Time Value of Money Marketing Need Want Demand Basic requirements to survive Needs shaped by society, culture, and personality Wants backed by purchasing power Marketing: Delivering value to customers, and capturing value from customers Marketing myopia: Focusing on current wants (i.e., increasing sales) instead of underlying needs (i.e., utility of products) Concept Feature of products Organisational implications Evaluation Production concept Easily available and highly affordable Improve production and distribution efficiency Demand > Supply Economies of scale and experience curve Assembly - lines Product concept Quality, performance, features Product innovation Marketing myopia (focus on improving product instead of solutions) Selling concept Not bought unless stimulated aggressively Selling and promotion “Hard sell” Unscrupulous image Focus on sales volume Marketing concept Meets the needs and wants of consumers Understand target markets “Sense and respond” instead of “make an d sell” Focus on customer satisfaction Customer Lifetime Value: Net present value of all future cash flows from a customer Present value: Value today of a future cash flow Discount factor: Present value of a $1 future payment Discount rate: Interest rate used to compute present values of future cash fl ows Stream of cash payments that never ends Stream of cash payments starting immediately Inflation: Rate at which prices are increasing Nominal interest rate: Rate at which money invested grows Real interest rate: Rate at which purchasing power of investment increases Fisher Eq uation Pricing Product Mix Pricing Strategies: Maximise the profits on the total product mix (Product line pricing, Optional - product pricing, Captive - product pricing, By - product pricing, Product bundle pricing) Price Adjustment Strategies: Adjust prices to account for customer differences and changing situations (Psychological pricing , Discount pricing, Segmented pricing, Promotional pricing (Loss Leader), Geographical pricing, Dynamic pricing, International pricing) Experience curve: The drop in the average per - unit production cost that comes with accumulated production experience (Combined effects of learning, volume, investment, & specialization) New Product Pricing Strategies : Set prices for products in introductory stage Digital Platforms • Platform’s purpose is to consummate matches among users and facilitate the exchange of goods, hence enabling value creation for all participants • Advantages: o No gatekeepers to manage flow through frictionless entry o Scalability by creatin g value using resources they don’t own or control ▪ Sharing economy: optimising usage of idle assets o Community feedback loops by deriving much of their value from the communities they serve ▪ Quality signals (e.g., YouTube comments) o In a nutshell, the focus has shifted from broadcast to segmentation, and then to virality and social influence; from push to pull; and from outbound to inbound • Network effects arise when the number of users affects the value created for each user o Industrial - era firms – supply economies of scale Linear Value Chain: Design → Manufacture → Sell → Deliver o Platforms – demand economies of scale (network effects) – Non - linear growth • Virality attracts people, but network effects keep them there • To minimise negative network effects, increase the chances of a happy match (quality curation) o Issues: Matching is difficult when number s are high, hence, curate on multiple levels • Positive same s ide: Adoption of telephones; Negative same side: Effect of competition , surge pricing • Positive cross side: Adoption of Visa by merchants; Negative cross side: Matching problems, clutter Issue o f Monetisation: Inherent value of platforms lies in the network effect, but charging will discourage users from joining May reduce negative network effects by increasing quality curation with lower numbers Platform Transformation Information - intensive industries Unscalable gatekeepers Highly fragmented ( hence susceptible to market aggregation, like Airbnb) Extreme information asymmetries (used car markets) Internet of Things (connectivity and power) Low regulatory co ntrol, failure cost Metrics • Traditional business models focus on the efficiency with which value flows through the pipeline o Operations: Produce goods and services efficiently at scale to meet demand o Marketing: Reach customers through proper channels at appropriate prices o Finance: Ens ure sufficient revenue generated to produce profits and value for investors o Metrics: Cash flow, inventory turnover, operating income, gross margin, overhead, ROI • Platform business models generate value through network effects o Rate of interaction success (e .g., first few interactions) Platform Metrics (Focus on rate of interaction success) Startup Phase (Core Interactions) Liquidity: No. of producers and consumers (focus on active usage ) Matching: Accuracy of algorithm (% of searches that lead to interactions – sales conversion rate) Trust: Degree of comfort for users (risk and safety – reviews and certification) Growth Phase (Enhanced Value Creation) • Balance between consumer and producer numbers • Lifetime value of producers and consumers • Sales conversion rate • Side switching Maturity Phase (Innovation) • Identify new functionalities • Identify strategic threats