London Business School Insight Marketing Oct 2008

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Interview published in LBS Marketing Insight, October 2008 - the evolution of Betfair\'s Marketing capability

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London Business School Insight Marketing Oct 2008

  1. 1. Marketing 22 Issue 9 October 2008 0.18 . 0 Price .10.0.8 2 812 0 busters Strategies to fight low cost rivals Price check Using price to awaken consumer thinking Place your bets The success of Betfair PLUS: Value Merchants – how to create superior value in business markets
  2. 2. Economic downturn? Time to address the marketing challenges facing your organisation London Business School’s marketing Customer Focused Marketing: The Key to Unlocking Profits Aligning customers and market strategy programmes will provide you with the Dates: 2-7 November 2008, 31 May – 5 June 2009, 8-13 November 2009 knowledge and tools needed to market Market Driving Strategies successfully during uncertain times. Create new markets through innovation Dates: 9–14 November 2008, 14-19 June 2009, 15-20 November 2009 For more information contact our Client Services Team on +44 (0)20 7000 7391 or email execinfo@london.edu Marketing Fundamentals Examine and critique core marketing principles London Business School Dates: This is an evening programme Tel +44 (0)20 7000 7390 (once a week from 12th January 2009 until 16th March 2009) Email execinfo@london.edu www.london.edu/ For more information, contact the London Business School Centre for Marketing via email: cm@london.edu
  3. 3. Marketing Insight Issue 9 In this issue “By far the single most important thing marketers 04 News and forthcoming events can do to boost the bottom line 06 Strategies to fight low cost rivals Companies have only three options: attack, coexist is improve the uneasily, or become low-cost players themselves. None of them is easy, but the right framework can way they price. help you learn which strategy is most likely to work, says Nirmalya Kumar. Interestingly, while firms 09 Value Merchants: Demonstrating and continue to spend Documenting Superior Value in Business Markets a lot of money An excerpt from a new book by James Anderson, Nirmalya Kumar and James Narus. trying to reduce 10 About Betfair costs or bolster A look at this company launched in 2000 and now revenue, very little the world’s number one online betting exchange. attention is paid to 12 Marketing Insight interview: Anton Bell optimising price.” Paddy Barwise talks to Director of Central Marketing Anton Bell about the role of marketing and branding at Betfair. page 14 Marco Bertini 14 Introducing Marco Bertini London Business School Assistant Professor >> Contact Marco Bertini discusses the effect that price can have on consumers’ judgments and preferences and suggests how pricing can be used to solve some of the issues facing marketers today. 16 Using price to awaken consumer thinking... ...and impact buying behaviour. Marco Bertini All enquiries to: develops the findings of recent research on the Centre for Marketing psychological aspects of pricing. London Business School Regent’s Park London 19 Centre for Marketing contact information NW1 4SA United Kingdom Tel +44 (0)20 7000 8627 Email cm@london.edu 3 Issue 9 October 2008
  4. 4. News The latest updates from Marketing |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| >> New faculty appointments Rajesh K. Chandy BA (Madurai Kamaraj) MBA (Oklahoma) PhD (Southern California) Professor of Marketing Science Institute Alden Clayton Award for the Rajesh K. Chandy joins London Business best marketing dissertation proposal, and School on sabbatical leave from the University the Mary Kay Award for the best marketing of Minnesota, where he holds the James D. dissertation. Fortune magazine described Watkins Chair in Marketing, and served until his findings on innovation as “an unorthodox August 2008 as Co-Director of the Institute for and bracing set of management principles.” Research in Marketing. Chandy served (with He serves on the editorial boards of Journal the CEOs of 3M, IBM, Microsoft, Medtronic, of Marketing Research, IEEE Transactions and UPS) as a member of the US Secretary of on Engineering Management, Journal of Commerce Advisory Committee on Measuring Marketing, International Journal of Research Innovation in the 21st Century Economy. Rajesh K. Chandy in Marketing, Journal of the Academy of His areas of expertise include innovation, Marketing Science, and Marketing Letters. technology management, and marketing Chandy has received a number of teaching strategy. His research and publications on awards, including the Outstanding Professor innovation have received several awards, of the Year Award, the Award for Excellence including the Journal of Marketing Harold in Teaching, and the Outstanding Faculty Maynard Award for contributions to Dedication Award at the Carlson School of marketing theory and thought, the American Management, University of Minnesota. Marketing Association Early Career Award for Contributions to Marketing Strategy, the AMA TechSIG Award for the best article on Technology and Innovation, the Marketing John Mullins BA (Lehigh) MBA (Stanford) PhD (Minnesota) Associate Professor of Management Practice in Marketing and Entrepreneurship John Mullins is an Associate Professor of John’s best-selling trade book, The New Management Practice in the Entrepreneurship Business Road Test: What Entrepreneurs and Marketing groups at London Business and Executives Should Do Before School. He earned his MBA at the Stanford Writing a Business Plan (2e, London: Graduate School of Business and his PhD. Prentice-Hall/FT 2006), is the definitive from the University of Minnesota. An award- work on the assessment and shaping of winning teacher, John brings to his teaching entrepreneurial opportunities. John is and research 20 years of executive experience also co-author of Marketing Management: in high-growth retailing firms including two A Strategic Decision Making Approach, John Mullins ventures he founded and one he took public. 7th edition and Marketing Strategy: A Decision Focused Approach, 5th edition. Since becoming a business school professor in 1992, John has published three John has consulted and taught executive books, numerous cases and more than education on four continents for a variety of 40 articles in a variety of outlets, including organisations both large and small, including Harvard Business Review, the MIT Sloan the African and European Venture Capital Management Review, and the Journal Associations, Eastman Kodak Company, of Product Innovation Management. His the International Finance Corporation research has won national and international of The World Bank, the International awards from the Marketing Science Institute, Planned Parenthood Federation, Kenya the American Marketing Association, Airways, Phoenix Equity Partners, Pumpkin and the Richard D. Irwin Foundation. Ltd., Roche Diagnostics, Time Warner He is a frequent speaker to audiences in Communications, the Young Presidents’ entrepreneurship and venture capital. Organization, and numerous others. 4 Issue 9 October 2008
