a productivity focus, the length and depth of a product mix is likely to be short, but breadth is
likely to be high (it will eventually also become low). You focus on your core business (length and
depth are the first to decrease and then breadth will also follow them).

• The fourth determinant of a product mix decision is the firm’s need focus:
➢ The number of firm’s targeted market segments
The more segments a firm target, the longer and deeper a product mix usually is. (This doesn’t refer to
having more product lines, because those are under different markets. It means, for example, if I add more
segments in the hair care market, I will need longer deeper product mix)

• Respectively, the fifth and sixth determinants of a product mix decision are the focus on the firm’s
competition and the nature of PEST (Political, Economical, Social, Technological) variables faced by
the firm:
➢ Clear tendencies do not exist for these two determinants and, hence, product mixes vary greatly.
➢ A related issue to how competition and PEST affects product mix decisions are the concepts of
downward stretching and upward stretching.
In responding to the competition, firms sometimes engage in downward stretching and upward
stretching.
Downward stretching occurs when a firm positioned at the upper end of the market (e.g., positioned in
premium or luxury target segments) stretches its product line downwards into more inexpensive segments
(e.g., into economy or deep-discount target segments).

(A downward-stretch strategy is an attempt to add products to the lower end of the product line. Luxury
car makers are introducing lower-priced cars to get new customers – like Mercedes and BMW which
weren’t known to offer lower-priced cars.)

Upward stretching occurs when a firm positioned at the lower end of the market (e.g., positioned in
economy or deep-discount target segments) stretches its product line upwards into more expensive target
segments (e.g., into premium or luxury target segments). (introducing a new product into a product line at
the higher priced end of the market.)

It is much easier to come down from a premium position and start offering something less expensive, than
to try to move your image and your brand up into a level you are not normally associated with.

In responding to PEST factors, firms sometimes also stretch their product lines downwards or upwards.
For instance, political factors may force firms to do that, just as technological developments might.

‘P’ FOR PRICE

How important is ‘price’ for shareholder value?

Price is the most important marketing mix variable for corporate value. (Important not in terms of priority,
but in terms of how immediately it affects the cash flows). For a typical company, a 5% price increase can
boost operating profits by more than 50%.
What is the implication of this price importance?
Price competition (instead of competing on the other 3 ‘Ps’) can have a devastating effect on profitability.
Thus, it often makes sense to defend prices rather than to defend volume.

Which factors are influencing the management of ‘price’?

The information revolution is destroying the simplicity of uniform pricing and bringing back individually
negotiated prices. With more information available, markets are becoming more price sensitive.

What are the major, traditional pricing concepts (forms of pricing a product)?
There are two popular ones:
➢ Mark-up pricing
Most popular among accountants, solicitors, and contractors. Suppose a firm sells printers at a variable cost
of EUR80 per unit, has fixed costs of EUR2,000,000, and plans to sell 100 000 units annually. Under this
scenario, its total unit cost is EUR100. If its standard cost mark-up is 33%, then the printer unit price will be
EUR133.

➢ Target-return pricing
Most popular among capital-intensive businesses such as public utilities and car companies. Here the firm
aims to achieve a target return on investment. If the firm had EUR13,000,000 invested in capital, and it
aimed for a 25% return, then the target price is given at EUR133 (100 + (13000000*0,25)/100000 per
printer.

Both methods use inside-out oriented pricing approaches. They really look at their costs, expectations for
the return on your investment, and then you set the price.

What are the fundamental problems with these pricing concepts?

➢ They ignore demand—they are based on cost estimates.

➢ They ignore the perceived value of the product to (what) the customer (wants)—they are based on
what the manager thinks the project is worth.
➢ They ignore the value created by effective marketing—they are based on ridged accounting and
finance metrics.
➢ They ignore competition—they are based on an internal view of the company (usually a product or
production view).

So, what are the principles that underlie effective pricing?

There are four principles:

• First principle: Pricing should be based on the value that the product offers to customers, not on its
costs of production.
 • Second principle: Since different customers attach different values to a given product (good or
service), prices should be customized so that these value differences can be capitalized on.

