EightPrac+calRulesforBuilding

Marke+ngMixModelsModelsthatwork

‐andyourclientscanbuyinto

mathematics applied to government, industry and commerce, llc

Rule1:Understandthebigpicture

•  Whoaretheplayersinthecategory•  Whataretheydoing

– Marke<ngexpenditures

– Productposi<oning– Marke<ngchannels– Productinnova<ons

•  Whatobjec<veistheclienttryingtomeet

Rule2:Grapheverythinginsight

•  OEoEcksteinrule:– Nevershowaclientamorethan2by2matrix

•  Noclient–andveryfewanalysts–canmakesenseofacomplexsetofnumbers

•  Don’tshowgraphsunlesstheytellastory– Somestoriestheyknow[toshowthatyouunderstandthebusiness]

– Andsometheydon’t[toshowyourvalue]

Illustra<on:Dish‐washingdetergent

•  Clientwasdisturbedbyasharpdeclineinmarketshareinlong‐<mecategoryleader

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MarketShare(byVolume)

BrandA BrandB BrandC AllOthers

Illustra<on

•  Newentrywasgrowingrapidly•  Butalsofundamentallyalteringthecategorybyintroducingconcentrates

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MarketVolume(byForm)

Concentrate Powder

Illustra<on

•  Asconcentratesweremuchmoreprofitable•  Theclient–whohadbeenquicktorespond–wasnowmakingfarmoremoney– Attheexpenseofthesmallerbrands

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ProjectedProfit

BrandA BrandB BrandC AllOthers

Realobjec<ve

•  Theclient’sconcernwasmisplaced•  Theobjec<veshouldn’thavebeentorestorelostmarketshare

– Buttobestrespondtocompe<<vepressureinordertomaximizeprofits

Rule3:Considereverything

•  Marke<ng•  Compe<<ve

•  Environmental

•  Justbecausethedatabaseis“big”doesn’tmeanincontainseverythingyouneed

•  Ifyouleavesomethingout,themodelisopentocri<cism

Rule4:Lookat–andunderstand–outliers

•  Outlierswreakhavoconmodels•  Inalmostallcases,there’sanexplana<on

– Strikes– Productrecalls– Weatherevents– Geopoli<calevents– Etc.

Rule5:Graphallrela<onships

•  Rela<onshipsareusuallymucheasiertoexplain–andgetclientbuy‐in–iftheycanbedemonstratedgraphically

Graphallrela<onships

•  Some<mes,explana<oniseasy

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Promo<on Sales

Graphallrela<onships

•  Outliersusuallypopout

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Promo<on Outlier Sales

Don’tshowconfusinggraphs

•  Ifsta<s<callysignificantrela<onshipsdon’tstandout

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Sales Adver<sing

Makerela<onshipsclear

•  Dosomethingtomaketherela<onshipclear– Lag,smooth,transformoraggregatevariables

•  Inthisexample,AdBankisasmoothedadver<singseries[equivalenttoAdStock]

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Sales AdBank

Makerela<onshipsclear

•  Plotagainstresidualsoraddaddi<onalinforma<on,asnecessary

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Outlier Sales AdBank

Rule6:Neverpresentalinearmodel

•  Althoughlinearandnon‐linearmodelsyieldsimilarresultsintherangeofactualdata– Theycanbequitedifferentwhenextrapolated

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SalesVo

lume

Marke+ngExpenditures

LinearModel

Non‐LinearModel

Problemswithlinearmodels

•  Theworldisnon‐linear– Alleconomictheoryisbasedonadecliningreturntoscale

•  Linearmodelsleadtodangerousinterpreta<ons,suchas:– Whydon’twetripleadspending….–  Ifpromo<onhasahigherresponsethanadver<sing,whynotputeverythingintopromo<on

Problemswithlinearmodels

•  Inmyopinion,allregressionbasedmodelsshouldbelog‐log

Ln[Salest] = β0 + β1 Ln [Advt] + β2 Ln [Promot] + β3 Dummy + …..

Or

Salest = Exp[β0] x Exp[β3 x Dummy] x [Advt]β1 x [Promot]β2 x …

Rule7:Besurethemodelmakessense

•  Toyouandtotheclient– Avoidnega<vemarke<ngelas<ci<es

•  And[inmostcases]posi<vepriceelas<ci<es

– Beawareofthedifferencebetweenpriceandpromo<on

– Havestrongevidencebeforeyouchallengetheclient’sbasicassump<ons

•  Testallresults

Rule8:Usethemodeltoguidedecision‐making

•  UsethemodelresultstosimulateaP&L•  Evaluatealterna<vescenarios•  Considerpossiblecompe<<veac<ons

– Andreac<ons

Illustra<on:Laundrydetergent

•  Ourclient’sbrandwasthecategoryleaderfacingchallengefromheavilysupportedmul<‐na<onalbrand

•  Bothbrandswerespendingaboutthesameonbothadver<singandtradesupport

•  However,thetwobrandsrespondedquitedifferentlytomarke<ngandfolloweddis<nctlydifferentmarke<ngstrategies

Modelingresults

•  Bothbrandswereresponsivetoadver<sing– Client’sbrandwasmoreresponsive

•  Bothbrandswerealsoinfluencedbytradepromo<on– Promo<onaleffectsweresimilarforbothbrands

– Butcompe<<vepromo<onshadasubstan<aleffectwhichcouldeffec<velyoffsettheimpactoftheirownpromo<ons

Impactofadver<singonleader

•  Leaderwasinaposi<ontoincreaseshareatminimalcost

Advertising Market Share Profits

Current

Maximum

Impactofadver<singonchallenger

•  Challengerwasinvestmentspendingtobuyshare

Advertising Market Share Profits

Current

Maximum

Impactofleader’stradespending

•  Client’sbrandcouldmakeonlylimitedgainsbyincreasingtradesupport

Spending on Trade Support Category Leader Challenger

Current Maximum

Profi

ts

Impactofleader’stradespending•  Butnotifcompe<tormatchesspendingincreases

Current Maximum

Spending on Trade Support Category Leader Challenger

Profi

ts

Outcome

•  Categoryleaderincreasedadspending– Whilethechallengercon<nueditshighlevelofadsupport

•  Bothbrandscarefullyavoidedatradewar•  Asaresult,bothbrandsgrew

– Attheexpenseofthesmallerbrandsinthecategory

Inconclusion

•  Ifyourclientsunderstandandbuyintoyourmodels– They’llusethem– Andprofitfromthem

•  Iftheydon’t– ………