  5. 5. |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| Forthcoming Events Executive Education October 2008 November 2008 Executive Workout Executive Workout Launch Event, London Launch Event, London Wednesday 1 October Monday 17 November 08.00 – 9.30am 18.30pm onwards With Steve Currall, Visiting Professor of With Dominic Houlder, Adjunct Professor Organisational Behaviour and Entrepreneurship of Strategic and International Management After Hours with London After Hours with London Business School, London Business School, Zurich Executive Workout Launch Events Tuesday 14 October Monday 17 November Be the first to experience first-hand a taster of 18.30pm onwards 18.30pm onwards our new 2-day programmes, network with other senior executives, meet and learn from world- With Andrew Scott, Richard Portes, With Zeger Degraeve, class faculty. Helene Rey and Lucrezai Reichlin Professor of Decision Sciences After Hours After Hours with London Other cities we will be visiting in Business School, hosted by 2009 include: Paris, Amsterdam, A series of informal evenings when senior Allen & Overy, Frankfurt Dubai, Abu Dhabi, Copenhagen, business executives can meet with the Milan and London London Business School Wednesday 29 October Executive Education senior 18.30pm onwards For more information and to register for any of management team. the events listed, please contact either Rebecca Each evening includes With Steve Currall, Visiting Professor of or Kate in our events team: a keynote seminar followed Organisational Behaviour and Entrepreneurship execevents@london.edu by a networking drinks or visit www.london.edu/execed/events/ reception. Forthcoming Event Centre for Marketing 12 November 2008 Price Discrimination Strategies Anja Lambrecht London Business School A company can price discriminate between profitability of such pricing strategies based customers with a high and a low willingness on results of multiple research projects. We to pay by offering multiple pricing plans. Such discuss questions such as why customers and plans differ in their monthly fee, their usage companies benefit from a “flat-rate bias”, how price and possibly the number of free units. For customers’ uncertainty about usage contributes example, mobile phone companies offer many to profits, when it may be profitable to switch different cell phone plans ranging from none to customers to new tariffs and whether companies unlimited free minutes. Web hosting companies should offer so-called rollover minutes. charge different monthly fees depending on the amount of web space and bandwidth. Insurance companies typically charge a flat fee per month but experiment with pay-as-you-drive insurance. This seminar highlights several strategies For full details and to register, that companies can use to price discriminate please visit www.london.edu/marketing/ with optional pricing plans and evaluates the 5 Issue 9 October 2008
  6. 6. Feature Strategies to fight low cost rivals Nirmalya Kumar Over the past five years, I’ve studied around 50 incumbents and 25 low-cost businesses. My research shows that ignoring cut-price rivals is a mistake because it eventually forces companies to vacate entire market segments. The sustainability of When market leaders do respond, they often the brutally competitive German market. low-cost businesses Aldi doesn’t pamper customers. Its stores set off price wars, hurting themselves more display products on pallets rather than shelves than the challengers. Companies that wake Be it in the classroom or the boardroom, in order to cut restocking time and save money. up to that fact usually change course in one executives invariably ask me the same Customers bring their own shopping bags or of two ways. Some become more defensive question: Are low-cost businesses a permanent, and try to differentiate their products—a enduring threat? Most managers believe they buy them in the store. Aldi was one of the first strategy that works only if they can meet a aren’t; they’re convinced that a business that retailers to require customers to pay refundable stringent set of conditions. Others take the sells at prices dramatically lower than those deposits for grocery carts. Shoppers return the offensive by launching low-cost businesses incumbents charge must go bankrupt. carts to designated areas, sparing employees of their own. This so-called dual strategy Successful price warriors stay ahead of the time and energy needed to round them succeeds only if companies can generate bigger rivals by using several tactics: they up. At the same time, Aldi gets the basics synergies between the existing businesses and focus on just one or a few consumer segments; right. There are several checkout lines, so wait the new ventures. If they cannot, companies they deliver the basic product or provide times are short even during peak shopping are better off trying to transform themselves hours. Its scanning machines are lightning fast, one benefit better than rivals do; and they which allows clerks to deal quickly with each into solution providers or, difficult though it back everyday low prices with superefficient shopper. Most retailers follow local pricing, but is, into low-cost players. Before I analyse the operations to keep costs down. That’s how every Aldi store in a country charges the same various strategy options, however, I must dispel Aldi, the Essen-headquartered retailer that price, which reinforces the chain’s image as some myths about low-cost businesses. owns Trader Joe’s in the U.S., has thrived in 6 Issue 9 October 2008
