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Marketing models
Chapter 1. Introduction to marketing models: multivariate statistics and marketing analytics
Marketing plan a written document containing the guidelines for the business centres marketing
programs and allocations over the planning period summarises what the marketer has learned
about the marketplace and how the firm plans to reach its marketing objectives. Why written:
- Disciplined thinking, prior strategies are not forgotten, communication between functions
(gain budget approval and buy-in from other functions), pinpoints responsibilities, provides
continuity during management turnover, generate funds from external sources.
- Objectives of a marketing plan:
o Define the current business situation.
Customers needs, what they want, what they think of our brand.
o Define problems (threats) and opportunities facing the business.
o Establish objectives what you want to achieve in the next years.
o Define the strategies and programs necessary to achieve the objectives.
o Pinpoint responsibility for achieving product objectives.
o Encourage careful and disciplined thinking.
o Establish a customer/competitor (i.e. market) orientation.

Marketing management the art and science of choosing
target markets and getting, keeping and growing customers
through creating, delivering and communicating superior
customer value.

Market planning sequence
- Update historical data. - Develop financial documents.
- Collect current situation data. - Negotiate final plan.
- Data analysis. - Measure progress toward objectives.
- Develop objectives, strategies, - Audit.

Elements of a product strategy
- Statement of the objective(s) the product should attain.
- Selection of strategic alternatives.
- Targeting and positioning.
o Selection of customer targets.
o Choice of competitor targets.
o Statement of the core strategy / value proposition.
- Description of supporting marketing mix.
- Description of supporting functional programs.

Market penetration use existing customers, either from yourself
or your competitors.

Chapter 2. Segmentation and cluster analysis
Segmentation: first identify groups of customers who are
similar to each other (with respect to their preferences and
purchases regarding the brand). Then look for segments to
be different from group to group (combine groups if
Market segmentation the subdividing of a market into
distinct subsets of customers. Members are different
between segments, but similar within. Criteria for
- Measureable (possible to obtain data).
- Sizeable (substantial, the segment should be big
/profitable enough to serve them).
- Identifiable (titles for segments, segments should have unique preferences to put a label on
the segment, e.g. service / high quality segment).
- Reachable (accessible).
- Respond differently (differentiable).
- Coherent (homogeneous within group).
- Stable (over time you should identify similar segments because it takes time to develop
unique products).
- Actionable (can we serve them?).

Segmentation process:
1. Articulate a strategic rationale for segmentation (why are we segmenting this market?).
2. Select a set of (needs-based) segmentation variables most useful for achieving strategic
3. Select a cluster analysis procedure for aggregating (or disaggregating customers) into
4. Groups customers into a defined number of different segments; describe them with
descriptor data.
o Bases characteristics that tell us why segments differ (i.e. respond differently) (e.g.
needs, preferences, decision processes).
o Descriptors characteristics that help us identify and reach segments.
Business markets: industry, size, location, organisational structure.
Consumer markets: age/income, education, profession, life style, media
5. Target the segments that will best serve the firms
strategy, given its capabilities and the likely reactions of

Also conduct market research, this supports the
segmentation process!
Basic market preference patterns
Clustered preferences are ideal groups of consumers
wanting the same, this places less emphasis on price.

Cluster analysis
A cluster analysis algorithm takes the input variables, computes a measure of similarity between the
entities (customers), and group together the entities that are most similar, keeping those that are
more different in different clusters (figure 2.1, page 9).
- Select variables for analysis these should be based on their potential for providing
meaningful ways to define the needs of customers.
- Define an overall measure to assess the similarity of customers on the basis of the needs
o After the variables are determined, the computer computes some measure of
similarity among all the customers a correlation coefficient r (+1 customers have
identical patterns, -1 customers have very different patterns). A cluster analysis
begins by looking for the customers who are highly correlated, the model puts those
customers together into a group to reflect their similarity. In the next iterations, the
model brings in customers whose data were a little less similar, and so on.
o When volume matters, we compute a distance between each pair of customers. For
customers a and b, we would measure how close or far apart they are on each of k =
1, 2, ..., r attributes (distances = squared differences between variables).
o The ordering of pairs of customers, in terms of who is similar to whom, changes
depending on whether the r or d is consulted.
- Group customers with similar needs.
o See clustering algorithms.
- Select the number of segments using numeric and strategic criteria, and your judgment.
- Profile the needs of the selected segments (e.g. using cluster means).

Input variables - the variables that marketers use can be indicators that are geographic (country,
climate, urban), demographic (age, gender, income, education), behavioural (online purchases,
loyalty programs), and attitudinal (brand awareness, price sensitivity).

