The Nature and Measurement of Marketing Productivity in Consumer Durables Industries: A Firm Level Analysis

1. The Nature and Measurement of MarketingProductivity in Consumer Durables Industries: A Firm Level Analysis Authors • Del I. Hawkins University of Oregon • Roger J. Best University of Oregon • Charles M. Lillis U S WEST, Inc. Group 3 - MKTG 5320 October 26, 2010 Juliana Carlisle, Kenneth Carnes, Cathy Hervey, Kyle Alan Thompson, Kyle Andrew Thompson © 1987, Academy of Marketing Science Journal of the Academy of Marketing Science Winter, 1987, Vol. 15, No. 4, 001-008 0092-0703 / 87 / 1504-0001

2. Introduction “The purpose of this article is to develop a managerially relevant concept of marketing productivity, its operational measurement, and a procedure for establishing environment specific benchmarks with which to compare the marketing productivity of various businesses.” "The basic question still remains of how to measure the productivity of the marketing team or of marketing decisions."

3. Nature of Marketing Productivity • Macro - entire economies or industries • Micro - individual firms or businesses • Primary Focus – Macro Environment • Productivity is a ratio of output from some activity to the input required by that activity • Marketing Productivity Ratio = Marketing Output/Marketing Input • Optimal way to allocate funds across all marketing activities

4. Marketing Output • Consumer/Society Viewpoint – Time & Effort • Managerial Viewpoint – Delivery Expectations • Relative Market Share = Sales/Total Sales • Allows for comparison across markets/industries • Price Level • Market must consider relative to competitor • Market Output = Relative Market Share x Relative Price • Key is to buy Market Share without sacrificing price

5. Marketing Input • Operational Considerations • Increase in raw materials to improve quality • Is this a Marketing Cost? • Measure each dollar of input to each dollar of return • Use Absolute Dollars to capture effects and economies of scale

6. Marketing Productivity Index Development • Marketing Productivity Score • Database • Variables

7. Marketing Productivity Score • MPS = Relative Market Share x Relative Price Marketing Expenditures/Sales • MPS is useless without a benchmark for comparison • Average Firm’s MPS = Marketing Productivity Index (MPI) • Individual firms MPS is benchmarked against the industry MPI

8. Database • PIMS = Profit Impact of Market Strategy • PIMS is designed to measure the relationship between business actions and results • Membership fee suggest larger profitable firms participate • Data is collected with self report questionnaires, which may create measurement bias • Sensitive data is multiplied by a constant to maintain confidentiality

9. Variables • Relative Market Share • Relative Price • Marketing Cost • Sales • Relative Product Breadth • Relative Product Quality • Relative Customer Size Range • Served Market Growth • Number of Immediate Customers • Purchase Amount Immediate Customers • Customization • Importance of Auxiliary Services to End Users • Frequency of Product Changes

10. The Model

11. Model Construction • Focused on business in the data base that focused on consumer durables • Firms without the ability for expansion due to capacity were eliminated • 135 firms comprised the data base • Variables with a chance of inclusion below .10 due to sampling were retained in the model

12. Model Construction (continued)

13. Model Evaluation • Each firm’s MPS serves as dependent variable

14. Model Limitations • Nonrandom nature of the PIMS data base suggests caution in generalization of findings • Expenditure data was only taken as a percentage of sales, absolute values would have been more exact

15. Model Implications • Communications and strategy will improve based on managements performance objectives (relative price & relative share) • Most firms can estimate their competition’s marketing expenditures, thus firms can compare MPS • If the firm is above or below the productivity level of key competitors, further analysis should be conducted • If firms differ on firm specific variables, comparison based on MPS is not appropriate • MPS score is influenced by how effective the firm’s marketing department functions

16. Journal of Marketing October 2004 Measuring Marketing Productivity: Current Knowledge and Future Direction Authors Roland T. Rust University of Maryland Tim Amber London School of Business V. Kumar University of Connecticut Rajiendra K. Srivastava Emory University

17. Article Overview • Central Issue – how nonfinancial measures of marketing effectiveness drive financial performance measures • Chain of marketing productivity – broad conceptual framework for evaluating marketing productivity

18. Tactical Actions Strategies Marketing ActionsThe Firm Customer Impact Marketing Assets Market Impact Market Position Financial Impact Financial Position Impact on Firm Value Value of the Firm

19. Strategies Promotion strategy, Product strategy Channel strategy, etc. Tactical Actions Marketing ActionsThe Firm Customer Impact Marketing Assets Market Impact Market Position Financial Impact Financial Position Impact on Firm Value Value of the Firm

20. Tactical Actions Advertising Service Improvements Branding, Loyalty Strategies Marketing ActionsThe Firm Customer Impact Marketing Assets Market Impact Market Position Financial Impact Financial Position Impact on Firm Value Value of the Firm

21. Tactical Actions Strategies Marketing ActionsThe Firm Customer Impact Impact on satisfaction, Impact on attitudes, loyalty Marketing Assets Market Impact Market Position Financial Impact Financial Position Impact on Firm Value Value of the Firm

22. Tactical Actions Strategies Marketing ActionsThe Firm Marketing Assets Brand Equity Customer Equity Customer Impact Market Impact Market Position Financial Impact Financial Position Impact on Firm Value Value of the Firm

23. Tactical Actions Strategies Marketing ActionsThe Firm Customer Impact Marketing Assets Market Impact Market share impact Sales impact Market Position Financial Impact Financial Position Impact on Firm Value Value of the Firm

