Today we're going to start talking about content and we're going to introduce the idea of what marketing is and how marketing as a discipline has evolved over time. So let's start by talking about what marketing is and if you ask people on the street what marketing is what you will hear for the most part is marketing is about advertising and it's about selling and I want to open your minds a little bit to the fact that marketing involves a lot more things than that. But from a conceptual standpoint, as we're going to discuss later, marketing is about creating satisfied customers, right? So it's about creating value for them.
And I have here a quote from Peter Drucker. If you guys don't know who Peter Drucker is, he was one of the most influential managerial consultants and professors of the 20th century. If there was a Nobel Prize in management, he probably would have gotten one, but there is not. So if you have some spare time, read some of his books. They are absolutely amazing.
Anyway, the interesting thing is he's not a marketing guy per se. He's a management person. But this is what he has to say about a business, right? That a business, the two primary functions are marketing and innovation. Everything else is a cost, okay?
So the moment that you understand that you realize how absolutely essential marketing is. OK, so let's start talking about what it really means by that. OK, so like I was mentioning before, marketing is about creating value.
Right. And I want you to realize that value when you are engaging in a transaction with a customer is going to be always defined from the perspective of the customer. okay if the customer cannot see that value that you think you are creating right and it really doesn't matter what you think okay and the reason why value is absolutely central is because for you to exchange anything in this case for the most part tends to be money right with a customer for something that you are providing either a good or a service and they need to see the value on it otherwise they will not actually complete the transaction And the reason why we do this is because of course we want that transaction to happen, but we are thinking long term.
It's not about the transaction today. It's not about ripping off customers, right? Which is something that marketing sometimes is accused of, right?
Because if you rip customers off, if you are purely rational, other than not being ethical, which is not, then you shouldn't do it. Just based on that, they just will not keep coming back, right? So if you don't rip customers off, if you actually create value for them and they are actually happy with what you are providing, whether it is a product or a service or a combination of products and services, right? And then you're going to be able to build a relationship. They're going to keep coming back.
So you're thinking long term, okay? And you're going to be able to retain some of that value that you have created. So the reason why people pay you money is because they want what you have, right?
Or what you're providing. So if you are a tax consultant right now. right we have changed our tax and deadline instead of being April like usually is in July 15th right now and probably they'll start getting busy right and the reason why you go to a tax consultant is because you don't think like you can do a good job when you're filling your income tax for example right in my case so the tax consultant has something that he or she has that is valuable to me and because of that I'm willing to pay money for them to actually just fill up some forms right And so that's where the value is. Marketing is about that value.
Whether it's tax consultancy, it's a car, or it's some chocolate, it really doesn't matter, right? And that value that the customer sees, and only the customer, is what determines the transaction. Now, when we're talking about customers, we need to make some distinctions that the average person on the street might actually not usually do.
So the terminology, I think it's one of the things that separates somebody who is educated in business and somebody who just is the average Joe on the street. So you need to really understand the terminology so that you are speaking about the same things when you're having a conversation with somebody else, maybe in the finance department or even within the marketing department, right? You need to be able to know exactly what it is that you're saying or they are saying, right? so i'm going to make a distinction between these three words that are oftentimes interchangeable in everyday life okay i'm going to make a distinction between needs wants and demand okay now let's start with needs and this is something that Sometimes people will say marketing creates needs.
I would argue that's not actually true, right? Needs are inherent to the person. Needs are something that we are born with, right? And needs are essentially state of felt deprivation, right? So it's something that you're lacking, something that you feel it's not right.
From the most basic ones like thirst or hunger, right? You just feel it, it's just there. Right, we have some mechanisms in our body that tell us, hey, you need to eat, you need to drink, otherwise you're going to have serious consequences.
And to other things, like we need socialization, right? I mean, sadly, these days, right, we've been all in lockdown and, you know, maintaining social distancing. And it's hard, right? Because we actually enjoy the interaction with other people, right? So we have that need to belong and that need to interact with other people from society.
In fact... What do we do to harden criminals when they misbehave in jail? The worst thing that we can do to them is to put them in isolation, right?
And yeah. And so what I'm trying to see is these needs are inherent to the person. They haven't changed in thousands of years, right? And they're just with us the entire time. Now, other than the needs that we have inherently, there are wants.
Now, what is a want? A want is a need that is transformed by a societal interaction and technology. So what do I mean by this?
Well, for example, humans, like I was saying, they are social animals, right? And because of that, one thing that we need is we need to communicate with other humans, right? And the way we communicate with humans has changed over time, right?
If you want to establish long-term communication with somebody, If you go back a few thousand years, right, the way you will do it is you will just walk to the other city and then talk to them, right? There was no telephone or there were no fax machines, which is archaic at this point. There was no email, right? So if you wanted to have a conversation with somebody, you actually literally physically had to go, right? There was no teleconferencing, no Zoom, right?
And then technology evolved. People found other ways. of achieving those needs based on what they could do, right? So you have smoke signals, right? Which were used to be able to communicate quickly, long distance, simple messages, right?
Danger is coming, right? The enemy is here, right? You know, telegraph, the Pony Express, right?
So there are many other ways in which we have satisfied these needs that are inherent to us based on what we have achieved in terms of technology and how these social norms have been created, what is typical and what is acceptable and what is not, right? So needs and wants are different, okay? Needs are inherent to the person, wants are the way in which we satisfy those needs using technology and societal norms. And then demand or demands are wants, right? that we could actually fulfill because we have the purchasing power to back them up, right?
