MARKETING (UNR471)

Dr. Mohamed Sameh

 A systematic approach to harness data and
MARKETING knowledge to drive effective marketing
ENGINEERING decision making and implementation
through a technology-enabled and model-
supported interactive decision process.
MARKETING Marketing Engineering translates data and
knowledge (including judgment calls) into tools
ENGINEERING
used to enhance marketing decision making.
VS. CONCEPTUAL
MARKETING Conceptual marketing is when a decision
maker relies solely on his mental models,
without using any support system.
 • Simplifies the decision context.
• Creates a decision-making architecture
• Helps focus on the key issues.
WHY • Distributes limited available resources well.
MARKETING • Transforms objective and subjective data
ENGINEERING ? into decisions.
• Helps to assess the opportunity cost.
Example: if a marketing manager must select
between two pricing policies and chooses the
lower-priced option, the Marketing Engineering
approach can help assess the forgone profitability of
the higher-priced option.
WHY
MARKETING
ENGINEERING ?
 Decision models
• Rely on data
• Consistent and unbiased, but
• May underweight or ignore individual
DECISION aspects of a situation.
MODELS OR Mental models
• Rely on knowledge and experience.
MENTAL MODELS?
• Can incorporate idiosyncratic aspects of a
decision situation,
• May force-fit new cases into old patterns.

Which is better?????
 • Forecasting accuracy improves when
combining decision models with mental
models; a 50-50 (equal weighting).
DECISION • Marketing Engineering can be both data-
MODELS OR driven and knowledge-driven.
MENTAL MODELS? • A data-driven support tool answers "what if'
questions on the basis of a quantified market
response model.
• A knowledge-driven decision support tool
captures the qualitative knowledge available.
 The German Railroad Corp

• Priced transportation as a multiple of the

WHY distance.
MARKETING • Was not competitive with automobile usage.
ENGINEERING ? • Used a large-scale conjoint analysis.
• launched a "Bahn Card" that allows customers
to buy tickets at large discounts.
• Many passengers found the train an attractive
alternative to driving.
• Increased the firm's profits by more than $200
million per year.
 J.D. Power and Co.

WHY • Developed a promotional analysis decision model

MARKETING for automobile manufacturers.
• Improved the timing, frequency, and components
ENGINEERING ? of the promotions to maintain sales but reduce
margin loss.
• They reported savings of about US$2 billion/year
across the auto industry, with Daimler Chrysler
executives alone claiming annual benefits of
US$500 million.
 Return on investment (ROI);

• Is a measure of the net gains from an investment

expressed as a proportion of the cost.
BASIC
ECONOMIC • Measures net cash flow associated with an
CONCEPTS FOR investment divided by the amount of the investment.
ANALYZING
MARKETING
ACTIONS • Is widely used, because it is relatively and can be
applied to any investment.
• Does not include a time frame.
 Breakeven analysis;
Breakeven quantity (BE): the quantity of product
sold at which the company breaks even.

Components:
BASIC 1) Fixed costs do not depend on the level of sales.
ECONOMIC 2) Variable costs vary with the number of sales.
CONCEPTS FOR Total revenue = quantity sold * price
ANALYZING Total cost= fixed cost+ variable cost
MARKETING Profit = (Total revenue - Total cost)
ACTIONS At Breakeven quantity, profit = o.
𝑭𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕
If all the products were sold, 𝑩𝑬 =
𝑼𝒏𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏𝒔
If not all the products (n) were sold:
0 = Total revenue - Total cost
 Example: Construct a breakeven analysis for anew
product to be sold in a department store. The
product requires an initial investment for the
display unit, training of sales associates, store fliers,
BASIC at a cost of $6,ooo. Each unit, sourced from a
ECONOMIC supplier, costs $10, and the unit price of the product
CONCEPTS FOR is $30.
ANALYZING
MARKETING 𝑩𝑬 =
𝑭𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕
=
𝟔𝟎𝟎𝟎
= 𝟑𝟎𝟎 𝒖𝒏𝒊𝒕𝒔
ACTIONS 𝑼𝒏𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏𝒔 𝟑𝟎 − 𝟏𝟎
If the store is able to sell more than 300 units, it will
make a profit.
BASIC ECONOMIC
CONCEPTS FOR
ANALYZING
MARKETING
ACTIONS
 Components:
Inputs: Marketing actions that the marketer can
control, such as price, advertising, selling effort, as
well as noncontrollable variables, such as market size
MARKET or the competitive environment.
Response model: The link from inputs to measurable
RESPONSE
outputs (customer awareness, sales levels, profits).
MODELS Objectives: The measure the firm uses to monitor and
evaluate actions (sales in response to a promotion,
percentage of a target audience that recalls an ad).
MARKET
RESPONSE
MODELS
 Marketing engineering models can be built
at many levels.
Managers use models of brand sales, models
of the total market, and models of market
share,
Brand Sales = Market Sales x Brand Market Share.
MARKET
RESPONSE
MODELS
 Characteristics:

• Number of marketing variables

MARKET • Whether they include competition
• Relationship between input and output variables
RESPONSE
• Static or dynamic
MODELS • Individual or aggregate responses
• Level of demand analyzed
 Parameters: are the constants (usually a's and b's, not
x’s and y's) in the mathematical representation of
models.
Calibration: is the process of determining appropriate
values for the parameters using statistical methods
judgment process, or a combination of approaches.

For example, a simple model is:

MARKET SALES = a + b * ADVERTISING
RESPONSE
MODELS • ADVERTISING is an independent variable.
• SALES is a dependent variable.
• Response model form is linear,
• a is the level of SALES when ADVERTISING
equals zero, (base sales level).
• b is the slope of the sales/advertising response
model.
 How to calibrate?
• We often use least squares regression to calibrate a
model.
• In effect, we have several observations of
MARKET ADVERTISING, or the X-values (call them x1, x2
RESPONSE , etc.), and the associated observations of SALES,
MODELS or the Y-values (called y1, y 2 , etc.)
• the regression estimates of a and b are those values
that minimize the sum of the squared differences
between each of the observed Y values and the
associated "estimate" provided by the model.
A SIMPLE MODEL

Y (Sales Level)
}b (slope of the
a

}
salesline)
(sales level when 1
advertising = 0)

X (Advertising)
PHENOMENA

P1: Through Origin P2: Linear

Y Y

X X

P3: Decreasing Returns

P4: Saturation
(concave) —
Q

Y Y

X X
PHENOMENA

P5: Increasing Returns P6: S-shape

(convex)

Y Y

X X

P7: Threshold P8: Super-saturation

Y Y

X X
 Aggregate Response Models:
Linear Model

Y = a + bX

• Linear/through origin

• Saturation and threshold (in ranges)

 Aggregate Response Models:
Fractional Root Model

Y = a + bXc

c can be interpreted as elasticity when a = 0.

Linear, increasing or decreasing returns (depends on c).

 Aggregate Response Models:
Exponential Model

Y = aebx; x > 0

Increasing or decreasing returns (depends on b).

 Aggregate Response Models:
Adbudg Function

c
Y = b + (a–b) X
d + Xc

S-shaped and concave; saturation effect.

Widely used. Amenable to judgmental calibration.

 Aggregate Response Models:
Multiple Instruments

• Additive model for handling multiple marketing instruments

Y = af (X1) + bg (X2)

Easy to estimate using linear regression.

 Aggregate Response Models:
Multiple Instruments cont’d
• Multiplicative model for handling multiple marketing instruments

Y = aXb1 X2c

b and c are elasticities.

Widely used in marketing.

Can be estimated by linear regression.