  7. 7. 0. 0.26 0.25 a consumer champion. Aldi sells products far cheaper than rivals do (their average markup is 13% while that of most European retailers is 28% to 30%) and according to European market research firms, the chain had a 20% share of Germany’s supermarket business. As Aldi’s story suggests, the financial calculations of low-cost players are different 0.24 from those of established companies. They earn smaller gross margins than traditional players do, but their business models turn those into higher operating margins. Those operating margins are magnified by the businesses’ higher-than-average asset turnover ratios, which result in impressive returns on assets. Because of those returns and high growth rates, the market capitalisations of many upstarts 0.23 are higher than those of industry leaders, despite the larger equity bases of the latter. Interestingly, low-cost companies stay ahead of market leaders because consumer behaviour works in their favour. If a business gets a customer to buy its products or services on the basis of price, it will lose the customer only if a 0.22 rival offers a lower price. Since the discounters win all their customers because of the prices they offer, they don’t have to worry about traditional rivals that always charge premiums. Only new entrants with even lower cost structures can compete with the price warriors. The futility of price wars The moment a company spots a low-cost competitor, it would do well to ask itself this 0.21 question: Is our new rival targeting a segment we don’t want to serve or will it eat into our sales? If the new entrant has set its sights on customers no other business serves, incumbents needn’t worry—for the moment. They can observe without engaging the competitor. That wait-and-watch strategy often 0.20 works for companies that market products for people at the very top of the pyramid, such as wines, perfumes, and cosmetics. Even when market leaders copy the critical elements of low-cost players’ business models, they are unable to match their prices. That’s because the individual elements of the model don’t matter as much as the interactions among them. Slashing prices usually lowers profits for all 0.19 incumbents without driving the low-cost entrant out of business. I learned that firsthand while serving as a consultant to a European telecom- equipment provider that was competing against traditional rivals as well as a low-cost Asian competitor for a multimillion-dollar contract in Africa. All the bidders kept cutting prices in 0.18 7
  8. 8. Feature the business models of such rivals appear to order to best the Asian rival’s offer, which proved various companies provide. Over time, the be simpler than their own. In the 1990s, for seller develops a deep understanding of to be the lowest after every round of bidding. instance, all the major airlines launched no-frills the customer’s business processes, so the Eventually, the telecom giants discovered second carriers—Continental Lite, Delta Express, that the Asian company had offered a 40% customer finds it difficult and costly to change discount on the lowest price the customer KLM’s Buzz, SAS’s Snowflake, US Airways’ suppliers. Furthermore, since low-cost players could negotiate with its rivals! Not surprisingly, MetroJet, United’s Shuttle—to take on low-cost have limited product ranges and service the low-cost company won the contract. In competition. All these second carriers have since capabilities, they cannot offer solutions. addition, although the telecom giants would been shut down or sold off, showing how tough Despite the popularity of this strategy, making it is for companies to use the dual strategy. not have made profits on their lowest bids, the changeover is difficult. Many companies, Although most executives don’t realise it, the Asian contender seemed likely to do so. such as Boots, Compaq, Xerox, and Uniys, didn’t succeed because they assumed that selling solutions required modifying their existing “Successful price warriors stay ahead business models rather than transforming them. of bigger rivals by using several tactics: Switch to low-cost models In theory, a company can consider switching they focus on just one or a few consumer from a high-cost to a low-cost business model. In practice, such a transformation segments; they deliver the basic product is unlikely because the incumbent will have a profitable albeit shrinking business to or provide one benefit better than rivals maintain. Moreover, switching to a low-cost business model means acquiring capabilities do; and they back everyday low prices that are different from the company’s existing competencies. It’s hard to imagine many with superefficient operations to keep market leaders having the stomach for that. Low-cost players will continue to mushroom, costs down.” and some will succeed. However, there will always be two kinds of consumers: those who buy on the basis of price and those who are When differentiation works partial to value. Therefore, there will always be companies should set up low-cost operations room for both low-cost players and value-added only if the traditional operation will become more When businesses finally realise they can’t businesses. How much room each will have competitive as a result and the new business win a price war with low-cost players, they try depends not only on the industry and customers’ will derive some advantages that it would to differentiate their products in a last-ditch preferences, but also on the strategies traditional not have gained as an independent entity. attempt at coexistence. Companies, we’re businesses deploy. If incumbents don’t take on Another factor that affects incumbents’ told, should adopt the following approaches: low-cost rivals quickly and effectively, they can low-cost businesses is the allocation of Design cool products, as, say, blame no one for their failure but themselves. resources. When disruptors are new ventures, Apple and Bang & Olufsen do. they face market tests of their capital needs. Continually innovate in the Subsidiaries face internal resource-allocation tradition of Gillette and 3M. This article is an abstract from