How to Win at Markstrat

How to win at Markstrat (Markstrat Tips and Tricks) Market Forecast and Segment Selection

Market Forecast Start by looking at the market forecast, determine which segments are the high-growth segments, get into these segments early. This has two benefits, establishing segment dominance and control which makes it difficult for competitors to enter the segment, secondly, the high-volumes help to decrease unit costs over time. Plotted is the market forecast of each segment with an exponential trend line, forecasted additional three periods in the future. Shoppers and Savers clearly have the highest market growth in this example.

Integrate the equations between period 0 and 8 to get total volume. Segment

Equation

Total over 8 periods

Explorers

y = 231764e-0.029x

1,654,717

Shoppers

y = 176438e0.2592x

4,733,251

Professionals

y = 160089e0.1414x

2,376,865

High Earners

y = 146295e0.1815x

2,637,148

Savers

y = 280506e0.1738x

4,868,505

One thing to consider is these two segments also have the smallest margins. An estimated simple Contribution Margin can be calculated using Recommended Retail Price minus Base Cost for each existing product. The summation of market share of each product multiplied by the calculated CM of each product gives as estimated CM per market segment. Product

Est. CM

Explorers

262

Shoppers

221

Professionals

299

High Earners

286

Savers

199

Using the total volume of each segment multiplied by CM of each segment, we get the following segment total CM.

When semantic scales are available from period one, we can associate price perceptions to actual prices, adding in an exponential trend gives a rough price perception to actual price equation. Semantic scales will be discussed in more detail next part.

Using ideal values for each segment, we can get a rough price for each segment. Segment

Ideal Values

RRP = 147.77e0.1955x

Explorers

3.5

294

Shoppers

3.4

288

Professionals

5.7

449

High Earners

5.3

420

Savers

2.3

231

An estimated base cost for each segment can be determined by summing the products of individual product’s base cost and individual product’s segment market share. With the estimated segment product cost and estimated base cost, the estimated contribution margin per segment can be calculated.

Product

Est. CM = 147.77e0.1955x

Est. Base Cost

Est. Total CM

Explorers

294

169.839

124

Shoppers

288

120.982

167

Professionals

449

211.426

237

High Earners

420

200.058

220

Savers

231

74.964

156

Again, the Professionals and High Earners segments, as expected, have the highest contribution margins. Finally, plotting the total contribution of each market segment calculated by the segment CM multiplied by the total segment size. It can be seen that Shoppers and Savers are still the higher earning segments, even though Professionals and High Earners have higher contribution margins, though the contribution growth is slightly slower.

It should be noted that spending more budget in a Market Segment naturally increases the market segment size. Companies moving into the high-growth segments will naturally fuel the segment’s growth in a virtuous circle, while the abandoned low-growth segments continue to die in a vicious circle. Markstrat Semantic Scales and Multidimensional Scaling There is two main market research data, Semantic Scales and Multidimensional Scaling, both have their advantages, Semantic Scales are more closely tied to product characteristics, new products must use Semantic Scales Ideal Values when designing the characteristic of products. Multidimensional Scaling combines the multiple characters into three simplified groups, this makes it a lot easier to change Brand Perceptions with advertising as you can chose two of the three, rather than two of the five. It is important to note, Ideal Values are constantly evolving, so forecasting is required. Additionally, Ideal Values change by spending on Advertising to change Perceptions. Plotting the Ideal Values of a given segment (Savers) and it can be observed that each characteristic is evolving at a different pace. If the current period’s Idea Values are used, they would have changed by next period. Add similar linear trend lines and the Ideal Values of each characteristic can be extrapolated.

Below shows variance between the trends of four points and actual periods ideals.

There is significant deviation between Processing Power and Design Index, possibly from the ranking of Importance of Characteristics. Companies will generally change Brand Perceptions (through advertising) of the important characteristics, which intern would alter the Ideal Values. No. of

Design

Features

Index

Battery Life

Display

Processing

Size

Power

Price

1.2

2.7

1.5

3.0

5.7

10.0

Similarly, the same can be done with Multidimensional Scaling, the below trends using three points and actual periods ideals.

The higher number of periods past, the closer the exploration would be to ideals. Once we know the ideal values for a given period, this can be used to calculated the desired characteristics of a product to meet a segments ideals. Markstrat Product Characteristics Let’s assume we want to create an ideal product for the Shoppers segment, it is know that it will take one period for development, so the Ideal Values of the following period must be forecast. If you are developing a product over multiple periods (a Vodite product), more than one period into the future must be forecast. Using a simple past two period example, the Excel TREND formula calculates the next periods values. Using LINEST, the direction (positive for up, and negative for down) can be calculated for determining if to round down or up, this is critical, as it can’t be assumed all characteristics are increasing.

