Recap and Some Additional Concepts

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November 8, 2017

Arvind Rangaswamy

Penn State University

Recap and

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Recap

Key Questions to Ask



Have I aligned my business and my digital strategies?

 What are your strategic objectives?

 Should digital opportunities drive business strategy, or should business strategy drive digital strategies?

 Have I created the appropriate organizational culture and structure for implementing potential digital strategies?



Am I doing enough experimenting and adapting in the digital

space?



Have I contextualized my marketing (e.g. real-time marketing,

customerization/personalization at scale)?

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Recap

Key Questions to Ask



Is my content of sufficient “quality” to drive traffic and

transactions? (Content quality can be defined by uniqueness,

authoritativeness, timeliness, easy to find and digest, “better”

than content provided by competition, etc.).



Am I facilitating closed-loop consumer decision processes

(especially with respect to integrating social media)?

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Three Areas Covered in These Slides



Online Advertising



Omni-channel/multi-channel retailing

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The New World of

Display and Search Advertising

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Traditional Advertising Versus

Online Display Advertising

 One-way

 Dedicated bandwidth

 Temporal multiplexing (Content and Ad generally separated)

 Tradeoffs between reach, richness, and frequency

 Consumers reactive

 Static ads

 Weak link between advertising and response measurement --Recall, Attitudes, Intentions

 Two-way

 Shared bandwidth

 Spatial multiplexing (Content and Ad generally co-mingled)

 Fewer tradeoffs between reach, richness, and frequency

 Consumers proactive

 Adaptive ads

 Stronger link between ad and response measurement --Impressions, Shares, Clickthroughs

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Broadcast -- Temporal Multiplexing

time 100%

Bandwidth

Output

Input

C o n ten t A d ver ti si n g Temporal Multiplexing

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Online -- Spatial Multiplexing

time

100%

C o n ten t A d ver ti si n g Spatial Multiplexing

Bandwidth

Output

Input

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Display Ads: The First Banner Ad

This is the first banner ad. Inserted by AT&T at

Hotwired.com in October 1994. It got a

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Display Advertising

Banner: 468x60

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Search Advertising

Paid Product Listing Ads Paid Text Ads Text Ads Organic Listings

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Potential Benefits of

Search Advertising



Can reach “motivated” customers.



Potential for communicating longer, more

content-rich information.



Quicker and less costly to change content seen

by customer.



Segment-of-one customization of content (e.g.,

landing page customization).



Integrates advertising with selling (closed-loop

marketing).



Can collect info about who views ads to gauge

impact (Advertising and ad research co-mingled).

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Some Terminology



Keyword: Words and phrases that an advertiser bids on.



Search term: What a customer types into the search box

(or speaks to Siri).



Paid Search

– this is what “surrounds” the organic search

results at Google.



Display Advertising (e.g. Google AdSense): An

advertisement that is shown to you on a web page to

where you are taken when you click on a link from organic

listing – here Google inserts Ads on the pages of the

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Overview of How

Google AdWords Works

Distributed

Web Crawler _{Keyword Auction}

Process

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Keyword Index

Database Keyword Ad_Database

7 Page-rank Process These sources contain relevant ads Google.com 6 Cached Web Pages Web Sites/ Landing pages User’s Browser 3 1 2

Numbers represent typical sequence of events starting with 1.

4 4 6 5 8 8 WWW Web map 1 1 1

Dotted lines indicate browser gets display components from different sources through Google.com.

Customer initiates process

These activities take place in the background. The other activities occur as a result of a user query.

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“Funnel” Analytics for

Assessing Online Ad Effectiveness

$$

Spent

1000 10 10% Clicks Clickthrough Rate (CTR) Conversions 1% 1% 2 Impressions 20% Conversion rate

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Some Online Advertising Metrics



Impressions or Exposures

 The number of times a page containing the ad is viewed (measured as the number of times an ad rotates through or pops-up on a web site).



Cost-per-thousand impressions (CPM)

 The cost of gaining 1,000 impressions/exposures. For example, if a banner ad has 30,000 impressions at a web site at a CPM of $5, the total cost of the ad is $150.



