Shazeeye's Blog Thoughts on User Experience, Technology and Business

4Jan/120

Two Consumer Behavior Models: Hierarchy of Effects and Elaboration Likelihood

Understanding consumer behavior, decision making and buying are critical aspects of any business. Consumer behavior models is just one of the many ways (real time observation and analyzing past data are some others) experts simplify this complex process. Let's look at two consumer behavior models: Hierarchy of Effects and Elaboration Likelihood Model.

Hierarchy of Effects: This suggests consumer buying behavior can be explained in phases. We need to influence and monitor these phases which range from first influencing the lower  level objectives such as awareness and understanding of the product to higher level objectives such as associating feelings with the product to encouraging purchase and regular use. This can be represented by a pyramid with fewer consumers  at the top than the bottom and each step has definite methods such as advertising or a sales promotion to encourage consumers to embrace the phase and move to the next in order to ultimately purchase the product. There are variations to this model as seen in the image below. Some examples: A fridge is utilitarian for most but Sub-Zero is hedonic. Toothpaste is mundane for most, but Tom’s could be considered utilitarian or self expressive. For some wealthy individuals, a Mercedes Benz may be mundane. A person could be a utilitarian when she starts to use the product and later be hedonic.

Elaboration Likelihood Model: Assumes consumers choose two routes before they decide which product to buy - the central or the peripheral route. The central route assumes customers are highly motivated, read a lot, weigh alternatives and make rational decisions. The peripheral route assumes buying is an emotional decision. Consumers can be persuaded  through cognitive and emotional responses and not through rationale or heuristics. For example, using the cartoon character Snoopy in Metlife's advertisements. Consumers tend to choose one over the other based on the type of product (big purchases could be peripheral decisions such as a car) and type of personality.


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30Dec/110

How do Venture Capitalists Value Companies?

What is the value of a company? That question comes up many times especially during mergers and acquisitions. Most venture capitalists value deals using an IRR hurdle rate or the minimum return they expect to receive in returns given risks of the new venture. Typically their goal is a potential IRR of at least 30%.

Let us look at five methods to value a company.

1. Price to Earnings ratio (P/E ratio): By using the P/E ratios of the industry we can value the company. For example, the medical device industry has a P/E ratio of 21-29 so given the earnings (or Net Income) we could calculate the price (offer to be made) to acquire the firm. If a medical device company had net income of 1.2M then taking 25 as the industry standard we can value the company at 1.2M*25= 30M.

2. Discounted Cash Flow (DCF): There are three methods to value a company using DCF as seen in the image. Its the main source of valuing a new venture as they are cash negative in the early years. Basically, you project the income for the first 6 years and discount it to the current year. You can forecast income in three ways - constant cash flow, constant growth and market multiple.

3. Price to Net Book ratio (PBR): This is is an indication of how much shareholders are paying for the net assets of a company. The book value is the difference between the balance sheet assets and balance sheet liabilities and is an estimation of the value if it were to be liquidated. When VCs want to buy companies they usually get all the financial statements from a company before making an offer. Thus, they have access to the balance sheets and the book value of the company. Based on their experience, the industry and the company, VCs usually have some  expectations of the PBR. They use this data and the book value of the company to arrive at the price they want to offer for the company.

4. Price to Sales Ratio (PSR): This is based  on the company's earnings or sales and does not consider debt and other liabilities. Again, there are industry standards for P/S ratio and if VCs know the sales of the company they can calculate the price they want to offer for the company.

5. EBITDA Multiple (Enterprise value /EBITDA): EBITBA is the earnings before interest, tax, depreciation, and amortization. This ratio measures the price (in the form of enterprise value) an investor pays for the benefit of the company's cash flow (in the form of EBITDA). An advantage of this valuation is that it is capital structure neutral, and, therefore, can be used for cross company valuations. VCs can get these numbers from the company's financial statements.

When to use which? Whichever method, brings you more money for your company. For example, companies that require big upfront investments or infrastructure (such as cable companies) and long gestation periods, EBITDA can be a more appropriate measure of the business's underlying profit potential since it excludes the cost of these investments so u=you would use the EBITDA multiple to value your company.

Three ways to calculate value of business at end of Year 6:

A.Constant Cash Flow: Assumes firm has lost its competitive advantage and is in steady state mode.

Method: Divide year 6 free cash flow by “k” cost of capital to value infinite earnings stream, then discount to present.

B. Constant Growth: Assume firm will continue to grow at constant percentage rate, with cash flow yield the same, to infinity.

Method: Multiply year 6 cash flow by 1+g (growth rate); divide that by

Kc – g (cost of capital less constant growth rate.) Discount to present.

C. Market Multiple: Assume firm could be sold at P/E multiple reflecting

year 6 earnings and growth rate.

Method: Apply industry average multiple to net income or EBITDA, tax effect proceeds, and discount to present.

29Dec/113

Cool software and hardware for your iPad

Over the past few months I've been trying to find ways to use my iPad more like a regular laptop so that I can just use one device instead of two and the fact that it's so convenient. I still use my laptop but along the way I've found  software and hardware for the iPad that's really amazing. Let's me show you this cool stuff with a few videos.

