16 Aug 2010  Lessons from the Classroom

HBS Introduces Marketing Analysis Tools for Managers

The tools can help managers inform decisions on market analysis, breakeven analysis, customer lifetime value, profit and pricing, and analyzing the competitive environment. Interview with Tom Steenburgh. Key concepts include:

  • Immense changes in marketing are driving an increasing need for data analysis.
  • The five HBS-developed tools provide decision-making support for market analysis, breakeven analysis, customer lifetime value, profit and pricing, and analyzing the competitive environment.

 

Harvard Business Publishing has released new toolkits to help managers make key marketing decisions on market analysis, breakeven analysis, customer lifetime value, profit and pricing, and analyzing the competitive environment.

The five toolkits were developed by marketing professors Thomas Steenburgh of HBS and Jill Avery (HBS DBA'07) of Simmons School of Management. We asked Steenburgh to explain how practitioners can use the toolkits in their businesses.

Sarah Jane Gilbert: Can you describe the marketing analysis toolkits? What led you to develop the toolkits?

Tom Steenburgh: The field of marketing has undergone immense changes over the past decade, and those changes are driving an increasing need for data analysis.

Marketing today combines both art and science: Managers must combine creative thinking with rigorous analysis when making decisions. Increasing financial pressures demand that managers deliver ROI from their marketing investments; therefore, quantifying the effects of marketing decisions is imperative. At the same time, customer relationship management (CRM) software and emerging Web 2.0 applications are providing managers with reams of data about their customers.

The marketing analysis toolkits are a suite of analytical tools that managers can use to inform decision-making in marketing. Each toolkit includes a technical note that outlines the analysis technique, provides examples of how it is used in marketing, and shows mathematical formulas used in the technique. Also included in each toolkit is a spreadsheet supplement that contains sample problems; interactive graphs and tables that illuminate the concept visually; and a prebuilt Excel model that guides users in conducting quantitative analysis.

The toolkits are designed to be self-study tools that students can complete on their own outside the classroom or that managers can use on the job. They are particularly useful for managers who lack a strong math foundation and/or who have not had experience with quantitative modeling.

Q: How are they incorporated into the curriculum? Can they be used outside the classroom?

A: The marketing analysis toolkits were designed to provide a quantitative foundation for analyzing marketing decisions and an analytical structure and process for completing a marketing plan project. They can be used in undergraduate and MBA courses to enhance students' comprehension and usage of quantitative concepts in marketing.

Professors have used the toolkits to introduce analytical concepts that appear in HBS cases and to provide supplemental support for students as they run quantitative analyses to support their case preparation. For example, the "Customer Lifetime Value Analysis" toolkit complements the "HubSpot: Inbound Marketing and Web 2.0" case, which introduces the concept of calculating the value that a customer segment delivers to the firm.

Professors have also used the toolkits to support marketing plan projects, which are often a key deliverable in the core principles of marketing course at the undergraduate level and the core marketing management course at the MBA level. The toolkits provide analytical structure for completing key sections of a marketing plan, including situation analysis, segmentation analysis, pricing strategy, and financial projections.

More importantly, all are designed to be toolkits that managers can keep in their virtual briefcase and use for real-world decision-making. All are easy to download into Microsoft Excel for use on the job.

Q: Let's focus on the concept of "customer lifetime value." Can you explain what CLV is? Who is the ideal customer?

A: Customers are increasingly being viewed as assets that bring value to the firm. Customer lifetime value is a metric that allows managers to calculate how much a customer (or customer segment) is worth to the firm over his purchasing life. The CLV formula incorporates metrics that capture the outputs of three key customer strategies that firms employ: asset acquisition (attracting new customers to the firm); asset maximization (maximizing the value the firm extracts from each customer); and asset retention (retaining existing customers for the long term). An ideal customer, from a CLV perspective, is one who is inexpensive to acquire, who delivers high annual profits from his purchases each year, and who remains a customer for a long period of time.

