Cracking the Marketing Code Training Session Columbia Business School October 29, 2010 Marketing 101

Objectives Look smart and knowledgeable in CPG interviews Actually learn something – Basic marketing concepts – Some clever tools to crack the code Have a global view

Basic marketing concepts STP Segmentation Targeting Positioning 4P´s Product Price Place Promotion 3C´s Corporation Customer Competitors

How they relate Corporation Competition Customer Segments Customer Segments Marketing Mix 4P´s by segment Customer Segments Customer Segments Target Customer Segments Target Customer Segments

A simple example…us AM Inc. Marketing Mix Product – CPG marketing tutorial Place – here Promotion – invites Price ??? 1st. yr. Columbia MBA´s Value proposition – 25% increased chances of getting CPG summer offer How much would you pay? How much should I charge?

Add a competitor AM Inc. RK Inc. 1st. yr. Columbia MBA´s Offers same product at 20% discount across the hall What do I do? Lower my price ? Differentiate product and promote it? Segment and target?

A segmented strategy 35% 65% 1 st yr. Columbia MBA´s Analitics More likely to succeed Better fit with my capabilities AM target Tailored marketing mix Product CPG analytical marketing Pricing premium Promotion to analytical elite Place here plus web tutorial Leave to RK

Basic marketing concepts STP Segmentation Targeting Positioning 4P´s Product Price Place Promotion 3C´s Corporation Customer Competitors

Customer segmentation What is Segmentation?Why is Segmentation Useful? Allows us to assign people and limited resources more efficiently and effectively Facilitates the uncovering of needs and opportunities not exploited by our current approach Helps orient the design of products and services for specific sub-groupings of customers, shoppers, and consumers Results in significant improvement in the impact of marketing initiatives (programs and promotions) and in-store execution Usually results in better balance between benefits and the costs required to generate them The science of finding, within a heterogeneous customer universe, homogeneous groupings of customers which meet segmentation criteria defined by us Segment quality improves dramatically to the extent that we utilize both subjective and objective criteria to define the segments

Segmented value propositions Direct cost to serve – sales, transportation, warehousing, etc. Commercial terms – channel margins, credit terms CTS optimization opportunities must be considered Service levels Product portfolio Service offering Commercial offering Channels Sales and distribution model Brand and product portfolio strength Value proposition Client satisfaction with competing value propositions Impact on ROI vs. competition and other product categories Include a holistic assessment including all elements of the value equation Cost to Serve Customer Requirements and Satisfaction Economic Benefit to Customers Competing Value Propositions Value Proposition Intensive use of market research tools – e.g., Choice analysis, Conjoint analysis, cluster analysis, etc.

Segmentation and targeting process Right Perform Competitor Analysis Define Market Target Segments Overall Market C Set Strategic Objectives Define Market Assess Market Structure & Trends Identify Attractive Market Segments Analyze Right-to- win Select Target Market Segments A B D E F

Define market Example Market Definition: Aquafina Bottled Water Share of WaterShare of BeverageShare of Stomach Substitute products –Other brands of bottled water –Tap water –Filtered water Market of drinking water Substitute products –Carbonated drinks –New age drinks –Nectar –Coffee and tea Market of non-alcoholic beverages Substitute products –Non-alcoholic beverages –Salty snacks –Sweet snacks –Fruits and vegetables Market of snack food and beverage 123 Options What does PepsiCo aspire to be in long-term? How can the aspiration be translated into a competitive goal for Aquafina? What else can the company potentially sell with its current capabilities? B

Asses market structure and trends Rural BrazilRural RussiaUrban ChinaRural Brazil CSD B Brands Fruit Nectars/Drin ks B brands Juice B Brands Fruit Nectars/Drin ks A brands Juice A Brands CSD A Brands Rural ChinaRural Russia C Non-alcoholic beverages value added path

Identify attractive market segments Pleasure Kick Sharing Conscious Stimulus Relaxation Functional Refreshment Expressive Controlling SocialIndividual Candy Pastilles Chewing gum ENJOYMENT REFRESHMENT Sugar confectionery consumer need diagram D

Analyze Right to win Example Description Leveraged R&D technology and consumer insights to introduce Crest Whitestrips and now own 70% of that category Leveraged Crest Whitestrips technology to create a Joint Venture with Clorox to launch new Glad products Leveraged strong consumer insights capability and position in Latin America to create an ethnic marketing capability in the US –First used this capability to attract new consumers in key markets (e.g. Miami, Los Angeles) –Later adapted the value proposition for these consumers with new products and marketing approaches Traditionally had the one of the strongest in-house sales organizations Built a comprehensive retail execution capability with its sales organization – improving revenue execution through merchandising effectiveness and greatly reducing retail out-of- stocks Advantaged Innovation Advantaged Customer Capabilities Advantaged Ethnic Marketing Advantaged Distribution System Level of Confidence Regarding Benefits Built a cost advantaged DSD delivery capability that was initially leveraged with existing products to out-execute competition Further leveraged scale with innovative new products and finally geographic expansion Examples of capabilities led extension into adjacencies E

