Figure 1: Motion Theory of Markets, Performance and Marketing Action. Year after year, managers strive to improve their performance in ever changing

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1 Figure 1: Motion Theory of Markets, Performance and Marketing Action Market Forces Customer Learning and Imitation Customer Inertia, Market Saturation Supply Chain Actions Socio-economic trends Pull in Motion Put to Rest Performance EVOLVING STABLE Offensive: Push in motion Defensive: Maintain Marketing actions Market Entry (M&A) Positioning (STP) Product Price Distribution Communication Year after year, managers strive to improve their performance in ever changing markets. Faced with customer inertia, competitive reactions and market uncertainty, they are looking for marketing actions that yield long-term benefits to the company. CEO statements often reflect this rationale, in industries ranging from manufacturing 1 to services 2 to fast moving consumer goods 3. Long-term marketing productivity permeates recent discussions on the profitability of Internet-based services, on downturn spending cuts, on building and maintaining brand equity, and on market entry strategies. The measurement and improvement of long-term financial returns to marketing investments continues as a top research priority of the Marketing Science Institute. Addressing this priority requires a dynamic understanding of the conditions for performance growth and of the role marketing actions play in this process. Existing theories of market dynamics, such as diffusion of innovation and life cycle theory, postulate deterministic changes over time, which are unrealistic in today s uncertain market environments. Therefore, I propose a motion theory of marketing, as summarized in Figure 1. 1 Chrysler s CEO Dieter Zetsche maintains that his forecasted sales gain of 1 million cars in the next 5 to 10 years will be driven by 12 new product introductions in the next three years rather than by low pricing (J. D. Power and Associates 2002) 2 In May 2001 (Wall Street Journal), America Online raised prices to meet its aggressive financial targets based on the company's confidence that the move would not compromise its growth in consumer base (164% since 1998) nor its growth in usage depth (52% since 1998). Bold? Maybe. Unwise? Certainly. 3 Despite saturated demand and strong competition, "Coke is sticking by its ambitious growth targets and believes that they can be reached "over the long-term (Wall Street Journal, November 16, 1999) 1

2 Basic Elements of the Motion Theory of Marketing Application of the Motion Theory requires us to answer a few questions: 1) The Performance Question: where are we heading, what is the long-term outlook? General answer: baseline forecasting as backbone of management action planning. Motion answer: identify and analyze performance regimes (see p. 3, and Pauwels 2001) 2) Profitable Growth Question: Are we satisfied or not with were we are going? General answer: If so, don t do anything (management by exception or thermostat), if not, use marketing actions to close gap between desired future and baseline performance Motion answer: If so, continue to pump the market for temporary, but profitable benefits (e.g. price promotions or minor product modifications). If not, a marketing policy change is needed to push performance into motion (see p. 5). Business as usual just won t do. 3) Marketing Question: how to change our destiny; how to improve where we are going? 4 General answer: increase marketing actions with the best bang-for-your-buck, i.e. combining high performance impact (elasticity) with cost efficiency. Performance benefits are typically estimated by a static model such as regression, logit, etc. Motion answer: The needed policy changes may differ from marketing actions with the highest elasticity and efficiency in stationary regimes and their long-term costs (including competitive reaction and needed maintenance spending) should be weighted against their long-term benefits: pushing performance towards a more favorable regime (see p. 5-6) t 4 A trend is a trend, is a trend, but the question is, will it bend? Will it alter its course, through some unforeseen force, and come to a premature end? Sir Alec Cairncross, chief economic advisor to the British government 2