So let me give you a simple example. I want a Ferrari, right? They are very nice sports cars.
And they are really amazing if you're into technology and into sports cars. However, given that I have three kids and the career that I have, I am not going to be able to afford a Ferrari, right? I don't have a quarter million dollars to be spent on a car, right? Because I need to make my house payments and I need to send my kids to college, right? So because of that, because I've made those choices and I don't have the money to back it up, even though I want a Ferrari, I cannot demand one, right?
I cannot actually go and buy it. So that's the distinction between these three concepts. And this is very important for you to understand, right? Needs and inherent to the person wants are the way we satisfy those needs based on the technology and the social norms, what is acceptable. And demands are ones that are backed by purchasing power.
Okay, now what do we observe in the marketplace? What we observe in the marketplace, we're going to call market offerings. Now, offerings are essentially a combination of products, services.
and maybe information and experiences. So what I'm trying to say is if you listen to a lot of the conversations that we're going to have, we're going to talk about products a lot, right? And the reason why we're going to talk about products a lot is because they are in many ways easier to understand than services or information and experiences, right? And because they are tangible, right?
There are things that you can touch, you can see, and because of that you can evaluate with your senses easier. But if you look at the U.S. economy, right and most and not most all developed economies in the world and any of the major countries in europe japan south korea etc what you will see is that roughly 75 to 85 percent of their gdp their gross and domestic product is actually services right so when we're talking about marketing offerings it's a big envelope that basically fulfills the placeholder of what will be a product, services, or anything else. Okay, and think about it from this perspective.
Products are important for customers only because they provide some benefit. We'll talk somewhat about this when we talk about marketing myopia, which is what we have next. So what do I mean by this? Think of it like this, if you buy a drill, right, if you buy a drill, a tool, right, something that enables you to do certain things, like for example, if you want to put a picture up in the wall, right, you can just take the drill, make a hole in the wall, and then put some sort of fastener that enables you to just hang your picture, right, so the benefit that you're trying to obtain by buying the drill is not the drill itself, it's what you can do with the drill.
right so customers don't care about drills what do i mean by this unless you are a drill collector i mean and you could be right there's nothing wrong with that but most people don't care about drills per se what they care about is what they can do with the drill okay so customers look at your products and services as a set or a bundle of benefits that they obtain from them okay and those benefits could be very varied right so in the case of the drill that i was talking about right It's not only the functionality, but also could be pride of ownership, right? If it's a really nice drill and you know all about drills and the kind of brands that are in the marketplace, maybe just owning that particular drill provides you with the benefit of knowing that you have something that is particularly, I don't know, efficient, high performance, whatever it is, right? And those are absolutely reasonable benefits, right? That maybe a person like me who maybe doesn't care that much about drills.
It's not actually going to be thinking about but think about it from another perspective What happens if I don't buy a drill and I buy one of those little? 3m stickers that enable you to hang things from the wall up to I think it's about 10 15 pounds, right that would be plenty for Me to hang a picture right unless it's a huge picture, right? So in that situation Because I don't care about drills The sales for drills are going to go down when 3M launches a product like this because a lot of people that would buy a drill just to hang pictures and do a couple of things around the house because they are not very handy, they're just not going to buy them, right? So this is a phenomenon that we call marketing myopia, right? Which is basically being myopic, meaning not seeing appropriately what's in front of you, right?
And it's to notice that customers don't buy the products because of the products. And when I say product, service is the same, okay? They buy because of the benefit that they are obtaining, okay? So unless they are collectors, okay?
If you collect watches, for example, right? Which I sort of do, for example, right? So if you collect watches, you derive pleasure in ownership of multiple watches, not because of the functional benefit of the product, but because you like watches, right?
which might be a disaster to you guys, right? Maybe you collect other things or maybe you don't collect anything at all, right? So unless you're in a situation like this, people don't care about your product. They care about the benefits that they derive from that, right?
So the moment that you understand this, you need to define your business not as a company that does a certain product, but a company that provides a certain benefit. So let me tell you about a conversation that I was having with, and this was... years ago, let's say about 10 years ago, with an executive from a large consumer packaged goods company that makes cleaning products for the house.
And this gentleman who is in charge of innovation, at least some of the portions of, this is a really large multi-billion dollar company. And he's an executive vice president that deals with innovation and new product development. And he was telling me that he's not worried about what the competition has, the other companies that are making similar products to clean the furniture, right?
This was dust polish that we were talking about, which doesn't sound like a very exciting product, right? But he was telling me that he's not worried about what the other guys are going to launch in terms of product properties and how they're going to beat them. He's not worried about that.
He knows exactly what they have. He knows all about these products. What he's worried about. is about all this nanotechnology and how it's going to impact the design of furniture.
Because what happens when you can put a coating on the furniture that repels the dust? And because of that, you don't need to use dust polishing at all. Who likes using dust polishing? So assuming that people are buying your product because they like it, it's wrong.
People are buying your product because of the benefit it provides to them. And the moment that they can achieve that benefit in other way, they are just going to jump in a hurry. if it's more convenient, if it has a better performance, or if it's cheaper or all the above, obviously.
