eight praccal rules for building markeng mix modelsnymetro.chapter.informs.org/prac_cor_pubs/06-2014...
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EightPrac+calRulesforBuilding
Marke+ngMixModelsModelsthatwork
‐andyourclientscanbuyinto
mathematics applied to government, industry and commerce, llc
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Rule1:Understandthebigpicture
• Whoaretheplayersinthecategory• Whataretheydoing
– Marke<ngexpenditures
– Productposi<oning– Marke<ngchannels– Productinnova<ons
• Whatobjec<veistheclienttryingtomeet
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Rule2:Grapheverythinginsight
• OEoEcksteinrule:– Nevershowaclientamorethan2by2matrix
• Noclient–andveryfewanalysts–canmakesenseofacomplexsetofnumbers
• Don’tshowgraphsunlesstheytellastory– Somestoriestheyknow[toshowthatyouunderstandthebusiness]
– Andsometheydon’t[toshowyourvalue]
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Illustra<on:Dish‐washingdetergent
• Clientwasdisturbedbyasharpdeclineinmarketshareinlong‐<mecategoryleader
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Illustra<on
• Newentrywasgrowingrapidly• Butalsofundamentallyalteringthecategorybyintroducingconcentrates
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Concentrate Powder
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Illustra<on
• Asconcentratesweremuchmoreprofitable• Theclient–whohadbeenquicktorespond–wasnowmakingfarmoremoney– Attheexpenseofthesmallerbrands
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ProjectedProfit
BrandA BrandB BrandC AllOthers
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Realobjec<ve
• Theclient’sconcernwasmisplaced• Theobjec<veshouldn’thavebeentorestorelostmarketshare
– Buttobestrespondtocompe<<vepressureinordertomaximizeprofits
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Rule3:Considereverything
• Marke<ng• Compe<<ve
• Environmental
• Justbecausethedatabaseis“big”doesn’tmeanincontainseverythingyouneed
• Ifyouleavesomethingout,themodelisopentocri<cism
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Rule4:Lookat–andunderstand–outliers
• Outlierswreakhavoconmodels• Inalmostallcases,there’sanexplana<on
– Strikes– Productrecalls– Weatherevents– Geopoli<calevents– Etc.
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Rule5:Graphallrela<onships
• Rela<onshipsareusuallymucheasiertoexplain–andgetclientbuy‐in–iftheycanbedemonstratedgraphically
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Graphallrela<onships
• Some<mes,explana<oniseasy
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Promo<on Sales
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Graphallrela<onships
• Outliersusuallypopout
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Promo<on Outlier Sales
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Don’tshowconfusinggraphs
• Ifsta<s<callysignificantrela<onshipsdon’tstandout
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Sales Adver<sing
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Makerela<onshipsclear
• Dosomethingtomaketherela<onshipclear– Lag,smooth,transformoraggregatevariables
• Inthisexample,AdBankisasmoothedadver<singseries[equivalenttoAdStock]
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Sales AdBank
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Makerela<onshipsclear
• Plotagainstresidualsoraddaddi<onalinforma<on,asnecessary
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Outlier Sales AdBank
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Rule6:Neverpresentalinearmodel
• Althoughlinearandnon‐linearmodelsyieldsimilarresultsintherangeofactualdata– Theycanbequitedifferentwhenextrapolated
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Problemswithlinearmodels
• Theworldisnon‐linear– Alleconomictheoryisbasedonadecliningreturntoscale
• Linearmodelsleadtodangerousinterpreta<ons,suchas:– Whydon’twetripleadspending….– Ifpromo<onhasahigherresponsethanadver<sing,whynotputeverythingintopromo<on
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Problemswithlinearmodels
• Inmyopinion,allregressionbasedmodelsshouldbelog‐log
Ln[Salest] = β0 + β1 Ln [Advt] + β2 Ln [Promot] + β3 Dummy + …..
Or
Salest = Exp[β0] x Exp[β3 x Dummy] x [Advt]β1 x [Promot]β2 x …
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Rule7:Besurethemodelmakessense
• Toyouandtotheclient– Avoidnega<vemarke<ngelas<ci<es
• And[inmostcases]posi<vepriceelas<ci<es
– Beawareofthedifferencebetweenpriceandpromo<on
– Havestrongevidencebeforeyouchallengetheclient’sbasicassump<ons
• Testallresults
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Rule8:Usethemodeltoguidedecision‐making
• UsethemodelresultstosimulateaP&L• Evaluatealterna<vescenarios• Considerpossiblecompe<<veac<ons
– Andreac<ons
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Illustra<on:Laundrydetergent
• Ourclient’sbrandwasthecategoryleaderfacingchallengefromheavilysupportedmul<‐na<onalbrand
• Bothbrandswerespendingaboutthesameonbothadver<singandtradesupport
• However,thetwobrandsrespondedquitedifferentlytomarke<ngandfolloweddis<nctlydifferentmarke<ngstrategies
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Modelingresults
• Bothbrandswereresponsivetoadver<sing– Client’sbrandwasmoreresponsive
• Bothbrandswerealsoinfluencedbytradepromo<on– Promo<onaleffectsweresimilarforbothbrands
– Butcompe<<vepromo<onshadasubstan<aleffectwhichcouldeffec<velyoffsettheimpactoftheirownpromo<ons
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Impactofadver<singonleader
• Leaderwasinaposi<ontoincreaseshareatminimalcost
Advertising Market Share Profits
Current
Maximum
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Impactofadver<singonchallenger
• Challengerwasinvestmentspendingtobuyshare
Advertising Market Share Profits
Current
Maximum
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Impactofleader’stradespending
• Client’sbrandcouldmakeonlylimitedgainsbyincreasingtradesupport
Spending on Trade Support Category Leader Challenger
Current Maximum
Profi
ts
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Impactofleader’stradespending• Butnotifcompe<tormatchesspendingincreases
Current Maximum
Spending on Trade Support Category Leader Challenger
Profi
ts
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Outcome
• Categoryleaderincreasedadspending– Whilethechallengercon<nueditshighlevelofadsupport
• Bothbrandscarefullyavoidedatradewar• Asaresult,bothbrandsgrew
– Attheexpenseofthesmallerbrandsinthecategory
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Inconclusion
• Ifyourclientsunderstandandbuyintoyourmodels– They’llusethem– Andprofitfromthem
• Iftheydon’t– ………