Monthly Archives: July 2017

StratSim Marketing Simulation

StratSim Automobile Industry Marketing Simulation Case Study

Todd Benschneider, Nadia Kaminskaya, Sam Mohammad

University of South Florida –  Dr. James Stock

July 8, 2017

 

EXECUTIVE SUMMARY

Current Marketing Situation:

As the Stratsim Automobile Industry simulation began, the market was split equally into four firms A,B,D and our own firm C. Each company produced three products, an economy car, a family sedan and a pickup truck. All three market offerings were priced identically for each competing firm and each product began with identical features and marketing budgets.

At the close of the game, team D was spending $610 million to generate a 13.2% brand preference. In comparison, our team C led the game with a 43% consumer brand preference a similar with marketing expenditures of $690 million. These final round numbers tripled the opening round’s baseline marketing costs of $215 million for all teams.
Market Environment:

The auto industry is one of the three largest industries in the U.S., which dictates the need for a well engineered marketing strategy and long term brand development consistency. The auto industry operates with little pressure of government regulations and relatively low expectations of social responsibility. Despite the lack of formal regulation, the industry operates in a conservative, understated communication of brand trumpeting.

 

 

 

Target Audience:

Our team targets the upper end of the mid-level market, middle class and high income families who prefer the most value for the dollar. Our customers compare product quality, performance and safety prior to comparing pricing. We aim for a broad spectrum of ages, from young singles and stylish economy cars, middle age families who desire larger, high performance cars  to those retirees who prefer a premium quality touring sedan. Our trucks, with their large size and powerful engines, are directed at small business owners and skilled tradesmen who view their truck as a symbol of their quality work and professionalism.

 

Distribution Channel Review:

The vehicles are sold through independently owned franchised dealers that share the advertising costs in their local market through advertising fees built into their franchise agreements. The dealers are rewarded through discounts and bonuses for achieving sales volume and customer satisfaction targets. Since the dealerships compete against each other over pricing and inventory levels, the dealer performance ratings diminish as overall dealer coverage increases. Profitable and stable dealerships attract the highest quality employees and provide customers with a better experience in both sales and service after the purchase. No vehicles are sold exclusively online or direct to consumers from the manufacturers. The barriers to entry and exit are great due to the capital requirements of billion dollar manufacturing facilities.

 

Marketing Goals and Strategy:

Team C creates a consistent and profitable demand by producing technologically advanced cars with above average performance and carefully tailored product features. Our brand identity is communicated with campaigns featuring quality, safety and performance. Through advanced feature and quality products, our vehicles are considered an investment that savvy buyers choose to protect their families from accidents and their pocketbooks from unexpected maintenance costs.

 

Action Plans:

Team C prioritizes the use of model specific advertising, with a heavy allocation toward direct marketing of vehicles to specific demographics. Brand value is enhanced by using dealer cash rebates, large negotiable dealer profit margins and supported consumer financing to allow greater affordability than the vehicle MSRP would suggest. The premium price point of the MSRP is the backbone of developing our premium brand image.
Budget:

Team C allocates triple the amount of budgeting expenditures per vehicle sold at nearly $300 per car in comparison to the budget brand marketing strategies. The large marketing budget is of little concern to a brand which averages a contribution margin of nearly $5000 per vehicle sold in comparison to $2000 margins of the low cost leaders in the market

 

Mission Statement:

Through manufacturing technology, we strive to produce vehicles on the leading edge of safety, quality, and reliability with our cars and trucks.

 

 

 

The Marketing Simulation Game Progression Timeline:

 

The StratSim marketing exercise simulated the competitive environment of four auto-manufacturing firms across a five-year span of customer and environmental variables, including interest rates, fuel prices, raw material costs and personal income levels. As each round progressed, the competing firms chose brand identity strategies, marketing budgets, product development, consumer research and financing strategies. The base round referred to as “the -1 round” set some standard industry average values to build an initial strategy from. The simulation was detailed and intricate with hundreds of options for cross industry analysis research studies of consumer preferences.  In the early rounds, the complex depth of the game took dozens of hours to comprehend and decisions from the early rounds revealed costly mistakes from poor consideration of the interactions the design costs, pricing and market targeting.

 

ROUND 0

Our team felt that we had an experience advantage in the game, with Todd’s experience in automobile sales and service, Sam’s six sigma and supply chain experience, and Nadia’s marketing talents. The experience of the team, however, did not automatically find quick success in competing against the other firms. In the early rounds we confidently rushed to decisions without fully testing the weight of each decision in the simulation’s “pro forma” estimated results. In fact, we did not fully understand how to use the pro-forma decision simulator until the 3rd round. In addition, during round zero we had miscalculated the due date of the upload and had only a partial collection of decisions uploaded. Fortunately the game automatically reloaded the values of the baseline round into any variable that we had not changed.

Our overall strategy was influenced by the game’s 5 year limit. Only 3 additional models of car could be introduced during the game and those would not go on sale until the 4th round. With the limitations of being unable to pursue a wide range of alternative models such as SUVs, vans, hybrids and sports car we chose to adopt a Honda style model mix, specializing in high quality, moderately equipped, safe vehicles at the upper end of the mid-level price point, all sold at a generous profit to both the dealer and manufacturer. We aggressively marketed our pickup truck, adding size and power to our model from the baseline. We noticed that the baseline contribution margins to the pickup were $5197 as opposed to the $1495 margin of the economy car, while the sales volumes between them were similar at 392,000 and 323,000 respectively. With a lack of other alternatives to cars, we expected to be able to double the sales volume of the pickup by carefully adapting our truck to the buying preferences uncovered in the consumer trend studies. Our intuition was correct and by the fourth round, we had nearly double truck volume and secured a number two ranking in truck sales at 749,000 units, despite being priced at $25,750, which was $2750 higher than the market leader that sold 859,000 with a large surplus remaining. The market leader had a slight advantage because we had run short of inventory in that 4th round; the game estimated that demand for our truck was 30% greater than we had produced.

In the zero round we decided our initial strategy was to begin major technology upgrades to our pickup, applying customer preferences gathered from focus groups, we increased the horsepower from 190 to 210, the size from 70 to 80 and increased interior, style, safety and quality all by two points. Fortunately, we did not notice that all those dramatic improvements had also increased the costs of building that now premium truck by 10%. Had we noticed the $2477 per truck increase in manufacturing costs we probably would have reduced the number of those improvements. Luckily, the results later revealed that truck buyers were willing to pay even 30% higher prices to get the features they wanted and subsequent studies later showed that customers wanted even more horsepower and size than our market leader. In later rounds, our truck was selling out of available inventory while trucks priced $4250 lower had surplus inventory even at half the manufacturing volume. The result managed to create the market position we had in mind to be a premium mid-level brand while the other three firms battled over positioning to be the low cost leader.

We also began a major upgrade to the cash cow of our models, increasing the size of the family sedan from 28 to 38 and horsepower from 145 to 165, we also increased the interior and quality by two points and the safety by one point. These changes increased the future cost of each sedan by $1702, which also was unnoticed by our team and would later haunt us in round two when the upgrades launched at the higher cost after we had lowered our selling prices to better compete with the battle among low-cost leaders. Later our larger sedan size added power commanded a large premium over the cost leader firms.

Planning to capitalize on the untapped market for larger vehicles in later rounds, we hoped to launch both a large family van and an SUV, so we began construction on another development center needed for the assembly plant. We later botched this idea because we did not notice that once the construction was complete on that center that we had to place the concept model into it to begin the 3-year production development. We did not notice what had gone wrong until the 4th round when it was too late to launch. This may have ultimately worked in our favor because the product would have been a poor fit for the 5th round’s consumer demand and complicated our predictions for an appropriate marketing mix.

For the zero round, we increased our price on the family sedan from $20,350 to $23,000, while increasing its marketing budget by 10%. We also increased the price on the truck from $20,498 to $22,500, nearly doubled its marketing budget and increased the dealer profit margin from 12% to 14% to encourage dealers to push the model. We maintained the price of the economy car and slightly increased its marketing budget. We chose to lower production levels by about 10% on all models to burn up round -1’s carry over inventory and test the waters of the higher price’s effect on sales volume.

An error that we made that probably cost us the first place ranking in net income was our choice to buy 500,000 in additional plant capacity to prepare for the later rounds when our new products went into production. That plant capacity cost us $3.57 billion, which we never fully utilized because of our lower volume higher profit strategy. Had the other two new models gone into production as planned, the investment would have allowed us to produce the adequate volume for the higher market share. However, because the added plant volume was never utilized, the investment cost us nearly two rounds of profit and reduced the performance of our otherwise superior round zero income statement to a paltry $1.2 billion despite our average contribution margin of $3830 per vehicle sold.

To finance the round zero investments we sold the maximum allowed stock issue of $3.5 billion and sold $6.6 billion in bonds at 5.5%, we used portion of those proceeds to pay off the $6.6 billion short-term loan that was accumulating 7.5% interest.

A mistake we also later regretted was paying $900 million in dividends back to stockholders rather than holding them as retained earnings. We rationalized that the standard 6% return to investors was needed to pump up our stock prices. Later we realized that holding that $900 million would have nearly doubled our annual earnings for the year. The contextual relationships among the costs and profits between 10 of millions and hundreds of millions and billions was difficult to grasp in the reporting format of thousands of dollars on some columns and millions on other columns rather than simple exact value.. Had it not been for the added plant capacity purchase and the poor choice to issue dividends we would have dominated round zero income statements among the competition through the strengths of our hefty contribution margins.

In round zero we also began our strategy to increase the number of dealerships. We maxed out the allowable by adding 48 dealerships and increasing dealer training to 14 million which equated to $29,167 per dealership compared to the $20,978 average default from round -1. Adequate dealership coverage was imperative to our strategy. Another mistake we had made here was our not understanding that adding all of these dealerships would be reducing the profitability of our existing dealerships if we continued to sell the same annual volume, this was later found in our low dealer ratings among the competition. Fortunately, we had increased the dealer profit margin as part of our marketing strategy, which offset a portion of the damage done by the oversaturation of dealerships. Had our original plan to launch two new models and grab a large share of the existing markets actually worked as designed the increased sales volume would have given those new dealers profits and allowed us the distribution network to outmaneuver competitors through community presence.

 

ROUND 1

Our initial strategy was to focus on the value seeker and family segments. After running some marketing research tests, those segments seemed to most profitable with our vehicle models at the time. We wanted to see what was important to those segments in terms of vehicle attributes. After running some focus groups and other market research, it was clear that there was an overwhelming demand for quality and safety with all the vehicles we made. Therefore, we invested heavily in technology. Investing in technology would allow us to have a competitive advantage over the competitors that stayed stagnant. In addition to revealing important ISSQ attributes, the focus groups also showed us consumer demands for vehicle size and engine power. We adjusted accordingly because we wanted to be proactive to market conditions – not reactive.

Another important part of our initial strategy was to begin developing new vehicle products to satisfy market demand for families. After conducting some market research like concept tests and perceptual mapping, it was clear that two new vehicle lines would mesh well with our brand image of serving families. We began development of a minivan and a utility vehicle, with the idea in mind that as families grew, more seating would be needed.

In round one, we paid the price for an overly optimistic production volume as we increased production of the family sedan to 603,000 and only sold 399,000. Our contribution margins dropped to an average of $2342 from round zero’s $3830 per car. Our marketing expense had attached a $400 burden to the cost to every family sedan sold and in addition, we lowered the price by $2000. Both changes failed to gain additional market share because teams B and D chose minor upgrades to their family sedan. Those minor upgraded sedans hit the market before our major upgrade at a $2000 lower price and captured the bulk of the family sedan market for round 1, even A team’s sedan was at the same specs as ours at a $2000 lower price. This left us with 250,000 unsold units that cost us 4.71 billion to build but not sell in that round, this would be compounded in the next round when our major upgrade launched, causing those 250,000 unsold units to be dumped at a large loss.