Click-through-rate (CTR)

 The number of visitors delivered to a site by a particular advertisement or the percentage of people who click on a web banner and visit a site,

computed as a percentage of impressions.

 An ad that generates only 1000 exposures, but gets 40 clicks is more

efficient than one that generates 10,000 exposures but only generates 100 clicks.

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Some Online Advertising Metrics



Cost-per-click (CPC)

 It is the price you pay for each click on your ad.

 Determined via a formula that takes into account your maximum bid and bids of those you are competing against, adjusted for quality of your ad.



Cost-per-visitor (CPV) – mainly for display advertising

 The cost of a given ad divided by the number of clicks obtained from it.  It combines CPM and CTR to evaluate effectiveness of ad placements  On a website with a CPM of $20 and a CTR of 2%, it costs you $1 per

visitor; a website with a $40 CPM and a CTR of 10% costs you $0.40 per visitor. The higher CPM ad actually has greater value to you.



Cost-per-conversion/Action (CPA)

 Cost of a given ad divided by the number of orders (or other measures of conversion such as filling out a call request) received through that ad. CPS is cost per sale.

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Cost Comparisons for Media

Alternatives

Source: Compiled from several sources; These are only indicative and the prices vary significantly depending on specific media vehicles under each option, and the extent of targeting you desire.

Medium Measure Approximate CPM

At-retail advertising Store traffic $1-$9

Radio Listeners $8-15

National TV (all) Household viewers $4-18

TV-Targeted Household viewers $15-45

TV Ad in Superbowl Household viewers $25-$30 Magazine/Newspapers Circulation/readers $5-$75

Search Engines Clicks $0.01-$75 (per click)

Branded websites Impressions $5-$40

Youtube Impressions $5-12 (avg. $7.50)

e-Mail Impressions/Clicks Free-$40

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Omni-channel (Multi-Channel)

Marketing

Omni-channel marketing is a firm capability for

synchronizing channels or touchpoints (e.g.,

website, store, mobile) to provide customers a

seamless experience across these multiple

channels with respect to information, products,

services, and support (or any combination of

these).

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Traditional

Multiple-Channel Marketing

Outside Reps

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Communications Channels Service Channels Transaction Channels Advertising /PR e-mail Online Telephone Store Kiosk Sales Force Store Service people Telephone Online

F

u

lfi

ll

ment

(Deliv

ery

,

Sto

re p

ick

u

p

)

Sales person Online Catalog Store Telephone

Alternative Consumer “Journeys”

Social media

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Omni-Channel Marketing

Product

Divisions

Customers Catalog Sales

Force CenterCall

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The Dilemma in Reaching

Heterogeneous Customers

Sales calls

Live seminars

Access to KB

Samples

Call center

Webinars

Web/Mobile

Self-service agents

Newsletters

Email alerts

PR/Advertising

Alte

rnat

iv

e

T

ou

ch

po

in

ts

Customers

Profits

80%

20%

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Differential Costs of Servicing

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Costs at a Small Software Company

(Before and After Web-Based Self-Help)

Before

After

Phone (No. of calls per

month )

80,000

25,000

Chat/E-mail

8,000

70,000

Self-help

-

330,000

Average Support Duration

5 Minutes

1 Minute

Support costs

$850,000

$310,000

Contacts per month

88,000

425,000

Cost per contact

$7.50

73 cents

Observation: Cost per contact goes down; so does contact

duration, which could be a bad thing!

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Attractiveness of

Omni-channel Customers

Shopped in One Channel Shopped in Two Channels Shopped in Three Channels Shopped in Four Channels Revenue ($) 193,274 69,865 322,149 1,682,853 Share of wallet 0.20 0.32 0.48 0.72

Past customer value ($) 152,502 97,798 690,514 3,428,024

Likelihood of staying Active 0.11 0.15 0.38 0.67

Source: Kumar and Venkatesan, Journal of Interactive Marketing (Spring 2005) Note: Within a row, cells of the same color are not statistically different from each

other. The analysis is based on data from 3,721 B2B customers for the period 1998-2002. Data is from a computer hardware and software company.

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The Strategic Challenges of

Omni-channel Marketing



Connecting the real world to the digital world at the point of purchase

(e.g., mobile apps, iBeacons, inventory visibility).