An important concept related to price customization is the customer surplus (how much are you
going to leave behind if you charge a price, but the customer would be willing to pay more). This
surplus is the difference between the price the customer would be willing to pay for a product and
the price the customer actually pays. The existence of a customer surplus means that a company is
leaving money on the table; the company is missing out on cash-flow.
The obvious solution (what we really want) is to minimize consumer surplus is to charge different
prices to different customers. Many firms do this such as airlines (airline seats are sold at different
prices as the departure of a jetliner comes closer).

• Third principle: Pricing decisions should anticipate the reactions of competitors and their long-run
objectives in the market. A company has to anticipate that a competitor will react strongly to any
attempts to capture its market share. For example, a competitor may not just match a price
reduction, but may under cut the price, resulting in a downward spiral in prices leaving all
participants worse off.
Thus, in considering pricing decisions, managers must consider two issues:
➢ How will competitors react and what are the subsequent effects on profits?
➢ Is there a way of influencing competitors towards less damaging responses?

These competing reactions and the ability to shape these responses depend on the nature of the industry,
such as:
➢ Number of competitors—competitor cooperation is more difficult to achieve with many
competitors.
➢ Differences among competitors—where companies have large differences in cost structures,
market shares, and product ranges, agreements on pricing cooperation are difficult.
➢ Price transparency—transparent processes encourage cooperation. If rivals can immediately
observe price cuts, aggressive pricing is deterred.
➢ Any short-term price gains from price cutting—the bigger the short-term gains, the more likely
price competition will break out.

How does cooperation in pricing manifest itself? (How do I actually influence the competition?)
➢ In price signaling. Involves tactics (e.g., advanced announcements of price increases, public
announcements of intentions not to lower prices) to make transparent what a firm’s objective is.
(You could signal to the competition that in two weeks you are going to change your price for 5%.
You are letting them know so that they have a chance to change things on their side).
Trust among competitors is created.

➢ In ‘tit-for-tat’. Involves simply matching the competitor’s price moves, thus not undercutting it.
Again, trust (= more cooperation) among competitors is created.

• Fourth principle: Pricing should be integrated with a firm’s broad strategic positioning. That is, prices
have to be designed to fit into a firm’s market position strategy; prices that are set too high for what is
offered will yield a brand that is perceived to be of poor value.
 The position and price come first and then, you think about the cost and the products design.

In summary: Price determines cost if shareholder value is to be maximized; not the other way around.

What are the typical brand positions in a market, from a pricing perspective?
Asked differently, what are the typical price segments of a market?
Historically, there has been a three-tier price segmentation of markets
➢ Economic position.
➢ Mid-range position.
➢ Luxury position.

A company that only competes in one of these segments is called a niche business.
Some companies aim to compete in all price segments so that they can achieve economies of scale and
research shows that the number of price segments is growing to include such segments as premium
economy and premium segments.

How do price cuts within and across price segments impact on buying behavior?

There are two price-cut effects:

➢ Price elasticity within a price segment is normally higher than between brands in different value
segments. That is, a price cut by a mid-market brand will draw more sales from other competing
mid-market brands than from other value segments (premium or economic). (A price cut in a mid-
market brand is going to draw consumers that purchase from other mid-market brands to switch to
yours, it will drive them over to your mid-brand).

➢ Switching that occurs between price segments (from premium to mid-range or to economic, for
example) is not symmetrical (if I cut in the mid-range, I will get more from the economic range than
from the premium one). That is, price cuts in a higher-quality tier are more powerful in pulling
customers up from lower-price segments than price cuts in a lower-price segment is in pulling
customers down from upper tiers. (it refers to consumers that already bought from you but now
switch between your price segments (premium, mid-range or economic)

So, how should a price be set to maximize corporate value?

