Marketing Engineering
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Marketing Engineering Computer-Assisted Marketing Analysis and Planning Gary L Lilien The Pennsylvania State University Arvind Rangaswamy The Pennsylvania State University Revised Second Edition 2004 Sponsored by Institute for the Study of Business Markets Penn State Smeal College of Business Contents Preface xvii About the Authors xxiii PART 1 The Basics 1 Chapter 1 Introduction 1 Marketing Engineering: From Mental Models to Decision Models 1 Marketing and marketing management 1 Marketing engineering 2 Why marketing engineering? 5 Marketing Decision Models 6 Definition 6 Characteristics of decision models 7 Verbal, graphical, and mathematical models 8 Descriptive and normative decision models 11 Benefits of Using Decision Models 13 Philosophy and Structure of the Book 19 Philosophy 19 Objectives and structure of the book 21 Design criteria for the software 22 Overview of the Software 23 Software access options 23 Running marketing engineering 24 Summary 25 viii CONTENTS How Many Draft Commercials Exercise 28 Chapter 2 Tools for Marketing Engineering: Market Response Models 29 Why Response Models? 29 Types of Response Models 31 Some Simple Market Response Models 33 Calibration 37 Objectives 39 Multiple Marketing-Mix Elements: Interactions 42 Dynamic Effects 42 Market-Share Models and Competitive Effects 44 Response at the Individual Customer Level 46 Shared Experience and Qualitative Models 50 Choosing, Evaluating, and Benefiting From a Marketing Response Model 52 Summary 53 Appendix: About Excel's Solver 54 How Solver Works 56 Conglomerate, Inc. Promotional Analysis 58 Conglomerate, Inc. Response Model Exercise 60 PART 11 Developing Market Strategies 61 Chapter 3 Segmentation and Targeting 61 The Segmentation Process 61 Defining segmentation 61 < Segmentation theory and practice 62 Phe SPP approach 64 Segmenting markets (Phase 1) 66 Describing market segments (Phase 2) 68 Evaluating segment attractiveness (Phase 3) 69 Selecting target segments and allocating resources to segments (Phase 4) 70 Finding targeted customers (Phase 5) 73 Defining a Market 75 Segmentation Research: Designing and Collecting Data 78 Developing the measurment instrument 78 CONTENTS ix Selecting the sample 79 Selecting and aggregating respondents 79 Segmentation Methods 83 Using factor analysis to reduce the data 84 Forming segments by cluster analysis: Measures of association 84 Clustering methods 88 Interpreting segmentation study results 92 Behavior-Based Segmentation: Cross-Classification, Regression, and Choice Models 96 Cross-classification analysis 96 Regression analysis 96 Choice-based segmentation 97 Customer Heterogeneity in Choice Models 101 Implementing the STP Process 102 Summary 103 Conglomerate Inc.'s New PDA (2001) 104 Introducing the Connector 104 The History of the PDA 105 PDA Types 105 The PDA Customer 106 PDA Features 106 Facts About the PDA Market 106 The HVC Survey 107 The Questionnaire 107 Questions for determining segmentation-basis or needs variables 107 Questions for determining variables for discriminant analysis 108 Appendix: PDA Features Guide 110 Opera ting sys tern 110 Screen 110 Memory 110 Ergonomics 111 Synchronization 111 Batteries 111 Modem and online services 111 Web 111 CONTENTS Email, etc. Ill Handwriting recognition 111 Other software 112 Accessories 112 Audio 112 ABB Electric Segmentation Case 113 History 113 Situation in 1974 113 New Strategy at ABB Electric 113 Establishing the MKIS Program 114 Choice Modeling 115 Postscript: Situation in 1988 116 Chapter 4 Positioning 117 Differentiation and Positioning 117 Definition 117 Positioning strategy 118 Positioning Using Perceptual Maps 119 Applications of Perceptual Maps 122 Perceptual Mapping Techniques 128 Attribute-based methods 128 Similarity-based methods for perceptual mapping 136 Joint-Space Maps 139 Overview 139 Simple joint-space maps 139 External analysis using PREFMAP3 141 Incorporating Price in Perceptual Maps 145 Summary 146 Appendix: Factor Analysis for Preprocessing Segmentation Data 147 Positioning the Infiniti G20 Case 148 Introducing the G20 148 Background 148 Research Data 148 CONTENTS xi Chapter 5 Strategic Market Analysis: Conceptual Framework and Tools 1 55 Strategic Marketing Decision Making 155 s Market Demand and Trend Analysis 159 Judgmental methods 160 Market and product analysis 161 Time-series methods 162 Causal methods 167 "' What method to choose? 