No. of

Design

Battery

Display

Processing

Features Index

Life

Size

Power

Price

Period 0

1.75

5.20

2.95

3.95

3.13

3.30

Period 1

1.81

5.24

2.89

4.04

3.30

3.41

1.87

5.28

2.83

4.13

3.47

3.52

0.1

0.0

-0.1

0.1

0.2

0.1

Est Period 2 (TREND) Gradient/Direction (LINEST)

To calculate the characteristics from the Ideal Values, there are two methods. Range method Knowing the ideal value is on a scale from 1 to 7, and knowing the range of the characteristic, one can calculate the characteristic with the following;

The characteristics are calculated as; No. of

Display

Processing

Features

Design Index

Battery Life Size

Power

Ideal Char.

1.87

5.28

2.83

4.13

3.47

Calc Char.

7.18

7.99

45.96

22.78

44.11

Trend

+ve

+ve

-ve

+ve

+ve

Rounded

8

8

45

23

45

Note, the above can’t be used for price, as the range is unknown. Trend method The second method is to trend ALL market product brand perceptions vs. product characteristics.

Similarly, the Excel TREND function can be used, the following characteristics are calculated; No. of

Design

Battery

Display

Processing

Features

Index

Life

Size

Power

Price

1.87

5.28

2.83

4.13

3.47

3.52

Char.

6.90

7.75

45.72

22.52

44.25

306.25

Trend

+ve

+ve

-ve

+ve

+ve

+ve

Rounded

7

8

45

23

45

307

Ideal Char. Calc

Using this method, the Recommended Retail Price (RRP) can also be calculated, it may be worth using an Exponential trend rather than Linear, since price increases are more dramatic at the higher-end of the scale. The only difference between the two methods is the ‘No. of Features’, and it can be seen that both values were hovering around 7, but the first range method was slightly over, which rounded it up to an 8. In this example it may be worth using a 7 for the ‘No. of Features’ value. Market Forecast Start by looking at the market forecast, determine which segments are the high-growth segments, get into these segments early. This has two benefits, establishing segment dominance and control which makes it difficult for competitors to enter the segment, secondly, the high-volumes help to decrease unit costs over time. Plotted is the market forecast of each segment with an exponential trend line, forecasted additional three periods in the future. Shoppers and Savers clearly have the highest market growth in this example.

Integrate the equations between period 0 and 8 to get total volume. Segment

Equation

Total over 8 periods

Explorers

y = 231764e-0.029x

1,654,717

Shoppers

y = 176438e0.2592x

4,733,251

Professionals

y = 160089e0.1414x

2,376,865

High Earners

y = 146295e0.1815x

2,637,148

Savers

y = 280506e0.1738x

4,868,505

One thing to consider is these two segments also have the smallest margins. An estimated simple Contribution Margin can be calculated using Recommended Retail Price minus Base Cost for each existing product. The summation of market share of each product multiplied by the calculated CM of each product gives as estimated CM per market segment. Product

Est. CM

Explorers

262

Shoppers

221

Professionals

299

High Earners

286

Savers

199

Using the total volume of each segment multiplied by CM of each segment, we get the following segment total CM.

When semantic scales are available from period one, we can associate price perceptions to actual prices, adding in an exponential trend gives a rough price perception to actual price equation. Semantic scales will be discussed in more detail next part.

Using ideal values for each segment, we can get a rough price for each segment. Segment

Ideal Values

RRP = 147.77e0.1955x

Explorers

3.5

294

Shoppers

3.4

288

Professionals

5.7

449

High Earners

5.3

420

Savers

2.3

231

An estimated base cost for each segment can be determined by summing the products of individual product’s base cost and individual product’s segment market share. With the estimated segment product cost and estimated base cost, the estimated contribution margin per segment can be calculated. Est. CM = Product

147.77e0.1955x

Est. Base Cost

Est. Total CM

Explorers

294

169.839

124

Shoppers

288

120.982

167

Professionals

449

211.426

237

High Earners

420

200.058

220

Savers

231

74.964

156

Again, the Professionals and High Earners segments, as expected, have the highest contribution margins. Finally, plotting the total contribution of each market segment calculated by the segment CM multiplied by the total segment size. It can be seen that Shoppers and Savers are still the higher earning segments, even though Professionals and High Earners have higher contribution margins, though the contribution growth is slightly slower.