Before we can answer the question, there are two fundamental decisions required (we want to minimize
customer surplus):
➢ Decide on a price position –
 ▪ a skimming price - a firm charges the highest initial price that customers will pay and then
lowers it over time. As the demand of the first customers is satisfied and competition
enters the market, the firm lowers the price to attract another, more price-sensitive
segment of the population (are we going to try to get as much profit as possible)

▪ or a penetration price - attract customers to a new product or service by offering a lower

price during its initial offering. The lower price helps a new product or service penetrate
the market and attract customers away from competitors. Market penetration pricing
relies on the strategy of using low prices initially to make a wide number of customers
aware of a new product.
The goal of a price penetration strategy is to entice customers to try a new product and
build market share with the hope of keeping the new customers once prices rise back to
normal levels. (Are we going to try and generate as much market shares as possible and be
content with a smaller price margin and leave a small surplus).

➢ Decide on a price variation policy – when and how to vary the price with promotional tools.

Regarding deciding on a price position: When should a skimming price (having no customer surplus) be
selected?
A skimming price is a price set to maximize how much money can be charged for a given product. There are
four conditions under which price skimming yields maximum corporate value:
• High barriers to entry - The high price does not attract competitors. (e.g., patents make it hard for
competitors to enter a market).
• Demand is price inelastic - There are enough prospective customers willing to buy the product at a
high price. (e.g., in high-end strategy consulting or for super-luxury products).
• High-value segments - Lowering the price would have only a minor effect on increasing sales
volume and reducing unit costs (e.g., premium and luxury segments).
• Few economies of scale - Lowering the price would have only a minor effect on increasing
sales volume and reducing unit costs. (e.g., where experience and scope does not reduce
costs of production).

When should a penetration price be selected?

Penetration pricing is a price set to maximize sales volume.

There are four conditions under which price penetration yields maximum corporate value:
• Low barriers to entry (e.g., internet business is relatively easy to set up and high prices would be
rapidly eroded by competitors).
• Demand is price elastic (e.g., in commodity markets, quality and performance are similar and price
becomes the most important market share driver).
• Network effects (e.g., xbox console and games, Microsoft word processor).
• Large economies of scale - Lowering the price would have only a minor effect on increasing
sales volume and reducing unit costs. (e.g., where experience and scope can reduce costs of
production).
Note: The following factors should also be taken into account:
➢ Core strategy.
➢ Strategic objectives.
➢ Strategic focus.
➢ Benefits needed.
➢ Competitors and PEST.

REGARDING DECIDING ON A PRICE VARIATION POLICY:

Which kinds of price variations exist?

➢ Trade promotions: refers to marketing activities that are executed in retail between these two
partners. Trade Promotion is a marketing technique aimed at increasing demand for products in
retail stores based on special pricing, display fixtures, demonstrations, value-added bonuses, no-
obligation gifts, and more. (e.g., discounts and allowances).

➢ Consumer promotions: are tactics or techniques designed to help a business find new customers or
reward current customers. (e.g., coupons, cash rebates, low-interest financing).

What are the effects of such price promotions?

Very powerful. Some research shows that price cuts of only 5% can result in 40% sales volume increases.

Why decide on a policy for price promotions (have a consistency in price promotions)?
The powerful sales effects of promotional pricing will almost guarantee a competitor response; the result
may be a zero-sum game where all competitors loose due to an ensuing price war.
Almost always does promotional pricing eat into regular sales (cannibalization: refers to a reduction in sales
volume, sales revenue, or market share of one product as a result of the introduction of a new product by
the same producer.); those who respond to the promotion are usually regular customers who would have
bought anyway.

So, what should be the policy for price variations with promotional pricing?
Do not start if you can avoid it. (But sometimes that is not possible. Ex: during the Easter season, if other
competitors change their price you have to do it as well).
Or only use a price promotion as an incentive to trial a new product.
If price promotions have to be used regularly, price on the basis of ‘everyday low prices’ (you say to
consumers that your price in day is the best for consumers. Every day I give you my best price).
 ‘P’ FOR PROMOTIONS

It is rarely sufficient to produce a good product and then place it at a good price in a carefully selected
market segment; important is that these product, place, and price efforts have to be promoted effectively
to potential customers.

Which variables does the promotions mix include?