1. Keyboard: If you do a lot of typing a tactile keyboard definitely helps. There are a few on the market - Zaggmate is popular and expensive ($100) and Kensington is great value at $65. As seen in the video the keyboard comes in a case and is removable if you just want an iPad case. There are slots for the camera and to charge the iPad. You can also tilt it from 20-70 degrees for a better viewing angle. Volume and home controls are available on the keypad and setup is very easy.

2. Microsoft Office:OnLive, a company based in Palo Alto, has created OnLive Desktop a cloud based service for creating Microsoft Office (MS Word, MS Excel, Ms PowerPoint, etc.) files on the iPad. Files created on the iPad are accessible on any other device through the OnLive Files Website. They can be mailed and shared on a laptop but not on the iPad. To share the files that you created on the iPad you have to open the file on a laptop.

I'm waiting for the next version of the iPad when they (hopefully) have a USB or some form of external drive to help save files or at least have a file sharing option that is not limited to the Apple network.

Channel

Value

When to use?

How to use?

Social Media-Facebook

Facebook friends are invested in helping you out so if you could ask them to share your message this channel will get you maximum reach

If you want to create awareness and get maximum reach using your social equity.

Ask friends to post your message and share with their network. In your message mention what you want and send the message with a link to your blog- don’t forget to track the link with bitly.

Social Media-Twitter

Gets you traffic but visitors will not spend quality time on your blog. It helps establish you in the Twitter world as a thought leader where you can communicate directly with other gurus in the field. It is also used to identify latest events, updates, etc in the field.

Use twitter to become a thought leader as you will be judged on the quality of your tweets. You could tweet every time you write a blog post. You must tweet daily or every other day to stay current.

Tweet regularly and often. Try to tweet original thoughts on topics in your field so that your followers will retweet it and thus your circle of influence grows to make you a thought leader in the field.

Social Media-LinkedIn

Very high value as people are looking to hire on this network and by using a blog you enhance its value. Visitors from this channel spent the maximum time on my blog.

Always as you build your career – even when not looking for a job. To help give you a professional brand identity.

Add the blog application to your linkedIn profile so that every time you post on your blog it appears on LinkedIn. Post LinkedIn status updates as and when possible.

SEO – Content based on user interest

This is the most valuable channel of all. If you don’t have a unique perspective that or interesting content visitors will not stay or revisit. This helps build loyalty and stickiness to your blog.

Must always use content based on user interest else you will be one among the millions on dying blogs.

With the help of many tools as mentioned above you can gauge user interest and write posts accordingly. I’ve also looked at the offline world (events, conferences) to gauge user interest in my field.

SEO- Linking

Social Media channels need regular effort but SEO is more of a long term strategy than Social Media. Efforts put in a year ago will still reap benefits. Linking helps get traffic from other similar blogs, directories and is one of the easiest SEO methods.

Use only when you are linking to sources that add value to your blog otherwise people will realize you are just spamming their pages/websites/blogs.

Check the credibility of the places you link with as they can either help you or even harm you. Page ranks of above 6/10 or higher are good to link to.

SEO-Long tail keywords

Helps differentiate you from competitors by targeting a niche within your field (example:marketing+ technology+healthcare)

Must use to win against the bigger competitors in your field as you won’t win competing head to head (like Judo Strategy).

Use the traffic estimator to see which combination of keywords keep increasing in traffic month over month

SEO tools- plugin

Tools help to make it easier for Google’s search bots to find the right keywords and thus increase SEO.

For every post use the SEO plugin to promote your keywords

WordPress (blog platform) has a number of SEO plugins that can be added easily.

SEO-keywords

Since the entire SEO game is about keywords it is critical to get the best value by choosing the most valuable keywords

Use to understand trends in the industry and what people are looking for so that content on blog can be tailored accordingly

Use keyword tools to identify these keywords as well as what keywords the competition is targeting

Adwords

Ads help reach a wider audience as well as create awareness. Adwords is the most targeted form of traffic.

When you have the budget to reach a wider audience and when you feel the ROI is worth it

There are some best practices mentioned above (categorize campaigns, use more than 1 ad, bid accordingly and write effective ads) but I still need to learn how to best use this channel

30Nov/110

Micromarketing: Location data to better serve your customers – Part 2 of 2

Location data such as using a zip code to find out how much revenue a grocery store can make is critical in your decision to decide if you want to open the store at that location. This is just one example of the powerful potential of micromarketing. Read an earlier post to get the details. Let's look at some more examples of how micromarketing can be used in defining marketing campaigns and identifying sales trends.

