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Marketing Mix Modeling

Marketing Mix Modeling

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Published by Robert Farkas
Marketing mix modeling
Marketing mix modeling

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Published by: Robert Farkas on Aug 01, 2013
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Marketing mix modeling
From Wikipedia, the free encyclopedia
Marketing mix modeling
(MMM) is a term of art for the use of statistical analysis such as multivariateregressions on sales and marketing time series data to estimate the impact of various marketing tactics(marketing mix) on sales and then forecast the impact of future sets of tactics. It is often used tooptimize advertising mix and promotional tactics with respect to sales revenue or profit.The techniques were developed by econometricians and were first applied to consumer packagedgoods, since manufacturers of those goods had access to good data on sales and marketing support.Early pioneer-users of econometric modeling were the ATG group at the advertising agency JWT in the1990s and the specialist modeling agency OHAL since the late 1980s. These agencies took MMM frombeing a little-used and academic discipline to being a widespread and common marketing tool.Improved availability of data, massively greater computing power, and the pressure to measure andoptimize marketing spend has driven the explosion in popularity as a marketing tool. In the recent timesMMM has found acceptance as a trustworthy marketing tool among the major consumer marketingcompanies. Often in the digital media context, MMM is referred to as attribution modeling.
Contents
1 History2 Marketing mix model2.1 Components2.2 Elements measured in MMM2.2.1 Base and incremental volume2.2.2 Media and advertising2.2.3 Trade promotions2.2.4 Pricing2.2.5 Distribution2.2.6 Launches2.2.7 Competition3 Studies in MMM4 Adoption of MMM by the industry5 Limitations6 See also7 References8 External links
History
The term Market Mix Modeling was developed by Neil Borden who first started using the phrase in1949. “An executive is a mixer of ingredients, who sometimes follows a recipe as he goes along,sometimes adapts a recipe to the ingredients immediately available, and sometimes experiments with or
http://en.wikipedia.org/wiki/Marketing_mix_modeling1
 
invents ingredients no one else has tried." (Culliton, J. 1948)According to Borden, "When building a marketing program to fit the needs of his firm, the marketingmanager has to weigh the behavioral forces and then juggle marketing elements in his mix with a keeneye on the resources with which he has to work." (Borden, N. 1964 pg 365).Jerome McCarthy (McCarthy, J. 1960), was the first person to suggest the four P's of marketing – price,promotion, product and place (distribution) – which constitute the most common variables used inconstructing a marketing mix. According to McCarthy the marketers essentially have these fourvariables which they can use while crafting a marketing strategy and writing a marketing plan. In thelong term, all four of the mix variables can be changed, but in the short term it is difficult to modify theproduct or the distribution channel.Another set of marketing mix variables were developed by Albert Frey (Frey, A. 1961) who classifiedthe marketing variables into two categories: the offering, and process variables. The "offering" consistsof the product, service, packaging, brand, and price. The "process" or "method" variables includedadvertising, promotion, sales promotion, personal selling, publicity, distribution channels, marketingresearch, strategy formation, and new product development.Recently, Bernard Booms and Mary Bitner built a model consisting of seven P's (Booms, B. and Bitner,M. 1981). They added "People" to the list of existing variables, in order to recognize the importance of the human element in all aspects of marketing. They added "process" to reflect the fact that services,unlike physical products, are experienced as a process at the time that they are purchased. Desktopmodeling tools such as Micro TSP have made this kind of statistical analysis part of the mainstreamnow. Most advertising agencies and strategy consulting firms offer MMM services to their clients.
Marketing mix model
Marketing mix modeling is an analytical approach that uses historic information, such as syndicatedpoint-of-sale data and companies’ internal data, to quantify the sales impact of various marketingactivities. Mathematically, this is done by establishing a simultaneous relation of various marketingactivities with the sales, in the form of a linear or a non-linear equation, through the statistical techniqueof regression. MMM defines the effectiveness of each of the marketing elements in terms of itscontribution to sales-volume, effectiveness (volume generated by each unit of effort), efficiency (salesvolume generated divided by cost) and ROI. These learnings are then adopted to adjust marketingtactics and strategies, optimize the marketing plan and also to forecast sales while simulating variousscenarios.This is accomplished by setting up a model with the sales volume/value as the dependent variable andindependent variables created out of the various marketing efforts. The creation of variables forMarketing Mix Modeling is a complicated affair and is as much an art as it is a science. Once thevariables are created, multiple iterations are carried out to create a model which explains thevolume/value trends well. Further validations are carried out, either by using a validation data, or by theconsistency of the business results.The output can be used to analyze the impact of the marketing elements on various dimensions. Thecontribution of each element as a percentage of the total plotted year on year is a good indicator of how
http://en.wikipedia.org/wiki/Marketing_mix_modeling2
 
the effectiveness of various elements changes over the years. The yearly change in contribution is alsomeasure by a due-to analysis which shows what percentage of the change in total sales is attributable toeach of the elements. For activities like television advertising and trade promotions, more sophisticatedanalysis like effectiveness can be carried out. This analysis tells the marketing manager the incrementalgain in sales that can be obtained by increasing the respective marketing element by one unit. If detailedspend information per activity is available then it is possible to calculate the Return on Investment of the marketing activity. Not only is this useful for reporting the historical effectiveness of the activity, italso helps in optimizing the marketing budget by identifying the most and least efficient marketingactivities.Once the final model is ready, the results from it can be used to simulate marketing scenarios for a‘What-if’ analysis. The marketing manager can reallocate this marketing budget in different proportionsand see the direct impact on sales/value. He can optimize the budget by allocating spends to thoseactivities which give the highest return on investment.
Components
Marketing-mix models decompose total sales into two components:
Base Sales
: This is the natural demand for the product driven by economic factors like pricing,long-term trends, seasonality, and also qualitative factors like brand awareness and brand loyalty.
Incremental Sales
: Incremental sales are the component of sales driven by marketing and promotionalactivities. This component can be further decomposed into sales due to each marketing component likeTelevision advertising or Radio advertising, Print Advertising (magazines, newspapers etc.), Coupons,Direct Mail, Internet, Feature or Display Promotions and Temporary Price Reductions. Some of theseactivities have short-term returns (Coupons, Promotions), while others have longer term returns (TV,Radio, Magazine/Print).Marketing-Mix analyses are typically carried out using Linear Regression Modeling. Nonlinear andlagged effects are included using techniques like Advertising Adstock transformations. Typical output of such analyses include a decomposition of total annual sales into contributions from each marketingcomponent, a.k.a. Contribution pie-chart.Another standard output is a decompositionof year-over year sales growth/decline,a.k.a. ‘Due-to charts’.
Elements measured in MMM
Base and incremental volume
The very break-up of sales volume into base(volume that would be generated in absenceof any marketing activity) and incremental(volume generated by marketing activities in the short run) across time gain gives wonderful insights.The base grows or declines across longer periods of time while the activities generating the incremental
http://en.wikipedia.org/wiki/Marketing_mix_modeling3

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