• Advertising (“we need to market something”. We shouldn’t use marketing as a synonym term of
advertising or promotion).
• Direct Marketing.
• Sales (Price) Promotions.
• Personal Selling.
• Publicity.

Marketing managers are usually positive about expenditures on promotion mix variables; managerial
accountants (and most other none-marketers) are generally suspicious about such expenditures.

What are the traditional objectives of promotions held by marketing managers?

Promotions should be used for the purpose of increasing:
• Sales volume (> 50% of respondents).
• Market share (>20% of respondents).
• Product awareness levels (>30% of respondents).
• Brand image (> 10% of respondents).
There is a positive correlation, if doing it right, between how much I spent on promotion and how all those
variables change).
Interestingly, improvements of financial performance metrics (indicators of shareholder value) are usually
not mentioned.

What are the problems with such objectives?

If the objective is to increase sales volume and market share, then too much money will be spent on
promotion because spending will nearly always increase sales volume and market share. The issue becomes
that beyond a point, increases in sales or share will cost more to gain than they bring incremental economic
profit which, in turn, destroys corporate value. (Every time I spend more in promotion, I do see an increase
in those above factors. But often times, if I don’t have a cash flow calculation involved, I lose track of what
point every incremental expenditure on promotion leads to an equivalent incremental improvement on
sales volume, and the other factors).
What are the traditional views of promotions held by accountants?
Spending on promotions are treated as a cost to be deducted immediately from revenue on the annual
profit and loss statement. Consequently, promotion spending is only justified if it increases sales and, thus,
profits in the current accounting year (we know that it usually takes more than one year to see results from
promotion). Promotion is not perceived as an investment.
Not surprisingly, faced with pressure to increase profits, promotion spending is among the first things cut
by accounting-driven management. Accountants see that cutting promotions leads to little short-term sales
loss (but what actually happens is that sales decline to the same level of promotion cut) while immediately
boosting the bottom-line (due to the savings).

What is the weakness of this “promotions are costs” view?

There are 2 weaknesses:

• It ignores the long-term sales effects of promotions. For example, strong brands take many years to
build. Only then do they pay off. Thus, a ‘promotions are costs’ mentality highlights how
accountants treat tangible and intangible assets differently. If accountants applied the same
reasoning to tangible assets as they do to promotions, companies would never invest, since
tangible investments such as plant equipment rarely pay off in the first year.
• It assumes that if the company does not spend money on promotions, sales and profits will
continue at current levels. We know that this is not true; without promotions, they decline over the
mid and long term.

So, what are the contemporary views of promotions held by marketing managers?
Promotions should be viewed in terms of their effects on shareholder value, it should be viewed as an
investment—their impact on the net present value (NPV) of all future cash flows.

How can the NPV of cash flow be increased?

Please recall (earlier slides); there are four ways:

• Increase the level of cash flow.

• Accelerate the timing of cash flow.
• Increase the duration of cash flow.
• Reduce the risks of cash flow.

How do effective promotions affect cash flow?

Let us approach this question by looking at each of the four ways discussed above:

• Promotions can increase cash flow levels by stimulating sales growth and establishing a price
premium (more sales and higher prices make more cash flow).
• Promotions can accelerate timing (by making people adopt the product quickly) through a faster
penetration of the market (sooner sales make cash to flow sooner).
• Promotions can improve the longevity of cash flows (improved customer loyalty, for example, can
make cash flow last longer).
• Promotions can reduce risks attached to cash flow (building barriers to entry, for example, can
reduce the possibility that new competitors may take your cash away from you).
 Note: Promotion spending is nearly always effective in increasing shareholder value. Money is only wasted if the
promotion strategy is poorly planned and executed, so that objectives are not achieved. Note however that
promotion spending can also destroy shareholder value if the objectives are achieved, but adequate operating
margins are not achieved to cover the promotion spending (if every incremental spending on promotion doesn’t lead
to equally incremental increase in cash flow than, we are having a shareholder destruction scenario).

How do promotions work?

There are two general promotion models: (see examples of advertisements)
➢ The rational model –
First, (1) get consumers to understand its features.
Then (2) consumers have to be persuaded to desire the product,
(3) which then culminates in purchases (hopefully).
A simple way to remember this model is to understand the sequence as: think (i.e., 1), feel (i.e., 2),
do (i.e.,3).