Identify attractive market segments Price Top Image Emotional Rational "Techniker" "Sparer" "Yuppies" "Sportler" "Rationalisten" "Statusbewußte" F

Position with different look and feel Piech´s common components strategy: a few token gimmicks and the same products Sextuplets

Basic marketing concepts STP Segmentation Targeting Positioning 4P´s Product Price Place Promotion 3C´s Corporation Customer Competitors

Price and product attributes QUALITY CONVENIENCE 60 RMB / 5 L 12 RMB / L 24 RMB / 1.8 L RMB / L COST ~50 RMB / 5 L ~10 RMB / L 20% premium11% premium Vegetable oil in China

Extruded BExtruded AChips BChips A Rural Brazil Urban ChinaUrban Russia Snacks value added path

21 Rural Urban Extruded B, LargeExtruded B, Small Chips A, LargeChips A, Small Extruded B Large Size, Small Size Chips A Large Size Small Size Price points and premiums

Price points…affordability

Place…retail channels evolve 100 % 0 % ILLUSTRATIVE Retail channels evolution IndiaChinaBrazil & Mexico 50 % Large Format Modern Trade Small Format Modern Trade Traditional Trade Growing convenience stores & Discounters for Low Income Consumers Large Formats stalled Low penetration among Low Income Consumers US & Europe

From traditional to modern trade Traditional trade in Anhui Hypermarket in Shanghai

Guidelines for a Successful Go to Market Model Upgrade Go-to-Market and Organizational Capabilities Crack the Economics to Serve Each Channel Crack the Economics to Serve Each Channel Understand product dynamics and requirements Understand customer requirements/satisfaction Understand competitors offering Segment customers based on needs Define optimal channel mix and number of WHs/Distributors Define WH/Distributors roles Balance service levels – call content, call frequency, fill rates, leadtimes – vs. cost-to-serve Reengineer commercial terms and service policies Understand cost-to-serve and profitability drivers Understand true cost of indirect channels vs. direct service Balance and control commercial terms and discounts vs. direct service needs Reengineer go-to-market and supporting organization infrastructure to improve cost-to- serve Redefine sales force activities and call standards Improve effectiveness of key processes – Market execution/OTC – Account planning – Business review and control Define optimal sizing, routing, profiles and skills Improve tools Align measurement and rewards Successful SuccessfulGo-to-Market Model Model Successful SuccessfulGo-to-Market Model Model Craft an Optimal Value Proposition for Each Channel Craft an Optimal Value Proposition for Each Channel Understand Business and Customer Requirements Go to Market model

26 Crack the economics to serve Profit-to-Serve Equation Volume (reach and lift) – Number of accounts reached – Shelf and cold space – Categories and # of SKUs carried – Out of Stocks and Service Levels Direct GTM and Sales Costs – Sales force – Merchandising – Sales supervision – Delivery/secondary transportation – Custom products and packaging – Supply chain and DC requirements Profit to Serve Costs Revenues less Net Price Realization – Consumer price – Trade margins – Trading terms Shopper and Customer Marketing – In-store advertising – Shopper marketing – Customer activation Trade Promotion Asset Amortization Working Capital

27 Modern Trade economics $ Per Stat Case Customer Costs as a Percent of Sales Dollars 36%37%29%25%24%26%22% 21%22%18%15%19%17%15% Route-To-Market – Variability Among Retailers in Cost to Serve Source: BAH Analyses

28 Traditional trade economics

RPMX-JGB-Feb23-06 Channel definition Break-Even Point of Direct Service Additional Go-to-Market Benefits Due to Additional Wholesalers Order Size (Units) US$ Volume Distributors and WH´s margin Direct Service Cost If a customer buys less than units, it cost less to use distributors Go-to-Market ($MM) Leading Products SKUs Complementary Products New Products Go-to-Market using Current WH´s Incremental revenues due To additional customer base Source: BA&H Analysis Benefits of direct service Better coverage of total portfolio Better service levels

Value offering by channel Survey / Conjoint Analysis Segments % CTS / Revenue volume Optimized Cost to Serve Negotiation Oriented Finance Oriented Value Offering Trade Terms/ Support Trade Terms/ Support ProductOffering DeliveryModel Service Levels Maximize value/ Minimize Cost Segments

Promotions…ROI Marketing Market Results Marketing Investments Purchase Behavior Market share Unit sales Price premium Penetration of key segments Etc. Market share Unit sales Price premium Penetration of key segments Etc. Television Print Consumer Events Promotions Relationship Marketing Sponsorships … which in turn affects … $ Spend affects … SOM Billboards (OOH) Consideration Brand and Product Awareness Intent Purchase Loyal- -ty Allocation of funds across marketing levers Optimization of spending within each lever

