Cracking the Marketing Code

Training SessionColumbia Business School

October 29, 2010

Marketing 101

Objectives

• Look smart and knowledgeable in CPG interviews

• Actually learn something– Basic marketing concepts– Some clever tools to crack the code

• Have a global view

Basic marketing concepts

STP

• Segmentation• Targeting• Positioning

4P´s

• Product• Price• Place • Promotion

3C´s

• Corporation• Customer• Competitors

How they relate

Corporation

Competition

CustomerSegments

Marketing Mix4P´s by segment

CustomerSegments

TargetCustomerSegments

A simple example…us

AM Inc.

Marketing Mix

Product – CPG marketing tutorialPlace – herePromotion – email invites Price ???

1st. yr. Columbia

MBA´s

Value proposition – 25% increased chances of getting CPG summer offer

How much would you pay? How much should I charge?

Add a competitor

AM Inc.

RK Inc.

1st. yr. Columbia

MBA´s

Offers same product at 20% discount across the hall

What do I do?Lower my price ?Differentiate product and promote it?Segment and target?

A segmented strategy

35% 65%

1st yr. Columbia MBA´s

Analitics

More likely to succeedBetter fit with my capabilitiesAM target

Tailored marketing mix

Product CPG analytical marketingPricing premiumPromotion to analytical “elite”Place here plus “web tutorial”

Leave to RK

Basic marketing concepts

STP

• Segmentation• Targeting• Positioning

4P´s

• Product• Price• Place • Promotion

3C´s

• Corporation• Customer• Competitors

Customer segmentation

What is Segmentation? Why is Segmentation Useful?

Allows us to assign people and limited resources more efficiently and effectively

Facilitates the uncovering of needs and opportunities not exploited by our current approach

Helps orient the design of products and services for specific sub-groupings of customers, shoppers, and consumers

Results in significant improvement in the impact of marketing initiatives (programs and promotions) and in-store execution

Usually results in better balance between benefits and the costs required to generate them

“The science of finding, within a heterogeneous customer universe, homogeneous groupings of customers which meet segmentation criteria defined by us”

“Segment quality improves dramatically to the extent that we utilize both subjective and objective criteria to define the segments”

Segmented value propositions

Direct cost to serve – sales, transportation, warehousing, etc.

Commercial terms – channel margins, credit terms

CTS optimization opportunities must be considered

Service levels Product portfolio Service offering Commercial offering Channels Sales and distribution model

Brand and product portfolio strength

Value proposition Client satisfaction with competing

value propositions

Impact on ROI vs. competition and other product categories

Include a holistic assessment including all elements of the value equation

Cost to Serve

Customer Requirements and

Satisfaction

Economic Benefit to Customers

Competing Value Propositions

Value Proposition

Intensive use of market research tools – e.g.,

Choice analysis, Conjoint analysis, cluster analysis,

etc.

Segmentation and targeting process

Right

Perform Competitor Analysis

Define Market

Target Segments

Overall Market

Overall MarketOverall

Market

C

Set Strategic Objectives

Define MarketAssess Market Structure & Trends

Identify Attractive Market Segments

Analyze Right-to-win

Select Target Market Segments

A

B

D

E

F

Define marketExample

Market Definition: Aquafina Bottled Water

Share of Water Share of Beverage Share of Stomach

Substitute products– Other brands of bottled

water– Tap water– Filtered water

Market of drinking water

Substitute products– Carbonated drinks– New age drinks– Nectar– Coffee and tea

Market of non-alcoholic beverages

Substitute products– Non-alcoholic beverages– Salty snacks– Sweet snacks– Fruits and vegetables

Market of snack food and beverage

1 2 3

Options

What does PepsiCo aspire to be in long-term? How can the aspiration be translated into a competitive goal for Aquafina? What else can the company potentially sell with its current capabilities?

