Marketing 101 – The Engineer’s Role in Marketing

1. Marketing 101 – The Engineer’s Role in Marketing • Michael Richarme, Ph.D. • Senior Vice President, Decision Analyst, Inc. • and Adjunct Professor of Marketing, • The University of Texas At Arlington • April 12, 2010 • Dallas, Texas

2. Session Objectives • A brief and eclectic trip through the mind of the customer • An overview of some modern marketing tools and practices • Tips for being effective as an engineer in dealing with “those marketing people”

3. Session Roadmap “Begin at the beginning and go on till you come to the end: then stop” – The King in Through the Looking Glass by Lewis Carroll

4. So, What is Marketing, Anyway? • Think of a single cell organism – your business • In the nucleus, there are all the major corporate functions – finance, accounting, manufacturing, engineering, and so forth • Outside the cell, there are all those customers floating around • Marketing is the membrane enclosing the cell, interfacing with the customer and all the corporate functions and establishing a two-way transaction between the customer and the business • Typically included in marketing functions are Product development and management, Advertising and promotion, Pricing, Distribution and sales, and Brand management • these may fall in different departments in the business or under different names

5. Let’s Start With the Customer • Marketing tries to listen very carefully to customer needs and wants • Generally customers can’t express these needs and wants very clearly • Marketing acts as an interpreter and translator for the rest of the business • Marketing can only impact what a customer wants, not what a customer needs

6. What a Customer Needs(Maslow’s Hierarchy of Needs) Independence needs Self-actualization Belonging needs Social Needs Ego Needs Survival needs Physiological Needs (food, water) Safety and Security Needs Source: Maslow, A., Motivation and Personality (New York: Grossman Publishers, 1970)

7. The Mind of the Customer Cognition Logical, precise, evaluative, systematic, recent evolution Occurs in the front of the brain Affect Unconscious, instinctive, highly heuristic, cave-man legacy Occurs in the rear of the brain • What distinguishes humans from animals? • Opposable thumb • Cerebral cortex • Some major Limbic Structures of the Brain • Medial Pre-frontal Cortex – higher thinking and reasoning functions • Hippocampus – center of memory • Amygdala – basic instinctive functions and center of emotion, mood, attitudes, and beliefs

8. Memory and Decision-Making • The brain receives continuous stimuli • The brain processes these stimuli and creates memory • Two types of memory • Short term, verbatim (photographic recall) • Long term, gist (reconstructed from cues) • Even verbatim memories contain emotional tags • When faced with a decision, people access memories for past experiences, framing, biases, and risk assessment

9. Memory and Decision-Making • The brain utilizes two simultaneous decision processes • Cognitive – deliberate, reasoned, unemotional • Affective – impulse, heuristic, highly emotional • These two decisions race, and often conflict • For simple decisions, affect often wins • Even with complex decisions, there is an affective element • Up to 95% of our decisions are affectively driven • Made in the subconscious • This means we don’t know and often can’t tell why we made the decisions we made Source: Scarabis, Florack, Gosejohann (2006), “When Consumers Follow Their Feelings: The Impact of Affective Or Cognitive Focus on the Basis of Consumer’s Choice,” Psychology & Marketing, 23:12, 1015-1034

10. Customer Decision-Making Process Origination What prompts the customer to action? Information Gathering Pre-purchase What factors influence the customer’s decision? Because value creation is basedon understandingand meeting customer needs. Evaluation What attributes of the product does the customer consider? Purchase Decision What options does the customer identify?What decision(s) does he make? Purchase Postpurchase Evaluation and Behavior Post-purchase What does the customer do about his decision? Source: Alba, Hutchinson, and Lynch (1990), “Memory and Decision Making,” Handbook of Consumer Theory and Research, Englewood Cliffs, NJ: Prentice-Hall, 1-49.

11. A Peek Inside the Marketer’s Toolbox(not suitable for viewing by small children) Brand equity, loyalty, and satisfaction – retaining your customers and keeping them happy Relationships versus transactions – new school versus old school Impact of the Internet – incorporating this medium into brick and mortar businesses Growth and expansion – new markets versus new products International issues – do we really want to go there? • Strategy –decide who you want to be • Positioning– decide how you are going to get there • Research– listening to the customer • Product innovation and development – moving from ideas to products • Pricing and Profitability – how much is that doggie in the window?