Look around and see what data you already have in-house, but be sure not to limit your cluster
analysis to these variables. There may be far more important variables that you should include but
for which you have no data yet.

Table 2.1, page 15.

Clustering algorithms
- Hierarchical clusters once two customers are put into the same segment, they are always
o Agglomerative every customer starts in his or her own segment, and with each
iteration, the model puts together customers who are similar, either by forming a
new cluster with two similar customers, or by adding a customer to an already
existing cluster. This continues until all customers are in the same segment.
o Divisive all customers begin in one segment, and each iteration breaks off the
customer, customers, or cluster segment that is the most different and should
probably be in its own group. This continues until everyone is in his or her own
Single-link clustering puts a customer into a segment if he or she is similar
enough to at least one member in the existing cluster look for the
customer is each cluster who is closest, then choose the closest one.
Complete-link clustering the customer joins a cluster only if he or she is
similar to all the other members the customer is completely linked to (or
similar to) all the members in the group look for the customer in each
cluster who is furthest, then choose the furthest one.
Average-link clustering looks at averages, take the customers in the
segments, find their means on both variables, and plot that point. That point
is the centroid (multivariate mean). After the means are computed, the
customer joins whichever cluster is closer (figure 2.5, page 17).
Wards method a hierarchical clustering technique that operationalizes the
intuition that if segments or clusters are indeed groups of similar customers,
then the variability within a group should be smaller than the variability
across the groups assign customers to segments so as to minimize the
variance within clusters.
R2 is the amount of the total variance explained by the model in
proportion to the total variance ((SStotal SSerror) / SStotal).
SSerror is minimized when R2 is maximized.
Wards method tends to find or create clusters of relatively equal
- Non-hierarchical clusters (k-means clustering) a portioning technique a partition is the
description of which customers belong in which cluster (bottom page 30).
o You tell the model how many clusters you want (e.g. 3 clusters), then the model sets
Previous segmentation studies, preliminary knowledge.
Trial and error, interpretation of various solutions.
Agglomeration coefficient.
o Specify cluster means or random assignment of customers to segments.
o Reassignment of customers to closer clusters.
o Recalculate centroids (cluster means) and iterate.

The idea behind any clustering model is to put customers into clusters such that within a cluster, the
units are similar to each other, and across clusters, the units in different clusters are different
minimizing the variability within clusters, and maximizing the variability between clusters.

Tests for significant differences:
- ANOVA analysis (compare means between all clusters).
- T-tests (compare means of two clusters).
- Cross-tab and Chi-square (actual versus expected frequencies).

Interpretation and verification
- Examine the means on each variable we used, for each segment get a profile as to how
the customer segments vary.
- Run an ANOVA, one for each input variable used as the dependent variable, and cluster
membership of all the customers in the database as the predictor variable determine
which segment differences are significant.

Chapter 3. Brand choice and logit models
Differentiation creating tangible or intangible differences on one or more attributes between a
focal offering and its main competitors (what you do to an offering).
Positioning a set of strategies a firm develops to differentiate its offering in the minds of its target
customers. Successful positioning will result in the offering occupying a distinct, important, and
sustainable position in the minds of the target customers (what you try to do in the minds of

A 7-step process for positioning:
1. Select target segment.
2. Determine relevant competitive offerings.
3. Determine potential differentiator-dimensions.
4. Select sample of customer in target segment and get ratings of competitors on the selected
The maps are derived from data of customer:
o Perceptions of products along various attributes.
o Perceptions of similarities between brands.
o Preferences for the products, or measures of behavioural response of customers
towards the products.
5. View the results (perceptual maps).
o Mapping techniques that enable managers to develop differentiation and
positioning strategies by helping them to visualize the competitive structure of their
markets as perceived by their customers.
6. Relate to preference, choice, or market share (preference maps).
7. Develop positioning statement and associated strategies.
o Statement of the objective(s) the product should attain.
o Selection of strategic alternatives.
o Targeting and positioning.
Selection of customer targets.
Choice of competitor targets.
Statement of the core strategy/value proposition.
Description of supporting marketing mix.
Description of supporting functional programs.

Identifying competitors using consumer behaviour data Brand switching matrix.
Brand-switching matrix
The rows represent the brands purchased at time t, and the columns represent the brands purchased
at time t+1. Then the pairs (A,B) are pairs of brands purchased at (time1,time2) (figure 3.1, page 37).
The times need to be recorded sequentially.