3 Performance Regimes Performance regimes can readily be classified by their managerial desirability, based on two dimensions: the direction of change (i.e. growth is better than stagnation, which is better than decline), and the uncertainty around this change (i.e. lower uncertainty is better than high uncertainty for improving conditions, and vice versa). Modern timeseries analysis can diagnose direction as well as uncertainty: a deterministic trend reveals the direction of change, and a stochastic trend reveals the uncertainty around the future direction of performance. If there is no stochastic trend, then performance is stationary, i.e. all observed fluctuations are temporary deviations from a deterministic component, which may include mean, trend and seasonal cycles. Stationary behavior implies that future performance is relatively predictable, as the expected forecasting error gently increases with the forecast horizon. In contrast, the presence of a stochastic trend or unit root implies that sales performance may move widely apart from any previously observed level, with a variance that increases in time. Table 1: Classification of performance regimes, ordered by managerial desirability Stochastic trend Deterministic trend Stationary Evolving Positive Deterministic Growth (#1) Stochastic Growth (#2) None Static Equilibrium (#3) Random Walk (#4) Negative Deterministic Decline (#6) Stochastic Decline (#5) 3

4 Table 1 combines the managerial desirability of a performance regime with observable conditions in the data. Deterministic growth (#1) and decline (#6) are, respectively, the best and worst-case scenarios. Performance evolution adds uncertainty and therefore attenuates the good news and the bad news. Finally, in the case of no deterministic trend, risk-averse managers typically prefer a static equilibrium above a random walk. When would we expect to observe performance stability and evolution? Table 2 lists several factors outside and inside the control of market players (firms and consumers). Table 2: Reasons for evolution and stability in performance Evolution Stability I. Factors outside the control of the market players Co-movements of performance with macro-economic variables Growth stage in the product life cycle Changing marketing effectiveness Government regulations that limit company growth and/or bankruptcy options Maturity stage in the product life cycle Stable marketing effectiveness II. Behavior of consumers and retailers Consumer learning Changing consumer tastes Positive feedback sales & retail distribution Consumer Forgetting Consumer inertia Retailer inertia & assortment commitment III. Management decision making Performance feedback Error-correction towards performance goal Competitive quest for more in budgeting Breakthrough changes in marketing strategy or practices, which are not quickly matched by competitors Normative marketing decision models Satisficing managers Fixing marketing budgets as sales ratios Interdependent adaptation with competitors enables fast competitive cancellation of marketing effects 4

5 Research postulates (RP) and marketing spending (MS) rules RP 1: Performance Evolution occurs in specific time windows between stable regimes Why? Stability is the natural state of the market performance because of consumer habit persistence / inertia and competitive vigilance. MS rule 1: your budget allocation should vary with the growth path of performance RP 2: In mature markets, these evolution periods are short relative to the stable periods Why? Punctuated equilibrium theory applies to markets: you can only change customer behavior in a few short-lived circumstances that engage customer learning, before customer inertia, market saturation and/or effective competitive reaction make this growth grind to a halt. MS rule 2: use your money first on marketing actions that co-evolve with outcome series RP 3: Marketing actions and policy shifts have different effects on performance regimes Why? In stable performance regimes, you can continuously improve marketing efficiency and perceived customer value by product modifications, price promotions, point-ofpurchase efforts and reminder advertising. However, these business-as-usual marketing actions do not have the power to put performance in motion towards a better regime. If you want to push performance in motion, you need a change in marketing policy. A major new product introduction, a sustained price decrease, a new distribution channel and innovative advertising have the potential to push performance in evolution and create permanent effects by enabling performance to stabilize at a new, higher equilibrium level. MS Rule 4: marketing policy shifts are needed to push stable performance into motion 5

6 RP 4: Return on Marketing Investment differs in different performance regimes Why? Unexpected actions that disrupt consumer expectations and habits are possible, but hard to pull off: they often require creative, integrated and expensive marketing changes. However, when performance is already evolving, i.e. consumers or retailers are learning, usual marketing actions may help push it along. For instance, printer manufacturers enjoy permanent advertising effects when their product is clearly superior to the competition. MS Rule 4: focus your marketing efforts to lift performance that is already evolving References Academic references were omitted for readability; they can all be found in: Pauwels, Koen (2001), Long-Term Marketing Effectiveness in Mature, Emerging and Changing Markets, Ph.D. Dissertation, The Anderson Graduate School of Management, University of California, Los Angeles. 6