Resource Allocation Prof Markus Christen INSEAD Singapore May June

Resource Allocation Prof. Markus Christen INSEAD Singapore May/June 2007

Resource Allocation § Three levels of resource allocation • Which segments? • Which brands/products? • What marketing instruments? § Steps in resource allocation • Set priorities among segments and products (marketing strategy) • Match marketing mix strategy with (customer view of) buying process (marketing tactics) • Quantify cost and return for different marketing instruments by product and segments (marketing control) § Identify synergies and conflicts across the product line (e. g. , customer groups, channels) 2 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Set Priorities: BCG Growth-Share Matrix Question Marks Cash Cows Dogs High 15 % Low Market Growth Stars 10 High 1. 0 Low Relative Market Share 3 Market Driving Strategies - May/June 2007 © Prof. Markus Christen 0. 1

Saku: Classification of Product Portfolio High Cider 10 % Import Beer Mineral Water Low Market Growth Other Alcohol Soft Drinks Beer 10 High 1. 0 Low Relative Market Share 5 Market Driving Strategies - May/June 2007 © Prof. Markus Christen 0. 1

Comments: Portfolio Analysis § Portfolio matrices are NOT decision tools, but they are useful analysis tools • Simple to construct, easy to read • Repeat for competitors and compare • Repeat over time to track changes § Possible pitfalls • • 6 Attractiveness and position are subjective assessments Atomization of company or product portfolio Focus on existing businesses/markets and existing world Overlook strategic roles of products (“guard dog”) Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Marketing Mix Strategy § Customer Buying Process • • • Think - Like - Buy - Like - Think Buy - Think - Like Think - Buy - Like … High involvement versus low involvement New purchase versus repeat purchase 7 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Buying Process: Hierarchy-of-Effects Customer Behavior Measure Your Decision § Do customers know about us? awareness advertising § Do customers have interest in us? interest targeting, positioning (consideration) § Do customers want to buy us? purchase intentions product, price, advertising message § Can customers buy us? distribution coverage sales force (size, allocation), product, price, advertising § Can retailers get enough products? stock outs demand forecast, production planning 8 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Influencing Buying Process Effect Main Forces Information § Awareness advertising, forgetting, share-of-voice advertising experiment, competitive ad spending § Purchase Intentions customer perceptions, product features, advertising, competition MDS, semantic scales, conjoint analysis § Availability sales force, feet-on-the-street product, price, ads sales force experiment, competitive sales forces § Market Demand maturity of segment product attractiveness market forecasts, MDS, … 9 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Quantify Marketing Investment & Return Account Hours/Month Sales A 5 217 B 1 30 C 2 40 D 3 300 E 1 5 F 5 250 G 2 20 H 1 50 1. Is this a reasonable allocation of sales hours? 2. How might hours be optimally allocated? 11 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Rule 11: Resource Allocation The optimal resource allocation depends on the marginal effect and not the average effect. 12 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Quantify Marketing Investment & Return Account Hours/Month 0 1 2 3 4 5 6 A 20 205 208 213 217 220 B 20 30 50 68 80 90 95 C 0 5 40 45 50 55 55 D 0 100 250 300 340 375 400 E 0 5 10 15 20 25 26 F 200 220 230 245 250 260 G 0 10 20 30 35 35 45 H 0 50 110 150 180 200 215 Present hours allocated 13 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Judgment-based Response Function § 5 data points to fit an S-shaped response function • • Sales at current marketing spending? Sales at 50% lower / 50% higher spending? Sales without marketing spending? Sales with saturation spending? § Can account for media and copy effectiveness (quality) 14 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Judgment-based Response Function 15 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Optimal Resource Allocation Rule § You want to increase marketing expenditures (Mktg), if the additional expenditure is less than the additional gross margin (GM) generated: • • Mktg increase ( Mktg) Mktg x Mktg/Mktg % Mktg x Mktg / GM • % Mktg / % GM • GM / Sales § Mktg / Sales = = GM increase ( GM) GM x GM/GM % GM x GM % GM / % Mktg = Elasticity = Sales - COGS = %Gross Margin = Elasticity x %Gross Margin Increase < Maintain marketing spending when Mktg / GM = Elasticity Decrease > 16 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Optimal Resource Allocation Rule Increase Maintain marketing spending when Mktg / GM Decrease 17 Market Driving Strategies - May/June 2007 © Prof. Markus Christen < = > Elasticity

Marketing Mix Elasticities § Price elasticities for non-durable consumer products are around – 2. 0 § Advertising elasticity for consumer goods is around 0. 3 short-term (0. 4 with carryover effect included) § But large variations • by stage pf product life-cycle • by strategy (e. g. , pioneer vs. follower) • by type of product, country, etc. § And many complexities • non-linearities • interactions (e. g. , price elasticity is influenced by advertising) • competitive effects 18 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Rule 12: Limited Resources When resources are limited, the relevant cost is the opportunity loss from forgoing alternative uses. 19 Market Driving Strategies - May/June 2007 © Prof. Markus Christen

Rule 13: Value-Creating Investment Not every sale is worth your effort. 20 Market Driving Strategies - May/June 2007 © Prof. Markus Christen