Identifying Marketing Campaigns based on Market Potential: Market potential is the estimated maximum sales revenue of a product during a certain time period. MapInfo Professional visually depicts the market potential of households who spend more than $150 per week on groceries for each block group (group of adjacent zip codes) in Orange County. The software also gives details on which customer segment will most likely contribute to the sales at the grocery store. For details on customer segments based on PRIZM groups read the earlier post. We see that White-Collar Suburbia have the highest market potential (count* penetration) of 21.1% and hence will be the target of a marketing campaign. This group is well described and is very specific so a direct mail ad campaign is suitable. As this group is family centric and enjoys a healthy and busy (both parents work) lifestyle we can tailor the campaigns to emphasize healthy foods and easy to make dishes that brings the family together. We can also identify the market potential by block group so say if Block X has high market potential we will place a billboard in that area to target customers. We could also use coupons to entice the White-Collar Suburbia that live outside the trade area (area where customers that visit the store reside - usually a 5 minute radius for a grocery store) of the grocery store to visit the store.

Using Point of Sale Data (data collected at cash registers) to Identify Sales Trends: AC Nielsen collects a lot of data from grocery stores and can show sales trends based on customer locations (zip codes). As seen in the image below we see market share and sales over a year for 2 brands of cranberry drink - Ocean Spray and Coca Cola.

For Ocean Spray we see that within a retailer’s trade area the retailer’s total market share for Ocean Spray’s SS Cranberry Drink is 38.6%, a decrease of 4.3 points from last year. This means that the retailer sells 38.6% of this brand SS Cranberry drinks in this trade area. When we look at the Total Sales we see that the retailer’s sales is down 14% while the remaining market increased by  2.9%.  This means its sales decreased by 14% or people could be going to another retailer with a better marketing campaign (possibly a discount) for this drink in the trade area. The total sales were $700,000+ which is significant. Thus this drink could be a cash cow (based on BCG classification) for the retailer with the right marketing campaign. Plus, the sales for Ocean Spray or the remaining market increased by 2.9% though the overall trend for sales of ocean spray was slightly down by 3.6%.

For Coca Cola within a retailer’s trade area the retailer’s total market share for Coca Cola’s SS Cranberry drink is 23.6%, a decrease of 14.9 points from last year. This means that the retailer sells 23.6% of this brand drink in this trade area. When we look at the Total Sales we see that the retailer’s sales is down 62.3% while the remaining market decreased by  23.5%.  Thus this drink is a dog for the retailer and should be dropped as its market share is less than 35% and its total sales % change is less than 5%. Plus, overall sales were $1450  which is nearly insignificant (less than 1k is insignificant).

30Nov/110

Micromarketing: Location data to better serve your customers – Part 1 of 2

Location data such as using a zip code to find out how much revenue a grocery store can make is critical in your decision to decide if you want to open the store at that location. This is just one example of the powerful potential of micromarketing. Let's go through an example of using location data to open a grocery store in Orange County. We will be using SRC's Allocate to help analyze the location data and MapInfo Professional to map the data.

Mapping propensity and density to determine revenue potential of the store: As we see in the images below, we use SRC's Allocate to determine the revenue potential of  a grocery store in Orange County (OC). We choose the retail store option as the input variable and the dollar per store as the output using the software. Data is also available for furniture stores, sports stores, etc. After the variables are input a map is produced (below) which can be interpreted as follows. For Orange County, the average grocery expenditure per house hold per month (propensity) across a block group (a group of zip codes) where darker green shades indicate  higher expenditure for groceries per household per month is approximately $5800-$16900/month for the darkest or most expensive parts. The hashed region shows total dollars spent for groceries per square mile per month in Orange County (expenditure density). The darkest hashed regions indicate people in OC spend a total of $18,000,000 to $103,000,000 per month on groceries. This data helps you determine if the revenue potential is close to what you expect and can help compute your approximate profit given all the expenses you will incur. It also helps you compare revenue potential across different locations to help you determine the ideal/optimal location for you.

Choosing a Store Location by Mapping Competitors Location Data: Using the Yellow pages we identify the zip codes of the competitors. For this example - a grocery store - let's assume it's Trader Joe's and Whole Foods. We identified 19 Trader Joe's and 2 Whole Foods store in the OC area and mapped their trade areas (area from where customers visit the store - usually a 5 minute radius for a grocery store) using the software.  The blue areas represent the Trader Joe's and the red and fluorescent green represent Whole Foods. This is mapped on the propensity and density map from above using MapInfo Professional. With this information we choose a location (in yellow) that is far from competitors and has good propensity and density. You will also check for magnet stores, customer demographics and traffic (info in next paragraph) and ensure that the information provided by these parameters will help drive your store's growth. You can also compute the break even demand (average retail demand per square mile) as seen below to inform your decision.

Identifying magnet stores, traffic, customer demographics and trade areas for the new store location: The software helps to draw the trade area for the new store location (for this example a 5 minute radius as seen in black) and can identify the magnet stores or stores that will help pull traffic (for example, drug stores).  It computes traffic - 32,800 cars/day. It also helps define the type of people in the trade area. Types of people are defined by PRIZM clusters (for details check  PRIZM Clusters) and gives you demographics and characteristics of the population you are likely going to attract. According to the report this store will attract 54% of people belonging to the PRIZM cluster defined as White-collar Suburbia. This group can be described as "upscale, college-educated baby boomers living in suburban comfort in expensive new subdivisions". For more details on this segment visit Experian's description. Now that you have such a wealth of information on your customers you can tailor your marketing message as well as grocery needs to better suit them.


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