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Koen Pauwels
Towards a Motion Theory of Marketing
4/7/2004
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
Performance
EVOLVING
Put to
Rest
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 manufacturing1 to
services2 to fast moving consumer goods3. 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.
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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.
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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)
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Koen Pauwels
Towards a Motion Theory of Marketing
4/7/2004
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)
t4 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
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Koen Pauwels
Towards a Motion Theory of Marketing
4/7/2004
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
Positive
None
Negative
Stationary
Evolving
Deterministic Growth (#1)
Stochastic Growth (#2)
Static Equilibrium (#3)
Random Walk (#4)
Deterministic Decline (#6)
Stochastic Decline (#5)
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Koen Pauwels
Towards a Motion Theory of Marketing
4/7/2004
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
Government regulations that limit company
growth and/or bankruptcy options
Growth stage in the product life cycle
Maturity stage in the product life cycle
Changing marketing effectiveness
Stable marketing effectiveness
II. Behavior of consumers and retailers
Consumer learning
Consumer Forgetting
Changing consumer tastes
Consumer inertia
Positive feedback sales & retail distribution Retailer inertia & assortment commitment
III. Management decision making
Performance feedback
Normative marketing decision models
Error-correction towards performance goal
Satisficing managers
Competitive quest for more in budgeting
Fixing marketing budgets as sales ratios
Breakthrough changes in marketing
strategy or practices, which are not quickly
matched by competitors
Interdependent adaptation with competitors
enables fast competitive cancellation of
marketing effects
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Koen Pauwels
Towards a Motion Theory of Marketing
4/7/2004
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
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Koen Pauwels
Towards a Motion Theory of Marketing
4/7/2004
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.
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