Marketing Notes
LECTURE 1) The basics of Marketing
Economic vs marketing view
economic: views consumers as rational marketing: views consumers as emotional
decision-makers, carefully weighing pros decision-makers, decision influences by a
and cons multitude of (irrational) factors
Marketing is a process by which companies create value for customers and build strong
customer relationships in order to capture value from customers in return. = Philip Kotler
Value for a business is ‘customer lifetime value’ (CLV):
CLV: ‘Gross Contribution’ (Revenue - cost of sales) - ‘Marketing costs’
For every time period, so longer (profitable) lifetime = higher CLV
Value for customers: Perceived benefits - perceived costs
Benefits: quality, convenience, experience, status, utility
Costs: price, time, effort, risk, hassle
If the value for customers is positive, customers stay and buy
Customer Equity: sum of CLV for all customers.
The value tradeoff:
The tradeoff exists because actions that increase one side can reduce de other.
One cannot capture value without creating it
Capturing more value can destroy created value.
eg. Raising prices.
Firm side: higher margin per transaction.
Customer side: Lower perceived value, shorter customer lifetime
Result: Short-term profit Increase, long-term CLV Decrease → Over-capturing value
Marketing Notes 1
, One might create value without properly capturing it
eg. Underpricing a great product.
Customer side: Very high perceived value
Firm side: Looses money from underpricing
Result: high customer perceived value, lower CLV relative to potential → Under capturing
value
Customer Inertia
When customers keep buying the same product or staying with the same company when
better alternatives exist.
Inertia = resistance to change
If customers are inert → they don’t switch → company keeps earning money.
Increases: customer lifetime value (CLV), customer equity
PCC = Perceived Cognitive Costs
mental effort required to switch
Comparing alternatives
Learning a new app
Opening new accounts
Higher PCC → more inertia
PCM = Perceived Monetary Costs
Financial cost of switching
Cancellation fee
Losing discounts
Paying setup fee somewhere else
Higher PCM → more inertia
Rewards: eg. Discounts, Bonus, Free trial, Cash back…
Rewards don’t directly decrease PCC or increase PCM, they change how strongly PCC and
PCM affect inertia, this is called a moderation effect.
Case 1: Reward disrupt PCC inertia effect
Reward makes customers more willing to think and switch
Marketing Notes 2
, Without reward: High PCC → strong inertia
With reward: High PCC → weaker inertia
Rewards weaken the positive effect of perceived cognitive costs on inertia, making customers
more willing to switch.
Intuition:
Cognitive cost = effort
Reward motivates effort → reduces inertia effect
Case 2: Reward reinforces PCM effect
Rewards can also make customers stay more
Without reward: Already High PCM → inertia
With reward: High PCM → stronger inertia
Rewards strengthen the positive effect of perceived monetary costs on inertia, making
customers more likely to stay.
Intuition:
Monetary cost = financial loss
Reward adds more financial benefit → increases inertia effect
Companies try to increase inertia because it helps keep customers → Longer lifetime, higher
CLV, higher customer equity.
they do this by:
Increase switching costs
Increase cognitive costs
Provide rewards
Marketing Notes 3
LECTURE 1) The basics of Marketing
Economic vs marketing view
economic: views consumers as rational marketing: views consumers as emotional
decision-makers, carefully weighing pros decision-makers, decision influences by a
and cons multitude of (irrational) factors
Marketing is a process by which companies create value for customers and build strong
customer relationships in order to capture value from customers in return. = Philip Kotler
Value for a business is ‘customer lifetime value’ (CLV):
CLV: ‘Gross Contribution’ (Revenue - cost of sales) - ‘Marketing costs’
For every time period, so longer (profitable) lifetime = higher CLV
Value for customers: Perceived benefits - perceived costs
Benefits: quality, convenience, experience, status, utility
Costs: price, time, effort, risk, hassle
If the value for customers is positive, customers stay and buy
Customer Equity: sum of CLV for all customers.
The value tradeoff:
The tradeoff exists because actions that increase one side can reduce de other.
One cannot capture value without creating it
Capturing more value can destroy created value.
eg. Raising prices.
Firm side: higher margin per transaction.
Customer side: Lower perceived value, shorter customer lifetime
Result: Short-term profit Increase, long-term CLV Decrease → Over-capturing value
Marketing Notes 1
, One might create value without properly capturing it
eg. Underpricing a great product.
Customer side: Very high perceived value
Firm side: Looses money from underpricing
Result: high customer perceived value, lower CLV relative to potential → Under capturing
value
Customer Inertia
When customers keep buying the same product or staying with the same company when
better alternatives exist.
Inertia = resistance to change
If customers are inert → they don’t switch → company keeps earning money.
Increases: customer lifetime value (CLV), customer equity
PCC = Perceived Cognitive Costs
mental effort required to switch
Comparing alternatives
Learning a new app
Opening new accounts
Higher PCC → more inertia
PCM = Perceived Monetary Costs
Financial cost of switching
Cancellation fee
Losing discounts
Paying setup fee somewhere else
Higher PCM → more inertia
Rewards: eg. Discounts, Bonus, Free trial, Cash back…
Rewards don’t directly decrease PCC or increase PCM, they change how strongly PCC and
PCM affect inertia, this is called a moderation effect.
Case 1: Reward disrupt PCC inertia effect
Reward makes customers more willing to think and switch
Marketing Notes 2
, Without reward: High PCC → strong inertia
With reward: High PCC → weaker inertia
Rewards weaken the positive effect of perceived cognitive costs on inertia, making customers
more willing to switch.
Intuition:
Cognitive cost = effort
Reward motivates effort → reduces inertia effect
Case 2: Reward reinforces PCM effect
Rewards can also make customers stay more
Without reward: Already High PCM → inertia
With reward: High PCM → stronger inertia
Rewards strengthen the positive effect of perceived monetary costs on inertia, making
customers more likely to stay.
Intuition:
Monetary cost = financial loss
Reward adds more financial benefit → increases inertia effect
Companies try to increase inertia because it helps keep customers → Longer lifetime, higher
CLV, higher customer equity.
they do this by:
Increase switching costs
Increase cognitive costs
Provide rewards
Marketing Notes 3