Another mistake along the way was that we had unwittingly put our economy car into the 3rd development center for a major upgrade that would add $500 to its cost, and in doing so prevented us from being able to add our van concept to the manufacturing plant. In hindsight, the minor feature changes that we made to the model could have been accomplished using the minor upgrade option and released from the development center a round earlier and given us another year of sales for the more competitive product. Another hindsight error we found, was choosing to reduce the size of our economy car from 12 to 8, while the 2E focus group in that round rated 8 as good for size, the same group later rated even 10 as too small for an economy car. The small size alienated the 2nd largest demographic for economy cars, the 4E customer, as well as overflow 2F buyers. We should have spent some more research money comparing the 10 or 11 size concepts in addition to comparing the needs of the 4E consumer focus group. In the following rounds, we should have retested customer preferences and adapted to the trend direction of larger economy cars.

Round one also saw damage done to the truck market, while holding our price to $22,500, team D’s truck was launched using a minor upgrade to the quality rating, gaining one point edge over ours and pricing at $20,499. While it was assumed that the D team would capture the market, they only produced about 1/3 of the demand volume, which allowed us to capture 400,000 in sales at a $2,000 per vehicle premium and finish above team D in profits.

Due to inadequate cash flow from round zero to round one, we generated a short-term loan of $1.688 billion, which we paid off by another $1.5 billion stock issue and an issue of $3 billion in bonds at 6.5%. Again, we made the poor choice in round one to issue $900 million in dividends as opposed to holding them as retained earnings, which lowered our real income from $1.13 billion to $203 million, pushing us down from 1st place to 3rd place in annual income. In nearly every measure of performance, our group C fell to near last place rankings.

 

ROUND 2

Here is a textbook example of how things can go wrong if the team is slow to learn the pro forma simulated round results. A multitude of mistakes combined with some rushed last minute decisions to set the semester record for most money lost in a single round at $3.4 billion. The largest mistake was not realizing that our major upgrades to the truck and family car went into effect that round, adding about $2000 per car to their manufacturing costs. In the same round, last minute reservations about our price point in the market prompted a revision to cust price increases by $1000 and to further drop production levels. The lower prices caused a sellout shortage exceeding 30% on trucks and sedans at minimal contribution margins as the market responding positively to the added features of the upgraded cars.  Adding to the poor performance was our overproduced stale economy car, causing a carryover production of 54,000 units that cost the round two bottom line $540 million.

Another misunderstanding was that the round one, carryover inventory of 25,000 family sedans would add to the income of round two. Somehow, in a manner that we still cannot comprehend, those units were sold at a loss and their income placed into round one profits. We expected those units to fulfill some of the round two demand and instead found ourselves underproduced by nearly 500,000 units in the family sedan that at a $3000 contribution margin would have generated another 1.5 billion in profits.

In round two financing, there was not a cash shortage, instead $500 million in stock was repurchased to take advantage of low stock prices caused by several rounds of mediocre income performance. Additionally a $2.5 billion CD was purchased at 3% interest because neither of the bonds were callable for an amount less than $6 billion.

Altogether, our heads are still spinning on how we could have made so many consecutive errors in cost to pricing and manufacturing volumes. We can only hope that the other teams makes similar mistakes before the game ends. However, we did learn from these mistakes.

 

ROUND 3

Round three is when we started to figure out where to go in the game to test pricing and predict sales volume. We read in the market news that car sales were expected to rise by 30% and therefore adapted our manufacturing volume, assuming that demand for our superior cars would lead us to victory. Fortunately, the demand for our large, high performance truck allowed for spectacular contribution margins of $6200 per truck and created an average contribution margin of $5176 per car sold of all our models. With confidence that several focus groups indicated that customers were willing to pay much higher prices than the recent market had expected, as two of the four automakers battled for low cost leadership, and the third wanted the middle ground in price point. In round three we lead the round with a profit of $1.131 billion and a second place market value of $15 billion, much of which could be attributed to a complete sellout of inventory which eliminates the cost of cars which get manufactured but not sold in the same round. All of our models had 30% higher demand at their pricing than we produced which meant that, had we been more confident in the appeal of our products we could have increased our income by over $2 billion with an adequate inventory despite being priced thousands above most of our competitors.

In round three, we repurchased $1.5 billion in stock with excess cash and bought a $3 billion CD. We cut the advertising back to try to maintain a marketing budget under $200 per car for each model as the focus groups showed little effect on expected market share for advertising above $100 per vehicle. We focused on controlling expenses and optimizing selling price to bring the contribution margins of the economy car back to $1500 per car sold, up from the low of $762 in the previous rounds.  In round, three we also did not invest in production or technology but stepped up on direct and social media marketing adding 20 million to each.

We also could not figure out why our dealer satisfaction ratings were lower than most of our competitors, we thought perhaps that we had failed to factor in enough dealer support. Our reaction to ramp up dealer ratings we increased dealer training and support from $20,000 per dealer to $210,000 per dealer. We were disappointed to find in round four that the additional spending had little benefit to our dealer ratings. We still failed to uncover all of the reasons for our low dealer ratings, but suspect that our lower sales volume was spread across a greater number of dealers, causing them to be less profitable than our competitors that had fewer dealer locations.

We also started to suspect that the competing firms have not realized that the cost to build the cars has gone up 8% in materials and labor; in addition, inflation has caused a 7% devaluation of the dollar since round zero. The steady price level on the economy car was becoming a costly liability of several hundred dollars for each car sold. We also noticed that our competitors have not reflected that market share does not equal total profit and suspect that they also had not been checking their pricing decisions against the pro forma estimator. In addition, the competition seemed oblivious to how much more the buyers were actually willing to pay, their strategy to hold prices near the -1 round was probably due to a lack of concept studies that showed that consumers were not as price sensitive as the competition believed. The competitors pricing also worked against us because we were competing against an unprofitable market. The odd thing to us was that only one of the other three competitors raised their prices when they saw us outsell them at 10-20% higher prices. The A team even dropped prices further than the beginning round started at.

 

ROUND 4

Round four’s decisions were based on news forecasts that gas prices would rise from $3.50 to $4.90 and real GDP growth will drop 1.5%. In a gas-crisis recession, trucks and larger sedans sales diminish considerably. In the real market, truck sales dropped around 30% in both 2008 and 2009 when fuel prices went from $2.90 to $3.57 with the least fuel-efficient like ours dropping 50%. Since the market news forecast predicted fuel prices to rise $1.40 we anticipated a 45% drop in demand for trucks and struggled to decide whether to eliminate all unneeded spending on product development and marketing to allow for the lower expected sales volume. In the real market history of vehicle sales there has never been an increase of even $1 average fuel price, so there was no historical precedence to predict the impact on the market mix.

Despite the predicted recession, the industry report expected sales to increase by another 20%; however, in round three we learned that historically these industry sales projections had been delusional optimistic. However, it seemed logical that sagging demand for economy cars would rebound, as consumers with long commutes would be forced into more fuel-efficient replacements. We expected our historical demand for economy cars to grow by 25% from 300,000 to 400,000 units and theorized that if the other teams did not increase production of the unprofitable economy car segment that we could capture half of the expected 1,300,000 new car market demand. If our competitors failed to recognize the changing marketplace, we could make a run at capturing a 700,000 unit share.

We pulled the sales trends of 2008 and 2009 to compare market direction and reasonable sales expectations. The wildcard in this round was the unknown, of new model market entrants, if any of the other teams would be launching new products that might take market share from the current players in each demographic. This observation greatly influences our pricing strategy. We could see that two of the other three teams had built the development centers to launch new products, but since they had not arrived by round four, we had assumed that teams A and B had made the same mistakes that we made by not transferring the concept prototype into the development center for production in round one. In hindsight, we should have begun our new concepts in one of the two existing development centers rather the new center because they would have launched in round three rather than round four since they would not have to wait for the center’s construction to be completed. In addition, we decided not to release our minivan and SUV in this round because of the forecasted gas prices.

In planning for round five, we assumed that total car sales would decline 20% or 13000 units. We decided that we were at a disadvantage on the family sedan market because our sedan had the largest size and highest horsepower, which reduces its appeal in years of skyrocketing fuel prices. In an attempt to compete in the new marketplace, we chose a minor upgrade and reduced engine size by five horsepower, but in a contradictory move increased size from 38 to 40 and added one point to every other metric for more of a long-term plan than an actual recession strategy. We initially expected the arrival of large SUVs and vans by this round to fill the customer demands for larger models, it appeared that those demands remained and probably would offset fractional disadvantages in fuel economy. We were surprised to see that these sweeping changes only increased the cost of each sedan by $550; those changes aligned us with customer preferences from the focus groups, which indicated that customers would consider the specifications of the product to be a good value even at $27,000. However, we were nervous about how accurate those value expectations would be in an uncharted recession marketplace.

The other three teams were competing at $20-$22,000 pricing and we had been outselling them priced at $24,000 going into round four. Team B priced theirs at $21,700 and even had a better-rated sedan than ours, but failed to produce enough to satisfy the market which gave us their spill-off, allowing us to sell out with a shortage of more than 30% less than demanded. Team A sold only 642,000 sedans with a surplus remaining; in comparison, our teams sedan was a 957,000 unit sellout despite being priced at $4000 higher than the similarly rated A team product. The sales volume cannot be explained entirely by model features because the A team had already upgraded theirs to be within one point of our sedan on nearly every measure. We believe that the premiums that our sedan sold at were a result of its larger size and increased horsepower, in addition to a larger dealer network and higher profit margins allowed to those dealers.

At the beginning of round four, our team no longer held the same great advantages in quality, safety, style and interior ratings and we expected that the two of the other three teams would launch additional minor upgrades to mimic our products and market those models at much lower prices. In fact, the B team had substantially surpassed our ratings for safety in every model and surpassed us in quality in the sedan market and two of the three other competitors outscored our sedan in style. Only our truck held great advantages over competitors in the market and team B had even surpassed its safety ratings. All of these observations support the conclusion that model size and performance had dramatic influences on customer demand that were beyond the measures of quality, safety and style rankings.

The main priority of round five was to end the game with sellout inventory to maximize the income statement and prevent disastrous consequences of over-producing vehicles in a recession gas-crisis. Overproduction could erase the profits from all five rounds while underproduction could still generate a modest $1.2 billion profit and retain our $11 billion gains in accumulated market value. The question we wrestled with was how far to decrease production? It made sense to cut truck production in half even at the cost of half our annual profits, the truck carried a round three, contribution margin of $6100 and still sold out. However, our truck was the largest and least fuel-efficient vehicle on the market so it made sense that our truck sales would take a disproportionate brunt of the decline. We could not afford to have 400,000 units carry over past the final graded round, those 400,000 would equate to an annual loss of $8.6 billion in net income

Our team then had to estimate how many sedans to produce; while we had taken a 29% share of the sedan market in the 4th round, at 957,000 units sold. We were at high risk for the market trend to turn against our high-priced gas guzzler and leave us with a 4th place finish at around a 19% market share of a 30% smaller pie, which would equate to around 441,000 units. Our sedan had a $6100 contribution margin, so we could even lower our prices beneath the competition to hold a greater piece of our market share or we could retain our contribution margins and lower production to one-half the previous round’s sales. Either strategy netted similar results on the pro forma. However, total sales could surprise us and remain near constant with the migration trends away from trucks to carry into sedans, which may hold total sales steady in sedans, which could justify producing as many as 5 million units. The night before the final round, we were still planning on the conservative play of cutting total production in half. Another change in strategy was to change our advertising direction from “safety” to “quality”, since all three competitors chose safety and two of the three matched or exceeded our safety rating on the sedan. Only one competitor exceeded our quality rating and with the minor upgrades we should take a solid first place ranking in the customer hotspot of quality.

