How to Think About the Future

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What do you hate about gas stations?
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• Shell Oil A Case Study
• Customer Analysis for New Product Launches

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The highly competitive gas industry
Each 1/10th of a point in share is massive
Situation Late 1990s Shells ROI not meeting
corporate standards and is being squeezed by
independent stations.
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The Majors Across all Markets
So is all lost? How does a company compete in a
market where the product itself appears to be
undifferentiated?
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So what should Shell do???
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Answer The Keys are

• Understand your customers needs
• Realize that customers dont buy products
  composed solely of attributes, but an
  experience.
• Customers are heterogeneous (segments exist).
• Some segments are attractive, others are not.
• It is customer perception, not reality that
  matters.

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Maybe Most Importantly Preference is not
everything

• Product attribute fixation
• Marketing research focuses on attributes Popular
  Attributes are important in driving use Easy
  People talk about attributes Reassuring
  Managers can relate to customers that
  evaluate brands using a logical model,
  which means decisions are also easier to
  predict

But, people dont buy attributes, they buy
products that are holistic perceptions of a
combination of attributes
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Maybe Most Importantly Preference is not
everything

• AC Nielsen Bases Model
• Market Share Share of Preference x
• Share of Awareness x
• Share of Distribution

Just do better?!, But How?
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Optimal resource allocation

• Diminishing marginal returns
• Returns are steeper for lower performing aspects

90
75
60
Variable
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Where do I get these curves from?
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15
0
0
25
50
75
100
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Spending
Apply spend to those aspects where slope is high!
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So, what did Shell do?Shell Goes High Tech with
Information Sources

• Source Richness Cost/person Purpose
  
• In-depth interviews High
  High Exploratory
• Focus Groups High High Exploratory
• Standard Survey Medium Medium
  Understanding
• (Semantic Analysis)
• Special Studies High High Actions
• (e.g. conjoint, MDS)

More details to come this is our lecture. How
did Shell utilize all of this information?
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Most Common Form of Qualitative Research in
Marketing Focus Groups

• Rationale in-depth probing, unstructured
  discussion, ability to observe dynamics
• Format 8-10 individuals, 1-2 moderators, about
  1-hr long, incentives for participants
  Homogenous Subject pool
• Common Uses Products, product concepts, ad
  copy, script for further studies, questionnaire
  design
• Upsides/downsides (methodological and
  implementation)?

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Pros and Cons of Focus Groups

• Pros
• Good for getting in-depth information
• Enables complex issues to be discussed
• One persons experiences or feelings often
  stimulate others
• Process highlights differences between consumers
• Allows for spontaneity

• Cons
• Not representative
• Difficulty getting attendees
• Group process may inhibit frank exchange
• Minority viewpoints may not be heard
• Need for skilled and experienced moderator

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The Use and Misuse of Focus Groupsby Jakob
Nielsen, 1997

• Focus groups are a somewhat informal technique
  that can help you assess user needs and feelings
  both before interface design and long after
  implementation
• Focus groups often bring out users' spontaneous
  reactions and ideas and let you observe some
  group dynamics and organizational issues.
• Since there are often major differences between
  what people say and what they do, direct
  observation of one user at a time always needs to
  be done to supplement focus groups.
• Although focus groups can be a powerful tool in
  system development, you shouldn't use them as
  your only source of usability data.

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The Use and Misuse of Focus Groupsby Jakob
Nielsen, 1997

• For participants, the focus-group session should
  feel free-flowing and relatively unstructured,
  but in reality, the moderator must follow a
  preplanned script of specific issues and set
  goals for the type of information to be gathered.
  During the group session, the moderator has the
  difficult job of keeping the discussion on track
  without inhibiting the flow of ideas and comments
• As with any method based on asking users what
  they want -- instead of measuring or observing
  how they actually use things -- focus groups can
  produce inaccurate data because users may think
  they want one thing when they need another

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Shells Customer Segmentation Study Methodology

• Surveyed 5000 respondents in 6 markets
• Questions included
• Behavior Patterns
• Desired Features
• Frustrations
• Brand Ratings
• Psychographics
• Demographics

• Statistically identified 10
• distinct clusters
• of customers
• with different
• needs/attitudes

• Studied survey
• results from each cluster
• Developed name personality
• for each cluster

• Understand perceptions of clusters

• Conducted in-depth inteviews
• and focus groups to understand key issues.