Cross-tabulations are the collection of the frequencies with which the ith level of the row variable
occurs in a sample with the jth level of the column variable.
- Categorical variables (nominal, ordinal).
- The Pearson chi-square tests for an association between two categorical variables.
- The null hypothesis is that the row variable is independent of the column variable, so we
would expect the frequencies in the table to be distributed randomly.

Residuals are the differences between our data and the expected frequencies. If any standardized
residual exceeds 1.96, it is significant, signalling that the model of independence is problematic for
that cell.

Logit models
If we are working with cross-tabbed data and we want to make predictions, we use logit models.
- 1 or more predictors.
- 1 dependent variable we are trying to understand categorical (nominal/ordinal)!

Odds ratio: all the people in column 1 in the numerator, and compares the odds that they are in two
1 vs. 2. All the people in column 2 in the denominator and compares their odds of being in row 1 vs.

Chapter 4. Measuring consumer satisfaction and factor analysis
Measurement theory
Reliability if we use the same scale again and again, the items will measure the same thing again.
Validity items measure what we say they measure or what they were designed to measure.
- Convergent validity: do the items correlate with other concepts they should be related to?
- Discriminant validity: are the items uncorrelated with concepts they are not related to?

A correlation between two variables and a covariance between those variables both capture the
essence of whether the two variables are positively or negatively related. A correlation r ranges from
-1 to 1, and a covariance ranges from - to +.

Eigenvalues and eigenvectors
Variance-covariance matrix (figure 4.3, page 60): variance along the diagonals, covariance in the cells
on the off-diagonals.
Each eigenvector is p x 1. The p values sitting in the eigenvector are the weights that create linear
combinations of our original Xs.
The eigenvalues (lambdas) are stored along the diagonal of a matrix. Each lambda is associated with
a particular eigenvector.

Factor analysis
Choosing number of factors: scree plot, elbow, number of factors above elbow.
Orthogonal rotation: the factors are still uncorrelated, and the axes are perpendicular to each other.
Oblique rotation: allows factors to be correlated (not perpendicular).

In the factor loadings matrix, we interpret the factors by
using the loadings that exceed 0.3 (these get a label).

Table 4.1: helpful tips for factor analysis.

Chapter 6. Perceptual maps and multidimensional scaling
Positioning statement includes information about what
our brand is, and how it is distinct from our competitors.
Perceptual map pictorial representation of such market
- Understand brand similarities and differences.

Multidimensional scaling (MDS) the perceptual question is how similar are brands X and Y? and
all pairs of brands are compared for their similarity.
- No specific attributes are stated, so consumers would compare brands X and Y along
whatever attributes matter to them.
- Essence is the analogy between similarity and closeness (or dissimilarity and distance).
Brands are placed in a perceptual map such that those that are similar are represented as
points close in space and those that are seen as different are represented as points further in

Kinds of data required to conduct an MDS analysis
1. Overall instructions of the survey give overall sense to what to expect (whole context).
2. Familiarity ratings (with product or brands) indication of the respondents knowledge of
each of the stimuli, exclude those data from respondents that are not familiar with a brand.
3. Proximities data (between products/brands) we need data that are real distances or
perceived differences. Proximities data are the similarities and dissimilarities.
o (Dis)similarities ratings:
Ask on a survey: how similar are these two things?
Urge them to keep their consideration as broad and as personally relevant as
they can.
o Dominance data:
Pairs of entities are pitted against each other, and we record how frequently
one wins over the other.
Which of these brands do you prefer: A or B, A or C, etc.
Usually demonstrate transitivity (if A is funnier than B, and B dominates C,
then A dominates C).
o Confusions data:
Blind taste tests.
o Sociometric data:
Social network ties are data that can help marketers with brands in social
o Derived dissimilarities:
Ask customers to rate several brands on a number of attributes.
Compute a correlation or distance score between each pair of brands.
Input the correlations (similarities) or distance scores (dissimilarities) into the
MDS maps the brands according to these proximities data.
The extent to which any pair of brands are through to be proximal was not a
direct judgment, but indirect, derived from the attribute variables.
4. Attribute ratings for each stimulus ask respondents
to rate each stimulus on a number of attributes that we
suspect will be the criteria they are thinking about.
5. Preference ratings collect data on what customers
like, and model those data as ideal points, overlaid onto
the MDS map.
6. Demographics and psychographics information
about the respondents themselves.

Evaluating perceptual and preference maps
- Technical adequacy: what percentage of the total
information (variance) in the raw data is captured in the
map? What percentage of the information of each
attribute is captured in the map?
- Managerial interpretation: what underlying dimensions
seem to characterize how customers view the
products? What is the competitive set associated with
the target product or new concept? How well is a target
product positioned with respect to the existing
products? Which attributes are related to each other?