It should be noted that spending more budget in a Market Segment naturally increases the market segment size. Companies moving into the high-growth segments will naturally fuel the segment’s growth in a virtuous circle, while the abandoned low-growth segments continue to die in a vicious circle. MARKETING Segmentation

Target one product for one market segment only, early on it may be tempting to target multiple segments, particularly due to initial market share in many segments and purchase intentions in multiple segments. Make a decision to target the single segment, the segment that will return the largest contribution. Targeting a single segment makes it easier to target your product for that specific segment. Since each segment has a different ideal characteristic product. Estimated Expenditures The total estimated advertising expenditure is correct, but about 10% of the total is added to each individual segment, this shouldn’t matter too much since it can be assumed competitors will be targeting one product per segment. The estimated advertising expenditure is extremely useful for determine competitor advertising spend, as well as competitor target segments. The estimated commercial team is spot on in number. Advertising I have found that advertising is more important than commercial team. Depending on your strategy, aim to at least match or trump your segment competitors total advertising spend in order to gain greater market dominance. If there are two competitors, aim to match their total spend, if budget permits of course. I haven’t found it necessary to ever use No Objectives, unless you are launching a new product. It is easier to use multidimensional scaling compared to semantic scales since with multidimensional scaling you can alter multiple dimensions at the same time. with semantic scales you are limited to a maximum of two of the five characteristics. You can change the perceptions of price, normally, if you want to match your product to ideal price you would change the price directly, the advantage of changing the price perceptions is you can increase the price above the segments ideal price, and then change the consumers perception of the price back to their ideals. If that makes sense, or simply, use the perceptions of price when you want to increase price.

Note, when you change a perception of a characteristic, you are changing the perception of the entire products market. This is why some ideal perceptions change dramatically, other competitors are changing those perceptions. Commercial Team Commercial Team possibly reaches a maximum, where any additional persons provide no additional benefit. I have observed a team with a third more commercial team not gain any additional market share; the market share was exactly proportional to advertising spent instead. A possibly reason is commercial team isn’t segment specific, but over the entire market, so whilst they may be a large difference between you and a competitor, over the larger market the difference is small. With commercial team, it is critical to distribute the commercial team using the Shopping Habits of the target segment. Though, this contradicts the Experiments which I will discuss below. Experiments The marketing experiments are useful for determining how to proportionate your budget. Though, it assumes the competitor actions remain the same, which is never the case. I have contacted StratX to try and determine how they calculate estimated change in contribution, but they didn’t provide a definite answer, “Change in Contribution is equal to Expected additional revenues minus Additional costs of advertising or commercial team. I will attempt show how it is calculated below. Advertising Experiment The Advertising Experiment calculates the increase in market share if advertising for a product was increased by 20%. An estimated expected change in contribution is provided, which is roughly calculated as Average Selling Price minus Average Unit Cost multiplies by the additional units sold (the addition of each segment of the Expected Change of Unit Market Share multiplied by the current period’s Market Size) subtract 20% of the current periods total Advertising spend.

Commercial Team Experiment Similarly, the Commercial Team Experiment calculates the increase in market share if the commercial team was increased by 10 persons in each distribution channel. This is where I haven’t got a definitive answer. The Expected Change in Number of Distributors is indirectly proportional to the Expected Change in Unit Market Share. This suggests that the Expected Change in Units Market Share is relevant to that specific distribution channel only. It even makes more sense, in that, when 10 persons are added to a distribution channel with low number of distributors compared to that with a high number of distributors, the increase in persons is a higher ratio, which explains why the units market share is higher (the indirect relationship). What this means is, even though the percentage increase in Expected Change in Unit Market Share is the largest for a particular distribution channel, it doesn’t necessarily mean that is the distribution channel which should have the additional 10 persons. The cost of 10 persons can be calculated using the market research, it is roughly $25,000. The contribution of each distribution channel can be calculated as follows, using Savers segment as an example; Mass MARKET : SONITES : Specialty

Merchandiser

Online

SAVERS

Stores

s

Stores

0.4%

0.0%

0.2%

19%

63%

18%

Expected Change in unit Market Share (%U) Shopping Habits of Savers

Total

Savers next period Expected Market Size 229,068

761,136

221,796

1,212,000

0

444

1,360

Expected Change in Savers units

916

CM (average selling price minus average unit cost)