So define your business as the benefit that basically the customer is getting from the business and not as the product that is associated. Now, like I was mentioning before, people come to you because they want to get some value, right? and that value is going to come from that benefit that they are getting and if the value that they are getting from your product service or solution solution is a combination of products and services right then they will go ahead and exchange usually money or maybe time money and maybe information right you have a lot of free games now that all they want to know is what it is that you're doing and who you are so they can actually sell that information to somebody else right so the exchange can be in terms of money which is the more traditional sense or it could be your time or maybe some of your information right but you're exchanging something that is valuable to the firm for something that is valuable to you right in the cases of a free video game in your computer or in your cell phone right and you're getting the benefit of you know entertainment having a good time right and the company if it's a free game it's getting the time of you having maybe eyeballs on the screen right so they can put an ad at the bottom right so they could monetize that that way or they can sell your information right but the company is getting something out of it there is nothing free right so that is the exchange that is happening and the exchange will only happen when i agree that what i get out of the out of the product in this case the video game It's more than how much I'm giving away, which in this case it will be maybe having to deal with annoying ads or having my information sold to another company so they can actually market other things to me, right? And when that exchange happens because the value is there, hopefully you can maintain that value in the long term. And what you're going to do is you're going to try to create a relationship, right?
Where. the customer keeps coming back. So what happens when you launch a new version of the game, right? Are these customers going to stay?
And if the game is not good, they're just going to move on because they don't see the value in the game, right? So what you're striving for is you're striving for building these long-term relationships instead of just selling something right now, right? So we're trying to take a perspective that it's more long-term instead of a short-term, more myopic view of exchanges in marketing.
right now we've been talking about exchanges now where do these exchanges take place in the marketplace right and what is a marketplace marketplace is a collection of customers and potential customers okay so it's really you know broadly defined right it's you know the world obviously comes from the world market where you literally had a group of people setting up their goods and maybe services but mostly goods originally right looking back a few thousand years right for people to come and you know buy them right so in the marketplace you're gonna have companies and you're gonna have also customers and the companies are gonna provide products and services like I said before so on the company side a market is essentially identifying customers right understanding their needs and after we've understand their needs designing some product or service that is going to help them see the value, right, create some value for them, and then concluding that transaction with them, right, so, you know, making sure that they understand what it is that they are getting and hopefully emphasizing what the good points of the product are. On the consumer side, the consumers are going to also engage in actions within the marketplace, right, they're going to look for the products or services. and sometimes the search could be very involved right when you're buying a house right it's not something that you're gonna buy quickly for the most part right unless you are i don't know like jeff bezos right who i think in the last six months he's bought multiple mansions right but i mean he has a few billion dollars right so for him spending a few million dollars in the house and it's like the way you and i maybe buy and i don't know a meal at a restaurant right it's it's a different ball game but you know we search for products right we do a lot of you know we go online we look for reviews and we talk to people that we know and sometimes we interact regularly with the company and to get some more information so you go to the website or you call customer service representative and talk to them and or maybe you visit a dealer if you're buying a car for example and talk to a salesperson And then finally you make a purchase, right?
Once you've decided that the value is there and that you want to go forth with the purchase, the transaction. And now, so what are the key elements in the marketplace then as we have discussed it, right? So what do we have?
Well, we have the central element. And this is interesting. I hope for you guys that we are going to be looking. at marketing from the perspective of the company. You are a professional consumer.
You've been a consumer roughly for 20 years, right? So you know all about the marketplace from the perspective of the consumer. And what we're going to do in this class is we're going to kind of give you a perspective of the firm, right? Where a lot of the things that you already have observed come from and why are there.
And also try to understand all the pieces of the puzzle, right? So we're going to start from the firm. This is going to be our lens.
this is what we're gonna the way we're gonna be looking at the at the whole marketplace right so the company right and the company could be making a product or a service like i said it really doesn't matter services and add a layer of complication we will talk about them i think in chapter 8 and if i remember correctly i don't have very good memory and we'll get there okay so you're gonna have the company that's going to be providing this product or service but for this company to provide the product or service it needs to have some suppliers right so if you're tesla for example right mr elon musk making electric cars right and what do you need to make an electric car well you need companies that supply you with for example the batteries right so tesla used to have an agreement with lg right and providing actually yeah was it LG or was it Panasonic? Maybe I'm confused between those two. Anyway, you have a supplier that provides your batteries. Now, Tesla, where they just have learned sufficiently about batteries that they are making their own batteries, right? But initially they have a contract that, you know, provides those batteries so they can actually go ahead and make the cars.
What else do you need, Ben? You need other components like the, you know, electric motors. What else do you need? You need steel and aluminum to make the body of the car, right? and you need like microprocessors for the you know nice big screens big screen there's only one in each of their cars right 15 inches in the model 3 right so you have some suppliers that provide you products or services right that you need for running the business like two weeks ago for example tesla sue alameda county because they were not letting them reopen their factory right i'm sure that the company went to a set of lawyers and you know asked them to file their the lawsuit on their behalf right so that will be a supplier for them right that's providing legal services in this case not necessarily only goods right for the company to operate okay and you're gonna have other companies that operate in the same marketplace right so if you're talking about cards right like we were talking about a minute ago Who is competing with Tesla?