On the surface it seemed like a natural plan to nearly double production of the economy car, which historically gains sales in a gas crisis; however, we had previously only allocated 300,000 in production facilities to the economy line. The low manufacturing capability greatly increased our retooling costs to ramp up production, what we found was that due to the economy car’s low $1600 contribution margin, the added retooling costs ate up the additional profits that 300,000 in additional unit sales would generate. To add to the overproduction risk, our economy car was priced $2000 higher than any of our competitors economy products were priced at and the features we had built into the car prevented us from competing at their pricing. In order to generate the $1500 contribution margin, we needed the higher price but our features did not provide high enough ratings to justify the premium price. In addition, our small size showed that we had fallen out of touch with demand for larger economy cars. This smaller size 8 mini would reduce our ability to cross sell to the family demographic that was seeking economical alternatives to the sedan market in the recession economy. As with the sedan we were at risk to have our sales volume to drop in half which and stick us with $49 billion in unsold inventory.

We realized looking at the round four results that the competitors we beginning to surpass our ratings and we could no longer justify premium prices in a recession market, faced with two choices to lower our prices or perform minor upgrades to align with our premium brand image. We launched two minor upgrades that were cost effective due to our zero unit carryover inventory, the sedan changes cost about $500 of our $6100 contribution margins. In addition, we planned to lower prices somewhere between $1000 and $2000 per unit, with the lower price and the premium features it seemed unlikely that we could end up with a carryover of round five inventory.

Feature upgrades to the economy car increased the cost by about $250 but allowed us to justify our premium prices. The economy car we increased the price enough to offset the added production costs because we believed that our competitors would fail to produce enough economy cars to meet gas crisis demand and we would sell out from the spill off effects. Both upgrades also supported our overall brand image for producing premium quality cars and the changes would be a symbolic gesture of our long-term planning past the end of the game.

If we could only predict what our competitors had planned for round five we could adapt our decisions to offset theirs. If any of them launched upgrades, we would surely lose market share even if they increased their prices, we doubted that any of the three competitors would increase their prices by more than 10% as evidenced by their past aversion to price increases. We suspected that at least one of the competitors would fail to read the market outlook and see the impending recession and gas crisis, if so the truck market would be saturated with less expensive and more fuel efficient trucks. In addition, if two of the three competitors failed to see the switch to economy cars, the market would run short of demand, which could allow us to sell out of the economy model. However, the recession in the auto industry of 2008 and 2009 demonstrated that all product sectors dropped in sales, the economy sector only dropped by a lower percentage than the gas-guzzlers. If all teams maintained economy production, we would probably end up with carryover of our own economy car. This observation prompted us to hold our economy production steady and consider scaling back rather than ramp up production, it was lower risk and more profitable per unit since we did not have the added costs of retooling for increased production volumes. In the gas crisis of 2008 truck sales dropped; but, there remained at least some market demand for consumers who used trucks for work or did not commute far. With that in mind, we assumed that we could hold our market share and assume a 50% drop in the market demand; to reinforce our market placement we lowered the pricing on our trucks to become more competitive in case the recession market placed a heavy penalty on price points. As mentioned before, the $1.40 per gallon increase in gas would create market disruption at levels beyond prediction; it seemed possible though that the forecasts would prove to be far inflated from the reality of round five results. We could assume that sedan sales would drop 30% and that our share would drop further than the market. However, the results of round four indicated that we had missed the market demand by more than 30%, which meant that our true market share would have been 1.3 million units instead of 957,000. With that in mind a drop to 600,000 units of production seemed appropriate.

 

In the final hours before the 11pm deadline for round four decisions needed to upload we realized that overproduction would not actually hurt our net income line, they only cost us on the cash flow report. Most importantly we had discovered that we were able to simulate more income using inflated pricing to make large profits on what we did sell and let what did not sell roll into the round six liabilities. With this discovery we readjusted our economy car production from 299 to 450 units adding $1000 for a price of $13,650. We increased trucks from the half volume that we expected at 250 up to a more optimistic but still greatly reduced 450, but increased the price from the initial plan to discount the trucks and instead added another $500 to price it at a lofty $27,000, nearly $2000 more than prior round. We kept the sedan production at 770 which would represent a 20% decline in volume from the previous round; however, increased the price by almost $2900. The strategy had expectations of 50% carryover inventory but a higher income that would be reported on the round five results. Regardless, our downside  income exposure seemed capped at a $2 billion loss even if we sold nothing or a $3.5 billion gain if we sold out according to the pro forma estimates. The potential upside to get us beyond our $1.2 billion profit prediction that we were able to generate by playing it safe with lower volumes at lower prices, motivated us to take the risk and overproduce at the higher prices.

 

ROUND 5

Tuesday Morning results surprised us with only a 17% decline in vehicle demand overall, the worst drop of 25% in was in sedans instead of trucks which shocked us by posting a mere 17% drop in reaction to the $1.40/gallon increase in gas prices. Economy car sales only climbed 12% and we were amazed to see that our competitors had all scaled production back on their economy cars, possibly they assumed every other team would pursue the economy market and underproduce for the sedan market.

Our strategy worked and despite being priced $5000 higher than historical market price maximum, we managed to sell out of every model and even at that. But we still missed meeting the demand by another 30%. We once again gained the largest share of the market on every model except the sedan only to be nudged out by D teams version which sold 787,000 at a $5000 lower price and they were plagued by leftover inventory even at that price. In the end, our team was in first place in terms of

  • Stock price ($70.65)
  • Total shareholder return (15.8%)
  • Firm preference (43.3%)

 

CONCLUSION

The results of the game reinforced the the philosophy, that price alone rarely wins the market share in major purchases. In fact, features and performance at a premium price do not automatically correct the shortcomings of bare bones pricing either. Automobiles are unique products in their ability to generate sales through each customer’s self-identity. Similar to how many customers would not buy a Wal-Mart branded sneaker or jeans, few customers want their self-identity  to be represented by an unstylish entry level vehicle. The slightest perception of substandard quality becomes a product liability to marketers and pricing the product at the bottom of a market nearly ensures that consumer will perceive the product to be a poorly-made substitute to the average quality market offerings. Competitive advantage is imperative.

Customers at times will even pay a premium for the same product for simply being marketed as a more prestigious product. One example is a $4 Starbucks coffee compared to $1 gas station house brand. Or Bud Light compared to the nearly identically flavored recipe of Busch Light which sells at a 20% discount and only captures a mere ⅕th the volume of the Anheuser Busch’s flagship product. Perception is reality in marketing.

Our results proved that the two teams that battled for the lowest price were outperformed by the other two firms who marketed premium priced vehicles at higher MSRP. At times, especially in the 4th round, product ratings of B and D firms ranked higher than C team’s vehicles selling at a 15% premium. If buyers were strictly logical beings, C team should not have been able to sell a single car in the sedan and economy sectors, but we even outsold the superior lower priced competitors.

 

FUTURE RECOMMENDATIONS

We believe that C team should advance its premium place in the market moving slightly further into luxury brand identity from premium product placement. The margins allow high revenues at a lower market share which reduces our risk of overproduction losses and need for expensive capital production facilities. Premium retail prices can weather market downturns when parlayed into affordability through manufacturer subsidized financing and lease programs. Large rebates can also be added to the marketing mix to tempt the bargain hunters and those products can still be sold at respectable profit margins.

Once gas prices decline to average prices, the C team should release the premium featured large van into the marketplace to corner niche markets that are not met with competitors products. Two rounds after the van introduction, if positive results are generated by the product, we would release a mid-grade SUV to cater to family’s whose tastes run the middle ground between the  family and the truck market.

Our fundamental brand placement would be based on the a mid-level marketing, this would prevent alienating the more modest and proudly “sensible” consumers who would avoid products that are seen as pretentious and extravagant. Just as some consumers will avoid entry level products, a portion of customers will avoid products that seem excessive, regardless of the quality the product offers.

With this strategy of a balanced brand placement that can appeal to both the middle ground and the luxury markets, we plan to avoid the pitfalls of luxury market position while also providing the profits that provide the greatest return on investment. With these profits, we can continue to fund the product development to lead the industry into the fastest technology evolutions. With our superior products, we can better withstand market volatility in the future.

Pharmaceutical Price Points – Pricing the EpiPen

epipenchart1

Marketing Case Study: Pharmaceutical Price Points – Pricing the EpiPen

Todd Benschneider – University of South Florida – Dr. James Stock

June 29, 2017

 

Introduction

Mylan Pharmaceuticals gained front page notoriety in 2016 for its part in sweeping allegations of price gouging and Medicaid abuses among large pharmaceutical companies. Consumer backlash to the rising costs of healthcare fueled a hailstorm of media attention, spotlighting Mylan’s unprecedented price inflation of several older generic drugs. The Mylan product at the forefront of the debate was the EpiPen; an emergency treatment device that assists patients in self-administering adrenaline (epinephrine) during severe allergic reactions. The device had grown into a household brand over the 30 years since its introduction and EpiPen’s brand loyalty provided the foundations for one of the industry’s most successful, and now most questionable, brand revitalization campaigns ever launched.  The marketing vision began in 2007 when Mylan Pharmaceuticals purchased the rights to the EpiPen brand inside a $6.6 billion packaged deal of 434 generic drugs from Merck Pharmaceuticals. Shortly after the acquisition, Mylan began increasing prices by increments of 10% per quarter until the EpiPen’s price had grown by over 600% in ten years that followed (Darden).

 

Mylan management defends the increases, claiming to have invested over $20 million in product and distribution chain improvements since acquiring the product (Koons). The firm’s executives cite that former owner Merck’s initial price of $94 per package generated a comparatively low 8.9% net profit in 2007. Defendants of the price increases also argue that price adjustments were necessary to create a sustainable supply chain of the lifesaving medicine (Lee).

 

The combined sum of those arguments were unable to pacify the critics after an investigative report by Ben Popkin of NBC news revealed that “from 2007 to 2015, Mylan CEO Heather Bresch’s total compensation went from $2,453,456 to $18,931,068, a 671 percent increase. During the same period, the company raised EpiPen prices, with the average wholesale price going from $56.64 to $317.82 per pen, a 461 percent increase, according to data provided by Connecture.” In a historical pricing perspective of the brand, Bresch’s salary increases alone increased the cost of manufacturing the EpiPen by nearly $5 per package; which, when contrasted to Merck’s original pricing, would have cost the product nearly its entire profit margin. The attention garnered by the compensation of CEO Bresch, along with the observation that over 40% of Mylan’s annual profits were now being generated by the EpiPen price increases, compounded Mylan’s public relations woes as a symbol of management’s greed, drawing nationwide criticism on executive pay excess and pharmaceutical anti-trust laws (Bastick).

 

Today Mylan has arrived at a strategic crossroads in its marketing vision. The firm’s 90% market share of epinephrine injectors will certainly be jeopardized if revised pricing fails to satisfy expectations of corporate responsibility, and the potential loss of the EpiPen market could cost stakeholders $847 million in annual earnings (Ubel). In addition, the brand collapse would generate a multi-billion dollar capital value loss of resale value of the brand. Since EpiPen’s patents will soon expire, Mylan’s original plan to sell off the division for a fast profit would be hampered by the devaluation of the EpiPen brand name, rendering the manufacturing facilities, goodwill and marketing capital worthless to prospective buyers.

 

Background

Unlike other pharmaceutical structure pricing bands, the EpiPen injector pricing was relative to the mechanical engineering patents contained within its dosing syringe system, rather than the chemistry of its medicine. The generic hormone solution inside the applicator has been widely available for years at prices less than $2 per dose; however, the precision, spring-loaded application syringes cost approximately $35 to manufacture. Critics claim that excessive marketing spending under Mylan’s management inflated the total cost to manufacture, market and distribute the device, from $80 to as much as $450 per package (Popkin). EpiPen had enjoyed a unique advantage in the drug market, because its mechanical design the EpiPen had been protected through engineering patents which were outside the pharmaceutical anti-trust regulations of the FDA (Darden). In addition, the arrival of new entrants to the market had been limited by the historically low profits earned by these injection devices (Lee).