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Lets discuss Segmentation in detail
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The idea behind segmentation
Segmentation
Mass advertising
1-1 Marketing
Level of customization
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Why Segment the Market? Variations in Marketing
Actions Based on Segment Differences
Products Product design and positioning more in
line with the needs of consumers in each segment.
Customer Communications Better directed media
selection and advertising messages Salesforce
allocation to key customers Customized sales
presentations
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Distribution Selection of distribution channels
consistent with segment buying patters
Pricing More precise guidelines for price
discrimination by levels of price sensitivity in
each segment
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Advantages of Segmentation
Specialist Cost Price Monopoly
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Major Segmentation Variables
Demographics Buying Behavior Personal
Characteristics (Psychographics)
Which would you use?
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Psychographics

• Definition the use of psychological,
  sociological, and anthropological factors
  combined with demographic information to identify
  market segments with a propensity to favor some
  product groups or characteristics over another
  due to the unique combination of these factors.

DEMOGRAPHICS PSYCHOGRAPHIC PROFILES
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So how does market segmentation
work?Fundamentals of Cluster Analysis

• Cluster analysis seeks to group objects such
  that segments are created that are as homogenous
  as possible given the choices by the researcher
• Cluster analysis works on the principle of
  maximizing the between-cluster variance while
  minimizing the within cluster variance
• Every object is allocated to one cluster

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Illustration in two dimensions
Price
Quality
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K-means clustering

• K-means clustering is the most commonly used
  clustering technique.
• It is an iterative technique that seeks to
  allocate each observation to the cluster that is
  located closest to it
• The number of clusters is chosen by you
• Business decision
• Diminishing marginal returns

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Profiling

• Once you determine the market segments, to make
  things actionable you want to compute who is in
  what segment (profiling)
• Here is where you use demographics and behaviors
  for each segment.
• Useful for reach and targeting purposes.
• Name the segment (ex Yuppie Young Urban
  Professional)

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Summary of Market Segmentation

• Cluster people based on their needs
  (Psychographics)
• Then use demographics and psychographics for
  reach
• The question then becomes what is the value of
  each segment. This is what Shell did next.

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So which segment(s) should Shell go after??
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How to Select Segments to Target

• Market Attraction
• Segment size
• Amount and strength of growth
• Value of segment
• Synergies between segments
• Company Fit
• Current position in segment
• Ease of entry into segment
• Competitive Environment
• Number and strength of competitors
• Ease of competitive entry into segment

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So which segment would you go after?
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Brand Identities Considered
Quick Easy (Premium Speedsters, Simplicity
Seekers, Safety Firsters)
One Stop Convenience (Value Minded Planners,
Struggling Survivors)
Friendliest Service (Relationship Shoppers,
Comfort Zoners)
Best Gasoline Performance (Hands on
Individualists,
Premium Speedsters)
Community Support (Comfort Zoners)
Lowest Price (Low Octane Commuters,
Sentimentalists)
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How do you decide on an identity??
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Identity Selection

• Focused selling to segments
• own a set of customers (80/20 Rule of Sales)
• Chose segments based on margins, volume, and
  Shells capabilities to meet those segments
• ex Leave Low Price to Independents
• Choose an identity in which segments have natural
  overlap and synergies (You cant be everything to
  everybody)

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Shell Customer Segments Target Segments and
Characteristics

• Premium Speedsters
• Personality
• Internally driven, Style Detail Oriented,
  Competitive, Mentally Active. Car Enthusiasts
• Gas Purchasing
• Fast Pumps, Quick Access, Quick Pay
• In a Word... Driven Goal Oriented

• Simplicity Seekers
• Personality
• Overburdened, Frustrated. Loyal to Others,
  Caring, Sensitive. Hard to Motivate.
• Gas Purchasing
• Reactive. Want things that make buying gas easy.
  Major Brand Product Reassurance.
• In a Word... Overwhelmed

• Safety Firsters
• Personality
• Confident, Self-Assured, Responsible
• Control Oriented, Well Prepared
• Gas Purchasing
• Want Cleanliness, Comfort, Efficiency, Safety
• In a Word... Safety Minded

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Plan Implementation (How do you align your local
franchises?)