Well, if you look at it broadly, any car manufacturer is competing with Tesla. Right now in the U.S., car sales for fully electric cars, I think they are roughly 3% of the market. So most car manufacturers are actually not making electric vehicles, or if they are making electric vehicles, they are selling very few of them.
So you could say maybe General Motors is competing with with Tesla right so that would be one of the competitors so maybe you'll see no only compete we're gonna define the market as electric vehicles and then General Motors still doesn't have electric vehicles actually it does right the Bolt so yeah General Motors will be a good competitor whether you define it narrowly or you define the market more broadly and by the way this definition is really up to you and and then we have marketing intermediaries these are companies that make sure that the products and services get to the final consumer right so let's move away from cars let's say that you're making i don't know let's say that you're gillette right and you're making razors right and so that you can shave right let's say that you know for some reason you want to shave you don't like to have a beer and in that situation how do you get those razor blades from the company to the final consumer instead of buying them directly from gillette you actually go to walmart or target or cvs right and those are marketing intermediaries they don't make anything but they actually uh enable you to get you know your products and services conveniently and when you want them so they provide some service to you in this case you will be stocking the product and you know providing a safe environment hopefully although with other riots you never know. And a safe environment where you can actually acquire the products that you are actually looking for. And then what do we have at the end of this puzzle?
It's the final consumer. And this is you and me, right? And it's gonna sometimes you're gonna be able to interact directly with the firm, right?
So for example in the case of Tesla, there are no dealerships involved, you buy directly your cars from the company. That's not the case with the case of General Motors, right? If you want to buy a car directly from General Motors, General Motors is going to tell you go and visit one of our dealers. Okay.
And take Coke, right? Let's say that you like Coke. You can go to their website and if you go to their website, you will see that you cannot buy Coke directly from them.
Okay. Actually, you might be able to buy one of the specialty cans that have your name on it. And they'll sell it to you for a lot of money. but a regular six pack of coke or or whatever size they sell i honestly don't know i don't buy and i don't buy coke and you're not going to be able to buy directly from them you're going to have to go through the store right so you're going to have these intermediaries okay we're going to talk more about this when we talk about channels good so this whole set of players is what you need to understand in the marketplace if you have any questions about any of this let me know Good.
So, like I was saying before then, marketing management, which is what we're going to be studying, is how we actually manage this whole marketing story, is going to be creating that value for a set of target markets, right? What is a target market? It's a collection of customers that we have identified as being similar, right?
And the reason why we're going to do this, by the way, I will mention it later on again, but it's because You know, ideally you want to treat everybody as an individual, right? Because we're all different. But from a business perspective, oftentimes that uniqueness is not so big that it basically does not necessarily require to do everything differently, okay?
So instead of treating everybody individually, which will be ideal, but maybe too costly oftentimes, unless you're talking about things like house right where you know there is a lot of margin in there because You're talking about a very expensive product. Okay, oftentimes what you're gonna do is you're gonna put people into groups We're gonna call those segments. Okay, and Segments are going to be defined by some characteristic, right?
So you could use for example Gender to keep it very simple. There are other variables and we'll talk about them later, right? So you could say males versus females, right? When it comes down to razor blades, you can go to the store and one thing that you'll notice is that there are products that are differentiated by gender. And if you're an engineer, you will notice that the differences between the two products oftentimes are mostly aesthetic, right?
It might be the color or maybe slightly different handle, but honestly, it's more to make it look different than anything else, right? And what we're going to do is we're going to try to group these customers in terms of something that makes them similar in this case it will be gender and then we're gonna try to identify which one of those segments are we interested in we're gonna call that a target market okay so for example it could be that I decide hey I'm gonna try to engage in in relationship or in transactions with males only or females only whatever it is or maybe both right and you don't need to pick and choose you can do multiple ones right that's okay And then what you're trying to do is you're trying to provide value for them so that they will actually create this relationship. And hopefully, you know, it will last a long time. Right.
The longer it lasts, if it's profitable, the more money I'm going to be making. Right. And to do that, what you're going to do is you're going to use this idea of the value proposition.
Right. So let me talk to you about it a little bit more. So the value proposition, it's basically a promise that you make to a customer. about the value that they are going to achieve if they engage in a transaction with you. So this is a forward-looking future promise of value, right?
And of course, when you're doing something like this, you're going to have to provide reasons to believe, right? So why should you believe that, you know, I'm going to provide you with a good hotel experience, right? So maybe you can discuss facts like, you know, what kind of amenities are in the hotel. So it's going to be fun because, you know, we have this, that, and the other.
So the value proposition is basically a condensing for the customer, what kind of benefits they are going to acquire if they engage in a transaction with you. So it's a very, very important piece, especially when you're talking about dealing with new customers, right? Somebody that has never bought your products or services, right? So distilling your value proposition in a way that is very clear, concise, and that it talks about the benefits as opposed to the product itself.
It's absolutely essential to make sure that people actually come and buy your product. Now, let's talk a little bit about how marketing has changed over time because it has quite a bit. OK, and let's start from the beginning.
And by the beginning, I really mean the beginning. Right. So go back a few thousand years.
Right. And. Maybe you don't want to go a few thousand years.
Let's go back to the Middle Ages, which is a long time ago, right? A long time ago, let's say about 1200, 1100, so almost a thousand years back. You had marketplaces, right?