12. #1 Strategy Marketing Strategy Positioning Segmentation Targeting

13. #2 Positioning • What are the important dimensions of the product from the customer’s point of view • How does your product map on that grid • How do your major competitors map on that grid • Where should your organization concentrate resources to have the biggest impact

14. Bases of Positioning • Product attributes – less calories with the same taste • Price and quality – lower price for more value • Use or application – suppresses appetite all day • Product user type – for the outdoor enthusiast • Product class – this class of product is different from normal ones • Competitor products – drink this product instead of coffee • Emotional profile – taps into emotional attributes of a product Source: Hair, McDaniel (2009), “Essentials of Marketing 6th Ed.,” (Mason, OH: South-Western Cengage, 2009)

15. Using Perceptual Mapping for Positioning Analysis Classy, Distinctive • Lincoln • Porsche • Mercedes • BMW • Cadillac • Chrysler • Buick • Pontiac Conservative Sporty • Chevy • Ford • Nissan • Dodge • Toyota • VW Practical, affordable

16. Types of Segmentation Source: Kenneth Kahn (2001), “Product Planning Essentials,” (Thousand Oaks, CA: Sage)

17. Keys to Effective Segmentation • Customers must demonstrate needs, aspirations or behavioral patterns that are similar within a segment and different across segments • A distinction between a price-sensitive and a quality-seeking segment is meaningful, since the two segments demonstrate distinguishable sets of needs Meaningful • A company must be able to reach customers within each segment through effective and targeted marketing programs • A customer segment consisting of customers with blue eyes is not actionable, since it is very hard to identify and reach only customers with blue eyes Actionable • Segments must be large and profitable enough to make the investment in serving them worthwhile • MyCFO.com is targeted toward high-net-worth individuals, helping them manage their portfolios; even though the number of those individuals is small, the dollar amount managed is sizeable, thus constituting a substantial segment Substantial • Key characteristics of the segments (e.g., size and spending patterns) must be easy to measure Measurable

18. #3 Research • Concept testing - Old school approach- Ask respondents to score a concept - Often respondents don’t know why they selected something - 95% of decisions made in the subconscious - Halo effect of other product features - Lack of realistic decision making setting • Choice modeling - New school approach - Calculates attribute utilities - Taps into respondent subconscious

19. If the following salad menu items were available at (your concept), how many of each item would you probably purchase for yourself in the next 30 days? (Please Type The Number Of Each Item You Would Purchase In the Boxes Next To Each Item Below) Beet and Goat Cheese Arugula Salad- $6.99 Healthy Turkey-Pasta Salad - $6.99 A super healthy dish with rotellapasta, fresh broccoli florets, and cooked turkey breast, combined with dried cherries, celery, chopped onion, and toasted almonds. An amazing salad made with beets, avocado, arugula, dried cranberries and walnuts. The goat cheese and the beet make a perfect great with balsamic vinegar. Creamy Fruit Salad - $6.99 Soy Sauce-Grilled Shrimp with Spinach Salad- $6.99 A fresh creamy salad with pineapple chunks, melon chunks, watermelon chunks, and chopped fresh mint leaves. Served with yogurt and honey dressing, with toasted sweetened shredded coconut on top. Grilled soy-sauce shrimp tossed with fresh baby spinach, green onions, cilantro leaves, and salted peanuts. This dish is a true winner! I would not buy any of these products. I would buy something else. (Once You Have Answered The Question(s) Above, Please Click On The “Next Page” Button Below.)

20. A more realistic choice modeling example

21. #4 Product Innovation and Development Typical “Hockey Stick”Adoption Curve Product diffusion curve MarketAdoption “Me Too”Entrant FastFollower Laggard First to Market Time Source: Frank Bass (1969), “A New Product Growth for Model Consumer Durables,” Management Science, 15:5, 215-227

22. Stage-Gate Process of Product Development Idea Generation Idea Screening Concept Development Business Analysis Prototype Development Product Design Test Market Commercialization Management Review Management Review Management Review Source: Cooper, Edgett, Kleinschmidt (2002), “Optimizing the Stage-Gate Process: What Best Practices Companies are Doing – Part 1,” Research Technology Management, 45:5, 21-27

23. New Concept Generation Techniques Six major techniques to generate ideas and concepts • Needs assessment – what does the customer need • Scenario analysis – where do trends take us • Group creativity – getting creative people together • Attribute analysis – identify and score each attribute • Relationship analysis – look for new connections • Lateral research – look sideways at the product

24. Key Factors Influencing Product Adoption • Reflect a relative advantage over other competitors • Have compatibility with customer’s environment • Minimize complexity of use • Be divisible (trial-able in small numbers) • Be communicable (easy to observe the word-of-mouth impact)

25. #5 Pricing and Profitability Three basic approaches to Pricing • Cost Plus – calculate cost and add a margin • Competitive – same price as everyone else • Market based – what the customer is willing to pay

26. Key Components of Reference Price Environments in Which to Consider Under-pricing (Fairness) When Fairness is Important • Past prices • Close substitute prices • Context or purchase environment • The market clearing price is much higher than some well-established reference price • Ongoing pecuniary relationship between buyer and seller • When there is an ongoing relationship between buyers and sellers • When the seller has significant market power over buyers Fairness in Pricing