• Allow local retailers flexibility to choose their
  own implementation
• Feedback system so that local retailers can say
  what worked
• Surveys throughout the year
• Reward retailers based on volume and profit
  numbers
• Develop a coordinated Media campaign
  (commercials!!)

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So what would you offer the Quick and Easy
Segment?
You cant just talk the talk, you must walk the
walk
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Options Considered

• Soft drinks and coffee at pumps
• Unmanned stations
• Cash accepted at pump
• Bar code payment
• Frequent filler plans
• Drive through mini-marts
• Co-branding with McDonalds
• Robotic Arm gas pump (CNN video)

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Issues due to Large Change

• risky due to high failure rate and large initial
  costs
• can change the face of the market
• may require a new way of thinking
• Are your customers ready?

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How quickly will my new technology diffuse?
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Penetration Curves Two Typical Curves
Cumulative Sales Penetration
Cumulative Sales ( Penetration)
Time
Time
C-curve
S-curve
Questionwhich one should you pray for???
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Some Lessons Learned From A Wide Range of
Industries

• The following characteristics of the innovation
  are associated with a faster rate of adoption
• Perceived relative advantage by consumers
• Compatibility with existing consumption patterns
  or fit within the consumption system
• Observability of the innovation and its benefits
• Ability to try the innovation
• The following characteristics of the innovation
  are associated with a slower rate of adoption
• Complexity (high learning requirement)
• Discontinuity from the consumers existing
  experience base
• Perceived risk
• Cost of the innovation

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New Products InnovatorsConsumers Goods

• The characteristics of innovators may vary by
  product category. There is no generalized
  innovator.
• Variables most likely to characterize innovators
  are
• higher income
• higher education
• younger
• greater social mobility
• favorable attitude towards risk (venturesome)
• greater social participation
• higher opinion leadership
• Is this Shells target audience?

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Does it pay to be first to the market?
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On the other handDoes it always pay to be the
leader?
Forecasted market share relative to the
pioneering brand
Prescription
Consumer packaged goods
anti-ulcer drugs
Urban et al.
Kalyanaram and
Berndt et al.
(1986)
Urban (1992)
(1994)
1.00
1.00
1.00
First
.71
.76
.70
Second
.58
.64
.57
Third
.51
.57
.49
Fourth
.45
.53
.44
Fifth
.41
.49
.40
Sixth
Source Marketing Science, Vol. 14, No. 3,
Part 2 of 2, 1995
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Share by order of entry
Brands come faster and faster
0.8
Third entrant
Second entrant
0.6
0.4
Volume share ratio
Fifth entrant
Fourth entrant
0.2
0
0
20
40
60
80
100
120
Time Period after Introduction (Weeks)
(Volume share at time t for entry N/
Volume share at time t for entry 1)
Source Kalyanaram, G. and G. L. Urban (1992),
"Dynamic Effects of the
Order of Entry on Market Share, Trial
Penetration, and Repeat Purchase
Marketing Science, 11 (Summer), 235-250.
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So, what have we ignored

• Competition

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Common Strategic ResponsesWhich ones win?

• Strategy Long-run Profitability
• Tit-for-tat Low
• Copy-cat Medium
• Aggressive first strike Low
• Strategic Signaling and High
• Cooperation

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If you decide to go for it How do you evaluate
an options potential value??
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Standard Approaches SurveyAsk People What They
Would do

• They dont know
• Cant tell us with any precision
• They dont want to say
• Dont have explicitly formed preferences

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Standard Methods (Contd)

• Laboratory Simulation
• external validity
• Test-market/beta testing
• requires full product development
• tips competition
• external validity

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How do I decide whether what I have tried works?
Run an ExperimentThe RAPP (ROI Analysis of
Pharmaceutical Promotion) Study
Does this mean JAD gets all of my dollars?
For overall median brand ROI Margin
of Error (95 Confidence) DET (Detailing)
1.72 Plus or Minus 0.19 for every 1
spent DTC (Direct-to-Consumer) 0.19 Plus
or Minus 0.52 for every 1 spent JAD (Journal
Advertising) 5.00 Plus or Minus 0.88
for every 1 spent PME (Meetings Events)
3.56 Plus or Minus 1.92 for every 1
spent Median brand was described as one which
was launched at or before 1993, in the 50 to
200 million range.
ROI Per Dollar Spent
1
2
3
4
5
6
0
Source ROI Analysis of Pharmaceutical Promotion
(RAPP) An Independent Study, Dr. Scott Neslin,
May 22, 2001
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Yet, beware of what seems obvious!