the author’s research, processes that optimise different criteria—both Offer a unique product mix, like that of which can be read in its entirety in Strategies to for legitimate reasons, such as higher margins Sharper Image and Whole Foods. Fight Low-Cost Rivals, Harvard Business Review, 84 (December 2006), 104-12. and lower risk, as well as illegitimate ones, Brand a community à la Harley- such as power and politics. Consequently, the Davidson and Red Bull. parent may end up starving the new unit. Sell experiences, as Four Seasons, Nordstrom, and Starbucks do. Switching to conquer Three conditions will determine their efficacy. First, smart businesses don’t use these tactics If there are no synergies between traditional in isolation. Second, companies must be able and low-cost businesses, companies to persuade consumers to pay for benefits should consider two other options: they and the ability to do so usually depends on can switch from selling products to selling the products they sell. And third, companies solutions or, radical though it may sound, must bring costs and benefits in line before convert themselves into low-cost players. implementing the differentiation strategy. Switch to solutions. Since low-cost players turn incumbents’ basic products or services Dealing with dual strategies into commodities, existing companies may be able to succeed by selling solutions. By offering When companies discover that the low-price products and services as an integrated package, customer segment is large, they often set up companies can expand the segment of the low-cost ventures themselves. Because of market that is willing to pay more for additional their years of industry experience as well as their abundant resources, incumbents are benefits. Solutions offer several advantages: often seduced into believing that they can They include a large service component, so easily replicate cut-price operations. Moreover, it’s hard to evaluate the quality of the solutions 8 Issue 9 October 2008
  9. 9. ? Value Merchants: Demonstrating and Documenting Superior Value in Business Markets By James C. Anderson, Nirmalya Kumar and James A. Narus allows more refined targeting through various squanders the superior value of the supplier’s Purchasing managers in business markets levels of service and enables suppliers to market offerings while getting little in return. are becoming increasingly sophisticated in capitalise on differences between customers. Doing business based on demonstrating their strategies and tactics. Increasingly held and documenting superior value is, indeed, accountable for reducing costs, purchasing Transform sales force to value merchants a rare commodity. Yet it doesn’t have to be so. and other customer, managers don’t have the challenges suppliers to transform their sales forces By adopting the customer value management luxury of simply believing suppliers’ claims of from selling on price to becoming value merchants. approach presented below, value merchants cost savings. A relatively easy and quick way can prevail when they encounter challenges. to obtain savings is for purchasing managers Profit from value provided is all about how to focus on price and obtain price concessions Conceptualise value focuses on the companies can profit from the superior value from suppliers. To enhance their negotiating they provide customers. Although it is natural fundamental building block of the customer power, purchasing managers attempt to to think first of price premiums, there are also value management and addresses questions convince suppliers that their offerings are the three other means of obtaining a fair return like: What do we mean specifically by “value” same as their competitors, so that they could from customers for value provided in business in business markets? How does one define be easily replaced. markets: a more profitable mix of business, a points of difference, points of parity and points In the face of such pressure, suppliers greater share of the customer’s business, and of contention vis-à-vis the next-best alternative? cave in and match competitor prices. It is a the elimination of value drains and value leaks. rare commodity in business markets to find Formulate value propositions begins with firms that do business based on demonstrably superior value. analysing what potential changes in the market Big idea: Prices are transparent, value is offering customers would value most vis-à-vis This content is taken from the new book, Value opaque. The book presents a methodology for the next-best alternative. This is used to develop Merchants: Demonstrating and Documenting Superior Value in Business Markets by James C. Anderson, how to demonstrate the value of your firm’s a value proposition to aspire to, and qualitative Nirmalya Kumar and James A. Narus offering versus the next best alternative in research is conducted to refine the value monetary terms. proposition. It brings together years of consulting experience and research to provide the reader with a detailed explanation of customer value management and how Value merchants versus Substantiate value propositions provides a to implement it. Discover the required tools to develop value spendthrifts methodology for persuasively substantiating new strategies that shift the focus from pleasing value propositions to customers. A value merchant recognises the supplier’s customers by reducing prices to retaining customers by demonstrating superior value. own costs and the market offering’s value to Tailor market offerings demonstrates how the customer and works to obtain a fair return Available to purchase through Harvard Business a deep understanding of customer value can for both the supplier firm and customer firm. School Press and Amazon be used to construct segment-specific market The value merchant stands in stark contrast offerings as naked solutions with options. This to the all-too-common value spendthrift, who 9 Issue 9 October 2008
  10. 10. Feature About Betfair Betfair is the UK’s biggest online betting company with over 1,800,000 registered customers and over 500,000 active users. Betfair offers betting on over 50 different It launched the betting exchange concept sports and events from 122 different countries. with cutting-edge technology in June 2000. Horse racing is the dominant sport, then soccer Co-founders Andrew Black and Edward Wray and tennis. Cricket and golf are growth areas. were named Ernst and Young Emerging Others include reality TV and financial markets. Entrepreneurs of the Year in 2002. The The Betfair Games portfolio has expanded to company has since become global and runs diversify its revenue streams in what is a highly from bases in London, Malta, and Tasmania. competitive market. Multiples and Accumulator Central to Betfair’s success is its technology Betting was launched in 2007 for customers to which allows it to manage risk perfectly. have the chance to win across selections with The result is that punters can choose their a range of accumulator betting options. This own odds and effectively bet against each runs from Malta and has been a significant area other. Betfair’s bookmaking model results in of growth and investment. In addition, Betfair odds which, according to one study, are on Poker was launched in 2004 and is now the average more than 20 percent better than the exclusive sponsor of the World Series of Poker prices offered by conventional bookmakers Europe in London. It’s the result of a three and offers genuine ‘in-running’ betting - year partnership with Harrah’s Entertainment this means customers can bet on an event to stage the first World Series of Poker event after it has started. Betfair charges a small outside of Las Vegas. Betfair Casino was commission between 2-5% on net winnings. launched in October 2006 with an innovative Losing customers pay no commission. Betfair ‘zero lounge’ which means the games have no launched its own Starting Price (SP) in house edge. December 2007 allowing customers to take SP The Betfair mobile product was launched odds set by customer demand instead of being in 2006 allowing in-play betting on the betting dictated by the bookmaker. 10 Issue 9 October 2008
  11. 11. “Betfair completes exchange. The company bought and rebranded ‘Mobet software’ from the Scottish IT company 5 million transactions Rapid Mobile to enable secure transactions to be carried out on a mobile network. Betfair per day – more Australia was awarded a betting exchange licence by the Tasmanian Gaming Commission than all of Europe’s and began operating in 2006. In 2007, the £10m launch of ‘Tradefair’ enabled betting on stock exchanges financial markets with a white label agreement signed with London Capital Holdings to combined.” produce a spread betting product. It means the company now employs over 1,200 people across its bases in Hammersmith, Stevenage, Hobart and Malta. With over 350 engineers, Betfair has one of the fastest and most resilient betting platforms, completing 5 million transactions per day – more than all of Europe’s stock exchanges combined - and 99.9% of the bets are handled in less than a second. Oracle views Betfair as one of its top five customers in the world today, alongside eBay and Google. There are automated price feeds to third parties for mobile, automated trading or historical data. The API (Application Programming Interface) to third parties integrates the exchange with participants in the Developers Program to build customised tools and interfaces for Betfair sports exchange. Betfair’s aim is to be the unassailable choice of the punter by providing the best value, service and protection. Betfair has a long- standing policy of not accepting US customers, funds or bets and was not affected by UIGEA (Unlawful Internet Gambling Enforcement Act) passed in 2006, restricting internet gambling financial processing. In the UK, Betfair pays tax in exactly the same way as every other bookmaker: a gross profits tax at 15%. This allows all bookmakers to compete on an even footing and ensures a well regulated and safe environment for all punters. In the 2007 budget, Gordon Brown set the Remote gaming duty’ at 15% in line with the rate of general betting duty. Betfair works closely with governments and regulators to provide transparency. It has a 40 strong Integrity Team which monitors betting patterns and records details of every bet and currently has 32 Memoranda of Understanding (MoU) with sports governing bodies to share information about betting patterns and customer behaviour. At the 2007 tennis tournament in Sopot, Poland, Betfair voided £3.4m bets between Martin Vassallo Arguello and Nikolay Davydenko following suspicious betting patterns during the match. The information provided by the Integrity Team to the Association of Tennis Professionals was key to the Gunn and Rees report ‘Environmental Review of Integrity in Professional Tennis’ in May 2008. Betfair has received two Queen’s Awards for Enterprise: 2003 for Innovation and 2008 for International Trade. In 2004, it won Company of the Year at the Confederation of British Industry Growing Business Awards and in November 2005, it retained its title as Company of the Year at the CBI Growing Business Awards. 11 Issue 9 October 2008
  12. 12. Interview Marketing Insight interview: Anton Bell Director of Central Marketing, Betfair Professor Patrick Barwise talked to Anton Bell about the role of marketing and branding at Betfair. What brought you to Betfair? >> to grow our product portfolio and needed to Curriculum Vitae prioritise this against customers’ perceptions After Centrica sold Goldfish.com to LloydsTSB, of the values we stood for – being innovative, I began looking for a new and fresh online Betfair 2004-present offering value, being fair and on the side of environment that would continue my move the punter and obviously, person to person away from financial services. When the Betfair Director Central Marketing (P2P). Talking to our customers provided opportunity came along, the company was a Customer Acquisition, CRM, Insight, some fascinating insights into their motivations relatively new and successful enterprise with Planning and Delivery – across sports, and we were able to model their responses to huge scope for global growth. I’d grown up casino, poker the range of new product concepts. Further around betting and gambling - my mum’s Director/Head of Insight quantitative understanding revealed that partner worked as an on-course bookmaker Customer, consumer, competitor and our savvy sports betting customers were still and I’d done a stint with William