B

Asses market structure and trends

Rural Brazil Rural Russia Urban ChinaRural Brazil

CSDB Brands

Fruit Nectars/DrinksB brands

Juice B Brands

Fruit Nectars/DrinksA brands

Juice A Brands

CSDA Brands

Rural China Rural Russia

C

Non-alcoholic beverages value added path

Identify attractive market segments

Pleasure

Kick

Sharing

ConsciousStimulus

RelaxationFunctionalRefreshment

Expressive

Controlling

SocialIndividual

Candy

Pastilles

Chewinggum

ENJOYMENT

REFRESHMENT

Sugar confectionery consumer need diagram

D

Analyze “Right to win”

Example Description

Leveraged R&D technology and consumer insights to introduce “Crest Whitestrips” and now own 70% of that category

Leveraged “Crest Whitestrips” technology to create a Joint Venture with Clorox to launch new Glad products

Leveraged strong consumer insights capability and position in Latin America to create an ethnic marketing capability in the US– First used this capability to attract new consumers in key markets (e.g. Miami, Los

Angeles)– Later adapted the value proposition for these consumers with new products and

marketing approaches

Traditionally had the one of the strongest “in-house” sales organizations Built a comprehensive “retail execution” capability with its sales organization – improving

revenue execution through merchandising effectiveness and greatly reducing retail out-of-stocks

Advantaged Innovation

Advantaged Customer Capabilities

Advantaged Ethnic Marketing

Advantaged DistributionSystem

Leve

l of C

onfid

ence

Reg

ardi

ng B

enefi

ts

Built a cost advantaged DSD delivery capability that was initially leveraged with existing products to out-execute competition

Further leveraged scale with innovative new products and finally geographic expansion

Examples of capabilities led extension into adjacencies

E

Identify attractive market segments

Price Top Image

Emotional

Rational

"Techniker"

"Sparer" "Yuppies"

"Sportler"

"Rationalisten"

"Statusbewußte"

F

Position with different look and feel

Piech´s common components strategy: a few token gimmicks and the same products

Sextuplets

Basic marketing concepts

STP

• Segmentation• Targeting• Positioning

4P´s

• Product• Price• Place • Promotion

3C´s

• Corporation• Customer• Competitors

Price and product attributes

QUALITY CONVENIENCE

60 RMB / 5 L12 RMB / L

24 RMB / 1.8 L13.33 RMB / L

COST

~50 RMB / 5 L~10 RMB / L 20% premium 11% premium

Vegetable oil in China

Extruded B Extruded A Chips B Chips A

Rural Brazil Rural BrazilUrban China Urban Russia

Snacks value added path

212121

Rural

Urban

Extruded B, Large Extruded B, Small Chips A, Large Chips A, Small

Extruded BLarge Size, Small Size

Chips ALarge Size Small Size

Price points and premiums

Price points…”affordability”

Place…retail channels evolve

100 %

0 %

ILLUSTRATIVERetail channels evolution

India China Brazil & Mexico

50 %

Large Format Modern Trade

Small Format Modern TradeTraditional Trade

Growing convenience stores &Discounters forLow Income Consumers

Large Formats stalledLow penetration amongLow Income Consumers

US & Europe

From traditional to modern tradeTraditional trade in Anhui Hypermarket in Shanghai

Guidelines for a Successful Go to Market Model

Upgrade Go-to-Marketand OrganizationalCapabilities

Crack the Economics to Serve Each Channel

Understand product dynamics and requirements Understand customer requirements/satisfaction Understand competitors offering Segment customers based on needs

Define optimal channel mix and number of WH’s/Distributors

Define WH/Distributors roles Balance service levels – call content,

call frequency, fill rates, leadtimes –vs. cost-to-serve

Reengineer commercial terms and service policies

Understand cost-to-serve and profitability drivers

Understand true cost of indirect channels vs. direct service

Balance and control commercial terms and discounts vs. direct service needs

Reengineer go-to-market and supporting organization infrastructure to improve cost-to-serve

Redefine sales force activities and call standards

Improve effectiveness of key processes– Market execution/OTC– Account planning– Business review and control

Define optimal sizing, routing, profiles and skills

Improve tools Align measurement and rewards

SuccessfulGo-to-Market Model

Craft an Optimal ValueProposition for Each Channel

Understand Business and Customer Requirements

”Go to Market” model

26

Crack the economics to serve“Profit-to-Serve” Equation

Volume (reach and lift)– Number of accounts reached

– Shelf and cold space

– Categories and # of SKUs carried

– Out of Stocks and Service Levels

Direct GTM and Sales Costs

– Sales force– Merchandising– Sales supervision– Delivery/secondary transportation– Custom products and packaging– Supply chain and DC requirements

