Marketing Engineering Model
Marketing ActionsInputs
Competitive ActionsObserved Market
Outputs
MarketResponse
Model
Environmental Conditions
Objectives e.g., Profits
Product design Price
AdvertisingSelling effort
etc.
Awareness levelPreference level
Sales Level
Evaluation
(5)
Control / Adaptation
(6)
(1) (4)
(2)
(3)
Steps in Creating a Marketing Response Model
1. Develop a relationship between sales and marketing variables
• Sales = f(marketing variables)
2. Calibrate the model• Statistically or judgmentally
3. Create a profit model• Profits = unit volume x contribution margin – fixed costs
4. Optimize• What if or optimum
Linear Response Model:
• Y = a + b1X1 + b2 X2
• Examples:– Medical advertising– Conjoint analysis– Bookbinders Book Club– Price, cart, and coupon exercise
• Easy to estimate, robust, good within certain ranges• Optimum is either zero or infinity• Judgmental – sales at current level of effort and
change in sales for a one unit change in effort.
Weight Loss Response and Profit Model
• Response Model
• Profit Model
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Nonlinear Response Models: ADBUDG
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ADBUDG Model
• Examples:– Response Modeler: units of marketing effort and sales
– Conglomerate: four cities responding to sales promotion
– Spreadsheet Exercise: (Blue Mountain Coffee) sales response to advertising
– Syntex: 7 products or 9 specialties responding to number of sales calls
– John French: 4 accounts responding to call frequency
Using Solver to Estimate Response Functions
• Locate parameters and choose starting values
• Create columns for independent and dependent variables. Calculate mean of dependent variable.
• Create column of predicted dependent variables based on parameters and independent variables.
• Create column of squared errors between actual and predicted dependent variable. Sum this column.
• Use solver to search over parameters to minimize sum squared errors.
Judgmental Calibration of ADBUDG
• Data: R(Xminimum), R(Xsaturation), R(X1.0), and R(X1.5)
• Parameters:
• a = R(Xsaturation)
• b = R(Xminimum)
• d = (a-R(X1.0))/(R(X1.0)-b)
• c = ln((d*(R(X1.5)-b)/(a-R(X1.5))/ln(1.5)
Judgmental Calibration of ADBUDG
• Data: R(Xminimum), R(Xsaturation), R(X0.5), R(X1.0), and R(X1.5)
• Parameters: • a = R(Xsaturation), b = R(Xminimum)• d = (a-R(X1.0))/(R(X1.0)-b)• Solve for c using least squares over R(X0.5) and R(X1.5)
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Profit Models
• Unit Sales = f(marketing variables) Response Function• Profits = Unit Sales(margin) – fixed costs
• Example: Example on page 38
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Linearizable Response Models: Multiplicative Model
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Multiplicative Models Cont’d
• Estimate judgmentally– Sales at current level of marketing variable(s)
– Percent change in sales for a percent change in marketing variable i = exponent bi
– Yc=a Xcb
– Solve for a
Multiplicative Models Cont’d
• Examples:– Allegro: Sales = a price-b . Advc
– Nonlinear Advertising Sales Exercise– Forte Hotel Yield Management: Sales = a price-b
• Constant elasticity – exponents are elasticities• Models both increasing (adv) and decreasing
(price) functions as well as both increasing (positive feedback) and decreasing (adv and price) returns
Other Linearizable Models
• Exponential Model: Y = aebx; x > 0– Ln Y = Ln a + bX– Models increasing (b>1) or decreasing (b<1) returns .
• Semi-Log Model: Y = a + b Ln X • Reciprocal Model: Y = a + b/X = a + b (1/X)
– Models saturation
• Quadratic Model: Y = a + bX + c X2
– Supersaturation– Ideal points in MDS– Bass Model
Choose model based on:
• Theory• Fit• Pattern of error terms• Signs and T-statistics of coefficients
Elasticity - Percent change in the dependent variable divided by the percent change in the independent variable
= (Y/Y)/(X/X) = (Y/X) (X/Y) = (dy/dx)(X/Y)
• If Y = bX then = 1 For example, if we double X (from x to 2x), Y also doubles (from bx to 2bx), so the percent change in X is always the same as the percent change in Y.
• If Y = a + bX, then Y/X = b(x)/ x = b and X/Y = X / (a + bX) and = (Y/X) (X/Y) = bX/(a+bX) <1 if a>0
Elasticities with a Multiplicative Model
Y = aXb
= (dy/dx)(X/Y)
• dy/dx = a bXb-1
= (a bXb-1) (X/aXb) = (a bXb-1 X)/aXb = b
Elasticity – A way to compare various marketing instruments
= (Y/Y)/(X/X) = (Y/X) (X/Y) = (dy/dx)(X/Y)
(Adv Existing Product) = .05 - .15 (Adv New Product) = .20 - .40• Advertising Long Term = 2X Short Term (Price) = -2.5 (Coupons) = .07
Source:Bucklin and Gupta, 1999
Elasticity in Product Classes where P&G Competes
(Adv) = .039 (Price) = -.541 (Deals) = .092 (Coupons) = .125
Source: Ailawadi, Lehmann, and Neslin 2001
Effect of Increasing Advertising
• Assume 100 units sold at $1.00/unit, 50% contribution margin, advertising elasticity of .22, and 10% A/S ratio
• No change in advertising:– Profit = (100 * $.50) - $10 = $40
• A 50% increase in advertising – sales increase by 11%– New Profit = (111 * $.50) - $15 = $40.50
Conglomerate Market Share Calculations – New York
Promotion Level
E4
Response Multiplier
P56
Non-Deal Prone Share
Deal Prone Share
Total Share
E10
0 .4 69% x .05 = 3.45
31% x .05x .4 = .62
4.07
100% 1 3.45 31% x.05 x 1 = 1.55
5.0
150% 1.64 3.45 31% x .05 x 1.7 = 2.635
6.0
Saturation 2.7 3.45 31% x .05 x 2.7 =4.185
7.635