There were places where you could actually buy stuff, but stuff was really limited and by stuff I mean everything, right? So if you look at an average person living in the Middle Ages, And they had, if they were lucky, they had a pair of shoes, one pair of shoes, maybe one or two pairs of socks, right? Maybe one or two pairs of pants, maybe one or two shirts, probably one. And then they'll have some garment, right, to put on top when they were cold, some sort of jacket or I don't know, something, right?
But products were very scarce. right? And oftentimes they were made by the person that was using them because you couldn't find them in the marketplace, right? So in a situation like this where there is very few to be bought at the stores, there are no stores, right?
There might be a location where people congregate, where they might bring some of the products that they have maybe excess of, or they have made if they are an artisan, right? But that's it. In that situation, marketing was about production. What do I mean by this? Well, if you could make it, you could sell it.
And the reason why you could sell it is because there was not a lot to be around, right? There was not a lot of competition. If you went to a marketplace, there was probably one place where they would sell bread because that was the only bread in town, right?
Maybe two, maybe, maybe, right? And bread being a common thing, but what about shoes? You'll have to make them, have them custom order and see if they can actually make them for you, right?
So in this situation, it's all about production. If you can make it, if you can improve your production system to achieve higher levels of productivity and because of that, be able to bring more product to the marketplace, you're going to be doing very well. And here, typical example will be Henry Ford, right? How he put on, he did a lot of things right.
by the way and we can discuss about this maybe another day but one thing that he's well known for is applying the concepts of a production line to cars right cars were a product that Started in the 19th century, the late 19th century, but they were very expensive. They were custom made for the most part. And ordering one was a bigger deal and you either had a lot of money or you had no car.
And his view, according to what we know and what he wrote, is that if he could make them cheap enough, people will buy them and they will become ubiquitous, which he was right. Right. And the way he achieved that. was by basically coming with processes that will enable him to his firm for make the cars for cheaper. And, you know, he created production lines.
They existed already in other product activities, but not in cars. And he improved it quite a bit. He was an engineer, right?
And also what he did is he simplified the product. In fact, there is a famous phrase from him that says you could have when it comes down to the Model T, which was one of the models that he launched early on. You can have any color so long as it's black, right? So he kept the product really simple.
It was the opposite to what was in the marketplace, which was customized. And the reason why he did that is because he wanted to be able to make more of it so that we could sell it for cheaper. Now, what happens as this goes on is that, you know, People get better at producing and because of that there is more product in the marketplace.
And as competition increases because there is more of the product, it's not only you but other firms are starting to make cars or you know dishwashers or bread right it doesn't really matter everything. What starts happening is firms realize that unless they make the products better they are not selling their products because there is enough supply in the marketplace. So here in the product concept, you move from production to product quality improvement, right?
So now what you're trying to do is you're trying to make the products better, you know, build a better mousetrap, right? And so this is quality improvement, ISO certification, making sure that your products are not defective, right? That they actually feel nice. And there's a whole science that comes behind this, right? things like ergonomics and for example talking about cars right we were talking about cars a quality improvement so there are people inside firms that all they do is they make sure that when you close the door it sounds right it doesn't sound teeny it sounds like thunk sounds like high quality because your perception of a car is not only dictated by you know knowing that the car is well put together but actually that it feels put together well put together right so quality improvement over here okay and like i said quality is not only objective quality but also perceived quality that's what matters right it's what people perceive what they notice now quality will only take you so far what do i mean by this well there are diminishing marginal returns right so if i create here a quick diagram it's not going to be pretty sorry i'm really bad at drawing okay and so here on this axis i have quality right And here in this axis, I have satisfaction.
Satisfaction is how happy you are with the product. Okay, sorry, it's going to be a little laggy. Okay, let me change color so that you see.
This is just the axis, right? And you can measure this how you measure quality, like number of falls per thousand or something like that. And satisfaction, it could be a one to seven score.
It's a Likert scale that says, you know, overall I'm really happy with this product. It could be a... a car, it could be chocolate, it could be bread, it could be a cell phone, I don't care, it doesn't matter, right, what's going to happen with satisfaction and quality is that the more quality you have, the more satisfied you are, but this is going to go at a diminishing rate, and it doesn't really go down, I didn't draw it right, this is going to keep increasing, but it increases at diminishing rate, okay, so in the beginning, a little change in quality is going to go a long way in terms of how much satisfaction you get.
but the same increase over here of one unit of quality whatever that measure is it barely gets you any improvements in satisfaction right and so when you have already a nice car having an even nicer car doesn't make a big difference right because you already have all the features that you want and it's already nice as it is right good so when quality gets to a point where further improvements didn't make much of a difference then people started focusing on selling selling is just basically trying to convince people to buy the product because it has certain features or benefits, right? And what you're doing is you're putting your emphasis on the communications of those value propositions that you have created, okay? So this is about doing advertising, etc., because now it's not good enough that you're making it or that it's good quality, but also you need to sell it because there is so much in the marketplace. And this only gets you so far.
Again, the same thing, right? Eventually, everybody's doing the selling, and then there's just a cacophony of people telling you, buy, buy, buy, buy, which is what you find in a lot of places, right? There is a lot of clutter, a lot of marketing clutter, especially advertising, right?
It's everywhere, right? And here, I will argue is where the break happens in terms of the marketing philosophy. Over here, it assumes that the firm knows what it is that they know how to do, and they're just going to sell that to you.