27. #6 Brand Equity, Loyalty, and Satisfaction A good brand . . . . . . provides positive consumer responses . . . . . . and benefits both target customers and the firm Product, Price, Communication, Community, and Distribution Programs Brand Awareness • Depth • Breadth Customer Benefits • Confidence • Loyalty • Satisfaction Wrap-Arounds Core Product / Service Brand Associations • Strength • Relevant • Consistent • Valence • Uniqueness • Memorable • Distinctive Firm Benefits • Reduced marketing costs • Increased margins • Opportunity for brand extensions Source: David Aaker (1996), “Building Strong Brands,” (New York, NY: Free Press)

28. Transactions versus Relationships #7 Transactions Relationships New School Oriented to building a relationship Significant up-front investment Customer need orientation Long term value and higher loyalty • Old School • Oriented to making the sale • Little up-front investment • Price orientation • No lasting value or loyalty

29. #8 Impact of the Internet • Cycle time • Competitive Comparison of identical offerings • Exploration of alternatives – variety seeking • Broader selection of alternatives • Elimination of brick-and-mortar restrictions (time, location) • Significant reduction of brand loyalty among consumers Source: Jerry Wind and Vijay Mahajan (2001), “Digital Marketing: Global Strategies from the World’s Leading Experts,” (New York, NY: John Wiley & Sons, Inc.)

30. #9 Growth and Expansion Products Existing New Market Penetration Product Development (product improvements, (line extensions) cost reductions) Market Extensions Diversification (new uses, new markets) (new-to-the-company, new-to-the-world) Existing Customers New Source: Kenneth Kahn (2001), “Product Planning Essentials,” (Thousand Oaks, CA: Sage)

31. #10 International Issues • Cultural differences – Four basic themes • Individualism-Collective Index • Power-Distance Index • Uncertainty Avoidance Index • Masculinity-Femininity Index • The scores are neither good nor bad, just different ways in which cultural values are evidenced Source: GeertHofstede, Culture’s Consequences, 2nd ed. (Thousand Oaks, CA: Sage, 2001)

32. Individualism-Collective Index • Self-orientation (the “I” versus the “We”) • Playing and working separately or together • Higher IDV scores tend to represent individual initiative • USA - IDV is 91 – rugged individualists • India - IDV is 48 – team cohesiveness • South Korea - IDV is 18 – very group oriented

33. Power-Distance Index • Focuses on authority orientation • The importance of hierarchies and position • High PDI scores tend to reflect higher levels of power inequality between levels of society • Mexico - PDI is 81 – your position is fairly fixed • USA - PDI is 40 – anyone can be President • New Zealand - PDI is 22 – you make your own way in life

34. Uncertainty Avoidance Index • Orientation toward risk acceptance or avoidance • Higher scores tend to be uncomfortable with ambiguity and less responsive to new ideas and behaviors • Greece – UAI is 112 – make it solid as concrete • France – UAI is 86 – certainty is a good thing • USA – UAI is 46 – fairly willing to take risks in life, face uncertainty

35. Masculinity-Femininity Index • Focuses on assertiveness and achievement • Found to be less predictive and useful than the other three indices

36. International Product Development Five main strategies • Straight extension – no change to the product • Communication adaptation – same product, only change the promotion aspects (color, language, name) • Product adaptation – adapting a product to meet local conditions • Dual adaptation – altering both communication and product • Product invention – new product for the local market Source: Solberg and Durrieu (2008), “Strategy Development in International Markets: A Two-Tier Approach,” International Marketing Review, 25:5, 520-543.

37. Collaborating on International Teams Five themes to consider • Time – perception differs across cultures • Space – personal space, being alone or in groups • Things – belongings, gifts • Friendships – personal relationships • Agreements – the way contracts are executed

38. Being Effective with a Balanced Scorecard • The balanced scorecard allows the business to evaluate where it is across the major business dimensions • Dimensions include • Financial Performance – creating profits for shareholders • Customer Performance – creating demand in primary and secondary segments and satisfying brand promises • Internal Business Processes – the areas of excellent efficiencies that drive business economies • Organizational Learning – innovating and investing in the future Source: Kaplan, R.S. and Norton, D.P. (1996), “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review, 74(1), 75–85.

39. Critical Blind Spots • Sacred assumptions • Not invented here • Value is obvious

40. Success Within the Organization Six main themes for improving your product development and introduction success rate • Ask your customers for candid feedback • Set realistic a priori goals • Break down walls in the company • Create gateways to pass or fail development projects • Watch the tests carefully • Do postmortems

41. Free Helpful Resources • www.secondarydata.com – Marketing and research portal • https://www.cia.gov/factbook - Country by country factbook • www.1to1.com – Customer Relationship Management site • www.btobonline.com – B2B Marketing resources • www.adbrands.net - Advertising and agency resources • www.patentcafe.com – Patent and IP resources • www.packworld.com – Packaging strategy resources • www.iccwbo.org – International Chamber of Commerce

42. Contact Information Michael Richarme, Ph.D. Ph. 817-337-8576 Cell 817-797-5294 Email (work): mrichar@decisionanalyst.com Email (school): richarme@uta.edu Website: www.uta.edu/faculty/richarme/