Hill when I was market analytics and research playing more recreational products with our at university - so I was excited by the chance competitors, whilst exhibiting sophisticated to be part of something that was revolutionising Centrica 2000-2004 behaviour on the Exchange, so it gave us the gambling industry. Group Insight Manager – Group CRM confidence in our plans for future growth. Tell me about the Insight function Marketing, customer relationship at Betfair How has marketing evolved at Betfair? management and insight role for Centrica Group – Goldfish, OneTel, Building the Insight capability at Betfair was my In the early days of the Exchange, customer The AA, British Gas first challenge. I started with a couple of data acquisition was heavily driven by word of analysts querying the new data warehouse and mouth but as our product portfolio has grown Capital One 1999-2000 then grew to a strong team of Insight specialists over the last four years, so has our marketing Senior Analyst/Project Manager responsible for customer understanding, investment. Understanding the effectiveness of behavioural analysis and modelling, consumer our marketing spend is critical as the product Marketing sub-prime financial credit and market research, competitor and market and channel mix evolves and we look to products and new partnership development intelligence. The aim was to bring these areas prioritise new opportunities. Our Finance and together to inform and drive business decisions. Insight teams work very closely with Marketing London School of Economics to stay on top of this. and Political Science What would be a typical As we grow, there is an increasing challenge BSc (Econ) Econometrics and Mathematical Insight project? to communicate effectively with our customer Economics base. Targeting relevant and valuable One of the first research projects we undertook communications to our customers, into an was simply to understand what our customers increasingly crowded email inbox, is something thought about us. Our customer base consisted that we strive to improve. A solid understanding mostly of sophisticated early adopters who were of customer life stage, value and risk is central very passionate about their betting and with it, to this activity. the opportunity that we provided them versus the traditional bookmaker. We were looking 12 Issue 9 October 2008
  13. 13. How has the brand developed over time? We have always been keen to differentiate ourselves from the traditional bookmakers and our early strap line, ‘Sharp minds Betfair’ was intended to be aspirational and inclusive. We found this approach excluded the more recreational segments of the marketplace and some bettors believed that we weren’t relevant to them. Currently, our aim is to promote both the relevance of our gambling proposition - through scale, value and choice - whilst reinforcing the key P2P differentiator of our sportsbook offering, which is betting against other people. In summary it’s a superior offering and hence, ‘Betting as it should be’. So does the brand now have to stretch across different categories? Betfair historically was purely a sports betting exchange, but we also have Poker and Casino as part of our portfolio. Tradefair was launched in 2007 for those segments attracted to financial and spreads products and, more recently, Tai Kai, where you can set up your own tournaments and play against your friends for money or just for fun. Growing our brand from our primary Exchange heritage and moving from niche to mainstream has been our biggest “The online betting challenge. exchange enables punters What’s the most exciting marketing innovation that you’ve undertaken to choose their own odds while you’ve been there? Betfair continues to innovate, developing new and bet against each other.” products and businesses and expanding into new markets, so the Central Marketing Team are constantly faced with new challenges. In the past 12 months we embarked on two new partnerships, the main one being with Harrah’s Entertainment sponsoring the World Series communicate with different segments of the achieving clear measurable objectives, is of Poker Europe. In October we went to air gambling population and show that we are fundamental to marketing effectiveness. with our first TV campaign and launched the relevant to everyone who wants to place a bet Marketers are often focused on developing the Betfair Starting Price (SP) in November, which or gamble online. This is important when some big idea or getting the campaign out of the door kicked off a 5 month multi-channel campaign of our competitors have decades of high street and lose sight of the original objectives and delivering a series of new innovations from ‘the presence benefiting their online proposition. the target audience. Constantly evolving and Betfair Stable’. This culminated in the Grand learning from successes and mistakes is critical What was the message from the TV? National activity which delivered a record to improving effectiveness and in a fast moving number of new customers. environment it can be difficult to stop and take The TV campaign ran from October and used stock of where these improvements can be animation to represent the Betfair world - And this really helped building realised. the scale of our community, betting against awareness of the Betfair brand? others online, providing value to the customer. Why are you supporting the Centre for Over three waves we have seen significant Brand investment has been central to the past Marketing at London Business School? growth in spontaneous awareness, improved 12 month’s marketing success with increased understanding of our portfolio and, importantly, exposure on television extending our reach and London Business School is a great place a 70% increase in consideration. driving growth in the UK and Europe. We have for staying in touch with new thinking about a very strong value proposition but the benefits business and marketing. Operating in new What do you think are the mistakes of the P2P concept can be a difficult message territory, it is vital to look at exemplars in people are making in marketing? to get across in a press ad, a poster or even other categories and apply learnings and best online. TV has provided a richer medium to practice to our relatively unique model. Aligning creativity with empiricism, and 13 Issue 9 October 2008
