MarketingStrategyChapter08

RobertPalmatier,1,MarketingStrategyChapter8,MarketingPrinciple#4AllResourcesAreLimitedManagingResourceTrade-Offs,Agenda,IntroductionApproachesforManagingResourceTrade-OffsEvolutionofApproachesforManagingResourceTrade-OffsAnchoringAdjustingHeuristicsAttributionAttributionApproachResponseModelsMarketingMetricsFrameworkforManagingResourceTrade-OffsInputstotheManagingtheResourceTrade-OffsFrameworkOutputsoftheManagingtheResourceTrade-OffsFrameworkProcessforManagingResourceTrade-OffsExampleTakeawaysCase,2,Palmatier,AllResourcesAreLimited,ThefinalandperennialissuefacingmanagersisthatallresourcesarelimitedandofteninterdependentManagingresourcesoptimallyiscritical,becausemarketingresourcesprovidetheprimaryactionleversthatfirmscanusetoimplementwhattheyhavelearnedfromthepreviousthreeMarketingPrinciplesTheprevious3Mkt.Principlesallinvolvetradeoffsinherentinmakingstrategicdecisions(STP,AER,BOR)whilealsoprovidinginputforthe4thMkt.Principle,whichdeterminestheannualbudgettospecificmarketingactions(plan,budgets,andmetrics)Specifically,weneedtobalancemarketingresourcesacross:Customersegments:targetingevenifafirmsexistingresourceallocationpoliciesappeareffective,rapidandoftenunexpectedchangesinthelegal,economic,technological,orinnovationlandscapedemandconstantvigilanceFirmsthusneedwaystoidentifymisallocationsandadjustspendinglevelsquickly,inresponsetoeachnewsituationAfirmsmarketingstrategymustaccountforresourcetrade-offs,orelseitsabilitytoexecutetheinitialthreeFirstPrinciplesofmarketingstrategy,andthusitsoverallmarketingstrategy,willsuffer,Palmatier,10,NeedForResourceTradeoffsAcrossFirstPrinciples,Selectingthewhoandwhatto“sell”acrossallpotentialcustomersinthemarketApproach:segmentandtargetlikecustomers(STP)Decisioncriteriabuildspecificexpertise)Attempttoaccountforcross-leveleffectsonacase-by-casebasis,17,17,Palmatier,GEPortfolioAnalysisisClassicApproachforMakingResourceTradeoffDecisions,Whataretheprosandconsofthisapproach?HowdoesitaccountforAER,BOR,andSCAtradeoffs?,18,Palmatier,AnchoringAdjustingHeuristicsApproach,Anchoringandadjustmentheuristicsarewidelyused,thoughtheexactanchoringrulesvaryinpractice:Inthepercentageofsalesmethod,marketingresourcesreflectthesalesrevenueearnedfromthefocalproductWiththepercentageofprofitsmethod,theresourcesdedicatedtomarketinginsteadvarywiththeprofitsearnedbytheproductinpreviousperiodsManagerswhoadoptthehistoricalmethodsimplysettheirpresentresourceallocationstoalevelveryclosetothepreviousyearsspendingFinally,thecompetitiveparitymethodimpliesthatmanagerssetresourceallocationlevelstomatchthoseoftheircompetitors,Palmatier,19,AttributionApproach,Specifyinganattributionmodel,suchthatthefirmlearnstheexactdollarimpactthatasmallresourceincreasewillexert,alsocanprovideanswerstotwomorequestions:Whatistherelativedollarvalueimpactofamarketinginvestment?Whatistheprofit-maximizinglevelofinvestment?Byusinganattributionmodel,managersthuscanallocateresourcestooptimizetheirdesiredoutcome,aswellasavoidwasteorrelianceonarbitraryheuristicsInturn,ratherthanreactiveresourceallocationstrategies,managerscanimplementproactiveones,Palmatier,20,Experimental-BasedAttribution,FirmsoperateinenvironmentsinwhichvariousfactorsoperatesimultaneouslyManagersstillmustmakeconstant,rapiddecisionsaboutwhethertocommitresourcesandhowmuchtocommitTheexperimentalattributionapproachinvolvesanintervention,outcome,designoftheexperimentalcondition,andacontrolconditionWiththisapproach,allotherfactors(atleastthoseunderthefirmscontrol)thatcaninfluencesalesarepurposefullykeptconstantThismethodoffersmanyadvantagesoverananchoringadjustmentapproach,Palmatier,21,Experimental-BasedAttribution(cont),Decidingwhichfactorstotestiscritical,andexperimentscanquicklygrowverycomplexAnotherelementthatdefinesthesuccessofanexperimentalapproachisitsreliability,thatis,itsinternalandexternalvalidityInternalvaliditymeansthattheexperimentiswelldesigned,anditreflectsthreekeycriteria:Thecauseshouldprecedetheeffectintime,knownastemporalprecedencecheckThecauseandtheeffectmustberelated,accordingtoacovariationcheckNoplausiblealternativeexplanationsexistfortheobservedoutcome,whichcanbedeterminedwithanon-spuriousnesscheck,Palmatier,22,ComponentsofExperimentalAttribution,Palmatier,23,ResponseModelAttribution,AresponsemodelisastatisticalmodelthatcapturestherelationshipbetweenpastmarketingresourcesandpastoutcomesTheunderlyingphilosophyisthathistoricaldatacontaininsightfulinformationaboutwhetherandhowmuchmarketingresourcestrulyincreaseoutcomes,whichisusefultoknowwhendecidingonfuturemarketingactionsWiththebasicandoftenreasonableassumptionthatpastoutcomesrelatetofutureoutcomes,thisapproachleveragesthepastdatatoisolatetherelationshipbetweenmarketingresourcesandperformanceResponsemodelsalsooffermanyadvantages,intermsoftheirflexibilityandusefulness,Palmatier,24,Example:SamsungElectronics(SouthKorea),In1999,SamsungElectronicsneededtoallocateitscorporatebudgetof$1billionacross14products,soldinmorethan200countries,withthegoalofimprovingthereturnsonitsmarketingspendingBeforethereallocation,Samsungusedananchoringandadjustmentmethod,allocatingresourcestoproductsandcountriesinproportiontothesizesoftheirmarketsWhenitadoptedaresponsemodelapproach,SamsunglearnedthatithadoverinvestedinNorthAmericaandRussia.ItreducedspendinginthoseregionsandinvestedmoreinEuropeandChinaBy2002,Samsungalreadyhadachievedsignificantmarketsharegainsinthesecountries,increaseditsbrandvalueby30percent(to$8.3billion),andgrewitsnetincometo$5.9billion,Palmatier,25,ResponseModels,Aresponsemodelisastatisticalandmathematicalmodelthatcapturestherelationshipbetweeninvestmentsinmarketingresourcesandoutcomes.,DAT8.1,Description,Todiscovertheshapeoftherelationshipsbetweenmarketingeffortsandperformance.Tocomparetheeffectsofvariousmarketingmixeffortsonmarketingoutcomes.Tocapturetheeffectsofcompetitivemarketingeffortsonafocalfirmsoutcomes.,WhentoUseIt,HowitWorks,Historicaldatacontaininsightfulinformationaboutwhetherandhowmuchmarketingresourcestrulyincreaseeconomicoutcomes,whichisusefultoknowwhendecidingonmarketingactionsinthefuture.Abasicassumptionisthatpastoutcomesrelatetofutureoutcomes,whichisreasonablemostofthetime,barringexceptionslikerecessionaryperiods.Usingpastdatatouncovertherelationshipbetweenmarketingresourcesandperformance,responsemodelsprovidefourmaininsights.First,theycapturetheshapeoftherelationshipbetweenmarketingresourcesandoutcomes,whichisusuallyconcave:Financialoutcomesincreasewithincreasesinmarketingresourcesbutatadiminishingrate.Second,responsemodelsrevealexactlyhowmuchfinancialoutcomeswouldchangeifmarketingeffortsincreasedby1percent,alsoknownasmarketingelasticity.Third,witharesponsemodel,marketingmanagerscanfigureouttherelativeimpactofseveralresourcesandtherebyallocatethemoptimallyandinproportiontotheeffectivenessofthedifferentactivities.Fourth,responsemodelshelpmanagerscapturetheeffectoffocalmarketingeffortsonoutcomeswhilealsocontrollingforcompetitivemarketingefforts,whichmayincreasetheclutterinthemarket.IfthemarketingoutcomeisgivenbyY,andwehavetwomarketingefforts(X1andX2)bythefocalfirm,aswellascompetitorspending(Z1),theformulaforaresponsemodelisgivenbyln(Y)=1ln(1)+2ln(2)+3ln(1)+Wheretheln()termisthenaturallogarithmofallvariablesinthemodel,whichcapturesthediminishingreturnsrelationshipbetweentheoutcomeandthecovariates,1and2arecalledtheelasticitiesofmarketingefforts,1capturesthe%changeexpectedinYfora1%changeinX1,1capturesthe%changeexpectedinYfora1%changeinX1,and3capturesthe%changeexpectedinYfora1%changeincompetitiveeffortsZ1,andisarandomerrorterm.Withdataaboutpastoutcomesandpastmarketinginventions,aswellasconfounds,softwareavailablefromSASorSPSScandeterminethesign,strength,andstatisticalsignificanceofthecoefficients.,26,Palmatier,Facingtougheconomictimes,newspaperexecutivesatXYZcompanyevaluatedhowmuchtospendonmarketinginvestmentsinthenewsroom(enhancingnewsqualitybyhiringmorereporters,sectioneditors,copyeditors,andphotographers)versusinvestinginthesalesforcetogeneratemoreadvertisingrevenues.Theydecidedtobuildaneconometricmodeltostudytherevenueeffectsofthesedifferentmarketinginvestments.Theycollectedmonthlydatafortheprevious10years,relatedtotheirinvestmentsinthenewsroomandadvertisingsalesforce,theirtotalrevenues(outcomes),andthenewsroomandsalesforceinvestmentsofothernewspapersoperatinginthesamecity(competitiveinvestments).Theresultingresponsemodelcapturedtherelationshipsamongoutcomes,marketingefforts,andcompetitiveefforts,asestimatedinthefollowingtable.Withthismodel,XYZdeterminedthattheelasticitiesofnewsroominvestments(.36)andsalesforceinvestmentswerebothpositiveandsignificant(.24).Thus,$1investedinthenewsroomledtoa36percentincreaseinsales,and$1investedinthesalesforceledtoa24percentincrease.Themagnitudeoftheelasticitiesthusrevealedthatnewsroominvestmentswere1.5timesmoreeffectivethansalesforceinvestments.InXYZscurrentplan,thecompanysplititsinvestmentsequallybetweenthenewsroomandsalesforce,sotheresponsemodelestimatesledtheexecutivestomakechangesandinvestmoreinthenewsroomthaninthesalesforce.Addingintheeffectsofcompetitiveeffortsrevealedthatcompetitivenewsroominvestmentshurt(-.12)theirrevenuesmorethandidcompetitivesalesforceinvestments(-.08).ThustheoverwhelmingevidencepointedtoXYZsurgentneedtocommitstronglytoinvestinginthenewsroom:Thehighqualityofthenewsroomwouldnotonlyhelpitattractsubscribersbutalsoenableittocombatattacksonitsrevenuebycompetitors.,ResponseModels,DAT8.1,Example,Palmatier,27,ResourceAllocationUsingMarketReponsesModels:ProsandCons,ClassicApproachestoSalesForecastsandMarketingBudgetsPercentofSalesMethodIndustryBenchmarksLastPeriod+/-RewardandPunishment“SqueakyWheel”Model“SpreadtheButter”ModelResponseModelBuildsa“blackbox”modelbasedonpastresponsetochangesininputsOncemodelisbuiltthenoptimizesforobjective(Solver)Inessenceitisjustcurvefitting,whichassumespastisgoodpredictoroffuture,28,28,Palmatier,AResponseModelSystemHasEightKey“Parts”,1)MarketingInputs,2)CompetitiveActions,5)BusinessOutputs(metrics),3)EnvironmentalFactors,6)OptimizeandEvaluate,8)AdjustMarketingInputs,29,Palmatier,ProductDesignPriceAdvertisingSellingEffortEtc.,4.MarketResponseModel,AwarenesslevelPreferencelevelSaleslevel,7.Objectives,StepstoBuildingaResponseModel,Determinerelevantinputs,outputs,andobjectivesMarketingactions(price,promotion,salescoverage)Competitiveactions(price,newproducts,discounts)Environmentalfactors(government,tradebarriers)Businessoutcomes/metrics(saleslevel,awareness)Objective(optimizesalesorprofits,advertisingorsalescoverage)Determinethe“form”and“calibrate”theresponsemodelForm(i.e.,typeofequation):linear,saturation,hysteresis,etc.Calibrate:estimateparametersusingexperiments,managerjudgments,pastdata(needvarianceacrossinputs)Estimateresponsemodelandevaluate(vs.objectives)Optimize(Solver)toadjustmarketinginputsDesignfieldexperimentandtestRolloutoradjustmodelandredoprocess,Palmatier,30,30,SelectResponseModelsFunctionalFormThatCapturesReality,31,Baselevel:“sales”withnoinputLinear:constantrelationshipbetweeninputandoutput(infrequent)Delayedresponse:lagbetweeninputandoutput(common)Saturation:curveflattensatsomehigherlevel(diminishingreturns,common)Sshape:slowtostartandreachsaturation(goodstartingpoint)Hysteresis:slowtodecayafterinputremoved,31,Palmatier,Examples:ResponseModelsFunctionalForm,Saturation,Linear,S-Shaped,CurrentSales,ResponseFunction,CurrentEffort,SalesResponse,EffortLevel,Y=a(1ebx)+c,32,Palmatier,CalibrationistheProcessforEstimatingParametersinResponseModel,33,EstimatefromhistoricaldataDatafromCRMsystemMustbesufficientvariabilityinthedatatoallowforreliableestimation(acrossregions,overtime)ConductexperimentsFairlyeasyinonlinesettingsP&Gdoesthisforadvertisingformostnewproductlaunches(3cities)ElicitmanagerialjudgmentQuickandhelpsbuildconsensus(combinewithothers)EncouragessystematicthinkingAseriesofquestionsonwhatwouldhappenwheninputschange,33,Palmatier,PreprogrammedResponseModels(manyincludedinME),34,ADBUDG:marketshareresponsemodelforadvertisingspend,whichbuildsinmanyknownadvertisingphenomenaFloortosharew/oadvertisingCeilingwhereadvertisingspendhasnoeffectNeedsomeadvertisingratetomaintainshareBuiltintypicaldelaysandcarryoverSalesforceallocationmodelsGEOLINE:allocationofsalespeopleoverterritoryCALLPLAN:allocationofsalescallsovercustomers,productsMDZ:allocationofcompensationoversalespeopleManyotherresponsemodelsaccountformultipletypesofmarketinginputssimultaneouslyInteractionamongadvertising,salespeople,andpromotion$ConsultantsspecializeineachmodelandacrossindustriesBuildyourownmodelforkeyongoingallocationdecisions,34,Palmatier,Solver:AnOptimizationPrograminExcel,Add-inforExcelthat“solves”linearandnonlinearfunctionsforoptimalpointPluginequationforresponsefunctiontooptimize(setminandmaxlimits)Setanyconstraints(e.g.,advertisingspending0)Solvergivesoptimumlevelofinput(s)“assuming”responsefunctioncapturesrelationshipbetweeninputsandoutputs,35,35,Palmatier,“Ifyoucantmeasureit,youcantmanageit!”TheBalancedScorecard,ManagersneedintermediatemetricstocapturetheeffectsoftheirdecisionsinordertoadjustactionsShortfeedbackloop,forward-looking,fastresponseScopeofmetricshouldaligntodomainofdecisionCommonmarketingmetrics:Customersatisfaction(productfocused,forward-looking)Servicequality(experienceandrelationshipfocused)Brandawareness(promotionfocused,fastresponse)Brandstrengthandquality(promotion,price,andproductfocused,slowresponse/highinertia)Customerretention(aggregate,backward-looking)Loyalty(probablybestforward-lookingaggregatemeasureofmarketingseffect),36,36,Palmatier,However,SomeMeasuresofLoyaltyareMisleading,Loyalty:attitudesandbehaviorsthatsignalamotivationtomaintainarelationshipAttitudes:capturesbeliefsandfeelingsrelativetocompetitiveoptionsBehaviors:capturesactualactions,Repurchase/WOMBehaviors,RelativeAttitude,37,Palmatier,Net-PromoterScore(NPS):PopularLoyaltyMeasure,Net-promoters:%ofcustomerswhoarepromoters-%whoaredetractors(i.e.,removespeopleinzoneoftolerance)Promotersanswer9or10anddistractor0to6toquestion,“Howlikelyisitthatyouwouldrecommendfirmtoafriendorcolleague?”ScoresarelinkedtoprofitablegrowthScoresof75%andaboveareworldclassMixedsupportinacademicresearchPros:simpleandgood“singleitem”measureCons:notverydiagnostic,maynotbetrueloyaltysincenoactualbehaviors,38,38,Palmatier,GrowthbyWordofMouth,10%50-5-10,-1001020304050,20253035,20%100-10,NetPromoters,NetPromoters,3YearGrowth,3YearGrowth,Airlines,CarRentals,Southwest,United,American