So I know how to make cars. I'm going to make a better car. That's here. And then I'm going to sell it to you. That's here.
So it assumes that the firm knows. So I'm a fantastic engineer. I can do something cool, sell it to you. Over here, from here on, the story changes, right?
Now what we're going to do is we're going to flip the story. we're going to start with the customer instead of starting with what i know how to make right whether it's cars or provided service like you know maybe i'm an accountant and i can do taxes for you right like i was mentioning now instead of starting with what i know how to do what i'm going to do is start with the customer try to understand their needs wants and demands we've already talked about them right and after we really truly understand our customer now we can design something to help them what are the pain points what are the things that are not working appropriately so once that i can actually identify those what can i do i can create some new value right something better okay good now and that's the marketing concept right the idea that you start with the customer you design a product or a service that is unique And then you engage in that relationship with the customer because you started from what they wanted and you created something that is valuable to them, like I was mentioning. This is very different than before.
And then finally, there is this societal marketing concept, which is kind of hot now. I philosophically have some problems with it, and we can talk about why. But the idea is going beyond the customer to society overall and do what's best for society.
Now, the problem with this. If you've seen the news at all, it's that it's very hard for people to agree on what's the best thing to do for society. Case in point, COVID-19, right?
So if you ask some people, like maybe elderly and people that are involved in healthcare, they'll tell you everybody needs to be in lockdown, nobody needs to get out, right? But if you ask other groups of society, they will tell you that they want to reopen the economy because we are losing jobs, the economy is tanking. And the consequences of this are going to be really bad, worse than maybe the disease itself, right?
And there is this back and forth, right? And this happens with so many things, right? You know, if you look at what being green and recycling, some people like it, some people dislike it, right? So what I'm trying to say is the moment that you start talking about doing what's best for society, who decides what's best for society? And by the way, there are...
Several examples where you can see companies that have moved to this societal marketing concept and it has backfired on them If you're interested in this you can look for example Google Gillette and they had an ad campaign about toxic Masculinity and it cost them three billion dollars. They lost three billion dollars six months after that because people still buying the products and Because they were upset right so because they are portraying men in a way that you know, they don't agree And you may agree or disagree. I don't care. It doesn't matter. The important thing is for you to understand what the consequences are to looking at society as something homogeneous.
It is not. People have different interests. Now, here, you're not doing that.
You are looking at the individual, right? And you're trying to start with what satisfied that individual. And we can make tradeoffs, right?
But society, I think it's tricky, right? So I'm not a big fan of this. That doesn't mean you need to not be a big fan.
You just need to understand what it is. and run with it right if you think this is a great thing just do it right some people are all excited about it right it's kind of the hard thing but it does have cost and i want you to understand that so how are you going to provide that value for the customer and the answer is your marketing mix right so what you're going to do is you're going to come up with a product That hopefully fulfills the need of those customers that you're trying to target. You're going to price it appropriately. You're going to promote it, right? Things like advertising, sales promotion, discounts, right?
And the last P, which is kind of funny, right? It's place or also means channels of distribution, right? Place is because you wanted to make it four P's, right? To make it easier to remember what it is. but nobody really calls it place except for when you're talking about the four piece but it's basically getting that product to your customer right how are you going to get that product or service to your customer and that's basically channels of distribution how you're going to distribute that product okay and an integrated marketing program is basically taking into consideration all these variables in a way that they work cohesively right so if your product's supposed to be premium your price should be premium because otherwise people get a mixed message and they don't know what to do with that right so everything needs to work in conjunction you have a phenomenal car and you're selling to me at a premium but the dealership it's not very nice right and it's just sending the wrong message to the customer and they're just not going to come right so the value needs to be an overall picture of all these elements that are important in the exchange okay now Like I was mentioning before, not only we want to engage in exchanges with customers, but we want to do so in a repeated manner, right?
So we want to make sure that you keep coming back. So you're happy, and because of that, satisfaction is going to be one of the key variables that we're going to be looking at when we're trying to determine how well we're doing in the marketplace. So it's not just about profits today. It's about profits in the long term, and to achieve those profits in the long term, which are only going to happen when you're providing that value for the customer. you need to look at satisfaction.
Let me talk a little bit more about that. So what is satisfaction? It's essentially the extent to which that product has fulfilled the benefits that it has promised and has gone beyond what you expected, right? So a key aspect of satisfaction is what expectations do you have prior to engaging in a transaction with the firm. Okay, because of this, it is absolutely essential that you manage expectations, right?
And it's a tricky business because if you lower the expectations too low, you can overcome it. So people are going to be more satisfied. So if you tell me, for example, that the pizza is going to arrive in four hours, but you send it to me in two, that's great in the sense that I expect it four and you send it in two.
So I'm going to be happy. However. If you tell me that it's going to take you four hours, maybe I'm just instead of buying from you, I'm going to buy from somebody else who tells me that it's going to have it here in 30 minutes.
Right. So the expectations cannot be lower so much that people just don't get excited about it. Expectations play a dual role. Right. If your expectations are high, you think that the restaurant is going to be good.
You are more likely to go. Now, of course, if they are impossibly high, you're always going to be disappointed. Right. So you need to manage those expectations and satisfaction is going to be a result of how those expectations are actually managed.