  14. 14. Faculty Profile Introducing Marco Bertini Assistant Professor of Marketing, Marco Bertini discusses the effect that price can have on people’s judgments and preferences and suggests how it can be used to solve some of the issues facing marketers today. What do you see as the main challenge How can companies improve the and in the way we teach our programmes for the marketing function today? quality of their pricing decision? and courses. As much as possible, we bring the insight generated by our research to the One of the main challenges still faced by the There are a number of steps firms can take to classroom. The feedback we then receive marketing function today is accountability. improve the quality of their pricing decisions. from the students is crucial to ensure we For a number of years now there has been First of all, prices should not be set based continue to study relevant phenomena. pressure on marketers to demonstrate the on costs. This does not mean costs are return generated by their investments. A lot irrelevant – far from it. Costs are important What are some of the more interesting of work has been done in that area. I can to understand the implications of pricing findings with practical implications think of a number of important research decisions. Beyond that, pricing policy needs of your research over the years? papers and books that have provided useful to start from two key pieces of information: insights. At the same time, I think there is still (1) the objective worth of the product we As I mentioned earlier, my main area of a considerable amount of work to do. More are selling, and (2) the perceived value of research is pricing. My work to date has looked important, I am concerned about some of the that same product to our customers. It is the at instances where price changes people’s reactive measures that marketers seem to be job of marketing to quantify the benefits in perceptions of the products and services they taking. Pressured to quantify their decisions, a firm’s offering, measure the gap between buy. I find this topic very interesting because some marketers are reverting to actions that objective and perceived value, and work such an effect is not really supposed to exist. have little to do with customers. One example hard to bridge that gap by communicating Price has nothing to do with the quality of is segmentation. Segmentation is getting a lot value in a way that customers understand. a good. All it is supposed to do is index the more attention nowadays; however, marketers An additional way to improve the quality terms of trade; that is, price “tells” consumers seem to favour more and more schemes of pricing is to make sure price policy is well how much money they need to give up in that rely on easy-to-justify variables such as integrated with the other marketing decisions. order to make a purchase. My own research demographics and geography in consumer For instance, a deep understanding of and that of other academics in marketing, markets and account size or industry type customer needs through segmentation gives psychology, and economics show that price in business markets – none of which really marketers the basic information for price can actually have a very strong effect on identify what customer needs exist in the discrimination – charging different prices to people’s judgments and preferences. marketplace. A second example is in pricing, different segments. Unless firms understand My article on page 16 demonstrates the area I conduct most of my research where value is created, and how that value that price (the amount firms charge, the and teaching in. Harsher economic times differs across groups of people, the prices way firms present price, etc.) can influence are putting pricing under the microscope. that are subsequently set are never going to how we perceive everyday goods. I have Unfortunately, marketers continue to base their be optimal. Also, price needs to be calculated documented cases when the effect is pricing decisions on the costs of the products in conjunction with the other three “Ps” of driven by the amount of thinking we do or they sell. Again, this move is easy to quantify the marketing mix. The marketing mix is just the attention we pay. The research of other and justify, but neglects the key criterion: that: a mix. Better pricing decisions keep academics has identified other explanations. what is the customer actually willing to pay? these other factors in mind: How should we What are the main research areas structure our product line such that we can What is the single most important you currently working on? charge different prices for different models? thing that marketing can do What channels of distribution should be used I am currently working on a number of to boost the bottom line? to reach different customer segments with interesting projects in the area of pricing and different prices? What promotional material By far the single most important thing promotions. One project I am particularly do we need to develop to communicate marketers can do to boost the bottom line keen on studies the relationship between the value we are selling and therefore is improve the way they price. Interestingly, assortment size and consumers’ willingness to justify the price we charge? And so on. while firms continue to spend a lot of money pay. My co-authors and I have conducted four trying to reduce costs or bolster revenue, different experiments to date. The data tells What is unique about the very little attention is paid to optimising us that consumers are willing to pay less for contribution of London Business price. This is amazing to me because price low quality products and more for high quality School’s Centre for Marketing to is by far the most significant profit lever. A products when assortments are large. This the discipline of marketing? number of studies have shown that a simple polarisation of willingness to pay is puzzling 1% increase in price can increase profit by because the evaluation of any product is The way in which it integrates rigorous 10-12% on average. This kind of return is supposed to be based solely on the merits of academic research with practical relevance. almost impossible with process re-engineering, that good, not on the number of alternatives All of the marketing faculty at the school advertising, product development, and available. My co-authors and I believe this have a strong interest in addressing problems other measures targeted at cutting costs or effect exists when consumers are uncertain that are important to practice. We definitely increasing revenue. A little sophistication in about the value of an offering – a fairly common pride ourselves in doing things that we think pricing can go a long way. To me this is the situation. When this is the case, we believe managers find both interesting and useful. This first thing marketers should look to improve. that consumers infer how important quality is evident in the research questions we tackle 14 Issue 9 October 2008
