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The Nature and Measurement of Marketing Productivity in Consumer Durables Industries: a Firm Level Analysis. Group 1: Mark LaRue & Adam Lopez. Introduction. Productivity emerged as a major concern in American business in the early 1980s

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The Nature and Measurement of Marketing Productivity in Consumer Durables Industries: a Firm Level Analysis
  • Group 1:
  • Mark LaRue & Adam Lopez
  • Productivity emerged as a major concern in American business in the early 1980s
  • Two statements made by executives in StephenGreyser’s“Marketing Issues” study in 1980:
executives statements
Executives’ Statements
  • “Senior management is concerned with evidence on the effectiveness of high marketing and advertising levels. The CEO with a non-marketing background wants more rigorous demonstration of what return he gets from the marketing investment and is more likely to expect marketing to be a science rather than an art.”
  • “The basic question still remains of how to measure the productivity of the marketing team or of marketing decisions.”
  • To develop a managerially relevant concept of marketing productivity
  • The operational measurement of marketing productivity
  • Aprocedure for establishing environment specific benchmarks with which to compare the marketing productivity of various businesses
the nature of marketing productivity
The Nature of Marketing Productivity
  • Can be discussed in macro or micro terms
  • Richard Feder’s approach (1965) based on determining expenditure levels for each of the main marketing functions
      • based on Dorfman-Steiner theorem
      • the optimal way to allocate funds across marketing activities given that the overall marketing budget is constrained at a level below the optimal amount
      • a completely internal approach and fails to measure the response elasticities of the firm should be given its operating environment
      • while useful, Feder’s approach is incomplete
marketing productivity defined
Marketing Productivity Defined
  • Productivity is generally conceived of as a ratio of output from some activity to the input required by that activity.

Marketing productivity is:

marketing output

marketing input

marketing output input
Marketing Output & Input
  • Complex to specify
  • Bucklin argued that Sevin’s definition of marketing productivity (sales/marketing costs) is inadequate as it fails to deal with inflation over time and differential inflation between components
  • Bucklin’s adjusted version adjusts sales and cost components over time and is adequate for macro studies, but not for a firm analysis.
marketing output
Marketing Output
  • Can be thought of in several different ways
  • A reasonable conceptualization: to equate marketing output with total time, place, form, and possession utility created by the department
    • Suffers from two problems:
      • Operational measures of various utilities are nonexistent
      • Firms, departments, managers do not think in those terms nor are they evaluated on those dimensions
what does top management expect the marketing function to deliver
“What does top management expect the marketing function to deliver?”
  • A combination of market share and price position
  • Two alternative measures of output:
      • market share (sales/total sales in relevant market)
      • relative market share (sales/sales of one or more competitors in market)
relative market share
Relative Market Share
  • Useful in indicating a firm’s relative position in an industry independent of degree of concentration in that industry
    • Advantage over dollar sales of being immune from effects of inflation over time.
    • Advantage over either dollar or unit sales of being unaffected by overall market growth or decline
    • Allows the direct comparison of this aspect of performance across different markets or industries
price level
Price Level
  • Absolute price level reflects performance of marketing department, level of industry competition, stage of product life cycle, inflation, and price of substitute products.
    • Not a practical measure of a firm’s marketing performance
  • Relative price (a firm’s price level in relation to its major competitors) overcomes these problems
    • is immune to fluctuations in the inflation rate
    • unaffected by industry wide price shifts that accompany evolution through product life cycle
    • can be compared across markets and industries
marketing output defined
Marketing Output Defined
  • Based on this logic, marketing output for an individual firm is defined as:
    • (Relative Market Share) X (Relative Price)
marketing input
Marketing Input
  • Poses difficult conceptual and operational problems
    • It is clear that marketing cost is the appropriate concept for marketing input
    • It is unclear on what constitutes marketing cost
marketing input cont
Marketing Input (cont.)
  • Primary conceptual problem: Should marketing cost be considered as absolute dollar amount or as a percentage of sales?
    • Using absolute dollars:
      • allows one to measure the marketing output purchased with one dollar or marketing input
      • is appealing because they are what one spends.
    • Using percentage of sales:
      • allows one to measure the marketing output purchased with one percent of sales
      • minimizes the impact of inflation over time
      • allows one to observe how the portion of the firm’s marketing resources is functioning over time
marketing productivity defined1
Marketing Productivity Defined
  • Given the concepts of marketing output and marketing input, marketing productivity is defined as:

Relative Market Share X Relative Price

Marketing Expenditures/Sales

marketing productivity cont
Marketing Productivity (cont.)
  • Suffers from one serious flaw: it assumes impact of marketing expenditures is limited to the current time period
  • Lagged, carry-over, cumulative effects from marketing activities
    • Carry-over effects: an established firm can improve its apparent marketing productivity by decreasing expenditures
    • Lagged & cumulative effects: heavy current marketing expenditures may not be reflected in numerator of the index until later
  • How to resolve this flaw: use four-year averages
development of a marketing productivity index
Development of a Marketing Productivity Index
  • The specified variables of marketing productivity must be given operational definitions, the defined variables measured, and marketing productivity ratio or score calculated, forming a marketing productivity score (MPS)
  • Misleading: comparing with a direct competitor’s MPS, comparing a firm’s current MPS and a past MPS
development of a marketing productivity index cont
Development of a Marketing Productivity Index (cont.)
  • Marketing Productivity Index (MPI) birthed by developing a regression model that would predict an average firm’s MPS given a specified operating environment
  • Predicted score is referred to as the MPI
  • Advantages: (1) compare the firm’s performance to what it “should be” given its environment, (2) makes direct comparisons with past performance and with competitors possible
data base
Data Base
  • PIMS data base
  • Data comes from annual self report questionnaires
  • Limitations
    • Membership fee
    • Some variables are multiplied by a constant
variables influencing marketing productivity
Variables Influencing Marketing Productivity
  • Ten variables selected beyond direct control of marketing management that affect MP
  • Hypothesized relationships for each variable
  • Relative Product Breadth (RPB)
    • Relatively wide range of products
    • Closer matching with consumer needs
  • Number of Competitors (NC)
    • More competitors affect on
      • marketing productivity
      • relative market share
      • relative price
variables influencing marketing productivity cont
Variables Influencing Marketing Productivity (cont.)
  • Relative Product Quality (RPQ)
    • Higher quality relative to competition
  • Relative Customer Size Range (RCSR)
    • Wider range of customer sizes
  • Served Market Growth (SMG)
    • Higher served market growth rate
  • Number of Immediate Customers (NIC)
    • Large number of immediate customers
variables influencing marketing productivity cont1
Variables Influencing Marketing Productivity (cont.)
  • Purchase Amount Immediate Customers (PAIC)
    • Large purchase amounts
  • Importance of Auxiliary Services to End Users (IASE)
    • High degree of importance on auxiliary services
  • Frequency of Product Changes (FPC)
    • Frequent product changes in industry
  • Customization (C)
    • Products customized for individual customers
model evaluation
Model Evaluation
  • Variability of MPS
  • Split model evaluation
  • Are hypothesized relationships supported?
  • Way in which the PIMS database gathers information
  • Way in which expenditure data is given
  • Management formulates marketing performance objectives
  • Way to compare performance to competitors
  • Marketing Productivity best explained as

Relative Market Share X Relative Price

Marketing Expenditures

  • Productivity score influenced by
    • Effectiveness of marketing department
    • Certain market characteristics
  • Measuring marketing performance has been a central concern in marketing for decades
  • Marketing Science Institute (MSI) using a newer formula (compared to the MPI)
  • MSI data base provides more information on companies
  • Criteria of metrics selection are established to define which metrics are used to measure a firm’s marketing performance