,Enterprise,Avis,Hertz,SeeTheRulesofMeasurementandNPSforoverview,39,Palmatier,BenefitsofCustomerLoyalty,Loyalcustomerstendtospendmorewiththeorganizationovertime(expansion,cross-selling)Lesschurn,higherretentionPricepremiumOnaveragecostsofaccountmaintenancearelowerthanfornewcustomercostsEmployeeretentionismorelikelywithastablecustomerbase(impactonfirmculture)PositiveWOMincreasescustomerbaseandreducesacquisitioncostsPositiveattributionsandcompetitiveshelteringSharesinformationandhelpsinnovationVerystrongpositiveaffectonCLV,SeeBuildingLoyaltyinBusinessMarkets,40,Palmatier,41,LoyaltyisBetterthanAccountingMetrics,but,RelationshipEquity,ServiceQuality,People,Physical,Place,Promotion,Process,Price,Product,BrandEquity,ValueEquity,Satisfaction,Loyalty(NPS),7PsMarketingMix(expense),CustomerEquityStack(assets),IntermediateMkt.Metrics,AccountingMetrics,Profits,Costs,Sales,Growth,1)Canbelongdelay,2)Operatesthrumanymechanisms(AER),3)Notverydiagnostics,41,Palmatier,ManyMarketingMetrics,ButTwoMainApproaches:ProsandCons?,Usespecificmetricforwhatyouwanttocontrol(narrow,fast,anddomainspecific)Brand(awareness,quality,strength)Offering(innovativeness,adoptionrates,pricepremium,value)Relationship(loyaltytosalesperson,trust,relationshipquality,velocity)Acquisition(#newcustomers,CLV,duration)Retention(churn,lostcustomer,share)Useaggregatefinancialmetricsandanalyzeusingchainratios(usesaccountingmeasures,canbedecomposed)Netmarketingcontribution(NMC)tellsusprofitaftersalesandmarketingcostsMarketingROStellsuswhatportionofoursalesisprofit(MROS=NMC/sales*100%)MarketingROItellsusourearningsforevery1$investedinsalesandmarketing(MROI=NMC/Salesandmarketingcosts*100%),42,42,Palmatier,TypesofMetrics,Palmatier,43,Note:SIC=StandardIndustryClassification,NetMarketingContribution(NMC)asaChainRatio,44,Sales(COGS)GrossProfit(SGA)NetIncome,Sales(COGS)GrossProfit(SalesandMarketingCosts)NetMarketingContribution(GA)NetIncome,SeeNoteonMarketingPerformanceAssessmentforexcellentoverviewofmetrics,44,Palmatier,StrategiestoGrowMarketDemand,StrategiestoLowerChannelCosts,StrategiestoGrowMarketShare,StrategiestoIncreaseAverageSellingPrice,NetMarketingContribution,MarketShare,MarketDemand,=,x,x,AverageSellingPrice,ChannelDiscount,ProfitMargin,MarketingBudget,StrategiestoIncreaseProfitMargin,StrategiestoImproveMarketingEfficiency,x,x,-,MBM6Chapter2,(Best2012),MarketingProfitability&MarketingProfitabilityMetrics,MROS&MROICanbeUsedtoBenchmarkEntities(competitors,products,regions),45,PercentMargin38.8%,OtherOperatingExpenses$20million,SalesRevenues$125million,Marketing&SalesExpenses$18.5million,GrossProfit$48.5million,NetMarketingContribution$30million,OperatingIncome$10million,MarketingROS24%,MarketingROI162%,MBM6Chapter2,InternalViewofPerformance,ExternalViewofPerformance,(Best2012),EffectiveMarketingDashboardsCaptureMultipleViewsoftheFirmOverTime,46,Agenda,IntroductionApproachesforManagingResourceTrade-OffsEvolutionofApproachesforManagingResourceTrade-OffsAnchoringAdjustingHeuristicsAttributionAttributionApproachResponseModelsMetricsFrameworkforManagingResourceTrade-OffsInputstotheManagingtheResourceTrade-OffsFrameworkOutputsoftheManagingtheResourceTrade-OffsFrameworkProcessforManagingResourceTrade-OffsExampleTakeawaysCase,Palmatier,47,FrameworkforManagingResourceTrade-Offs,InputstotheManagingResourceTrade-OffsFrameworkPositioningStatementsAERStrategiesBORStrategiesOutputsoftheManagingResourceTrade-OffsFrameworkPlansandBudgetsMarketingMetrics,Palmatier,48,ManagingResourceTrade-Offs,Approaches&ProcessesHeuristicapproachAttributionapproachAnalysesResponsemodelattrib