Allocation across levers Efficiency: Cost per GRPs (US$) Effectiveness: Awareness / GRP – Relative to TV (1) 100% 3% 1% 34% 19% 3569% 1028% 1428% ,010 41,522 69,204 (1) Relative effectiveness to TV = (Media awareness /Media GRPs) / (TV awareness / TV GRPs) Source: Economic Model; Booz Allen analysis Media Effectiveness x Efficiency (Relative to TV – 100%) 1.0x 4.0x 4.4x 2.5x 25.0x 12.9x 10.7x 12.9x EXAMPLE

Optimization within levers Event ROI Events ROI Over All Events and Products (Four Account Sample) -63% median event ROI. -48% average ROI -63% median event ROI. -48% average ROI 91% of events yield a negative ROI Notes: (1) Assumptions made on list price, feature cost, and that retailers retain their base margin (2) ROI=(Revenue-Cost)/Cost Source: IRI Scanner Data; Manufacturer Cost Data; Booz Allen analysis Sample Trade Promotion Event ROI Event ROI Events Kmart -63% median event ROI Event ROI Events Product 1 -43% median event ROI

Share of Market – Value All Appliances 2004 to 2006 Change in Spend vs. Change in Market Share 2004 to 2006 Point Increase in Share of Market Share of Spend vs. Market Share (2004 to 2006) 2004 to 2006 Point Increase in Share of Media Spend Kenmore LG Maytag Whirlpool GE Kitchen Aid Source: TNS Data, AHAM, Traqline, Booz Allen Analysis Maytag KitchenAid LG Whirlpool GE Kenmore Competitive impact

Scale impact Beer Brands Marketing investment by hectoliter Millions of HL/year USD/HL Budweiser MillerLite CoorsLight BudLight Heineken Miller Genuine Draft Corona Extra MichelobLight Coors AmstelLight R 2 = 89% Budweiser MillerLite Co orsLight BudLight Heineken Miller Genuine Draft Corona Extra MichelobLight Coors AmstelLight R 2 = 89% Fuente: Morgan Stanley Quarterly Report. Beverages US. Análisis BAH

Consumer purchase funnel Potential Problem Inadequate advertising/PR support? Positioning not unique, meaningful? Brand A 99% 27% 19% -73% 0% -30% Brand B 99% 55% 46% -44% -16% -65% Awareness Preference Intent Purchase 16% Identified Issue: Product positioning is not truly differentiated or compelling Retail outlets steer customers to competitive products on which the outlet earns superior returns Positioning not unique, meaningful? Product, service offering does not deliver positioning? Perceived pricing overrides benefit of positioning? Perceived availability (channels) doesnt support positioning? Actual price/value is different from perceived price/value? Actual availability (channels) does not support positioning? Not easy to find in channels? Other benefits, products are advertised in channel? Source: Client Data; Booz Allen analysis

Consumer Purchase Funnel Mass Media Outdoor advertising Marketing Vehicles ConventionalAlternative Product placement Unconventional print Internet marketing Graffiti advertising Marketing vehicles mix and purpose Retention Mass Media Outdoor advertising Event marketing Buzz marketing Guerrilla marketing Viral marketing Broad market sampling Event marketing One-to-one sampling Direct marketing Lifestyle shop placement Switch Selling Mass Media Outdoor advertising Promotions Pricing Direct marketing Event marketing Lifestyle shop placement Awareness Consideration Trial Occasional Buyer Regular Buyer Pene -tration

Search for long term value value Incremental Spending on Marketing Levers and Impact on EBITDA, SOM and Enterprise Value Incre. Share EBITDA (US$ MM) Enterprise Value ($B) Source: Client Data; Booz Allen analysis Managing Trade-offs Marketing investments drive share growth, but profitability tends to decline as incremental share becomes more expensive In the short-term, the right decision is to maximize profits which requires incremental investments until they begin producing negative returns However, in the long-term, the more profitable decision may be to grow share, even at a loss, if this enables superior market power / sustainable competitive advantage However, getting this right is an iterative process and the trade-offs need to be clearly understood and carefully managed This process provides significant insights into the dynamic impact of marketing investments on share and earnings Marketing investments drive share growth, but profitability tends to decline as incremental share becomes more expensive In the short-term, the right decision is to maximize profits which requires incremental investments until they begin producing negative returns However, in the long-term, the more profitable decision may be to grow share, even at a loss, if this enables superior market power / sustainable competitive advantage However, getting this right is an iterative process and the trade-offs need to be clearly understood and carefully managed This process provides significant insights into the dynamic impact of marketing investments on share and earnings 02%4%6%8%10% 0$10M$20M$30M$45M$65M Incre. Spending Base Vol Trend 0(2%)(1%)0%1%2% EBITDA (Annual) Enterprise Value EXAMPLE

In summary Grab the big picture Pick your fights Strive for top value STP Segmentation Targeting Positioning 4P´s Product Price Place Promotion 3C´s Corporation Customer Competitors