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

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

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  1. The Nature and Measurement of Marketing Productivity in Consumer Durables Industries: a Firm Level Analysis • Group 1: • Mark LaRue & Adam Lopez

  2. Introduction • 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:

  3. 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.”

  4. Purpose • 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

  5. 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

  6. 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

  7. 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.

  8. 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

  9. “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)

  10. 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

  11. 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

  12. Marketing Output Defined • Based on this logic, marketing output for an individual firm is defined as: • (Relative Market Share) X (Relative Price)

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. Data Base • PIMS data base • Data comes from annual self report questionnaires • Limitations • Membership fee • Some variables are multiplied by a constant

  20. 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

  21. 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

  22. 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

  23. Model Evaluation • Variability of MPS • Split model evaluation • Are hypothesized relationships supported?

  24. Limitations • Way in which the PIMS database gathers information • Way in which expenditure data is given

  25. Implications • 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

  26. Critique • 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

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