Profit to Serve

Costs

Revenues

less

Net Price Realization– Consumer price

– Trade margins

– Trading terms

Shopper and Customer Marketing

– In-store advertising– Shopper marketing– Customer activation

Trade PromotionAsset Amortization Working Capital

27

“Modern Trade” economics$

Per S

tat C

ase

Customer Costs as a Percent of Sales Dollars

36% 37% 29% 25% 24% 26% 22% 22% 21% 22% 18% 15% 19% 17% 15%

Route-To-Market – Variability Among Retailers in Cost to Serve

Source: BAH Analyses

28

Varied Customer Contribution

Customer 1 Customer 2 Customer 3 Customer 4

Customer 5 Customer 6 Customer 7 Customer 8

Channel Categories

(80%)

(60%)

(40%)

(-20%)

0

20%

40%

100 1,000 10,000 100,000 1,000,000

Client Size (kg)

% C

usto

mer

Pro

fitab

ility

Mean Customer Profitability

“Traditional trade” economics

RPMX-JGB-Feb23-06

Channel definition

Break-Even Point of Direct Service

Additional Go-to-Market Benefits Due to Additional Wholesalers

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8

Order Size (Units)

US$

Vol

ume

Distributors and WH´s margin

Direct Service Cost

If a customer buysless than 4 - 5 units, it cost less to use distributors

$0

$20

$40

$60

$80

$100

$120

1 2 3 4 5 6 7 8

Go-

to-M

arke

t ($M

M)

Leading Products

SKUs

Complementary Products

New Products

Go-to-Market using Current WH´s

Incremental revenues due To additional customer base

Source: BA&H Analysis

Benefits of direct service

Better coverage of total portfolio

Better service levels

Value offering by channel

0

0.2

0.4

0.6Bonificaciones

Licencia

Crédito

Refrigeración

Imagen

Promociones /Activaciones

0

0.2

0.4

0.6

0.8Bonificaciones

Licencia

Crédito

Refrigeración

Imagen

Promociones /Activaciones

0

0.2

0.4

0.6Bonificaciones

Licencia

Crédito

Refrigeración

Imagen

Promociones /Activaciones

Survey / Conjoint AnalysisSegments

% C

TS /

Rev

enue

volume

Optimized Cost to Serve1.7 1.9 2.2 2.9 3.3 3.91.2 1.4 1.6 0.5

0.51.1 1.3

1.44.6

5.36.0

0.4

0.0

2.0

4.0

6.0

8.0

10.0

12.0

C M G C M G

Negotiation Oriented

Finance Oriented

Value Offering

Trade Terms/Support

Product Offering

Delivery Model

Service Levels

Maximize value/ Minimize Cost

Segments

Promotions…”ROI Marketing”

Market ResultsMarketing Investments Purchase Behavior

Market share

Unit sales

Price premium

Penetration of key segments

Etc.

Television

Print

Consumer EventsPromotions

RelationshipMarketing Sponsorships

… which in turnaffects …

$ Spendaffects …

SOM

Billboards(OOH) Consideration

Brand and Product Awareness

Intent

Purchase

Loyal- -ty

Allocation of funds across marketing levers

Optimization of spending within each lever

Allocation across levers

Efficiency: Cost per GRP’s (US$)

Effectiveness: Awareness / GRP– Relative to TV(1)

100%3%

1%

34%19%

3569%1028%1428%

682100

40

3191790

173,01041,522

69,204

(1) Relative effectiveness to TV = (Media awareness /Media GRPs) / (TV awareness / TV GRPs)Source: Economic Model; Booz Allen analysis

Media Effectiveness x Efficiency(Relative to TV – 100%)

1.0x

4.0x

4.4x

2.5x

25.0x

12.9x

10.7x

12.9x

EXAMPLE

Optimization within leversEv

ent R

OI

Events

ROI Over All Events and Products (Four Account Sample)

-63% median event ROI.-48% average ROI

91% of events yield a negative ROI

Notes: (1) Assumptions made on list price, feature cost, and that retailers retain their base margin(2) ROI=(Revenue-Cost)/Cost