 

 

The patents alone however, did not allow for a market domination, Pfizer had patented a rival product, the Adrenaclick, which was released for exclusive distribution through Wal-Mart in 2010. The new entrant, however, faltered due to limited brand awareness and its restrictive distribution exclusivity to Wal-Mart stores. In two years following its introduction, Adrenaclick failed to capture more than a 7% market share, despite selling at a price point of 1/3rd that of the EpiPens. In 2012 the maker of Adrenaclick sold off its manufacturing equipment and the product temporarily left the market, under the assumption that the timing was not right to continue challenging the EpiPen for market share (Bastick). Internationally EpiPen competed against a French rival the “Auvi-Q” which was sold in Europe at around $100 per package; however, Auvi-Q initially chose not to apply for U.S. distribution due to possible U.S. patent overlaps with some of EpiPen’s design. The continued existence of this international competition in the injector market remains the driving force behind why EpiPen prices in Europe have remained near their original 2007 prices, at around 1/5th the price of EpiPens sold in the U.S.

 

Much of Merck’s pre-2007 decisions for U.S. price points near the $100 mark were justified by the international price competition of the French Auvi-Q. Merck management believed that if U.S. market profits grew too lucrative, that Auvi-Q would challenge its U.S. patent rights, generating a legal battle that would cost years of EpiPen’s profits along the way. In addition to Auvi-Q, a new rival was introduced to the U.S. market in 2005 named Twinject which was marketed at a lower price point, at the time, than the $90 EpiPen. With pricing influenced by anticipated market competition of 2007,  the 25 year old EpiPen line had been generating less than $17 million in profits from about $200 million in sales. Even Mylan executives had initially planned to spin off the EpiPen line from its new portfolio purchased in the Merck deal (Koons). However, CEO Heather Bresch saw a golden opportunity for the product and persuaded the board of directors to use EpiPen as a sample case for the future marketing of its generic brands. Mylan took on a revitalization marketing campaign and set its sights on capitalizing on the remaining untapped profits from its captive mechanical syringe market (Koons).

 

Pricing the EpiPen was a great challenge, since strategies in drug pricing are deeply complex; pharmaceutical makers are faced with a more complicated marketing landscape than manufacturers of retail goods. Prices for the same drug can vary widely from one country to the next, for example an EpiPen is priced in Great Britain at $69, in Germany at $190 and in the U.S. at $600. This variation among pricing processes reflects the complexities of distributing a product to meet a variety of competitors and price-influencing criteria in each market. For example in the U.S. the FDA along with private insurers utilize a market driven price allowance, in the spirit of capitalism, a drug maker can charge nearly any price for its products, a policy that is intended to draw new entrants into the market and drive prices down and quality up. In comparison, many European countries require an approved “reference pricing model”, which dictates the fair insurance reimbursement value of a drug is based on the costs of its alternatives. Some countries such as France include negotiable “price band” restrictions that cap the maximum price the drug can be sold at as an allowable percentage over the lowest price which the company sells the drug in other nations. Because of these price regulations some pharmaceutical firms choose not to distribute their products in highly regulated markets such as France and Switzerland (Rankin).

In 2009, the anticipated arrival of new entrants to the market became a reality when French rival Auvi-Q applied for North American distribution. Auvi-Q was expected to challenge EpiPens U.S. patent rights; however, Auvi-Q withdrew from the U.S. market entry after a series of safety recalls crippled their brand’s market value, they too believed the timing was not optimal to challenge the EpiPen for market share. Bresch’s strategy flourished by the subsequent delay of new competitors to the market and EpiPen found a growing market, even at much higher prices. The CEO’s belief was, that through an increased profitability of the mature market, Mylan had created an incentive for competitors to join with their own rival products in the final years remaining, until 2025, when the EpiPen patents would expire. The resulting lucrative margins created by the new higher prices would provide an improved resale market for the EpiPen division or the future licensing of its technology (Koons).

 

Mylan expected that the new players in the market would quickly drive EpiPen prices back to near its original $90 per package through price wars. During the eight year period of price increases, EpiPens previously stalled sales volume, even grew by 67%.  Mylan had successfully expanded the existing market by lobbying for revisions to school medical restrictions which had prevented school staff from administering the shots to students in emergencies. With the restrictions lifted, Mylan further lobbied for tax subsidies to donate free EpiPens to schools, increasing goodwill and lowering corporate tax burden by $600 per package rather than the $100 per package deduction which would have been captured in the previous price formula. The theoretically deductible donations allowed Mylan to pay an effective 20% U.S. corporate income tax rate in 2015, saving it nearly $100 million in tax liabilities (Lee).

 

Bresch’s short-term strategy was directed at harvesting larger profits in the U.S. market through price increases, brand recognition and distribution expansion for several years until competitors could mobilize new products. From Bresch’s long term perspective, once that competition arrived to the market, Mylan could sell off the EpiPen brand and its soon expiring patent protection to the new competitors. However, in the eight years that followed the campaign launch, the anticipated competitive price pressure never materialized, as both Auvi-Q and Twinject suffered public relations problems and financial difficulties during the recession which caused both competitors to withdraw from the U.S. market by 2014. Capitalizing on the limited competition, Mylan increased prices by about 10% per quarter per year, gradually bringing the price from $90 per pair of EpiPens to over $600 per pair.

 

Alternatives

Mylan executives forecasted the introduction of EpiPen rivals by 2010, however the recession and other unforeseen regulatory factors delayed the arrival of that competition by nearly a decade. Bresch defends Mylan’s aggressive pricing strategy, justifying the tactics by capitalizing on the opportunity to harvest an additional $600 million per year in profits for every year that competition failed to materialize. Executives such as Bresch could claim a fiduciary obligation to the investors to exploit market gaps for shareholder gain and to pad the company cash reserves to fund new drug products (Koons).

 

In addition, Mylan leadership claims that they did not believe that they were creating a public safety crisis of affordability, because the allergic reactions could be just as effectively treated with an economical alternative which utilizes a $2 syringe and $5 vial of epinephrine. They pointed to the low switching costs of those alternatives and pointed to the examples of emergency responders that had converted back to dosing patients from syringes in addition to the arrival of free clinics which guided the uninsured on the creation of their own emergency kits for a fraction of the cost of a preloaded EpiPen (Rankin).

 

Mylan’s leadership could not have reasonably anticipated the market’s reluctance to self-dose from conventional syringes. Bresch initially believed that the primary competitive advantages envisioned for the EpiPen were limited to small children who could not administer epinephrine through syringes and to schools which were only protected from legal liability by using the EpiPen or an approved similar device (Koons). Regardless of price, consumer’s fear of incorrect dosing or injecting air into their bloodstream stalled the advancement of self-administered syringes (Bastick). The media scrutiny chose not to address that the EpiPen price should have little effect on affordable healthcare since it is viewed by medical practitioners as a simple convenience, rather than a medical necessity (Lee).

 

The lack of mounting competition for the past decade could not have been foreseen by management either, as three attempts at injector market entry by other firms failed due to poor timing or marketing. The introduction of a generic EpiPen competitor by Israeli firm Teva Pharmaceuticals was also denied by the FDA in 2016 further diffusing competitive influences. However, in late June of 2017, the FDA approved the next major player in the epinephrine injection market, Adamis Pharmaceuticals introduced their own injector under the brand name “Symjepi” a cheaper alternative to Mylan’s EpiPen, but expected to price higher the Adrenaclick (Bastick). Auvi-Q has also been approved to market their rival injector beginning in 2017 and Adrenaclick and Twinject have announced their returns to the market.

In response to consumer backlash and the coming arrival of generic substitutes, Mylan has announced that it will release a generic version of the EpiPen priced at around $300 per package of two. Analysts suspect that Mylan will continue to donate the EpiPen brand version to schools for a write off of $600 per package to maintain their tax savings and continue to promote the EpiPen brand to those whose insurance allows for brand name premiums. Despite the announcement, Mylan has not been quick to launch the distribution of its half priced generic alternative (Bastick).

 

Proposed Solution

The arrival of the new competitors, the aging patents, along with the media scrutiny makes a clear case for drastically reducing the EpiPen price. It stands to reason that competition among new firms will drive prices back down to the mid-$100’s per package or possibly even lower by 2025. The inevitable loss of EpiPen’s mechanical patent protection will soon render the brand’s competitive advantages obsolete. The EpiPen brand appears to have run its lifecycle and while the marketing tactics of Bresch succeeded at capturing an astounding quantity of remaining value from the brand; a change of course is needed to salvage the remains of Mylan’s public image and diffuse additional conflicts with lawmakers. The negative publicity around the EpiPen pricing is a driving force that pressured lawmakers to fine Mylan $465 million in 2016 for exploiting a regulatory misclassification to increase Medicaid reimbursement rates. It is likely that regulatory backlash will begin impacting the future FDA cooperation of Mylan’s other products. Continued friction between government regulators and Mylan could delay the FDA approval of more profitable new products and increase scrutiny into other areas of taxation and accounting regulations.

According to Porter’s five forces, over the next 10 years, EpiPen will suffer the fate of many other mature, low technology products which survived by the slight advantages of their distribution chain efficiency and became unable to grow and generate premium profits through technology advantages. For a firm such as Mylan, their interests would be best served by directing their focus toward the development of new products rather than expending administrative resources on the low-margin, maintenance of a supply chain distribution in a mature market.

 

Recommendations

Selling off the EpiPen brand and facilities to rival Teva Pharmaceuticals seems to be the most logical course of action. Teva’s acquisition of a widely recognized brand such as EpiPen would gain them access to the U.S. market which had recently been denied to them by the FDA’s rejection of their competitive product. The brand development value to Teva appears to exceed the future earnings potential of the EpiPen division to Mylan and could allow the firm to negotiate a premium sale price. However, there is some friction remaining between the leadership of both companies after Teva’s 2015 failed takeover attempt of Mylan.

The logical course of action, would be to advise Mylan’s CEO, Bresch, to contact leaders at Adrenaclick, Teva and Adamis to locate the highest bidder for the sale of the EpiPen brand prior to Mylan’s own launch of the generic version. By leveraging Teva’s offer, Mylan may be able to tempt either Adrenaclick or Adamis to pay a similar premium price for the brand. In addition, by delaying the generic marketing launch, a new competitor could capture the generic market by utilizing their own marketing campaign budget already allocated toward their entrance to the market. By allowing the new entrants to control the price band, the strategy could allow the entrants to more efficiently gain control over the adrenaline injector market, allowing the fewer remaining players to enjoy greater profit margins. It should be expected that EpiPen’s $800 million in annual profits will soon diminish back near the $18 million level of 2007 in the face of international competition and public scrutiny.

 

Conclusions

Mylan’s success at capturing untapped profit potential from a low-profit, mature market provided a valuable case study in both brand management strategies and an application of SWOT metrics. While the long-term brand potential remained limited, CEO Heather Bresch demonstrated great insight by capitalizing on EpiPen’s remaining market strengths and leveraged those strengths through marketing to exceed all foreseeable expectations of profit potential for the lackluster brand. Some analysts calculate that Bresch harvested more than three times the profits from EpiPen in the 10 years at the end of its patent protected lifecycle than the profits from all of the other companies combined, that owned the product along the 35 years that EpiPen was on the market (Koons).

The negative press would likely have been unforeseen by anyone, since the catalyst for the media scrutiny was originally aimed at Turing Pharmaceuticals and its outspoken CEO Martin Shkreli for their price hikes on lifesaving AIDS treatments. Mylan’s own negative press exposure was viewed by many as unjustified collateral damage, which brought an unfavorable spotlight on Bresch’s strategy and may have accelerated the entrance of new competitors which had been waiting patiently to exploit the optimum timing to reduce switching costs for consumers (Lee).