• Diminishing Returns
• Promotion effectiveness has a saturation
  
• point
• ROI is not a linear function and is
• dependent on the spend of other companies

Cost of Promotion
Sales

• Promotion Lags
• Most promotions do not produce their
• maximum impact immediately
• Sales force promotions such as detailing
• tend to have shorter lags whereas DTC
• usually has a longer lag
• Total effect of promotion is realized over
• time (1-2 years), making it hard to measure

Level of Promotion
Promotion Event
Sales due to promotion event

• Long-term Contributions
• Prior promotions continue to have an effect
• beyond the first month effects are measured
• Long term effects can vary by promotion
• element and by company. They are hard to
• measure and cant be generalized.

PROFIT
Lag
TIME
Long Term Contributions
Source ZS Associates, Optimizing a
Pharmaceutical Products Promotional Mix PMSA
2001 RAPP Study
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A Better Approach to Attribute Valuation

• Used by virtually ALL Fortune 500 firms

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Conjoint overview

• An introduction to the conjoint world
• How does conjoint analysis work
• How do you set up a conjoint study
• What are the critical steps

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The conjoint world

• Attributes
• Attribute levels
• Part-worths
• Attribute importance
• Utility

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Attributes

• Conjoint analysis represents products or services
  as bundles of attributes
• An attribute may be any clearly defined feature
  or characteristic
• Examples
• price
• brand
• size
• performance

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Attribute selection

• Attributes in conjoint should be
• clear and unambiguous
• determining choice
• actionable
• The total number of attributes should be kept low
• 6 is the average
• most studies fall between 4 and 8
• Use qualitative research and pretests to decide
  on attributes and levels

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Part-worth utilities

• The utility for a specific level on a particular
  attribute is called a part-worth.
• It designates how much that part of the product
  is worth to the consumer
• Part-worth utilities are the building blocks of
  all of the entire analysis

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Choice-Based Conjoint Analysis

• Give customers sets of profiles and make them
  choose one option or the other
• From these profiles you can infer the relative
  utility associated with a particular feature

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Conjoint for Gas Stations

• Given a choice between these two gas stations,
  which would you choose?

Exxon
Mobil
Brand name
Price
1.94 1.83
Number of Pumps 6 8
Mini-mart Yes No
Neither
Check your preference
Lets run a conjoint exercise for Shell
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So What Happened to Shell??

• Mobil beat them to the market with Speed-Pass
• Still Beta Testing the Robot Arm
• Shell acquired Texaco and now is resegmenting its
  dual markets
• Has mostly abandoned the Quick and Easy strategy.

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What Happened to Quick n Easy?Imitate Mobil
Shell easyPay
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Shell Strategy, 2001
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And the robots.
Robotic Gas Attendants
Replaced by Humans
Shell Oil Company recently abandoned a 3-year
experiment with robotic gas pumps. The system was
being tested in Indiana and California and worked
pretty well. It required a special colorful gas
cap and protective rubber target. Although the
system reportedly worked well in clear weather,
rain and snow created problems for the vision
system, a spokesperson for Shell said. It also
had problems with ever-changing car designs. Each
robotic pump cost about 40,000 more than a
regular pump. It didnt sound like Shell was
trying too hard to get people to use the system,
however. They charged people an extra dollar per
gallon (recall the high prices of gas anyway this
past summer), and also required them to buy the
20 special gas cap. About 300 people tried the
experiment.
Intelligence News Updates, Fall 2000
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Summary

• Defining benefit segments, and approaches to
  those segments is a key tool utilized in
  marketing.
• Need to consider margins, size, and ability to
  reach those markets.
• Your success depends upon your ability to have a
  comparative advantage towards the segments you
  approach.