Providing brand consistency and seamless experiences across all

touchpoints (this is often difficult because of organizational structure).



Facilitating multiple consumer journeys and “path dependence” to

encourage use of low-cost channels and devices. Offer “deep-linking”

to the best customers.



Making shopping social, and creating a bazaar-like atmosphere – this

applies to both online and offline retailers.



Deploying integrated, IT-supported real-time supply chain, inventory,

and customer repository systems.



Instituting appropriate organizational structure, management

incentives, and measurement metrics.

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Brand Presentation Consistency

Sephora

Ca

ta

log

Catalog

W

eb

site

Store

Pri

nt

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Online Pricing

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Internet’s Impact on Pricing



Differential pricing (Different prices for different

individuals or segments)



Flexible pricing (Different price options for the

same person)



Dynamic pricing/Price discovery (Real time

pricing based on context, competition, etc.)

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Traditional Pricing Meets

New Realities

Traditional Economic theory suggests that

Price = Marginal cost

is the likely outcome of competitive markets.

Traditional Economic analysis also suggests that a

necessary condition for Pareto- efficiency is:

Marginal cost = Marginal willingness to pay.

Question: What happens under high fixed cost and

near zero marginal cost? (This is the case with many

digital products).

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Solution: Differential Pricing

Making every customer pay marginal costs will not be

Pareto efficient in this case.

An alternative approach for seller is Differential pricing/

Nonlinear Pricing:

-- yield/revenue management

-- two-part tariffs, as used by ISPs such as AOL -- two-tier pricing through loyalty cards.

Internet and other digital technologies are making it

easier for sellers to implement differential pricing in

many categories, such as perishable products, and

products with high fixed costs.

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Price Differentials

First Degree — Charge consumers exactly what they are willing to pay for product

(e.g., college tuition)

Second Degree — Offer consumers a menu of

options at different prices that correspond to consumers’ willingness to pay for the different options

(e.g., volume pricing)

Third Degree — Divide consumers into distinct segments, charging different

prices to different segments (e.g., movie-theater pricing)

Price

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Consumer’s Demand for Electronic Music Value of . . . First Single: $6.00 Second Single: $5.00 Third Single: $4.00 Fourth Single: $3.00 Fifth Single: $2.00 Sixth Single: $1.00 Seventh Single: $0.50

Production cost of a single: $1.50

 Buy first three singles at $4 per single

 After three singles have been purchased, buy two additional singles for $2 each

 $4 is “left on the table” (consumer was willing to pay $20 for five songs)

– Revenue: $16 – Profit: $8.50

 A flat subscription fee of $12.50 can be charged.

 In addition to the flat subscription fee, a fee of $1.50 per single can be charged.

 Given his/her demand schedule, the consumer is willing to pay the subscription fee and purchase five singles at $1.50 per single; recall that the consumer values the five singles at $20

– Total Revenue: $20 – Total Profit: $12.50

 Economically speaking, it is optimal to use a flat fee subscription model only when the marginal cost of

Volume Discounts and

Two-Part Pricing

Simple Volume Discount Pricing Plan

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Flexible Pricing



Bundled prices (bundling across products, users,

or time) versus “Pay per use.”



Lease versus buy

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Financial News

Legal News

Current

News Value Bundle

E-Information’s Price $3,000 $1,500 $1,250 $5,000 Company A’s Valuation $3,000 $1,500 $500 Company B’s Valuation $3,000 $750 $1,250 Company C’s Valuation $3,250 $750 $750 Strategy Result

Company A: Purchases value bundle. Implicitly pays $1,500 for legal news, $500 for current news.

Company B: Purchases value bundle. Implicitly pays $750 for legal news, $1,250 for current news.

Company C: Purchases financial news. Pays more ($3,250 vs. $3,000) for financial news relative to Companies A and B.

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Price Discovery

(Involves both Buyers and Sellers in Price

Determination)

Buyers

Exchange/Marketplace www.tradeweb.com Covisint.com Auction eBay.com Ubid.com Ad Exchanges Bidding Ariba Priceline Haggling/Negotiation