24. Tactical Actions Strategies Marketing ActionsThe Firm Customer Impact Marketing Assets Market Position Market share, Sales, etc. Market Impact Financial Impact Financial Position Impact on Firm Value Value of the Firm

25. Tactical Actions Strategies Marketing ActionsThe Firm Customer Impact Marketing Assets Market Impact Market Position Financial Impact ROI, IRR, NPV, EVA Financial Position Impact on Firm Value Value of the Firm

26. Tactical Actions Strategies Marketing ActionsThe Firm Customer Impact Marketing Assets Market Impact Market Position Financial Position Profits Cash flow Other measures Financial Impact Impact on Firm Value Value of the Firm

27. Tactical Actions Strategies Marketing ActionsThe Firm Customer Impact Marketing Assets Market Impact Market Position Financial Impact Financial Position Impact on Firm Value Forward thinking Hinges on growth prospects Value of the Firm

28. Tactical Actions Strategies Marketing ActionsThe Firm Customer Impact Marketing Assets Market Impact Market Position Financial Impact Financial Position Value of the Firm Market capitalization Total shareholder return Impact on Firm Value

29. What We Already Know • Chains of Marketing Impact • Several chains of marketing impact in existence • Practical decision models for use in specific marketing decision scenarios • More general chain-of-effects models are much rarer

30. What We Already Know • Strategies and Tactics • Marketing sets the strategic direction for the firm and guides investments to develop marketing assets • Strategic marketing investments reduce risk • Investments in brand equity can also reduce risk • A firm needs to understand the triggers of customer products purchases in order to implement appropriate strategies and tactics

31. What We Already Know • Strategies and Tactics (continued) • The implementation of tactics requires resources • Firms allocate resources to contact their customers through various channels but most of these contacts are ineffective • Customer touch histories are important in the prediction of customer profitability in future business cycles

32. What We Already Know • Customer Impact • Two types of customer impact: 1) Impact on a customer’s perceptions and attitudes 2) Impact on a customer’s summary judgments • Business world has turned emphasis toward relationships rather than just transactions • Marketing actions can affect a customer’s satisfaction, loyalty, preference, and purchase intention

33. What We Already Know • Marketing Assets: Brand Equity • The more powerful a brand is the more vivid and favorable the associations are with that brand • Increases the over-all value of the brand • Various non-financial methods for measuring brand equity that measure: • Buyer’s knowledge • Insights into brand equity that breaks down overall value • Estimations of the value of brand equity by deduction • Value of brands in regards to various market performance measures

34. What We Already Know • Marketing Assets : Brand Equity • Aaker and Jacobson have examined the influence of brand equity on stock returns • found that brand equity has a positive affect on stock returns

35. What We Already Know • Marketing Assets: Customer Equity • Models are characterized by models of the lifetime value of individual customers • Methods for assessing the lifetime value of a customer now central focus • Drivers of customer equity are obtained and statistically related to purchase behavior

36. What We Already Know • Market Impact • Models focused in the quantitative research tradition • Long-term impact is very different from short-term impact • In the long run, firm capabilities and context effects become more important

37. What We Already Know • Financial Impact • Considered the most crucial measure of success for marketing efforts by many managers • Marketing expenditures are considered investments

38. What We Already Know • Impact on the Value of the Firm • Analyses that like market-based assets and marketing actions to shareholder value are very rare but beginning to emerge • Brand reputation has been shown to be a durable asset that can help reduce the risk of future cash flows

39. What We Already Know • Environment • Limited support that the competitive environment moderates the market orientation – performance relationship • When high levels of market turbulence, market orientation is negatively associated with ROI • Marketing orientation is still a strong determinant of performance

40. What We Already Know • Competition • Investments in marketing assets make firms less vulnerable to competition and directly influence firms’ performance

41. What We Would Like to Know • Chains of Marketing Impact • Need methods that comprehensively model the chain of marketing productivity all the way from tactical actions to financial impact • Challenge exists in reconciling the short- and long-term approaches • Stand Tactics • Need to identify strategies the levels of marketing expenditures that provide firms with maximum opportunities for customer acquisition, retention, and cross-selling • The influence of marketing and communications tactics on multiple measures of impact • Several areas of strategies need to be further researched

42. What We Would Like to Know • Customer Impact • Need to model which customers are going to buy, what products they are most likely to buy next, and when they are going to buy the product • Need to research how customer impact pertains to how customers behavior responds to changes in marketing actions

43. What We Would Like to Know • Measuring Marketing Assets • Brand dynamics need to be researched • Need further conceptual development of key constructs in order to develop better measures of brand equity • Need to build individual-level, industry wide customer databases • Need to develop models of customer lifetime value that maximize

44. What We Would Like to Know • Market Impact • Market impact models need to be based on individual customer response rather than on aggregates • Financial Impact • Customer-level longitudinal date will be a priority • Need practical productivity tools when firms do not have access to all necessary longitudinal data

45. What We Would Like to Know • Impact on the Value of the Firm • Many questions in this area remain unanswered • Other Factors • Much research needs to be performed to understand how competition and environment influence firm value

46. Summary and Conclusions • Financial metrics are no longer adequate for justifying marketing expenditures; now need nonfinancial metrics • There is a need for greater emphasis on aggregate-level models that link tactics to financial impact • Need to account for customer heterogeneity • Firm performance is fundamentally affected by competition

47. Summary and Conclusions • The evaluation of marketing productivity ultimately involves projecting the differences in cash flows that will occur from implementation of a marketing action • More attention needs to be paid to marketing assets