174 The Product Life Cycle 175 Cost Dynamics: Scale and Experience Effects 180 Summary 183 Bookbinders Book Club Case 185 The Bookbinders Book Club 185 Chapter 6 Models for Strategic Marketing Decision Making 1 88 Market Entry and Exit Decisions 188 Shared Experience Models: The PIMS Approach 198 Product Portfolio Models 201 The Boston Consulting Group (BCG) approach 201 The GE/McKinsey approach 203 Financial models 204 Analytic Hierarchy Process 205 Competition 208 Summary 212 ICI Americas R&D Project Selection Case 213 Product Planning Using the GE/McKinsey Approach at Addison Wesley Longman Case 216 Background 216 The new marketing texts 217 The new marketing book promotional challenge 217 Applying the GE approach 217 Appendix: Details of the Three Books from AWL Promotional Material 220 Portfolio Analysis Exercise 223 xii CONTENTS Jenny's Gelato Case 226 ACME Liquid Cleanser Exercise 231 Background 231 The Compete Model 231 111 Developing Marketing Programs 233 Chapter 7 New Product Decisions 233 Introduction 233 New Product Decision Models 236 Models for identifying opportunities 236 Models for product design 238 Models for new product forecasting and testing 239 Conjoint Analysis for Product Design 239 Introduction 239 Conjoint analysis procedure 242 Other enhancements to the basic conjoint model 250 Contexts best suited for conjoint analysis 251 Forecasting the Sales of New Products 253 Overview of the Bass model 253 Technical description of the Bass model 255 Extensions of the basic Bass model 261 Pretest Market Forecasting 263 Overview of the ASSESSOR model 264 The preference model 266 Trial-repeat model 268 The validity and value of the ASSESSOR model 271 Summary 271 Forte Hotel Design Exercise 272 Forte Executive Innes 272 Company Background 272 Preliminary Evaluation 272 Conjoint Analysis (Matching hotel attributes to customer preferences) 274 Zenith High Definition Television (HDTV) Case 277 HDTV Background 277 CONTENTS xiii Zenith HDTV Efforts to Date 279 The TV Market 279 Forecasts of HDTV Sales 281 Johnson Wax: Enhance Case (A) 283 Instant Hair Conditioner 283 S.C. Johnson & Company 283 New-Product Development at Johnson Wax 284 The Hair Conditioning Market 284 Agree 285 Enhance Product Development 286 The ASSESSOR Pretest Market 286 ASSESSOR Results 288 Trial and repeat model 290 Preference model estimates of share 291 Recommendations 292 Chapter 8 Advertising and Communications Decisions 302 The Bewildering Nature of Advertising 303 Advertising Effects: Response, Media, and Copy 304 Advertising response phenomena 304 Frequency phenomena 308 Copy effects 309 Advertising Budget Decisions 310 Media Decisions 319 Advertising Copy Development and Decisions 324 Copy effectiveness 324 Estimating the creative quality of ads 327 Advertising design 328 Summary 335 Blue Mountain Coffee Company Case 336 Blue Mountain's Market Position 336 Operation Breakout 337 Planning for Fiscal Year 1995 340 The market planning model 340 Recent developments: The U.S. coffee market in transition 341 xiv CONTENTS Convection Corporation Case 343 Using a Communication Planning Model to Aid Industrial Marketing Budget Decisions 343 Background 343 Heatcrete 4000 344 Ceratam 344 Flowclean Sootblowers 345 Corlin Valve 346 ADVISOR: An Approach to Marketing Budget Planning 347 Budget task force meeting 348 Johnson Wax Ad Copy Design Exercise 353 Chapter 9 Salesforce and Channel Decisions 354 Introduction to Salesforce Models 354 Sales-response models for representing the effects of sales activities 354 Salesforce management decisions 356 Salesforce Sizing and Allocation 357 Intuitive methods 357 Market-response methods (the Syntex model) 359 Extending the Syntex Model: Reallocator 365 Sales Territory Design 366 The GEOLINE model for territory design 367 Salesforce Compensation 369 Using conjoint analysis to design a bonus plan (the MSZ model) 370 Improving the Efficiency and Effectiveness of Sales Calls 373 The CALLPLAN model 373 Marketing Channel Decisions 379 The gravity model 379 Summary 384 Syntex Laboratories (A) Case 386 Company Background 386 Syntex Laboratories 386 Syntex Labs' Product Line 387 Naprosyn 387 Anaprox 387 Topical Steriods 387 Norinyl 388 Nasalide 388 CONTENTS xv The Sales Representative 388 Sales Management at Syntex Labs 389 Sales Force Size 389 Call Frequency 390 Allocation of Sales Efforts Across Products and Physician Specialties 390 Geographic Allocation of Sales Force 390 Sales Force Strategy Model 391 Model Development Process 392 Defining the model inputs 392 Model Structure 393 Results of the SSM Analysis 395 Management implications 395 The John French Exercise: Sales Call Planning for UBC (CALLPLAN) 409 J&J Family Video Case 411 Chapter 10 Price and Sales Promotion Decisions 414 Pricing Decisions: The Classical Economics Approach 414 Pricing in Practice: Orientation to Cost, Demand, or Competition 418 Cost-oriented pricing 418 Demand-oriented pricing 419 Competition-oriented pricing 422 Interactive Pricing: Reference Prices and Price Negotiations 424 Price Discrimination 426 Understanding price discrimination 426 Geograph ic price discrim ina tion 428 Temporal price discrimination