Q: How can managers use the CLV toolkit when making marketing decisions?

A: Calculating CLV allows managers to identify opportunities for growing the value of their customer portfolio. CLV can guide segmentation and targeting analysis to decide which customer segments are the most valuable for the firm to target. It can also inform customer relationship management (CRM) planning by helping to segment the customer base by their profitability to the firm, so that managers can increase or decrease marketing expenditures to a particular segment. It provides specific advice on how much to spend to acquire a customer, to retain a customer, or to cross-sell and/or upsell existing customers to other products in the firm's portfolio.

Q: Now let's discuss the challenge of product pricing. How should businesses go about conducting a profitability analysis?

A: Choosing a price for your product is one of the most fundamental and important decisions managers face, and it is often one of the hardest. Pricing decisions require managers to understand how sensitive consumer demand is to changes in price. This requires constructing and interpreting a demand curve to understand how responsive (or elastic) customers' demand for a product is to a change in price. The pricing and profitability toolkit guides managers in how to construct a demand curve, how to calculate the price elasticity of demand, and how to use these metrics to inform the process of choosing a price.

Once a price point is chosen, managers need to understand the impact of that price on their financial projections for the firm. Profitability analysis begins with calculating the revenue the firm will generate from sales of its products. Then, an analysis of variable and fixed costs is undertaken. Finally, these numbers are used to calculate the profit or margin the firm will earn from its operations. The pricing and profitability toolkit provides guidance for calculating revenue, variable costs, fixed costs, contribution margin, gross margin, and net income. In addition, for those firms that sell their products through distribution channels, this toolkit enables the calculation of retailer penny profit and retailer margin.

Q: In addition to CLV and pricing and profitability, what other toolkits are available for marketing managers?

A: There are five toolkits currently available that cover the key analytical tools marketing managers use:

"Market Size and Market Share Analysis": Managers frequently need to estimate the size of their markets, both for existing products, so that sales forecasts can be developed, and for new products, so that market opportunities can be assessed. This tookit enables managers to size a market and generate a sales forecast. Users will learn to measure market demand and calculate market penetration rates and market share.

"Situation Analysis": Before managers can begin to formulate marketing strategies for their businesses, they must have a strong understanding of the internal and external marketing environments in which they are operating. In this toolkit, we present three methods for collecting and analyzing information about these marketing environments firms face: Five C's Analysis, Porter's Five Forces Industry Analysis, and SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis.

"Breakeven Analysis": Managers are often called on to make recommendations for or against programs that cost money to implement. Before marketing expenditures are made, managers want to be sure that they will be getting a return on their investment. In this toolkit, we introduce the concept of breakeven analysis, which helps managers assess the feasibility of proposed fixed and variable marketing expenditures, the feasibility of pricing changes, and the feasibility of a new product introduction.

"Customer Lifetime Value Analysis": Customers are increasingly being viewed as assets that bring value to the firm. Customer lifetime value is a metric that allows managers to understand the overall value of their customer base and relate it to three customer strategies firms employ: asset acquisition (attracting new customers to the firm): asset maximization (maximizing the value the firm extracts from each customer); and asset retention (retaining existing customers for the long term).

"Pricing and Profitability Analysis": Pricing is one of the most difficult decisions marketers make and the one with the most direct and immediate impact on the firm's financial position. This toolkit introduces the fundamental terminology and calculations associated with pricing and profitability analysis. Users will learn how to produce and interpret demand curves and calculate the price elasticity of demand. The concepts of revenue, costs, and contribution margin, gross margin, and net income will be introduced to inform profitability analyses. Finally, retailer profitability metrics including retailer margin and penny profit are discussed.

Q: What are you working on next?

A: Over the longer term, we hope to expand the marketing analysis toolkits with other analytical tools used for marketing decision-making. These could include marketing research concepts such as conjoint analysis and perceptual mapping, and brand analysis techniques such as calculating brand equity and conducting brand audit analyses.