Uses of mapping
- Check how customer perceptions of client products compare to perceptions of competitors.
- Identify product strengths and weaknesses.
- Select competitors to compete against.
- Determine how much change is needed on key product attributes to move product to more
favourable positions.
- Visually determine impact of communications programs on market perceptions.

Multidimensional scaling models
Distance metrics
Distances relations between points in space. Three rules whether a metric can be called a distance:
1. Non-negativity and equivalence distances cannot be negative, the distance between a
point and itself is zero, dij = 0 only if points i and j coincide on all r dimensions.
2. Symmetry dij = dji (not always in data).
3. Triangle inequality dik dij + djk (not always in data).

Nonmetric multidimensional scaling
Metric MDS models treat data such as 1, 2, 4 at face value, whereas non-metric models look only at
the rank information in the data, essentially 1, 2, 3. The dissimilarities data are ranked from the most
similar pair to the most different.
- Begins with data that are ordinal (ranks) and results in a model of distances (ratio-level).
- The distances dij are a monotonic function of the data always rises or stays level.
- Disparities d^ fixing the distances when they are disparate from the monotonic function.

Attribute vector fitting
Interpreting the perceptual map:
1. Understand the configuration as a whole closeness tells us who our toughest competitors
are, or what brands are seen as substitutes for our own.
2. Label the axes the characteristics that consumers primarily use to discriminate among the
brands. Interpretation of the axes: vector fitting.
Vector fitting:
- Multiple regression for each attribute (figure 6.26, page 113).
- Before running the regressions, you must pre-process the data standardize the dimension
coordinates such that each dimension in the MDS has a mean of zero and a standard
deviation of 1.
- The regression coefficients tell us where to put the head of an attribute vector emanating
from the origin. The direction in which the vector points is the direction in which the
attribute is maximized (figure 6.28, page 115). If attributes point in the same direction, they
are related.
- To use attribute vectors, we project (orthogonal 90 line on the vector) to see which brands
are best.
- The longer the vector, the larger R2 means this is an important attribute in interpreting
the plot.

Ideal point preference models
Each respondent will be represented by his or her own point in the same space as the brands. While
the inter-point distances between brands represent similarities and differences, the distance
between an ideal point representing a customer and any brand represents how much the customer
likes that brand. The customers ideal point will be located closest to the brands that the customer
likes the most customers choose the product (brand) closest to their ideal point.

Correspondence analysis
Produces vectors with coordinates to plot entities in space, where inter-point distances are
Table 6.1, page 122.

MDS and correspondence analysis both provide means of plotting brands and attributes and
customer information. In MDS, we plotted the brands, and represented attributes as vectors and
customers as ideal points. In correspondence analysis, all entities (brands, attributes, customers, etc)
are represented in the same manner, as points in space.

Chapter 7. New products and conjoint analysis
New product success factors
Compare successful new product development teams and their products with unsuccessful teams.
1. Unique and superior product superior because the product does something for the
customer which the products that already exist in the market do not yet do. Unique
competitors do not offer it and will not offer it in the future (when you introduce the product
it should be unique and you try to keep it as long as possible that way).
2. Strong market orientation market research, get information from competitors and
customers, to know what competitors offer and what customers want. Your customers must
think it is a superior/unique product, test the product in the market, get feedback from the
3. Up-front homework up-front = before you actually start to develop the product.
Homework = figuring out which market segments you want to serve with this product, doing
conjoint analysis to test if customers are willing to buy your product, financial analysis (can
we make a profit?), testing technological feasibility. Developing is expensive, doing research
is less expensive, so you need to make sure that the product can be a success before you
actually start to develop (step 1 up to 5 in stage-gate process).
4. Sharp and early product definition clear description of the product to the R&D people,
based on your up-front homework.
5. Cross-functional team approach marketing, engineering, finance, etc. The people of the
different disciplines must work closely together, incorporating all the knowledge of the
different functions in one team.
6. Focus: sharp evaluation and decision points controlling during the process, if it turns out
not to be a success halfway through the production, abandon product. Focus on all those
product that could be a success in the market.
7. Quality of execution do the job that you do well, quality of research/development/etc
must be good, scientific approach.
8. Multi-stage-and-gate game plan stage-gate processes, process organised in steps, after
each step there is a gate (an evaluation whether or not to continue with the product). Earlier
stages are cheaper than later stages.