116

Expected Change in Contribution

105,831

0

51,236

157,067

Cost of 10 persons

-250,000

-250,000

-250,000

-750,000

Proportioning Budget Performing the above analysis on all products in all markets will give you an indication of where budget should be spent to maximise returns. It is also a good indication on where to decrease budget spend and even where you have overspent. Using the experiments is only one indication, and should be used with previous competitor actions to determine the optimal strategy. Competitor analysis In most cases Excel’s Conditional Formatting Colour Scales is all that is required. For the below examples blue is segment targeted. It is important to apply the conditional formatting over each market segment individually, not the entire market. In other cases, a little bit of work is required, the square root of the sum of squared differences can be used to determine the distance between two points, in many cases this can be used to calculate how close a competitor is to ideal values. Excel makes this calculation easy with the SQRT(SUMXMY2()) formula. Advertising

Advertising competitor analysis is the easiest, the Estimated Advertising Expenditures (in thousand dollars) gives a good indication to which company is targeting which segment.

Commercial Team Using the Estimated Commercial Team Size (in full-time equivalent), the exact commercial team size per channel of the competitors’ products can be determined. Converting the distribution between each channel to a percentage, it can then be compared against the Shopping Habits found in the Consumer Survey. Using Excel’s SQRT(SUMXMY2()) we can get the difference between the ideal distribution and the actual for a particular product and segment. A lower value means closer ideal and actual.

The results show which company is targeting their products to which segment. But more importantly, which product has a more ideal commercial team distribution to meet a particular segment. Semantic Scales Similar can be done to semantic scales, which provides an indication to which products are ideal for the market segment. The two tables to use in the calculation are Brand Perceptions and Ideal Values.

Multidimensional Scaling Similar to Semantic Scales, the same can be done for Multidimensional Scaling. Ignoring the values, what is interesting is how similar the Multidimensional Scaling is to Semantic Scales seen through the similar shades of colours. Change Multidimensional Scaling Perceptions and you change Semantic Scales perceptions and vice versa.

Vodites market.

My main view is to be the first to enter the market. The trick is to enter with the basic and least expensive product, as long as you are the only product in the market, the consumers will have no other choice but to purchase your product. The ad spend doesn’t have to be very high since there would be no competitors. Though you still need to maintain ad spent to increase the market size. However, if a competitor happens to enter the market at the same time as you, then you won’t gain any market share, especially since the product would not meet ideal values. The second advantage to entering the market with a basic product is when it is time to R&D the upgrade, you will notice significant (more than 50%) reduced costs. This makes it very easy to upgrade the product as soon as a competitor enters the market.

Target the largest markets first, Innovators and Early Adopters, they will also pay a premium for your products. A rough estimate for RRP for a Voditie product on launch is $1,000 or five times the base cost. If you are the only competitor, you may be able to charge even more.

Dos and Don’ts in Markstrat: 

Read the manual: even though it is long, and tedious. IT IS THE BEST GUIDE to SUCESS.  Make an excel sheet to keep all the data about the competitors. This will helps you analyze and predict what the competitors are up to.  Be the first one in the Vodite market. Do not be afraid that your product won’t be good enough. You can always change it later through R&D. Consumer’s awareness and perceptions are the most important factors to gain the market share in the Vodite market.  Use your resources: talk to the professor early in the period, or others who already played this game.  Continually have R&D to improve the products because the PRODUCT LIFE CYCLE in Markstrat is real.  A product should only target one segment. Trying to target more segments with one products will be the disadvantage for the long run.  Take a risk. Don’t be afraid to take short term losses for long term gains. Be creative but smart about your decision.  Make sure that you have enough money to keep your product in the portfolio competitively. Too many products without management will decrease the market share in the long run.  Map out your team decisions. Know why you are doing what you doing, have data, and numbers to support it. Do not go with “I think we should”. That’s vague and dangerous.  Performances in the later periods determine your win or loss, so do not get too comfortable with the initial success.  People said buy all the reports. But I think it is redundant. A couple of research reports I suggest buying are: o Industry benchmarking: you will be able to see what other teams spend on R&D, thus predict their next steps. o Market Report: shows how much product did other teams sold, their prices, and based costs

Consumer Panel: shows the market share each product gains in each

o segment.

Distribution Panel: market share per distribution channel. This will help to allocate the commercial team o Semantic Scales: Brand perceptions, important characteristics that consumers want. o Market Forecast: Helps you calculate production plan. ( I will have more detail on how to calculate this next blog) o Competitive advertising and competitive commercial teams: shows how much competitors spend on these two categories. Help you determine how much you should spend to gain more market share. o