So you need to explain to people what it is that they are going to be receiving in terms of product or service, okay? And that needs to be high enough expectations that they will come but not so high that you will never delight them by fulfilling those expectations and going beyond. Now to put emphasis on not only satisfaction but it is another metric that is very important which is customer lifetime value.
So the idea is if you look at customers as a potential partner that you're gonna try to establish a relationship with long term and you stop thinking about the sales today you start thinking about the sales tomorrow right so you need to have some sort of metric that enables you to basically value how much the relationship is worth to you right and customer lifetime value is essentially that metric right that basically looks at the exchanges that you're going to have with the customer over the long term and how much are they valued today now this metric comes from finance right so this is essentially finance applied to marketing but it's important for you to understand so i'm going to walk you through an example it's not in the book so pay attention if you have any questions let me know okay So here is the formula for customer lifetime value. Now don't get scared about the formula, right? I'm going to break it down to you. Hopefully it's going to be simple.
Okay, I'm going to give you some simple numbers. The cool thing about customer lifetime value is you can use it in any business. Okay, it's not easy to estimate some of these things, right? You're going to have to guess a little bit. But if you're an experienced person in that industry, you can actually come up with numbers for it.
So let me walk you through it. First, it starts with the sigma, right? Sigma is just a sum.
Okay, so if you know how to add, you're fine. We're just going to add multiple terms here. I'm going to break it down for you later. And you're adding from A1 to N, where N is a large number, right?
This we're going to call the horizon. So let's say that you think that, you know, you can make plans five years out in your business. So N will be five. What do you think that, you know, customers are going to stick to you, you know, if things got good for maybe five years, right? Planning out more than five years may be difficult, right?
If you're in a technology space, you don't know what's going to be after five years, right? In other industries like insurance, maybe N should be 10 or 20 because, you know, relationships tend to be long term, right? So you decide how long you want to be out.
And the example we're going to use, we're going to go five years out, but you can make it longer. That's really your choice, right? Then we're going to have here margin.
What is margin? Margin is the difference between your price and your variable cost, right? So you're charging X for your...
for your product or service right and it costs you why to make well the difference between x and y that's your margin that's how much you are pocketing and clean of your variable cost then you have the cost of marketing right this could be things like advertising or sales people that you have to pay to actually have and that product sold right so you're gonna take your margin and you're gonna subtract your other cost which is gonna be your marketing cost okay so what you're gonna have here is essentially your profit right per unit so for each unit that you sell to this customer of whatever you're making right it could be a car like I said it could be a house it could be bread could be coke it could be whatever you like right and it could be life insurance right if you want to make it boring and nothing wrong with life insurance just not very exciting and so we're gonna take this this is gonna be our profit per unit right or for time period in this case and now what we're going to do is we're going to acknowledge the fact that some of our customers they are going to go away what do i mean by going away it means that tomorrow let's say that you're doing this on a yearly basis they will just go to either the competitors that will stop buying the product category altogether right and we're going to call this the retention rate this is the people that stay with us right so if this is 90 that would mean that 90 of our customers Stay with us every year, hence 10% go away. And they're going to keep going away, right? And we're going to acknowledge that by, you know, elevating this to the power of the period that we're in.
So on the first year, sorry, in the first year we're going to lose 10% of the customers, but on the second year we're going to lose more than 10% because it compounds, right? So, yeah. So you're going to go from having 90% of your initial customers to having 81%.
of your initial customers and so on and so forth and then finally what we're going to do is we're going to acknowledge the fact that the money tomorrow is not worth the same as the money today and the way we do this is using a discount factor so we're going to discount our money because the money five years down the line it's not worth the same as today two reasons why one is inflation right we know that things are going to be more expensive a few years down the line But two, there is risk associated with that money. You still don't have it, right? So you should acknowledge that with D. So let me see how you apply this formula. Let me give you an example, right?
So let's just come up with simple numbers, right? So we have a price of $100. This is, let's say this is for an inexpensive cell phone, right?
Charging $100. Let's say that the variable cost of making that cell phone is $50. That's how much it costs the company to make the thing, right? and you can get this from your accounting department your price is your price whatever you're charging customers if they can buy it directly from you right so your margin is going to be 100 minus 50. so it's 50 margin let's say that your cost of advertising is 20 dollars right and by the way when i say advertising it could be any other function that marketing is fulfilling it doesn't have to be that it could be customer service it could be multiple say 20 dollars right And then you have a retention rate of 90%. That means 10% of your customers go away every year.
Okay. And let's assume that the discount rate is 10%. This will include inflation plus any other interest that you should be achieving because of the risk involved, right? So if you're getting a loan, right, 4% right now for a fixed asset like a mortgage, inflation is about 2%.
So that will be 6% plus. Businesses are more risky than a mortgage. So because of that, we are adding some extra. So let's say that is 10%.
Good. And then finally, we have an acquisition cost. This is the amount of money that it costs me as a firm to acquire those customers, to bring them in.
For example, in the case of a cell phone, this could be, well, if I'm Verizon, it could be giving a discount on the phone. So this could be, you know. give me the cell phone just for $50 instead of $100. So put in MSRP, $100, but your cost today is $50.
So this could be an acquisition cost. Okay, good. So now what happens on the first year?