Conjoint studies allow marketers to study how consumers make trade-offs.
- Ask consumers to evaluate the stimuli how much they like each, how likely to buy, etc.
They must rank the stimuli.
- Conjoint analysis helps us discover which attributes are most valued. The analysis also
indicates which levels of those values are most desired.

Designing a conjoint study
Table 7.1, page 128.

Conjoint analyses
- Analyse data that come from a conjoint study by a regression accessible (easy to run and
explain), robust, powerful.
- Dependent variable: respondents judgments.
- Predictors: the design factors.

Conjoint analysis
You ask your respondents to evaluate for example 12 different mobile phones. These phones vary on
some attributes (brand, price, photo option, etc). Then you ask how would you rate these mobile
phones on a scale from 1 (worst possible) to 10 (best possible)?
U = b0 + b1*z1 + b2*z2 + b3*z3 + b4*z4 + b5*z5
Utility = b (coefficients)*z (dummy variables, value of 1 or 0)
You always need 1 dummy variables less than attribute options you have.

Then you build a database.

Profile a: Siemens, 49 Euro,
no photo option.

Then you do regression analysis to get your coefficients.

N = 1836, number of students (153) times number of mobile
phones (12).
b1 = -0.387, if z1 goes from 0 to 1, the utility decreases with
0.387 if you go from Samsung to Siemens (z1 from 0 to 1),
utility decreases with 0.387 (you like Samsung better than
b3 = -0.246, if z3 goes from 0 to 1, the utility decreases with
0.246 if you go from 49 Euro to 99 Euro, utility decreases
with 0.246.

Which brand does this customer prefer?
Utility for Samsung = 0 (0 x -0.387 + 0 x 0.538)
Utility for Siemens = -0.387 (1 x -0.387 + 0 x 0.538) like Siemens least.
Utility for Nokia = 0.538 (0 x -0.387 + 1 x 0.538) like Nokia best.

Willingness to pay x Euro more for a photo option?

SPSS output for conjoint analysis
- Standardized coefficients (so look at the
differences between coefficients).
- Linear relationship for price (so from 49 Euro to 99
Euro is exactly as much as from 99 Euro to 149

Main effects model conjoint analysis that estimates the
impact of each design feature on the consumers
If we included interaction terms, we could study whether there were any combinations that were
especially good or bad, to help us in the designing and planning.

Chapter 9. Diffusion and forecasting
Marketing diffusion model
Figure 9.2, page 161:
- Innovators: for any new product or service or idea, there is an initial small part of the
Marketplace that finds the new item faster than everyone else.
- Early adopters.
- Early majority.
- Late majority.
- Laggards: might not ever adopt the product because it is not important to them.

Figure 9.3, page 162:
- The numbers of new customer adoptions from figure 9.2 cumulated and plotted.

Diffusion model: two parameters p and q p = coefficient of innovation, q = coefficient of imitation.
- If p is high, it means that you have seen or will see strong early sales (figure 9.5, page 164).
- If p is low, it means it is taking longer for the sales to take off.
- If q is high, it means that the product is getting into the rest of the marketplace very quickly,
even to customers beyond the innovators.
- If q is low, it means that the product is diffusing relatively slowly throughout the rest of the
- Average p = 0.04, average q = 0.30.

Factors affecting the rate of diffusion:
- Product-related:
o It has a clear relative advantage to other products already in the marketplace.
o It is compatible with the customers lifestyle.
o Low complexity.
o It is something where trial is easy and inexpensive.
o It is something that customers can observe an innovator using, hence facilitating
their imagining the products utility for themselves.
- Market related:
o Type of innovation adoption decision.
o Communication channels used.
o Nature of links among market participants.
o Nature and effect of promotional efforts.

The Bass diffusion model of new product adaption
The model attempts to answer the question: when will customers
adopt a new product or technology? helps in planning major
investments with respect to the product.

Assumptions of the basic Bass model:
- Diffusion process is binary (consumer either adopts, or waits to adopt).
- Constant maximum potential number of buyers (N^-).
- Eventually, all will adopt the product.
- No repeat purchase, or replacement purchase.
- The impact of word-of-mouth is independent of adoption time.
- Innovation is independent of substitutes.
- The marketing strategies supporting an innovation are not explicitly included.
- Uniform influence or complete mixing. That is, everyone in the population knows everyone
else, or is at least able to communicate with, or observe everyone else.
Estimating the parameters in the Bass model:
- Estimating using data regression, specialised non-linear estimation.
- Estimating using analogous products select analogous products based on the similarity in
environmental context, market structure, buyer behaviour, marketing mix strategies and
innovation characteristics.

Chapter 11. Marketing models to infinity and beyond
Figure 11.2, page 196.