The public relations opportunity that Mylan probably missed was to demonstrate an empathy toward the uninsured by launching a parallel campaign to provide a package of free EpiPens a year to the uninsured or low-income underinsured customers, rather than their chosen direction of providing “$100 off” coupons that were limited only to those with commercial health insurance. Mylan’s disregard for the underinsured struck a nerve with the low-income masses and fueled the media frenzy that surrounded the executive pay scandals. The public relations damage to Mylan’s brand value and the resulting lack of political cooperation that will follow could be estimated to cost several billion dollars in the coming years as lawmakers begin to apply their own pressure by withholding cooperation and avoiding any compromises that appear to benefit Mylan.

 

 

Exhibit 4. Expert Financial Analysis

Martin Zweig Analyst Commentary on Recent Financial Performance of Mylan: Guru Score 62%

P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. MYL’s P/E is 38.62, , while the current market PE is 19.00. Therefore, it passes the first test.

TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. If a company does have a high level, an investor may want to avoid this stock altogether. MYL’s Debt/Equity (128.91%) is not considered high relative to its industry (152.29%) and passes this test.

 

 

SOURCES

“10 New Years Resolutions for the Pharmacy Industry”. 2017. Medreps.com

https://www.medreps.com/medical-sales-careers/10-new-years-resolutions-for-the-pharma-

industry/

Bastick, Erin. 2017. “EPA Approves EpiPen Rival”. Formulary Journal.

http://formularyjournal.modernmedicine.com/formulary-journal/news/fda-approves-epipen-rival

Lee, Jaime. 2016. “Mylan CEO defends EpiPen strategy, questions pricing model in the U.S.” MMM   

         Online. http://www.mmm-online.com/commercial/mylan-ceo-defends-epipen-strategy-questions-        

          pricing-model-in-the-us/article/576448/

Koons, Cynthia. (2015). “How Marketing Turned EpiPen into a Billion Dollar Business”. Bloomberg

          Business Week. https://www.bloomberg.com/news/articles/2015-09-23/how-marketing-turned-

the-epipen-into-a-billion-dollar-business

Mattingly, Joseph. 2017. “Drug Price Wars, Episode VII: The General Assembly Awakens”. Mattingly  

            Report. https://www.mattinglymanagement.com/2017/02/generalassemblyawakens/

Popkin, Ben. (2016). “Mylan’s CEO Pay Rose over 600% as EpiPen Prices over 400%”. NBC News. http://www.nbcnews.com/business/consumer/mylan-execs-gave-themselves-raises-they-hiked-epipen-prices-n636591

“Pricing the EpiPen: This is Going to Sting”. (2016). Darden Business Publishing University of Virginia.

https://cb.hbsp.harvard.edu/cbmp/product/UV7186-PDF-ENG

Rankin, Peter. 2014. “Global Pricing Strategies for Pharmaceutical Product Launches”.

www.pharmaceticalpricing.com Sourced:

https://www.crai.com/sites/default/files/publications/Global-Pricing-Strategies-for-

Pharmaceutical-Product-Launches.pdf

Ubel, Peter. 2017. “What is Maddening About Pharmaceutical Prices”. Forbes. 

          https://www.forbes.com/sites/peterubel/2017/04/28/what-is-maddening-about-pharmaceutical-

prices/2/

Zweig, Martin. 2017. “Mylan Guru Performance Assessment”. NASADQ.

http://www.nasdaq.com/symbol/myl/guru-analysis/zweig#anchor2

 

Marketing: AccorHotels – Leveraging Online Content

content strategy  

AccorHotels Case

Todd Benschneider, Nadia Kaminskaya, Sam Mohammad

 University of South Florida

26 June 2017

Dr. James Stock

 

AccorHotels Case

       Over the past decade, technologies like smartphones and the internet have evolved rapidly. These advancements have ushered in new ways for consumers to buy from and communicate with businesses. AccorHotels, one of the most renowned hotel corporations in the world, is trying to find ways to keep up with the new demand for online presence and e-reputation. Olivier Arnoux, SVP Customer Experience and Satisfaction, has two weeks to present a plan for integrating a digital platform strategy into Accor’s brand image.

AccorHotels

50 years ago, owning and running a hotel consisted of a completely different dynamic which relied on travel agents, connections, and customer feedback cards. Today, the hotel industry has evolved into its very own beast. Consumers are informed, you can book a hotel with a click of a button, and you can customize your experience as you like. Today AccorHotels has over 4,000 hotels, 570,000 rooms, and is located in 95 countries.

As the dynamics of the hotel world changed, so did the leadership. In 2013 AccorHotels appointed Sebastien Bazin as its fifth CEO in 8 years. With Bazin AccorHotels embarked on a new strategy that was asset-light in certain markets but at the same time actively buying new properties in emerging markets. The new strategy separated AccorHotels into two business units with separate balance sheets: HotelInvest and HotelServices.  Accor’s hotels spanned all the major market segments – economy, midscale, and luxury/upscale. The major focus was on midscale which had a combined portfolio focus of 45%, economy was second with 39% , and luxury/upscale was 16% (Dubois).  With all of the changes AccorHotels has tried its best to keep up, the analysis of their 50 years to today shows the extensive changes in the lodging industry.

AccorHotel’s 50 Year Perspective of the Lodging Industry

     Imagine the business landscape of the lodging industry during Accor’s entry to the market in 1967,  in contrast to the data rich industry of today. Across that 50 year divide, Accor has successfully adapted to countless changes in the ways that customers interacted with hotels and how those hotels generated profits. Nearly every aspect of the host to guest exchange has changed since 1967, customer preferences have evolved through many changes in value perception as well as the emotional processes which influence prospects to choose one hotel over another.

    Convenience was a driving factor in the late 1960’s, but a convenient payment infrastructure remained absent for another 20 years. The lack of a remote payment system limited a hotel’s ability to collect reservation deposits. While credit cards were in use by 40% of U.S. households in 1967, their utilization for telephone reservations was restricted by the banking regulations of the day. Credit Card Companies required card imprints and physical signatures on those imprints, a process that limited a hotel’s ability to enforce cancellation fees (Durkin). The lack of a practical remote payment method created a “first-come, first-serve” market where fewer than 20% of hotel rooms were, on average, booked by reservation in years prior to 1970 . Since the internet would not arrive until three decades later, guest communications were handled by mail or a phone call from the customer’s home to the exact hotel branch. Centralized nationwide 1-800 reservations centers would not become widely used until the late 1980s (Bearne).

    Mobile phones remained an additional two decades away from improving communication convenience for travelers, so hotel customers stopped along the travel route to make calls to the hotel from a payphone to cancel reservations if there was a change in their travel plans. Because of these logistical obstacles many hotels routinely rented rooms out from under those who held  reservations once the recommended 6:30pm check-in had passed. The limited communication and payment options contributed to a hotel market that was driven by its location, billboards and highway visibility. In comparison, 45 years later the mobile phone tapped into the internet and instant access to price and vacancy were found with just a few finger swipes, no matter where the customer was located. In fact today many travelers double check advertised room rates and make modifications to their reservation “online” while they are waiting “in-line” to pick up their keys from the desk clerk  (Benschneider).

1970’s: Sales Pressure Success and the Leverage of the Escalation of Commitment

    From the 1960’s through the 1980’s, the typical traveler would choose a hotel after arrival to their destination, often stopping for pricing and room availability at several hotels prior to making a decision amongst those local competitors. In that period of the industry, location, brand reputation, lobby appeal and desk clerk’s salesmanship were the influential factors that differentiated local competitors. Interpersonal sales skills were greatly valued traits in desk clerks throughout the 70’s. In those years, desk-clerk sales practices for mid-level to luxury brands included a tour of the hotel and a visit to the room prior to the presentation of  the exact rate quote for that room.. Sales bonuses were a standard employee incentive practice, paid in proportion to the desk clerk’s prospect to guest conversion ratios in addition to their average “room-price” booked. Consumer criticism about wide deviations paid between guests reflected the low bargaining power of hotel guests and prompted regulations requiring maximum rate cards to be posted on the inside of each room door (Bearne).

    The sunken time investment required to get a precise rate quote and hotel tour deterred those tired travelers from comparing more than two or three hotels. Much like the car buying process today, deliberate sales tactics stalled the customer at the front desk for as long as possible before quoting the nightly rate, if the customer balked at the rate, savvy desk clerks were trained to ask the prospect for memberships and organizations they might belong to, that might “entitle” them a “preferred rate”. If the customer interview revealed them to have “no qualifying memberships”, the clerk would further detain the guest by “paging a manager” to request an “unprecedented one-time rate discount”. Research of the period studied the buying behaviors and documented, that through the psychological “escalation of commitment principle”, that each minute a guest remained in the hotel past the 10 minute mark, the odds exponentially climbed that the guest would agree to the rate, succumbing to the inertia of the stop, rather than continuing down the road to compare rates at the next hotel. Oftentimes, the guest would relent to the convenience of location, renting from the third hotel even when they preferred the first. The stresses of driving back to find the first hotel again in an unfamiliar city without navigational guidance outweighed the benefit of renting a better room. The convenience appeal of renting from the current hotel rather than the next stop hotel on the guest’s comparison list allowed larger margins as the bargaining power of consumers was very limited in comparison to modern online price comparisons (Harrington).

Late 1970’s – Advances in Telecommunications Improve Bargaining Power of Consumers

     Simple long distance telecommunications technology similar to fax transmission networks provided the infrastructure for the growth of travel agencies in the late 1970s. These agencies enabled reservation cancellation penalties by accepting the cash or check payment locally, while guaranteeing payment to the destination hotel through a commercial line of credit. The technology spawned the arrival of discount programs for travelers who prepaid. Travel agencies popularity also grew in popularity through the arrival of more affordable airline travel. A travel agency’s main products featured intricately designed “travel packages” which bundled specific hotel and airline combinations. Travel agency services dominated the long-distance travel and tended to direct the guests to those hotels which offered the largest agent commissions, regardless of brand recognition, location or lobby appeal (Bearne).

    Airline travel was considered a luxury product at the time, a service with enough margin to provide handsome commissions back to the travel agents, allowing those successful travel agents to enjoy respectable earnings potential until the mid-1980s. The bundling of hotel reservations into airfare packages allowed airlines to circumvent the FAA regulated minimum airline rates which contained large profit margins to prevent price wars between airlines. Until airline deregulation in 1978, airlines routinely offered kickbacks to hotel chains in exchange for discounts on bundled room rates to package into their travel services, these discounts allowed airlines to circumvent the regulated minimum seat prices and undercut competitors to gain market share. In addition, the customer’s inexperience with air travel,  reduced the percentage of customers willing to purchase their tickets in person through the airline kiosks at airports (Highly).

     The expensive risks of booking incompatible connecting flights among competing airlines deterred even the most experienced travelers from self-booking air-inclusive travel plans. Most travelers chose to employ a professional travel agent, their expert guidance also provided a guaranteed delivery of the travel contract, as the agency, hotels and the airlines cooperated to insure the fulfillment of the itinerary. Those guarantees were influential at a time when a round trip cross country airline ticket cost nearly a month’s wages. In inflation adjusted dollars, the lowest possible price for a round trip, red-eye connecting flight from New York to Los Angeles was $1444 in 1974, where today that same ticket can be found as a direct, round trip flight for under $400. The bargaining power of the airline industry supplier’s in that period justified large travel agent commissions and airline subsidized hotel rates. With the guaranteed income from airlines and travel agencies, hotels were less dependent on the street level consumer that arrived seeking lower room rates and competitive hotel amenities. The efficiencies of a demand influenced hotel industry were diffused by the travel agents influence on demand (Thompson).

1980’s: Credit Card and Airline Deregulations Increase Customer Bargaining Power

     A loosening of credit card regulations arrived in the 1980’s that allowed hotels to take payment in full or charge enforceable cancellation fees over the telephone. Those remote electronic payments in combination with the prior airline deregulations of 1978 enabled customers to book their own airfares by phone, bypassing the travel agents who previously held a captive market in airline ticket sales. These changes allowed travelers to cherry pick their precise wants on each day of their trip rather than accepting a plain vanilla bowl of prepackaged hotel offerings, the changes in payment infrastructure resulted in the improved bargaining power of hotel customers (Durkin).