  15. 15. “By far the single most important thing marketers can do to boost the bottom line is improve the way they price. Interestingly, while firms continue to spend a lot of money trying to reduce costs or bolster revenue, very little attention is paid to optimising price.” 15 Issue 9 October 2008
  16. 16. Faculty Profile Using price to awaken consumer differences are by observing the number of thinking and impact alternatives firms are willing to market: the more populated an assortment is, the more important quality differences are expected to be, which in turn increases the willingness to pay. buying behaviour A second project I am involved with is studying the effects of monetary incentives on the type of products people buy. We argue that incentives such as quantity discounts, bundling, referral bonuses, coupons, etc. change people’s frame of mind, making them much more price sensitive at the time of selecting a product. Are you aware just how much the price of a product or even the way that the price is presented to the consumer can affect buying behaviour? painful than a single loss of equal monetary Recent research on the psychological aspects value and that advertising a partitioned of pricing suggests that the relationship price often triggers negative effect, which between price and choice might be more could consequent into boycotting of the complex than originally thought. Marco Bertini brand and damaging word-of-mouth. and Luc Wathieu explore this further. Firstly Price partitioning will not only impact on they look at the way that price information the perception of expenses, but also the is presented and how this can influence perception of nonprice attributes; i.e. the Finally, I am working on a project with perceptions of value. Secondly they consider benefits of the purchase. Consumers that colleagues from Columbia and Duke that how overpricing can motivate consumers are presented with an all-inclusive price examines the quality of people’s choices when to think about the personal value of a new are likely to concentrate their evaluation price is a factor in the decision. Marketers have benefit, in turn affecting their likelihood to buy. on the focal attribute of the transaction known for quite a while that pricing can have The practice of price partitioning has (DVDs, groceries, etc.). A partitioned price, significant psychological implications. Some of become increasingly common. Instead of on the other hand, increases the amount my past and current research has demonstrated charging a simple, all-inclusive price, firms of attention paid to secondary attributes that point exactly. In this research we study regularly post sets of mandatory charges (shipping and handling, advance booking, a more fundamental question: how good are attached to various attributes of an offer. This etc.), which in turn affects preference people at making decisions when they have to phenomenon is not limited to predictable and choice. It can sensitise consumers to process price? Common intuition would suggest settings such as Internet sites and catalogues. features they might otherwise overlook. that price is the easiest attribute to consider Today, one can also find furniture stores An emphasis on perceived benefits (rather when making a purchase. After all, price is an breaking out the cost of sofa pillows and than expenses) suits situations in which ubiquitous, objective quantity. However, we hotels charging a separate fee for room keys. price partitioning increases demand as well repeatedly found that people make many more There are differing views on the effects as situations in which price partitioning errors in judgment when price is presented. of price partitioning on consumer behaviour. harms demand. For instance, shipping We attribute this counterintuitive result to two Some believe that price partitioning could and handling is a requisite in most online observations: (1) money is much more than a increase demand because buyers tend to transactions, and the cost associated with medium of exchange – we feel pleasure or pain underestimate the total cost associated with this service typically varies little across just by receiving or spending money, and (2) multiple charges. Others, however, argue vendors. A secondary attribute is neglected unfortunately we don’t really have a good sense that price partitioning will decrease demand if price is all-inclusive but overemphasised of how much pleasure or pain money brings because multiple losses are generally more us – this is because money has no specific inherent value beyond what we can buy with it. Marco Bertini is Assistant Professor of Marketing at London Business School. His research focuses on the strategic implications “Consumers’ motivation to think of consumer behaviour, with particular emphasis on pricing policy and product is determined by market prices in differentiation decisions. Marco has also consulted to companies such as AstraZeneca, combination with other factors such as BT, De Beers, and Procter & Gamble. He teaches on the 5-day Executive Education magnitude of the potential benefit, initial programme Customer Focused Marketing: The Key to Unlocking Profits and on the 2-day degree of uncertainty, and cost of thinking.” Executive Workout: Pricing for Profit. For more information please contact the Client Services team on +44 (0)20 7000 7378 16 Issue 9 October 2008

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