Source: IRI Scanner Data; Manufacturer Cost Data; Booz Allen analysis

Sample Trade Promotion Event ROI

Even

t RO

I

Events

Kmart -63% median event ROI

Even

t RO

I

Events

Product 1

-43% median event ROI

Share of Market – ValueAll Appliances

2004 to 2006 Change in Spend vs.Change in Market Share

2004 to 2006 Point Increase inShare of Market

Share of Spend vs. Market Share(2004 to 2006)

2004

to 2

006

Poin

t Inc

reas

e in

Shar

e of

Med

ia S

pend

Shar

e of

Med

ia S

pend

Kenmore

LG

Maytag

Whirlpool

GE

KitchenAid

Source: TNS Data, AHAM, Traqline, Booz Allen Analysis

Maytag

KitchenAid

LG

Whirlpool

GE

Kenmore

Competitive impact

Scale impact

Beer BrandsMarketing investment by hectoliter

Millions of HL/year

USD

/HL

Budweiser

Miller Lite

Coors Light

Bud Light

Heineken

Miller Genuine Draft

Corona Extra

Michelob Light

Coors

Amstel Light

R2

= 89%

-

5

10

15

20

25

0 5 10 15 20 25 30 35 40 45

Budweiser

Miller Lite

Co ors Light

Bud Light

Heineken

Miller Genuine Draft

Corona Extra

Michelob Light

Coors

Amstel Light

R2

= 89%

-

5

10

15

20

25

0 5 10 15 20 25 30 35 40 45

Fuente: Morgan Stanley Quarterly Report. Beverages US. Análisis BAH

Consumer purchase funnel

Potential Problem

Inadequate advertising/PR support? Positioning not unique, meaningful?

Brand A

99%

27%

27%

19%

-73%

0%

-30%

Brand B

99%

55%

46%

-44%

-16%

-65%

Awareness

Preference

Intent

Purchase 16%

Identified Issue:

Product positioning is not truly differentiated or compelling

Retail outlets steer customers to competitive products on which the outlet earns superior returns

Positioning not unique, meaningful? Product, service offering does not deliver

positioning?

Perceived pricing overrides benefit of positioning?

Perceived availability (channels) doesn’t support positioning?

Actual price/value is different from perceived price/value?

Actual availability (channels) does not support positioning?

Not easy to find in channels? Other benefits, products are advertised in

channel?

Source: Client Data; Booz Allen analysis

Consumer Purchase Funnel

Mass Media Outdoor advertising

Marketing Vehicles

Conventional Alternative Product placement Unconventional print Internet marketing Graffiti advertising

Marketing vehicles mix and purpose

Retention

Mass Media Outdoor advertising

Event marketing Buzz marketing Guerrilla marketing Viral marketing

Broad market sampling Event marketing One-to-one sampling Direct marketing Lifestyle shop placement Switch Selling

Mass Media Outdoor advertising Promotions Pricing

Direct marketing Event marketing Lifestyle shop placement

Awareness

Consideration

Trial

Occasional Buyer

RegularBuyer

Pene-tration

Search for long term value valueIncremental Spending on Marketing Levers and Impact on EBITDA, SOM and Enterprise Value

Incre. Share

EBIT

DA (U

S$ M

M)

Enterprise Value ($B)

340

345

350

355

360

365

370

375

380

0

1

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Source: Client Data; Booz Allen analysis

Managing Trade-off’s Marketing investments drive share

growth, but profitability tends to decline as incremental share becomes more expensive

In the short-term, the right decision is to maximize profits which requires incremental investments until they begin producing negative returns

However, in the long-term, the more profitable decision may be to grow share, even at a loss, if this enables superior market power / sustainable competitive advantage

However, getting this right is an iterative process and the trade-offs need to be clearly understood and carefully managed

This process provides significant insights into the dynamic impact of marketing investments on share and earnings

0 2% 4% 6% 8% 10%

0 $10M $20M $30M $45M $65MIncre. Spending

Base Vol Trend 0 (2%) (1%) 0% 1% 2%

EBITDA (Annual) Enterprise Value

EXAMPLE

In summary

Grab the big picture Pick your fights Strive for top value

STP•Segmentation•Targeting•Positioning

4P´s•Product•Price•Place •Promotion

3C´s•Corporation•Customer•Competitors