    Hotels began to produce color catalogs listing their locations in a state by state directory with actual photos, contact information, local maps and advertised nightly rates. This fresh recipe provided a consistent and convenient platform for travelers to prepay their reservations for added discounts. The publication of room rates in directories allowed consumers additional bargaining power through the quick comparisons of dozens of hotels near their destination, a factor that allowed hotels with less desirable locations to compete with those flagship hotels in downtown areas. Travelers began to frequent hotels that were located between their destinations rather than at their eventual location to lower the overall expense of their trips. Subsequent hotels were built on the inexpensive real estate along rural stretches of interstate highways. These rural hotels were not only less expensive, but also offered ample parking and relief from the stresses of comparison shopping hotels on the busy downtown streets of unfamiliar cities (Benschneider).

1990’s: Mobile Phones and the Popularity of the Travel Clubs

   The early 1990’s brought the arrival of the mobile phone in addition to an increased consumer confidence in paying by credit card over the phone. These market changes fueled the introductions of travel clubs which provided catalogs that featured detailed state maps which soon replaced conventional travel atlas’ maps. These travel club catalogs highlighted their participating hotel partners and those hotel locations within both state and local maps.  The catalogs contained new driving-directional details which lent themselves well to attracting mobile travelers looking for the least-expensive hotel nearest a particular exit of a highway. Travel club popularity grew quickly, pioneered by Citi-group subsidiary, Citi-Travel, which was the 1990’s incarnation of Priceline.com, the club functioned like a wholesale club, leveraging the bargaining power of millions of members to pressure hotel’s into deeper discounts. Travel clubs featured the participating hotel’s names and addresses as well as their discounted member rates, amenities and distances to major attractions. The 1990’s catalog approach to hotel marketing brought changes to hotel construction and location in order to create offerings that most importantly “looked good on paper”(Bearne).

    In order to utilize the travel club system, members normally paid fees from $100-$250 per year in 2017 dollar equivalent. In order to buy at the “member rate”, customers were required to call a central 800 phone number to request reservations, even if they were already standing in the hotel lobby. This captive reservation system ensured that the travel clubs would be paid their commission on the booking. The club’s hotel catalog was arranged by city and sorted by rates from low-high, a factor that strongly incentivized hotels to shave their margins thinner to capture a larger percentage of the members passing through their city. Travel clubs pre-negotiated rates resolved the variable hotel rate shell game that travelers found distasteful. To combat the leverage of travel clubs, hotels introduced rewards clubs and credit cards that required customers to book their trip direct to the hotel rather than through a travel club. Room rates for “rewards club members” and were similar to the discounts of the travel clubs but pressured the customer to use their company rooms throughout a trip. The publication of those discounted rates laid the foundation for ever increasing bargaining power of customers, in a formula that would later evolve into the travel booking websites of today (Bearne).

Today’s Lodging Market

     In the current U.S. lodging market, hotels are enjoying the highest occupancy rates since 1984, with an average occupancy rate of 66% for 2016 (Edelson). Accor and most other chains have reduced on their reliance on Online Travel Agents (OTA) such as Expedia or Travelocity which still provide about a third of their bookings while currently a quarter of the average hotel industry bookings come through the corporate hotel websites, roughly 10% of bookings are made by inbound phone calls and the balance are a variable and wide mix of rewards clubs, organization referrals and repeat customer walk ins (Edelson). Accorhotels will need to plot their course into the 2020’s, allocating resources to hold or grow their market share utilizing search engine optimization and organic social media brand recognition  We will answer the questions on how Accorhotels can enhance their “Online Travel Agent” relationships, harvest brand value through social media and integrate loyalty rewards clubs. In addition, we can demonstrate how the supplementation of conventional strategies such as charitable contributions and alternating waves of well-designed television, billboard and print advertising can increase in effectiveness when leveraged across online platforms.

       Today, brand recognition for a company is heavily dependent on search engine rankings with those most searched brands returning the highest in search engine results. Search engine optimization, the ability for a company to climb higher in the search engine results, for as an example “Best hotel in Tampa?” is dependent on web traffic that refers to “Hilton, Tampa” or “Accor Tampa”. If web mentions of “Best Hotel” are most often correlated with AccorHotels Tampa than “Hilton Tampa” than the Accor results will show up nearer the top of the page in a search. For a company to fully optimize its search engine rankings, it must depend on consumer posted references of its brand name which have greater influence on rankings than those from corporate public relations websites (Perrin).

    In the internet marketing world, a company that utilized its name brand in most of its products such as “Disney” will have a search engine advantage over an equal sized company that has diversified its brands into independently named products; for example Coca-Cola=Coke, Sprite, Mello-Yello, Barq’s,Seagrams, Nestea, Dasani ect… In an internet optimized world, a hypothetical soft-drink company would be best served to use the word “Coke” in all its offerings and advertising such as Coke-Lemon, Coke-Root Beer, Coke Tea ect to leverage its brand strength in web searches. Today, cost-effective marketing campaigns include the parent brand along with the subsidiary brand name mention in the post titles to pull in larger share of search results. Search engine keyword selections dictate how search engine steer web traffic down the path to the desired content and repeated use of those keywords train search engines to direct similar searches to the intended online content (Campbell).

 

Competition

AccorHotel is one of the largest international hotel chains in the world. The company’s biggest competitors include Starwood, Marriott, Hilton, InterCon, and Wyndham (Exhibit 2). The hotel industry is highly concentrated worldwide. Almost every hotel offers the fulfilling of the same need – a temporary room in which to stay. Because hotels corporations offer near-identical services at similar prices, differentiation in features and minor details is vital. There are two ways to differentiate and obtain a competitive advantage: either vertically or horizontally (Becerra, Santalo, & Silva, 2013).

Differentiation

Vertical differentiation occurs when a company’s product or service is objectively better than the competition’s.  For example, Ferrari makes cars of much higher quality than Toyota, so they can charge significantly more. Since hotel rooms are so similar, vertical differentiation is likely not an attainable strategy for AccorHotel to differentiate from its biggest competitors.

Horizontal differentiation is valuable for gaining market share in industries like that of the hotels. This is attained through offering minor features or distinctions not offered by the majority of competitors (Piana, 2003). Using cars as an example again, Ferrari and Lamborghini offer similar products: high quality sports cars. However, Ferrari generally has always been deeply involved in Formula One racing – a detail that potentially captures more market share.

In the hotel industry, customers are influenced by location, room price, service, quality, reputation, security, and cleanliness (Becerra, Santalo, & Silva, 2013). It would make sense for AccorHotel to differentiate more horizontally because the possibilities are virtually endless as to the features and distinctions of a hotel room that can be offered, both physically and digitally.

Prior to the evolution of digital technologies, hotels found success differentiating horizontally by including pools, gym rooms, and breakfast. Eventually, demand for these extras became mainstream, so other methods of differentiation ensued. Major hotel chains began strategically forming collaborations with airlines, cruises, restaurants, and travel agencies for deals that were mutually beneficial for both the customers and partnering businesses.

Wyndham

No other hotel chain in the world operated more hotels than Wyndham, with over 7,800 facilities around the world (Exhibit 3). They dominated the economy/budget segment of the hotel industry, making them direct competition to Accor in that sector. Both Wyndham and Accor were the biggest players in the low-cost hotel room sector, where the number of rooms offered targeting economy class were 64% and 47%  respectively of their portfolios. Wyndham and Accor were the only two major hotel chains to successfully operate in all three segments – economy, midscale, and luxury.

Wyndham found differentiation by entering the resort and timeshare field. They launched Wyndham Vacation Ownership in 2004, attracting independent timeshare and hotel developers to participate in franchise and affiliation opportunities (“History of Wyndham Resorts”, 2017). Wyndham would later rebrand into Club Wyndham, the umbrella brand from three primary groups: Wyndham Vacation Resorts, WorldMark by Wyndham, and Wyndham Resorts Asia Pacific).

Starwood

Although one of the biggest hotel chains in the world, Starwood operated fewer hotels and rooms than other major competitors. They were the only major international hotel chain in which 100% of their rooms were of the luxury/upscale segment, where AccorHotel was only 16% (Exhibit 4).

Starwood was the first hotel chain to differentiate themselves through collaboration with the airline industry. In 2013, they teamed up with Delta Airlines to offer a unique reward point system called Crossover Rewards. The new point system would allow customers to use accumulated points interchangeably to redeem rewards with either Delta Airlines or Starwood. The new reward system was a major success, winning the Industry Impact award and changing the way the industry rewarded customers. Five months after Starwood was awarded for success with their Crossover Rewards system, some competitors followed suit.

Marriott

Similar to Starwood, Marriott hotels mainly centered on luxury/upscale class. Only 15% of their hotels were not luxury. The three biggest players controlling the upscale hotel segment were Marriott, Starwood, and Hilton – Hilton being the largest. Marriott bought Starwood in 2015 for $12.2 billion, surpassing Hilton in the number of luxury hotel facilities and rooms worldwide.

Marriott discovered a successful differentiation strategy through founding a travel agent training program called Hotel Excellence! (HE!) in 1999. HE! would educate travel agents on the general hotel industry and Marriott’s portfolio, offering special certification and discounts through using Marriott hotels. This strategy aimed at influencing customer decisions at an important point of their inquiry process, knowing that customers relied heavily on travel agents for availability information, price listings, deals and discounts (Dubois, 2016).

Hilton

Hilton hotels mainly target the upscale hotel segment, where 99% of their rooms were of the luxury/upscale type. Hilton, Doubletree, Embassy Suites, Hampton Inn, Hampton Inn & Suites, and several other subsidiaries. They were the first major hotel chain to incorporate the use of balanced scorecards, a concept developed in the early 1990’s that helped Hilton manage its performance of value to customers and stakeholders (Huckstein & Duboff, 1999). The scorecards pointed out a gap between franchised and company-owned properties in meeting basic customer needs of a clean, quiet, comfortable room. A new customer-focused strategy was formed, helping the company continuously evaluate their commitment to customer demands, priorities, and expectations. This approach led to a clear vision for Hilton employees to follow, empowering team members with a sense of pride in creating value for customers.

InterCon

Intercon owned hotel brands like Holiday Inn, Candlewood Suites, and Crowne Plaza. They are the only major hotel company to focus most of their targeting on the midscale segment was InterCon. Over 2/3 of their 744,364 rooms were midscale-focused, more than any other competitor. They wanted to serve the ‘everyday heroes’ of society, like firemen, sports coaches, and teachers. The InterCon strategy was directed at making guests stay comfortable, starting at the entrance. They decluttered lobbies and implemented peaceful sounds and scents for guests upon arrival (Rooney, 2009). Inside guest rooms, bedding and bathroom amenities were of the highest quality for the average mid-scale hotel room.

Airbnb

One of the biggest disruptions to the hotel industry was the launch of Airbnb in 2008. Its founders, Brian Chesky and Joe Gebbia, were roommates that rented out an air mattress of their San Francisco apartment during a local conference in which all nearby hotels were sold out. After recognizing its potential, they create an online platform that allowed travelers to link up with locals. They expanded the idea and have exploded in growth ever since (Exhibit 5). In 2015, the company received a total of $25.5 billion in funding, surpassing the market cap of hotel chains like Marriot, Starwood, and Wyndham (Dubois, 2016).