➢ The image model –

First (1) positive feelings have to be built about the product.
Then (2) get consumers to understand the product’s features,
(3) which then culminates in purchases (hopefully).
A simple way to remember this model is to understand the sequence as: feel (i.e., 1), think (i.e., 2),
do (i.e., 3).

Now we move on to developing a promotions strategy.

❖ What is the first step in developing a promotions strategy?

The process must start with two understandings (note: a product, its place, and its price has usually been
determined prior to developing a promotion strategy):

➢ Understand the brand; that is, understand what strengths in the 3Ps can be built on and what
weaknesses in the 3 Ps need to be overcome.

Image

➢ Understand the audience; that is, understand who will be communicated to.

❖ What is the second step in developing a promotions strategy?

The next step is to determine specific, measurable and operational communications objectives.

What does the determination of specific, measurable, and operational communication objectives depend
on?
It depends on:
• The degree of involvement in the buying decision (high/low involvement).
• The degree of rationality in the buying decision (high/low rationality).
 For example:
For high involvement / high rational purchasing decisions (Ex: buying a plane ticket), the special benefits
that the brand offers must be focused on. The communication objective here would be to communicate
rational benefits.
For high involvement / low rational purchasing decisions, the special emotional appeal of the brand must
be focused on. The communication objective here would be to communicate emotional involvement.

❖ What is the third step in delivering a promotions strategy?

The next step is to design the message. Your fantasy is the limit, but basically, the message content has to
be rational or emotional in appeal.

❖ What is the fourth step in delivering a promotions strategy?

The next step is to decide on the promotions budget. This is the most difficult task.
The fundamental question is: How much to spend to maximize corporate value?
That means selecting a budget that maximizes the net present value of all future cash flow.

How should promotions be budgeted for? Below are some rules of thumb:
• The effect of promotions on sales is usually small. Most studies find advertising elasticities around
0.2 or less compared to elasticities of up to 2.0 for price promotions. This implies that a 10%
increase in advertising would increase sales by 2%, while a 10% price cut would increase sales by
20%.
• Promotions is often critical for new brands. Advertising elasticity is higher for new brands.
• Promotions add corporate value by maintaining sales and prices rather than increasing them.
(promotions help sustain the brand) While these may appear modest goals, they can have a major
effect on corporate value.
• Advertising (as a form of promotions) has diminishing effects on sales results. The first exposure to
an add has the biggest effect on consumers purchasing behavior. After the third add exposure,
sales effects are usually very small.
• Promotions are more effective when the brand has a differential (i.e., non-price) advantage. Such
an advantage can be based on rational or emotional attributes.
• Large promotion budgets are unlikely to create value on low-margin products (ex: pens).

❖ What is the fifth step in developing a promotions strategy?

The final step in developing a promotions strategy is allocating the budget across the promotions mix.
Knowing the single most dominant strength that each promotion variable has helped allocate the
promotions budget efficiently:

• For advertising: (strength: it is reachable) longest reach (weakness: usually the least persuasive
among the promotional variables).

• For sales (price) promotions: most effective in obtaining customer (trials) to try on low involvement
markets (but most damaging to image).
 • For public relations (newspapers, magazines articles about some products): highest level of
credibility (but most difficult to control).

• For personal selling (ex: person goes from door to door selling, promoting a product): most
immediate feedback, allowing promotional information to be tailored to the customer’s reactions
(but very expensive, with costs of keeping a salesperson on the road frequently exceeding 100,000$).

• For direct marketing: highly targeted (but most annoying to customers, e.g., mailbox always full,
telemarketing at dinner time).

Exame: 60 minutes Open book exame

4 questions: real life example (company annual report)

Ex: which strategic focus is alluded to this section (which one they adopted)

Question: just answer the question (it doesn’t matter the length, not a long one)

Can you recognize which cash flow dimension is the company focusing in this paragraph

No calculation questions

See page 85…88 of the book