On the first year, A is equal to one, right? And now all we're going to do is we're going to apply this formula right here. Okay, so I'm going to take the margin, right, which is going to be 50. minus my cost of marketing, which is going to be 20. So it's going to get, I'm going to have $30 in there. And then I'm going to take my retention rate, which I have right here, and I'm going to elevate it to the power of one minus one. One minus one is zero, right?
And I'm assuming you know this, but any number that you elevate to the power of zero gives you one, okay? You will see that in a minute right here, right? So we have 30 here is the profit we're making per customer after we discount our marketing cost and our variable cost.
And then here in the denominator, what we have is we have year one. So A is equal to one right here. And because of that, you are dividing by 1.1.
So one plus 0.1 to the power of one. By the way, that 0.1 is this discount factor. So what do we have in the end? We have 30 times 1 divided by 1.1, which, if you have a calculator handy, you will see is $27.3.
This is all in dollars. Good. Now, on year 2, we do the same calculations, but notice the only thing that changes is that now A, instead of being 1, is 2. So this number here changes. So now we're not going to the power of 0. We're going to the power of 1. So you're going to have 0.9, right?
And the same thing you're going to have here to the power of 2. Okay. And when you do these calculations and you repeat the same thing, you're going to get 22.3. So what's going to happen is after the year goes by, any payouts that I get are going to be worth less than before.
Before it was 27.3. Now it's going to be 22.3. Why? Because like I said, money tomorrow is worth less than money today.
Okay. And you repeat the same thing for year 3. And as you can see, the only thing that changes here is 3 and 3, right? And you do these calculations in your calculator and you'll get 18.3. And you can repeat this to infinity. Let's just assume that in our case, our time horizon is 5. So let's say that we're going to do this for 5 years because, I don't know, we're in a technology space, cell phones, right?
And we don't know what's going to be down the line in 5 years. So we think 5 years as far as we can plan out. Okay.
And in that situation, if you repeat the calculations and you add all the terms, remember that big, ugly sigma that we have in the formula is just summation, right? So what we're doing is we're adding these terms, that they get smaller and smaller over time, okay? They get smaller because of two things, honestly. One is because you're discounting it, but also because you're losing customers, right? Remember, we have that retention rate in there that is going to make it smaller and smaller over time.
And then at the end where we are subtracting here is... your acquisition cost. Oh, I make a mistake here. This was supposed to be 50. So I made a mistake. You should say 50 here.
My apologies. Okay. You can see it is correct here. It's 50. And then what do you end up having is you end up having a profit of 45. So even though in the first year you don't make any money because it costs you $50 to acquire that customer and it only pays out $27.3. In the long term, in five years, you are making money with the customer.
So this is the value of customer lifetime value, where you can value how much a customer is worth to you financially. And you can make decisions based on this. There are other metrics that you can use also, like share of the customer.
That means what percentage of their budget. is spent on your company right so for example if i'm target right i want to know how much of my budget for groceries and you know any other products that i can buy from target i'm buying a target if i'm buying 30 of it that means that my share of customer because i'm spending money in walmart also and maybe in aldi let's say right my share of customer will only be 30 so this is the view that you know the customer is voting with their wallet and you want to know how much they are living in your firm, they might be spending a lot of money, but if they are spending more money in other places, share of customer is a good metric to basically try to improve their relationship with the customer. This is a good indication of how much they value your firm, right?
Because if they value it a lot, they will spend a large percentage of their expenditure in that product. Customer equity is basically the reverse of the customer lifetime value. It's what happens when you add all those customer lifetime values of all your customers.
So this is a good metric of how much your brand is worth. Okay. Customer equity is kind of the flip side of brand equity.
Because your brand is valuable because your customers are there. Right. Because your customers are going to keep buying your product. Okay. Now.
Let me say this, we're going to talk about digital a little bit throughout the class, but digital is the big change in the last 10 years in marketing. It's the fact that people now spend time on their phone, on their tablet, social media, and where they spend time, that's what marketing is. And so a lot of the big changes that have happened in marketing, other than what I've already talked historically, is the fact that now digital and social media play an absolutely prevalent role and we're going to talk through it as we discuss products as we describe prices etc etc okay and what other things have changed other than digital media non-for-profits are big right and they behave a little bit different because they don't care so much about profit although they still need funds to run and because of that they're still going to want to maximize the impact that they have in terms of exchanges in this case it will be through maybe donations etc okay You have the globalization.
Now, this has been like this for the last, I will say, at least 40 years, that globalization has gotten bigger and bigger. And more and more important, that's when you exchange goods and services with other countries. I suspect, and this is just happening as we speak, this is going to slow down or even start going backwards because of COVID-19.
So it's going to be interesting to see when the book was printed last year, right? globalization globalization globalization right now we'll see i think this could actually be changing so that's going to be interesting and scary but interesting okay and then this idea of sustainable marketing right so taking into consideration the environment and what can you actually do in the long term not only what you can do today and this is all that we have discussed today which is a lot okay this is the whole marketing system right starts with understanding the customer you always start with the customer first right and then based on that what you're gonna do is you're gonna design a value proposition and hopefully based on that value proposition good product or service right and then you're gonna create your 4p program right your price your product and your place right and then you're going to build a relationship with your customer based on that value that they actually see they will hopefully stay right if their expectations are fulfilled and then you're gonna be able to track that using customer lifetime value like we have mentioned okay I think that was a handful for today