Airbnb offers a completely different experience for travels than a traditional hotel. Customers are accommodated with choices from a plethora of residential location to stay for the night. Not only are many offerings cheaper than hotels, but the experience is inherently different. Unlike hotels, travelers establish a one-on-one relationship with their host to feel more like a local than a tourist. Not only is the experience a major differentiator for Airbnb, but the listings are much more unique, where customers a can stay in RVs, Boats, and even castles (Exhibit 6)

Technology

 

Technology Disruption #1: Internet Pricing Search Engines

    The internet arrived in the late 1990’s to spawn a disruptive revolution in customer bargaining power with the arrival of Priceline.com, which unlike a Citi-Travel club, was a free service paid for by its hotel partners rather than club members and its live streamed pricing and room availability information allowed online shoppers to even pick specific rooms from a hotel chart for a better view or preferred location near the pool (Bearnes). However until early 2000’s most customers remained cautious about typing their credit card and personal information into the unfamiliar digital void and instead typically called operators at Priceline to pay for their reservations. Priceline and its imitators were able to publish live discounted pricing and real-time availability from custom built itineraries of airfare, hotel and rental cars rather than prepackaged bundles of the travel agencies of the 70’s and rolled those a-la-carte selections into those familiar guaranteed terms that made the travel agencies of the 70’s popular (Highly).       

      Today, internet shopping is the go-to for Millennials, Generation Z, and even Generation X and Baby Boomers. The advancement of sites such as Expedia.com, Booking.com, Agoda, KAYAK, TripAdvisor, and Google Bookings has completely changed the way consumers plan trips and book hotels. 148.3 million consumer make travel bookings online, ⅔ of these consumers booked their stay online. The reason for this shift is not only convenience, but also reduced costs. For example, you can book a hotel on Expedia.com that can be almost half the price of booking from an agent.

Technology Disruption #2 – Social Media

As the 21st century progressed, social media and customer ratings began to steer customers away from hotels that featured misleading pictures, an area of customer dissatisfaction that emerged with advancements in online marketing. Customer ratings and reviews revolutionized the customer service factor of the travel industry, not only was the shell game of front desk pricing removed; but, overly flattering hotel pictures and descriptions were exposed to those who were considering a booking. Since customers continued to gain confidence in the online security of their banking information, online purchases exploded and luxuries such as the travel industry grew into the most searched categories of search engine activity (Teicher).

    Today potential customers put greater trust in the feedback from strangers than they afford the public relations campaigns of business owners. Online review sites have magnified the bargaining power of customers and held entire brand names accountable for the wrongs weakest personnel links.  In the social media age, hotel manager’s performance bonuses are directly tied to the metrics of their online customer ratings. Modern desk clerks are no longer recruited for their sales closing ratios and average booking price, instead they are measured by a newly discovered tangible: “customer enthusiasm” which generates high ratings on customer review sites through the gratuitous use of smiles, welcoming body language and energetic verbal skills. Studies revealed that the first ten minutes of a guest’s arrival had become the most critical in generating positive guest ratings throughout the rest of their stay. Every step of the arrival process was refined, from the street signage that guided the guest to the unloading zone through the design of the doorknob that opened the door to their room every detail of the arrival experience was reevaluated (Hognas).

     Social media review scores provided a previously unmeasurable insight into every detail of the customer’s experience, which typically features positive feedback from the guests. IN the past previous attempts to solicit feedback through email and guest card surveys had typically gathered only negative experiences, which only increased the management’s awareness of what customers did not like, where social media was able to articulate and advertise what each hotel’s strengths were in customer appeal. The barriers to entry of new hotel chains and single location boutique hotels were dramatically lowered through social media and brand reputation became less important as customers spent less time browsing the online catalog of hotels from a single brand and instead turned to a google search of hotels near a certain address. Existing hotel chains that had large sunken costs in marketing departments, brand research and advertising contracts found themselves burdened by the high carrying costs of their own operational infrastructure (Mckinsey.com).

    By 2006 family owned bed and breakfasts were able to surpass nearby chain hotels in web traffic and search engine rankings by utilizing a few thousand dollars in servers and then staffing the hotel with pioneers of grassroots social media optimization which was enabled by the arrival of millennial born employees. This new generation of employee was able to reach the digitally influential millennial customers that were coming into their own period of buying power. The social media conscious young employees were often able to push their employer’s search engine rankings ahead of the established hotel chain competition through the simple amplification of their own personal Klout scores which was attached through affiliation to the hotel’s own social media efforts (Teicher).

    The technological disruption of social media is a positive aspect for lodging businesses. Through social media, AccorHotels can connect with the consumers on a day to day basis, instantly. One of the most important technologies that should be utilized is Social Media Listening (SML) which allows for hotels to acquire information easily, brands can also reply to criticism or negative reviews quickly and efficiently to make sure that they do not become a problem and ruin the brands image. For example the Swiss-based Nestle brand developed an internal task force to monitor and respond to potential attacks, criticisms, and negative reviews. Another famous example is Wendy’s, who utilize social media as a brand building mechanism, they use Twitter, Facebook, and Instagram to reply to consumers directly, making them feel special and engaged.    

2009 – Technology Disruption #3 – Airbnb

      EBay introduced a pioneering business model in 1998 that reduced the risks of buying items from unfamiliar sellers in the mysterious, digital void of internet commerce. EBay’s unique escrow partner PayPal guaranteed refunds if seller failed to deliver on the transaction. User ratings allowed both buyers and sellers to rate each other on each transaction and attach those scores to the buyers own public reputation. 11 years later Uber launched a ride sharing system on top of eBay’s escrow payment and peer rating model. Uber’s success is forecasted to become the revolutionary disruption that will reshape the foundations of the 21st century auto industry.  However Uber would have not been able to gain the needed foothold in transportation-for-hire sector, if it had not been for the deregulation of the taxi industry. Today the hotel industry is waging a regulatory battle against the likes of the Uber-esque lodging start-up, Airbnb, to protect their industry from following in the footsteps of the declining taxi industry. The popularity of Uber with millennials has led its customers and investors to expect great success from the business model of Airbnb, a lodging broker that enables hosts to rent rooms in their homes, guesthouses or offer their entire dwelling for short term vacation rentals (Yu, 2017).

Hotel Industry analysts are struggling to determine if AirBnB has added 3% to the total lodging market or taken a 3% share away from existing hotel operators. Regardless of the impact on the distribution of market shares, AirBnB has surprised analysts by increasing in value despite generating operating losses over its nine years in business. In fact today the total market value for AirBnB is 30% greater than that of Accorhotels, despite the 40 year age difference. However, the valuation of Airbnb may be misleading since the startup’s capital value is based mostly on speculative stock value, where over 40% of Accor’s  market value is based on its ownership of sellable capital infrastructure such as hotels, office buildings and furnishings (Stone). The most unique aspect of Airbnb’s  market appeal was the discovery that customer demand for alternative lodging options was not being driven by a demand for lower rates, in fact AirBnB hosts charge average nightly rates 25% higher than those charged by hotels. However, that figure also may prove to be misleading because much of the price premium reflected in the Airbnb rates could be attributed to the higher percentage of “whole-house” vacation rentals that drive up Airbnb’s average nightly rates, these house rentals are difficult to compare since they would equate to three or four hotel rooms.  The arrival of peer to peer lodging sales and the infrastructure that overcame the safety risks that had previously deterred the rental practice may become the biggest disruption that the hotel industry has encountered. Since May of 2016 over 20% of U.S. travelers have used Airbnb at least once for their lodging needs (McDermott).

      In the first quarter of 2017 Airbnb generated an operating profit for the first time since its launch in 2008. Despite the inadequacies of its revenue generation, Airbnb surpassed the then 47 year old Accor’s market value only six years after it opened and today Airbnb is valued at nearly three times the market capitalization of Accorhotels. While Airbnb may only hold 3% of the market share, the capital efficiency of its infrastructure could soon harvest the lion’s share of lodging industry’s profits. The true measure of success remains to be seen as the privately held Airbnb’s true market value will remain unknown until it goes public, but its potential influence to reshape both the housing and lodging markets will have  the potential to make history as one of the greatest digital disruptions in history (Ting).

    Airbnb is one of the greatest threats to the lodging industry, and it has become the go to for young HENRYs (High Earners, Not Rich Yet) , entrepreneurs, college students, and young couples. The CEO Bazin was quoted as saying “I would have loved to participate in Airbnb.” Airbnb provides any experience you desire that can be authentic, welcoming, and engaging. The hardest aspect for hotels is to keep up with the trend. For example AccorHotels has a luxury hotel in China, that is in a garden and was part of the Emperor’s castle. Authenticity and uniqueness is what draws consumers in today.

Recommendations

 

  • Content and the customer journey.

 

    1. Steps of the customer journey.
      1. The customer experience begins with educational content, a prospect realizes that they have a problem to solve and have turned to the internet to search for solutions. “How To Videos” are a great tool in creating brand and product awareness. For example Accor could create a youtube series of short videos that highlight how to have unique travel experiences in each of the cities that it services. Content should genuine and avoid excessive brand trumpeting. Additional video series could feature travel tips such as how to fold clothes in a suitcase to avoid wrinkling or life hacks on best ways to  how to hail a cab or save time utilizing street vendor dining during your vacation. The second step in the customer journey is the customer’s readiness for the explanation pitch. These are storytelling examples utilizing a case of a customer and how your hotel overcomes their specific travel inconveniences. Here is where customers want to hear how your service works and defines what you can do for them. This is where you would post blog or video on the range of travel services that are included with a nights stay at an Accor hotel. An example would be how the free morning breakfast is made from superior all fresh ingredients or how the fleet of hotel shuttles at each property are happy to drive you to dinner or pick you up at a bar as a free alternative to Uber. Each video should wrap up with a call to action and clear brand trumpeting. An example of this would be: “You will never need to call a cab if you stay at an Accor hotel, because Accor cares about customer convenience!”. The third step in the customer experience requires added confidence to choose your solution over alternatives. Here is the opportunity for endorsements and testimonials. Highlighting positive reviews and awards in the corners of the rate and room content pages is a good example of this strategy’s application. The fourth step of the customer experience is to be sure to express your gratitude for their patronage. In addition to the standard emailed “thank you for your stay”and survey, by utilizing SML’s you can locate the customer’s posts and add an enthusiastic reply to a positive tweet, rating or geo-check in the guest  made on social media. Supporting posts of others demonstrates that the organization is genuinely happy for the customer and proud to have been a participant in creating the best experience for that guest. The fifth step is continued engagement with customers after their stay is completed. This can be accomplished by emailing the customer links about new features or locations for them to try.
  1. Which types of content efficiently improve each of the different stages of customer experience such as triggering brand awareness or changing customer perceptions?
    1. Short sharable how-to videos are an effective device to introduce the company for brand awareness without the hard sale approach of an advertisement.
    2. Once a customer is aware of the brand, descriptive videos or meme style posts on company facebook page are another type of content exposure to trumpet the competitive advantages of the Accor hotel chains over its competitors. Many companies post action pictures of happy guests and smiling employees with their day to day messages.
    3. Ratings and endorsements further guide the customer along the path to the confidence they need to choose Accor over the competition. A system to encourage satisfied and influential customers to post positive reviews will advance Accor’s own marketing efforts with little to no cost to the bottom line.
    4. Follow up emails that feature upcoming events, discounts or informative links to lifehack videos can maintain the relationship after the stay is over.

 

 

  • How to leverage content?
  • For Accorhotels to become “customer-centric” across digital platforms it must first quantify a real-time, single-view of each customer as an individual entity. This can be achieved by isolating the user’s email, phone number, social media profile. By identifying and cataloging an individual user, that person’s online presence and posted feedback can allow Accor insight to how that user and corresponding demographic interacts with, not only Accor, but other people and businesses. Web content posted by that individual can provide insight on how that person might be expected to interact with Accor’s business offerings and allow the firm to adapt its offerings to best serve the largest majority of like-minded consumers. Big Data analyst Vamsi Chemitiganti captured the customer-centric vision of today when he said “The only way to attain Digital success is to understand your customers at a micro level while making strategic decisions on your offerings to the market. Big Data has become the catalyst in this massive disruption as it can help business in any vertical solve their need to understand their customers better. It aids this by providing foundational platform for amazing products.” To launch the data collection process we  recommend that Accor hire the experienced big data software firm Eleks to design a database to harvest customer data and provide guidance on how to interpret and integrate the data into the Accor business model.
  • The online content should first be intuitively responsive to customer posted content gathered by “Social Media Listening Software” that will be designed into Elek’s data analytics product. We recommend that Accor reduce its conventional advertising department by three people to be reallocated to the communication of the Accor corporate vision with the recommended social media marketing firm “Friendemic”. We propose that Friendemic in conjunction with your existing brand managers handle the launch of the multi-platform social media campaign, where the Accor brand can be molded into a carefully groomed online presence by a social media firm with seven years of experience managing campaigns for companies such as Fiat and the Habberstat Group.
  • Social media is a major influencer of customer decision making. According Andrew Perrin of the to the Pew Research Center (2015), most adults use at least one form of social media – and the trend is growing (Exhibit 7); usage grew from only 7% in 2005, to 65% in 2015. Advertising on social media can be an effective way of reaching customers, even before they begin their own independent research. Because Accor does not specialize in creating digital content, it is recommended that they hire in-house employees that are expert in creating social media content that can capture interest. Centralizing the flow of online traffic can be helpful in uniformity, as well as evaluating which personnel and techniques work best. Hiring employees to manage this component can ensure that a consistent image is projected, as opposed to leaving all decisions to a 3rd party social media company to do so. In addition to existing conventional media efforts, we are recommending a strong investment in social media content generation such as youtube, Facebook, Twitter, instagram and WordPress. The content should include travel blogs, destination photos, employee photos, stories and fun, informative one minute videos. The staff should also closely monitor yelp, tripadvisor, google reviews and other ratings sites to gather feedback on areas for improvement.

 

      1. Youtube is the primary platform to post videos longer than 15 seconds, while Facebook would be the platform to post a mix of links, company news, photos of Accor’s hotels, destinations and happy guests. Twitter is the channel to post very brief news updates and funny stories of less than 140 characters while on the other end of the spectrum WordPress would be the ideal platform to post commentary on the industry or the company history. Review websites like TripAdvisor influence customer decision-making early, so getting guests to leave reviews during or after their stay is critical. According to Dubois’ article (2016), “95% of customers check reviews and research about destinations and rooms”. One way Accor can get more guests to leave reviews is by incentivizing them with discounts on their next visit. For example, upon completion of an online review, customers can receive a promo code to receive 15% off their next visit when booked directly from the company website. In addition, each Accor employee should be encouraged to create LinkedIn profiles that are linked to the main Accor profile, Friendemic consultants should assist and train employees on ideal LinkedIn career content. The more employees who list Accor as their employer, the higher the social media ranking that Accor will reach, especially true for employees who themselves have high Klout scores.

 

  • How to become a content-driven organization?
  • In addition to creating digital content, monitoring what guests are talking about can be pivotal to Accor’s brand. Technology companies like HootSuite and Social Sprout provide software that allows the monitoring of a company’s entire social media presence.  The software can immediately alert the hired campaign managers of customer posts, allowing for timely responses to any complaints that arise. Accor managers can regularly check the aggregate data to better understand what they are doing right, and to fix what customers say they are doing wrong. This is a fast, reliable way for Accor to become customer-centric.
          Through a combinations of the analytics software designed by Eleks to monitor Accor’s online traffic and the outbound social media pictures and stories from the Friendemic we plan to quantify gains in online presence through  a dashboard of standardized social media metrics. One primary measure of online influence is taken from an organization’s Klout score, a metric which measures web traffic interactions with Accor’s corporate home page and select social media sites: Facebook, LinkedIn,Twitter, Instagram, WordPress, youtube and google+ platforms. In addition we recommend the use of social media tools “Wildfire Monitor”, “Mention” and “Trackur” to compare the trends and performance of competitors Marriott, Hilton and Wyndham in “Wildlife Monitor” and Klout scoring metrics against the social media performance of Accor’s campaign content.
  • The most important guiding principles of a corporate online presence is above all else, do no harm to the anyones perception of the organization, avoid controversial topics and when confronted by a hostile critic, to immediately respond by posting the customer satisfaction help number encouraging that critic to call with the promise that a manager will be happy to help resolve the issue for them. To build brand value it is important that the company post positive and supportive messages of affirmation to others in the online community even congratulating its competitors for acts of  altruism. To be effective it is critical that posts are interesting, entertaining and image rich original content rather than simply sharing or retweeting the posts of others, pictures and videos are especially effective at generating content. Most importantly create a posting protocol that requires a marketing manager with social media training approve all content prior to posting.
  • Marketing or Public Relations employees can post company news and should quickly respond to customer comments on the corporate pages. However, we recommend leaving the foundation content to the professionals and suggest hiring Cox Media to film short and fun informational videos featuring real employees from Accor to demonstrate travel tips, lifehacks and offer local recommendations for fun tourism experiences in the areas around Accor’s various locations. We also recommend leaving the timing and mix of postings to the professionals at Friendemic until the Accor marketing professionals master the concepts through feedback metrics.We recommend bringing in both Cox Media and Friendemic on annual vendor agreements while also seeking out a third Social Media Management firm at the  six month mark to audit the work of all three online content partners: Cox, Friendemic and Eleks.

 

    1. We recommend that no hard and fast rules be applied to differentiation between each level until the social media partners have initially rolled out a universal marketing campaign.  One year from now Accor will be able to compare the responses to the social media campaign and tweak the content mix for each of the brands. However we do recommend that the Accor parent brand name be included in all content in addition to the subsidiary brand names to leverage the web traffic from all the brands into a single larger and more influential entity.
    2. The success of the social media campaign will be partly dependent on the “buy-in” depth and organizational changes of the Accor staff. Incentive bonus’ for each property’s online ratings and Klout scores should be added to employee’s current compensation plan. Since effective social media marketing can reduce Accor’s dependence on the more expensive advertising in conventional media platforms such as television, print and radio could social media performance bonuses would be a justified through the added payroll expense. There are several recommendations that could help with Olivier’s task. The customer journey taken to reserving hotel rooms typically begin with some research. To get Accor employees on-board with the new digital transformation, an online review system can be sent to guest with a section to rate customer service by employees. This was previously accomplished through client feedback cards which grew into a computerized platform consistent with the digital movement and simplifies tracking. In addition to identifying low customer service score locations, employees of high customer services rating can be rewarded with praises or raises.
    3.      We strongly recommend that employee’s current pay level not be docked for poor social media performance, as negative backlash from the perceived punishment will hinder the enthusiasm needed to drive cultural changes. We recommend that Accor fully integrate social media feedback metrics into their ROA calculations and post each property’s social media influence and customer ratings in common employee areas. Additional bonuses should be awarded properties with the highest scores as compared to other Accor locations to create teamwork and peer pressure within each property to adapt the new directive. We believe that no reasonable business argument could made in favor of remaining absent from social media marketing investments and that Accor should plan to reduce its conventional marketing budget to reallocate it in small incremental fractions into social media development and analysis.

 

 

 

 

 

 

 

 

 

 

Exhibits

 

Exhibit 1

New Player Example
Online Travel Agents (OTA) Booking.com, Agoda,  Expedia
Aggregators-Metasearch sites Trivago, Tripadvisor, KAYAK
Review Sites Tripadvisor, Dianping
Travel Blogs and Forums Lonely Planet
Social Media Sites Facebook, Twitter, Instagram
Alternative Lodging Platforms Airbnb, Homestay

Latest Search Engine Highways Driving Traffic to Hotel Brand Content: Dubois, D. (2016)

Exhibit 2

Dubois, D. (2016)

 

Exhibit 3

Dubois, D. (2016)

Exhibit 4

Dubois, D. (2016)

Exhibit 5

http://www.businessinsider.com/airbnbs-summer-reach-has-grown-by-353-times-in-5-years-2015-9

Exhibit 6

https://www.smartertravel.com/2015/09/09/airbnb-reports-17-million-guests-this-summer/

Exhibit 7

http://www.pewinternet.org/2015/10/08/social-networking-usage-2005-2015/

 

 

 

References

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Benschneider, Carla. “A Travel Agent Perspective on the Evolution of the Hotel Industry.” Personal interview. 15 June 2017. From 16 year old Hotel Greeter to Travel Trade Manager for Disney Resorts

Campbell, K. (2016). “How to Drive Organic Search Results for Hotels”. Hotel News Now             http://hotelnewsnow.com/Articles/29352/How-to-drive-organic-search-results-for-hotels

Chemitiganti, V. (2016). “How to Create Customer Centric Digital Transformation”. Hortonworks
https://hortonworks.com/blog/create-customer-centric-digital-transformation/

Dubois, D. (2016). “AccorHotels and the digital transformation”. ISNEAD case study. Harvard Business Publishing.

Durkin, Thomas. (2000). “Credit Cards: Use and Consumer Attitudes 1970–2000”. Federal Reserve Bulletin         https://www.federalreserve.gov/pubs/bulletin/2000/0900lead.pdf

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Hershman, B. (2017). “AirBnB Vs. Accor: The Battle For Luxury Rental Market Supremacy”. Benzinga   https://www.benzinga.com/news/17/02/9082330/airbnb-vs-accor-the-battle-for-luxury-rental-market-supremacy

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Highly, J. (2013). “A History Lesson in Hotels”. Hotel News Now

           http://www.hotelnewsnow.com/Articles/20090/A-history-lesson-in-hotels

Hognas, S. (2015). “The Importance of First Impression for Hotel Customer Service”.     https://publications.theseus.fi/bitstream/handle/10024/96496/Sandra_Hognas.pdf?sequence=1

Huckstein, D., & Duboff, R. (1999, August). “Hilton Hotels: a Comprehensive Approach to Delivering Value for All Stakeholders”. Cornell Hotel & Restaurant Administration Quarterly. Retrieved from: https://business.highbeam.com/4074/article-1G1-55905416/hilton-hotels-comprehensive-approach-delivering-value

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         http://www.economicswebinstitute.org/glossary/product.htm#vertical

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Mcdermott, R. (2017). “Hotel industry rests uneasily with growth of Airbnb and other short-term rental services”. Washington Times     http://www.washingtontimes.com/news/2017/may/25/airbnb-gives-hotels-competition-with-lower-costs-f/

Mckinsey.com (2014).”Strategic Principals for Compeeting in the Digital Age”  Retrieved from:   http://www.mckinsey.com/business-functions/strategy-and-corporate-fin ance/our-insights/strategic-principles-for-competing-in-the-digital-age

Morrow, M. (2015). “How Airbnb Became More Valuable Than Marriott & Hilton”. Fox Business News            http://www.foxbusiness.com/features/2015/06/22/is-airbnb-best-lodging-stay.html

Perrin, A. (2015). “Social media usage: 2005-2015”. Retreived from: http://www.pewinternet.org/2015/10/08/social-networking-usage-2005-2015/

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Ting, F. (2016). “Airbnb’s Latest Investment Values It as Much as Hilton and Hyatt Combined”. Skift           https://skift.com/2016/09/23/airbnbs-latest-investment-values-it-as-much-as-hilton-and-hyatt-combined/

Thompson, D. (2013). “How Airline Ticket Prices Fell 50% in 30 Years (and Why Nobody Noticed)”. The Atlantic. https://www.theatlantic.com/business/archive/2013/02/how-airline-ticket-prices-fell-50-in-30-years-and-why-nobody-noticed/273506/

Yu, H. (2017). “Marriott And Hilton Stay Ahead Of The Sharing Economy, Proving That Airbnb Is Not    The Uber Of Hotels”. Forbes https://www.forbes.com/sites/howardhyu/2017/02/16/marriott-and-hilton-stay-ahead-of-the-sharing-economy-proving-that-airbnb-is-not-the-uber-of-hotels/#2c709b4576b3